Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his
income tax return that a sum of money that he erroneously received and already spent is the subject of a
pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent
return.
This question is the subject of the petition for review before the Court of the portion of the Decision

dated

July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs.
Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the
50% surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution
Reconsideration

dated May 25, 1987, denied the Commissioner's Motion for

and Motion for New Trial

on the deletion of the 50% surcharge assessment or imposition.

The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
respondent herein), received from the Prudential Bank and Trust Company in Pasay City the
amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in
the United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the
petitioner (private respondent herein), his wife and other defendants, claiming that its

remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only,
and praying that the excess amount of US$999,000.00 be returned on the ground that the
defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear,
immediate, and continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with
the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner
(private respondent herein) and his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own personal use and benefit the amount
of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank
and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax
Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of
P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some
money received from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a
letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together
with income assessment notices for the years 1976 and 1977, demanding that petitioner
(private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of
Internal Revenue that he was paying the deficiency income assessment for the year 1976 but
denying that he had any undeclared income for the year 1977 and requested that the
assessment for 1977 be made to await final court decision on the case filed against him for
filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply
to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous
remittance which you were able to dispose, is definitely taxable." . . .

The Commissioner also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal

before the respondent Court of Tax Appeals on December 10, 1981.

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding
portion:
We note that in the deficiency income tax assessment under consideration, respondent
(petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge as
provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of
P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income
tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by

respondent (petitioner) because he considered the return filed false or fraudulent. This
additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was
recipient of some money received from abroad which he presumed to be gift but turned out to
be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of
deception willfully and deliberately done or resorted to by petitioner (private respondent) in
order to induce the Government to give up some legal right, or the latter, due to a false return,
was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for respondent to examine. Error or
mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.).
Besides, Section 29 is not too plain and simple to understand. Since the question involved in
this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge
imposed in the deficiency assessment should be deleted.

The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to
us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY?
On the other hand, Javier candidly stated in his Memorandum,

that he "did not appeal the decision which

held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he
submitted in the samememorandum "that the issue may be raised in the case not for the purpose of correcting
or setting aside the decision which held him liable for deficiency income tax, but only to show that there is no
basis for the imposition of the surcharge." This subsequent disavowal therefore renders moot and academic
the posturings articulated in as Comment

10

on the non-taxability of the amount he erroneously received and

the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of the
Comments) would have been already too late to be seasonable. The petitioner, through the office of the
Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is
self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to
tax. Put another way, the studied insinuation that private respondent may not be the beneficial
owner of the money or income flowing to him as enhanced by the studied claim that the
amount is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy,
as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for
the amount of private respondent's wife was $999,000.00 after opening a dollar account with
Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste
and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14,

1977, effected a total massive withdrawal from the said dollar account in the sum of
$975,000.00 or P7,020,000.00. . . .

11

In reply, the private respondent argues:

xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the
"mistaken remittance" in his income tax return and by merely making a footnote thereon which
read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation." It is respectfully submitted that
the said return was not fraudulent. The footnote was practically an invitation to the petitioner
to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50
F [2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would
be sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart
from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances attendant
to the case at bar show that in filing the questioned return, the private respondent was guided,
not by that "willful and deliberate intent to prevent the Government from making a proper
assessment" which constitute fraud, but by an honest doubt as to whether or not the "mistaken
remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar
case" was given very, very wide publicity by media; and only one who is not in his right mind
would have entertained the idea that the BIR would not make an assessment if the amount in
question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression
in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the
authorities are not unanimous in holding that similar receipts are subject to the income tax. It
should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very
case before this Honorable Court, one out of three Judges of the respondent Court was of the
opinion that the amount in question is not taxable. Thus, even without the footnote, the failure
to declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was
being sued by the Mellon Bank for the return of the money, and was being prosecuted by the
Government for estafa committed allegedly by his failure to return the money and by converting
it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition)
and could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the
amount received was still under litigation. If he had paid the tax, would that not constitute
estafa for using the funds for his own personal benefit? and would the Government refund it to
him if the courts ordered him to refund the money to the Mellon Bank?
xxx xxx xxx

12

Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the
falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of
the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax
return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or
mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation
and that Javier had literally "laid his cards on the table."
In Aznar v. Court of Tax Appeals,

14

13

fraud in relation to the filing of income tax return was discussed in this

manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud
with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be
considered as fraudulent intent, and if both petitioner and respondent Commissioner of
Internal Revenue committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be unfair to treat
the mistakes of the petitioner as tainted with fraud and those of the respondent as made in
good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.

