1

EN BANC
[G.R. No. 12287. August 7, 1918.]
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, vs. JAMES
J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy
Collector of Internal Revenue, defendants-appellees.
Gregorio Araneta, for appellants.
Assistant Attorney Round, for appellees.
SYLLABUS
1. TAXATION; INCOME TAX; PURPOSES. The Income Tax Law of the United States in force in
the Philippine Islands has selected income as the test of faculty in taxation. The aim has been to mitigate
the evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the
burden on those best able to pay. To carry out this idea, public considerations have demanded an
exemption roughly equivalent to the minimum of subsistence. With these exceptions, the Income Tax Law is
supposed to reach the earnings of the entire non-governmental property of the country.
2. ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY. Income as contrasted
with capital or property is to be the test. The essential difference between capital and income is that capital
is a fund; income is a flow. Capital is wealth, while income is the service of wealth. "The fact is that property
is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs.
City of Savannah [1878], 60 Ga., 93.)
3. ID.; ID.; "INCOME:," DEFINED. Income means profits or gains.
4. ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in Nable Jose vs. Nable
Jose [1916], 16 Off. Gaz., 871, and Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265, approved
and followed. The provisions of the Civil Code concerning conjugal partnerships have no application to the
Income Tax Law.
5. ID.; ID.; ID. M and P were legally married prior to January 1, 1914. The marriage was
contracted under the provisions concerning conjugal partnerships. The claim is submitted that the income
shown on the form presented for 1914 was in fact the income of the conjugal partnership existing between
M and P, and that in computing and assessing the additional income tax, the income declared by M should
be divided into two equal parts, one-half to be considered the income of M and the other half the income of
P. Held: That P, the wife of M, has an inchoate right in the property of her husband M during the life of the
conjugal partnership, but that P has no absolute right to one-half of the income of the conjugal partnership.
6. ID.; ID.; ID. The higher schedules of the additional tax provided by the Income Tax Law directed
at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code
dealing with the conjugal partnership. The aims and purposes of the Income Tax Law must be given effect.
7. ID.; ID.; ID. The Income Tax Law does not look on the spouses as individual partners in an
ordinary partnership.
8. ID.; ID.; STATUTORY CONSTRUCTION. The Income Tax Law, being a law of American origin
and being peculiarly intricate in its provisions, the authoritative decision of the official charged with enforcing

it has peculiar force for the Philippines. Great weight should be given to the construction placed upon a
revenue law, whose meaning is doubtful, by the department charged with its execution
DECISION
MALCOLM, J p:
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to
the Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE
Vicente Madrigal and Susana Paterno Were legally married prior to January 1, 1914. The marriage
was contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales) .
On February 25, 1915, Vicente Madrigal filed a sworn declaration on the prescribed form with the Collector
of Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the
year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of
Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal
parts, one-half to be considered the income of Vicente Madrigal and the other half the income of Susana
Paterno. The general question had in the meantime been submitted to the Attorney-General of the
Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington
for a decision by the United States Treasury Department. The United States Commissioner of Internal
Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente Madrigaland his wife Susana Paterno in the
Court of First Instance of the city of Manila against the Collector of Internal Revenue and the Deputy
Collector of Internal Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and
illegally assessed and collected by the defendants from the plaintiff, Vicente Madrigal, under the provisions
of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if the income
tax for the year 1914 had been correctly and lawfully computed there would have been due and payable by
each of the plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18 instead of
P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that
plaintiff Madrigal has paid ' as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due
and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the
stipulation, sets forth the basis of defendants' stand in the following way: The income of
Vicente Madrigal and his wife Susana Paterno for the year 1914 was made up of three items: (1)
P362,407.67, the profits made by VicenteMadrigal in his coal and shipping business; (2) P4,086.50, the
profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by
Vicente Madrigalin a pawnshop company. The sum of these three items is P383,181.97, the gross income
of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in

the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the
normal tax of one per cent on the net income there were allowed as specific deductions the following: (1)
P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted to
VicenteMadrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon
which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the
Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely with the additional income tax, is that
it should be divided into two equal parts, because of the conjugal partnership existing between them. The
learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad
de gananciales. The counter contentions of appellees are that the taxes imposed by the Income Tax Law
are as the name implies taxes upon income and not upon capital and property; that the fact
that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal
partnership, has no bearing on income considered as income, and that the distinction must be drawn
between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from
the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given in the
course of history. The final stage has been the selection of income as the norm of taxation. (See Seligman,
"The Income Tax," Introduction.) The Income Tax Law of the United States, extended to the Philippine
Islands, is the result of an effect on the part of legislators to put into statutory form this canon of taxation and
of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive
scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public
considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these
exceptions, the income tax is supposed to reach the earnings of the entire non governmental property of the
country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between
capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time
is called capital. A flow of services rendered by that capital by the payment of money from it or any other
benefit rendered by a fund of capital in relation to such fund through a period of time is called income.
Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.")
The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that
property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit."
(Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as
here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C.,
26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's
Income Tax, second edition [1915.], Chapter IV; Black on Income Taxes, second edition [1915], Chapter

