G.R. No. 108576 January 20, 1999COMMISSIONER OF INTERNAL REEN!E, petitioner, vs.T"E CO!RT OF A##EALS, CO!RT OF TA$ A##EALS an% A. SORIANO COR#., respondents.MARTINE&, J.:Petitioner Commissioner of Internal Revenue (CIR) seeks thereversal of the decision of the Court of Appeals (CA)1 whichaffirmed the ruling of the Court of Ta Appeals (CTA) 2 that privaterespondent A. !oriano Corporation"s (hereinafter A#!C$R)redemption and echange of the stocks of its foreign stockholderscannot %e considered as &essentiall' e(uivalent to a distri%ution oftaa%le dividends& under, !ection )*(%) of the +,*, InternalRevenue Act. 'The undisputed facts are as follows-!ometime in the +,*.s, /on Andres !oriano, a citi0en and residentofthe1nited !tates, formedthecorporation&A. !oriano2Cia&,predecessor of A#!C$R, with a P+,...,...... capitali0ationdivided into +.,... common shares at a par value of P+..3share.A#!C$Ris wholl'ownedandcontrolled%'thefamil'of /onAndres, whoareall non4resident aliens. ( In+,*5, /onAndressu%scri%ed to 6,,7* shares of the 8,... shares originall' issued. 5$n !eptem%er+9, +,68, A#!C$R"sauthori0ed capital stockwasincreasedtoP9,8..,......dividedinto98,...commonshareswiththesamepar valueof theadditional +8,...shares, onl'+.,... was issued which were all su%scri%ed %' /on Andres, aftertheother stockholderswaivedinfavor of theformer their pre4emptive rights to su%scri%e to the new issues. 6 This increased hissu%scription to +6,,7* common shares. 7 A month later, 8 /onAndrestransferred+,98.shareseachtohistwosons,:oseandAndres, :r., as their initial investments in A#!C$R. 9 ;oth sons areforeigners. 10;' +,65, A#!C$R declared stock dividends. $ther stock dividenddeclarations were made %etween +,6, and /ecem%er 9.,+,7*. 11 $n /ecem%er *., +,76 /on Andres died. As of that date,the records revealed that he has a total shareholdings of +)8,+86shares 12 < 8.,6,8 of which are original issues and the %alance of+*6.78, shares as stock dividend declarations. 1'Correspondingl',one4half of that shareholdings or ,9,855 1( shares were transferredto his wife, /o=a Carmen !oriano, as her con>ugal share. The otherhalf formed part of his estate. 15A da' after /on Andres died, A#!C$R increased its capital stock toP9.? 16 and in +,77 further increased it to P*.?. 17 In the same'ear (/ecem%er +,77), stock dividends worth 67,9,. and 67,9)5shares were respectivel' received %' the /on Andres estate 18 and/o=a Carmen from A#!C$R. @ence, increasing their accumulatedshareholdings to +*),)75 and +*),)76 19 common shares each. 20$n /ecem%er 9), +,75, /o=a Carmen re(uested a ruling from the1nited !tates Internal Revenue !ervice (IR!), in(uiring if anechange of common with preferred shares ma' %e considered as ata avoidance scheme 21under !ection *75 of the +,86 1.!.Revenue Act. 22 ;' :anuar' 9, +,7), A#!C$R reclassified itseisting *..,... common shares into +8.,... common and+8.,... preferred shares. 2'Inaletter4repl'datedAe%ruar'+,7), theIR!opinedthat theechange is onl' a recapitali0ation scheme and not taavoidance. 2( Conse(uentl', 25 on?arch *+, +,7) /o=a Carmenechanged her whole +*),)76 common shares for +*),)7. of thenewl' reclassifiedpreferredshares.The estateof/onAndres inturn, echanged ++,+6. of its common shares, for the remaining++,+6.preferredshares, thusreducingits(theestate)commonshares to +95,595. 26$n :une *., +,7), pursuant to a ;oard Resolution, A#!C$Rredeemed 9),... common shares from the /on Andres" estate. ;'#ovem%er +,7), the;oardfurther increasedA#!C$R"s capitalstock to P58? divided into +8.,... preferred shares and 7..,...commonshares. 27 A%out a'ear later,A#!C$Ragainredeemed).,...commonshares fromthe/onAndres" estate, 28 furtherreducing the latter"s common shareholdings to +,,595. As stated inthe ;oard Resolutions, A#!C$R"s %usiness purpose for %othredemptions of stocks is to partiall' retire said stocks as treasur'shares in order to reduce the compan'"s foreign echangeremittances in case cash dividends are declared. 