Commissioner of Internal Revenue v. A. Soriano Corp.

SEVENTEENTH DIVISION [CA-G.R. SP No. 26017. January 15, 1993.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . A. SORIANO CORPORATION, otherwise known as ANSCOR and THE COURT OF TAX APPEALS , respondents . D E C I S I O N HERRERA , J p : This petition for review seeks to set aside the decision of the Court of Tax Appeals, which reversed the Decision of the Commissioner of Internal Revenue holding A. Soriano Corporation otherwise known as Anscor, liable for the amounts of P3,428,163.90 and P2,950,000.00 as deficiency withholding tax-at-source, inclusive of interest, for the year 1968 and the second quarter of 1969. The instant petition originated as a protest to the deficiency withholding tax-at-source assessments issued by petitioner Bureau of Internal Revenue (BIR) against respondent Anscor. The assessments were in pursuance of the findings of the BIR examiners that the redemption by Anscor of the 28,000 common shares in 1968 and 80,000 common shares in 1969 from the Estate of Don Andres Soriano, as well as the conversion into preferred shares of Don Andres Soriano's 11,140 common shares and Doa Carmen Vda. de Soriano's 138,865 common shares, are "essentially equivalent to the distribution of taxable dividends" under Section 83 (b) in relation to Sections 53 and 54 of the National Internal Revenue Code of 1939. The facts, as found by the tax court, are as follows: In 1930, Don Andres Soriano organized A. Soriano Corporation with an authorized capital stock of P1,000,000.00 divided into 10,000 common shares at P100.00 par value per share. Don Andres Soriano subscribed to 4,963 common shares from the original issue of 5,000 common shares. As of 1 March 1945, he had total shareholdings of 4,971 common shares, inclusive of eight (8) shares in the name of four (4) nominal stockholders with two (2) shares each. On 12 September 1945, the corporation increased its authorized capital stock from P1,000,000.00 to P2,500,000.00. However, only 10,000 common shares or P1,000,000.00 from the increased P1,500,000.00 common shares were issued. Don Andres Soriano was allowed to subscribed to all the additional issues making his shareholdings total to 15,471 common shares. Don Andres Soriano then transferred 2,500 common shares to his two sons, Jose M. Soriano and Andres Soriano, Jr. The transfer left him with 12,471 common shares. Anscor declared stock dividends in 1947 and from 1949 to 20 December 1963. A year after, it increased its authorized capital stock to P20,000,000.00 divided into 200,000 common shares. Of the 200,000 common shares issued by the corporation, 53,000 common shares were original issues and 147,000 common shares represented stock dividends. 50,495 common shares of the original issues were registered in the name of Don Andres Soriano. Don Andres Soriano died on 30 December 1964. At the time of his death, he owned a total of 185,154 common shares which consisted of the aforementioned 50,495 common shares of original issue and 134,659 common shares previously declared as stock dividends. 50% of his interest with Anscor or 92,577 shares were transferred to his surviving spouse, Doa Carmen Soriano, as per conjugal share. The other half remained in the name of his Estate. On 15 May 1966, Anscor's authorized capital stock was again increased to P30,000,000.00 to provide additional capital due to the increase in the value of corporate assets. In July of the same year, it declared 50% stock dividends. The Estate of Don Andres Soriano received 46,290 stock dividends, raising its total shareholdings to 138,867 common shares. It consisted of 22,756 shares purchased by the deceased and 116,111 shares of accumulated stock dividends. Doa Carmen Vda. de Soriano, likewise, received 46,290 stock dividends making her total shareholdings equal to that of her husband's estate. On 2 January 1968, Anscor amended its Articles of Incorporation to reclassify its 300,000 authorized common shares into 150,000 common shares and 150,000 10% preferred, cumulative and non-voting shares. Thus, on 31 March 1968, the Estate of Don Andres Soriano exchanged 11,140 common shares for 11,140 10% preferred cumulative shares at P100,000 par value per share. By reason of said conversion, the common shares of the estate numbered only 127,727. Doa Carmen Vda. de Soriano, on the other hand, exchanged all her 138,864 common shares for preferred shares. Pursuant to a Board Resolution duly approved by its Directors, Anscor purchased 28,000 common shares from the Estate of Don Andres Soriano. The purpose of the redemption was to retire the common shares held by the non-resident stockholders in the event the corporation declares cash dividends. With the same objective, Anscor purchased another 80,000 common shares from the