VIII; Gibbons vs. Mahon [1890], 136 U. S., 549; and Towne vs. Eisner, decided by the United States
Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife
not living apart, contains the following:
"The husband, as the head and legal representative of the household and general
custodian of its income, should make and render the return of the aggregate income of himself
and wife, and for the purpose of levying the income tax it is assumed that he can ascertain the
total amount of said income. If a wife has a separate estate managed by herself as her own
separate property, and receives an income of more than $3,000, she may make return of her
own income, and if the husband has other net income, making the aggregate of both incomes
more than $4,000, the wife's return should be attached to the return of her husband, or his
income should be included in her return, in order that a deduction of $4,000 may be made from
the aggregate of both incomes. The tax in such case, however, will be imposed only upon so
much of the aggregate income of both as shall exceed $4,000. If either husband or wife
separately has an income equal to or in excess of $3,000, a return of annual net income is
required under the law, and such return must include the income of both, and in such case the
return must be made even though the combined income of both be less than $4,000. If the
aggregate net income of both exceeds $4,000, an annual return of their combined incomes
must be made in the manner stated, although neither one separately has an income of $3,000
per annum. They are jointly and separately liable for such return and for the payment of the tax.
The single or married status of the person claiming the specific exemption shall be determined
as of the time of claiming such exemption if such claim be made within the year for which return
is made, otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands, we
turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership.
Recently in two elaborate decisions in which a long line of Spanish authorities were cited, this court, in
speaking of the conjugal partnership, decided that "prior to the liquidation, the interest of the wife, and in
case of her death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal
nor an equitable estate, and does not ripen into title until there appears that there are assets in the
community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz.,
871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income after such income has become capital.
Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized
of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and income, actually and
legally vested in her and entirely distinct from her husband's property, the income cannot properly be

considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax
Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife
are only entitled to the exemption of P8,000, specifically granted by the law. The higher schedules of the
additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions
in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.
The aims and purposes of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the
Philippine Islands and the United States Treasury Department. The decision of the latter overruling the
opinion of the Attorney-General is as follows:
"TREASURY DEPARTMENT, Washington.
"Income Tax.
"FRANK MCINTYRE,
"Chief, Bureau of Insular Affairs, War Department,
"Washington, D.C.
"SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of
correspondence 'from the Philippine authorities relative to the method of submission of income
tax returns by married persons.'
"You advise that 'The Governor-General, in forwarding the papers to the Bureau, advises
that the Insular Auditor has been authorized to suspend action on the warrants in question until
an authoritative decision on the points raised can be secured from the Treasury Department.'
"From the correspondence it appears that Gregorio Araneta, married and living with his
wife, had an income of an amount sufficient to require the imposition of the additional tax
provided by the statute; that the net income was properly computed and then both income and
deductions and the specific exemption were divided in half and two returns made, one return for
each half in the names respectively of the husband and wife, so that under the returns as filed
there would be an escape from the additional tax; that Araneta claims the returns are correct on
the ground that under the Philippine law his wife is entitled to half of his earnings; that Araneta
has dominion over the income and under the Philippine law, the right to determine its use and
disposition; that in this case the wife has no 'separate estate' within the contemplation of the Act
of October 3, 1913, levying an income tax.
"It appears further from the correspondence that upon the foregoing explanation, tax was
assessed against the entire net income against Gregorio Araneta; that the tax was paid and an
application for refund made, and that the application for refund was rejected, whereupon the
matter was submitted to the Attorney-General of the Islands who holds that the returns were
correctly rendered, and that the refund should be allowed; and thereupon the question at issue
is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the
advisory opinion of this office.

"By paragraph M of the statute, its provisions are extended to the Philippine Islands, to
be administered as in the United States but by the appropriate internal-revenue officers of the
Philippine Government. You are therefore advised that upon the facts as stated, this office
holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this
case was taxable to Gregorio Araneta, both for the normal and additional tax, and that the
application for refund was properly rejected.
"The separate estate of a married woman within the contemplation of the Income Tax
Law is that which belongs to her solely and separate and apart from her husband, and over
which her husband has no right in equity. It may consist of lands or chattels.
"The statute and the regulations promulgated in accordance therewith provide that each
person of lawful age (not excused from so doing) having a net income of $3,000 or over for the
taxable year shall make a return showing the facts; that from the net income so shown there
shall be deducted $3,000 where the person making the return is a single person, or married and
not living with consort, and $1,000 additional where the person making the return is married and
living with consort; but that where the husband and wife both make returns (they living
together), the amount of deduction from the aggregate of their several incomes shall not exceed
$4,000.
"The only occasion for a wife making a return is where she has income from a sole and
separate estate in excess of $3,000, or where the husband and wife neither separately have an
income of $3,000, but together they have an income in excess of $4,000, in which latter event
either the husband or wife may make the return but not both. In all instances the income of
husband and wife whether from separate estates or not, is taken as a whole for the purpose of
the normal tax. Where the wife has income from a separate estate and makes return thereof, or
where her income is separately shown in the return made by her husband, while the incomes
are added together for the purpose of the normal tax they are taken separately for the purpose
of the additional tax. In this case, however, the wife has no separate income within the
contemplation of the Income Tax Law.
"Respectfully,
"DAVID A. GATES,
"Acting Commissioner."
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax
Law was drafted by the Congress of the United States and has been by the Congress extended to the
Philippine Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the
authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines. It
has come to be a well-settled rule that great weight should be given to the construction placed upon a
revenue law, whose meaning is doubtful, by the department charged with its execution. (U. S. vs. Cerecedo
Hermanos y Cia. [1907], 209 U. S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine
Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.)

