G.R. No.

L-9692 January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS
COMPANY, respondents.

Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R.
Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.

MONTEMAYOR, J.:

This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the
assessment and decision of petitioner Collector of Internal Revenue, later referred to as Collector,
assessing and demanding from the respondents Batangas Transportation Company, later referred to
as Batangas Transportation, and Laguna-Tayabas Bus Company, later referred to as Laguna Bus,
the amount of P54,143.54, supposed to represent the deficiency income tax and compromise for the
years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A., but before the Collector
filed his answer in said court, was increased to P148,890.14.

FACTS:

The following facts are undisputed: Respondent (Laguna Bus Co. and Batangas Transport)
companies are two distinct and separate corporations engaged in the business of land
transportation by means of motor buses, and operating distinct and separate lines. Batangas
Transportation was organized in 1918, while Laguna Bus was organized in 1928. Each company
now has a fully paid up capital of Pl,000,000. Before the last war, each company maintained
separate head offices, that of Batangas Transportation in Batangas, Batangas, while the Laguna
Bus had its head office in San Pablo Laguna. Each company also kept and maintained separate
books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities.
Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the
Laguna Bus. To show the connection and close relation between the two companies, it should be
stated that Max Blouse was the President of both corporations and owned about 30 per cent of
the stock in each company. During the war, the American officials of these two corporations
were interned in Santo Tomas, and said companies ceased operations. They also lost their
respective properties and equipment. After Liberation, sometime in April, 1945, the two
companies were able to acquire 56 auto buses from the United States Army, and the two companies
diveded said equipment equally between themselves,registering the same separately in their
respective names. In March, 1947, after the resignation of Martin Olson as Manager of the Laguna
Bus, Joseph Benedict, who was then managing the Batangas Transportation, was appointed
Manager of both companies by their respective Board of Directors. The head office of the Laguna
Bus in San Pablo City was made the main office of both corporations. The placing of the two
companies under one sole mangement was made by Max Blouse, President of both companies,
by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on
August 10, 1945, and ratified by the Boards of the two companies in their respective resolutions of
October 27, 1947.

According to the testimony of joint Manager Joseph Benedict, the purpose of the joint
management, which was called, "Joint Emergency Operation", was to economize in overhead
expenses; that by means of said joint operation, both companies had been able to save the salaries
of one manager, one assistant manager, fifteen inspectors, special agents, and one set of office of
clerical force, the savings in one year amounting to about P200,000 or about P100,000 for each
company. At the end of each calendar year, all gross receipts and expenses of both companies were
determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of
each company, and each company "then prepared its own income tax return from this fifty per
centum of the gross receipts and expenditures, assets and liabilities thus transferred to it
from the `Joint Emergency Operation' and paid the corresponding income taxes thereon
separately".

Under the theory that the two companies had pooled their resources in the establishment of the Joint
Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies
that there was due from them the amount of P422,210.89 as deficiency income tax and
compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be
restrained, seized, and advertized for sale all the rolling stock of the two corporations,
respondent companies had to file a surety bond in the same amount of P422,210.89 to guarantee
the payment of the income tax assessed by him.

After some exchange of communications between the parties, the Collector, on January 8, 1955,
informed the respondents "that after crediting the overpayment made by them of their alleged
income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment, the
income tax due from the `Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the
total amount of P54,143.54." The respondent companies appealed from said assessment of
P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector set aside his
original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of
P148,890.14, claiming that he had later discovered that said companies had been "erroneously
credited in the last assessment with 100 per cent of their income taxes paid when they should
in fact have been credited with only 75 per cent thereof, since under Section 24 of the Tax
Code dividends received by them from the Joint Operation as a domestic corporation are
returnable to the extent of 25 per cent". That corrected and increased reassessment was
embodied in the answer filed by the Collector with the Court of Tax Appeals.

The theory of THE COLLECTOR: is the Joint Emergency Operation was a corporation distinct
from the two respondent companies, as defined in section 84 (b), and so liable to income tax
under section 24, both of the National Internal Revenue Code.

After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or
joint management of the two companies "is not a corporation within the contemplation of
section 84 (b) of the National Internal Revenue Code much less a partnership, association or
insurance company", and therefore was not subject to the income tax under the provisions of
section 24 of the same Code, separately and independently of respondent companies; so, it
reversed the decision of the Collector assessing and demanding from the two companies the
payment of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax Court did not
pass upon the question of whether or not in the appeal taken to it by respondent companies, the
Collector could change his original assessment by increasing the same from P54,143.14 to
P148,890.14, to correct an error committed by him in having credited the Joint Emergency
Operation, totally or 100 per cent of the income taxes paid by the respondent companies for the
years 1946 to 1949, inclusive, by reason of the principle of equitable recoupment, instead of only 75
per cent.

The two main and most important questions involved in the present appeal are: (1) whether the two
transportation companies herein involved are liable to the payment of income tax as a
corporation on the theory that the Joint Emergency Operation organized and operated by
them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code,
and (2) whether the Collector of Internal Revenue, after the appeal from his decision has been
perfected, and after the Court of Tax Appeals has acquired jurisdiction over the same, but before
said Collector has filed his answer with that court, may still modify his assessment subject of the
appeal by increasing the same, on the ground that he had committed error in good faith in making
said appealed assessment.

