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THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 172231


REVENUE,
Petitioner,
Present:
- versus - Ynares-Santiago, J. (Chairperson),
Austria-Martinez,
Callejo, Sr.,
Chico-Nazario, and
Nachura, JJ.
ISABELA CULTURAL
CORPORATION, Promulgated:
Respondent.
February 12, 2007
x ---------------------------------------------------------------------------------------- x

DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September
30, 2005 Decision[1] of the Court of Appeals in CA-G.R. SP No. 78426 affirming
the February 26, 2003 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case
No. 5211, which cancelled and set aside the Assessment Notices for deficiency
income tax and expanded withholding tax issued by the Bureau of Internal
Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation,
received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-8690-000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions


for professional and security services billed to and paid by ICC in 1986,
to wit:
(a) Expenses for the auditing services of SGV & Co., [3] for the
year ending December 31, 1985;[4]
(b) Expenses for the legal services [inclusive of retainer fees] of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengsonfor the years 1984 and 1985.[5]
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986. [6]
(2) The alleged understatement of ICCs interest income on the
three promissory notes due from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest


and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services.[7]
On March 23, 1990, ICC sought a reconsideration of the subject
assessments. On February 9, 1995, however, it received a final notice before
seizure demanding payment of the amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the petition is premature because the
final notice of assessment cannot be considered as a final decision appealable to
the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final
decision on the protested assessment and may therefore be questioned before the
CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No.
135210.[8] The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting
aside the assessment notices issued against ICC. It held that the claimed deductions
for professional and security services were properly claimed by ICC in 1986
because it was only in the said year when the bills demanding payment were sent
to ICC. Hence, even if some of these professional services were rendered to ICC in

1984 or 1985, it could not declare the same as deduction for the said years as the
amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the
subject promissory notes. It found that it was the BIR which made an
overstatement of said income when it compounded the interest income receivable
by ICC from the promissory notes of Realty Investment, Inc., despite the absence
of a stipulation in the contract providing for a compounded interest; nor of a
circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded
withholding tax on its claimed deduction for security services as shown by the
various payment orders and confirmation receipts it presented as evidence. The
dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice
No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986, are
hereby CANCELLED and SET ASIDE.
SO ORDERED.[9]

Petitioner filed a petition for review with the Court of Appeals, which
affirmed the CTA decision,[10] holding that although the professional services (legal
and auditing services) were rendered to ICC in 1984 and 1985, the cost of the
services was not yet determinable at that time, hence, it could be considered as
deductible expenses only in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the
instant petition contending that since ICC is using the accrual method of
accounting, the expenses for the professional services that accrued in 1984 and

1985, should have been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said expenses as deduction for
the taxable year 1986. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner invoked the presumption
that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1)
sustained the deduction of the expenses for professional and security services from
ICCs gross income; and (2) held that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc; and that ICC withheld the
required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services, are: (a)
the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.[11]
The requisite that it must have been paid or incurred during the taxable
year is further qualified by Section 45 of the National Internal Revenue Code
(NIRC) which states that: [t]he deduction provided for in this Title shall be taken
for the taxable year in which paid or accrued or paid or incurred, dependent upon
the method of accounting upon the basis of which the net income is computed x x
x.
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions.[12] In the instant case, the
accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the
accrual method of accounting, expenses not being claimed as deductions by a
taxpayer in the current year when they are incurred cannot be claimed as deduction
from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.[13]

The accrual method relies upon the taxpayers right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment.[14]
For a taxpayer using the accrual method, the determinative question is, when
do the facts present themselves in such a manner that the taxpayer must recognize
income or expense? The accrual of income and expense is permitted when the allevents test has been met. This test requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the reasonable accurate determination of
such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable
accuracy. However, the test does not demand that the amount of income or liability
be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with reasonable
accuracy. Accordingly, the term reasonable accuracy implies something less
than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its
books for the taxable year.[16] Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.[17]
Corollarily, it is a governing principle in taxation that tax exemptions must
be construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority; and one who claims an exemption must be able to justify the

same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax exemption, then
it must also be strictly construed.[18]
In the instant case, the expenses for professional fees consist of expenses for
legal and auditing services. The expenses for legal services pertain to the 1984 and
1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICCs tax problems for the year 1984. As testified by the Treasurer
of ICC, the firm has been its counsel since the 1960s. [19] From the nature of the
claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm as
well as the compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have been claimed
as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have
inquired into the amount of their obligation to the firm, especially so that it is using
the accrual method of accounting. For another, it could have reasonably determined
the amount of legal and retainer fees owing to its familiarity with the rates charged
by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact
and that the taxpayer bears the burden of establishing the accrual of an expense or
income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were
completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are
questions of fact which ICC never established. It simply relied on the defense of
delayed billing by the firm and the company, which under the circumstances, is not
sufficient to exempt it from being charged with knowledge of the reasonable
amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the
financial statements of ICC for the year 1985 cannot be validly claimed as expense