We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So
ordered
||| (Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918)
[G.R. No. 48532. August 31, 1992.]
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners, vs. THE HONORABLE
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
[G.R. No. 48533. August 31, 1992.]
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DYLIACO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO
A. RIALP and JAIME A. SOQUES, petitioners, vs. THE HONORABLE COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
SYLLABUS
1. TAXATION; INCOME TAX; INCOME; DEFINED. Income may be defined as an amount of money coming
to a person or corporation within a specified time, whether as payment for services, interest or profit from
investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow
of the fruits of one's labor.
2. ID.; ID.; FOREIGN EXCHANGE TRANSACTION; DOLLAR EARNED ARE NOT RECEIPTS DERIVED
THEREFROM. Petitioners are correct as to their claim that their dollar earnings are not receipts derived from
foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into an
equivalent amount of money or currency of another." When petitioners were assigned to the foreign subsidiaries
of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO spending in said
currency. There was no conversion, therefore, from one currency to another.
3. ID.; ID.; EXCHANGE RATE TO DETERMINE THE PESO EQUIVALENT OF FOREIGN EARNINGS; RULE.
What exchange rate should be used to determine the peso equivalent of the foreign earnings of petitioners
for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the classification of
foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they are not
included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when the
par value of the peso shall not be the conversion rate used. They conclude that their earnings should be
converted for income tax purposes using the par value of the Philippine peso. Respondent Commissioner
argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale of foreign exchange or
foreign borrowings and investments but not income tax. He also claims that he had to use the prevailing free
market rate of exchange in these cases because of the need to ascertain the true and correct amount of income
in Philippine peso of dollar earners for Philippine income tax purposes. A careful reading of said CB Circular No.
289 shows that the subject matters involved therein are export products, invisibles, receipts of foreign

exchange, foreign exchange payments, new foreign borrowing and investments nothing by way of income
tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to
them, the par value of the peso should be the guiding rate used for income tax purposes. The dollar earnings of
petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount
of money which came to them within a specified period of time of two years as payment for their services.
4. ID.; SECRETARY OF FINANCE; EMPOWERED TO PROMULGATE RULES AND REGULATIONS FOR
THE PROPER ENFORCEMENT OF THE NATIONAL INTERNAL REVENUE CODE. And in the
implementation for the proper enforcement of the National Internal Revenue Code, Section 338 thereof
empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its
provisions. Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to
prescribe a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the
authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And
these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.
DECISION
NOCON, J p:
Petitioners pray that this Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner of
Internal Revenue to refund to them their income taxes which they claim to have been erroneously or illegally
paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows: prLL
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing
Corporation, with offices at Sarmiento Building Ayala Avenue, Makati, Rizal. Said corporation is
a subsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A.
During the years 1970 and 1971 petitioners were assigned, for certain periods, to other
subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid
U.S. dollars as compensation for services in their foreign assignments. (Paragraphs III,
Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When
petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate
ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S.
$1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U S.
$1.00
Petitioners in C.T.A Case No. 2594 likewise used the above conversion rate in converting their
dollar income for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent Commissioner, amended income
tax returns for the above-mentioned years, this time using the par value of the peso as

prescribed in Section 48 of Republic Act No. 265 in relation to Section 6 of Commonwealth Act
No. 699 as the basis for converting their respective dollar income into Philippine pesos for
purposes of computing and paying the corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments
were filed with respondent Commissioner. Without awaiting the resolution of the Commissioner
of Internal Revenue on their claims, petitioners filed their petitions for review in the abovementioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No.
2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common question of
law and facts, the respondent Court of Tax Appeals heard the cases jointly. In its decision dated
September 26, 1977, the respondent Court of Tax Appeals held that the proper conversion rate
for the purpose of reporting and paying the Philippine income tax on the dollar earnings of
petitioners are the rates prescribed under Revenue Memorandum Circulars Nos. 7-71 and 4171. Accordingly, the claim for refund and/or tax credit of petitioners in the above-entitled cases
was denied and the petitions for review dismissed, with costs against petitioners. Hence, this
petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding: LibLex
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes is the prevailing free market
rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into
Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two cases are Philippine income
tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and,
therefore, should be governed by the provisions of the National Internal Revenue Code and its
implementing rules and regulations, and not by the provisions of Central Bank Circular No. 42
dated May 21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their income tax returns for the period involved herein, they gave their
legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes 'A'
to 'A-8', and Annexes 'C' to 'C-8', Petition for Review, CTA Cases Nos. 2511 and 2594).

