Tax 1 2nd Assignment (FULL CASES)

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals in
CA-G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No.
5200. Also assailed is the April 3, 2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement4 with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and
operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet
Province. The parties’ agreement was denominated as "Power of Attorney" and provided for the
following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the MANAGERS
within the said 3-year period, for use in the MANAGEMENT of the STO. NINO MINE. The
said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit
purposes, as the owner’s account in the Sto. Nino PROJECT. Any part of any income of the
PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be
added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to
the Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by
the Sto. Nino PROJECT as a special fund to be known as the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be added to the MANAGERS’
account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the
MANAGERS’ account has to the owner’s account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will
be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property originally transferred by them to the
Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to
the MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the
Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall pay
income tax on their compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS’
compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the
future, may incur other obligations in favor of the MANAGERS. This Power of Attorney has
been executed as security for the payment and satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’ account. After all obligations of the
PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency
shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-
month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to
the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be
operative in case of the MANAGERS’ withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing
losses over the years which resulted to petitioner’s withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Gold’s
tangible assets to petitioner, transferring to the latter Baguio Gold’s equitable title in its Philodrill
assets and finally settling the remaining liability through properties that Baguio Gold may acquire in
the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in
Payment"8 where the parties determined that Baguio Gold’s indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible
assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were
set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction
for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites
for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within the taxable year when it was
determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it entered into with
Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to
the management contract, formed part of Baguio Gold’s "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold’s long-term loans which legally
entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it would
not be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt
to be considered worthless, petitioner claimed that it was neither required to institute a judicial action
for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It
is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable
means to collect.
On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis. It held
that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and
had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting
debt considering that, under the management contract, petitioner was to be paid fifty percent (50%)
of the project’s net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for
lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income
tax in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995, which is the date after the 20-
day grace period given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership
with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could not be deducted as a
bad debt from petitioner’s gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio
Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio
Gold was not in default since its loans were not yet due and demandable. What petitioner did was to
pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank imposed and collected
a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature
of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto.
Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto.
Nino Mine notwithstanding the clear absence of any intent on the part of Philex and Baguio
Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement when it
construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad
debts write-off.14
Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we
should not only rely on the "Power of Attorney", but also on the subsequent "Compromise with
Dation in Payment" and "Amended Compromise with Dation in Payment" that the parties executed in
1982. These documents, allegedly evinced the parties’ intent to treat the advances and payments as
a loan and establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’ contractual intent must first be
discovered from the expressed language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise agreements were mere collateral
documents executed by the parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties’ true intent. The compromise agreements were
executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by
which petitioner could recover the advances and payments it made under the "Power of Attorney".
The parties entered into the compromise agreements as a consequence of the dissolution of their
business relationship. It did not define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed
intended by the parties. Under a 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.15 While a corporation, like petitioner, cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has been held that it may enter into a joint
venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary
purpose. x x x It is in fact hardly distinguishable from the partnership, since their elements
are similar – community of interest in the business, sharing of profits and losses, and a
mutual right of control. x x x The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single transaction, and is
thus of a temporary nature. x x x This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem therefore that
under Philippine law, a joint venture is a form of partnership and should be governed by the
law of partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. x x x (Citations
omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property
and industry to the common fund known as the Sto. Niño mine.17 In this regard, we note that there is
a substantive equivalence in the respective contributions of the parties to the development and
operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold
would contribute P11M under its owner’s account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioner’s contribution would consist of
its expertise in the management and operation of mines, as well as the manager’s account which is
comprised of P11M in funds and property and petitioner’s "compensation" as manager that cannot
be paid in cash.
However, petitioner asserts that it could not have entered into a partnership agreement with Baguio
Gold because it did not "bind" itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIÑO MINE."18
The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph
5(c) which prohibits petitioner from withdrawing the advances until termination of the parties’
business relations. As can be seen, petitioner became bound by its contributions once the transfers
were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to
exercise its option under paragraph 5.
There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal of
advances should not be taken as an indication that it had entered into a partnership with Baguio
Gold; that the stipulation only showed that what the parties entered into was actually a contract of
agency coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent.19 In this case, the non-revocation or non-withdrawal under paragraph 5(c)
applies to the advances made by petitioner who is supposedly the agent and not the principal under
the contract. Thus, it cannot be inferred from the stipulation that the parties’ relation under the
agreement is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the
parties was one of agency and not a partnership. Although the said provision states that "this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS’ account," it does not necessarily follow that the parties
entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not to confer a power in
favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former was to manage and operate
the latter’s mine through the parties’ mutual contribution of material resources and industry. The
essence of an agency, even one that is coupled with interest, is the agent’s ability to represent his
principal and bring about business relations between the latter and third persons.20 Where
representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of one’s paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate undertaking of the
parties.21
In this case, the totality of the circumstances and the stipulations in the parties’ agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made
by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the
parties’ business relations, "the ratio which the MANAGER’S account has to the owner’s account will
be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims" shall be transferred to petitioner.22As pointed out by the Court of Tax Appeals,
petitioner was merely entitled to a proportionate return of the mine’s assets upon dissolution of the
parties’ business relations. There was nothing in the agreement that would require Baguio Gold to
make payments of the advances to petitioner as would be recognized as an item of obligation or
"accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the
Sto. Niño mine upon termination, a provision that is more consistent with a partnership than a
creditor-debtor relationship. It should be pointed out that in a contract of loan, a person who receives
a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor
an equal amount of the same kind and quality.23 In this case, however, there was no stipulation for
Baguio Gold to actually repay petitioner the cash and property that it had advanced, but only the
return of an amount pegged at a ratio which the manager’s account had to the owner’s account.
In this connection, we find no contractual basis for the execution of the two compromise agreements
in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Nino mine. The "Power of Attorney" clearly
provides that petitioner would only be entitled to the return of a proportionate share of the mine
assets to be computed at a ratio that the manager’s account had to the owner’s account. Except to
provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio
Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and
above the proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds
of millions of pesos to another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific
maturity date for the advances to become due and demandable, and the manner of payment was
unclear. All these point to the inevitable conclusion that the advances were not loans but capital
contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety
of the parties’ contractual stipulations simply leads to no other conclusion than that petitioner’s
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the
profits of a business is prima facie evidence that he is a partner in the business." Petitioner asserts,
however, that no such inference can be drawn against it since its share in the profits of the Sto Niño
project was in the nature of compensation or "wages of an employee", under the exception provided
in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who
will be paid "wages" pursuant to an employer-employee relationship. To begin with, petitioner was
the manager of the project and had put substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to profits, petitioner also stood not to be
remunerated in case the mine had no income. It is hard to believe that petitioner would take the risk
of not being paid at all for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement

actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not be
entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold.25 It is
not surprising that petitioner was to receive a 50% share in the net profits, considering that the
"Power of Attorney" also provided for an almost equal contribution of the parties to the St. Nino mine.
The "compensation" agreed upon only serves to reinforce the notion that the parties’ relations were
indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioner’s advances as investments in a partnership
known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch
as the latter was under no unconditional obligation to return the same to the former under the "Power
of Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find
no reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due
and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the
deduction claimed.27 In this case, petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it
could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No.
49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case
No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency
tax on its 1982 income in the amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment of the deficiency income tax,
up to the actual date of payment.
SO ORDERED.

SUPREME COURT
Manila
EN BANC
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,

MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only
one subject which shall be expressed in the title thereof.
Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Article III, Section 1 — No person shall be deprived of . . . property without due

process of law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme
for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections
21 and 29 of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:
Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. — A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-
employed or practices his profession herein, determined in accordance with the
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%

Over P120,000 P15,600 + 20%

Over P350,000 P61,600 + 30%

of excess over P350,000
Sec. 29. Deductions from gross income. — In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to
the business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having
still retained the net income, taxation scheme. The allowance for deductible items, it is true, may
have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the
new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually made, of the subjects
of legislation.1 The above objectives of the fundamental law appear to us to have been sufficiently
met. Anything else would be to require a virtual compendium of the law which could not have been
the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
taxation "shall be uniform and equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes the tax on corporations and
partnerships. The contention clearly forgets, however, that such a system of income taxation has
long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to
the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment3 on taxable
corporations. We certainly do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general professional partnership

(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and
therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

version of the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or

to partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective professions
and partners in general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is treated as a corporation
for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but
on the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act
7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each
partner —
(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless

he declares his distributive share of the gross income undiminished
by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view
can easily become myopic, however, when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in
levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income tax on their
income from Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such
as in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example.4Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so
as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a
flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno,
Kapunan and Mendoza, JJ., concur.
Padilla and Bidin, JJ., are on leave.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.

OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and
D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la

sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,

en que la sociedad presupone necesariamente la convencion, mentras que la
comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la
linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad
perseguida por los interesados: lucro comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2,
Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to
purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The
15 persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oña vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.—We find that the case at bar is

fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa
heirs inherited the 'hacienda' in question pro-indiviso from their deceased parents;
they did not contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the property to the use to
which it had been put by their forebears; they individually reported in their tax returns
their corresponding shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value and to continue the existing
contractual relations with the Central Azucarera de Bais for milling purposes. Longa
vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who

own properties which produce income should not automatically be considered
partners of an unregistered partnership, or a corporation, within the purview of the
income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a
property does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on corporation. (De
Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on
May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels
of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels
of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners
realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net
profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed
of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the
unregistered partnership was subject to corporate income tax as distinguished from profits derived
from the partnership by them which is subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual
income tax liabilities but did not relieve them from the tax liability of the unregistered partnership.
Hence, the petitioners were required to pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA
Case No. 3045. In due course, the respondent court by a majority decision of March 30,
1987, 2 affirmed the decision and action taken by respondent commissioner with costs against
petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was
in fact formed by petitioners which like a corporation was subject to corporate income tax distinct
from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners,
there was no adequate basis for the conclusion that they thereby formed an unregistered partnership
which made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA

CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE
EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage
their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they gained net profits from the rental
income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to
the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something they found already in existence. It was not
a property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said common
fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transcations undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several
persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way
of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit
notes and checks. Thus, the affairs relative to said properties have been handled as
if the same belonged to a corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only one
or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common
fund or even the properties acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor
make any improvements thereon. In 1966, they bought another three (3) parcels of land from one
seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under
the management of one of the partners. Such condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common
does not convert their venture into a partnership. Or the sharing of the gross returns
does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside
from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence
of a juridical personality different from that of the individual partners, and the freedom
to transfer or assign any interest in the property by one with the consent of the
others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-
636)
It is evident that an isolated transaction whereby two or more persons contribute

funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of
the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect

thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the
same; (b) generally participating in both profits and losses; (c) and such a community
of interest, as far as third persons are concerned as enables each party to make
contract, manage the business, and dispose of the whole property.-Municipal Paving
Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form
a partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as
petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions,
they are thereby relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby
rendered relieving petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.
Cruz, Griño-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney 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 Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in
the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo
T. Oña the surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo
T. Oña, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they
received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned,
two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T.
Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p.
74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
Year Investment Land Building
Account Account Account
1949 — P87,860.00 P17,590.00
1950 P24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)

decided that petitioners formed an unregistered partnership and therefore, subject to
the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the
Tax Code. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co.,
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE

PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

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

THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales thereof in real properties and
securities," as a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years
herein involved, some of the said properties were sold at considerable profit, and that with said
profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It
is likewise admitted that all the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-
owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to
continue holding said shares under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil
Code from that of unregistered partnerships which are considered as "corporations" under Sections
24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(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.
Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.
Reyes, J.B.L. and Teehankee, JJ., concur in the result.
Castro, J., took no part.
Concepcion, C.J., is on leave.

SUPREME COURT
Manila
EN BANC
G.R. No. L-9996 October 15, 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA,

petitioners,
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and
Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real
estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance
with the respondent's assessment for the same in the total amount of P6,878.34, which is
hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs
against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq.
m. including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive rents;
to issue receipts therefor; in default of such payment, to bring suits against the defaulting
tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit
all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the
same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
1948 1,912.30
1949 1,575.90
Total including surcharge and P6,157.09

compromise
REAL ESTATE DEALER'S FIXED TAX
1946 P37.50
1947 150.00
1948 150.00
1949 150.00
Total including penalty P527.00
RESIDENCE TAXES OF CORPORATION
1945 P38.75
1946 38.75
1947 38.75
1948 38.75
1949 38.75
Total including surcharge P193.75
TOTAL TAXES DUE P6,878.34.
Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in question, with costs against
the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to
the tax on corporations, the issue hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compañias
colectivas), 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 participacion), associations or
insurance companies, but does not include duly registered general copartnerships.
(compañias 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,
properly, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945
to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus,
the affairs relative to said properties have been handled as if the same belonged to a
corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no opinion — tends
to increase the similarity between the nature of their venture and that corporations, and is, therefore,
an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is
created by an agreement, a declaration of trust, a statute, or otherwise. It includes a
voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name known) which
is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63;
emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized,

whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how
created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually contributed money to a common fund with
express purpose of engaging in real estate business for profit. The series of transactions which they
had undertaken attest to this. This appears in the following portion of the decision:
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. On April 3, 1944, they purchase 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state
for P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner in February,
1943, In other words, we cannot but perceive a character of habitually peculiar
to business transactions engaged in for purposes of gain.
I wish however to make 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 of 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 partnership, whether or not the
person 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 shared or do
not share any profits made by the use of 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 judicial
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 Floyd R.
Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in respect
thereto; nor does not agreement to share the profits and loses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S
Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality,
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 plaintiff's commissions, no partnership existed as between
the parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N.
E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same;
(b) generally a 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 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for 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.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances (referring to the series of transactions) such as to leave no room for doubt on
the existence of said intent in petitioners herein."
SYLLABI/SYNOPSIS
THIRD DIVISION
[G.R. No. 112675. January 25, 1999]
AFISCO INSURANCE CORPORATION; CCC INSURANCE

CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES
INSURANCE CORPORATION; COMMONWEALTH INSURANCE
COMPANY; CONSOLIDATED INSURANCE CO., INC.;
DEVELOPMENT INSURANCE & SURETY CORPORATION;
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES;
EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE
INSURANCE COMPANY; EQUITABLE INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION INC.;
FGU INSURANCE CORPORATION; FIDELITY & SURETY
COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE
SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH
INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.;
METROPOLITAN INSURANCE COMPANY; METRO-TAISHO
INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO.,
LTD.; PAN-MALAYAN INSURANCE CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLES TRANS-
EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE
SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.;
PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER
INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL
INSURANCE CORPORATION; PROVIDENT INSURANCE
COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO.,
INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL
SURETY & INSURANCE COMPANY; SANPIRO INSURANCE
CORPORATION; SEABOARD-EASTERN INSURANCE CO.,
INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY &
INSURANCE CO., INC.; STATE BONDING & INSURANCE CO.,
INC.; SUMMA INSURANCE CORPORATION; TABACALERA
INSURANCE CO., INC.all assessed as POOL OF
MACHINERY INSURERS, petitioners, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company.May the clearing house or insurance pool so formed be deemed a
partnership or an association that is taxable as a corporation under the National Internal Revenue
Code (NIRC)? Should the pools remittances to the member companies and to the said foreign
firm be taxable as dividends? Under the facts of this case, has the governments right to assess
and collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before us,
assailing the October 11, 1993 Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which
dismissed petitioners appeal of the October 19, 1992 Decision[3] of the Court of Tax
Appeals[4] (CTA) which had previously sustained petitioners liability for deficiency income tax,
interest and withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioners.[5]
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution[6] denying reconsideration.
The Facts
The antecedent facts,[7] as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and ContractorsAll Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and
filed an Information Return of Organization Exempt from Income Tax for the year
ending in 1975, on the basis of which it was assessed by the Commissioner of Internal
Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding
taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich
and to the petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency
income tax, interest, and with[h]oldingtax, itemized as follows:
Net income per information

return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE ===========
Dividend paid to Munich

Reinsurance Company P3,728,412.00
===========
35% withholding tax at

source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P 655,636.00

===========
10% withholding tax at

source due thereon P 65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the
address given in the information return filed. Hence, this Petition for Review before us.[9]
The Issues
Before this Court, petitioners raise the following issues:
1.Whether or not the Clearing House, acting as a mere agent and performing strictly
administrative functions, and which did not insure or assume any risk in its own name,
was a partnership or association subject to tax as a corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of their respective