The first question has already been passed upon and determined by this Tribunal in the case
of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L-9996, promulgated
on October 15, 1957. Considering the views and rulings embodied in our decision in that case
penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to extensively discuss the
point. Briefly, the facts in that case are as follows: The three Evangelista sisters borrowed from their
father about P59,000 and adding thereto their own personal funds, bought real properties, such as a
lot with improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost
P4,000 square meters with improvements thereon for P18,000 in 1944, another lot for P108,000 in
the same year, and still another lot for P237,000 in the same year. The relatively large amounts
invested may be explained by the fact that purchases were made during the Japanese occupation,
apparently in Japanese military notes. In 1945, the sisters appointed their brother to manage their
properties, with full power to lease, to collect and receive rents, on default of such payment, to bring
suits against the defaulting tenants, to sign all letters and contracts, etc. The properties therein
involved were rented to various tenants, and the sisters, through their brother as manager, realized a
net rental income of P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948.

In 1954, the Collector of Internal Revenue demanded of them among other things, payment of
income tax on corporations from the year 1945 to 1949, in the total amount of P6,157, including
surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed to the
Court of Tax Appeals, which court decided in favor of the Collector of Internal Revenue. On appeal
to us, we affirmed the decision of the Tax Court. We found and held that considering all the facts and
circumstances sorrounding the case, the three sisters had the purpose to engage in real estate
transactions for monetary gain and then divide the same among themselves; that they contributed to
a common fund which they invested in a series of transactions; that the properties bought with this
common fund had been under the management of one person with full power to lease, to collect
rents, issue receipts, bring suits, sign letters and contracts, etc., in such a manner that the affairs
relative to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit; and that the said sisters had the intention to constitute a
partnership within the meaning of the tax law. Said sisters in their appeal insisted that they were
mere co-owners, not co-partners, for the reason that their acts did not create a personality
independent of them, and that some of the characteristics of partnerships were absent, but we held
that when the Tax Code includes "partnerships" among the entities subject to the tax on
corporations, it must refer to organizations which are not necessarily partnerships in the
technical sense of the term, and that furthermore, said law defined the term "corporation" as
including partnerships no matter how created or organized, thereby indicating that "a joint
venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term
"corporation" includes "joint accounts" (cuentasenparticipacion) and "associations", none of
which has a legal personality independent of that of its members. The decision cites 7A Merten's
Law of Federal Income Taxation.

In the present case, the two companies contributed money to a common fund to pay the sole
general manager, the accounts and office personnel attached to the office of said manager,
as well as for the maintenance and operation of a common maintenance and repair shop.
Said common fund was also used to buy spare parts, and equipment for both companies,
including tires. Said common fund was also used to pay all the salaries of the personnel of
both companies, such as drivers, conductors, helpers and mechanics, and at the end of each
year, the gross income or receipts of both companies were merged, and after deducting
therefrom the gross expenses of the two companies, also merged, the net income was
determined and divided equally between them, wholly and utterly disregarding the expenses
incurred in the maintenance and operation of each company and of the individual income of
said companies.

From the standpoint of the income tax law, this procedure and practice of determining the net
income of each company was arbitrary and unwarranted, disregarding as it did the real facts in the
case. There can be no question that the receipts and gross expenses of two, distinct and separate
companies operating different lines and in some cases, different territories, and different equipment
and personnel at least in value and in the amount of salaries, can at the end of each year be equal
or even approach equality. Those familiar with the operation of the business of land transportation
can readily see that there are many factors that enter into said operation. Much depends upon the
number of lines operated and the length of each line, including the number of trips made each day.
Some lines are profitable, others break above even, while still others are operated at a loss, at least
for a time, depending, of course, upon the volume of traffic, both passenger and freight. In some
lines, the operator may enjoy a more or less exclusive exclusive operation, while in others, the
competition is intense, sometimes even what they call "cutthroat competition". Sometimes, the
operator is involved in litigation, not only as the result of money claims based on physical injuries ar
deaths occassioned by accidents or collisions, but litigations before the Public Service Commission,
initiated by the operator itself to acquire new lines or additional service and equipment on the lines
already existing, or litigations forced upon said operator by its competitors. Said litigation causes
expense to the operator. At other times, operator is denounced by competitors before the Public
Service Commission for violation of its franchise or franchises, for making unauthorized trips, for
temporary abandonement of said lines or of scheduled trips, etc. In view of this, and considering that
the Batangas Transportation and the Laguna Bus operated different lines, sometimes in
different provinces or territories, under different franchises, with different equipment and
personnel, it cannot possibly be true and correct to say that the end of each year, the gross
receipts and income in the gross expenses of two companies are exactly the same for
purposes of the payment of income tax. What was actually done in this case was that, although
no legal personality may have been created by the Joint Emergency Operation, nevertheless, said
Joint Emergency Operation joint venture, or joint management operated the business affairs
of the two companies as though they constituted a single entity, company or partnership,
thereby obtaining substantial economy and profits in the operation.

