TITLE II

TAX ON INCOME
CHAPTER I DEFINITIONS
Section 22. Definitions - When used in this Title:
(A) The term 'person' means an individual, a trust, estate or corporation.
(B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and 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
consortium agreement under a service contract with 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.
(C) The term 'domestic,' when applied to a corporation, means created or organized in the
Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a corporation which is not
domestic.
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
(F) The term 'resident alien' means an individual whose residence is within the Philippines
and who is not a citizen thereof.
(G) The term 'nonresident alien' means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade
or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in
trade or business within the Philippines.
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which
is not a capital asset or property described in Section 39(A)(1). 1 Any gain from the sale or
1 Section 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business,

exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary income' shall be treated as gain from the sale or exchange of property which is not
a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from
the sale or exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a
capital asset.
Section 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a 'nonresident alien doing
business in the Philippines'. Section 22 (G) of this Code notwithstanding.
CHAPTER V - COMPUTATION OF TAXABLE INCOME
Section 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross
income specified in this Code, less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by this Code or other special laws
Section 35. Allowance of Personal Exemption for Individual Taxpayer. (B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Eight
thousand pesos (P8,000) for each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the spouses in the case of
married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children: Provided, That the total amount of additional
exemptions that may be claimed by both shall not exceed the maximum additional exemptions
herein allowed.
For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally
adopted child chiefly dependent upon and living with the taxpayer if such dependent is not
more than twenty-one (21) years of age, unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-support because of mental or physical
defect.
Section 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in trade of
the taxpayer or other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer.
Resident Citizens and Resident Alien
Garrison vs. Court of Appeals
Nature of the Case: Appeal on the decision of the the Court of Appeals, which affirmed the decision of the
of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.

Court of First Instance of Zambales at Olongapo City convicting the petitioners "of violation of Section 45
(a) (1) (b) of the National Internal Revenue Code.
Facts: The petitioners "are United States citizens, entered this country under Section 9 (a) of the Philippine
Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo
City.
All said petitioners "received separate notices from Ladislao Firmacion, District Revenue Officer, stationed
at Olongapo City, informing them that they had not filed their respective income tax returns for the year
1969, as required by Section 45 of the National Internal Revenue Code, and directing them to file the said
returns within ten days from receipt of the notice.
The petitioners contend that given these facts, they may not under the law be deemed resident aliens
required to file income tax returns. Hence, they argue, it was error for the Court of Appeals
1) to consider their "physical or bodily presence" in the country as "sufficient by itself to qualify . .
(them) as resident aliens despite the fact that they were not 'residents' of the Philippines
immediately before their employment by the U.S. Government at Subic Naval Base and their
presence here during the period concerned was dictated by their respective work as employees of
the United States Naval Base in the Philippines," and
2) to refuse to recognize their "tax-exempt status . . under the pertinent provisions of the RP-US
Military Bases Agreement."
Issue: Whether or not the petitioners are exempt from paying taxes and filing income tax returns.
Ruling: The Petitioners are tax-exempt as the requisites provided under the provisions of the Bases
Agreement2 have been complied with. However, they are not exempt from filing income tax returns. For the
Internal Revenue Code requires the filing of an income tax return also by any "alien residing in the
Philippines, regardless of whether the gross income was derived from sources within or outside the
Philippines;" and since the petitioners, although aliens residing within the Philippines, had failed to do so,
they had been properly prosecuted and convicted for having thus violated the Code.
Question One: Based on the Internal Revenue Code, aliens residing in the Philippines are required to file
income taxes. Do the petitioners fall under the qualification of being aliens residing in the Philippines?
Answer: Yes, as per Revenue Relations No. 2 of the Department of Finance of February 10, 1940:
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
the Philippines for purposes of income tax...If he lives in the Philippines and has no definite
intention as to his stay, he is a resident...
Question Two: What is the logic of being tax-exempt but required to submit an income tax return?
Answer: The duty rests on the U.S. nationals concerned to invoke and prima facie establish their taxexempt status. It cannot simply be presumed that they earned no income from any other sources than their
employment in the American bases and are therefore totally exempt from income tax.
They (the individuals that are tax-exempt) have to make this (the tax exemption) known to the Government
authorities (through the filing of income tax returns). 3
Non-resident Citizen
RR 1-79 (January 8, 1979)
SECTION 2. Who are considered as nonresident citizens. The term "non-resident citizen" means
2

Bases Agreement very plainly Identifies the persons NOT "liable to pay income tax in the Philippines except in regard
to income derived from Philippine sources or sources other than the US sources." They are the persons in whom concur
the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction, maintenance, operation or defense of the bases;"
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from "U.S. sources."
Also consider that the Bases Agreement provided for a tax exemption that is not absolute.

