CTA Case No. 3710 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY A. SORIANO CORPORATION, OTHERWISE KNOWN AS ANSCOR, Petitioner, � - versus - C. T. A. CASE NO. 3710 COMMISSIONER OF INTERNAL REVENUE, .. - )( .... ...- - - - Respondent. )( D E C XB X0 N This petition seeks th e review of respondent's decisi on assessing petitioner of withholding taMes on th redeMption by p e titioner of its co1111on shar s fro� the Estate of Don Andres Sori no and the cancellation an into preferred shares of the Estate of Don Andres Soriano and Dona Carmen Vda. de Soriano which respondent considered as "essenti ally equivalent to a distribution of a taMable dividend" pursuant to Section 83(b) in relation to Sections 33 and 34 of the National Internal Re venue Code of 1939. Petitioner was assessed deficiency withholding taMes of P3,428,613.90 for the year 1968 / and I

DECISION CTA CASE NO. 3710 - 2- P2,93o,ooo.oo for the second quarter of 1969 inclusive of interests due thereon.� Without presenting any evidence, respondent subMitted this case for decision based on the pleadings and the BIR records. The relevant Mate ri~l fActs are as followsa Petitioner, A. Soriano Corporation <ANSCOR for short), is a do�est ic � corporation engaged in the business of �anaging its affili a te corporations under long-terM Management contracts. A�ong other things it acquires shares of stocks of other corporations for invest Ment purposes and fro� ti�e to ti�e act� as an insurance and shipping agent. It is wholly owned and controlled by the fa�ily of Don Andres Sor iano who are all non -re sidont AMerican citizens. So�etime in 1930, Don Andres Soriano organized A. Soriano y Cia, a predecessor of ANSCOR. At the tiMe of its incorporation, A. Soriano y Cia had an authorized capital stock of P1,000,000.00 divided into 10,000 co��on shares at P100.00 par value per share. In 1937, Don Andres Soriano purchased and subscribed to 4, 963 co��on shares co�ing fro� the original issue of 3,000 co��on shares.� �exn. B, pp. 99-100, Folder I, BIR rec. ' Exh. ~. p. 215, Folder II, BIR rec. -Exh. M, pp. 114-1 13, Folder III, BIR rec.; EK h. P, p. 46,, F o 1de r I I I , 8 I R r e c.

DECISION CTA CASE NO. 37 10 - 3- When World Wa r I I broke out, the corpor ation suspended it s operation . It was only on March 1, 1945 when it resumed its usual business operation. As of said date, Don Andres Soriano has a total shareholding of 4,971 common shares (inclusive of 8 shares in the name of'+ nominal stockhold ers with two shares each>. On September 12, 1945, the stockholders unanimously approved, in a special meeting, the proposed increase in the authorized capital stock from P1,000,'000.00 to P2,500,000.00 divided into 25,000 commom s ha re s at P100.00 par value per share. 31 The By-laws and the Articles of Incorporation were amended accordingly. Meanwhile, the corporation issued only 10,000 common shares or P1, 000,000.00 common stock from the increased P1,500,000.00 common stock. The stockholders of the corporation waived their pre- emptive rights to subscr ibe to these new issue of shares and allowed Don Andres Soriano to s ubscrib e to the additional issue of 10,000 common shares fo r Pl,OOO,OOO.OO. In October, 1945, Don Andres Soriano transferred 2, 500 common shares to his two sons, Jose M. Soriano and Andres Soriano, Jr., divided 31Exh. R- 1, pp. 25-29 , Folder III, BIR rec. 10tJ

DEC I SION CTA CASE NO. 3710 - 4- equally, each owning 1,250 co111111on s h.u"'es as t h eir in it i a 1 invest 11ent wi t h A. Sot"'iano y Cia. The total shareholdings of Don Andr es S or iano a fter th e tran11fer was 12, 471 c o11111on shares <inclus i ve of 8 I n 1947 , the corporation declared 100" stoc k d i v i dends in f a vor of it 11 s tockholders on rec ord. Th co r re&po nd i ng sto c k dividends of 12, 4 63 co111 11 on share� we r e issued in favo r of Don And res S oriano. 4 During a Special Meeting of the Board of Directors h ld on Nov e Mber 4, 1948, the Board approved the offe r of Don Andres Sorian o, th e n President and Chat rMan of the Board , to e><cha nge h is shareholdings in thr ee other c orporations �an ag ed by A. Sori An o y Cia, n tu� elya Sa n Miguel Brewer y, Ph il i p p in e Oi l De ve lo p11ent Co., ~n d Taysan Gold Mining Co., f or 3 8, 000 un i s'Su e d co11111on s har es o f A. Soriano y Cia. e In Dece111ber, 1949, the Board of Direct ors declared st ock di v id end s i n fa vot" of i t s stockholders and by J an uar y, 1950, the c orresponding 12, 590 a nd 15, 108 c o�� on shares were issued in the naMe of Don Andres Sori an o a s stock dividends.� Ther eaft er , the corporati on c ontinued 4� ><h . P- 6, p. 43 , Folder I I I, BIR rec. BE><h. R, pp. 30-34, Fol d er II I, BIR r ec . -E><h. P-8, p. 4 2 , Fold e r III, BIR rec. ' E><h. P-10, p. 41, Folder I II , BIR r ec.

DECISION CTA CASE NO. 3710 - 5- to declare and issue stock dividends in favor of Don Andres Soriano up to December 20, 1963. Don Andres Soriano d ied on December 30, 1964. At that time, he own e d a total of 185,154 co mm on shares (includes qualifying shares in the names of director-n ominees) with 5 0,495 common shares (includes 21 common shares from nominees of Don Andres Soriano) coming fr om original issue and the balance thereof or P134 , 659 comm on shares from stock dividends. 7 These shar es were acquired during the decedent's marriage with Dona Carmen M. Soriano. The law says that the rights to the succession are transmitted from the moment of the death of the decedent.� There fore, the rights of Dona Carmen Vda. de Soriano are made effective upon the death of her husband on Dec ember 30, 1964. The BI R examiners rightfully considered Dona Carmen Vda. de Soriano to be entitled to one-half of the total 185, 154 common share s owned by her deceased husband or 92,577 common shares which represents her share in the conjugal partnershi p while the other half 7 Exh. J, pp. 255-261 , Folder I, BIR rec.; Exh. J - 2, p. 2 61, Fold er I , BIR rec. Exh. L, pp. 193- 202, Folder I, BIR rec. ; Exh. I-1, p. 216, Folder I, BIR rec.; ANSCOR Inter - Office Memorandum, pp. 265-269, Folder II, BIR rec. �Article 777, New Civil Code.