For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of
Internal Revenue case, supra, we believe and hold that the Joint Emergency Operation or
sole management or joint venture in this case falls under the provisions of section 84 (b) of
the Internal Revenue Code, and consequently, it is liable to income tax provided for in section
24 of the same code.

The second important question to determine is whether or not the Collector of Internal Revenue,
after appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax
Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed his answer
with the court, may still modify his assessment, subject of the appeal, by increasing the same. This
legal point, interesting and vital to the interests of both the Government and the taxpayer, provoked
considerable discussion among the members of this Tribunal, a minority of which the writer of this
opinion forms part, maintaining that for the information and guidance of the taxpayer, there should
be a definite and final assessment on which he can base his decision whether or not to appeal; that
when the assessment is appealed by the taxpayer to the Court of Tax Appeals, the collector loses
control and jurisdiction over the same, the jurisdiction being transferred automatically to the Tax
Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction of the Tax Court
is not revisory but only appellate, and therefore, it can act only upon the amount of assessment
subject of the appeal to determine whether it is valid and correct from the standpoint of the taxpayer-
appellant; that the Tax Court may only correct errors committed by the Collector against the
taxpayer, but not those committed in his favor, unless the Government itself is also an appellant; and
that unless this be the rule, the Collector of Internal Revenue and his agents may not exercise due
care, prudence and pay too much attention in making tax assessments, knowing that they can at any
time correct any error committed by them even when due to negligence, carelessness or gross
mistake in the interpretation or application of the tax law, by increasing the assessment, naturally to
the prejudice of the taxpayer who would not know when his tax liability has been completely and
definitely met and complied with, this knowledge being necessary for the wise and proper conduct
and operation of his business; and that lastly, while in the United States of America, on appeal from
the decision of the Commissioner of Internal Revenue to the Board or Court of Tax Appeals, the
Commissioner may still amend or modify his assessment, even increasing the same the law in that
jurisdiction expressly authorizes the Board or Court of Tax Appeals to redetermine and revise the
assessment appealed to it.

The majority, however, holds, not without valid arguments and reasons, that the Government is not
bound by the errors committed by its agents and tax collectors in making tax assessments, specially
when due to a misinterpretation or application of the tax laws, more so when done in good faith; that
the tax laws provide for a prescriptive period within which the tax collectors may make assessments
and reassessments in order to collect all the taxes due to the Government, and that if the Collector
of Internal Revenue is not allowed to amend his assessment before the Court of Tax Appeals, and
since he may make a subsequent reassessment to collect additional sums within the same subject
of his original assessment, provided it is done within the prescriptive period, that would lead to
multiplicity of suits which the law does not encourage; that since the Collector of Internal Revenue, in
modifying his assessment, may not only increase the same, but may also reduce it, if he finds that
he has committed an error against the taxpayer, and may even make refunds of amounts
erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the Court
of Tax Appeals partakes of a trial de novoand the Tax Court is authorized to receive evidence,
summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present
and argue their sides, so that the true and correct amount of the tax to be collected, may be
determined and decided, whether resulting in the increase or reduction of the assessment appealed
to it. The result is that the ruling and doctrine now being laid by this Court is, that pending appeal
before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed
assessment, as he has done in the present case.

There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely,
the liability of the two respondent transportation companies for 25 per cent surcharge due to their
failure to file an income tax return for the Joint Emergency Operation, which we hold to be a
corporation within the meaning of the Tax Code. We understand that said 25 per cent surcharge is
included in the assessment of P148,890.14. The surcharge is being imposed by the Collector under
the provisions of Section 72 of the Tax Code, which read as follows:

The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to
file the return or list within the time prescribed by law, or in case a false or fraudulent return
or list is willfully made the collector of internal revenue shall add to the tax or to the
deficiency tax, in case any payment has been made on the basis of such return before the
discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or
deficiency tax. In case of any failure to make and file a return list within the time prescribed
by law or by the Collector or other internal revenue officer, not due to willful neglect, the
Collector, shall add to the tax twenty-five per centum of its amount, except that, when the
return is voluntarily and without notice from the Collector or other officer filed after such time,
it is shown that the failure was due to a reasonable cause, no such addition shall be made to
 the tax. The amount so added to any tax shall be collected at the same time in the same
manner and as part of the tax unless the tax has been paid before the discovery of the
neglect, falsity, or fraud, in which case the amount so added shall be collected in the same
manner as the tax.