one who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical
presence abroad with the definite intention to reside therein and shall include any Filipino who leaves
the country during the taxable year as:
(a) Immigrantone who leaves the Philippines to reside abroad as an immigrant for which a foreign visa as
such has been secured.
(b) Permanent employee one who leaves the Philippines to reside abroad for employment on a more or
less permanent basis.
(c) Contract workerone who leaves the Philippines on account of a contract of employment which
is renewed from time to time within or during the taxable year under such circumstances as to
require him to be physically present abroad most of the time during the taxable year. To be
considered physically present abroad most of the time during the taxable year, a contract worker must have
been outside the Philippines for not less than 183 days during such taxable year.
Any such Filipino shall be considered a non-resident citizen for such taxable year with respect to the
income he derived from foreign sources from the date he actually departed from the Philippines.
A Filipino citizen who has been previously considered as a non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside therein permanently shall also be
considered a non-resident citizen for the taxable year in which he arrived in the Philippines with
respect to his income derived from sources abroad until the date of his arrival.
RR 5-01 (July 31, 2001)
SECTION 1. Scope -Pursuant to Section 244 of the Tax Code of 1997, in relation to Section 23(B) and (C)
and Section 51(A)(2)(d) and (A)(3) of the same Code, these Regulations are hereby promulgated to repeal
Revenue Memorandum Order No. (RMO) 30-99 and Revenue Regulations No. (RR) 9-99, prescribing the
filing of information returns by non-resident citizens, overseas contract workers (OCWs) and seaman with
respect to their income derived from sources outside the Philippines.
SECTION 2. Filing of Information Returns (BIR Form 1701C or BIR Form 1703) No Longer Required
Non-resident citizen who are exempt from tax with respect to income derived from sources
outside the Philippines in accordance with Section 23(B) and (C), in relation to Section 22 (E) and
Section 51 (A)(2)(d) and (A)(3) of the Tax Code of 1997, but who are nevertheless mandated to file
information returns (BIR Form 1701C or the new computerized Form 1703) pursuant to RMO 30-99 and
RR 9-99, shall no longer be required to file the same on their income derived from sources outside
the Philippines beginning taxable year 2001.
SECTION 3. Repealing Clause For purposes of these Regulations, RMO 30-99 and RR 9-99 are hereby
repealed accordingly.
SECTION 4. Repealing Clause - These Regulations shall take effect (15) days after publication in any
newspaper of general circulation.
BIR Ruling 33-00
Section 23(C) of the Tax Code of 1997 provides that an individual citizen of the Philippines who is
working and deriving income from abroad as an overseas contract worker is taxable only on
income from sources within the Philippines. Corollary thereto, Section 22(E)(3) of the same Code
provides that a citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.
Thus, for purposes of exemption from income tax, a citizen must be deriving foreign-sourced income
for being a non-resident citizen or for being an overseas contract worker (CW). All employees whose
services are rendered abroad for being seconded or assigned for at least 183 days may fall under the first
category and are therefore exempt from payment of Philippine income tax. The phrase "most of the time"
shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year.
(Sec. (2)(c), Revenue Regulations No. 1-79)
The same exemption applies to an overseas contract worker but as such worker, the time spent
abroad is not material for tax exemption purposes. All that is required is for the worker's employment
contract to pass through and be registered with the Philippine Overseas Employment Agency (POEA).

BIR Ruling DA 095-05

Question: A citizen of the US is applying for dual citizenship. He is asking if he is required to pay taxes for
income earned in the United States of America.
Ruling: No. When dual citizenship is granted, he will be considered as a non-resident citizen and as such,
only his Philippine-sourced income is taxable. His US-sourced income will be tax exempt. Only resident
citizens are taxable for income sourced within or outside of the Philippines.
Non-resident aliens engaged in business in the Philippines
REVENUE REGULATIONS NO. 02-40 INCOME TAX REGULATIONS
SECTION 5. Definition. A "non-resident alien individual" means an individual
(a)

Whose residence is not within the Philippines; and

(b)

Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to
return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has
no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite
purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such
a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes
his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times
to return to his domicile abroad when the purpose for which he came has been consummated or
abandoned.
SECTION 6. Loss of residence by alien. An alien who has acquired residence in the Philippines
retains his status as a resident until he abandons the same and actually departs from the
Philippines. An intention to change his residence does not change his status as a resident alien to that of
a nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a
resident for the remainder of his stay in the Philippines.
Corporations
AFISCO Insurance Corporation vs. Court of Appeals
Facts: 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 Munchener Ruckversicherungs-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
withholding tax.
Question 1: Was the Pool a Corporation or Partnership under the contemplation of Section 24 of the
NIRC?
BUT FIRST: How did the Petitioners argue the case? Petitioners belie the existence of a partnership in this
case, because (1) they, the reinsurers, did not share the same risk or solidary liability, (2) there was no
common fund; (3) the executive board of the pool did not exercise control and management of its funds,
unlike the board of directors of a corporation; 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."

