WISE AND CO., INC. VS MEER G.R. NO. 48231 JUNE 30, 1947 PONENTE: HILADO, J.

CASE DIGEST BY: LUZADIO, LOURY MAE M.

Facts:

On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and its
capital stock was distributed to its stockholders, one of which is the petitioner. As part of its
liquidation, the corporation was sold to Manila Wine Merchants., Inc. for Php400,000. The said
earnings, declared as dividends, were distributed to its stockholders. The Hongkong company
then paid the income tax for the entire earnings. As a result of the sale of its business and assets,
a surplus was realized by the Hongkong company after deducting the dividends. This surplus
was also distributed to its stockholders. The Hongkong company also paid the income tax for the
said surplus. The petitioners then filed their respective income tax returns. The respondent
Commissioner, then, made a deficiency assessment charging the individual stockholders for
taxes on the shares distributed to them despite the fact that income tax was already paid by the
Hongkong company. The petitioners paid the assessed amount in protest. The lower courts ruled
in favor of the Commissioner of Internal Revenue, hence, this action.

Issue(s):

1.) Appellants contend that the amounts received by them and on which the taxes in question
were assessed and collected were ordinary dividends; CIR contends that they were liquidating
dividends.SC: The distributions under consideration were not ordinary dividends. Therefore,
they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and
transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They
could not consistently deem all the business and assets of the corporation sold as of June 1, 1937,
and still say that said corporation, as a going concern, distributed ordinary dividends to them
thereafter.

2.) Are such liquidating dividends taxable income?

SC: Income tax law states that Where a corporation, partnership, association, joint-account, or
insurancecompany distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporation, is a taxable
income or a deductible loss as the case may be. Appellants received the distributions in question
in exchange for the surrender and relinquishment by them of their stock in the HK Co. which
was dissolved and in process of complete liquidation. That moneyin the hands of the corporation
formed a part of its income and was properly taxable to it under the Income Tax Law. When the
corporation was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a transaction
took place. The shareholder who received the consideration for the stock earned that much
money as income of his own, which again was properly taxable to him under the Income Tax
Law.

3.) Non-resident alien individual appellants contend that if the distributions received by them
were to be considered as a sale of their stock to the HK Co., the profit realized by them does not
constitute income from Philippine sources and is not subject to Philippine taxes, "since all steps
in the carrying out of this so-called sale took place outside the Philippines." SC: This contention
is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH
Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK
Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of
wine, beer, and spirit merchants and the other objects set out in its memorandum of association.
Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in
question were made, the major part of which consisted in the purchase price of the business, had
been earned and acquired in the Philippines. As such, it is clear that said distributions
wereincome "from Philippine sources."