29In +,5*, after eamining A#!C$R"s %ooks of account and records,Revenueeaminers issuedareport proposingthat A#!C$R%eassessed for deficienc' withholding ta4at4source, pursuant to!ections 8* and 86 of the +,*, Revenue Code, '0 for the 'ear +,7)andthe second(uarter of +,7,%asedonthe transactions ofechange *+ and redemption of stocks. '1 The ;ureau of InternalRevenue(;IR)madethecorrespondingassessmentsdespitetheclaimof A#!C$R that it availed of the ta amnest' underPresidential /ecree (P./.) 9* '2 which were amended %' P./."s 75 and +85. '' @owever,petitioner ruled that the invoked decrees do not cover !ections 8*and 86 in relation to Article )*(%) of the +,*, Revenue Act underwhichA#!C$Rwasassessed. '(A#!C$R"ssu%se(uentprotestonthe assessments was denied in +,)* %' petitioner. '5!u%se(uentl', A#!C$Rfiledapetitionfor reviewwiththeCTAassailing the ta assessments on the redemptions and echange ofstocks. In its decision, the Ta Court reversed petitioner"s ruling,after finding sufficient evidence to overcome the primafacie correctness of the (uestioned assessments. '6 In a petition forreview the CA as mentioned, affirmed the ruling of theCTA. '7 @ence, this petition.The%oneof contentionis theinterpretationandapplicationof!ection )*(%) of the +,*, Revenue Act '8 which provides-!ec. )*. /istri%ution of dividends or assets %' corporations. ect to ta. @owever, if acorporation cancels or redeems stock issued as a dividend at suchtime and in such manner as to make the distri%ution andcancellation or redemption, in whole or in part, essentiall'e(uivalent to the distri%ution of a taxable dividend, the amount sodistri%utedinredemptionor cancellationof the stock shall %econsidered as taxable income to the etent it represents adistri%utionof earningsor profitsaccumulatedafter ?archfirst,nineteen hundred and thirteen. (Bmphasis supplied)!pecificall', the issue is whether A#!C$R"s redemption of stocksfromits stockholder as well as theechangeof commonwithpreferred shares can %e considered as &essentiall' e(uivalent to thedistri%ution of taa%le dividend& making the proceeds thereoftaa%le under the provisions of the a%ove4(uoted law.Petitioner contends that the echange transaction a tantamount to&cancellation& under !ection)*(%) makingtheproceedsthereoftaa%le. It also argues that the !ection applies to stock dividendswhich is the %ulk of stocks that A#!C$R redeemed. Aurther,petitioner claims that under the &net effect test,& the estate of /onAndres gained from the redemption. Accordingl', it was the dut' ofA#!C$R to withhold the ta4at4source arising fromthe twotransactions, pursuant to !ection 8* and 86 of the +,*, RevenueAct. '9A#!C$R, however, avers that it has no dut' to withhold an' taeither from the /on Andres estate or from /o=a Carmen %ased onthe two transactions, %ecause the same were done for legitimate%usinesspurposeswhichare(a)toreduceitsforeignechangeremittances in the event the compan' would declare cashdividends, (0 and to (%) su%se(uentl' &filipini0ed& ownership ofA#!C$R, as allegedl', envisioned%'/onAndres. (1 It likewiseinvoked the amnest' provisions of P./. 75.Ce must emphasi0e that the application of !ec. )*(%) depends onthespecial factual circumstancesof eachcase.(2 Thefindingsoffacts of a special court (CTA) eercising particular epertise on thesu%>ect of ta, generall' %inds this Court, (' considering that it issu%stantiall'similartothefindingsof theCAwhichisthefinalar%iter of (uestions of facts. (( The issue in this case does not onl'deal with facts %ut whether the law applies to a particular set offacts. ?oreover, this Court is not necessaril' %ound %' the lowercourts" conclusions of law drawn from such facts. (5A?