10

Petitioners being subject to Philippine income tax, their dollar earnings should be converted into
Philippine pesos in computing the income tax due therefrom, in accordance with the provisions
of Revenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and
Revenue Memorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which
reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
'For internal revenue tax purposes, the free market rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be applied in order to determine the true and
correct value in Philippine pesos of the income of petitioners.' 3
After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are
inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus vote
to deny the petition.
This is basically an income tax case. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4 Income can also
be thought of as a flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign exchange
transactions. For a foreign exchange transaction is simply that a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one country into an equivalent amount of
money or currency of another."6 When petitioners were assigned to the foreign subsidiaries of Procter &
Gamble, they were earning in their assigned nation's currency and were ALSO spending in said currency. There
was no conversion, therefore, from one currency to another. llcd
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell
under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign earnings
of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual inward remittances, and, therefore,
they are not included in the coverage of Central Bank Circular No. 289 which provides for the specific instances
when the par value of the peso shall not be the conversion rate used. They conclude that their earnings should
be converted for income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts of
sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims that he had
to use the prevailing free market rate of exchange in these cases because of the need to ascertain the true and
correct amount of income in Philippine peso of dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 8a shows that the subject matters involved therein are export
products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by concluding that since
C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate used for
income tax purposes.

11

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It
was a definite amount of money which came to them within a specified period of time of two years as payment
for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every individual, whether a citizen
of the Philippines residing therein or abroad or an alien residing in the Philippines, determined
in accordance with the following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to prescribe
a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for
the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to the
Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are presumed to
be a valid interpretation of said code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are
citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to
income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long standing
and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the government"
and one of the duties of a Filipino citizen is to pay his income tax.prLL
WHEREFORE, the petitions are denied for lack of merit. The dismissal by the respondent Court of Tax Appeals
of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED. Costs against
petitioners.
SO ORDERED.
||| (Conwi v. CTA, G.R. No. 48532, 48533, August 31, 1992)
144 F.2d 110 (1944)
RAYTHEON PRODUCTION CORPORATION
v.
COMMISSIONER OF INTERNAL REVENUE.
No. 3956.
Circuit Court of Appeals, First Circuit.
July 28, 1944.

12

Writ of Certiorari Denied November 20, 1944.

*111 Edward C. Thayer, of Boston, Mass., for petitioner.
Newton K. Fox, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and J. Louis
Monarch, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.
Writ of Certiorari Denied November 20, 1944. See 65 S.Ct. 192.
MAHONEY, Circuit Judge.
This case presents the question whether an amount received by the taxpayer in compromise settlement of a
suit for damages under the Federal Anti-Trust Laws, 15 U.S.C.A. 1 et seq., is a non-taxable return of capital
or income. If the recovery is non-taxable, there is a second question as to whether the Tax Court erred in
holding that there was insufficient evidence to enable it to determine what part of the lump sum payment
received by the taxpayer was properly allocable to compromise of the suit and what part was allocable to
payment for certain patent license rights which were conveyed as a part of the settlement.
Petitioner, Raytheon Production Corporation, came into existence as a result of a series of what both parties as
well as the Tax Court have treated as tax free reorganizations. Since we think such is the proper treatment, we
shall simplify the facts by referring to any one of the original and successor companies as Raytheon. The
original Raytheon Company was a pioneer manufacturer of a rectifying tube which made possible the operation
of a radio receiving set on alternating current instead of on batteries. In 1926 its profits were about $450,000; in
1927 about $150,000; and in 1928, $10,000. The Radio Corporation of America had many patents covering
radio circuits and claimed control over almost all of the practical circuits. Cross-licensing agreements had been
made among several companies including R.C.A., General Electric Company, Westinghouse, and American
Telephone & Telegraph Company. R.C.A. had developed a competitive tube which produced the same type of
rectification as the Raytheon tube. Early in 1927, R.C.A. began to license manufacturers of radio sets and in the
license agreement it incorporated "Clause 9", which provided that the licensee was required to buy its tubes
from R.C.A. In 1928 practically all manufacturers were operating under R.C.A. licenses. As a consequence of
this restriction, Raytheon was left with only replacement sales, which soon disappeared. When Raytheon found
it impossible to market its tubes in the early part of 1929, it obtained a license from R.C.A. to manufacture tubes
under the letters patent on a royalty basis. The license agreement contained a release of all claims of Raytheon
against R.C.A. by reason of the illegal acts of the latter under Clause 9 but by a side agreement such claims
could be asserted if R.C.A. should pay similar claims to others. The petitioner was informed of instances in
which R.C.A. had settled claims against it based on Clause 9. On that ground it considered itself released from
the agreement not to enforce its claim against R.C.A. and consequently, on December 14, 1931, the petitioner
caused its predecessor, Raytheon, to bring suit against R.C.A. in the District Court of Massachusetts alleging
that the plaintiff had by 1926 created and then possessed a large and valuable good will in interstate commerce
in rectifying tubes for radios and had a large and profitable established business therein so that the net profit for
the year 1926 was $454,935; that the business had an established prospect of large increases and that the
business and good will thereof was of a value of exceeding $3,000,000; that by the beginning of 1927 the
plaintiff was doing approximately 80% of the business of rectifying tubes of the entire United States; that the
defendant conspired to destroy the business of the plaintiff and others by a monopoly of such business and did