deductions in 1986. This is so because ICC failed to present evidence showing that
even with only reasonable accuracy, as the standard to ascertain its liability to SGV
& Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the said year and were
therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these
expenses were incurred by ICC in 1986[20] and could therefore be properly claimed
as deductions for the said year.
Anent the purported understatement of interest income from the promissory
notes of Realty Investment, Inc., we sustain the findings of the CTA and the Court
of Appeals that no such understatement exists and that only simple interest
computation and not a compounded one should have been applied by the
BIR. There is indeed no stipulation between the latter and ICC on the application
of compounded interest.[21] Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security
services and remitted the same to the BIR is supported by payment order and
confirmation receipts.[22] Hence, the Assessment Notice for deficiency expanded
withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set aside but only
insofar as the claimed deductions of ICC for security services. Said Assessment is
valid as to the BIRs disallowance of ICCs expenses for professional services. The
Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681 in
the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September


30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426,
is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-186-90-000680, which disallowed the expense deduction of Isabela Cultural
Corporation for professional and security services, is declared valid only insofar as
the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is
affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:

MA. ALICIA AUSTRIA-MARTINEZ


Associate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO


Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA


Associate Justice

ATTESTATION
I attest that the conclusions in the above decision were reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, it is hereby certified that the conclusions in the above
Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
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.
The following facts are undisputed: Respondent 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" (cuentas en participacion) 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 taxpayerappellant; 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 revisethe
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 novo and 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 warranted 1

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.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B.


OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA, 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 Purificacion Ureta 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 Buales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oa 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.
Oa 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
Oa, were still minors when the project of partition was approved, Lorenzo T. Oa,
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.
Oa, 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. 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 from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:

Y
e
a
r

Invest
ment

Lan
d

Buil
din
g

Accou
nt

Acc
oun
t

Acc
oun
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. Oa 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. Oa 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 nonfiling," 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.

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 Buales 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. Oa, 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. Oa 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. Oa 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. Oa.
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. Oa, 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. Oa 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 coowners 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 copartnership. 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 coheirs 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,(cuentas en participacion)" 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 xxx xxx
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 coownership 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.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.

Republic of the Philippines


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

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company

sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and
D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge
Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely

incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,
en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice
que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la
linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad
perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2,
Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15
persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement
that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held
liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa
heirs inherited the 'hacienda' in questionpro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the property to the use to
which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value and to continue the existing

contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership who
own properties which produce income should not automatically be considered
partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Araas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 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.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION

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 Constante Roaquin 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 (cuentas en 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 coowners 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.
Cruz, Grio-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.

THIRD DIVISION
[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 PHILIPPINES;
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; PEOPLES TRANSEAST 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, petitioners, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
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
reinsurance 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 pools remittances to the member companies and to the said foreign
firm be taxable as dividends? Under the facts of this case, has the governments 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 29502, 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 petitioners. [5]


The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying 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 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 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 penaltynon-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00

===========
10% withholding tax at
source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penaltynon-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters 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 Commissioners right to assess the Clearing House
had already prescribed.[10]
The Courts 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 governments 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 or 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 risks thus reinsured.
[11]
Hence, the pool did not act or earn income as a reinsurer.[12] Its 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 fund;[15] (3) the
executive board of the pool did not exercise 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 laws, 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 includingduly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and
building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations.Parenthetically, the
NLRCs 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 thirtyfive 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
xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx

(B) 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 [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.
xxx xxx xxx."
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]

xxx 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 Mertens Law of Federal
Income Taxation, p. 562 Note 63)
Article 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. [27] Meanwhile, an
association implies associates who enter into a joint enterprise x x x 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[32]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.[33] This common fund pays for the
administration and operation expenses of the pool.[34]

(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
pools formation. As aptly found by the CTA:
xxx 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. x x x 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 Pascual 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. [39] The
Court of Appeals did not err in applyingEvangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:

Pools 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 taxing 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 premium income twice in the hands of the same
taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends. [41] They add
that even if such remittances were 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, xxx 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 xxx be paid upon
reinsurance by any company that has already paid the tax xxx. 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 Articles 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 governments 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 governments 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 pools 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 Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are herebyAFFIRMED. Costs against petitioners.
SO ORDERED.
Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.