Name of stockholder 1927 1928 1929 Total
P. I. Telephone and Tele-
graph Company P286,600 P352,560 P358,560 P997,655
Telephone Investment
Corporation 6,600 9,800 16,400
———— ———— ———— ————
Total 286,600 359,160 368,295 1,014,055
" ’7. The defendant, acting under the provisions of section 9 (b) and 13 (f) of the Income Tax Law (Act No. 2833 as amended), levied and assessed against the plaintiff, and demanded of the latter the payment of the sum of P30,421.65 as income taxes on the aforesaid amount of P1,014,55, the dividends paid by the plaintiff as stated in paragraph 6 hereof, notwithstanding the tax exemption or commutation granted to plaintiff by its charter stated in paragraph 3 hereof.
"‘8. On September 11, 1930, the plaintiff, having no other recourse in the matter and to avoid the distraint of its goods and the payment of fines and penalties, under duress, against its will, under due written protests, paid to the defendant the said sum of P30,421.65, the amount levied and assessed by defendant against the plaintiff as aforesaid.
"‘9. Said payment mentioned in the last preceding paragraph was made under five separate protests. A copy of the first protest is set out in paragraph VIII of the complaint, and is hereby made a part hereof. The second protest is in all respects like the first, except that it is in connection with the tax on dividends for 1928 paid to the Philippine Islands Telephone & Telegraph Company, said tax being in the amount of P10,574.80. The third protest is in all respects like the first, except that it is in connection with the tax on dividends for 1928 paid to the Telephone Investment Corporation, said tax being in the amount of P198. The fourth protest is in all respects like the first, except that it is in connection with the tax on dividends for 1929 paid to the Philippine Islands Telephone & Telegraph Company, said tax being in the amount of P10,754.85. The fifth protest is in all respects like the first, except that it is in connection with the tax on dividends for 1929 paid to the Telephone Investment Corporation, said tax being in the amount of P294.
"‘10. On September 13, 1930, the defendant, in a communication addressed to plaintiff’s attorneys, overruled and denied each and all of plaintiff’s protests.’
"With respect to the first counterclaim of the defendant, the admitted facts are as follows:jgc:chanrobles.com.ph
"‘1. During the years 1919, 1920, 1921 and 1922, the Philippine Islands Telephone and Telegraph Company, a corporation, organized in the United States and duly authorized to transact business in the Philippine Islands, transacted the business in the Philippine Islands, transacted the business of furnishing telephone service on the Island of Luzon under the franchise granted by Act No. 1368 of the Philippine Commission, hereinabove mentioned, which it had previously duly acquired.
"‘2. During said years 1919, 1920, 1921 and 1922, the principal stockholder of the said the Philippine Islands Telephone & Telegraph Company was the Philippine Telephone & Telegraph Corporation, a non- resident foreign corporation organized and existing in the United States.
"‘3. During said years 1919, 1920, 1921 and 1922, the said Philippine Islands Telephone & Telegraph Company delivered to the said Philippine Telephone & Telegraph Corporation, as the latter’s share in the yearly profits or dividends duly declared by the former for said years the aggregate sum of P613,559.34 as follows:
For the year 1919 P334,919.38
For the year 1920 109,764.86
For the year 1921 40,410.00
For the year 1922 128,465.10
—————
Total 613,559.34
" ’4. In delivering the amounts mentioned in the last preceding paragraph the Philippine Islands Telephone & Telegraph Company did not deduct and withhold therefrom and did not make return of the sum of P15,057.59 which amount is equivalent to a normal tax on the aforesaid sum of P613,559.34, as follows:
2% normal tax on P334,919.38 P6,698.39
3% normal tax on 109,764.86 3,292.95
3% normal tax on 40,410.00 1,212.30
3% normal tax on 128,465.10 3,853.95
————— —————
Totals 613,465.10 15,057.59
========= ==========
" ’5. At the beginning of the year 1923 the plaintiff purchased and acquired all the assets, liabilities and franchises of the said Philippine Islands Telephone & Telegraph Company, and has since, during all the time covered by the complaint, been operating a telephone system on the Island of Luzon under the franchise granted by Act No. 1368 of the Philippine Commission, as aforesaid.