13

suppress *112 and destroy the existing companies; that the manufacturers of radio sets and others ceased to
purchase tubes from the plaintiffs; that by the end of 1927 the conspiracy had completely destroyed the
profitable business and that by the early part of 1928 the tube business of the plaintiff and its property and good
will had been totally destroyed at a time when it had a present value in excess of $3,000,000, and thereby the
plaintiff was injured in its business and property in a sum in excess of $3,000,000. The action against R.C.A.
was referred to an auditor who found that Clause 9 was not the cause of damage to the plaintiff but that the
decline in plaintiff's business was due to advancement in the radio art and competition. The auditor, however,
also found that if it should be decided that Clause 9 had turned the development of the radio art away from
plaintiff's type of tube, then the damages would be $1,000,000.
In the spring of 1938, after the auditor's report and just prior to the time for the commencement of the trial
before a jury, the Raytheon affiliated companies began negotiations for the settlement of the litigation with
R.C.A. In the meantime a suit brought by R.C.A. against the petitioner for the non-payment of royalties resulted
in a judgment of $410,000 in favor of R.C.A. R.C.A. and the petitioner finally agreed on the payment by R.C.A.
of $410,000 in settlement of the anti trust action. R.C.A. required the inclusion in the settlement of patent
license rights and sublicensing rights to some thirty patents but declined to allocate the amount paid as between
the patent license rights and the amount for the settlement of the suit. The agreement of settlement contained a
general release of any and all possible claims between the parties.
The officers of the Raytheon companies testified that $60,000 of the $410,000 received from R.C.A. was the
maximum worth of the patents, basing their appraisal on the cost of development of the patents and the fact
that few of them were then being used and that no royalties were being derived from them. In its income tax
return the petitioner returned $60,000 of the $410,000 as income from patent licenses and treated the
remaining $350,000 as a realization from a chose in action and not as taxable income. The Commissioner
determined that the $350,000 constituted income on the following ground contained in the statement attached
to his notice of deficiency: "It is the opinion of this office that the amount of $350,000 constitutes income under
22(a) of the Revenue Act of 1936. There exists no clear evidence of what the amount was paid for so that an
accurate apportionment can be made as to a specific consideration for patent rights transferred to Radio
Corporation of America and a consideration for damages. The amount of $350,000 has therefore been included
in your taxable income."
The pertinent sections of the statute are set out in the margin.[1]
Adverting to the question of whether *113 that part of the $410,000 which was paid by R.C.A. to Raytheon to
settle the anti trust suit was a return of capital or ordinary income, we must observe that the auditor's report is
immaterial on that issue. Despite the fact that the auditor found that the loss was not caused by Clause 9, it was
open to the jury to come to a different conclusion on the question of liability, and to avoid this R.C.A. settled the
suit by compromise.
Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital. As in other types
of tort damage suits, recoveries which represent a reimbursement for lost profits are income. Swastika Oil &
Gas Co. v. Commissioner, 6 Cir., 1941, 123 F.2d 382, certiorari denied 1943, 317 U.S. 639, 63 S.Ct. 30, 87
L.Ed. 515; H. Liebes & Co. v. Commissioner, 9 Cir., 1937, 90 F.2d 932; Sternberg v. Commissioner, 1935, 32