estate in November 1969. On June 1, 1972, petitioner issued Letter of Authority No. 72881 NA, authorizing the Bureau of Internal Revenue examiners named therein to examine Anscor's "books of accounts and other accounting records for all internal revenue tax purposes for the calendar/fiscal year 1971 and all unverified prior calendar/fiscal year(s)" (page 136, BIR Records, Folder II). On January 2, 1973, the Bureau of Internal Revenue examiners submitted a report on the result of their examination pursuant to the aforesaid Letter of Authority wherein they proposed to assess Anscor deficiency income and business taxes for 1968, 1969, 1970 and 1971 and withholding taxes for 1968 and 1969 (pp. 148-158, BIR Records, Folder II). Subsequently, the Bureau of Internal Revenue examiners submitted two reports dated April 2, 1974 and May 3, 1974, respectively, reiterating their findings and recommendations in their previous report dated January 2, 1973 on the withholding tax liabilities of Anscor for 1968 and 1969 (pages 19-25, BIR Records, Folder I, pp. 201-210, BIR Records, Folder II). (pp. 8-9, rollo). Based on the above findings: The examiners of the BIR recommended the issuance of assessments against Anscor. The corporation contested the assessments. But its protest were denied by the BIR, which even reiterated its demand for the payment of the assessments. On 22 December 1983, Anscor filed a petition for review with the Court of Tax Appeals which ruled in its favor. The decretal portion of the decision is herein reproduced, to wit: WHEREFORE, premises considered, the presumption of prima facie correctness of the assessments issued by the respondent having been overcome by sufficient and convincing evidence presented by petitioner, the decision appealed from is hereby reversed. Without pronouncement as to cost. (p. 99, Rollo). In this petition, the BIR posed the sole issue of "whether the redemption by Anscor of its common shares from the Estate of Don Andres Soriano and the cancellation and conversion of its common shares into preferred shares of the Estate of Don Andres Soriano and Doa Carmen Vda. de Soriano was tantamount to a distribution of a taxable dividend pursuant to Section 83 (b) in relation to Sections 53 and 54 of the National Internal Revenue Code of 1939. Hence, making Anscor liable for the respective amounts of P3,428,613.90 for the respective amounts of P3,428,613.90 for the year 1968 and P2,956,000.00 for the second quarter of 1969 as deficiency withholding tax-at-source, inclusive of interest." (Petitioner's Brief, p. 20). In maintaining that the redemption of shares is essentially equivalent to the distribution of a taxable dividend, appellant Commissioner points to the following facts and circumstances under which the redemption of the shares from the estate of Andres Soriano was made: 1. Anscor is owned by a single family, i.e., the late Don Andres Soriano, his spouse Doa Carmen Soriano and their two sons, Jose and Andres, Jr. After the death of Don Andres Soriano, Anscor was constructively controlled and managed by only two brothers, who made the corporate decisions and policies which perforce were subject to the will of only two stockholders. When the estate own a substantial part of the stock of the corporation and most of the rest of the stocks are owned by persons closely related to the decedent, there is a likelihood that any redemption would not make any substantial change in the ownership of the stock in the corporation and for that reason the redemption would be equivalent to a dividend (Wilson v. U.S., 154 F Supp 341 (DCNDNY, 1957), affd 257 F2d (CA 2d. 1958). 2. As of December 31, 1967, the year immediately preceding the redemption of the 28,000 shares, the total share-holdings of the Estate in common shares were 138,867 shares consisting of 22,756 shares acquired by purchase and 116,111 shares of accumulated stock dividends. Originally, 50,495 shares acquired by purchase. However, upon the death of Don Andres Soriano in 1964, 50% of said shares were transferred to Carmen Soriano. Hence, the bulk of the shares redeemed in 1968 consisted of stock dividends. On June 30, 1969, before the redemption of the 80,000 shares the Estate received 99,728 common shares as stock dividends. Again, the bulk of the shares redeemed in 1969 consisted of stock dividends. 