Answer 1: In the case before us, the ceding companies entered into a Pool Agreement or an association
that would handle all the insurance businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich. The following unmistakably indicates a 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 name
and credit of the pool. This common fund pays for the administration and operation expenses of the pool.
(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.
(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. 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.
Question 2: Is their income taxable?
BUT FIRST: Why not? 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"
Answer 2-A: 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" 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.
Answer 2-B: 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.
Answer 2-C: 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.
Pascual vs. Commissioner of Internal Revenue
Facts: The petitioners both two parcels of land and bought three more after a year. They eventually sold
the first two parcels of land in 1968 and the other three on 1970. Petitioners realized net profits and paid
the corresponding capital gains taxes through availing of the tax amnesties.
However, the BIR Commissioner alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment asserting that they had availed of tax amnesties way back in
1974. Respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as coowners 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 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.
Issue: Whether the Petitioners are to be considered an unregistered partnership or joint venture taxable
as a corporation
BUT FIRST: Discuss the Evangelista Case:
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 THIS CASE IT WAS RULED THAT: 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.
NOW FOR THE PROPER QUESTION: Does Evangelista apply to the case?
Ruling/Answer: No, it does not. 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 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.
Question: When do you consider that there is a partnership that exists?
Answer: 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.
Obillos vs. Commissioner of Internal Revenue
Facts: Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots. he next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. he next day he
transferred his rights to his four children, the petitioners, to enable them to build their residences. They
treated the profit as a capital gain and paid an income tax.
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. 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.
The petitioners contested the assessments.
Issue: Whether or not the Petitioners are partners
Ruling: They are not a partnership. 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.
DOCTRINES FROM OTHER CASES: Co-owership distinguished from partnership.We find that the case
at bar is fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited
the 'hacienda' in questionpro-indiviso from their deceased parents; they did not contribute or invest
additional ' capital to increase or expand the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they continued for many
years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda')
value and to continue the existing contractual relations with the Central Azucarera de Bais for milling
purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered partnership.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.

ONA vs. COMMISSIONER OF INTERNAL REVENUE

Facts: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A civil
case was instituted for the settlement of her state, in which Oa was appointed administrator and later on
the guardian of the three heirs who were still minors when the project for partition was approved. This
shows that the heirs have undivided interest in 10 parcels of land, 6 houses and money from the War
Damage Commission.
Although the project of partition was approved by the Court, no attempt was made to divide the properties
and they remained under the management of Oa 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.
Petitioners returned for income tax purposes their shares in the net income but they did not actually receive
their shares because this left with Oa who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore,
subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for
reconsideration, which was denied hence this petition for review from CTAs decision.
Question 1: Was there an unregistered partnership.
Answer 1: Yes, there was an unregistered partnership. The Tax Court found that instead of actually
distributing the estate of the deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Oa and let him use their shares as part of the
common fund for their ventures, even as they paid corresponding income taxes on their respective shares.
Question 2: Whether the petitioners are liable to pay taxes
Answer 2: Yes. 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 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.
For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships

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
Mertens Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
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. Judgment affirmed.
REVENUE REGULATIONS NO. 10-2012
Section 1. COVERAGE. Pursuant to the provisions of Sec 244 and 245 of the National Internal Revenue
Code of 1997, as amended, these Regulations are hereby promulgated to properly implement exclusion to
the definition of what is considered as a corporation pursuant to Sec 22 (B) of the NIRC of 1997, in
particular, those concerning joint venture undertakings involving construction projects.
Section 2. BACKGROUND. Pursuant to Section 22(B) of the NIRC of 1997, as amended, the term
corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, but does not include general
professional partnerships and 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 with the Government.

The tax exemption of joint ventures formed for the purpose of construction projects was pursuant to
Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors in achieving
competitiveness with foreign contractors by pooling their resources in undertaking big construction projects.
Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS. A joint venture or consortium
formed for the purpose of undertaking construction projects not considered as corporation under Sec 22 of
the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that is, licensed as general
contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and
Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI)
Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if the
member foreign contractor is covered by a special license as contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); and the construction project is
certified by the appropriate Tendering Agency (government office) that the project is a foreign
financed/internationally-funded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine Government and the foreign / international financing
institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise known as
Contractors License Law.
Absent any one the aforesaid requirements, the joint venture or consortium formed for the purpose of
undertaking construction projects shall be considered as taxable corporations.
In addition, the tax-exempt joint venture or consortium as herein defined shall not include those who are
mere suppliers of goods, services or capital to a construction project.
The member to a Joint Venture not taxable as corporation shall each be responsible in reporting and
paying appropriate income taxes on their respective share to the joint ventures profit.
Section 4. MANDATORY ENROLLMENT TO THE BIRS EFPS. All licensed local contactors are hereby
required to enroll themselves to the Bureau of Internal Revenues Electronic Filing and Payment System
(EFPS). The enrollment should be done at the Revenue District Office (RDO) where the local contractors
are registered as taxpayers.