shares of reinsurance premiums, pertaining to their individual and separate contracts
of reinsurance, were dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House
had already prescribed.[10]
The Courts Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point out
that the reinsurance policies were written by them individually and separately, and that their
liability was limited to the extent of their allocated share in the original risks thus
reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited to
its principal function of allocating and distributing the risk(s) arising from the original insurance
among the signatories to the treaty or the members of the pool based on their ability to absorb the
risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance,
collection and custody of funds, etc.[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers,
did not share the same risk or solidary liability;[14] (2) there was no common fund;[15] (3) the
executive board of the pool did not exercise control and management of its funds, unlike the
board of directors of a corporation;[16] and (4) the pool or clearing house was not and could not
possibly have engaged in the business of reinsurance from which it could have derived income
for itself.[17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue,
the agency tasked with the enforcement of tax laws, is accorded much weight and even finality,
when there is no showing that it is patently wrong,[18] particularly in this case where the findings
and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals.[19] Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of
quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
its authority.[20]
This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of the
NIRC, as worded in the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is
hereby imposed upon the taxable net income received during each taxable year from
all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private educational institutions, and
building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRCs inclusion of such entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997,[21] which amended the Tax Code. Pertinent provisions of the new law read
as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-
five percent (35%) is hereby imposed upon the taxable income derived during each
taxable year from all sources within and without the Philippines by every corporation,
as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation
xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24
covered these unregistered partnerships and even associations or joint accounts, which had no
legal personalities apart from their individual members.[23] The Court of Appeals astutely
applied Evangelista:[24]
xxx Accordingly, a pool of individual real property owners dealing in real estate
business was considered a corporation for purposes of the tax in sec. 24 of the Tax
Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on. * * * (8 Mertens Law of Federal
Income Taxation, p. 562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two
or more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.[25] Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits.[26] In other words, a
partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves.[27] Meanwhile, an
association implies associates who enter into a joint enterprise x x x for the transaction of
business.[28]
In the case before us, the ceding companies entered into a Pool Agreement[29] or an
association[30] that would handle all the insurance businesses covered under their quota-share
reinsurance treaty[31]and surplus reinsurance treaty[32]with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool.[33] This common fund pays for the
administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums. The ceding companies share in the business ceded to
the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement.[36] Profit motive or business is, therefore, the primordial reason for the
pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business. x x x If together they have conducted business, profit
must have been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it implies that
profit actually resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts
obtaining therein are not on all fours with the present case. In Pascual, there was no unregistered
partnership, but merely a co-ownership which took up only two isolated transactions.[39] The
Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged
in a series of transactions spanning more than ten years, as in the case before us.
Second Issue:
Pools Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the ceding companies and
Munich are not dividends subject to tax. They insist that taxing such remittances contravene
Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the same
taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add
that even if such remittances were treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and
Article 5 of paragraph 5[44] of the RP-West German Tax Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice
when it should be taxed only once. That is, xxx taxing the same person twice by the same
jurisdiction for the same thing.[46] In the instant case, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is obviously
different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.[47] Petitioners have failed to
discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable,
because these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as
their own.
On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code,
because the same subsection specifically taxes dividends, the type of remittances forwarded to it
by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of
the ceding companies in the entity formed, pursuant to their reinsurance treaties which required
the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance
Treaty and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty. The foregoing interpretation
of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.[53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for
corporate taxes on the basis of the information return it had submitted for the year ending 1975, a
taxable year when said treaty was not yet in effect.[54] Although petitioners omitted in their
pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect
only later, on December 14, 1984.[55]
Third Issue: Prescription
Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14,
1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that
the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC,[57] because the taxpayer
cannot be located at the address given in the information return filed and for which reason there
was delay in sending the assessment.[58] Indeed, whether the governments right to collect and
assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is
axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as
in this case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return filed
in 1980 indicated therein its present address. The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law
clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
[1]
Rollo, pp. 57-69.
[2]
Second Division, composed of J. Vicente V. Mendoza (now an associate justice of the Supreme
Court), ponente and chairman of the Division; concurred in by JJ. Jesus M. Elbinias and Lourdes K. Tayao-Taguros,
members.
[3]
Rollo, pp. 172-191.
[4]
Penned by Presiding Judge Ernesto D. Acosta and concurred in by Judges Manuel K. Gruba and Ramon O. De
Veyra.
[5]
Decision of the Court of Appeals, p. 12; rollo, p. 68.
[6]
Rollo, p. 71.
[7]
The petition aptly raises only questions of law, not of facts.
[8]
CA Decision, pp. 1-3; rollo, pp. 57-59.
[9]
The case was deemed submitted for resolution on January 20, 1998, upon receipt by this Court of the
Memorandum for Respondent Commissioner. Petitioners Memorandum was received earlier, on July 11, 1997.
[10]
Memorandum for Petitioners, p. 10; rollo, p. 390.
[11]
Ibid., p.14; rollo, p.394.
[12]
Ibid., p. 28; rollo, p. 408.
[13]
Ibid., p. 15; rollo, p. 395.
[14]
Ibid., p. 24; rollo, p. 404.
[15]
Ibid., p. 26; rollo, p. 406.
[16]
Ibid., pp. 24-25; rollo, pp. 404-405.
[17]
Ibid., p. 25; rollo, p. 405.
[18]
See Joebon Marketing Corporation v. Court of Appeals, the Commissioner of Internal Revenue, GR No. 125070,
July 17, 1996, Third Division, Minute Resolution; citing Misamis Oriental Association of Coco Traders,
Inc. v. Department of Finance Secretary, 238 SCRA 63, 68, November 10, 1994.
[19]
See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 619-620, April 18, 1997.
[20]
Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182, 189-190, per Regalado, J.
[21]
RA No. 8424, which took effect on January 1, 1998.
[22]22
102 Phil. 140, (1957).22
[23]
Supra, pp. 146-147; cited in Justice Jose C. Vitug, Compendium of Tax Law and Jurisprudence, p. 52, 2nd
revised ed. (1989).
[24]
[25]
Art. 1767, Civil Code of the Philippines.
[26]
Tolentino, Civil Code of the Philippines, p. 320, Vol. V (1992).
[27]
Prautch, Scholes & Co. v. Dolores Hernandez de Goyonechea, 1 Phil. 705, 709-710 (1903), per Willard, J.; cited
in Moreno, Philippine Law Dictionary, p. 445 (1982).
[28]
Morrissey v. Commissioner, 296 US 344, 356; decided December 16, 1935, per Hughes, CJ.
[29]
Pool Agreement, p. 1; rollo, p. 154.
[30]
Ibid., p. 2; rollo, p.155.
[31]
Annex C; rollo, pp. 72-100.
[32]
Annex D; rollo, pp. 101-153.
[33]
Pool Agreement, p. 4; rollo, p. 157.
[34]
Ibid., p. 6; rollo, p. 159.
[35]
[36]
[37]
CTA Decision, pp. 16-17; rollo, pp. 187-188.
[38]
166 SCRA 560, October 18, 1988.
[39]
Pascual v. Commissioner, supra, p. 568.
[40]
Memorandum for Petitioners, pp. 32-33; rollo, pp. 412-413.
[41]
Ibid., p. 29; rollo, p. 409.
[42]
Ibid., p. 30; rollo, p. 410.
[43]
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State through a permanent establishment situated therein. xxx.
[44]
5. An insurance enterprise of a Contracting State shall, except with regard to re-insurance, be deemed to have a
permanent establishment in the other State, if it collects premiums in the territory of that State or insures risks
situated therein through an employee or through a representative who is not an agent of independent status within
the meaning of paragraph 6.
[45]
Memorandum for Petitioners, p. 31; rollo, p. 411. Petitioners are referring to the treaty entitled Agreement
between the Federal Republic of Germany and the Republic of the Philippines for the Avoidance of Double
Taxation with respect to Taxes on Income and Capital.
[46]
Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental, 25 SCRA 192, 209, September 27,
1968, per Sanchez, J.
[47]
Vitug, supra, p. 29; citing Wonder Mechanical Engineering Corporation v. Court of Tax Appeals, 64 SCRA 555,
June 30, 1975. See also Commissioner of Internal Revenue v. Court of Appeals, Court of Tax Appeals and Young
Mens Christian Association of the Philippines, Inc., GR No. 124043, pp. 11-12, October 14, 1998; Commissioner of
Internal Revenue v. Court of Appeals, 271 SCRA 605, 613-614, April 18, 1997.
[48]
Section 24 (b) (1), as amended by RA No. 6110 which took effect on August 4, 1969, reads:
(b) Tax on foreign corporations. -- (1) Non-resident corporations. -- 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 thirty-five per cent of the gross income received during each taxable year
from all sources within the Philippines, as interests, dividends, rents, royalties, salaries, wages, technical services or
otherwise, emoluments or other fixed or determinable annual, periodical or casual gains, profits, and income, and
capital gains: Provided, however, That premiums shall not include reinsurance premiums.
[49]
Rollo, p. 73.
The Ceding Companies undertake to cede to the Munich fixed quota share of 40% of all insurances mentioned in
Article 2 and the Munich shall be obliged to accept all insurances so ceded.
[50]
Ibid., p. 76.
The Munichs proportion of any loss shall be settled by debiting it in account, and a monthly list comprising all
losses paid shall be rendered to the Munich xxx.
[51]
Ibid., p. 102.
The Ceding Companies bind themselves to cede to the Munich the entire 15 line surplus of the insurances specified
in Article 2 hereof.
The surplus shall consist of all sums insured remaining after deduction of the Quota Share and of the proportion
combined net retention of the Pool.
The Munich undertakes to accept the amounts so ceded up to fifteen times the Ceding Companys proportionate
retention.
[52]
Ibid., p. 105.
The Munichs proportion of any loss shall be settled by debiting it in account. A monthly list comprising all losses
paid shall be rendered to the Munich on forms to be agreed. xxx.
[53]
Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, GR No. 117359, p.
15, July 23, 1998.
[54]
See Philippine Treaties Index: 1946-1982, Foreign Service Institute, Manila, Philippines (1983). See also
Philippine Treaty Series, Vol. I to VII.
[55]
See Bundesgesetzblatt: Jahrgang 1984, Teil II (Federal Law Gazette: 1984, Part II), p. 1008.
[56]
Memorandum for Petitioners, pp. 33-35; rollo, pp. 413-415.
[57]
SEC. 333. Suspension of running of statute. -- The running of the statute of limitations provided in section three
hundred thirty-one or three hundred thirty-two on the making of assessment and the beginning of distraint or levy or
a proceeding in the court for collection, in respect of any deficiency, shall be suspended for the period during which
the Commissioner of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court, and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted
by the Commissioner when the taxpayer cannot be located in the address by him in the return filed upon which a tax
is being assessed or collected: x x x.
[58]
SYNOPSIS
This is a Petition For Review on Certiorari assailing the Decision of the Court of
Appeals dismissing petitioners appeal of the Decision of the Court of Tax Appeals which
had sustained petitioners liability for deficiency income tax, interest and withholding
tax. Petitioners contended that the Court of Appeals erred in finding that the pool or
clearing house was an informal partnership, which was taxable as a corporation under
the NIRC. Petitioners further claimed that the remittances of the pool to the ceding
companies and Munich are not dividends subject to tax. They insisted that taxing such
remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be
tantamount to an illegal double taxation. Moreover, petitioners argued that since
Munich was not a signatory to the Pool Agreement, the remittances it received from the
pool cannot be deemed dividends. However, even if such remittances were treated as
dividends, they would have been exempt under the previously mentioned sections of
the 1977 NIRC, as well as Article 7 of paragraph land Article 5 of the RP-West German
Tax Treaty. Petitioners likewise contended that the Internal Revenue Commissioner
was already barred by prescription from making an assessment.
In the present case, the ceding companies entered into a Pool Agreement or
association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich.
Petitioners allegation of double taxation is untenable. The pool is a taxable entity
distinct from the individual corporate entities of the ceding companies. The tax on its
income is different from the tax on the dividends received by the said companies. The
tax exemptions claimed by petitioners cannot be granted. The sections of the 1977
NIRC which petitioners cited are inapplicable, because these were not yet in effect
when the income was earned and when the subject information return for the year
ending 1975 was filed. Petitioners claim that Munich is tax-exempt based on the RP-
West German Tax Treaty is likewise unpersuasive, because the Internal Revenue
Commissioner assessed the pool for corporate taxes on the basis of the information
return it had submitted for the year ending 1975, a taxable year when said treaty was
not yet in effect. Petitioners likewise failed to comply with the requirement of Section
333 of the NIRC for the suspension of the prescriptive period. The Resolutions of the
Court of Appeals are affirmed.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF INTERNAL REVENUE IS
ACCORDED WEIGHT AND EVEN FINALITY IN THE ABSENCE OF SHOWING THAT IT IS
PATENTLY WRONG. The opinion or ruling of the Commission of Internal Revenue, the agency
tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is
no showing that it is patently wrong, particularly in this case where the findings and conclusions of
the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body
created for the exclusive purpose of reviewing tax cases, and the Court of Appeals. Indeed, [I]t has
been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its authority.
2. CIVIL LAW; PARTNERSHIP; REQUISITES. Article 1767 of the Civil Code recognizes the creation of a
contract of partnership when two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves. Its requisites
are: (1) mutual contribution to a common stock, and (2) a joint interest in the profits. In other words,
a partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves. Meanwhile, an
association implies associates who enter into a joint enterprise x x x for the transaction of business.
3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION UNDER SECTION 24 OF THE NIRC. In the case before us, the
ceding companies entered into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich. The following unmistakably indicates a partnership or an association covered by
Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. This common fund pays for the administration
and operation expenses of the pool. (2) The pool functions through an executive board, which
resembles the board of directors of a corporation, composed of one representative for each of the
ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have received their premiums. The
ceding companies share in the business ceded to the pool and in the expenses according to a Rules
of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial
reason for the pools formation.
4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED PARTNERSHIPS AND
ASSOCIATIONS ARE CONSIDERED AS CORPORATIONS FOR TAX PURPOSES. This Court
rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal
revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the
year ending 1975, provides: SEC. 24. Rate of tax on corporations. (a) Tax on domestic
corporations. A tax is hereby imposed upon the taxable net income received during each taxable
year from all sources by every corporation organized in, or existing under the laws of the Philippines,
no matter how created or organized, but not including duly registered general co-partnership
(companias colectivas), general professional partnerships, private educational institutions, and
building and loan associations xxx. Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRCs inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997, which amended the Tax Code. The Court of
Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series of
transactions spanning more than ten years, as in the case before us.
5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE AT BAR. Double taxation
means taxing the same property twice when it should be taxed only once. That is, xxx taxing the
same person twice by the same jurisdiction for the same thing. In the instant case, the pool is a
taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its
income is obviously different from the tax on the dividends received by the said companies. Clearly,
there is no double taxation here.
6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT BAR; REASONS. The tax
exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains
unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, exemptions therefrom are highly disfavored in law and he who claims tax exemption
must be able to justify his claim or right. Petitioners have failed to discharge this burden of
proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet
in effect when the income was earned and when the subject information return for the year ending
1975 was filed. Referring to the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon
reinsurance by any company that has already paid the tax xxx. This cannot be applied to the
present case because, as previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax paid by the former as their
own.
7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN INSURANCE CORPORATION IN
CASE AT BAR; REASONS; TAX EXEMPTION CONSTRUED STRICTISSIMI JURIS. Section 24
(b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies
which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool
Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant
to their reinsurance treaties which required the creation of said pool. Under its pool arrangement
with the ceding companies, Munich shared in their income and loss. This is manifest from a reading
of Articles 3 and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that
a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be
expressed in a language too plain to be mistaken.
8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR; REASON. The petitioners
claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive,
because the internal revenue commissioner assessed the pool for corporate taxes on the basis of
the information return it had submitted for the year ending 1975, a taxable year when said treaty
was not yet in effect. Although petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984.
9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION; CHANGE IN THE ADDRESS OF
THE TAXPAYER WILL NOT TOLL THE RUNNING OF THE PRESCRIPTIVE PERIOD UNLESS
THE COMMISSIONER OF INTERNAL REVENUE HAS BEEN INFORMED OF SAID CHANGE. The
CA and the CTA categorically found that the prescriptive period was tolled under then Section 333
of the NIRC, because the taxpayer cannot be located at the address given in the information return
filed and for which reason there was delay in sending the assessment. Indeed, whether the
governments right to collect and assess the tax has prescribed involves facts which have been ruled
upon by the lower courts. It is axiomatic that in the absence of a clear showing of palpable error or
grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA
and the CTA. Furthermore, petitioners admitted in their Motion for Reconsideration before the Court
of Appeals that the pool changed its address, for they stated that the pools information return filed in
1980 indicated therein its present address. The Court finds that this falls short of the requirement of
Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the
said period will be suspended only if the taxpayer informs the Commissioner of Internal Revenue of
any change in the address.
APPEARANCES OF COUNSEL
Angara Abello Concepcion Regala for petitioners.
June 30, 1987
G.R. No. L-53961
NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
CRUZ, J.:
We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous.
We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So
finding, we affirm.
Reduced to simplest terms, the background facts are as follows.
The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price was
to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made in
cash and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the
balance by the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in
due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo. 5
The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on
the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable
on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon
served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The
NDC went to the Court of Tax Appeals.
The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of
P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a petition
for certiorari.
The petition must fail for the following reasons.
The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the
Tax Code, thus:
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources
within the Philippines. — The following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise;
xxx xxx xxx
The petitioner argues that the Japanese shipbuilders were not subject to tax under the above
provision because all the related activities — the signing of the contract, the construction of the
vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices in Manila.
As the Tax Court put it:
It is quite apparent, under the terms of the law, that the Government's right to levy and
collect income tax on interest received by foreign corporations not engaged in trade or
business within the Philippines is not planted upon the condition that 'the activity or labor —
and the sale from which the (interest) income flowed had its situs' in the Philippines. The law
specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there
speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where
the contract is signed. The residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of payment, is the determining
factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p.
128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of
L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd.,
4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest payment
paid by him can have no other source than within the Philippines. The interest is paid not by
the bond, note or other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol.
8, p. 124.)
Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels purchased and
acquired by it from the Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA
Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of
these promisory notes, which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on
the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)
The law is clear. Our plain duty is to apply it as written. The residence of the obligor which
paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to
the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the
purchase price of the vessels acquired by petitioner is interest derived from sources within
the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest upon the obligations of the Government of
the Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act
authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)
The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in
fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization
but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.
It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:
Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above
note.10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this question
must be resolved in favor of the taxing power. 12
Nowhere in the said undertaking do we find any inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by the government in consonance with and certainly not
against the following provisions of the Tax Code:
Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real
or personal capacity, executors, administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the Government of the Philippines having
control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any nonresident alien
individual, not engaged in trade or business within the Philippines and not having any office
or place of business therein, shall (except in the cases provided for in subsection (a) of this
section) deduct and withhold from such annual or periodical gains, profits and income a tax
to twenty (now 30%) per centum thereof: ...
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in section fifty-
three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be returned and
paid in the same manner and subject to the same conditions as provided in that section:....
Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations
of the NDC but without diminution of its taxing power under existing laws.
In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines,
the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its
proprietary activities not only by its charter but also by the Corporation Code and other pertinent
laws.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests
earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of
the Philippines that was subject to the tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the
Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of
April of each year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities
of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for
the determination whether or not the income paid to an individual is not subject to
withholding. In case the Commissioner of Internal Revenue decides that the income paid to
an individual is not subject to withholding, the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could be released from
liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14
The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.
WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so
ordered.
Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano,
Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur
FIRST DIVISION
[G.R. No. 137377. December 18, 2001]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI

CORPORATION, respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered
the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income,
branch profit remittance and contractors taxes from Marubeni Corporation after finding the latter
to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the
laws of Japan. It is engaged in general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the Philippines and maintains a
branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioners revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractors and commercial brokers taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos and
and NDC construction projects). . . . . . . . . . . . P 967,269,811.14
Less: Cost and expenses (50%) . . . . . . . . . . . . . . . 483,634,905.57
Net undeclared income . . . . . . . . . . . . . . . . . . . . . . . 483,634,905.57
Income tax due thereon . . . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . . 84,636,108.50
20% int. p.a. fr. 7-15-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 36,675,646.90
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . . . P 290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Undeclared net income from
Philphos and NDC construction projects . . . . . P 483,634,905.57
Less: Income tax thereon . . . . . . . . . . . . . . . . . . . . . 169,272,217.00
Amount subject to Tax . . . . . . . . . . . . . . . . . . . . . . . 314,362,688.57
Tax due thereon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,154,403.00

Add: 50% surcharge . . . . . . . . . . . . . . . . . . . . . . 23,577,201.50
20% int. p.a. fr. 4-26-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 12,305,360.66
III. DEFICIENCY CONTRACTORS TAX
Undeclared gross receipts/ gross income from
Philphos and NDC construction projects . . . . P 967,269,811.14
Contractors tax due thereon (4%). . . . . . . . . . . . . . . 38,690,792.00
Add: 50% surcharge for non-declaration. . . . . . 19,345,396.00
25% surcharge for late payment . . . . . . . . . 9,672,698.00
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,708,886.00
Add: 20% int. p.a. fr. 4-21-85 to
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 17,854,739.46
IV. DEFICIENCY COMMERCIAL BROKERS TAX
Undeclared share from commission income
(denominated as subsidy from Home
Office). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,683,114.50
Tax due thereon . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 1,628,569.00
Add: 50% surcharge for non-declaration. . . . . . . 814,284.50