3. As of December 31, 1967, the year immediately preceding the date of redemption of the 28,000 shares, the balance of Anscor's accumulated unappropriated surplus was P12,497,641.05. As of December 31, 1968, the year immediately preceding the date of redemption of the 80,000 shares, the balance of its accumulated unappropriated surplus was P21,675,702.07. As of December 31, 1969 said balance was P55,131,184.07. The consideration for which the stocks were redeemed could have been distributed from the earned surplus with a substantial balance left. 4. From 1945 to December 31, 1969, Anscor did not distribute cash dividends to common stockholders despite tremendous earnings and profits and a large supply of cash. (pp. 24-26, rollo). Appellant claims that the presence of a substantial surplus (Brown vs. Comm., 79 F2d 73 (CCA 3d, 1935); Hyman v. Helvering, 71 F2d 342 (App DC, 1934), cert den 293 US 570, 79 LEd 669, 55 S Ct 700 (1934) and a generous supply of cash (Robert R. Meyer, 27 BTA 764; Levin v. Comm., 385 F2d 521 (CA 2d. 1967) invite judicial suspicion as does a meager dividend policy in relation both to current earnings and accumulated surplus (William H. Grimditch, 37 BTA 402; Mackillon v. Comm., 1941 P-H, Fed Tax Sev (CCA 5th, 1941). (p. 27, Rollo). Appellant likewise points to the U.S. Courts two approaches on determining what time and manner of cancellation or redemption render the distribution essentially equivalent to a taxable dividend. The criterion for the first approach is whether there is a contraction of the corporate business. While the test for the other approach is whether the cancellation or redemption completely eliminated or substantially reduced the interest of a particular stockholder. In both cases, the distribution did not have the effect of a taxable dividend. (p. 27, Supra). Appellant stress that the circumstances mentioned in the aforesaid approaches are not present in this case. The redemption of the stocks did not contract the business of Anscor. On the contrary, after the redemption, its volume of business increased with corresponding increases in profits. Neither did the redemption eliminate or substantially reduce the interest of the Estate. Immediately before the redemption of the 28,000 shares, the Estate owned 85% of the stocks. After said redemption, its interest or ownership remained although it slightly went down to 82% and, after the redemption of the 80,000 shares, its percentage further went down to 73%. Furthermore, under the "net effect" test previously mentioned, the circumstances show that the redemption did not as a practical matter change the essential relationship between Anscor and the stockholders (Comm. v. Roberts, 203 F2d 304 (CA 4th, 1953; Rev Rul 56-103, CB 1956-1, p. 159; Sorem v. Comm., 344 F3d 275 (CA 10th, 1964). (p. 28, Rollo). The BIR asserts that the redemption of the shares from the Estate of Don Andres Soriano was equivalent to the distribution of a taxable dividend. Despite tremendous earnings and a large supply of cash, Anscor did not distribute cash dividends to common stockholders from 1945 to December 1969. Instead, it redeemed 28,000 and 80,000 common shares from the Estate of Don Andres Soriano, the bulk of which consisted of stock dividends. It is next argued that only 50% of the 50,495 common shares of original issue remained in the estate of Don Andres Soriano. Thus, assuming that all the 28,000 common shares redeemed in 1968 were original issues, there were no more shares of original issue left upon the redemption of the 80,000 common shares in 1969. The BIR further avers that the purpose of the redemption to reduce the corporation's requirement of foreign exchange, in the event of the declaration of cash dividends, is not legitimate because Anscor never distributed a single centavo in cash dividend despite enormous supply of cash. The existence of a single business purpose for the redemption is not sufficient to demonstrate that the net effect of the transaction was not a taxable dividend. Another error pointed out by the BIR is the Tax Court's findings that at the time of the redemption of the 80,000 common shares in November 1969, almost six (6) years have lapsed from the time Anscor declared stock dividends in 20 December 1963. Such findings are contrary to the records which reveal that on 30 June 1969 or barely four (4) months before the redemption, the estate received from Anscor 99,728 common shares as stock dividends. Coming to the conversion of the common shares into preferred shares, the BIR submits that the transaction resulted in income to stockholders as follows: ESTATE OF DOA CARMEN DON SORIANO SORIANO Value of preferred shares issued P1,114,000.00 P13,886,000.00 Less: Cost of common shares cancelled 759,882.85 2,512,089.71 Income realized from conversion P354,117.15 P11,373,910.29 The conversion of the common shares into preferred shares, the bulk of which consisted of stock dividends, was tantamount to a cancellation of common shares. The issuance of the 10% cumulative preferred shares, with entirely different rights and purposes, is therefore, equivalent to a distribution of taxable dividend. From the above allegations, the BIR concluded that Anscor as withholding agent, had the legal duty to deduct the tax