DECISION CTA CASE NO. 3710 -6 belong to the Estate of the deceased, Don Andres Soriano.� As of Dece�ber 31, 1964, A. Soriano y Cia, now referred to s A. Soriano Corpo ration <ANSCOR>, had its authorized capital increased to P20, 000,000.00 divided into 200,000 COIIIIIIOn shares at P100.00 par value per share. 10 It was ascertained th t of the 200,000 co��on shares and 147,000 COIIIftiOn shares represent stock dividends. Of the 53,000 ca��an shares original shares fro111 no111inees of Don Andres Soriano> were reg istered in the name of Don Andres Soriano at the ti111 e of hi death. 1 1 A Special Proceeding <No. 5~24) was filed by his twa sans, Jose M. Soriano and AndrE!s Soriano, Jr., in the Court of First In!ltance of Rizal far the probate a~ the last will and testa111ent of their deceased father. ut Both were appoi nted ancillary ad11inistrators far the purpos e of 1iquidat ing the Estate of Dan Andres Soriano in the Phi 1 i ppi n4u. WExh. J, su pra. Inter-Office BIR rec. 1 0Exhs . J and L; ANSCOR Me�arandu�, supra. � 1 Exhs. J-2, L and I-1, supra. ~-Exh. J-3, pp. 2-6, Fo lder III, 20"

DECISION CTA CASE NO. 3710 - 7- 1'374 and the cusets of the Estate of Don Andres Soriano in the Ph i l ppi n es were finally distributed to the heirs. On July 2 , 1'365 M~� . Ben.lamin N. l'abios, then Acting Commissioner of Internal Revenue iss�Jed a certification to the effect that the Ancillary Administrat ors of the l' e ~ tate Es t a te of Don Andres Soriano had already paid the Republi c of the Philippines on June 3 0, 1'365 total of P2,78'3,063.'34, repres enting full payment of the estate and iMheritance ta~es due on account o f the transmiss ion of the a f oresoi:\id estate to the heirs. 13 On May 15, 1'356, ANSCOR' s aut horized capital stock was increased from P2o,ooo,ooo.oo (200,000 common shares> to P3o,ooo,ooo.oo <300,000 common shares > with the same P100.00 par value per share. The reason for the increase, which was appro ved by the Securitiea and Exchange Commission on December 8, 1966, Win to provide for ad ditiona l capital due to the increase i n the value of corpo rat e assets. 1 ~ On July 13, 1966, ANSCO R declare d 59" stock divid end!~. The Estate of Don Andres Soriano 13p. 1, Fo ldttr I I I, BI R r ec. 1 ~Exh. J, pp. 255-261, Folder I, BIR rec.; Ex h. L, pp. 193-202, Folder I, BI R rec. ; ANSCOR �Inter-Office Memorandum, pp. 265-269, Folder II, BIR rec.; Exh. D-2, pp. 270-287, Folder II, BIR rec.

DECISION CTA CASE NO. 3710 - 8- received 46,290 stock di vidends on December 16, 1966 Making its tot 1 shareholdings to 138,867 coMmon shares <92,577 + 46,290) as of December 31, 1967. Likewise, Dona Car Men Vda. de Soriano received 46,287 stock dividends. This Made her total shareholdings equal to 138,864 co�mon shares (92, 577 + 46, 287 ) with an original cost of P2,312,089.71. 1 ~ In a letter dated DeceMber 28, 1967, Dona CarMen Vda. de Soriano requested for a ruling fro� th� United States Internal Revenue S�rvice in Washington D. C. on the q�Jestion of whether or not the exchange of a numb er of comMon shares in ANSCOR for the saMe nuMber of preferred sh res in the saMe coMpany with the same par value of P100.00 would be interpret�d as a tax avoidance scheme under Section 367 of the U.S. Internal Revenue Code of 1934. In its reply letter dated February 28, 1968, the U.S. Internal Revenue Service ruled that the proposed transaction is not in pursuance of a plan to avoid the Federal incoMe taxes. It further held that th� r�classification and exchange of c o�Mon stock for pr�f�rred stock in the same co mpany will qualify as a recapitalization and therefore a reorganization within the Meaning of Section 368 (a) (1) <E> � ' � aae:xns. J and ANSCOR Inter-Office M��orandu�, supra. 2.0?.

DECISION CTA CASE NO. 3710 - 9- Moreover, no gat n or 1oss wi 11 bet realized by the shareholders from the eHchange contemplated.&& On January 2, 1968, pcttitioner' s At..ticlcts of Incorporat ion was a�ended to allow the re- classificati on of its 300,000 authorized co��on shares to be divided into 150,000 co��on shares and 150,000 10~ preferr d, cu�ulativct and non-voting shares both at P1 00.00 par value per share. 17 On March 31, 1968, the Estat� of Don Andres Sori no actually e xchan g Pd 11 , 140 co�mon shares (costing P759,882.85 based on the fair �arket value declared by the Estate of Don Andres Sorian o for estate and inheritance ta,c purposes>, instead of .. 11,134.5 co��on shares as earlier proposed, for 11,140 <valued at P1,114,000.00> 10" preferred cu�ulattve shares at P100.00 par value per share. After the conversion of com�on to preferred shares, the coMmon shares re maini ng from the E st ~ te of Don Andres Soriano numbered only 127,727. Likewise, Dona Carmen Vda. de Soriano eHchanged all her 138, 864 co� �on ~hares <originally P2,512,089.71> for 138,860 preferred / shares, at P100. 00 par value per share, vallted at P13,886,000.00. 1 � 1 &�Hh. S, pp. 19- 23, Fold11r II I , BIR rec. 17EHhs. J, L, and D-2, supra. 1 -EHhs. J and L, supra.

DECISION CTA CASE NO. 3710 - 10 - Pur6uant to a Board Resolution approved by its Directors in their meeting called on June 15, 1968, ANSCOR p�Jrchased, on J�Jne 30, 1968, in the United States 9ome 28,000 common shares from the Estate of Don Andres Soriano at P100. 00 par value amounting to Pe,8oo,ooo.oo. These shares were redeemed for the purpose of partially retiring <as treasury shares) the common shares held by non-resident stockholders in order to reduce the exchange req uirements of the corporation in the event it would declare cash dividends. 1 � On November 30, 1968, the stockholders � approved in a Special Meeting the recommendation of the Board of Directors to increase the capital of the corporati on from P3o,ooo,ooo.oo divided into 150,000 preferred shares and 150,000 common shares both At P100. 00 par vall.te, to P75,ooo,ooo.oo, divided into 150,000 preferred shares and 600,000 co"'mon shares at P100. 00 par value.�o In Nov .!Db r, 1969, ANSCOR again purchased in the United States another 80,000 commo n shares fro111 the Est te of Don Andres Soriano at P125. 00 per share co ting P1o,ooo,ooo.oo pursuant to Board . s�ibid.; Exh. R-2, pp. 12-13, Folder III, BIR rec. 1 Exhs. E-1 and E-1-a, p. 48, Folder III, BIR rec. � 0 Exh. R-3, pp. 9-11, Folder III, BIR rec.