25% surcharge for late payment . . . . . . . . . 407,142.25
Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2,849,995.75
Add: 20% int. p.a. fr. 4-21-85
to 8-15-86 . . . . . . . . . . . . . . . . . . . . . . 751,539.98
TOTAL AMOUNT DUE . . . . . . . . . . . . . . . . . . . P 3,600,535.68
The 50% surcharge was imposed for your clients failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge was imposed because of your
clients failure to pay on time the above deficiency percentage taxes.
x x x x x x x x x. [1]
Petitioner found that the NDC and Philphos contracts were made on a turn-key basis and that the
gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece
of work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was
petitioners final decision and that if respondent disagreed with it, respondent may file an appeal
with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractors tax assessments in petitioners assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial brokers assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41[2] declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer
who wished to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a
sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy of
his statement declaring his net worth as of December 31, 1980 on record with the Bureau of
Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to
verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth
as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3,
1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net
worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64[3] included estate and donors taxes under Title III and the tax on
business under Chapter II, Title V of the National Internal Revenue Code, also covering the
years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O.
No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer
could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already
filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business, estate and donors tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five
percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:
WHEREFORE, the respondent Commissioner of Internal Revenue is hereby

ORDERED to DESIST from collecting the 1985 deficiency taxes it had assessed
against petitioner and the same are deemed considered [sic] CANCELLED and
WITHDRAWN by reason of the proper availment by petitioner of the amnesty under
Executive Order No. 41, as amended.[4]
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the
Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision
of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondents deficiency tax liabilities were
extinguished upon respondents availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance,
and contractors taxes assessed by petitioner.[5]
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax,
branch profit remittance tax and contractors tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O.
No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty
herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as
of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions)
and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code,
as amended.
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioners claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers with income tax cases already
filed in court as of the effectivity hereof. The point of reference is the date of effectivity of E.O.
No. 41. The filing of income tax cases in court must have been made before and as of the date of
effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there
must have been no income tax cases filed in court against him when E.O. No. 41 took effect.
This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files
it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractors tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became
effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent
corporation did not fall under the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III
of the National Internal Revenue Code.[6] In the tax code, this tax falls under Title II on Income
Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b)
when it filed for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractors tax assessment and respondents
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donors taxes and tax on business. Estate and donors taxes fall under Title
III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractors tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business.[7]
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donors taxes. Instead, Section 8 of E.O. No.
64 provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary
to or inconsistent with this amendatory Executive Order shall remain in full force and
effect.
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or

inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No.
41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4
(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who
has income tax cases already filed in court as of the effectivity hereof. As to what Executive
Order the exception refers to, respondent argues that because of the words income and hereof,
they refer to Executive Order No. 41.[8]
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to
refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act
operates prospectively.[9] While an amendment is generally construed as becoming a part of the
original act as if it had always been contained therein,[10] it may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and no vested right or obligations
of contract are thereby impaired.[11]
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity
of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or
any of its provisions should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements
the original act by adding other taxes not covered in the first.[12] It has been held that where a
statute amending a tax law is silent as to whether it operates retroactively, the amendment will
not be given a retroactive effect so as to subject to tax past transactions not subject to tax under
the original act.[13] In an amendatory act, every case of doubt must be resolved against its
retroactive effect.[14]
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law.[15] It partakes of an absolute
forgiveness or waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate.[16] A tax amnesty, much like a tax
exemption, is never favored nor presumed in law.[17] If granted, the terms of the amnesty, like
that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of
the taxing authority.[18] For the right of taxation is inherent in government. The State cannot strip
itself of the most essential power of taxation by doubtful words. He who claims an exemption (or
an amnesty) from the common burden must justify his claim by the clearest grant of organic or
state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent
of the legislature, that doubt must be resolved in favor of the state.[19]
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term income tax cases should be read as
to refer to estate and donors taxes and taxes on business while the word hereof, to E.O. No. 64.
Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the
taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No.
41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took
effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By
the time respondent filed its supplementary tax amnesty return on December 15, 1986,
respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was
disqualified from availing of the business tax amnesty granted therein.
It is respondents other argument that assuming it did not validly avail of the amnesty under
the two Executive Orders, it is still not liable for the deficiency contractors tax because the
income from the projects came from the Offshore Portion of the contracts. The two contracts
were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the Offshore Portion were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
Before going into respondents arguments, it is necessary to discuss the background of the
two contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to engage in
the large-scale manufacture of phosphatic fertilizer for the local and foreign markets.[20] The
Philphos plant complex which was envisioned to be the largest phosphatic fertilizer operation in
Asia, and among the largest in the world, covered an area of 180 hectares within the 435-hectare
Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development Estate.
The wharf/ port complex was intended to be one of the major facilities for the industrial plants at
the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and Refining Corporation
(Pasar),[21] and other industrial plants within the Estate. The bidding was participated in by
Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into
an agreement entitled Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation.[22] The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.[23] The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,[24] and:
x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Wharf/Port Complex through the Owner, with the design and construction of other
facilities around the site. The scope of works shall also include any activity, work and
supply necessary for, incidental to or appropriate under present international industrial
port practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I.[25]
The contract price for the wharf/ port complex was Y12,790,389,000.00
and P44,327,940.00. In the contract, the price in Japanese currency was broken down into two
portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in
Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I
and II were financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by suppliers credit in favor of Marubeni from the Export-
Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by
the Japanese government as assistance to foreign governments to promote economic
development.[26] The OECF extended to the Philippine Government a loan of Y7,560,000,000.00
for the Leyte Industrial Estate Port Development Project and authorized the NDC to implement
the same.[27] The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-
contractors.[28]
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract.[29]
A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it
was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2,
1982, Philphos and respondent corporation entered into an agreement entitled Turn-Key Contract
for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation.[30] The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia[31]and for the delivery of ammonia to
an integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. [32] The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts,
and other related facilities.[33] The scope of the works required for the completion of the ammonia
storage complex covered the supply, including grants of licenses and transfer of technology and
know-how,[34] and:
x x x the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the design and construction
of other facilities at and around the Site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or appropriate under present
international industrial practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the abovementioned
Annex I.[35]
The contract price for the project was Y3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency was
broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in
Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I
and II were financed by suppliers credit from the Export-Import Bank of Japan. The price stated
in the three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III.[36]
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the contracts were
classifiedthe Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the
Japanese Yen Portion I corresponds to the Foreign Offshore Portion.[37] Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.[38]
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractors tax on the income from the two projects. In fact respondent claims, which petitioner
has not denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government.[39] It is
with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the
liabilities involved in the assessments subject of this case arose. Petitioner argues that since the
two agreements are turn-key,[40] they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is
in the Philippines, and the materials provided and services rendered were all done and completed
within the territorial jurisdiction of the Philippines.[41] Accordingly, respondents entire receipts
from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected
to contractors tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.[42]
A contractors tax is imposed in the National Internal Revenue Code (NIRC) as follows:
Sec. 205. Contractors, proprietors or operators of dockyards, and others.A

contractors tax of four percent of the gross receipts is hereby imposed on proprietors
or operators of the following business establishments and/or persons engaged in the
business of selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined

in Republic Act No. 4566;
xxxxxxxxx
(q) Other independent contractors. The term independent contractors includes

persons (juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their
employees. It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific Region.
x x x x x x x x x.[43]
Under the afore-quoted provision, an independent contractor is a person whose activity

consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of such
contractors or their employees. The word contractor refers to a person who, in the pursuit of
independent business, undertakes to do a specific job or piece of work for other persons, using
his own means and methods without submitting himself to control as to the petty details.[44]
A contractors tax is a tax imposed upon the privilege of engaging in business. [45] It is
generally in the nature of an excise tax on the exercise of a privilege of selling services or labor
rather than a sale on products;[46] and is directly collectible from the person exercising the
privilege.[47] Being an excise tax, it can be levied by the taxing authority only when the acts,
privileges or business are done or performed within the jurisdiction of said authority. [48] Like
property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.[49]
In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were not
all performed in the Philippines because some of them were completed in Japan in accordance
with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to
be made and the works and services to be performed by respondent are indeed classified into
two. The first part, entitled Breakdown of Japanese Yen Portion I provides:
Japanese Yen Portion I of the Contract Price has been subdivided according to
discrete portions of materials and equipment which will be shipped to Leyte as
units and lots. This subdivision of price is to be used by owner to verify invoice for
Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision of
Japanese Yen Portion I is as follows:
x x x x x x x x x. [50]
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan.[51] The machines and
equipment were designed, engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical appendices to each
contract.[52] Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and manufacture thereof;[53] Yashima
& Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;[54] and B.S. Japan for the supply of radio equipment.[55] The
engineering and design works made by Kawasaki Steel Corporation included the lay-out of the
plant facility and calculation of the design in accordance with the specifications given by
respondent.[56] All sub-contractors and manufacturers are Japanese corporations and are based in
Japan and all engineering and design works were performed in that country.[57]
The materials and equipment under Portion I of the NDC Port Project is primarily composed
of two (2) sets of ship unloader and loader; several boats and mobile equipment.[58] The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of each
is a large crane and a compartment for operation of the crane. Two sets of these equipment were
completely manufactured in Japan according to the specifications of the project. After
manufacture, they were rolled on to a barge and transported to Isabel, Leyte. [59] Upon reaching
Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where
they were installed.[60] Their installation simply consisted of bolting them onto the pier.[61]
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded at
the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once unloaded
at the port, they were ready to be driven and perform what they were designed to do.[62]
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex
III to the NDC contract. These other items consist of supplies and materials for five (5) berths,
two (2) roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and other
steel structures, navigational and communication as well as electrical equipment. [63]
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units.[64] The steel plates for the
tank were manufactured and cut in Japan according to drawings and specifications and then
shipped to Isabel. Once there, respondents employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed and assembled in Japan and
thereafter shipped to Isabel. The units were simply installed there.[65] Annex III to the Philphos
contract lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material
and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts.[66] The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on the
machines and equipment[67]while Philphos sent a representative to Japan to inspect the storage
equipment.[68]
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all
paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa,
formerly the Assistant General Manager and Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid
by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese
and English.[69] Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.[70]
Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondents submission of pertinent documents, released the amount in the letters of credit in
favor of respondent and credited the amount therein to respondents account within the same
bank.[71]
Clearly, the service of design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination[72]of the two projects involved two taxing jurisdictions. These acts occurred in two
countries Japan and the Philippines. While the construction and installation work were
completed within the Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan. The two sets of ship unloader and
loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan. They were already finished products when
shipped to the Philippines. The other construction supplies listed under the Offshore Portion such
as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractors tax.
Contrary to petitioners claim, the case of Commissioner of Internal Revenue v. Engineering
Equipment & Supply Co[73]is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported some
items for the system it designed and installed.[74] The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
[1]
Assessment Letter of the Commissioner of Internal Revenue, Rollo, pp. 73-74; also marked as Exhibit C Pet and
Exhibit 2 Resp, Folder No. 11, BIR Records, pp. 2072-2076.
[2]
Entitled Declaring a One-Time Tax Amnesty Covering Unpaid Income Taxes for the Years 1981 to 1985.
[3]
Entitled Declaring a One-Time Tax Amnesty Covering Income Taxes, Estate and Donors Taxes Under Title III,
And The Tax on Business Under Chapter II, Title V, of the National Internal Revenue Code, As Amended, For the
Years 1981- 1985.
[4]
CTA Decision, Annex B to Petition, Rollo, p. 45.
[5]
Petition, p. 6; Rollo, p. 15.
[6]
1984 and 1986 NIRC.
[7]
Title V, 1984 and 1986 NIRC. Business taxes were replaced in 1988 by the Value-Added Tax under Executive
Order No. 273.
[8]
Comment, pp. 14-15; Rollo, pp. 99-100.
[9]
Agpalo, Statutory Construction, p. 395 [1998]; Sutherland, Statutory Construction, vol. 1A (5th ed.) Sec. 22.36, p.
304 [1992-1994].
[10]
People v. Garcia, 85 Phil. 651, 655 [1951]; Sutherland, supra, Sec. 22.35.
[11]
Buyco v. Philippine National Bank, 112 Phil. 588, 592 [1961]; Pacia v. Kapisanan ng mga Manggagawa sa MRR
Co., 99 Phil. 45, 48 [1956]; Agpalo, supra, pp. 370, 395 [1998].
[12]
A supplementary act is an amendatory act that supplies a deficiency, adds to, or completes or extends that which
is already in existence without changing or modifying the original --Sutherland, supra, Secs. 22.24 and 22.01.
[13]
Collector of Internal Revenue v. La Tondena, Inc., 115 Phil. 841, 846-847 [1962].
[14]
Montilla v. Agustinian Corp., 24 Phil. 220, 222 [1913]; Agpalo, supra, at 370, 395.
[15]
Republic v. Intermediate Appellate Court, 196 SCRA 335, 340 [1991] citing Commissioner of Internal
Revenue v. Botelho Corporation & Shipping Co., Inc., 20 SCRA 487 [1967].
[16]
Ibid.
[17]
Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152, 171-172 [1999]; People v. Castaeda,
165 SCRA 327, 341 [1988].
[18]
People v. Castaneda, supra, at 341; E. Rodriguez Inc. v. Collector of Internal Revenue, 28 SCRA 1119, 1127-
1128 [1969]; Commissioner of Internal Revenue v. A.D. Guerrero, 21 SCRA 180, 183-185 [1967]; Asiatic
Petroleum v. Llanes, 49 Phil. 466, 471 [1926].
[19]
Asiatic Petroleum v. Llanes, supra, at 471-472.
[20]
Exh. AA, Project Background, Philippine Phosphatic Fertilizer Corporation, Folder No. 5, CTA Case No. 4109.
[21]
Pasar is a copper smelter plant whose sulfuric acid by-product is used in manufacturing fertilizers-- Exhibit AA-1
Pet, Folder No. 5, CTA Case No. 4109.
[22]
Exhibit J Pet, Wharf/ Port Complex, Turn-Key Contract for Leyte Industrial Estate Port Project Between the
National Development Company [sic] and Marubeni Corporation (hereinafter to be referred to as the NDC
Contract), Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.
[23]
Exhibit J Pet, NDC Contract, Article 1, supra.
[24]
Exhibit J Pet, NDC Contract, Article 2.1, supra.
[25]
Scope of Work, Exhibit J Pet, NDC Contract, Article 2.2, supra.
[26]
Exhibit JJJ Pet, Exchange of Notes dated June 9, 1981 by and between the Japanese and Philippine
Governments, Folder No. 8, CTA Case No. 4109 and CTA Case No. 4110.
[27]
Exhibit JJJ-1 Pet, Loan Agreement for the Leyte Industrial Estate Port Development Project, Folder No. 8, CTA
Case No. 4109 and CTA Case No. 4110.
[28]
Takeshi Hojo, TSN of March 23, 1990, pp. 17-20.
[29]
Exhibit J-2 Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price,
Annex III to NDC Contract, Folder No. 2, CTA Case No. 4109 and CTA Case No. 4110.
[30]
Exhibit I Pet, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.
[31]
Ammonia is one of the raw materials for fertilizer productionHojo, TSN of March 21, 1990, pp. 20-21.
[32]
Exhibit I Pet, Article 2.1, Turn-key Contract for Ammonia Storage Complex Between Philippine Phosphate
Fertilizer Corporation and Marubeni Corporation, (hereinafter referred to as Philphos Contract), supra.
[33]
Exhibit I Pet, Article I, Ammonia Storage Complex, Philphos Contract, supra.
[34]
Exhibit I Pet, Article 2.1, Philphos Contract, supra.
[35]
Scope of Work, Exhibit I Pet, Article 2.2, Philphos Contract, supra.
[36]
Exhibit I-2 Pet, Breakdown of Japanese Yen Portions I & II and Philippine Pesos Portion of Contract Price,
Annex III to Philphos Contract, Folder No. 4, CTA Case No. 4109 and CTA Case No. 4110.
[37]
Hojo, TSN of March 22, 1990, pp. 6-7.
[38]
Id.
[39]
Footnote No. 2, Comment, p. 16; Rollo, p. 19.
[40]
A turn-key job is defined as a job or contract in which the contractor agrees to complete the work of building and
installation to the point of readiness for operation or occupancyWebsters Third New International Dictionary of the
English Language, Unabridged [1993].
[41]
Exhibit 4 Resp, Memorandum of Head Revenue Examiner to the Commissioner of Internal Revenue, BIR
Records, Folder No. 11, CTA Case No. 4109 and CTA Case No. 4110; Exhibit 2 Resp, Letter Assessment of
Commissioner Tan, Rollo, pp. 73-77.
[42]
64 SCRA 590 [1975].
[43]
1984 NIRC; Sec. 170, 1986 NIRC. The contractors tax was replaced in 1988 by the Value-Added Tax pursuant
to Executive Order No. 273.
[44]
Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590, 597-598 [1975].
[45]
Section 205 in relation to Section 188, 1984 NIRC; Aranas, National Internal Revenue Code, vol. 2, p. 134
[1983].
[46]
Commissioner of Internal Revenue v. Court of Tax Appeals and Avecilla Building Corp., 134 SCRA 49, 54
[1985];Celestino & Co. v. Collector, 99 Phil. 841, 843 [1956]; E. Gonzales and C. Gonzales, National Internal
Revenue Code, p. 527 [1984].
[47]
Gonzales and Gonzales, National Internal Revenue Code, p. 456 [1986].
[48]
Iloilo Bottlers, Inc. v. City of Iloilo, 164 SCRA 607, 615 [1988]; Commissioner of Internal Revenue v. British
Overseas Airways Corp., 149 SCRA 395, 410 [1987].
[49]
Gulf Refining Co. v. City of Knoxville, 136 Tenn 23, 188 SW 798, 799 [1916]; Robinson v. City of Norfolk, 108
Va. 14, 60 SE 762, 763-764, 15 LRA (N.S.) 294 [1908]-- a license tax for revenue cannot be imposed by a city upon
a circus exhibiting beyond its territorial limits; see also Cooley, The Law of Taxation, vol. 4, Secs. 1675, 1683;
Cooley, vol. 1, Secs. 46, 94-95 [1924].
[50]
Exhibit J-2 Pet, Annex III to NDC Contract, supra; Exhibit I-2 Pet, Annex III to Philphos Contract, supra.
[51]
Hojo, TSN of March 22, 1990, pp. 11, 15.
[52]
Exhibits J-8-a to J-8-d Pet ,Vendors List, Chapter 1.14, Leyte Industrial Estate Port Development Project,
Technical Appendices to the Contract, pp. 1-127 to 1-131, Folder No. 2, CTA Case No. 4109; Exhibits I-13-a to I-
13-i Pet, Vendors List for Main Items, Chapter II, Technical Appendices for Leyte Fertilizer Project, Ammonia
Storage Complex, pp. II-5.7-1 to II-5.7-9, Folder No. 1, CTA Case No. 4109.
[53]
Hojo, TSN of March 22, 1990, p. 34; Kenjiro Yamakawa, TSN of Deposition Upon Oral Examination, January
31, 1992, p. 6; Exhibit OO Pet, Plant Supply Contract between Marubeni and Kawasaki Steel Corporation for NDC
Project, Folder No. 6, CTA Case No. 4109; Exhibit BBB-1 Pet, Plant Supply Contract between Marubeni and
Kawasaki Steel Corporation for Philphos Project, Folder No. 7, CTA Case No. 4109. Both contracts allow Marubeni
to procure materials and equipment from an approved list of sub-contractors without need of further approval from
the ownerArticle 8.4, Philphos contract; Article 8.4, NDC contract, supra.
[54]
Hojo, TSN of March 22, 1990, p. 34.
[55]
Exhibit AAA-1 to AAA-1-b Pet, Folder No. 7, CTA Case No. 4109.
[56]
Hojo, TSN of March 21, 1990, p. 32.
[57]
[58]
Exhibit J-2 Pet, Annex III to NDC Contract, pp. 356-363, supra.
[59]
Exhibit FF Pet, Photograph of ship unloader and loader on a barge, Folder No. 5, CTA Case No. 4109.
[60]
Hojo, TSN of March 22, 1990, pp. 11-12; Exhibit FF-1 Pet, Photograph of roll off works for ship unloader,
Folder No. 5, CTA Case No. 4109.
[61]
Hojo, TSN of March 22, 1990, pp. 11-12; TSN of March 23, 1990, pp. 39-40.
[62]
Hojo, TSN of March 23, 1990, pp. 38-39; Exhibits II and JJ Pet, Photographs of mobile equipment, Folder No.
5, supra.
[63]
Annex III to NDC Contract, pp. 357-363, Exhibit J-2 Pet, Folder No. 2, CTA Case No. 4109 and CTA Case No.
4110.
[64]
[65]
[66]
Exhibit J Pet, Article 11, pp. 45-47, NDC Contract, supra; Exhibit I Pet, Article 11.5, pp. 43-44, Philphos
Contract, supra.
[67]
Exhibit KK Pet, NDC Board Resolution appointing Pacific Consultants, Intl., Folder No. 3, CTA Case No. 4109.
[68]
Exhibit LL Pet, letter of Philphos VP appointing a representative to inspect storage equipment, Folder No. 5,
CTA Case No. 4109.
[69]
Exhibits VV, VV-1 to VV-50-a Pet, Folder No. 7, CTA Case No. 4109; Exhibits CCC-1 to CCC-27-a Pet, Folder
No. 6, CTA Case No. 4109.
[70]
Hisatsugu Yoshida, TSN of September 20, 1991, pp. 15-33; Exhibits VV Pet, ZZ, ZZ-2-d, AAA Pet, Folder No.
6, CTA Case No. 4109.
[71]
Yoshida, TSN of Deposition Upon Oral Interrogatories, January 27, 1993, pp. 11-12; Exhibits JJJ-3 to JJJ-17-c
Pet, Folder No. 10, CTA Case No. 4109.
[72]
Scope of Work, Exhibit J Pet, Article 2.1, NDC Contract; Exhibit I Pet, Article 2.1 Philphos Contract.
[73]
64 SCRA 590 [1975].
[74]
Such as refrigeration compressors in complete set, heat exchangers or coilsId., at 598.