We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was
due to a reasonable cause, the honest belief of respondent companies that there was no such
corporation within the meaning of the Tax Code, and that their separate income tax return was
sufficient compliance with the law. That this belief was not entirely without foundation and that it was
entertained in good faith, is shown by the fact that the Court of Tax Appeals itself subscribed to the
idea that the Joint Emergency Operation was not a corporation, and so sustained the contention of
respondents. Furthermore, there are authorities to the effect that belief in good faith, on advice of
reputable tax accountants and attorneys, that a corporation was not a personal holding company
taxable as such constitutes "reasonable cause" for failure to file holding company surtax returns, and
that in such a case, the imposition of penalties for failure to file holding company surtax returns, and
that in such a case, the imposition of penalties for failure to file return is not warranted1

In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax
Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved
in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue
Code, and so is liable to incom tax under section 24 of the code; that pending appeal in the
Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector,
pending hearing before said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may on the basis of the evidence
presented before it, redetermine the assessment; that where the failure to file an income tax return
for and in behalf of an entity which is later found to be a corporation within the meaning of section 84
(b) of the Tax Code was due to a reasonable cause, such as an honest belief based on the advice of
its attorneys and accountants, a penalty in the form of a surcharge should not be imposed and
collected. The respondents are therefore ordered to pay the amount of the reassessment made by
the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge.
No costs.

Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix,
JJ., concur.
Reyes, A. J., concurs in the result.
G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and
Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax,
real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in
accordance with the respondent's assessment for the same in the total amount of P6,878.34,
which is hereby affirmed and the petition for review filed by petitioner is hereby dismissed
with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area
of 3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this
property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353
sq. m. including improvements thereon for P108,825.00. This property has an assessed
value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive
rents; to issue receipts therefor; in default of such payment, to bring suits against the
defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse
and deposit all notes and checks for them;
 7. That after having bought the above-mentioned real properties the petitioners had the
same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation
residence tax for the years 1945-1949, computed, according to assessment made by said officer, as
follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and P6,157.09

compromise

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00
 Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that
"the decision of the respondent contained in his letter of demand dated September 24, 1954"
be reversed, and that they be absolved from the payment of the taxes in question, with costs
against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.

THE ISSUE in this case whether petitioners are subject to the tax on corporations provided for
in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue
Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and
paid annually upon the total net income received in the preceding 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-partnerships (compañiascolectivas), a tax upon such income equal to the
sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentasenparticipacion),
associations or insurance companies, but does not include duly registered general
copartnerships. (compañiascolectivas).
Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute

money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration
of all the facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide the same
among themselves, because:

1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944,
they purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses,
of petitioners herein. The properties were leased separately to several persons, who, from
1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the
lots are still being so let, for petitioners do not even suggest that there has been any change
in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts,
to bring suits, to sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been handled as if the same
belonged to a corporation or business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

PETITIONERS insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality independent of
that of its members, did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court
of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that
one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to
said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentasen
participation)" and "associations," none of which has a legal personality of its own, independent of
that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general copartnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of
the term "corporation" It may not be amiss to add that petitioners' allegation to the effect that their
liability in connection with the leasing of the lots above referred to, under the management of one
person — even if true, on which we express no opinion — tends to increase the similarity between
the nature of their venture and that corporations, and is, therefore, an additional argument in favor of
the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is
created by an agreement, a declaration of trust, a statute, or otherwise. It includes a
voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name known) which
is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

 . . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63;
emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within
the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax
for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:

Entities liable to residence tax.-Every corporation, no matter how created or

organized, whether domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five pesos and an annual additional
tax which in no case, shall exceed one thousand pesos, in accordance with the
following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentasenparticipacion), association or insurance company, no matter how created
or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both
statutes with substantially the same meaning. Consequently, petitioners are subject, also, to
the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties
from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax
provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers,"
inasmuch as, pursuant to section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding
himself out as a full or part time dealer in real estate or as an owner of rental property
or properties rented or offered to rent for an aggregate amount of three thousand pesos
or more a year. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

G.R. Nos. L-24020-21 July 29, 1968

FLORENCIO REYES and ANGEL REYES, petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE and HON. COURT OF TAX APPEALS, respondents.

Jose W. Diokno and Domingo Sandoval for petitioners.

Office of the Solicitor General for respondents.

FERNANDO, J.:

Petitioners (REYES ) in this case were assessed by respondent Commissioner of Internal

Revenue the sum of P46,647.00 as income tax, surcharge and compromise for the years 1951 to
1954, an assessment subsequently reduced to P37,528.00. This assessment sought to be
reconsidered unsuccessfully was the subject of an appeal to respondent Court of Tax Appeals.
Thereafter, another assessment was made against petitioners, this time for back income taxes plus
surcharge and compromise in the total sum of P25,973.75, covering the years 1955 and 1956.
There being a failure on their part to have such assessments reconsidered, the matter was likewise
taken to the respondent Court of Tax Appeals. The two cases1 involving as they did identical issues
and ultimately traceable to facts similar in character were heard jointly with only one decision being
rendered.

In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to
1954 was reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax
due "from the partnership formed" by petitioners.2 The reduction was due to the elimination of
surcharge, the failure to file the income tax return being accepted as due to petitioners
honest belief that no such liability was incurred as well as the compromise penalties for such
failure to file.3 A reconsideration of the aforesaid decision was sought and denied by respondent
Court of Tax Appeals. Hence this petition for review.

