Posados v. Warner, Barnes & Co.

Background

In two related suits a British corporation and an individual sued the Philippine tax collector to recover taxes paid on dividends issued in company stock under Act 2833 (amended by Act 2926). In 1923 each received stock dividends—one worth 43,500 pesos, the other 50,000 pesos—and the collector treated the distributions as taxable income, assessed taxes, and kept the payments after lawsuits began.

Reasoning

The central question was whether stock dividends could be taxed under the Islands’ income law even though they are not strictly cash income. The Court explained that the Philippine law properly included such distributions as taxable advantages, that earlier U.S. cases resting on the U.S. Constitution did not control the Islands, and that objections based on the law’s title and on uniformity of rates failed because graduated rates applied only to individuals while corporations faced a flat rate. The Supreme Court reversed the Philippine supreme court’s judgments and sustained the tax authority’s action.

Real world impact

The decision lets Philippine tax authorities collect and keep taxes assessed on stock dividends and confirms the Legislature’s power to tax shareholder benefits from dividend shares. Corporations and individuals who receive stock dividends in the Islands face taxation on those distributions under the statute, and prior local decisions that had suggested otherwise do not bind the United States Supreme Court. In the cases at issue taxpayers had paid 1,305 pesos and 637.87 pesos under protest, amounts now upheld as collectible.

Dissents or concurrances

The insular supreme court had been divided, and one justice was disqualified; that split contributed to the United States Court’s review and reversal.