14

B.T.A. 1039. The reasoning is that since the profits would be taxable income, the proceeds of litigation which
are their substitute are taxable in like manner.
Damages for violation of the anti-trust acts are treated as ordinary income where they represent compensation
for loss of profits. Commercial Electrical Supply Co. v. Commissioner, 1927, 8 B.T.A. 986; see Park v. Gilligan,
D.C.S.D.Ohio 1921, 293 F. 129, 130.
The test is not whether the action was one in tort or contract but rather the question to be asked is "In lieu of
what were the damages awarded?" Farmers' & Merchants' Bank v. Commissioner, 6 Cir., 1932, 59 F.2d 912;
Swastika Oil & Gas Co. v. Commissioner, supra; Central R. Co. of New Jersey v. Commissioner, 3 Cir., 1935,
79 F.2d 697, 101 A.L.R. 1448. See United States v. Safety Car Heating & Lighting Co., 1936, 297 U.S. 88, 98,
56 S.Ct. 353, 80 L.Ed. 500. Plumb, "Income Tax on Gains and Losses in Litigation" (1940) 25 Cornell L. Q. 221.
Where the suit is not to recover lost profits but is for injury to good will, the recovery represents a return of
capital and, with certain limitations to be set forth below, is not taxable. Farmers' & Merchants' Bank v.
Commissioner, supra. Plumb, supra, 25 Cornell L. Q. 221, 225. "Care must certainly be taken in such cases to
avoid taxing recoveries for injuries to good will or loss of capital". 1 Paul and Mertens Law of Federal Income
Taxation 6.48.
Upon examination of Raytheon's declaration in its anti-trust suit we find nothing to indicate that the suit was for
the recovery of lost profits. The allegations were that the illegal conduct of R.C.A. "completely destroyed the
profitable interstate and foreign commerce of the plaintiff and thereby, by the early part of 1928, the said tube
business of the plaintiff and the property good will of the plaintiff therein had been totally destroyed at a time
when it then had a present value in excess of three million dollars and thereby the plaintiff was then injured in its
business and property in a sum in excess of three million dollars." This was not the sort of antitrust suit where
the plaintiff's business still exists and where the injury was merely for loss of profits. The allegations and
evidence as to the amount of profits were necessary in order to establish the value of the good will and
business since that is derived by a capitalization of profits. A somewhat similar idea was expressed in Farmers'
& Merchants' Bank v. Commissioner, supra, *114 59 F.2d at page 913. "Profits were one of the chief indications
of the worth of the business; but the usual earnings before the injury, as compared with those afterward, were
only an evidential factor in determining actual loss and not an independent basis for recovery." Since the suit
was to recover damages for the destruction of the business and good will, the recovery represents a return of
capital. Nor does the fact that the suit ended in a compromise settlement change the nature of the recovery;
"the determining factor is the nature of the basic claim from which the compromised amount was realized." Paul
Selected Studies in Federal Taxation, Second Series, pp. 328-9, footnote 76; Helvering v. Safe Deposit & Trust
Co. of Baltimore, 1941, 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513; Lyeth v. Hoey, 1938, 305
U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410; Central R. of New Jersey v. Commissioner, supra;
Farmers' & Merchants' Bank v. Commissioner, supra; Megargel v. Commissioner, 1944, 3 T.C. 238.
But, to say that the recovery represents a return of capital in that it takes the place of the business good will is
not to conclude that it may not contain a taxable benefit. Although the injured party may not be deriving a profit
as a result of the damage suit itself, the conversion thereby of his property into cash is a realization of any gain
made over the cost or other basis of the good will prior to the illegal interference. Thus A buys Blackacre for
$5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A sues and recovers $50,000 tort

15

damages from B. Although no gain was derived by A from the suit, his prior gain due to the appreciation in
value of Blackacre is realized when it is turned into cash by the money damages.
Compensation for the loss of Raytheon's good will in excess of its cost is gross income. See Magill Taxable
Income, p. 339. 1 Mertens, Law of Federal Income Taxation, 5.21, footnote 82. Plumb, supra, 25 Cornell L. Q.
225, 6.
Since we assume with the parties that the petitioner secured the original Raytheon's assets through a series of
tax free reorganizations, petitioner's basis for the good will is the same as that of the original Raytheon. As the
Tax Court pointed out, the record is devoid of evidence as to the amount of that basis and "in the absence of
evidence of the basis of the business and good will of Raytheon, the amount of any nontaxable capital recovery
cannot be ascertained." 1 T.C. 952. Cf. Sterling v. Commissioner, 2 Cir., 1937, 93 F.2d 304.
Where the cost basis that may be assigned to property has been wholly speculative, the gain has been held to
be entirely conjectural and not taxable. In Strother v. Commissioner, 4 Cir., 1932, 55 F.2d 626, affirmed on
other grounds, 1932, 287 U.S. 308, 53 S.Ct. 150, 77 L.Ed. 325, a trespasser had taken coal and then destroyed
the entries so that the amount of coal taken could not be determined. Since there was no way of knowing
whether the recovery was greater than the basis for the coal taken, the gain was purely conjectural and not
taxed. Magill explains the result as follows: "as the amount of coal removed could not be determined until a final
disposition of the property, the computation of gain or loss on the damages must await that disposition."
Taxable Income, pp. 339-340. The same explanation may be applied to Farmers' & Merchants' Bank v.
Commissioner, supra, which relied on the Strother case in finding no gain. The recovery in that case had been
to compensate for the injury to good will and business reputation of the plaintiff bank inflicted by defendant
reserve banks' wrongful conduct in collecting checks drawn on the plaintiff bank by employing "agents who
would appear daily at the bank with checks and demand payment thereof in cash in such a manner as to attract
unfavorable public comment". Since the plaintiff bank's business was not destroyed but only injured and since it
continued in business, it would have been difficult to require the taxpayer to prove what part of the basis of its
good will should be attributed to the recovery. In the case at bar, on the contrary, the entire business and good
will were destroyed so that to require the taxpayer to prove the cost of the good will is no more impractical than
if the business had been sold.[2]
Inasmuch as we conclude that the portion of the $410,000 attributable to the suit is taxable income, the second
question as *115 to allocation between this and the ordinary income from patent licenses is not present.
The decision of the Tax Court is affirmed.
[G.R. No. 66416. March 21, 1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOURS SPECIALISTS, INC., and
THE COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for private respondent.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; FINDINGS OF FACTS OF COURT OF TAX APPEALS; BINDING
WITH THE SUPREME COURT IF SUPPORTED BY SUBSTANTIAL EVIDENCE. The well-settled doctrine is
that the findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons for
this Court to delve into facts, only questions of law are open for determination. (Nilsen v. Commissioner of