DECISION CTA CASE NO. 3710 - 11 - Resolution approved by its Direct ors durin g thei r Meeting held on October 30, 1969. The same purpose was cited by th Board as in the initia l purchase of 28, 000 co�mon shares fro� the Estate of Don Andres ao.-.i no in 1968, that is, to reduce the foreign eNchange requirements of t he corporation in th ev nt it would d c l re cash dividend .� 1 in 972, the 8\re u of I nterna l R~venue i fUUed Lett. e,... of Authority No. 7288 1 NA 1, 1972 authorizing its r evenu� Na mi n e th e b ook of acco unts of peti t i o ner-ANSCOR. An e xaM in a t ion was conducted and a 111 111orandutn re p ort d at �d J nuary 2, 197 3 wa� subMitted by the r�venue exa�in ers to th� Chief of the S . rvices & Mi c. <Audit ) Divis i o n . �31 On the s alfte date , petitiont>r was invited for an infor�al conf renee to en b l e petitioner or any of its dul y uthorized represent t ive to go ov�r the findin g s of the Bur-e u' s exa imu��s. Inste d of acc ~tpting the invitation , pet it i on e.-.�s r presentative and �evers l occasions f or an extens i on of t iMe within wh1eh to sv.b111it th necessary docuMent in support o f hi~ cl i ent' B side of the p.-.apo sed !!!t Exh, R...4, PP� 7-8, Fo l der lli, BIR rec.' Exns. J and L, supra. �&t�>fn~ ~, p. 136, Fo lde r II, BIR rec . 8 3 pp. 148-tea, Folder II, Bl R re c.

DECISION CTA CASE . NO. 3710 - 12 - The Bureau, on the other hand, gave petitioner up to May 14, 1973 to subMit the necessary documents.�"" In a letter d at ed May 14, 1973, Atty. Gadioma inforMed the Bureau tha t ANSCOR availed of the tax -- '---- amnesty under Presidential Decree Nos. 23 and 157. This was verified by the Burea u to be true as shown in the BIR record�.�e Meanwhile, petitioner was informed thru a letter, dated December 5, 1973, sent by Mt". Largion A. Najera, ' Chief , Se rvices and Misc. <AL\dit) Division that re spondent h a d iss u ed a me morandL\11 dated April 5, 1973, stati n g t h at all those who have availed of th e t ax amnes ty under Presidential Decree No. 23, as amend ed, are exen1pt fron1 investigation. as This notwith s t a nd ing, on 3, 1974, petitioner still received from respondent a letter dated March 29, 1974 informing it that the tax amnesty under Presidenti a l Decree Nos. 23 and 157 does not cover Secti ons 53 and 54 <now Sections 50 (a), as an~ ended by Executive Order Nos. 37 and 51, respectively> of the National Internal Revenue Code insofar as the withholding tax liability on � ""'p. 173, Folder II, BIR rec. Exh. �eExh. A-2, p. 175, Folder I I, BI R rec. ; A-3, p. 244, Folder II, BIR rec. ��Exh. A-1, p. 117, Folder I, BIR rec.

DECISION CTA CASE NO. 3710 - 13 - ta~able dividends of the Estate of Don Andres . Soriano and Don Cerm@n rlP MontemAr Vda. de S orian o On April 4, 1974, petitioner receiv ed from 1'368 defieienc y for withholdinR amount in g to Total taxabl d'vid@nds income of Don ~ Carm n d~ MontPm~ Vd A. d e Soriano an th Es t ate o f Don Andr e Stn"' i �no Withholding t~H d~ t h e~"e on ( 20~ > p 2,905 ,605 . 00 Ad d ; 1I 2 " mo, i 11 t . fr. 4-16-69 to 4-lG-72 TOTAL AMOUNT PUE AND COLLECTIBLE p 3,428 !! 613. ':3.0 The to tal taxab le dividend of the Estat e of Don Andres Soriano an d Don a Carmen Vda. de Soriano fa~" 1'368 a mountin g t o P14,528,027.44 is iteMized below per computation of the Bureau's examiners, to wita 89 \ Estate of P..Q.J.l. . J~.n.d r_e..�. Preferred shares i ss ued P1,114,000.00 P13,88G,OOO. OO Least Cost of common share s can c e 1 1 e d ______]J;!.~..J~.e.?..~...$~. __ . J~ ' � ~1 ~ ,_Q_~-~-'!.11. Income realized from conversion � 7 pp. 179-180, Folder II, BIR rec. ��E~h. B, pp. 99- 100 , Folder I, BIR rec. ��MeMo.-Report of Examiners dated April 2, 1974, p. 104, Folder I, BIR rec.

DECISION CTA CASE NO. 37 10 - 14 - 1968 I nc o me r ealized from c on ve r~iona Estat of Don Andres S ori an o P 354, 117. 15 Don Carmen de Mo n temar Vda . de Sor i ano 11, 373, 9 10.29 1968 redemption of 28,000 common shares of the Estate of Don Andr ~ Soriano -��-�----~�'���~O.Q., .9QQ.~..9Q_ Tot al 1968 taxable dividends i n c ome o f Dona C�rmen de Montemar Vda . de S or i ano and the Es t ate o f Don On May 7, 197 4, respondent issue d a no t her deficiency a s s es~ment agai nst p e tition er t hi s t ime for the 2nd quarter of 1969 in the amount of P2 , 950, 000. 00, inc llts i ve of i nt e re st, computed as followsa.:ao RedeMption of stock s f ro m the e.. _tQ,_.Q.QQ, .9QO.~__Q.Q. Estate of Don Andr e s So r i a n o c onsidered as equi val ent to p 2 , 500,000. 00 a distribution of tax a ble �-��-�-�-���-��4p 0, QQQ.. _Q_Q. dividend (80 ,000@ P1 25. 00 ) Wi t hho l d i ng ta x-at -so urce due thereon Add: 1/2" mo . in t . f t' . 4- 16 - 70 to 4- 16 - 74 TOTAL AMOUNT DUE & COLLECTIBLE P etitioner filed its protest on the fir st on Apr i 1 18 , 197 4 and the secon d ass~tssment was protest ed on June 11, 197 4. 3 1 A suppl~tmental memor an d u m d a ted June 8, 197 9 was later filed by petiti on er wi th r espe ct to th� 1968 30Exh. C, p. 215 , Fo l d er I I, BIR rec. ; 31 Exh. D, pp. 11 8 - 122 , Fol d er Ex h . D- 1, pp. 221-22 9 , Fol d er II, BI R

DECISION CTA CASE NO. 3710 - 15 - and 1969 <2nd quarter> de f icie n cy assess me n ts issued by respondent . 32 1983, respondent's decision dat ed 4, 1983 denying its prote s t a nd a t the r eitera ti n g th~ payment of the total a mount of P6, 378, 613.90. 3 3 He n ce, this petitton for r view. Th us f ar, the main issue t o be reso 1 ved i � whether or not petition r is liabl e for the deficiency ~ithho lding tax-at-source for th e ye ars 1968 and the s econd quarter of 1969 a�ount i ng to P3,428,613.90 and P2, 95o, ooo. oo, respectively, on the basis of the finding s of th& exa�iners holding� ( 1 ) the red emption of 28,000 co�� on shares in 1968 and 8 0 ,000 common shares of the Estate o f Don And r es Sori ano in 1969 ; and <2 > the conver sio n a nd cancellation of 11, 140 co�mon s hares of the Estate of Don Andre s Sorian o an d 138,865 com�on shares of Dona Carmen Vda. de S oriano into preferred shar e s in 1968, "e s sent ia lly equivalent to a distribution of taxabl e divi dend" under Section 83(b) in relation to Sections 53 and 54 of the National Internal Reven ue Code of 1939. ~�Exh. D-2 , PP � 270-2 87, Folder II, BIR rec. 33Exh. D-3, p. ~66, F older I, BIR rec.