The facts as found by respondent Court of Tax Appeals, which being supported by substantial
evidence, must be respected4 follow: "On October 31, 1950, petitioners, father and son, purchased
a lot and building, known as the Gibbs Building, situated at 671 Dasmariñas Street, Manila, for
P835,000.00, of which they paid the sum of P375,000.00, leaving a balance of P460,000.00,
representing the mortgage obligation of the vendors with the China Banking Corporation, which
mortgage obligations were assumed by the vendees. The initial payment of P375,000.00 was shared
equally by petitioners. At the time of the purchase, the building was leased to various tenants,
whose rights under the lease contracts with the original owners, the purchasers, petitioners herein,
agreed to respect. The administration of the building was entrusted to an administrator who collected
the rents; kept its books and records and rendered statements of accounts to the owners; negotiated
leases; made necessary repairs and disbursed payments, whenever necessary, after approval by
the owners; and performed such other functions necessary for the conservation and preservation of
the building. Petitioners divided equally the income of operation and maintenance. The gross income
from rentals of the building amounted to about P90,000.00 annually."5

From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of
the National Internal Revenue Code, the first of which imposes an income tax on corporations
"organized in, or existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships (companiascolectivas),
...,"6 a term, which according to the second provision cited, includes partnerships "no matter how
created or organized, ...,"7 and applying the leading case of Evangelista v. Collector of Internal
Revenue,8 sustained the action of respondent Commissioner of Internal Revenue, but reduced the
tax liability of petitioners, as previously noted.

PETITIONERS :

maintain the view that the Evangelista ruling does not apply; for them, the situation is
dissimilar. Consequently they allege that the reliance by respondent Court of Tax Appeals was
1äwphï1.ñ ët

unwarranted and the decision should be set aside. If their interpretation of the authoritative doctrine
therein set forth commands assent, then clearly what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter. A perusal of the Evangelista decision is
therefore unavoidable.

As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether
petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act
No. 466, otherwise known as the National Internal Revenue Code, ..."9 After referring to another
section of the National Internal Revenue Code, which explicitly provides that the term corporation
"includes partnerships" and then to Article 1767 of the Civil Code of the Philippines, defining what a
contract of partnership is, the opinion goes on to state that "the essential elements of a
partnership are two, namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to and
did, contribute money and property to a common fund. Hence, the issue narrows down to their
intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, ..."10

In support of the above conclusion, reference was made to the following circumstances, namely, the
common fund being created purposely not something already found in existence, the investment
of the same not merely in one transaction but in a series of transactions; the lots thus acquired not
being devoted to residential purposes or to other personal uses of petitioners in that case; such
properties having been under the management of one person with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and contracts and to endorse notes and checks;
the above conditions having existed for more than 10 years since the acquisition of the above
properties; and no testimony having been introduced as to the purpose "in creating the set up
already adverted to, or on the causes for its continued existence."11 The conclusion that emerged
had all the imprint of inevitability. Thus: "Although, taken singly, they might not suffice to establish
the intent necessary to constitute a partnership, the collective effect of these circumstances is such
as to leave no room for doubt on the existence of said intent in petitioners herein."12

It may be said that there could be a differentiation made between the circumstances above detailed
and those existing in the present case. It does not suffice though to preclude the applicability of the
Evangelista decision. Petitioners could harp on these being only one transaction. They could stress
that an affidavit of one of them found in the Bureau of Internal Revenue records would indicate that
their intention was to house in the building acquired by them the respective enterprises, coupled with
a plan of effecting a division in 10 years. It is a little surprising then that while the purchase was
made on October 31, 1950 and their brief as petitioners filed on October 20, 1965, almost 15 years
later, there was no allegation that such division as between them was in fact made. Moreover,
the facts as found and as submitted in the brief made clear that the building in question
continued to be leased by other parties with petitioners dividing "equally the income ... after
deducting the expenses of operation and maintenance ..."13 Differences of such slight significance do
not call for a different ruling.

It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of
an authoritative decision; it recognized its binding character. There is clearly no merit to the second
error assigned by petitioners, who would deny its applicability to their situation.

The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a partnership subject to income tax as a corporation under
the National Internal Revenue Code is likewise untenable. In their discussion in their brief of this
alleged error, stress is laid on their being co-owners and not partners. Such an allegation was
likewise made in the Evangelista case.

This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was
correctly rejected by the Court of Tax Appeals."14 Then came the explanation why: "To begin with,
the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct
and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly
registered general partnerships", which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax on corporations. Again,
pursuant to said section 84(b), the term "corporation" includes, among others, "joint
accounts, (cuentasenparticipacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker could
not have regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" — which are possessed of the aforementioned personality - have been
expressly excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation"."15 The opinion went on to summarize the matter aptly: "For purposes of the tax
on corporations, our National Internal Revenue Code, include these partnerships — with the
exception only of duly registered general co-partnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations."16

In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the
matter incorrectly. There is no warrant for the assertion that it failed to apply the settled law to
uncontroverted facts. Its decision cannot be successfully assailed. Moreover, an observation made
in Alhambra Cigar & Cigarette Manufacturing Co. v. Commissioner of Internal Revenue,17 is well-
worth recalling. Thus: "Nor as a matter of principle is it advisable for this Court to set aside the
conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of
its functions, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless, as did not happen here, there has been
an abuse or improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the
sums of P37,128.00 as income tax due from the partnership formed by herein petitioners for the
years 1951 to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days from the date this
decision becomes final, plus the corresponding surcharge and interest in case of delinquency," is
affirmed. With costs against petitioners.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Angeles, JJ.,
concur.

