1)

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. 3441, 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

Inve
stme
nt

La
nd

Bu
ildi
ng

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)

Acco
unt

Ac
co
un
t

Ac
co
un
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

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, 102104).
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

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);

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

III.

1956

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT

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

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

IV.

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

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

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;

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was
eliminated in line with the ruling of the Supreme Court in
Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan.
6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said
years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C
to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
II.

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 coowners, 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 copartners within the contemplation of our corporate tax laws
aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs,
obviously, without them becoming thereby unregistered co-partners, but it
does not necessarily follow that such status as co-owners continues until
the inheritance is actually and physically distributed among the heirs, for it
is easily conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under the
common management of the administrator or executor or of anyone chosen
by them and engage in business on that basis. Withal, if this were to be
allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National
Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated,
among the reasons for holding the appellants therein to be unregistered co-

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

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." ....

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:

Similarly, the American Law

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

xxx xxx xxx

... 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.

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:

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.

Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24
SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.
As regards the second question raised by petitioners about the segregation,
for the purposes of the corporate taxes in question, of their inherited
properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion
for reconsideration:
In connection with the second ground, it is alleged that, if
there was an unregistered partnership, the holding should be
limited to the business engaged in apart from the properties
inherited by petitioners. In other words, the taxable income of
the partnership should be limited to the income derived from
the acquisition and sale of real properties and corporate
securities and should not include the income derived from the
inherited properties. It is admitted that the inherited
properties and the income derived therefrom were used in the
business of buying and selling other real properties and
corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and
sale of other properties but also the income of the inherited
properties.
Besides, as already observed earlier, the income derived from inherited
properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part

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.
GR No. L -19342 | May 25, 1972 | J. Barredo
Facts:
Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and
her five children. A civil case was instituted for the settlement of her state,
in which Oa was appointed administrator and later on the guardian of the
three heirs who were still minors when the project for partition was
approved. This shows that the heirs have undivided interest in 10 parcels
of land, 6 houses and money from the War Damage Commission.
Although the project of partition was approved by the Court, no attempt
was made to divide the properties and they remained under the
management of Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceeds

from the sales thereof in real properties and securities. As a result,

petitioners properties and investments gradually increased. Petitioners
returned for income tax purposes their shares in the net income but they
did not actually receive their shares because this left with Oa who
invested them.
Based on these facts, CIR decided that petitioners formed an unregistered
partnership and therefore, subject to the corporate income tax, particularly
for years 1955 and 1956. Petitioners asked for reconsideration, which was
denied hence this petition for review from CTAs decision.
Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax
Held:
Unregistered partnership. The Tax Court found that instead of actually
distributing the estate of the deceased among themselves pursuant to the
project of partition, the heirs allowed their properties to remain under the
management of Oa and let him use their shares as part of the common
fund for their ventures, even as they paid corresponding income taxes on
their respective shares.
Yes. For tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as
a common fund with intent to produce profits for the heirs in proportion to
their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by
the court in the corresponding testate or intestate proceeding. The reason
is simple. From the moment of such partition, the heirs are entitled already
to their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly, he becomes liable
individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single

management to be used with the intent of making profit thereby in

proportion to his share, there can be no doubt that, even if no document or
instrument were executed, for the purpose, for tax purposes, at least, an
unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships
The term partnership includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on (8 Mertens Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships within
the purview of the term corporation. It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations. Judgment
affirmed.
OA V. COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-19342; May 25, 1972
Ponente: J. BARREDO
FACTS:
Julia Buales died on March 23, 1944, leaving as heirs her surviving
spouse, Lorenzo T. Oa and her five children
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.
The project of partition 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.
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.
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 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
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.
ISSUE:
Whether the petitioners formed an unregistered partnership
HELD:
Yes, the petitioners formed an unregistered partnership.
The Supreme Court held that 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 proceeds from
the sales thereof in real properties and securities. 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 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.

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.

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.

2)
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

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.

Revenue demanded the payment of income tax on a corporation, among

others, from them.

Hence, this petition wherein petitioners invoke as basis thereof the

following alleged errors of the respondent court:

In resolving the issue, this Court held as follows:

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

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 copartnerships (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 copartnerships (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:

do not even suggest that there has been any change in the
utilization thereof.

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.

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.

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

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.

