G.R. No. 48231 , June 30, 1947
WISE & CO., INC., ET AL., plaintiffs-appellants, vs. BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.

FACTS

The plaintiffs-appellants, stockholders of the foreign corporation Manila Wine Merchants, Ltd. (the Hongkong Company), sought a refund of deficiency income taxes assessed and collected by the Collector of Internal Revenue for the year 1937. The Hongkong Company sold its business and assets in the Philippines to a newly formed Philippine corporation (Manila Wine Merchants, Inc.) for P400,000 on August 3, 1937. Prior to the sale, on June 8, 1937, the Hongkong Company declared and paid a dividend from its 1937 earnings to its stockholders, including the plaintiffs. After the sale, the Hongkong Company’s surplus increased. On July 22, 1937, its Board declared further distributions from this surplus, paid on August 4 and October 28, 1937. Subsequently, on August 19, 1937, the shareholders resolved to voluntarily liquidate the company, which was carried out under Hong Kong law, culminating in the distribution of the remaining capital. The Collector assessed deficiency taxes by treating all distributions made after June 1, 1937, as taxable dividends or gains from liquidation, not as a return of capital. The plaintiffs paid under protest and sued for a refund.

ISSUE

The core issue, as framed by the appellants’ assignments of error, was whether the distributions (the June 8 dividend and the subsequent distributions from surplus and capital) received by the plaintiffs from the Hongkong Company, a foreign corporation in the process of liquidation, constituted taxable income under the Philippine Income Tax Law ( Commonwealth Act No. 466 ), or whether they were exempt as a mere return of capital or otherwise not subject to double taxation.

RULING

The Supreme Court affirmed the judgment of the Court of First Instance, absolving the Collector of Internal Revenue. The Court ruled that all distributions made by the Hongkong Company after it effectively ceased its business operations (from June 1, 1937, onward) were made in the process of its complete liquidation. Consequently, these distributions were not ordinary dividends but constituted distributions in liquidation. For tax purposes, the gain or profit realized by a stockholder from such distributions—calculated as the amount received in excess of the cost of the shares—is taxable income. The Court held that this taxable gain was realized in the Philippines because the funds and assets of the Hongkong Company were located in the Philippines, the dividends were declared here, and the distributions were received by the plaintiffs or their agents in the Philippines. The Court rejected the appellants’ arguments that the income was not taxable under specific sections of the law or that it constituted double taxation, finding the Collector’s assessments and the collection to be in accordance with the law. The motion for reconsideration was denied.