GR L 49102; (May, 1949) (Digest)
G.R. No. L-49102; May 30, 1949
W. C. OGAN AND BOHOL LAND TRANSPORTATION CO., plaintiffs-appellants, vs. BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.
FACTS
On May 5, 1936, the stockholders of Central Motor Supply Co., Inc. (CMSC), including appellants W.C. Ogan and Bohol Land Transportation Co., exchanged their CMSC shares (par value P100 each) for an equal number of shares in Motor Service Co., Inc. (MSC), pursuant to a corporate resolution. CMSC’s primary asset was its holdings in MSC. The market value of an MSC share on the exchange date was P166.66. The Collector of Internal Revenue assessed and collected income tax on the difference of P66.66 per share, treating it as taxable gain. Appellants paid under protest and sued for recovery, arguing the transaction was a mere simplification of corporate structure between a parent and subsidiary that yielded no real income.
ISSUE
Did the appellants realize taxable income from the exchange of their CMSC shares for MSC shares?
RULING
Yes. The Supreme Court affirmed the dismissal of the complaint, holding the exchange produced taxable income. The Court rejected the argument that the transaction was a non-taxable simplification because CMSC and MSC were separate and distinct corporate entities, each with its own legal personality. The exchange constituted a disposition of property (CMSC shares) for another property (MSC shares) under Section 2(c) of the Income Tax Law ( Act No. 2833 , as amended). The taxable gain is the difference between the market value of the property received (MSC shares at P166.66 each) and the cost of the property given up (CMSC shares at P100 each). The appellants, by becoming direct stockholders of MSC, gained new rights and privileges (e.g., voting rights in MSC) and realized an economic benefit, making the gain subject to income tax.
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