DECISION CTA CASE NO. 3710 - 16 - ~side from the m in issu@ above-men tioned, two corollary i6 sues present itself and if answered in ihft f'ir'lt coroll ry issu is whether or not peti tion r is excu s d fr om any with holding taxes liability under Sect i ons 53 And 54 aftet~ having availed of the tax amnesty as provided by Presidential Decree No. 23, as amended by Presidential Decree No. 67. Second, whether the withdrawal of the letter of a�Jthority previous ly issued by respondent deprived the revenue examiners report of any validity, thereby rendering the deficiency assessments, which was based on said report, null and void. On t ...,' .. first coro\ l a r< y is s ue, "' maintains tMat t m payment o f the ta>< amnesty for the un t ){ d nc ome earned prior to 1972 under .3, ~s ame nde d, clears pstitiano ~ f~gm ~1 1 investig tton, whether civil or criminal, t n ~e;>f9\"' as ttle t x~bl e years 1968 and 1969 are concerned. Re�pondent on the other hand averred that the withholding taxes as provided under Sections 53 and 54, are not covered by Presidential Decree No. 2 3, as amended. ? 1. n

DECISION CTA CASE NO. 3710 - 17 - We a g t" ee wit h re5po nd e n t . Petitionet"'5 avail111ent of' the ta x au 1n sty t.tnder Presi dtt ntial Decree Nth 2 3 do e s not cover its l iabi 1 it y for withholding taHes. S ection 1 of Presidential Decree No~ 23, as t~u,ended, insofar as pet"t i nent or or a c co �Jnt as civi l, or liabilitie15 the the Penal Code , and Act, Revised Code, the Service l aws and t"e g u lRti on s , laws and regulat ions on I~ m ig r~t ion and Deportation, or any othet" appl icab1e l aw of proclaMation, are het"eby condon ed and, in 1 i eu the t"eof, a tax of ten UO~) per eentu� on such previou5ly un t a xe d inco111e or w�alth is h ereby iMpos ed, subject to the foll owing eonditio~st tOOi x)< x xxx 11 (Undet"s e oring Ours.> untaxed ineo�e or wealth. Thus, a� correct 1y put by re15pondent, the 11 Wi thho ld i ng tax agent, in this ?.1 -~ �

DECISION CTA CASE NO. 3710 - 18 - case the petitioner, or the person required by law to withhold the tax due on inco111e realized by another person i s, o bv � ously, not the earner of t h a t inco11e ."~ 4 By the very nature of the withholding tax the l i ab i l i ty to withhold t he inco11e of another belongs to the wit hholding agent. Petitioner has a duty to withhold tax� s du� on dividends inco111e earned by it 5 stockhold�rs. Therefore, the d ec l arat ion 111ade by petitioner- taxpayer <earner of incoMe) of untaxed inc o111e prior to 1972 and .its avai l111 ent of the t&x a�n�sty und�r to incom-e earned and not to its liability as a withholding agent, who under Sections 53 and 54 of the National Internal Revenue Code ( 1939) required to withhold the tax due on the in ~~a e earned by another person. Hence, Se~tions 53 and are not covered by protections and i11111uniti~$ granted by Pr e5idential Decree No. 23, as a111ended. An�nt the t1econd corollary issue, petitioner �aintains that the cancellation and revocation of the letter of authority �ade the findings of the revenue exa� i nt'rs without 1egal basis. Thus, the decision of respondent, based on the investigative

DECISION CTA CASE NO. 3710 - 19 - lett~'l" af authority, is null nd v o id . Ae~pondtt nt av err ed th t the cl\n c:e llat ion and r ~voeation of h e l etter of ~uthor ity did not take � f fe ~t in e o, ~ As the withho ldin g t M liabil ity of do n ot a p ply to withh old i n n t Men . Further�ore, the i s suan e of the de�a nd etter to petitioner authcri t y. , We fi.f'ld the le tter d ated Mar ch 29, 1974 sent by respo , cent to petitioner i nf orMing the l a tter that Beet i on 53 of the Nation 1 Internal Revenu e ended, and the revalidated t he l ett r of ut hority previously eancelled it a ppe r-h g fr' QIJ t h e r eords that the deficiency asses s�ent letters sent were for the withholding taM deficiency for 1968 and 1969. The liabil ity for wit hholding taK is not covered by the taK a�nesty decree <P. D. 23). Hence, the letter of a uthority is not dee�ed cancelled insofar s the withholding taK aspect is concerned.

DECISION CTA CASE NO. 3710 -20- We now go to the 11ai n i s<Jue of whether the petitioner is liabl e under Section 83 in relation to Section 53 of the National Internal Revenue Code. Respondent posits that the rede11ption of 28,000 and 80,000 com11 on shares in 1968 and 1969, respectively, from th@ Est ate of Don Andres Soriano as well as the cancellation a nd conver<Jion of 11, 140 co1111on shares of the Estate of Don Andr tu Soriano and 138, 8 65 co��on shares of Dona Car111en Vda. de Soriano into preferred shares in 1968 have caused the reali zation of ineo�e to thtue stockholders where the shares cancelled or redee11ed pre vi ous ly for11 part of stock dividends withi n th e purview of " es!Sentially equivalent to a taxable div idend" pursuant to Section 83(b). According to respondent, petitioner is liable to withhold the tax on dividends earned by its non- resident stockholders under Section 53(b). Fa ilure of petitioner to withhold the tax gave ri!Se to the 1968 and 1969 deficiency withholding tax assess11ent subject 11atter of the inst a nt petition for review. Petitioner insists tha t its purchase of 108,000 co1111on shares fro11 the Estate of Don Andres Soriano and the conversion of co1111on shares to preferred shares is not within the purview of

'' DECISION CTA CASE NO. 3710 - 21 - "essentially equivalent to the distribution of a taHable dividend" under Section 83(b) for the following reasons: (1) purcha~ed by peti tioner ar e shares coming fro� original issues; ( 2 ) that altho ug h the re~aining balan ce of the st ocl<f; purchased c a e f t"O III stock dividends still Section 83(b ) does not apply here there being no �otive to ev a de or avoid the inco111e taH considering the long period of ti111e since these stocks were redeemed and there be i ng a legitimate business purpose for the purchase of said ~hare~; (3) that the purchase b y ANSCOR of its own shares resulted in partial liquidation whereby capital gains is attributable to the seller, therefore, the corresponding duty to wit hhold any in come ta>< is not present; and <4 > the reclassification of shares from co�mon to pre ferred does not fall under Section 83(b) for the same reason that there was a legitimate business purpose for the conversion and that no magnificent c han ge ha d occurred fro� the Move to convert these shares it being of the saMe quantity, par value and Market value eHcept that preferred shareholders would be deprivttd of their voting rights in eHchange for the preference in ease of liquidation.