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney PurificacionUreta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted
in the Court of First Instance of Manila for the settlement of her estate. Later,
Lorenzo T. Oña the surviving spouse was appointed administrator of the estate of
said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo
T. Oña, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the
heirs have undivided one-half (1/2) interest in ten parcels of land with a total
 assessed value of P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount of P50,000.00,
more or less. This amount was not divided among them but was used in the
rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten
parcels of land aforementioned, two were acquired after the death of the decedent
with money borrowed from the Philippine Trust Company in the amount of
P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo
T. Oña, the administrator thereof, in the obligation of P94,973.00, consisting of
loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or
see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties
in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and
securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned
from the following year-end balances:

Yea Investmen Land Building

r
t

Account Accoun Account

t

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
 incomes are recorded in the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100).
The income was always left in the hands of Lorenzo T. Oña who, as heretofore
pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp.
50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal

Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in relation
to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners
the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and
1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co.,
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:
 I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE

PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN
NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS
FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED
USING THE INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,

THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.

ISSUE:

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from
1955 that he considered them as having formed an unregistered partnership. At least, there is
nothing in the record indicating that an earlier assessment had already been made. Such
being the case, and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should
find comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal
Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oña who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in
"building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account"
and P169,262.52 in "building account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from Lorenzo T. Oña and
instead, they allowed him to continue using said shares as part of the common fund for their
ventures, even as they paid the corresponding income taxes on the basis of their respective shares
of the profits of their common business as reported by the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance. In
these circumstances, it is Our considered view that from the moment petitioners allowed not
only the incomes from their respective shares of the inheritance but even the inherited
properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking
several transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered partnership within the purview of the
above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily follow that such
status as co-owners continues until the inheritance is actually and physically distributed
among the heirs, for it is easily conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under the common management
of the administrator or executor or of anyone chosen by them and engage in business on that
basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National
Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding. The reason for this
is simple. From the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each of them to manage and
dispose of as exclusively his own without the intervention of the other heirs, and, accordingly
he becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to be
used with the intent of making profit thereby in proportion to his share, there can be no doubt
that, even if no document or instrument were executed for the purpose, for tax purposes, at
least, an unregistered partnership is formed. This is exactly what happened to petitioners in
this case.

In this connection, PETITIONERS' reliance on Article 1769, paragraph (3), of the Civil Code,
providing 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," and, for that matter, on any other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships under
the Civil Code from that of unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now
Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentasenparticipacion)" and
"associations", none of which has a legal personality of its own, independent of that
of its members. Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84[b]) from the connotation of the term "corporation." ....
 xxx xxxxxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term

"partnership" it includes not only a partnership as known in common
law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial
operation, or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation. ... . (7A Merten's Law of
Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture

or other unincorporated organization, through or by means of which
any business, financial operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis
ours.)

For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore, clear to
our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue,
G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently,
We consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the
partnership should be limited to the income derived from the acquisition and sale of
real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties
but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision
of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that

the herein petitioners have formed an unregistered partnership and,
therefore, have to be taxed as such, it might be recalled that the
petitioners in their individual income tax returns reported their shares
of the profits of the unregistered partnership. We think it only fair and
equitable that the various amounts paid by the individual petitioners
as income tax on their respective shares of the unregistered
partnership should be deducted from the deficiency income tax found
by this Honorable Court against the unregistered partnership. (page
7, Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the other
way around. The partnership profits distributable to the partners (petitioners herein)
should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in
issue in this proceeding, it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is
argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since they paid their individual
income taxes, they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay
the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be
reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the
State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.
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 ½ 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. CastanTobeñas says:

Como establecer el deslinde entre la comunidadordinaria o copropiedad y la

sociedad?

El criteriodiferencial-segun la doctrina mas generalizada-esta: porrazon del origen,

en que la sociedadpresuponenecesariamente la convencion, mentras que la
comunidadpuedeexistir y existeordinariamente sin ela; y porrazon del fin objecto, en
que el objeto de la sociedadesobtenerlucro, mientras que el de la indivisiones solo
mantenerensuintegridad la cosacomun y favorecersuconservacion.

Reflejo de estecriterioes la sentencia de 15 de Octubre de 1940, en la que se dice

que siennuestro Derecho positive se ofrecen a vecesdificultades al tratar de fijar la
lineadivisoria entre comunidad de bienes y contrato de sociedad, la
modernaorientacion de la doctrinacientificaseñalacomonota fundamental de
diferenciacionaparte del origen de fuente de que surgen, no siempreuniforme, la
finalidadperseguidaporlosinteresados: lucrocomun partible en la sociedad,
y meraconservacion y aprovechamientoen 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 Oña 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 question pro-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 Arañas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

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.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels
of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels
of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners
realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed
of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as distinguished from profits derived
from the partnership by them which is subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the unregistered partnership.
Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA
Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was
in fact formed by petitioners which like a corporation was subject to corporate income tax distinct
from that imposed on the partners.

