Liquidating dividends are not income and are thus not subject to income tax. In Wise & Co., Inc. v. Meer (G.R. No. 48231, June 30, 1947), the…

The question

Liquidating dividends are not income and are thus not subject to income tax. In Wise & Co., Inc. v. Meer (G.R. No. 48231, June 30, 1947), the Supreme Court defined liquidating dividends as the dissolving corporation’s payments to the stockholders for their surrender and relinquishment of interest in the dissolving corporation. They are generally a return of capital. Liquidating dividends are unlike cash and property dividends which are portions of corporate profits that are set aside for distribution to the stockholders in proportion to their subscription to the capital stock of the corporation.1 MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to its stockholders, all of whom are individuals. Are the dividends taxable? (2013 Bar Question)

1. A.The dividends are taxable; the tax exemption of MGC Corp. does not extend to its stockholders.
2. B.The dividends are tax exempt because of MGC Corp.'s income tax holiday.
3. C.The dividends are taxable if they exceed 50% of MGC Corp.'s retained earnings.
4. D.The dividends are exempt if paid before the end of MGC Corp.'s fiscal year.

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