"‘6. The defendant has demanded of plaintiff the payment of the said sum of P15,057.59 but the plaintiff refuses to pay the same, alleging as a reason for its refusal that it is exempt from the payment of said normal tax amounting to P15,057.59 by virtue of the tax exemption or commutation provided for in section 5 of its franchise, Act No. 1368 of the Philippine Commission.’
"With respect to the second counterclaim of the defendant, the admitted facts are as follows:jgc:chanrobles.com.ph
"‘1. At the beginning of the year 1923, the plaintiff purchased and acquired from the Philippine Islands Telephone & Telegraph Company, a corporation organized in the United States and authorized to transact business in the Philippine Islands, the latter’s franchise granted by Act No. 1368 of the Philippine Commission, and all property appertaining thereto; and since then during all the period of time covered by the complaint the plaintiff has been operating a telephone system on the Island of Luzon.
"‘2. After thus transferring its property and franchise to the plaintiff as aforesaid, the said Philippine Islands Telephone and Telegraph Company ceased to do business in the Philippine Islands and became a non-resident foreign corporation, and a majority stockholder in the plaintiff corporation.
"‘3. During the years 1923 to 1926, the plaintiff delivered and paid over to the Philippine Islands Telephone & Telegraph Company, then a non-resident foreign corporation, and a stockholder in plaintiff corporation, as aforesaid, as its share in the yearly dividends or profits duly declared by plaintiff for the said years, the aggregate sum of P1,412,027.26 as follows:
1923 P317,377.26
1924 751,450.00
1925
1926 343,200.00
—————
1,412,027.26
==========
" ’4. In making delivery of the amounts mentioned in the last preceding paragraph, the plaintiff did not deduct and withhold from the said sum of P1,412,027.26 and did not make return of the sum of P42,360.82, which the latter amount is equivalent to a normal tax on the said aggregate sum of P1,412,027.26, as follows:
3% normal tax on P317,377.26 P9,521.32
3% normal tax on 751,450.00 22,543.50
3% normal tax on 343,200.00 10,296.00
————— ————
"Totals 1,412,027.26 42,360.82
" ’5. The defendant has made demand upon the plaintiff for the payment of the aforesaid sum of P42,360.82, but plaintiff has refused to pay defendant the said sum, alleging, as a reason for its refusal, that it is exempt from the payment of said normal tax amounting to P42,360.82 by virtue of the tax exemption or commutation provided for in section 5 of its franchise, Act No. 1368, of the Philippine Commission.’
"Manila, P. I., February 2, 1931.
"DEWITT, PERKINS & BRADY
"Attorney for plaintiff"
By ——————
"601 Nat. City Bank Bldg.
"DELFIN JARANILLA
"Attorney-General
"Attorney for defendant"
By
————————
"Assistant Attorney"
On the foregoing facts we are of the opinion that the only question submitted for our determination is whether the appellant is bound to pay said taxes in view of the exemption granted in its favor by section 5 of Act No. 1368 of the Philippine Commission establishing said franchise.
However, before we proceed with the discussion of the legal aspect of the case, as above stated, we must first determine the law upon which the appellee bases his right to collect the income tax in question, and also whether the dividends of a domestic corporation, which are distributed and delivered to foreign corporations, are subject to said tax.
The appellee invokes in support of his authority sections 9 (par. b) and 13 (par. f) of Act No. 2833, as amended otherwise known as Income Tax Law, which reads as follows:jgc:chanrobles.com.ph
"SEC. 9 (a) . . .