16

Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA 495
[1980]). In the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the factual
findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not
supported by substantial evidence.
2. TAXATION; CONTRACTOR'S TAX; HOTEL ROOM CHARGES HELD IN TRUST BY TRAVEL AGENCY
FOR FOREIGN TOURIST AND PAID TO LOCAL HOST HOTEL; NOT SUBJECT THEREOF. Goss
receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do
not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a
law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the
Tax Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent
do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to
the private respondent. The private respondent never benefited from their payment to the local hotels. As stated
earlier, this arrangement was only to accommodate the foreign travel agencies.
3. ID.; ID.; PRES. DECREE NO. 31; PURPOSE. The significance of P.D. 31 is clearly established in
determining whether or not hotel room charges of foreign tourists in local hotels are subject to the 3%
contractor's tax. As the respondent court aptly stated: ". . . Of the hotel room charges entrusted to petitioner will
be subjected to 3% contractor's tax as what respondent would want to do in this case, that would in effect do
indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax.
Although, respondent may claim that the 3% contractor's tax is imposed upon a different incidence, i.e. the
gross receipts of petitioner tourist agency which he asserts includes the hotel room charges entrusted to it, the
effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges.
One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase
the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists."
DECISION
GUTIERREZ, JR., J p:
This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the money
entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges of tourists,
travelers and/or foreign travel agencies does not form part of its gross receipts subject to the 3% independent
contractor's tax under the National Internal Revenue Code of 1977. LLjur
We adopt the findings of facts of the Court of Tax Appeals as follows:
"For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its
activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino
'Balikbayans' during their stay in this country. Some of the services extended to the tourists
consist of booking said tourists and travelers in local hotels for their lodging and board needs;
transporting these foreign tourists from the airport to their respective hotels, and from the latter
to the airport upon their departure from the Philippines, transporting them from their hotels to
various embarkation points for local tours, visits and excursions; securing permits for them to
visit places of interest; and arranging their cultural entertainment, shopping and recreational
activities.

17

"In order to ably supply these services to the foreign tourists, petitioner and its correspondent
counterpart tourist agencies abroad have agreed to offer a package fee for the tourists.
Although the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel
room accommodations, food and other personal expenses of said tourists, as a rule, are paid
directly either by tourists themselves, or by their foreign travel agencies to the local hotels (Pp.
77, t.s.n., Feb. 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp. 2425, t.s.n., ibid) and restaurants or
shops, as the case may be. prcd
"It is also the case that some tour agencies abroad request the local tour agencies, such as the
petitioner in the case, that the hotel room charges, in some specific cases, be paid through
them. (Exh. Q, Q-1, p. 29 CTA rec., p. 25, T.s.n., ibid., pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.;
See also Exh. "U", pp. 22-23, t.s.n., Oct. 9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this
arrangement, the foreign tour agency entrusts to the petitioner Tours Specialists, Inc., the fund
for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel
when billed. The procedure observed is that the billing hotel sends the bill to the petitioner. The
local hotel identifies the individual tourist, or the particular groups of tourists by code name or
group designation and also the duration of their stay for purposes of payment. Upon receipt of
the bill, the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency. cdll
"Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner
for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel
room charges in its gross receipts from services for the years 1974 to 1976. Consequently, on
December 6, 1979, petitioner received from respondent the 3% deficiency independent
contractor's tax assessment in the amount of P122,946.93 for the years 1974 to 1976, inclusive,
computed as follows:
1974 deficiency
percentage
tax
per investigation P3,995.63
15% surcharge for late payment 998.91
_________
P4,994.54
14%
interest
computed
by
quarters
up to 12-28-79 3,953.18 P8,847.72
1975 deficiency
percentage
tax
per investigation P8,427.39
25% surcharge for late payment 2,106.85
__________
P10,534.24
14%
interest
computed
by
quarters up to 12-28-79 6,808.47 P17,342.71

