CIR v Aldecoa, Claudio Zulaoga Jr., Miren Zuloaga, Rodriguez and CTA 1. Plaintiffs Isasi, Aldecoa, Zuloaga, Jr.

, and Zuloaga formed a partnership known as "Aldecoa, Zuloaga e Isasi"; Purpose: Exploitation and development of 2 Haciendas in Negros, Occidental. Partnership agreement: "Escritura de Constitucion de la Sociedad Agricola Aldecoa, Zuloaga e Isasi" was duly registered on October 27, 1947; For the tax years 1948 and 1949 the CIR assessed the sum of P26,873.66 against said partnership which the latter paid. June 30, 1951, the partners agreed to dissolve the partnership; The agreement of dissolution was duly recorded in SEC on October 25, 1951. Plaintiff Rodriguez was appointed as liquidator. Plaintiffs filed for a refund of the P26,873.66: They believed that that their partnership was a duly registered general co-partnership (sociedad colectiva) and therefore not subject to income tax, plaintiffs filed a claim for the refund of P26,873.66 which the partnership paid as income tax. CIR didnt act on it so a complaint was filed with the CFI on August 4, 1951; Prayer: the sum be returned to plaintiffs with costs, and for such other remedies; Provincial Fiscal: said partnership was a limited partnership and as such cannot be exempt from income tax The fiscal further set up the affirmative defense that it being a civil partnership, whether registered or not, Aldecoa, Zuloaga e Isasi could be taxed as a corporation under Section 24 of the National Internal Revenue Code; prayed for dismissal. CTA (by virtue of the enactment of Republic Act No. 1125, creating the Court of Tax Appeals,) ordered a refund; it held: The partnership was a duly registered general co-partnership (compania colectiva) with the meaning and contemplation of sections 24 and 26 of the National Internal Revenue Code and as such it is not liable for income tax as a juridical person although the partners composing it are liable in their individual capacity. CIR filed with this SC a petition to review the said decision making the following assignment of errors: CTA was wrong in holding that the term "duly registered general co-partnership (sociedad colectiva)" found in sections 24 and 26 of the National Internal Revenue Code includes civil partnerships which have adopted the form of compaias colectivas and (were) duly registered; CTA was wrong in saying the partnership has adopted the form of general partnership (sociedad colectiva) under the Code of Commerce; and that the partnership was a duly registered general co-partnership (sociedad colectiva) within the meaning and contemplation of the aforesaid sections of the Tax Code and was not therefore liable to pay income tax.

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W/N the partnership is exempt from tax. Yes. The Partnership "Aldecoa, Zuloaga e Isasi" was a duly registered general co-partnership (sociedad colectiva) within the meaning and contemplation of sections 24 and 26 of the National Internal Revenue Code. SEC. 24. RATE OF TAX ON CORPORATIONS. There shall be.paid annually upon the total net income received in the proceeding taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines no matter how created or organized but not including duly registered general co-partnership (compaias colectivas), a tax upon such income equal to the sum of the following: . . .

Sec. 26. TAX LIABILITY OF MEMBERS OF DULY REGISTERED GENERAL CO.-PARTNERSHIPS. Persons carrying on business in general co-partnership (compaia colectiva) duly registered in the mercantile registry shall be liable for income tax only in their individual capacity, and the share of the profits of the registered general copartnership (compaia colectiva) to which any taxable partner would be entitled, whether divided or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title.

As you see sec 25 and 26, expressly exempts from corporation tax "duly registered general co-partnerships" (sociedades colectivas) o RESPONDENT PARTNERS maintain that their defunct partnership (which by its purposes and scope seemed to partake of the nature of a civil partnership), was dully registered and had the form and style of a general co-partnership and is, therefore, entitled to the exemption. o They also advanced the theory that a partnership, whether civil or commercial, would be entitled to the exemption as long as it is a general partnership, because the Tax Code makes qualification to this effect. Whereas the partnership agreement entered into by the respondent partners was styled "Escritura de Constitucion de la Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi", thereby giving said partnership is a limited one. On the other hand, said agreement specifies that the primary purpose was the exploitation of the two haciendas. o PETITIONER CIR CONTENDS that this clause clearly indicates that respondents' partnership was a civil partnership which justifies petitioner's stand in collecting the taxes in question.