DECISION CTA CASE NO. 3710 22 Section 83<b ) of the National I nternal Revenue Code <1 939) Wii\ fi copied from Section 115(g) of the United St~ates Internal Re venue Code of 1939, the pertinent prov i ~ion o f which reads as follows: "Se c. 8 3 . Di ~ t r ib u ti.on of dividends or assets by r ot~ porations. (a) De f i n i t i on o f d i v i d end s � - x �x x (b) Stock dividends A stock dividend representing the transfer of st.trplus to capital accot.mt shall not be st.tbject to tax. Howevet~, j._f _____.~ G..QJ::PJ~_r._.._t.J .PJJ_._�-���f=.~. n c._e ~ s .-.. -� ..QJ:.____x_~_q ~ ~_!!!_!?._ _.�.~-cg;:Ji lls. .S.'.\.~_c;:l__~.?___i;L.P.i. v i, c;ten.c;:l ---~!:....J?.,t,~_c._b__j;_J_II!.~---~Il ft.__j n s_l.,!c.h__J!!..~n.ne.r. ..___a s . J; p _ .ma!:< e.. __!; be. . d i s.trJ.I::l_u.!:.i o T1. ~r.tc;!__q_~nP~~-U .stJ. P.n ..... o_r_.. r..e 9 empt_i on , _. _j, n.._. _V:Ib pJ ~- Q.t"...._J _r.L...P.l'l..rJ:._,__.~.?._ '?.J~..nt.(~.J ly__ _e..Q..\J..tY..~J.~D...t._t q__t.. b..~ d. l.~~x:.~J;B,Lt._tQJJ__...Q.f____~ ___t;_~~.!ll_Qj_~__cU_yj__c;:l_~..!l_c;:l_.__t....b ~.t t.. ~.!!!..!:t'.\11L. _~.Q....___gj __~_1:;.r._!..P.':t1=_~.c;:_ l j,.!!__~_!;t_!lt1!!.P i o n ......Q..l: . G.~.TJ..l;..t ..U_.~~.J. .9..n..____.._q f _____tJ:u~ -~t_q_c,.._k _ s hj!jj___b..~. ~-9_n_J....~. Q-~ t" e d ___s _?._____.t..~!.<-~J?.il__ !..DJ;...Q..I!le t o t.t:l.~ '-15..~-~.nl_~__i..:L__L.~.PJ::~..~-?...f!!l't...~~~---d.. t?..~J:~.A..I::l.J:l1:_~...9. n_ .JLf ~ rn t~_P.r..Jtf_t1:;_?._...!\~G..IJ.!.1!_t,!_l,__~j;_!tg__...~..f _1:; ~.r: ___ ~-~~b_____fAJ~ ~tt. n!JJJ~_t_ ~.?..n_____h..t.AT'l9.J::-....~.,c;:l.____~m;l_ ~J:tl.rt_tit!J1.!.. '' (Under~ 1 in i nQ SLtppl i ed. > I t i s c 1 ear fro m t he abo v e - q u ot e d p t~ o v i 5 i on that the redemption or cancellation of stock by a corporation refers only to F �..trthermore , such redemption or cancellation of s to ck divi de nds must be at such a !;j_J'!!._, _ and in sucfl manner a s t o constitute t h e trans a ction as on� whi c h i s e s sentially equivalent to the di,tribution of a taxable dividend.

'' DECISION CTA CASE NO. 3710 - 23 - atocks othe"' tt'lan ttoek dividends said pr-oviaion do as not ppl Y� The deficieney by lleg d withholding taxes due fr-om pe t itioneY' on account of its r- demption of 28,000 and 80,000 common shares of the Estate of Don Andres Soriano in 1968 and 1969, respectively, as well as the cancellation or convers i on of 11,140 coMMon shares of the Estate of Don Andres Soriano into 11,140 preferred shares and 138,865 common ahares of Dona Car111 en Vda. de Sor-iano to 138,860 preferred shares in 1968. (1) Redemption of 28,000 and 80,000 co mmon shares of the Eatat e of Don Andre s Sor . no i n 1968 and 1969, respectiv e ly. We 111ust first determine tt't ~ ~-~L~~ of the shaY'ea ~ede~med by petition ~r. If the !!hares r-edeemed c:al!le fl"'o 111 shares of o rigin 1 issue then the r-edemption of th ese shares would not be tr�ated as a divide nd di~tri bution but ~ s a r-eturn of investment ~ince Section 83<b) pplies only to stock dividends cancelled or redeemed. There is no disput e that 50,495 c:o�mon shares of the Estate of Don Andres Soriano ar-e original

DECISION CTA CASE NO. 3710 - 24 - Petitioner was a b l e to prove fro� th� evidence Bubm itt ed th at all of the 50, 495 co111111on sh a res redeem ed f r oM the Es t a te of Don Andres Soriano ca111 e from original issues. 3 a It is e vid~nt that the 28, 000 comm on ~hAres re d ee med i n 196 8 ca111e from original subscri ptions . Th e r e fore, since this 28,000 co1111110n shares do no t form part of the stock dividends issued to Do n And r es So riano , thttn Section 83<b> does not apply. Parenthetically, the alleged realized inco111e of the Estate of Don Andres Soriano on the 28, 000 c ommon shares redee111ed by petitioner on which wi thho l d i n g of ta~ thereon should have been ma de oe s no t l i e . With re s pe ct t o the 8 0 9 0 0 0 COIIIIIIOn '!h a r es of th� Estate of Don Andre s Soriano which petitioner redeemed in 1969 in the United States, 22, 49~ of these common share s c ame from original issue and ~7,305 common s h a r e s f r o111 stock dividends previously issued to Don An dr es So r iano. As to the 22,495 COIIIMon �hares purchased by petitioner, We adopt the same ruling a� in the 28,000 coMmon shares purchased in 1968 it appearing that the 22, 49~ co��on shares alBo ca111e fro111 the original :ame:~n. I-1, P� 216, Folder I, BIR rec.' E><h J - 2, P� 261, Folder I, BIR rec.' E~h. N-1, pp. 2~9- 262, Folder II, BIR r ec. :a�Exh. N, p. 263, Folder II, BIR rec.' Exh. N- 1, s�Jpra.

DECISION CTA CASE NO. 3710 - 23 - i~~ue o f 50,495 coMmon shares. Sec tion 83<b > does not app ly. this refers on l y to t he cance ll at ion or redemption such Manner as to Ma ke the di~tribution and cancellation or redeMpt ion, in whole or in part, essent i ally eq uivalent t o the d i stribution of a taKable dividend. How about the 57, 505 coMMon share~ purchased by petitioner or that portion of the 80,000 coMMon I shares which forMed part of stock dividends? Would these shares purchased . forMing part of stock dividend~ be eq u iva lent to a distribution of taKable dividend under Sec tion 83<b>? There are no clear cut criteria nor 8 defin i t e yardstick to deterMin e i f Section 83(b) would be applicable. on its own particular facts and circu�~tances. The United St a te s Co �..trts have co�� up with a soMewhat coMparabl e listing of the "judicial criteria" which ha ve proven useful in coMing to a conclusion as to whet h er Section 83 (b) is applicable. So111e rec o gni z ed c r ite r ia developed by the courts include the following� the presence or absence of a real bus i ne�s p ur po~e 1 wh e ther the action was initiat e d b y the c orporation ot" by the