6. Petitioners have not testified or introduced any evidence,

either on their purpose in creating the set up already adverted
to, or on the causes for its continued existence. They did not
even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the
intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein.
Only one or two of the aforementioned circumstances were
present in the cases cited by petitioners herein, and, hence,
those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund,
and that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain
parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners
purchased twenty-four (24) lots showing that the purpose was not limited
to the conservation or preservation of the common fund or even the

properties acquired by them. The character of habituality peculiar to

business transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make
any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of gain was not
present.
In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and
ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista
he said:
I wish however to make the following observation Article 1769
of the new Civil Code lays down the rule for determining when
a transaction should be deemed a partnership or a coownership. 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 copartnership 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.
Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988
25 Mar
FACTS:
Petitioners bought two (2) parcels of land and a year after, they bought
another three (3) parcels of land. Petitioners subsequently sold the said lots
in 1968 and 1970, and realized net profits. 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, the Acting BIR Commissioner
assessed and required Petitioners 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 asserting that they had availed of
tax amnesties way back in 1974. In a reply, respondent Commissioner
informed petitioners that in the years 1968 and 1970, petitioners as coowners in the real estate transactions formed an unregistered partnership
or joint venture taxable as a corporation under Section 20(b) and its income
was subject to the taxes prescribed under Section 24, both of the National
Internal Revenue Code that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners
relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership. Hence,
the petitioners were required to pay the deficiency income tax assessed.
ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or

a co-ownership for the purposes of income tax.
RULING:
The Petitioners are simply under the regime of co-ownership and
not under unregistered partnership.
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 (Art. 1767, Civil Code of
the Philippines). 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. 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. Hence, 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.

3)

G.R. No. L-68375 April 15, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS,
respondents.

Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
369 and 778, and not on the basis of 35% which was withheld and paid to
and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on
July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.

The Solicitor General for petitioner.

On October 6, 1977, petitioner file his Answer.

Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

On January 19, 1984, respondent Court of Tax Appeals rendered a Decision,

the decretal portion of which reads:

BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of
the Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander
Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander
Philippines, Inc. is entitled to the preferential rate of 15% withholding tax
on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd.
of Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a
domestic corporation organized under Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not
engaged in trade or business in the Philippines.

WHEREFORE, respondent is hereby ordered to grant a refund

and/or tax credit to petitioner in the amount of P115,440.00
representing overpaid withholding tax on dividends remitted
by it to the Glaro S.A. Ltd. of Switzerland during the second
quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the
same was denied in a Resolution dated August 13, 1984. Hence, the instant
petition.
Petitioner raised two (2) assignment of errors, to wit:
I

On July 18, 1975, Wander filed its withholding tax return for the second
quarter ending June 30, 1975 and remitted to its parent company, Glaro
dividends in the amount of P222,000.00, on which 35% withholding tax
thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the
second quarter ending June 30, 1976 on the dividends it remitted to Glaro
amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00
was withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal
Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
contending that it is liable only to 15% withholding tax in accordance with

ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT

ALL, THE COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN
RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID
REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE
HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE
HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO
S.A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT
EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT
PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS

IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE PHILIPPINE

TAX CODE.
The sole issue in this case is whether or not private respondent Wander is
entitled to the preferential rate of 15% withholding tax on dividends
declared and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not
Wander is the proper party to claim the refund; and (2) Whether or not
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on
such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not
Wander, the remitter or payor of the dividend income and a mere
withholding agent for and in behalf of the Philippine Government, which
should be legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being
raised for the first time in this Court. It was never raised at the
administrative level, or at the Court of Tax Appeals. To allow a litigant to
assume a different posture when he comes before the court and challenge
the position he had accepted at the administrative level, would be to
sanction a procedure whereby the Courtwhich is supposed to review
administrative determinationswould not review, but determine and
decide for the first time, a question not raised at the administrative forum.
Thus, it is well settled that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial level, issues not
raised in the lower court cannot be raised for the first time on appeal
(Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue,
112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725;
Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107
SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding
agent of the government and therefore cannot claim reimbursement of the
alleged overpaid taxes, is untenable. It will be recalled, that said
corporation is first and foremost a wholly owned subsidiary of Glaro. The
fact that it became a withholding agent of the government which was not
by choice but by compulsion under Section 53 (b) of the Tax Code, cannot

by any stretch of the imagination be considered as an abdication of its

responsibility to its mother company. Thus, this Court construing Section 53
(b) of the Internal Revenue Code held that "the obligation imposed
thereunder upon the withholding agent is compulsory." It is a device to
insure the collection by the Philippine Government of taxes on incomes,
derived from sources in the Philippines, by aliens who are outside the
taxing jurisdiction of this Court (Commissioner of Internal Revenue vs.
Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be
assessed for deficiency withholding tax at source, plus penalties consisting
of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine
counterpart, Wander is the proper entity who should for the refund or credit
of overpaid withholding tax on dividends paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether
or not Switzerland, the foreign country where Glaro is domiciled, grants to
Glaro a tax credit against the tax due it, equivalent to 20%, or the
difference between the regular 35% rate of the preferential 15% rate. The
dispute in this issue lies on the fact that Switzerland does not impose any
income tax on dividends received by Swiss corporation from corporations
domiciled in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the
law involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of
the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
(b) Tax on foreign corporations. 1) Non-resident
corporation. A foreign corporation not engaged in
trade or business in the Philippines, including a
foreign life insurance company not engaged in
the life insurance business in the Philippines,
shall pay a tax equal to 35% of the gross income
received during its taxable year from all sources
within the Philippines, as interest (except interest
on foreign loans which shall be subject to 15%
tax), dividends, premiums, annuities,
compensations, remuneration for technical

services or otherwise, emoluments or other fixed

or determinable, annual, periodical or casual
gains, profits, and income, and capital gains: ...
Provided, still further That on dividends received
from a domestic corporation liable to tax under
this Chapter, the tax shall be 15% of the
dividends received, which shall be collected and
paid as provided in Section 53 (d) of this Code,
subject to the condition that the country in which
the non-resident foreign corporation is domiciled
shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to
20% which represents the difference between the
regular tax (35%) on corporations and the tax
(15%) dividends as provided in this section: ...

