Case Summary (G.R. No. L-2659)
Procedural Posture
The lower court authorized the estate administrator to endorse and deliver the 54,000 shares to the life tenant. The legal heirs objected and appealed from that order; the question on appeal is whether a stock dividend is fruit (income) belonging to the usufructuary or capital belonging to the remainder-man.
Issue Presented
Whether a stock dividend declared by a corporation constitutes fruit (civil income) of the shareholder’s estate and therefore belongs to a life tenant (usufructuary), or whether a stock dividend is part of the capital/corpus and therefore belongs to the remainder-men.
Parties’ Contentions
Appellants’ position: A stock dividend is not true income but an addition to invested capital; the so-called “Massachusetts rule” treats cash dividends as income but stock dividends as capital because stock dividends do not distribute corporate assets or diminish corporate property.
Appellee’s position: A stock dividend is a distribution of corporate earnings and thus constitutes income; under the “Pennsylvania rule,” dividends, however declared or paid, represent profits and therefore are fruits belonging to the life tenant.
Relevant Legal Provisions Cited
- Corporation Law, section 16: no corporation may declare or make any dividend except from surplus profits arising from its business (i.e., dividends must derive from earnings).
- Civil Code, art. 471: usufructuary is entitled to receive all natural, industrial, and civil fruits of the property in usufruct.
- Civil Code, art. 474: civil fruits are deemed to accrue day by day and belong to the usufructuary in proportion to the time the usufruct lasts.
- Civil Code, art. 475: when usufruct consists of enjoyment of benefits arising from an interest in an industrial or commercial enterprise, undistributed profits shall be considered civil fruits and distributed as such.
Court’s Analysis
The Court examined the competing rules from U.S. jurisprudence (Massachusetts vs. Pennsylvania rules) and the substance-over-form principle. It emphasized section 16 of the Corporation Law, which confines dividend declarations to surplus profits. Given that statutory command, any declared dividend—regardless of whether paid in cash or stock—represents surplus profits. Articles 471, 474, and 475 of the Civil Code characterize fruits and expressly treat profits from industrial or commercial enterprises as civil fruits when the usufruct consists of the enjoyment of such an interest. On that legal foundation, a stock dividend that is based on corporate earnings is, in reality, a mode of distributing profit and thus constitutes civil fruits. The Court reasoned that allowing a corporation’s choice of form (cash vs. stock) to alter ownership of distributable corporate earnings would subvert the testator’s intention and permit external alteration of property relations between usufructuary and remainder-men. The Court further noted the practical consequence that stock dividends may be sold independently of the original shares, like offspring of property, and that delivery of the certificate is equivalent to payment of the profits.
Rule and Holding
Where a stock dividend is declared from a corporation’s surplus
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Citation and Court
- 87 Phil. 483; G.R. No. L-2659.
- Decision rendered October 12, 1950.
- Opinion by Justice Ozaeta.
- Concurring: Moran, C.J., Paras, Feria, Pablo, Bengzon, Tuason, Montemayor, and Reyes, JJ.
Procedural Posture
- Petition filed in the lower court by Mary McDonald Bachrach, as usufructuary or life tenant, on June 10, 1948.
- Petitioner sought authorization for the administrator, Peoples Bank and Trust Company, to transfer to her a 54,000-share stock certificate representing a 50% stock dividend on the decedent's 103,000 shares of Atok-Big Wedge Mining Co., Inc.
- Opponents and appellants, Sophie Seifert and Elisa Elianoff (legal heirs of the deceased), objected to the petition; the lower court granted the petition and overruled their objection.
- Appellants appealed from the order granting the petition and overruling their objection.
Relevant Facts
- Decedent: Emil Maurice (E. M.) Bachrach.
- Testator left no forced heir except his widow, Mary McDonald Bachrach.
- In his last will and testament the testator made various legacies in cash and then viriled the remainder of his estate; the will contained a specific clause as to usufruct:
- “Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald Bachrach for life all the fruits and usufruct of the remainder of all my estate after payment of the legacies, bequests, and gifts provided for above; and she may enjoy said usufruct and use or spend such fruits as she may in any manner wish.”
- The will further provided that upon the death of Mary McDonald Bachrach, one half of all his estate “shall be divided share and share alike by and between my legal heirs, to the exclusion of my brothers.”
- The decedent owned 103,000 shares of stock of Atok-Big Wedge Mining Co., Inc.
- The corporation issued 54,000 shares to the estate, described in the record as representing a 50 per cent stock dividend on the said 103,000 shares.
- Petitioner claimed the 54,000-share stock dividend was fruit or income and therefore belonged to her as usufructuary/life tenant.
- Opponents contended the stock dividend was capital, forming part of the corpus and therefore belonged to the remaindermen.
Legal Issue Presented
- Whether a stock dividend, issued by the corporation to the decedent’s estate during the usufruct, is to be characterized as fruit or income belonging to the usufructuary (life tenant), or as capital forming part of the corpus and belonging to the remaindermen.
Arguments of the Parties
- Appellants (Sophie Seifert and Elisa Elianoff):
- Admit that a cash dividend is income.
- Contend that a stock dividend is not income but an addition to invested capital.
- Rely on the so‑called Massachusetts rule: cash dividends are income, stock dividends are capital because a stock dividend involves no severance of corporate assets, merely dilutes existing shares and does not distribute property or change shareholders’ interests in substance (citing Minot v. Paine, 99 Mass. 101, 96 Am. Dec. 705).
- Appellee (Mary McDonald Bachrach):
- Asserts that stock dividends representing corporate earnings are income and therefore fruits of the property in usufruct belonging to the life tenant.
- Relies on the so‑called Pennsylvania rule: earnings of the corporation made prior to the death of the testator that are declared as dividends in whatever form, when distributed during the life of the usufructuary, constitute income and belong to the life tenant (citing Earp’s Appeal, In re Thompson’s Estate, and other Pennsylvania authority).
Competing Judicial Doctrines Cited
- Massachusetts rule (as articulated in Minot v. Paine):
- Treats cash dividends as income but regards stock dividends as capital; a stock dividend is not a true dividend because it does not distribute corporate assets and merely dilutes preexisting shares without changing the shareholders’ proportional interests.
- Pennsylvania rule (as articulated in Earp’s Appeal and In re Thompson’s Estate):
- Holds that earnings of a corporation prior to the testator’s death belong to the corpus, but when such earnings are declared and distributed as dividends during the usufruct, regardless of form (cash or stock), they are income and belong to the lif