due on the dividends declared by it. As pointed out by respondent Court: the main issue to be resolved is whether or not petitioner is liable for the deficiency withholding tax-at-source for the years 1968 and the second quarter of 1969 amounting to P3,428,613.90 and P2,950,000.00, respectively, on the basis of the findings of the examiners holding: (1) the redemption of 28,000 common shares in 1968 and 80,000 common shares of the Estate of Don Andres Soriano in 1969; and (2) the conversion and cancellation of 11,140 common shares of the Estate of Don Andres Soriano and 138,865 common shares of Doa Carmen Vda. de Soriano into preferred shares in 1968, as "essentially equivalent to a distribution of taxable dividend" under Section 83(b) in relation to Sections 53 and 54 of the National Internal Revenue Code of 1939. Section 83(b) of the National Internal Revenue Code (1939) was copied from Section 115(g) of the United States Internal Revenue Code of 1973, the pertinent provision of which reads as follows: "Sec. 83. Distribution of dividends or assets by corporations . (a) Definition of dividends. . . . (b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, that amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen ." (Emphasis supplied.) (p. 80, Rollo) The purpose of the law was to prevent the issuance and cancellation or redemption of a stock dividend, which is fundamentally non taxable from being made a device for the actual distribution of cash dividend (Commr. vs. Brown CA (7) 69 F.2d 602; 13 AFTR 734 cited in page 9 of Appellee's Answer). As pointed out by respondent Court: "The essentially equivalent to a dividend provision was evidently aimed at the capitalization of earnings which had no fair business object and were intended merely to evade the payment of taxes (p. 31 of Decision citing Commissioner of Internal Revenue v. Quackenbos, 78 F2d 156, (CCA 2d, 1935). Thus, redeemed shares are the equivalent of dividends if and only if the shares were not issued for genuine business purposes (Commissioner of Internal Revenue v. Quackenbos, 78 F2d 156, (CCA 2d, 1935). Moreover, it is clear from the above-quoted provision that the redemption or cancellation of stock by a corporation refers only to stock dividends. Such redemption or cancellation of stock dividends must be at such a time and in such manner as to constitute the transaction as one which is essentially equivalent to the distribution of a taxable dividend. The acts complained of in this case do not disclose an intent to distribute earnings under the guise of cancellation or redemption of stock dividends. The following authorities cited by appellee is instructive: "The statute clearly contemplates that stock dividends may be issued and redeemed; it makes explicit provision as to the taxation of sums paid in such redemption; it recognizes that the capitalization of earnings by means of stock dividends is not a distribution of earnings and is not taxable. Section 115(f). "The statute does not provide that every cash redemption of shares shall be treated per se as a dividend, but only those which because of some circumstances of time and manner are in fact essential equivalent of a dividend". (Fitzhenry, J. Commr. vs. Broxn (CCA) 89 F. 2nd 620, 604. To hold that stock issued as stock dividend to capitalize accumulated earnings, is, if redeemed, taxable as a dividend to the full amount paid for it, would be in effect to impose on such stock an undisclosed lien, and would be extremely unfair to intervening purchasers who had bought such stock after the stock dividend had been issued. Such purchasers would find on the redemption of the stock that a large part of their capital investment was taxed as income. The result of the decision appealed from is by no means so unfair to the Government as the Commissioner contends. If the corporation prospers, the capitalized earnings will be reflected in the price of its stock and ultimately taxed as profits when the stock is converted into money by sale or redemption. (Emphasis supplied.) We think there was a consistent legislative purpose in the statutes beginning with the act of 1921 and extending into the act of 1928, vis, that corporations shall be permitted to capitalize earnings by stock dividends issued for legitimate purposes, that stock so issued should stand on the same footing as other stock, and that the owner of it should be taxed on the profit or loss when it was converted into money. As has been said, the view has long been accepted by the BTA and by various Courts of Appeals before which the question came." (Commr. vs. Cordingley, 78F. 2nd 118, 16 AFTR 318). In this case, the record disclose that pursuant to a Board Resolution approved by its Directors in their meeting called on June 15, 1968, ANSCOR purchased, on June 30, 