"(b) All persons, corporations, joint-stock companies, partnerships, joint accounts (cuentas en participacion), associations, insurance companies, and general copartnerships (compañias colectivas), in whatever capacity acting, including lessees or mortgagors of personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, employers, and all officers and employees of the Government of the Philippine Islands having the control, receipt, custody, disposal, or payment of interest, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien individual, other than income derived from dividends or net profits subject to the tax established in subsection (a) of section ten are hereby authorized and required to deduct and withhold from such annual or periodical gains, profits, and income such sum as will be sufficient to pay the normal tax thereon, and shall make return thereof on or before March first of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippine Island authorized to receive the same; and they are each hereby made personally liable for such tax, and they are each hereby indemnified against every person, corporation, joint-stock company, partnership, joint-account (cuenta en participacion), association, or insurance company, or demand whatsoever by reason of the payment of the said tax."cralaw virtua1aw library
"SEC. 13. . . .
"(f) Likewise, all the provisions of this Law relating to the tax required to be deducted and withheld and paid to the officer of the Government of the Philippine Islands authorized to receive the same from the income of non-resident alien individuals from sources within the Philippine Islands shall be made applicable to income derived from dividends upon the capital stock or from the net earnings of domestic or other resident corporations, joint-stock companies, partnerships, joint-accounts (cuentas en participacion), associations, and insurance companies by nonresident alien firms, corporations, joint-stock companies, partnerships, joint-accounts (cuentas en participacion), associations, and insurance companies, not engaged in business or trade within the Philippine Islands and not having any office or place of business therein."cralaw virtua1aw library
In the light of the provisions of said sections there seems to be no question that the dividends of a domestic corporation, which are paid and delivered in cash to foreign corporations as stockholders, are subject to the payment of said tax.
"An ordinary dividend on corporate stock, paid in money or its equivalent, and representing a distribution to stockholders of profits of the corporation, as distinguished from a stock dividend representing a capitalization of profits or of an increase in the value of corporate assets, and from distributions of capital and liquidating dividends, is income of the recipients, within the meaning of a statute imposing a tax upon incomes, and accordingly is taxable as such, unless specifically exempted or excepted by the statute; and the taxability of a dividend is not affected by the fact that the profits out of which it is declared have in whole or in part accrued to or been accumulated by the corporation during a long period of time or even before taxes on incomes were imposed by law, since corporate profits first become income of the stockholders when they are distributed as dividends." (61 C. J., pp. 1572, 1573 and cases cited therein.)
The same rule applies to dividends which are paid and delivered to the stockholders in the form of stock dividends:jgc:chanrobles.com.ph
"Except where a statute imposing a tax upon incomes otherwise specifically provides, it has been held that a stock dividend in the ordinary sense, being a dividend on corporate stock paid in newly issued stock of the corporation, as distinguished from one paid in treasury stock or in stock of a subsidiary or other corporation, is income, within the meaning of the statute, and so is subject to taxation thereunder, whether it represents earnings or profits of the corporation or an increase in the value of corporate assets, although on the latter point there is also authority to the contrary." (61 C. J., 1573 and cases therein cited.)
In the cases of Posadas v. Warner, Barnes & Co., and Posadas v. Menzi (73 Law. ed., 339 et seq.) the Supreme Court of the United States, among other things, said:jgc:chanrobles.com.ph
". . . The Philippine Legislature has power to lay a tax in respect of the advantage resulting to recipients from the allotment and delivery of such dividend shares. (Swan Brewing Co. v. Rex [1914], A. C., 231-P. C.) Respondent rightly concedes that, there being no constitutional restriction, such dividends may be taxed and that the statute discloses a purpose to tax them. . . ."cralaw virtua1aw library
Reference is herein made to said cases, coming from this court, only for the purpose of showing that if stock dividends are subject to income tax, a fortiori the dividends paid and delivered in cash to stockholders should be subject thereto.
