COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX APPEALS, Respondents. D E C I S I O N CASTRO, J.:

 Doctrine: Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholder’s estate until they were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and plainly violative of public policy.

FACTS:
​Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reese’s death, the company would purchase back all of its shares. Reese died. Upon Reese’s death and partial payment by the company of Reeses’s share, a new certificate was issued in the name of MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in the Treasury to the capital account of the company as stock dividends to be distributed to the stockholders. When the entire purchase price of Reese’s interest in the company was paid in full by the latter, the trust agreement was terminated, and the shares held in trust were delivered to the company. The BIR ordered an examination of MANTRASCO’s books and discovered that the 24,700 shares declared as dividends were not disclosed by respondents as part of their taxable income for the year 1958. Such declaration was assessed by the BIR as distribution of assets subject to income tax. Hence, the CIR issued notices of assessment for deficiency income taxes to respondents. Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR

ISSUE:
​ Whether the subject shares are treasury shares

HELD:
NO. In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared as stock dividends were treasury shares. The Court are however is convinced, that after a careful study of the trust agreement, that the said shares were not, on December 22, 1958 or at anytime before or after that date, treasury shares. The reasons are quite plain. The Supreme Court held that the newly acquired shares were not treasury shares; their declaration as treasury stock dividends was a complete nullity and that the assessment by the Commissioner of fraud penalty and the imposition of interest charges pursuant to the provision of the Tax Code were made in accordance with law. Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation though it still represent a paid — for interest in the property of the corporation. These features of a treasury stock are lacking in the questioned shares. In this case, and under the terms of the trust agreement, the shares of stock of Reese participated in dividends which the trustee received and the said shares were voted upon by the trustee in all corporate meetings. They were not, therefore, treasury shares. The 24,700 shares were outstanding shares of Reese’s estate until they were fully paid. Such being the case, their declaration as treasury stock dividend was a complete nullity. Where the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased stockholder as absolutely outstanding shares of said stockholder’s estate until they were fully paid. the declaration of said shares as treasury stock dividend was a complete nullity and plainly violative of public policy.