#B!T2-Ce will deal first with the issue of ta amnest'. !ection + of P./.75 (6 provides-+. In all cases of voluntary disclosures of previously untaxedincome and/or wealth such as earnings, receipts, gifts, %e(uests oran' other ac(uisitions froman' source whatsoever which aretaa%leunderthe#ational Internal RevenueCode,asamended,reali0edhereora%road%'an'tapa'er,natural or>udicialDthecollection of all internal revenue taes including the increments orpenalties or account of non4pa'ment as well as all civil, criminal oradministrative lia%ilities arising from or incident to such disclosuresunder the #ational Internal Revenue Code, the Revised Penal Code,the Anti4Eraft and Corrupt Practices Act, the Revised AdministrativeCode, the Civil !ervice laws and regulations, laws and regulationsonImmigrationand/eportation, or an'otherapplica%lelaworproclamation, are here%' condoned and, in lieu thereof, a ta often(+.F) per centumonsuchpreviousl' untaedincome orwealth, is here%'imposed, su%>ect tothefollowingconditions-(conditions omitted) GBmphasis suppliedH.The decree condones &the collection of allinternalrevenue taesincluding the increments or penalties or account of non4pa'ment aswell asall civil, criminal or administrativelia%learisingfromorincident to&(voluntar') disclosuresunderthe#IRCof previousl'untaedincomeand3or wealth&reali0edhereor a%road%'an'tapa'er, natural or >uridical.&?a' the withholding agent, in such capacit', %e deemed a tapa'erfor it toavail of theamnest'I Anincometapa'er covers allpersonswhoderivetaa%leincome. (7 A#!C$Rwasassessed%'petitioner for deficienc' withholding ta under !ection 8* and 86 ofthe +,*, Code. As such, it is %eing held lia%le in its capacit' as awithholding agent and not its personalit' as a tapa'er.Intheoperationof thewithholdingtas'stem, thewithholdingagent is the pa'or, a separate entit' acting no more than an agentof the government for the collection of the ta (8 in order to ensureits pa'mentsD (9 thepa'er is thetapa'er ect to ta impose %' lawD 50 and the pa'ee is the taingauthorit'. 51 In other words, the withholding agent is merel' a tacollector, not a tapa'er. 1nder the withholding s'stem, however,theagent4pa'or%ecomesapa'ee%'fictionof law.@is(agent)lia%ilit' is direct and independent from the tapa'er, 52 %ecause theincome ta is still impose on and due from the latter. The agent isnot lia%le for the ta as no wealth flowed into him < he earned noincome. The Ta Code onl' makes the agent personall' lia%le forthe ta 5' arising from the %reach of its legal dut' to withhold asdistinguish from its dut' to pa' ta since-the government"s cause of action against the withholding is not forthe collection of income ta, %ut for the enforcement of thewithholdingprovisionof !ection8*of theTaCode,compliancewith which is imposed on the withholding agent and not upon thetapa'er. 5(#ot %eingatapa'er,awithholdingagent, likeA#!C$Rinthistransaction is not protected %' the amnest' under the decree.Codal provisionson withholding taaremandator'and must%ecomplied with %' the withholding agent. 55 The tapa'er should notanswerforthenon4performance%'thewithholdingagentof itslegaldut'to withhold unless there is collusion or %ad faith.Theformer couldnot %edeemedtohaveevadedthetahadthewithholding agent performed its dut'. This could %e the situationfor which the amnest'decreewas intended. Thus, to curtailtaevasion and give ta evaders a chance to reform, 56 it was deemedadministrativel' feasi%le to grant ta amnest' in certain instances.In addition, a &ta amnest', much like a ta eemption, is neverfavored nor presumed in law and if granted %' a statute, the termof theamnest'likethatof ataeemptionmust%econstruedstrictl'against thetapa'er andli%erall'infavor of thetaingauthorit'. 57 The rule on strictissimi juris e(uall' applies. 58 !o that,an' dou%t in the application of an amnest' law3decree should %eresolved in favor of the taing authorit'.Aurthermore, A#!C$R"s claimof amnest' cannot prosper. Theimplementing rules of P./. *5. which epanded amnest' onpreviousl' untaed income under P./. 9* is ver' eplicit, to wit-!ec. 6. Cases not covered %' amnest'. < The following cases arenot covered %' the amnest' su%>ect of these regulations-