1968, in the United States some 28,000 common shares from the Estate of Don Andres Soriano at P100.00 par value amounting to P2,800.00. These shares were redeemed for the purpose of partially retiring (as treasury shares) the common shares held by non-resident stockholders in order to reduce the foreign exchange requirements of the corporation in the event it would declare cash dividends. On November 30, 1968, the stockholders approved in a Special Meeting the recommendation of the Board of Directors to increase the capital stock of the corporation from P30,000,000.00 divided into 150,000 preferred shares and 150,000 common shares both at P100.00 par value, to P75,000,000.00, divided into 150,000 preferred shares and 600,000 common shares at P100.00 par value. In November, 1969, Anscor again purchased in the United States another 80,000 common shares from the Estate of Don Andres Soriano at P125.00 per share costing P10,000,000.00 pursuant to Board Resolution approved by its Directors during their meeting held on October 30, 1969. The same purpose was cited by the Board as in the initial purchase of 28,000 common shares from the Estate of Don Andres Soriano in 1968, that is, to reduce the foreign exchange requirements of the corporation in the event it would declare cash dividends. (pp. 68-69, Rollo). Respondent Court thus made the following findings and observation: 1. The purpose of redeeming 28,000 and 60,000 common shares in 1968 and 1969, respectively, was to reduce the number of shareholdings of non-resident stockholders in order to minimize the outflow of foreign exchange which will be incurred by the corporation in case it declares cash dividends in the future. Petitioner's Board of Directors envisioned this scenario in the event ANSCOR would declare cash dividends, where the non-resident stockholders would receive the foreign exchange equivalent of their cash dividends. In order to save on the cash outflow of foreign exchange from the country, the Board of Directors resolved to purchase the shares of these non-resident stockholders. 2. The shares redeemed from the Estate of Don Andres Soriano was part of the plan to implement the desire of the late Don Andres Soriano to Filipinize the corporation and spread ANSCOR's equity ownership to the Filipino employees of ANSCOR as well to Filipino employees of corporations managed by ANSCOR having for its purpose their improvement as well as their social and economic well-being. This plan was implemented in 1972 and 1973 when the Executors of the Estate of Don Andres Soriano offered 45,000,000 common shares, 75% hereof to Filipino employees of ANSCOR and its affiliated companies and 25% to other interested Filipino in general. 3. At the time the 80,000 common shares were redeemed in November, 1969, almost 6 years have lapsed from the time ANSCOR declared stock dividends on December 20, 1963 and the period of redemption. 4. The stocks redeemed were not retired or put out of circulation but were placed in the name of ANSCOR as treasury shares for the purpose of re-issuing them in the future to the employees and officers of ANSCOR and other affiliate corporation managed by petitioner. In summary therefore, an examination of the purpose for the redemption would show that there was no intention on the part of petitioner to avoid or evade the tax on "dividend equivalence" under Section 83(b) of the National Internal Revenue Code. The "essentially equivalent to a dividend" provision was evidently aimed at the capitalization of earnings which had no fair business object and were intended merely to evade the payment of taxes. Adequate evidence were presented by petitioner showing proof of a valid corporate purpose for the redemption of its own shares, such as: (a) its desire to limit the stock interest of its non-resident stockholders by the acquisition of their stocks in order to save on foreign exchange requirement in case cash dividends would be declared and remitted abroad; and (b) the objective of the late Don Andres Soriano to Filipinize the corporation thru the distribution of its shares to Filipino employees of ANSCOR and its affiliates and to the public in general. Thus, redeemed shares are the equivalent of dividends if and only if the shares were not issued for genuine business purposes. Furthermore, Section 41 of the Corporation Code (1980) mandates the power of a corporation to purchase or acquire its own shares for a legitimate corporate purpose(s), provided, it has unrestricted earnings to cover the said purchase and that its capital is not thereby impaired and provided further, that the conditions of corporate affairs warrant it. There being valid corporate purpose for the redemption, there is, therefore, sufficient justification for the redemption to exclude it from the purview