While it may be true that claims for refund are construed strictly against
the claimant, nevertheless, the fact that Switzerland did not impose any tax
or the dividends received by Glaro from the Philippines should be
considered as a full satisfaction of the given condition. For, as aptly stated
by respondent Court, to deny private respondent the privilege to withhold
only 15% tax provided for under Presidential Decree No. 369, amending
Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and
intent of said law and definitely will adversely affect foreign corporations"
interest here and discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent
Court is but a confirmation of the May 19, 1977 ruling of petitioner that
"since the Swiss Government does not impose any tax on the dividends to
be received by the said parent corporation in the Philippines, the condition
imposed under the above-mentioned section is satisfied. Accordingly, the
withholding tax rate of 15% is hereby affirmed."

From the above-quoted provision, the dividends received from a domestic

corporation liable to tax, the tax shall be 15% of the dividends received,
subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.

Moreover, as a matter of principle, this Court will not set aside the
conclusion reached by an agency such as the Court of Tax Appeals which is,
by the very nature of its function, 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
authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which
is not present in the instant case.

In the instant case, Switzerland did not impose any tax on the dividends
received by Glaro. Accordingly, Wander claims that full credit is granted and
not merely credit equivalent to 20%. Petitioner, on the other hand, avers
the tax sparing credit is applicable only if the country of the parent
corporation allows a foreign tax credit not only for the 15 percentage-point
portion actually paid but also for the equivalent twenty percentage point
portion spared, waived or otherwise deemed as if paid in the Philippines;
that private respondent does not cite anywhere a Swiss law to the effect
that in case where a foreign tax, such as the Philippine 35% dividend tax, is
spared waived or otherwise considered as if paid in whole or in part by the
foreign country, a Swiss foreign-tax credit would be allowed for the whole or
for the part, as the case may be, of the foreign tax so spared or waived or
considered as if paid by the foreign country.

WHEREFORE, the petition filed is DISMISSED for lack of merit.

SO ORDERED.

CIR vs WANDER PHILIPPINES, INC. - CASE DIGEST

G.R. NO. L-68275, April 15, 1988
Commissioner of Internal Revenue, petitioner
vs
WANDER Philippines, Inc., and the Court of Tax Appeals,
respondents

FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic
corporation organized under Philippine laws. It is wholly-owned subsidiary
of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not engaged in trade for
business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its
parent company Glaro dividends from which 35% withholding tax was
withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a
claim for reimbursement, contending that it is liable only to 15%
withholding tax in accordance with sec. 24 (b) (1) of the Tax code, as
amended by PD nos. 369 and 778, and not on the basis of 35% which was
withheld ad paid to and collected by the government. petitioner failed to
act on the said claim for refund, hence Wander filed a petition with Court of
Tax Appeals who in turn ordered to grant a refund and/or tax credit. CIR's
petition for reconsideration was denied hence the instant petition to the
Supreme Court.
ISSUE:
Whether or not Wander is entitled to the preferential rate of 15%
withholding tax on dividends declared and to remitted to its parent
corporation.
HELD:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law
involved in this case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as
amended is hreby further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign
corporation not engaged in trade or business in the Philippines, including a

foreign life insurance company not engaged in life insurance business in

the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest
(except interest on a foreign loans which shall be subject to 15% tax),
dividends, premiums, annuities, compensation, remuneration for technical
services or otherwise emolument, or other fixed determinable annual,
periodical ot casual gains, profits and income, and capital gains: xxx
Provided, still further that on dividends received from a domestic
corporation liable to tax under this chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided in sec 53
(d) of this code, subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against tax due
from the non-resident foreign corporation taxes deemed to have been paid
in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporation and the tax (15%) dividends
as provided in this section: xxx."
From the above-quoted provision, the dividends received from a domestic
corporation liable to tax, the tax shall be 15% of the dividends received,
subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the
non-resident foreign corporation taxes deemed to have been paid in the
Philippines equivakent to 20% which represents the difference betqween
the regular tax (35%) on corpoorations and the tax (15%) on dividends.
While it may be true that claims for refund construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax on
the dividends received by Glaro from the Philippines should be considered
as a full satisfaction if the given condition. For, as aptly stated by
respondent Court, to deny private respondent the privilege to withhold only
15% tax provided for under PD No. 369 amending section 24 (b) (1) of the
Tax Code, would run counter to the very spirit and intent of said law and
definitely will adversely affect foreign corporations interest here and
discourage them for investing capital in our country.