15

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not
be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898.

16

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier
is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the
extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money
he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that
he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of
Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in
the deficiency assessment should be deleted.

WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED.
No costs. SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,
ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and
JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACCO,
MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A.
SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner of
Internal Revenue to refund to them their income taxes which they claim to have been erroneously or illegally
paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal.
Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in
Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for certain
periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which

petitioners were paid U.S. dollars as compensation for services in their foreign assignments.
(Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19).
When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate
ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S.
$1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S.
$1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their
dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent Commissioner, amended income
tax returns for the above-mentioned years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act
No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of computing and paying the
corresponding income tax due from them. The aforesaid computation as shown in the amended
income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly,
claims for refund of said over-payments were filed with respondent Commissioner. Without
awaiting the resolution of the Commissioner of the Internal Revenue on their claims,
petitioners filed their petitioner for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No.
2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common question
of law and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision
dated September 26, 1977, the respondent Court of Tax Appeals held that the proper
conversion rate for the purpose of reporting and paying the Philippine income tax on the dollar
earnings of petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 771 and 41-71. Accordingly, the claim for refund and/or tax credit of petitioners in the aboveentitled cases was denied and the petitions for review dismissed, with costs against petitioners.
Hence, this petition for review on certiorari.

Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free
market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into
Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two cases are Philippine income
tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and,
therefore, should be governed by the provisions of the National Internal Revenue Code and its
implementing rules and regulations, and not by the provisions of Central Bank Circular No. 42
dated May 21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable year from
all sources by a citizen of the Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their tax returns for the period involved herein, they gave their legal
residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be converted
into Philippine pesos in computing the income tax due therefrom, in accordance with the
provisions of Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970
income and Revenue Memorandum Circular No. 41-71 dated December 21, 1971 for 1971
income, which reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be applied in order to determine the true
and correct value in Philippine pesos of the income of petitioners.

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are
inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and
thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash or its equivalent.
also be though of as flow of the fruits of one's labor.

Income can

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange,
foreign exchange being "the conversion of an amount of money or currency of one country into an equivalent
amount of money or currency of another."

When petitioners were assigned to the foreign subsidiaries of

Procter & Gamble, they were earning in their assigned nation's currency and were ALSO spending in said
currency. There was no conversion, therefore, from one currency to another.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner
fell under Section 2(f)(g) and (m) of C.B. Circular No. 42.

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall
within the classification of foreign exchange transactions, there occurred no actual inward remittances, and,
therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for the
specific instances when the par value of the peso shall not be the conversion rate used. They conclude that
their earnings should be converted for income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts of
sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims that he had
to use the prevailing free market rate of exchange in these cases because of the need to ascertain the true and
correct amount of income in Philippine peso of dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are export
products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing
and investments nothing by way of income tax payments. Thus, petitioners are in error by concluding
that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate
used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble.
It was a definite amount of money which came to them within a specified period of time of two yeas as
payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every individual, whether a
citizen of the Philippines residing therein or abroad or an alien residing in the Philippines,
determined in accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions.

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71

10

and 41-71

11

were issued to prescribe

a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for
the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to
the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are
presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.

12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they
are citizens of the Philippines, and their income, within or without, and in these cases wholly without,
are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long
standing and not contrary to law, are valid.

13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of Tax
Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED.
Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers
and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they
had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124
and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his
four children, the petitioners, to enable them to build their residences. The company sold the two lots to
petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to
them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from
the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and
paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in
full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the
Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership. The
petitioners were not engaged in any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution
of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or
later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y
existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun
y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en
nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica
seala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la
sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol.
2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an unmistakable intention to form a
partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as
an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus,
in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is fundamentally
similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the
'hacienda' in questionpro-indiviso from their deceased parents; they did not contribute or invest
additional ' capital to increase or expand the inherited properties; they merely continued
dedicating the property to the use to which it had been put by their forebears; they individually
reported in their tax returns their corresponding shares in the income and expenses of the
'hacienda', and they continued for many years the status of co-ownership in order, as conceded
by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual
relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case
No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who own properties
which produce income should not automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax law. To hold otherwise,
would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property
does not produce an income at all, it is not subject to any kind of income tax, whether the
income tax on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No.
738, September 11, 1961, cited in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 7778).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce
profits for themselves, it was held that they were taxable as an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived
rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father donated the two
lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging
this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No
costs.

SO ORDERED.