(9) Ta lia%ilities with or without assessments, on withholding taat source provided under !ection 8* and 86 of the #ationalInternal Revenue Code, as amendedD 59A#!C$R was assessed under !ections 8* and 86 of the +,*, TaCode. Thus, %' specific provision of law, it is not covered %' theamnest'.TAJ $# !T$CK /ILI/B#/!Eeneral Rule!ec. )*(%) of the +,*, #IRC was taken from the !ection ++8(g)(+)of the 1.!. Revenue Code of +,9). 60 It laid down the general ruleknownastheproportionatetest 61 whereinstockdividendsonceissued formpart of the capital and, thus, su%>ect to incometa. 62 !pecificall', the general rule states that-Astockdividendrepresentingthetransfer of surplustocapitalaccount shall not %e su%>ect to ta.@aving %een derived from a foreign law, resort to the >urisprudenceof itsoriginma'shedlight. 1nder the1!RevenueCode, thisprovision originall' referred to &stock dividends& onl', without an'eception. !tock dividends, strictl' speaking, represent capital anddo not constitute income to itsrecipient. 6' !o that the mere issuance thereof is not 'et su%>ect toincome ta 6( as the' are nothing%ut an&enrichment throughincrease in value of capital investment.& 65 As capital, the stock dividends postpone thereali0ationof profits%ecausethe&fundrepresented%'thenewstock has %een transferred from surplus to capitaland no longeravaila%le for actual distri%ution.& 66 Income in ta law is &anamount of mone'comingtoapersonwithinaspecifiedtime,whether as pa'ment for services, interest, or profit frominvestment.& 67 It means cash or its e(uivalent. 68 It is gain derivedand severed from capital, 69 from la%or or from %oth com%ined 70 ect to income ta. It should %e noted that capital and incomeare different. Capital is wealth or fundD whereas income is profit orgain or the flow of wealth.7' The determining factor for theimposition of income ta is whether an' gain or profit was derivedfrom a transaction. 7(The Bception@owever, if a corporation cancels or redeems stock issued asa dividend at such time and in such manner as to makethe distribution and cancellation or redemption, in whole or in part,essentiall' e(uivalent to the distri%ution of a taxable dividend, theamountso distri%utedinredemptionorcancellation ofthestockshall %e considered as taxable income to the etent it represents adistri%utionof earningsor profitsaccumulatedafter ?archfirst,nineteen hundred and thirteen. (Bmphasis supplied).In a response to the ruling of the American !upreme Court in thecaseof Eisner v. Macomber 75 (that prorata stockdividends arenot taa%le income), the eempting clause a%ove (uoted wasadded %ecause provision corporation found a loophole in theoriginalprovision. The' resorted to devious means to circumventthe law and evade the ta. Corporate earnings would %e distri%utedunderthe guiseofits initialcapitali0ation %' declaring the stockdividends previousl'issuedandlater redeemsaiddividends%'pa'ing cash to the stockholder. This process of issuance4redemptionamountstoadistri%utionof taa%lecashdividendswhichwaslust dela'edsoastoescapetheta. It %ecomesaconvenient technical strateg' to avoid the effects of taation.Thus, to plug the loophole < the eempting clause was added. Itprovidesthat theredemptionor cancellationof stockdividends,depending on the &time& and &manner& it was made, is essentiall'e(uivalent to a distri%ution of taa%le dividends,& making theproceeds thereof &taa%leincome& &totheetent it representsprofits&. The eception was designed to prevent the issuance andcancellation or redemption of stock dividends, which isfundamentall' not taa%le, from %eing made use of as a device forthe actual distri%ution of cash dividends, which is taa%le. 76Thus,the provision had the o%vious purpose of preventing a corporationfrom avoiding dividend ta treatment %' distri%uting earnings to itsshareholders in two transactions ust 9to*'earsearlier.Thetimealonethatlapsedfromtheissuancetotheredemptionis not asufficientindicator to determine taa%ilit'. It is a must to consider the factualcircumstances as tothemanner of %oththeissuanceandtheredemption. The&time&elementisafactortoshowadevicetoevadetaandtheschemeof cancellingorredeemingthesameshares is a method usuall' adopted to accomplish the endsought. 