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
Year
Investment
Tax Court as follows:
Account
Julia Buales died on
1949

March 23, 1944, leaving

1950
P24,657.65
as heirs her surviving
1951
51,301.31
spouse, Lorenzo T. Oa
1952
67,927.52
and her five children. In
1953
61,258.27
1948, Civil Case No.
1954
63,623.37
4519 was instituted in
1955
100,786.00
the
Court
of
First
1956
175,028.68
Instance of Manila for

Land
Account
P87,860.00
128,566.72
120,349.28
87,065.28
84,925.68
99,001.20
120,249.78
135,714.68

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
Building
management
of
Account
Lorenzo
T.
Oa
P17,590.00
who used said
96,076.26
properties
in
110,605.11
business
by
152,674.39
leasing or selling
161,463.83
them and investing
167,962.04
the income derived
169,262.52
therefrom and the
169,262.52
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:

(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. 3738). 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

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

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. L9692, 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

concerned, the total income thereof should be considered as that of coowners 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 copartners, 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 abovementioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the
heirs can be considered as co-owners rather than unregistered co-partners
within the contemplation of our corporate tax laws aforementioned. Before
the partition and distribution of the estate of the deceased, all the income
thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is actually and
physically distributed among the heirs, for it is easily conceivable that after
knowing their respective shares in the partition, they might decide to continue
holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for heirs in any
inheritance to circumvent and render meaningless Sections 24 and 84(b) of
the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among
the reasons for holding the appellants therein to be unregistered co-partners
for tax purposes, that their common fund "was not something they found
already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are
doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated,
for tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple.
From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of
them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion

to his share, there can be no doubt that, even if no document or instrument

were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this
case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the
Civil Code, providing that: "The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns are
derived," and, for that matter, on any other provision of said code on
partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and
different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore,
to organizations which are not necessarily "partnerships", in
the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute precisely
one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said
Code, "the term corporation includes partnerships, no matter
how created or organized." This qualifying expression clearly
indicates that a joint venture need not be undertaken in any
of the standard forms, or in confirmity with the usual
requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,
(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 co-ownership
pursued by appellants therein.
As regards the second question raised by petitioners about the segregation,
for the purposes of the corporate taxes in question, of their inherited
properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:
In connection with the second ground, it is alleged that, if
there was an unregistered partnership, the holding should be
limited to the business engaged in apart from the properties
inherited by petitioners. In other words, the taxable income
of the partnership should be limited to the income derived
from the acquisition and sale of real properties and corporate
securities and should not include the income derived from
the inherited properties. It is admitted that the inherited
properties and the income derived therefrom were used in
the business of buying and selling other real properties and
corporate securities. Accordingly, the partnership income
must include not only the income derived from the purchase
and sale of other properties but also the income of the
inherited properties.

Besides, as already observed earlier, the income derived from inherited

properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part
of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the clear
intent of the law.
Likewise, the third question of petitioners appears to have been adequately
resolved by the Tax Court in the aforementioned resolution denying
petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of
this Honorable Court that the herein
petitioners have formed an unregistered
partnership and, therefore, have to be taxed
as such, it might be recalled that the
petitioners in their individual income tax
returns reported their shares of the profits of
the unregistered partnership. We think it
only fair and equitable that the various
amounts paid by the individual petitioners as
income tax on their respective shares of the
unregistered
partnership
should
be
deducted from the deficiency income tax
found by this Honorable Court against the
unregistered
partnership.
(page
7,
Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28,
1961.)
In other words, it is the position of petitioners that the taxable
income of the partnership must be reduced by the amounts
of income tax paid by each petitioner on his share of
partnership profits. This is not correct; rather, it should be the
other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the
amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities
of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever
excess they might have paid as individual income tax cannot be credited as

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

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

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.

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 co-owners thereof.

In Evangelists, there was a series of transactions where petitioners

purchased twenty-four (24) lots showing that the purpose was not limited to
the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista
in Evangelista he said:
I wish however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a coownership 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 coowners 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.

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

COMMISSIONER
OF
INTERNAL
vs.
WANDER PHILIPPINES, INC. AND THE
APPEALS, respondents.
The Solicitor General for petitioner.

REVENUE, petitioner,
COURT

OF

TAX

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

I
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,

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.
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
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.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision,
the decretal portion of which reads:
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:

10

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: ...
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 nonresident 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.
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.
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

11

imposed under the above-mentioned section is satisfied. Accordingly, the

withholding tax rate of 15% is hereby affirmed."
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.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

12