SUBISSUES and RULINGS: Whether the term duly registered general co-partnership (sociedades colectivas) used in sections 24 and 26 of the Tax Code includes both the commercial civil ones. Yes. Art. 1670. Partnerships which on account of the purpose to which they devoted are civil may adopt any of the forms recognized by the Code of Commerce. In such cases its provisions shall be applicable to them in so far they do no conflict with those of this Code, A civil partnership adopting a form recognized by the Code of Commerce (sociedad colectiva) does not necessarily cease to be a civil partnership. Members of a partnership organized for civil purposes may form themselves into a general or collective partnership (sociedad colectiva) which is sanctioned by Sections 125 to 144 of the Code of Commerce and register as such in the registry in which case their obligations and liabilities will be governed by the provisions of said Code as long as they are not in conflict with the Civil Code. This organization in mercantile form does not transform the civil partnership into a commercial one, but just the same it is a sociedad colectiva, and since Sections 24 and 26 of the Tax Code duly registered general co-partnership (Compaia

colectiva)", there is no reason why a civil organized in accordance with the provisions of the Code of Commerce and duly registered as such should not fall within the exemption provided for in said Sections of the Tax Code. Whether the partnership has adopted the form of a general partnership (compaia colectiva) or of a "Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi", as the partners thereof named their own association. ART. 122. As a general rule commercial associations shall be established by the adoption of any of the following forms: 1. The regular general co-partnership in which all the partners, under a collective commercial name, bind themselves participate, in the proportion they establish in the same rights and obligations. 2. The limited co-partnership to which one or more persons contribute a specific amount of capital to a common fund, to become liable for the business transactions of the firm executed exclusively by others under a collective name. 3. (The provisions of this paragraph have been repealed by the Corporation Law). The partnership agreement would reveal that they followed the pattern set for the pattern set for the regular co-partnership They have a firm name Aldecoa, Zuloaga e Isasi; that firm name was composed of all the surnames of the partners to which the words "and company" (to indicate the limited partnership Art. 146 of the Code of Commerce) is not added; The management of the firm was entrusted to a partner, Don Juan Isasi; The contribution of all the partners was expressly provided therein there being no person contributing a specific amount of capital to a common fund to become liable for the business transactions executed exclusively by others under a collective name, as is the case in limited partnerships The duration of the partnership was made to last until June 30, 1952; and it allowed its manager, Don Juan Isasi to engage in the same kind of undertaking. It is unmistakable, notwithstanding the title of the partnership agreement (Escritura de Constitucion de la Sociedad Agricola Limitada Aldecoa, Zuloaga e Isasi), that the partners intended to organize a general partnership under the Code of Commerce. Hence CTA WAS CORRECT IN SAYING: To establish a limited partnership there must be at least one general partner and the name of at least one of the general partners must appear in the firm name. If these requisites are not complied with, the partnership, notwithstanding the fact that the articles of association are entitled "limited partnership" An examination of the firm name of the partnership "Aldecoa, Zuloaga e Isasi" will readily show that neither of this requirements have been fulfilled; instead it operated under the name of all its members, of some of them, or of only one (without necessarily adding to the name of names stated in last two cases, the words "and company" A limited partnership that has not complied with the law of its creation is not considered a limited partnership at all, but a general partnership in which all the members are liable. Moreover, a limited partnership cannot perform any act in the management of the partner interests and cannot even examine the condition and state of partnership administration except at stated times. (Articles 122 (2), 148 and 150, Code of Commerce), unlike the partnership Aldecoa, Zuloaga e Isasi, wherein all the partners exercised powers of management and administration. REYES, J.B.L., J., concurring: 1. The essence of a limited partnership is precisely the presence of one or more limited partners, who by the articles of co-partnership are not liable to firm creditors beyond their capital contribution; who are not authorized to take part in the firm the management nor to have their names included in the firm name. None of these restrictions are imposed upon any of the members of "Aldecoa, Zuloaga e, Isasi." How could this association then be a limited partnership when it had no limited partner? 2. In laying emphasis on the terms "sociedad agricola limitada" used in the partnership articles, the Solicitor General overlooks that in the Spanish the word "limitada" has no significance whatever. The partnership,sociedad or compaia, had to be either colectiva or comanditaria (en comandita) or anonima. Legally, there is no such entity as a sociedad limitada co-partnerships; but the correlative Spanish term is sociedad en comanditaor sociedad comanditaria, not "sociedad limitada". 3. If the firm "Aldecoa, Zuloaga e Isasi" was not a sociedad en comandita," it had necessarily to be a "sociedad colectiva". It could not be a sociedad anonima, because these could not be organized after 1906, when the corporation law was enacted; 4. The Internal Revenue Code, sec. 26, exempts from the corporation tax those "persons carrying on business in general co-partnership"; and the construction of the phrase indicates that the word "business" is here used in the sense of transactions, not precisely of commercial character. The law is more concerned with the manner in which the business is carried out, rather than the nature of such business; hence it cannot be said that the exemption excludes civil partnerships. 5. If the reason for exempting general co-partnerships from the tax is "to encourage the registration of partnerships so that the government and the public may have notice of the organizational facts and of the names of the individual partners" (Tan Senguan & Co. vs. Collector of Internal Revenue, 55 Phil. 439), that purpose is attained upon recording of the articles, regardless of the civil mercantile purpose of the partnership, and whether the partners are solidarily liable to creditors or not. The creditors are duly notified and can take the necessary measures to safeguard their interests.