96 Cas this transaction used as a &continuing plan,&&device& or &artifice& to evade pa'ment of taI It is necessar' todetermine the &net effect& of the transaction %etween theshareholder4income tapa'er and the ac(uiring (redeeming)corporation. 97 The &net effect& test is not evidence or testimon' to%e consideredD it is rather an inference to %e drawn or a conclusionto %e reached. 98 It is also important to know whether the issuanceof stock dividends was dictated %' legitimate %usiness reasons, thepresence of which might negate a ta evasion plan. 99Theissuanceof stockdividendsanditssu%se(uent redemptionmust %e separate, distinct, and not related, for the redemption to%e considered a legitimate ta scheme. 100 Redemption cannot %eused as a cloak to distri%ute corporate earnings. 101 $therwise, theapparent intention to avoid ta %ecomes dou%tful as the intentionto evade %ecomes manifest. It has %een ruled that-GAHn operation with no %usiness or corporate purpose < is a meredevise which put on the form of a corporate reorgani0ation as adisguise for concealing its real character, and the sole o%>ect andaccomplishment of which was the consummation of a preconceivedplan, not to reorgani0e a %usiness or an' part of a %usiness, %ut totransfer a parcel of corporate shares to a stockholder. 102/epending on each case, the eempting provision of !ec. )*(%) ofthe +,*, Code ma' not %e applica%le if the redeemed shares wereissuedwith bonafide %usinesspurpose, 10' whichis>udgedaftereach and ever' step of the transaction have %een considered andthe whole transaction does not amount to a ta evasion scheme.A#!C$R invoked two reasons to >ustif' the redemptions < (+) thealleged&filipini0ation& programand(9) thereductionof foreignechangeremittancesincasecashdividendsaredeclared. TheCourt is not concerned with the wisdom of these purposes %ut ontheir relevance to the whole transaction which can %e inferred fromtheoutcomethereof.Again,itisthe&neteffectratherthanthemotives and plans of the tapa'er or his corporation& 10( that is thefundamental guide in administering !ec. )*(%). This ta provisionis aimed at the result. 105 It also applies even if at the time of theissuance of the stock dividend, there was no intention to redeem itas a means of distri%uting profit or avoiding ta ondividends.106 The eistence of legitimate %usiness purposes insupport of the redemptionof stock dividends is immaterial inincome taation. It has no relevance indetermining &dividende(uivalence&. 107 !uchpurposes ma'%ematerial onl'upontheissuanceof thestockdividends. Thetestof taa%ilit'undertheeemptingclause, whenit provides&suchtimeandmanner&aswould make the redemption &essentiall' e(uivalent to thedistri%ution of a taa%le dividend&, is whether the redemptionresultedintoaflowof wealth. If nowealthisreali0edfromtheredemption, there ma' not %e a dividend e(uivalence treatment. Inthe metaphor of Eisner v. Macomber, income is not deemed&reali0e& until the fruit has fallen or %een plucked from the tree.The three elements in the imposition of income ta are- (+) theremust %e gain or and profit, (9) that the gain or profit is reali0ed orreceived, actuall' or constructivel', 108 and (*) it is not eempted%' law or treat' from income ta. An' %usiness purpose as to wh'or how the income was earned %' the tapa'er is not are(uirement. Income ta is assessed on income received from an'propert', activit' or service that produces the income %ecause theTa Code stands as an indifferent neutralpart' on the matter ofwhere income comesfrom. 