DECISION CTA CASE NO. 3710 - 26 - stockholders, the amount of 11arnings and profit s available for the declaration of a regular dividend and the corporation' 1J past record wi th respect to the payMent of dividend s; whether the distribution resulted in any substantial change in ownership and control or in a contracti on of corporate operations; continued prof itable operations; th� effect of the d i s t ri but i on as compared with the declaration of a regular dividend; nd any special circumstances e)(istin R a t the time! of a distribution. 317 The factor of lapse of ti11e between issuance and rede11ption wa!J also held i mportant sine& the test of wh&th er or not th& redemption and distribution are "essentially equivalent to a taKable dividend" depend on the "time" and "Mann�r" of redemption. In s e lect ed ca s in the Unit�d States, it was rul e d th ~t t he lapse of time between issuance and red mptio n s uc h as a matter of days or a period of up to 2 years were deeMed to be 1 317 Mertens 304-305, see Giles v. Bullock, 26 TC 276 <1956>; Herbe rt E. Pl iner, TC Mello 1961-218; HiMmel v. Com11., 338 F2d 815 CCA 2d, 1964), citing Mertens teKt; Salvatori v. U.S. , 66-2 USTC 9670 CDCBD Cal, 1966) 1 E!Jtate of Arthur F. Hinrichsen, TC Mello 1966-271; Levin v. Co1111., 385 F2d 521 <CA a �d, 1967), citing Mertens teKt, affg 47 TC . 258 (1966)' Howard P. Blount, 51 TC 1023 <1969>, affd 425 F2d 921 CCA 2nd, 1969>.

DEC I SION CTA CASE NO. 3710 - 27 - esse nti all y equivalent to the d i str ibution of a taKable div i dend .~� Ho we v e r, i n SOMe i nst .nces the inter venin b e t we en issua nce and redeMption if in eKeess o f 2 ye a rs wa r e d ee111ed to b e not e q u i va lent Likewise , the c ourts hAve als o r uled th at "the st atut8 dOel no provi d e th t ev ry e sh rede pt i on of s h ar cu sh 1 1 be tre a t ed p ar se at but o nly thoe which b e c au t e of so111e e ireuMs t anee of t i llla an d � Ml.mne r ar e in faet the a ssen t ia l equival ent o f a dividend. " 40 The r eas on a dva nced for this is if stocks i ssued as stock div idend s are rad a a111 ed a n d are t aMed a s d i v i dend s to t he f1..1 l l ~�1 Mert e ns 305, sees Ad ler v. CoiiiMissio n e r o f Internal Revenue, 77 F 2 d 733 <CCA 5th, 1935 ) 2 years; Robinson v . Co111111issioner of I nternal Revenue, 69 F2d 972 <CCA 5th, 1934>, 2 111 o nth ; Stan ley Goldstein, BTA Me 111 o Op Dkt 9142 6 <1939), affd 11 3 F2d 363 <CCA 7th, 1940>, 9 �onth s v Art h1..1r M. Godwin , 34 BTA 485, a Mat t e r of da y ~ . ~�1 Mert ens 305; s ees Co111 111i ssioner of Internal Reve nue v. Cord i ngley, 78 F 2d 11 8 <CCA 1st, 1935> and Co 111 ai s sio ner of I n t e rnal Re v enue v. Quac ke nbos, 78 F2d 1S6 <CCA 2d , 1935>, 8 ye ar~t Co111111i s si on e r o f I ntern� l Revenue v. Ch a �pi o n , 7 S F2d 5 13 <CCA 6th, 1933) , 6 yo r s9 C ~ M III il s ione r of I n tern al Re v e n ue v. Ahlb o rn, 11 F2d 700 <CCA 3 d , 1935 >, 11 yaars1 Coa~ate�ion!ltt'l o f Intern l Revenue v . Br own, 69 F2d 6 02 <CCA 7th 9 1934) 9 2 y e ars 5 Mon ths ; Bon a Al l en, Jr. , 41 BTA 2 06 , 9 years ; Willi a Swinde lls, 4 4 BTA 336, 5 month s t o a ye r ' ~ l fr ed E. Fuh la g a, 79 F 2d 998 <CCA Sth, 1935>, 9 ye a rs , Ja��� A. Connelly, 30 B.TA 331, 1 to 5 ye ars; Rob e rt R. Mayer, 27 BTA 44, 3 ye a rst Alfred A. L � n , 26 BTA 7 6 4, 3 to 4 years. �oco mmi ssionar of Int e r nal Reve nue v. Brown, su pra.

DECISION CTA CASE NO. 3710 - 28 - .a111ount paid for then it would in effect impose on such stocks an undi sc losed lien, and this would bl! ~txtrl!mely unfair to intervening purchas~trs who bought such stocks after the stock dividend had been issued. Such purchasers would find on the redeMption of the stocks that a large part of their is the view that sum5 paid in retirl!llltl!'nt of stock arl! not taxable as dividends, unless the retirement was 111ade in pursuance of a plan forMe d at the time when the stock was originally issued, or as a cloak for the distribution of earnings. 4 e Often tiMe s, We have resorted to the United Statl!s decisi ons in connection with construction of Ph ilippine tax laws. 43 It is a rational rule of statutory construction that a statuti! adopted from a nothPr tate or country will be presumed to be adopted with the construction placed upon it by the courts of that state or country before its adoption. Such constructi on is regarded as of great weight, or at least persuasivl!, and will generally be followed if found 4 ..Commissioner of Interna l Revenue v. Cording l ey , supra. �eco111M iss i oner of Intern a 1 Reven ue v. Cordingley, supr , citing Co111111. v. Babson, 70 F2d 304 <CCA 7th, 1934) lllnd Comm. v. Brown, supr � 4310so rio v~ Posadas, 56 Phi l. 748; Wise v. Meer, 78 Phil. 655.

DECISION CTA CASE NO. 3710 - 29 - r eas onable , and in harMony with justice and public poli cy, with other laws of t h e adopting juri sdietion on the subject.,.,. Cons i der ing t hat See t ion 83(b) of the National Internal Rev enue Code was patt r n ed after Section 1H5<g > of th e Unit � d St ates Intern al Reven11P Code <1939>, dticisions of the United States courts con struin g silllil r laws nd have persua s i v e f f ect in interpreting 9 ction 83<b>. In the case a t bar , this Cou~t re ch ed at the follow ing findings and observ tton s1 1 . The purpo~e of redeeMi n g 28 , 0 00 and 80,000 sh are!! i n 1968 and 1969, respective 1y, was to reduce the of shareholdings of non-re sident stockholders in order to �ini�ize th e outflo w of foreign excha n ge which will be incurred by the corporat i on in case i t declares cash d i vid end s in the future. Petitioner's Board o f Direetors envisioned this seenario in the e ve n t ANSCOR WO\.tld declare ca i h dividends, where the non- resident stockholder� would receive the f ore 1gn excha nge equivalent of their cash dividends. In order to save on the cash outflow of foreign e xc hange fro� the countl"y, the 44Cu v. Republic of the Philippines, 89 Phil. 473.