In a separate dissenting opinion, Associate Judge ConstanteRoaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA

CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE
EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental
income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding 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-partnerships (companies collectives), a tax upon such income equal to
the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentasen participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.

Pursuant to this article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same
among themselves, because:

1. Said common fund was not something they found already in existence. It was not
a property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said common
fund.

2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transcations undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several
persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way
of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said properties have been handled as
if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the manager.
 6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only one
or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one
seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under
the management of one of the partners. Such condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether

such co-owners or co-possessors do or do not share any profits made by the use of
the property;

(3) 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;

From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common
does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside
 from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence
of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-
636)

It is evident that an isolated transaction whereby two or more persons contribute

funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of
the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect

thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the
same; (b) generally participating in both profits and losses; (c) and such a community
of interest, as far as third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole property.-Municipal Paving
Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form
a partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as
petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions,
they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.

SO ORDERED.

G.R. No. 112675 January 25, 1999

AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER

INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH
INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION DOMESTIC INSURANCE COMPANY OF THE
PHILIPPINE; EASTERN ASSURANCE COMPANY & SURETY CORP; EMPIRE INSURANCE
COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE
CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF
THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.; GOVERNMENT SERVICE
INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE
CO.; INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY;
METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-
MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION;
PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST
INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF
THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE
COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.;
SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC. — all assessed
as "POOL OF MACHINERY INSURERS, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF INTERNAL
REVENUE, respondent.

PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool"
in order to facilitate the handling of business contracted with a nonresident foreign insurance
company. May the "clearing house" or "insurance pool" so formed be deemed a partnership or an
association that is taxable as a corporation under the National Internal Revenue Code (NIRC)?
Should the pool's remittances to the member companies and to the said foreign firm be taxable as
dividends? Under the facts of this case, has the goverment's right to assess and collect said tax
prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the
October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP 25902, which
dismissed petitioners' appeal of the October 19, 1992 Decision 3 of the Court
of Tax Appeals 4 (CTA) which had previously sustained petitioners' liability for deficiency income tax, interest and withholding
tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioner 5

The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution 6denying reconsideration.
The Facts

The antecedent facts, 7 as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the MunchenerRuckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement
and filed an "Information Return of Organization Exempt from Income Tax" for the
year ending in 1975, on the basis of which it was assessed by the Commissioner of
Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid
to Munich and to the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency
income tax, interest, and with [h]olding tax, itemized as follows:

Net income per information return P3,737,370.00

===========
Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60

——————

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE

Dividend paid to Munich

Reinsurance Company P3,728,412.00

——————

35% withholding tax at

source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P655,636.00

===========

10% withholding tax at

source due thereon P65,563.60

Add: 25% surcharge 16,390.90

 14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise penalty-

non-filing of return 300.00

late payment 300.00

——————

TOTAL AMOUNT DUE & P89,438.68

COLLECTIBLE =========== 8

The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latter's collection of
premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal Revenue
(BIR) from collecting the taxes due, because "the taxpayer cannot be located
at the address given in the information return filed." Hence, this Petition for
Review before us. 9
The Issues

Before this Court, petitioners raise the following issues:

1. Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own
name, was a partnership or association subject to tax as a corporation;

2. Whether or not the remittances to petitioners and MUNICHRE of their respective

shares of reinsurance premiums, pertaining to their individual and separate contracts
of reinsurance, were "dividends" subject to tax; and

3. Whether or not the respondent Commissioner's right to assess the Clearing House
had already prescribed. 10

The Court's Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable
as a corporation, and that the government's right to assess and collect the taxes had not prescribed.

First Issue:

Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them "individually and separately," and that their liability was
limited to the extent of their allocated share in the original risk thus reinsured. 11 Hence, the pool
did not act or earn income as a reinsurer. 12Its role was limited to its principal
function of "allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool
based on their ability to absorb the risk(s) ceded[;] as well as the performance
of incidental functions, such as records, maintenance, collection and custody
of funds, etc." 13

Petitioners belie the existence of a partnership in this case, because (1) they,
the reinsurers, did not share the same risk or solidary liability, 14 (2) there was no common
(3) the executive board of the pool did not exercise
fund;
15

control and management of its funds, unlike the board of

directors of a corporation; 16 and (4) the pool or clearing
house "was not and could not possibly have engaged in
the business of reinsurance from which it could have
derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of
Internal Revenue, the agency tasked with the enforcement of tax law, is
accorded much weight and even finality, when there is no showing. that it is
patently wrong, 18 particularly in this case where the findings and conclusions
of the internal revenue commissioner were subsequently affirmed by the CTA,
a specialized body created for the exclusive purpose of reviewing tax cases,
and the Court of Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, 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. 20

This Court rules that the Court of Appeals, in affirming the CTA which had
previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC, as worded in the year ending 1975,
provides:
Sec. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is
hereby imposed upon the taxable net income received during each 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 (compañiascolectivas), general professional partnerships,
private educational institutions, and building and loan associations . . . .

Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the NIRC's
inclusion of such entities in the tax on corporations was made even clearer by the tax Reform Act of
1997, 21 which amended the Tax Code. Pertinent provisions of the new law
read as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations. —

(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-
five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation,
as defined in Section 22 (B) of this Code, and taxable under this Title as a
corporation . . . .

Sec. 22. — Definition. — When used in this Title:

x xx x xx x xx

(B) The term "corporation" shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas enparticipacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service
contract without the Government. "General professional partnerships" are
partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.

x xx x xx x xx

Thus, the Court in Evangelista v. Collector of Internal Revenue 22

held that Section 24
covered these unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the Tax
Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court
said:

The term "partnership" includes a syndicate, group, pool, joint venture

or other unincorporated organization, through or by means of which
any business, financial operation, or venture is carried on. *** (8
Merten's Law of Federal Income Taxation, p. 562 Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when "two or more
persons bind themselves to contribute money, property, or Industry to a common fund, with the
intention of dividing the profits among themselves." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In
other words, a partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the intention of dividing
the profits between
themselves." Meanwhile, an association implies associates who enter into a
27

"joint enterprise . . . for the transaction of business." 28

In the case before us, the ceding companies entered into a Pool
Agreement 29 or an association 30 that would handle all the insurance
businesses covered under their quota-share reinsurance treaty 31 and surplus
reinsurance treaty with Munich. The following unmistakably indicates a
32

partnership or an association covered by Section 24 of the NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the
This common fund pays for the
name and credit of the pool. 33
administration and operation expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of the
ceding companies. 35

(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of
Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by the
CTA:
. . . The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It
is apparent, and petitioners admit, that their association or coaction was
indispensable [to] the transaction of the business, . . . If together they have
conducted business, profit must have been the object as, indeed, profit was earned.
Though the profit was apportioned among the members, this is only a matter of
consequence, as it implies that profit actually resulted. 37

The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced,

because the facts obtaining therein are not on all fours with the present case.
In Pascual, there was no unregistered partnership, but merely a co-ownership
which took up only two isolated transactions. The Court of Appeals did not39

err in applying Evangelista, which involved a partnership that engaged in a

series of transactions spanning more than ten years, as in the case before us.
Second Issue:

Pool's Remittances are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are
not dividends subject to tax. They insist that such remittances contravene Sections 24 (b) (I) and 263
of the 1977 NIRC and "would be tantamount to an illegal double taxation as it would result in taxing
the same taxpayer" 40 Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it
41
They add that even if such remittances were
received from the pool cannot be deemed dividends.

treated as dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC, 42 as well as Article 7 of paragraph
1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax Treaty. 45

Petitioners are clutching at straws. Double taxation means taxing the same
property twice when it should be taxed only once. That is, ". . . taxing the
same person twice by the same jurisdiction for the same thing" 46 In the instant
case, the pool is a taxable entity distinct from the individual corporate entities
of the ceding companies. The tax on its income is obviously different from the
tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption
must be able to justify his claim or right." 47 Petitioners have failed to discharge this
burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was
earned and when the subject information return for the year ending 1975 was
filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify
the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any
company that has already paid the tax . . ." This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the
latter cannot individually claim the income tax paid by the former as their own.

On the other hand, Section 24 (b) (1) 48

pertains to tax on foreign corporations; hence,
it cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code, because the same subsection
specifically taxes dividends, the type of remittances forwarded to it by the
pool. Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their
reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their income and loss. This
is manifest from a reading of Article 3 49 and 10 50 of the Quota-Share Reinsurance treaty and Articles 3 51 and
10 52 of the Surplus Reinsurance Treaty. The foregoing interpretation of
Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be
expressed in a language too plain to be mistaken. 53

Finally the petitioners' claim that Munich is tax-exempt based on the RP- West
German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year
when said treaty was not yet in effect.54 Although petitioners omitted
in their pleadings the date of effectivity of the treaty, the
Court takes judicial notice that it took effect only later, on
December 14, 1984. 55
Third Issue:

Prescription

Petitioners also argue that the government's right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14, 1976. On
the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them notice of
its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-year
statute of limitations then provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an assessment. 56

We cannot sustain the petitioners. The CA and the CTA categorically found
that the prescriptive period was tolled under then Section 333 of the
NIRC, 57 because "the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the government's right to collect and assess
the tax has prescribed involves facts which have been ruled upon by the lower
courts. It is axiomatic that in the absence of a clear showing of palpable error
or grave abuse of discretion, as in this case, this Court must not overturn the
factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals
that the pool changed its address, for they stated that the pool's information return filed in 1980
indicated therein its "present address." The Court finds that this falls short of the requirement of
Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the
said period will be suspended only "if the taxpayer informs the Commissioner of Internal Revenue of
any change in the address."

WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated October 11,
1993 and November 15, 1993 are hereby AFFIRMED. Cost against petitioners. 1âw phi1.nêt

SO ORDERED.

Romero, Vitug, Purisima, Gonzaga-Reyes, JJ., concur.