109As stated a%ove, the test of taa%ilit' under the eempting clauseof !ection)*(%) is, whether income was reali0edthroughtheredemption of stock dividends. The redemption converts intomone' the stock dividends which %ecome a reali0ed profit or gainandconse(uentl',thestockholder"sseparatepropert'. 110 Profitsderivedfromthecapital investedcannot escapeincometa. Asreali0ed income, the proceeds of the redeemed stock dividends can%e reached %' income taation regardless of the eistence of an'%usiness purpose for the redemption. $therwise, to rule that thesaid proceeds are eempt from income ta when the redemption issupported%'legitimate%usinessreasonswoulddefeat thever'purpose of imposing ta on income. !uch argument would open thedoor for income earners not to pa' ta so long as the person fromwhom the income was derived has legitimate %usiness reasons. Inotherwords,thepa'mentoftaundertheeemptingclauseof!ection )*(%) would %e made to depend not on the income of thetapa'er, %ut on the %usiness purposes of a third part' (thecorporationherein)fromwhomtheincomewasearned. Thisisa%surd, illogical andimpractical consideringthat the;ureauofInternal Revenue (;IR) would %e pestered with instances indetermining the legitimac' of %usiness reasons that ever' incomeearner ma' interposed. It is not administrativel' feasi%le andcannot therefore %e allowed.The ruling in the American cases cited and relied upon %' A#!C$Rthat &the redeemed shares are the e(uivalent of dividend onl' ifthe shareswere not issued for genuine %usiness purposes&, 111 orthe &redeemedshares have %een issued %' a corporation%onafide& 112 %ears no relevance in determining the non4taa%ilit' of theproceeds of redemption A#!C$R, rel'ing heavil' and appl'ing saidcases, argued that so long as the redemption is supported %' validcorporatepurposestheproceedsarenot su%>ect tota. 11' Theadoption %' the courts %elow 11( of such argument is misleading ifnot misplaced. A review of the cited American cases shows that thepresence or a%sence of &genuine %usiness purposes& ma' %ematerial with respect to the issuance or declaration of stockdividends %ut not on its su%se(uent redemption. The issuance andthe redemption of stocks are two different transactions. Althoughthe eistence of legitimate corporate purposes ma' >ustif' acorporation"s ac(uisition of its own shares under !ection 6+ of theCorporation Code, 115 such purposes cannot ecuse the stockholderfromtheeffectsof taationarisingfromtheredemption. If theissuance of stock dividends is part of a ta evasion plan and thus,without legitimate %usiness reasons, the redemption %ecomessuspiciouswhicheemptingclause. Thesu%stanceof thewholetransaction, not its form, usuall' controls the ta conse(uences. 116The two purposes invoked %' A#!C$R, under the facts of this caseare no ecuse for its ta lia%ilit'. Airst, the alleged &filipini0ation&plancannot%econsideredlegitimateasitwasnotimplementeduntil the ;IR started making assessments on the proceeds of theredemption. !uch corporate plan was not stated in nor supported%' an' ;oard Resolution %ut a mere afterthought interposed %' thecounselof A#!C$R. ;eing a separate entit', the corporation canact onl' through its ;oard of /irectors. 117 The ;oard Resolutionsauthori0ing the redemptions state onl' one purpose < reduction offoreign echange remittances in case cash dividends are declared.#ot even this purpose can %e given credence. Records show thatdespite the eistence of enormous corporate profits no cashdividend was ever declared %' A#!C$R from +,68untilthe ;IRstarted making assessments in the earl' +,5."s. Although acorporation under certain eceptions, has the prerogative when toissue dividends, 'et when no cash dividends was issued for a%outthree decades, this circumstance negates the legitimac' ofA#!C$R"s alleged purposes. ?oreover, to issue stock dividends istoincreasetheshareholdings of A#!C$R"sforeignstockholderscontrar' to its &filipini0ation& plan. This would also increase ratherthan reduce