of an "essentially equivalent to a taxable dividend" provision. However, this factor alone is not controlling although it may be relevant and at times considered to be a critical factor in determining the applicability of Section 83 (b). Moreover, the distribution and redemption of stock dividends were not made at the same time nor at a time close to each other as to make them one transaction. The issuance of new common stocks in 1963 was due to the declaration of stock dividends, but the redemption of common shares in 1969, though forming part of stock dividends, was not made at such time in such manner as to make the transaction essentially equivalent to a distribution of dividend since over 6 years have lapsed after it was issued and before the redemption was effected. Redemption under Section 83(b) connotes something other than repurchase; it includes the idea of a surrender of shares by a stockholder and a retirement of that which he surrenders. Conceivably the reason may be found in the fact that the corporation's acquisition of the stock with a view of reissuing it indicates that there was no intention on its part to permanently distribute part of its surplus. The characteristics of a sale may be thought to predominate over the characteristics of a distribution in partial liquidation. A true redemption of stock occurs when it is called and retired. Petitioner did not retire the stocks purchased from the Estate of Don Andres Soriano instead it placed them in its treasury as live assets to be disposed of as it should thereafter determine in this case to be distributed to its employees in the near future or more particularly in 1973 when the intent to Filipinize materialized. In view of the findings arrived at by this Court, We can fairly conclude that Section 83(b) of the National Internal Revenue Code does not apply to the redemption of 28,000 and 80,000 common shares in 1968 and 1969, respectively. Hence, no obligation on the part of petitioner was created in order to withhold the tax from the Estate of Don Andres Soriano. (pp. 87-92, Rollo). The failure to declare cash dividends by private respondent since 1945 to 1969 is not determinative of whether or not purchase of stocks dividend essentially equivalent to the distribution of a taxable dividend. The conversion of the 11,400 common shares of the Estate of Don Andres Soriano and 138,864 common shares of Doa Carmen Vda. de Soriano into 11,140 and 138,860 preferred shares, respectively, with the same par value may not be considered as essentially equivalent to a distribution of taxable dividend within the contemplation of Section 83(b). The conversion was merely a reclassification of petitioner's capital structure in order to give greater shares of stocks to the active Managers (Jose M. Soriano and Andres Soriano, Jr.) of the corporation to reduce the risk of being over turned by the vote of Doa Carmen Vda de Soriano (their mother) who owns majority of the stocks in ANSCOR without any actual gain being realized from the transaction by the stockholders concerned from the exchange or conversion. As pointed out by the tax court: It is worthy to note that the persons responsible in the management of ANSCOR are the two sons of Don Andres Soriano, namely, Andres Soriano, Jr. and Jose M. Soriano, who prior to the reclassification owned only 23,000 common shares while the majority of the stocks were owned by the Estate of Don Andres Soriano (including that of his wife). For this reason, the Board of Directors decided to reclassify the 300,000 common shares and 150,000 preferred shares, which was later approved by the Securities and Exchange Commission, in order to give greater shares of stock of the active managers (Jose M. Soriano and Andres Soriano, Jr.) of the corporation thereby reducing the risk of being over turned by the vote of Doa Carmen Vda de Soriano (their mother) who owns majority of the stocks in ANSCOR. With the conversion, Doa Carmen Vda. de Soriano would loose her right over the management of the corporation in exchange for some preferred rights in the distribution of dividends and assets upon liquidation. The purpose to reclassify was therefore a valid one. More or less the same number of common shares were exchange for the same number of preferred shares with the same par value per share. In general, the rights and privileges of a common stockholder is the same as that of a preferred stockholder except that holders of preferred shares are entitled to certain preferences such as payment of dividends or the distribution of assets of a corporation in case of its dissolution or such other preferences as may be stated in the articles of incorporation which are not violative of the Corporation Code in exchange for their voting rights. As a result of restrictions upon other