DECISION CTA CASE NO. 3710 -30- Boa~d of Di~ecto~s ~esolved to pu~chase t he sha~es e. The h ~e !l re d e lflftd from the Estate of Don ~ndr~s Soriano was pMrt of the plan to implement the desir . f the 1 t Don Andres Soriano to ~i11p1n1:u: the corporation nd spread ANSCOR' s qui ty owng~ship. to the Filipino employees of ANSCOR &6 well a to Filipino eeployee s of pu~pose the!r iMproveM ent as well as their social when the EHeeuto~s of the E tate of Don Andres So~iano offe~ed 45,000,000 comMon shares, 75~ hereof to Filipino eMployees of ANSCOR and its redee111ed in Nove~t~ber, 19&9, al11ost G years have lapse d fr-011 the t in1e ANSCOR declared stock dividends on Dec�111ber 20, 1963 and the period of ~UExn~ M-1, PP� 97- 108, Folder III, BIR rec. 4 6�><hs. M- 1 and M-2, Ad� n i ttl"'at i v� Hearings conducted on April 26, 1980 and May eo, 1980, pp. 85- 108, Folder 111, BIR ~ee. �"'EHhs. 0 and 0-1, p. 121, Folder III, BIR rec.

DECISION CTA CASE NO. 3710 - 31 - 4. The stocks redee111ed were not ret ired or put out of circulati on but w re p l ac ed in the nante of ANSCOR 5 trea s ury t hares fo r th e purpo s e of re- i sui ng t heM in t he f ut ur to th entpl oyetn and officer~ of ANSCOR a nd other ffiliate corporations Mana ged by p et i t i oner. In SUIII!I r y thel"efor, an � �><alliin tion of the purpose for the rede mption would show that there was no intention on the part of petitioner to avoid or evade the ta>< on "dividend equivalence" under Section 83(b) of the National Internal Revenue Code. The "essentially equivalent to a dividend" provision was evidently aiMed at the capitalization of earnings which had no fair bus iness object and were intended Merely to evade the pay111ent of taxes. 4 � Adequate evidence were pre sented by petitioner showing proof of a valid corporate purpose for the redeMption of its own shares , such ass <a> its desi re to li111it the stock interest of its non-resident stoc kh o lders by the acquisition of their stocks in order to save on foreign e xchange require111ent in divi dends would be declared and re111itted abroad, and � ---co111111issioner of In ternal Revenue v. Quackenbos, 78 F2d 1~6, <CCA 2d, 1935)

DECISION CTA CASE NO. 3710 - 32 - <b> tn objective of the 1 te Don Andr�s Soriano to Filipinize t h e corporat ion thru the di stribution of its shares to Fi lipino employees of ANSCOR and its affiliates and to the public in general. Thus, redeeMed shares are the equivalent of dividends if and only i f the sh~res were not issued Sectio n 41 of the Co r po r atio n Code ( 1980) Mandates the power of a corpor a ti on to p1..1n::h!~se or acq uire it. own for purpose <s), provided, it has unrestricted earnings to cover the said purchase and that its capital is not thereby i�paired and provided fur ther, that the conditions of corporat e affairs warrant it. eo There being a valid corporate purpose for the rede�pt ion, there therefore, sufficient justification for the redempti on to exclude it fro� the purview of an "er.;.entiall y equivalent to a taxa b 1e d i v i dend " prov i s i on. However, this factor alone is not controlling although it �ay be relevant and at tiMes considered to be a critical factor in deterMining the applicabi lity of Section 83 (b). 4 -Patty v. Helvering, 98 F2d 717 <CCA 2d, 1938>, De Nobill Cigar Co. v. Co��issioner of Internal Revenue, 143 F2d 436 <CCA 2d, 1944) 80see SEC Opinion, Feb. 27, 1976.

DECISION CTA CASE NO. 3710 - 33 - di5tribution and rw de mption of Th e issuance of new commo n ~tacks in 1g63 w . ~ due to the declarat ion of stock divi d end s, but the t"ede111pt ion of co 111mon shat"es in 1969, though for ming part of ~t ock dividwnds, was not made at such ti me in ~uc h ma nn e r a s to ma ke the transaction essent i ;ally equi valent to distribution of di vi dend since over 6 ywars have lapsed after it wa s issued and before the redemption was effected. RedeMption under Sec tion 83(b) connotes something oth er t han repurcha s e ; it incl ud e s the idea of a surrender of shares by a stockholder and a retire11ent of that which he Conceivably the reason 111ay be found in the fact that the corporation's acquisition of the stock with a view of re i ssu ing it indicatws that there was no intention on its part to pwrmanently distribute part of its surplus. Thw characteristics of a sale 111ay be thought to predo�inate over the characteristics of a distribution in partial liquidation.se A truw 8 �Huntoon v. Comm is sioner of Internal Revenuw, 14 BTA 4~9. 8 �Al per� v. Co m� iss i oner of Int wrnal Revenue, 126 F2d ~8.

DECISION CTA CASE NO. 3710 - 34 - Petiti on e did n ot retire the s tocks purchased frOGii the ~ tate of' Do" Andres Sori no instead it pl aced the� in its treasury a s 1 i ve assttt s to bt! disposed of as it should thereafter deter�ine in this ease to be distributttd to its tt�ployttes in the nttar future or �ore particularly in 1973 when the intent to Filipini ztt ~a terialized. In view of the findings arrived at by this Court, We can' fairly eoneludtt that Section 83(b) of the National Internal Revttnue Code does not apply to thtt rede�ption of 28,000 and 80,000 eo��on shares in 1968 and 1969, rttspeetively. Hence, no obligation on th e p~rt of petitioner was created in order to withh old the tax fro11 the Estate of Don And res Soriano. <2> Conversion of 11 , 140 COMMon shares of the Estate of Don Andres Soriano and 138,864 coM�on shares of Dona CarMen Vda. de Soriano into preferred shares in 1968. The conversion of 11,140 eo��on shares of the Estate of Don Andres Soriano and 138,864 eo��on shares of Dona Car11en Vda. de Soriano into 11,140 and 138,860 preferred shares, respectively, with 813Co�n~issioner of Internal Revenue v. Snite, 177 F2d 819.

. DECISION CTA CASE NO. 371'0 - 3S - 'the ~a�e par value were con~ id er ed by re~pondent �~ "essentially equival ent to distribution of ta)(able dividend!' under Sec ti on 83(b) since the bulk of the ~tocks cance l le d ca�e fro� ~tock di v id en d ~ re 9u l ting f r o ;a ta)(able in coftle on the part o f peti tio n er's s toc kh o lder~ whi c h c rea ted o n its part a liabi l it y t o withhold the ta)( due th er eon. Respondent rel ied on the report of his e)( &Min e rs find i ng the c onversion of ~tock~ fro� co1111110n to preferred c reat e d an entirely di f ferent right and privilege resulting in a sub~tantial change in the equity of its stockholder~. Cash dividend~ were declared fro� the ti111e preferred 31, 1971 on t he bas i s of the total value of the preferred share~. It even recognized the total value of the preferred shares iss ued a s i ts indebtednes~ in favo r of preferred shareholder~ ~ince the dividends paid to the� were clai111ed as an interest e)(pense. Petitioner also obligated itself to red��� the preferred shares at par value.�� Other factor s c o ns idered by re~pondent�s e)(allliners were1 peti t ioner i!l owned by ~ingle fa111ily; the conver sion wa~ n ot pro- rata a111ong it~ ._Respondent ' s M 111oran du111 , pp. 1~2- 1~3, CTA rec. ; E)(allliners' Report , p. 2 1, Folder I, BIR rec.