their need for foreign echange remittances in case ofcashdividenddeclaration, consideringthat A#!C$Risafamil'corporation where the ma>orit' shares at the time of redemptionswere held %' /on Andres" foreign heirs.!econdl',assuming arguendo, that those%usiness purposesarelegitimate, the same cannot %e a valid ecuse for the imposition ofta. $therwise, the tapa'er"s lia%ilit' to pa' income ta would %emade to depend upon a third person who did not earn the income%eing taed. Aurthermore, even if the said purposes support theredemption and >ustif' the issuance of stock dividends, the samehasno%earingwhatsoever ontheimpositionof thetahereinassessed%ecausetheproceeds of theredemptionaredeemedtaa%le dividends since it was shown that income was generatedtherefrom.Thirdl',A#!C$Rarguedthat totreat as&taa%ledividend& theproceeds of the redeemed stock dividends would %e to impose onsuch stock an undisclosed lien and would %e etremel' unfair tointervening purchase, i.e. those who %u's the stock dividends aftertheir issuance. 118 !uch argument, however, %ears no relevance inthis case as no intervening %u'er is involved. And even if there isan intervening %u'er, it is necessar' to look into the factual milieuof the case if income was reali0ed from the transaction. Again, wereiterate that the dividend e(uivalence test depends on such &timeand manner& of the transaction and its net effect. The undisclosedlien 119 ma'%eunfair toasu%se(uent stock%u'er whohasnocapital interest in the compan'. ;ut the unfairness ma' not %e trueto an original su%scri%er like /on Andres, who holds stockdividendsasgainsfromhisinvestments. Thesu%se(uent %u'erwho%u'sstockdividendsisinvestingcapital. It>ustsohappenthatwhat he%oughtisstockdividends. Theeffectof its(stockdividends)redemptionfromthat su%se(uent %u'er ismerel'toreturn his capitalsu%scription, which is income if redeemed fromthe original su%scri%er.After considering the manner and the circumstances %' which theissuance and redemption of stock dividends were made, there is noother conclusion %ut that the proceeds thereof are essentiall'considerede(uivalent toadistri%utionof taa%ledividends. As&taa%ledividend&under !ection)*(%), it ispart of the&entireincome& su%>ect totaunder !ection99inrelationto!ection9+ 120 of the+,*,Code. ?oreover,under !ection9,(a)of saidCode, dividendsare includedin &gross income&.As income,itissu%>ect to income ta which is re(uired to %e withheld at source.The +,,5 Ta Code ma' have altered the situation %ut it does notchange this disposition.BJC@A#EB $A C$??$# CIT@ PRBABRRB/ !@ARB! 121Bchange is anact of taking or giving one thing for anotherinvolving 122 reciprocal transfer 12' and is generall' considered as ataa%le transaction. The echange of common stocks withpreferredstocks, or preferredfor commonor acom%inationofeither for %oth, ma' not produce a recogni0ed gain or loss, so longas the provisions of !ection )*(%) is not applica%le. This is true in atrade %etweentwo(9) persons as well as atrade %etweenastockholder and a corporation. In general, this trade must %e partsof merger, transfer to controlled corporation, corporate ac(uisitionsor corporate reorgani0ations. #o taa%le gain or loss ma' %erecogni0ed on echange of propert', stock or securities related toreorgani0ations. 12(;oth the Ta Court and the Court of Appeals found that A#!C$Rreclassified its shares into common and preferred, and that parts ofthecommonsharesof the/onAndresestateandall of /o=aCarmen"s shares were echanged for the whole +8..... preferredshares. Thereafter, %oth the /on Andres estate and /o=a Carmenremained as corporate su%scri%ers ecept that their su%scriptionsnowinclude preferred shares. There was no change in theirproportional interest after the echange. There was no cash flow.;oth stocks had the same par value. 1nder the facts herein, an'difference in their market value would %e immaterial at the time ofechange%ecausenoincomeis 'et reali0ed