classes of stock with respect to voting classes, have common stock may, as to those classes, have preference in the matter of management. The law provides that "Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share be in all respects equal rights and privileges. Therefore, the findings of respondent's examiners that the conversion created entirely different rights and privileges resulting in very substantial change in the equity of the stockholder have no legal nor factual basis to stand on. Significantly, before the common shares of Doa Carmen Vda. de Soriano were actually converted into preferred shares, she requested for a ruling from the Internal Revenue Service of Washington D.C., regarding the tax consequence of the exchange which ruled: that the proposed transaction was not in pursuance to a plan to avoid Federal Income Taxes that the reclassification will classify as a recapitalization or a reorganization; no gain or loss will be recognized by the stockholders; and the basis for the exchange will be the same. The fact that some of the common shares converted came from stock dividends is of no consequence because no gain was realized from the transaction. The stocks of petitioner were merely reclassified into two common and preferred. Only the certificate of stocks evidencing ownership was changed whereby the certificates evidencing ownership in common stock was cancelled and a new certificate this time evidencing ownership in preferred stock was issued for the same number of shares originally owned and with the same par value per share. (pp. 97-98, Rollo). Respondent Court thus concluded: The "dividend equivalence" contemplated by Section 83(b) must necessarily have some logical relation to the conventional form, notion and effect of a dividend. In the instant case, the stockholders, the Estate of Don Andres Soriano and Doa Carmen Vda. de Soriano, did not receive, as is required, any "net beneficial income" nor any 'realized income" by reason of the exchange. Therefore, Section 83(b) does not apply to the cancelled and converted common shares to preferred shares. Thus, there is no liability to withheld on the part of petitioner there being no taxable dividend to speak of. (p. 98, Rollo). We agree. There is identity of par value, fair market value and rights owned in the shares thus exchanged. Except for the preference in the distribution of the liquidating dividends in the preferred shares in exchange for giving up voting rights, both common and preferred shares represent the same assets and liability of one corporation, ANSCOR. As aptly pointed out by the appellee, the reclassification was rendered imperative to eliminate "the fetters that tied the hands of the active manager of the corporation. Upon the death of their father, the late Don Andres, management of ANSCOR (and consequently of the managed corporations) passed on to sons, Jose and Andres Jr.. In fact, they were already harnessed and in the process of being "broken in" before and at the time that their father died. But an anomaly stared these two active managers in the face. Actually, they were managing at the sufferance of their mother, Doa Carmen who had more number of shares in Anscor than they inherited from their father. They knew that their mother was for the most part of the year living in France. She never visited the Philippines and was understandably not knowledgeable of the business. Yet these two sons were also aware of the character and temper of their mother. What if she made demands in management that they knew for sure might be against wise and prudent management? What if she exercised her prerogative as majority stockholder? Appalled at the frightful possibilities, they discussed the matter of revising the capital structure by re-classifying the capital stock from 100% common to 50% common and 50% preferred. Their mother was amenable to the scheme. (Exh. R-3, BIR Rec., Folder III, pp. 9-11; Exh. M-2, Folder III, pp. 87-90). (p. 129, Rollo). Findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the Tax Court (Nasiad, et al. vs. Court of Tax Appeals, 61 SCRA 238 (1974); Raymundo vs. de Joya, et al., 101 SCRA 495 (1980); Commissioner of Internal Revenue vs. Arnoldus Carpentry Shop, Inc., et al., 159 SCRA 199 (1988). As succinctly stated by the Supreme Court: "Moreover, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies and, with more reason, those of a Court such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority." (Commissioner of Internal Revenue, vs. Court of Tax Appeals, et al., G.R. No. 86785, November 21, 1991, 204 SCRA 182). WHEREFORE, finding no such abuse or improvident exercise of authority or discretion, the decision of the Court of Tax Appeals must be as it is hereby AFFIRMED. SO ORDERED. Montoya and Montenegro, JJ., concur.