DECISION CTA CASE NO. 3710 - 36 - �tockholdera, there wa'! no di5tribution of cash dividends in �f vor of shareholders, petitioner continue to operate with a profit, and 1 st but not the 1 ast, the accu�ulated surplus of peti tioner before and after th� Petitioner on the other hand Maintains that the cGnve~~ion w � merely reclassification of its The stockho lder� received equal n umber of' pr-e 'I' e rred share� in exchang e for their co 11mon hares with the sa�� par value of PlOO. 00 The comp osition of p~ttitioner' s assets t>ame. Ther� was on ly a cancellati on of t he certific te evidencing ownership in common stock in lieu of another certificate e videncing o ner hip in pref�rr�d stock. Furthermore, the Uni ted Stat �s Internal Rev~tnue Service of W1uh ington D.C. issued a ruling of..... on thi'l �atter regardin g the contemplated exchange to pr�ferred sh res in the corporation as one that wo ul d qualify 11!11 a recapitalization or a reorganizat ion. However, re15pondent contends th t the above ruling WIHI bastd on incompl ete facts. Pe.t it i on er did not m~ntion that prior to the recapitalization

DECISION CTA CASE NO. 3 7 10 - 37 - of the 300,000 c o��on shares outst anding, into 150,000 co��on and 150,000 preferred share s , its capital structure was a co~ b i n a tion of stocks originally purchas ed and st ock dividends i s s ued to st ockholders. Cash dividends were not declared sinc e 1945, wh en it r es� me its bu iness operat ion due t o World WC\r I I, until the dat e of recapitalization in 1968. The boo k va lue (absent the fair Market value > as of December 31 , 1967 or prior to the exchange in March, 1968 w<u P 14 1. 92 per coMmon share. We find for the p e ti t ione r . The vital question to be d et or�ined is whether a gain or pr o fi t had been ~-'-�~l_i_~eq_ by the stockholders concl!rned from the exchange or conversion of t h e commo n sh ares of stoc k t o preferred !Sh ares of stoc k, as compared to reali zable gai n, i n order to subject petitioner fro� the withholdin g of t a x due thereon. It is wo rt hy t o no t e th a t the person s responsible in the man ag e men t of ANSCOR are the two sons of Don Andres Soriano, naMely, Andres Soriano, Jr. and Jose M. Soriano, who prior to the reclassification owned only 23,000 co�mon shares while the �ajority of the stocks were owned by the Estate of Don Andres Soriano (including that of hi s

DECISION CTA CASE NO. 3710 - 38 - wife). For this reason t he Board of Directors decided to recl assify t h e 300, 000 co��on shares into 150,000 c ol!llmon ~har es and 150,000 pre ferred shares, which wa s later a p pro v ed by the Sec urities and E><change Co11111issi on, in order to give greater shares of stock of t he active 111anagers <Jose M. Soriano and Andres Soriano, Jr.) of the corporation thereby reducing the ri sk of being over turnl!d by the vote of Dona Car111en Vd a. de Soriano <th~Pir �other> who owns Majority of the stocks in ANSCOR. With the conversion, Dona Car� en Vda. de Soriano would loose her right over the � nage�ent of the corporation in e><change for so�e preferred rights in the distribution of dividend� and assets upon liquidation.- Th e purpose to reclassify was therefore a valid one. More or less the s a�e nu 111 b e r of co��on shares were e><change for the sa�e n 111 b er of preferred shares with the sallie pa r value per share. In general, the rights and privileges of a co��on stockholder is the s am e as that of a preferred stockholder e><cept t h at h o l ders of preferred shares are entitled to cert a i n preferen c es such as pay�ent of dividends or th e dist ri bt.ltion of ssets of a corporation in case of its dissolution or such B&Exh. M-2, pp. 8 -89, Fol d~r I II, BIR r c.

DECISION CTA CASE NO. 3710 -39- other prefa~ences s May b ~tated in the articles of' ine orgorati n whi h are not viol tive of the Corporat ion Code jn for their voting el ~se t o f toek with resp et to voting rights, the COMMOn stock May, have preference in the matter of man age ment. e The l a w provides that "Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be in all respects equal to every other share ... .,.. This Means that all stocks enjoy equa l rights and privileges. Therefore, the findings of respondent's exall!:!. ~�Htrs that the conversion created entirely different rights and privileges re~ult lng in very substantial chang~ in ~~e equity a~ the stockholder have no legal i'ICi"' f~~ 1 bast to stand on. Before the co��on shares of Dona C<l!lr��m Vda. de Soriano were actually converted into preferred shares, she requested for a ruling fro� the Internal Revenue S~Prvice of Washington D. C. regarding the tax consequence of the exchange which ruled 1 that the proposed transaction was no~ in pursuance to a plan to avoid Federal Ineo�e Taxes' s~sec ~ ~, par. 2, Co~poration Code. 1 A. Jur. 2d, 74 t. SWSec� S , par. 5, Corp r tion Code.

DECISI ON CTA CASE NO. 3 71 0 - 40 - th t t he ~ecla�s if icat i on will c l as sify as a lotus wi l l be t"eeo nized by the the bat i ' f or' the eHehange wi 11 be the sa��� The fro� stock dividends i s of no consequence because no gain was realized fro� the trans a cti on . The stocks of petitioner were ��rely r e cl a ssified into two - co��on and prefer red. Only the cer tificate of stocks evidencing own ership was changed whereby the certificates evidenc ing ownership in co��on stock was cancelled and a new certificate this ti�e evid e nc i ng owne r ship in prefe r red s tock was i s su ed for the s aM e n u�be r of s h a res origi n al l y owned a nd with the ���� par value per 5hare. The "dividend equi va l enc e" c onte�plated by Section 83 (b) �ust nec essari 1y have so�� 1og ical relation to the conv entional for�, notion and effect of a dividend.�0 In the instant case, the stockholders, the Estate of Don Andr'es Soriano ana Dona Car��n Vda. de Sori an o, did not t"eceive, as is required, any "net bene ficial inco��" n or any " r'e alized inco�e" by reaso n of the exchange. Ther'efare, Sec tton 83 <b> does not apply to the eanee ll .O nd eonve)"'ted co��on sha~ea to pr'eferred

DECISION - CTA CASE NO. 3710 - 41 - s har-es. Thu , ther-e is no l iabil ity t o wi t hh o ld on t h e p r-t of petitioner there be ing no taxable div idend t o speak of- WHEREFORE, pre� i s es c onsidered, the .ac;. presu�ption o~ ~ correctness o~ the assess�ent s issued by the respondent having be�n ov�rco�e by su~~tcien t and convincing evidence presented by pe t it i one r, t he deci s i on appealed ~ro� is her�by reversed. Without pronounce�ent a s t o cost. 80 ORDERED. Qu�zon City, Metr o Ma ni l a , Ju l y 4, 9 1. c J L\d g e WE CONCUR1 C(_~a~ ERNESTO D. ACOSTA Associate Judge

DECISION CTA CASE NO. 3710 - 42 - CERTIFICATION I hereby certify that this deci5ion was r�ached after due con'!Hiltatio n a~~tong the lltelltbers of the Court of Tax Ap pe als in ccordanc e with Section 13, Arti cle VIII of the Connt itution.