SUPREME COURT
Manila
EN BANC
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance companies not doing business in the Philippines
namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp.,
Ltd., Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on
insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were
signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the
Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties
in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that
of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The
foreign reinsurers further agreed, in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance
contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding

100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00

Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc.

is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes
for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs
against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to
the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from
sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers
commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the original
insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the Philippines
the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of
doing insurance business in the Philippines were payable by the foreign reinsurers when the same
were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co.,
Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was
signed by both parties in Switzerland, the same specifically provided that its provision shall be
construed according to the laws of the Philippines, thereby manifesting a clear intention of the
parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippines. The word "sources" has been interpreted as the activity, property or service giving
rise to the income.1 The reinsurance premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss
under original insurances. Such undertaking, as explained above, took place in the Philippines.
These insurance premiums, therefore, came from sources within the Philippines and, hence, are
subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may
consist of only a single transaction. An activity may occur outside the place of business. Section 24
of the Tax Code does not require a foreign corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity creating the income is performed or done in
the Philippines. What is controlling, therefore, is not the place of business but the place
of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein
should be treated as income from sources within the Philippines but it does not require that other
kinds of income should not be considered likewise. 1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve,
public improvement designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were afforded protection by the government
and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit
any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines
and not having any office or place of business therein, there shall be deducted and withheld
at the source in the same manner and upon the same items as is provided in Section fifty-
three a tax equal to twenty-four per centum thereof, and such tax shall be returned and paid
in the same manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships

(compañias colectivas), in what ever capacity acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income of any nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of business therein, shall (except in
the case provided for in subsection [a] of this section) deduct and withhold from such annual
or periodical gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence)was derived from sources
within the Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be
deducted and withheld from the interest upon any securities the owners of which are not
known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining
the amount to be withheld. According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00,
or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum amount that may
be collected as interest shall not exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala,
JJ., concur.
Makalintal and Zaldivar, JJ., took no part.
Footnotes
1 Mertens, Jr., Jacob, Law On Federal Income Taxation, Vol. 8, Section 45.27.
2 Imperial v. Collector of Internal Revenue, L-7924, September 30, 1955.
3Hilado v. Collector of Internal Revenue, 53 O.G. 2471; Koppel (Philippines), Inc. v. Collector
of Internal Revenues, L-10550, September 19, 1961; Compañia General de Tabacos de
Filipinas v. City of Manila, L-16619, June 29, 1963.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19392 April 14, 1965
ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL., petitioners,
vs.
THE COLLECTOR (NOW COMMISSIONER) Of INTERNAL REVENUE, respondent.
Sycip, Salazar, Luna and Associates and Lichauco, Picazo and Agcaoili for petitioners.
Office of the Solicitor General for respondent.
BENGZON, J.P., J.:
In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance
contracts with 32 British insurance companies not engaged in trade or business in the Philippines,
whereby the former agreed to cede to them a portion of the premiums on insurances on fire, marine
and other risks it has underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British
corporation not engaged in business in this country, represented the aforesaid British insurance
companies. The reinsurance contracts were prepared and signed by the foreign reinsurers in
England and sent to Manila where Commonwealth Insurance Co. signed them.
Pursuant to the aforesaid contracts, Commonwealth Insurance Co., in 1951, remitted P798,297.47
to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co.,
Ltd., Commonwealth Insurance Co. filed in April 1952 an income tax return declaring the sum of
P798,297.47, with accrued interest thereon in the amount of P4,985.77, as Alexander Howden &
Co., Ltd.'s gross income for calendar year 1951. It also paid the Bureau of Internal Revenue
P66,112.00 income tax thereon.
On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd. filed
with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to
P65,115.00, because Alexander Howden & Co., Ltd. agreed to the payment of P977.00 as income
tax on the P4,985.77 accrued interest. A ruling of the Commissioner of Internal Revenue, dated
December 8, 1953, was invoked, stating that it exempted from withholding tax reinsurance premiums
received from domestic insurance companies by foreign insurance companies not authorized to do
business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted an action in the
Court of First Instance of Manila for the recovery of the aforesaid amount claimed. Pursuant to
Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals. On November
24, 1961 the Tax Court denied the claim.
Plaintiffs have appealed, thereby squarely raising the following issues: (1) Are portions of premiums
earned from insurances locally underwritten by a domestic corporation, ceded to and received by
non-resident foreign reinsurance companies, thru a non-resident foreign insurance broker, pursuant
to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not? (2) If subject thereto, may or may not the income tax
on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal
Revenue Code?
Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign
corporation's income from sources within the Philippines. The first issue therefore hinges on whether
or not the reinsurance premiums in question came from sources within the Philippines.
Appellants would impress upon this Court that the reinsurance premiums came from sources outside
the Philippines, for these reasons: (1) The contracts of reinsurance, out of which the reinsurance
premiums were earned, were prepared and signed abroad, so that their situs lies outside the
Philippines; (2) The reinsurers, not being engaged in business in the Philippines, received the
reinsurance premiums as income from their business conducted in England and, as such, taxable in
England; and, (3) Section 37 of the Tax Code, enumerating what are income from sources within the
Philippines, does not include reinsurance premiums.
The source of an income is the property, activity or service that produced the income. 1 The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had
for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took place in the
Philippines. In the first place, the reinsured, the liabilities insured and the risks originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based,
were all situated in the Philippines. Secondly, contrary to appellants' view, the reinsurance contracts
were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. The
American cases cited are inapplicable to this case because in all of them the reinsurance contracts
were signed outside the jurisdiction of the taxing State. And, thirdly, the parties to the reinsurance
contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for
arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the
parties in regard to the interpretation of said contracts or rights in respect of any transaction
involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of
exchange and for the payment of Philippine taxes.
Appellants should not confuse activity that creates income with business in the course of which an
income is realized. An activity may consist of a single act; while business implies continuity of
transactions. 2 An income may be earned by a corporation in the Philippines although such
corporation conducts all its businesses abroad. Precisely, Section 24 of the Tax Code does not
require a foreign corporation to be engaged in business in the Philippines in order for its income from
sources within the Philippines to be taxable. It subjects foreign corporations not doing business in
the Philippines to tax for income from sources within the Philippines. If by source of income is meant
the business of the taxpayer, foreign corporations not engaged in business in the Philippines would
be exempt from taxation on their income from sources within the Philippines.
Furthermore, as used in our income tax law, "income" refers to the flow of wealth. 3 Such flow, in the
instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine
Government. As wealth flowing from within the taxing jurisdiction of the Philippines and in
consideration for protection accorded it by the Philippines, said income should properly share the
burden of maintaining the government.
Appellants further contend that reinsurance premiums not being among those mentioned in Section
37 of the Tax Code as income from sources within the Philippines, the same should not be treated
as such. Section 37, however, is not an all-inclusive enumeration. It states that "the following items
of gross income shall be treated as gross income from sources within the Philippines." It does not
state or imply that an income not listed therein is necessarily from sources outside the Philippines.
As to appellants' contention that reinsurance premiums constitute "gross receipts" instead of "gross
income", not subject to income tax, suffice it to say that, as correctly observed by the Court of Tax
Appeals, "gross receipts" of amounts that do not constitute return of capital, such as reinsurance
premiums, are part of the gross income of a taxpayer. At any rate, the tax actually collected in this
case was computed not on the basis of gross premium receipts but on the net premium income, that
is, after deducting general expenses, payment of policies and taxes.
The reinsurance premiums in question being taxable, we turn to the issue whether or not they are
subject to withholding tax under Section 54 in relation to Section 53 of the Tax Code.
Subsection (b) of Section 53 subjects to withholding tax the following: interest, dividends, rents,
salaries, wages,premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income of any non-resident alien individual not
engaged in trade or business within the Philippines and not having any office or place of business
therein. Section 54, by reference, applies this provision to foreign corporations not engaged in trade
or business in the Philippines.
Appellants maintain that reinsurance premiums are not "premiums" at all as contemplated by
Subsection (b) of Section 53; that they are not within the scope of "other fixed or determinable
annual or periodical gains, profits, and income"; that, therefore, they are not items of income subject
to withholding tax.
It is urged for the applicant that no opposition has been registered against his petition on the issues
above-discussed. Absence of opposition, however, does not preclude the scanning of the whole
record by the appellate court, with a view to preventing the conferment of citizenship to persons not
fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31, 1965). The applicant's
complaint of unfairness could have some weight if the objections on appeal had been on points not
previously passed upon. But the deficiencies here in question are not new but well-known, having
been ruled upon repeatedly by this Court, and we see no excuse for failing to take them into
account.1äw phï1.ñët
The argument of appellants is that "premiums", as used in Section 53 (b), is preceded by "rents,
salaries, wages" and followed by "annuities, compensations, remunerations" which connote
periodical income payable to the recipient on account of some investment or for personal services
rendered. "Premiums" should, therefore, in appellants' view, be given a meaning kindred to the other
terms in the enumeration and be understood in its broadest sense as "a reward or recompense for
some act done; a bonus; compensation for the use of money; a price for a loan; a sum in addition to
interest."
We disagree with the foregoing proposition. Since Section 53 subjects to withholding tax various
specified income, among them, "premiums", the generic connotation of each and every word or
phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word
"premiums", which is neither qualified nor defined by the law itself, should mean income and should
include all premiums constituting income, whether they be insurance or reinsurance premiums.
Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they
may be classified as determinable and periodical income under the same provision of law. Section
199 of the Income Tax Regulations defines fixed, determinable, annual and periodical income:
Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand,
it is determinable whenever there is a basis of calculation by which the amount to be paid
may be ascertained.
The income need not be paid annually if it is paid periodically; that is to say, from time to
time, whether or not at regular intervals. That the length of time during which the payments
are to be made may be increased or diminished in accordance with someone's will or with
the happening of an event does not make the payments any the less determinable or
periodical. ...
Reinsurance premiums, therefore, are determinable and periodical income: determinable, because
they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as
they were earned and remitted from time to time.
Appellants' claim for refund, as stated, invoked a ruling of the Commissioner of Internal Revenue
dated December 8, 1953. Appellants' brief also cited rulings of the same official, dated October 13,
1953, February 7, 1955 and February 8, 1955, as well as the decision of the defunct Board of Tax
Appeals in the case of Franklin Baker Co., 4thereby attempting to show that the prevailing
administrative interpretation of Sections 53 and 54 of the Tax Code exempted from withholding tax
reinsurance premiums ceded to non-resident foreign insurance companies. It is asserted that since
Sections 53 and 54 were "substantially re-enacted" by Republic Acts 1065 (approved June 12,
1954), 1291 (approved June 15, 1955), 1505 (approved June 16, 1956) and 2343 (approved June
20, 1959) when the said administrative rulings prevailed, the rulings should be given the force of law
under the principle of legislative approval by re-enactment.
The principle of legislative approval by re-enactment may briefly be stated thus: Where a statute is
susceptible of the meaning placed upon it by a ruling of the government agency charged with its
enforcement and the Legislature thereafter re-enacts the provisions without substantial change, such
action is to some extent confirmatory that the ruling carries out the legislative purpose.5
The aforestated principle, however, is not applicable to this case. Firstly, Sections 53 and 54 were
never reenacted. Republic Acts 1065, 1291, 1505 and 2343 were merely amendments in respect to
the rate of taximposed in Sections 53 and 54. Secondly, the administrative rulings of the
Commissioner of Internal Revenue relied upon by the taxpayers were only contained in letters to
taxpayers and never published, so that the Legislature is not presumed to know said rulings. Thirdly,
in the case on which appellants rely, Interprovincial Autobus Co., Inc. vs. Collector of Internal
Revenue, L-6741, January 31, 1956, what was declared to have acquired the force or effect of law
was a regulation promulgated to implement a law; whereas, in this case, what appellants would seek
to have the force of law are opinions on queries submitted.
It may not be amiss to note that in 1963, after the Tax Court rendered judgment in this case,
Congress enacted Republic Act 3825, as an amendment to Sections 24 and 54 of the Tax Code,
exempting from income taxes and withholding tax, reinsurance premiums received by foreign
corporations not engaged in business in the Philippines. Republic Act 3825 in effect took out from
Sections 24 and 54 something which formed a part of the subject matter therein,6 thereby affirming
the taxability of reinsurance premiums prior to the aforestated amendment.
Finally, appellant would argue that Judge Augusto M. Luciano, who penned the decision appealed
from, was disqualified to sit in this case since he had appeared as counsel for the Commissioner of
Internal Revenue and, as such, answered plaintiff's complaint before the Court of First Instance of
Manila.
The Rules of Court provides that no judge shall sit in any case in which he has been counsel without
the written consent of all the parties in interest, signed by them and entered upon the record. The
party objecting to the judge's competency may file, in writing, with such judge his objection stating
therein the grounds for it. The judge shall thereupon proceed with the trial or withdraw therefrom, but
his action shall be made in writing and made part of the record.7
Appellants, instead of asking for Judge Luciano's disqualification by raising their objection in the
Court of Tax Appeals, are content to raise it for the first time before this Court. Such being the case
they may not now be heard to complain on this point, when Judge Luciano has given his opinion on
the merits of the case. A litigant cannot be permitted to speculate upon the action of the court and
raise an objection of this nature after decision has been rendered. 8
WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants. It is so
ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Makalintal and Zaldivar, JJ.,
concur.
Paredes, Dizon and Regala, JJ., took no part.
Footnotes
1 Mertens, Jr., Jacob, Law on Federal Income Taxation, Vol. 8, Section 45. 27.
2 Mentholatum Co. vs. Mangaliman, 40 O.G. 1838.
3 Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418.
4 Umali, Roman M., Decisions of the Board of Tax Appeals, Vol. 2, pp. 303-307.
5Laxamana v. Baltazar, 92 Phil. 32; Mead Corporation v. Commissioner of Internal Revenue,

116 F. (2d) 187.
6 Manila Electric Co. v. Public Utilities Employees Association, 79 Phil. 409.
7 Secs. 1 and 2, Rule 137 (formerly Rule 126),, Rules of Court.
8Rodriguez v. Treasurer of the Philippines, 45 O.G. 4457 (Resolution); Arnault v. Nazereno,

L-3820, Resolution of August 9, 1950.

Tax 1 2nd Assignment (FULL CASES)

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Republic of the Philippines

G.R. No. 148187 April 16, 2008

PHILEX MINING CORPORATION, petitioner,

The facts of the case are as follows:

The petition lacks merit.

Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement

Republic of the Philippines

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,

Rufino R. Tan for and in his own behalf.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the

In G.R. No. 109289, it is asserted that the enactment of Republic Act

Article III, Section 1 — No person shall be deprived of . . . property without due

The Solicitor General espouses the position taken by public respondents.

The full text of the title actually reads:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

Not over P10,000 3%

Over P10,000 P300 + 9%

Over P30,000 P2,100 + 15%

Over P120,000 P15,600 + 20%

Over P350,000 P61,600 + 30%

(a) Raw materials, supplies and direct labor;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

G.R. No. 109446

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

This bill, Mr. President, is not applicable to business corporations or

(2) Shall be deemed to have elected the itemized deductions, unless

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

Republic of the Philippines

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.

Demosthenes B. Gadioma for petitioners.

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen,

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who

Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

Concepcion, Jr., is on leave.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

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

The Solicitor General for respondents

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

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

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

The petition is meritorious.

In resolving the issue, this Court held as follows:

Article 1767 of the Civil Code of the Philippines provides:

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

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

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

Cruz, Griño-Aquino and Medialdea, JJ., concur.

Narvasa, J., took no part.