We shall now proceed with the consideration of the main question. The appellant vigorously contends that it is exempted from the payment of said tax, by virtue of the provisions of section 5 of Act No. 1368, which reads as follows:jgc:chanrobles.com.ph
"SEC. 5. The grantees, their successors or assigns, shall be liable to pay the same taxes on their real estate, buildings, and personal property exclusive of the franchise as other persons or corporations are now or hereafter may be required by law to pay. The grantees, their successors or assigns, shall further pay to the Insular Treasurer each year, within ten days after the audit and approval of the account as prescribed in section four of this Act, two per centum of all gross receipts of the telephone, telegraph, or other electrical transmission business transacted under this franchise by the grantees, their successors or assigns, and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof."cralaw virtua1aw library
Section 14 of the same Act, containing some reference to the same subject, reads as follows:jgc:chanrobles.com.ph
"SEC. 14. The grantees may transfer, sell, or assign this franchise to any corporation formed, organized, or existing under the laws of the Philippine Islands or of any State of the United States and such corporation shall have the right to buy and to own said franchise. Any corporation to which this franchise is sold, transferred, or assigned shall be subject to the corporation laws of the Philippine Islands now existing or hereafter enacted and shall be subject to all the terms, conditions, restrictions, and limitations of this franchise as fully and completely and to the same extent as if the franchise had been originally granted to said corporation."cralaw virtua1aw library
It is contended that the exemption provided by law includes all taxes to be paid by the appellant on all of its earnings from the business for which the franchise was granted, with the exception of the 2 per cent fixed by it. If this contention is correct there is no doubt that the dividends delivered by the appellant and those which are the subject matter of the counterclaims are exempted from the payment of income tax. We hold, however, that such interpretation of the law is untenable. As the law clearly provides, the exemption only relates to the income and earnings of the franchise and it should not be construed as including those which cease to belong to the franchise or to the corporation holding it, for they have been delivered to its stockholders as their own. The law did not exempt from the payment of said tax those dividends paid and delivered to stockholders, because they ceased to be the property of the corporation and became of the stockholders; and evidently it was not the intention of the Philippine Commission to extend such privilege to parties other than the original holders of the franchise and their grantee.
It is a well known principle that the States of the Union possess full authority to collect an income tax from individuals and corporations, in the absence of any constitutional prohibition, and that the exemptions are to be given strict interpretation. The Philippine Legislature has the same authority and may levy taxes on income in the absence of any prohibition or limitation in the Organic Law, and the same rule of construction must be adopted. In the instant case the exemption is evidently limited, and we find no justification for extending it to dividends received by the stockholders of a corporation after they have become their exclusive property.
"Since taxation is necessary to the existence and continuance of government, there are no implied exemptions from its burdens, and a relinquishment of such right by the state will not be presumed, unless a deliberate purpose to relinquish it appears. (Trimble v. City of Seattle, 116 P., 647; 64 Wash., 102, judgment affirmed 34 S. Ct., 218; 231 U. S., 683; 58 Law. ed., 435.)" (Am. Dig., 2d Dec., Vol. 21, p. 604.)
The appellant, in its endeavor to show that the dividends received and delivered to it are included in the exemption, invokes the ruling in the case of Farrington v. Tennessee (95 U. S., 679). In order to determine whether or not the doctrine laid down in said case is applicable, we quote herein the facts and reasoning given in the decision, to wit:jgc:chanrobles.com.ph
"The Union and Planters’ Bank of Memphis was duly organized under a charter granted by the Legislature of Tennessee, by two acts, bearing date respectively on the 20th of March, 1858, and the 12th of February, 1869. Since its organization, it has been doing a regular banking business. Its capital stock subscribed and paid in amounts to $675,000, divided into six thousand seven hundred and fifty shares of $100 each. Farrington, the plaintiff in error, was, throughout the year 1872, the owner of one hundred and fifty shares, of the value of $15,000.
"The tenth section of the charter of the bank declares ’that the said company shall pay to the State an annual tax of one half of one per cent on each share of the capital stock subscribed, which shall be in lieu of all other taxes.’ "The State of Tennessee and the county of Shelby claiming the right, under the revenue Laws of the State, to tax the stock of the plaintiff in error, assessed and taxed it for the year 1872. It was assessed at its par value. The tax imposed by the State was forty cents on the $100, making the State tax $60. The county tax was $1.20 on the $100, making the county tax $180.