18

1976 deficiency
percentage
tax per investigation P54,276.42
25% surcharge for late payment 13,569.11
__________
P67,845.53
14%
interest
computed
by
quarters
up to 12-28-79 28,910.97 P96,756.50
_________ __________
Total amount due P122,946.93
=========
"In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a
compromise penalty of P500.00.
"Subsequently, on December 11, 1979, petitioner formally protested the assessment made by
respondent on the ground that the money received and entrusted to it by the tourists,
earmarked to pay hotel room charges, were not considered and have never been considered by
it as part of its taxable gross receipts for purposes of computing and paying its contractor's
tax. prLL
"During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant
and in charge of the Accounting Department of petitioner, had testified, her credibility not having
been destroyed on cross examination, categorically stated that the amounts entrusted to it by
the foreign tourist agencies intended for payment of hotel room charges, were paid entirely to
the hotel concerned, without any portion thereof being diverted to its own funds. (t.s.n., Feb. 2,
1981, pp. 7, 25; t.s.n., Aug 20, 1981, pp. 5-9, 17-18). The testimony of Serafina Sazon was
corroborated by Gerardo Isada, General Manager of petitioner, declaring to the effect that
payments of hotel accommodation are made through petitioner without any increase in the
room charged (t.s.n., Oct. 9, 1981, pp. 21-25) and that the reason why tourists pay their room
charge, or through their foreign tourists agencies, is the fact that the room charge is exempt
from hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on crossexamination, that if their payment is made, thru petitioner's tour agency, the hotel cost or
charges 'is only an act of accommodation on our (its) part' or that the 'agent abroad instead of
sending several telexes and saving on bank charges they take the option to send money to us
to be held in trust to be endorsed to the hotel.' (pp. 3-4, t.s.n. Aug 10, 1982.).
"Nevertheless, on June 2, 1980, respondent without deciding the petitioner's written protest,
caused the issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent
had petitioner's bank deposits garnished. (pp. 49-50, BIR Rec.)
"Taking this action of respondent as the adverse and final decision on the disputed assessment,
petitioner appealed to this Court." (Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:

19

"WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY

INCLUDED IN A PACKAGE FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES,
INTENDED OR EARMARKED FOR HOTEL ACCOMMODATIONS FORM PART OF GROSS
RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX." (Rollo, p. 23)
The petitioner premises the issue raised on the following assumptions:
"Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room
accommodations, were received as part of the package fee and, therefore, form part of 'gross
receipts' as defined by law.
Secondly, there is no showing and is not established by the evidence, that the amounts
received and 'earmarked' are actually what had been paid out as hotel room charges. The mere
possibility that the amounts actually paid could be less than the amounts received is sufficient to
destroy the validity of the ruling." (Rollo, pp. 26-27)
In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent court.
The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court and
absent strong reasons for this Court to delve into facts, only questions of law are open for determination. (Nilsen
v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De
Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled
that the factual findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on
appeal if not supported by substantial evidence.
In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of Tax
Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like the
herein private respondent, rendered to foreign customers. The respondent differentiated between the package
fee offered by both the local travel agency and its correspondent counterpart tourist agencies abroad and the
requests made by some tour agencies abroad to local tour agencies wherein the hotel room charges in some
specific cases, would be paid to the local hotels through them. In the latter case, the correspondent court found
as a fact ". . . that the foreign tour agency entrusts to the petitioner Tours Specialists, Inc. the fund for hotel
room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed." (Rollo, p.
42) The following procedure is followed: The billing hotel sends the bill to the respondent; the local hotel then
identifies the individual tourist, or the particular group of tourists by code name or group designation plus the
duration of their stay for purposes of payment; upon receipt of the bill the private respondent pays the local
hotel with the funds entrusted to it by the foreign tour correspondent agency. Cdpr
Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the foreign
tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its funds; this
arrangement was only an act of accommodation on the part of the private respondent. This evidence was not
refuted.
In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were part
of the package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to the effect

20

that the amounts entrusted to the private respondent were exclusively for payment of hotel room charges of
foreign tourists entrusted to it by foreign travel agencies.
As regards the petitioner's second assumption, the respondent court stated:
". . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners'
Worksheet (Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following
sums made up the hotel room accommodations:
July 1976 P102,702.97
Aug. 1976 121,167.19
Sept. 1976 53,209.61

P282,079.77
==========
Oct. 1976 P 71,134.80
Nov. 1976 409,019.17
Dec. 1976 142,761.55
__________
622,915.51

Grand Total P904,995.29

==========
"It is not true, therefore, as stated by respondent, that there is no evidence proving the amounts
earmarked for hotel room charges. Since the BIR examiners could not have manufactured the
above figures representing 'advances for hotel room accommodations,' these payments must
have certainly been taken from the records of petitioner, such as the invoices, hotel bills, official
receipts and other pertinent documents." (Rollo, pp. 48-49) LLjur
The factual findings of the respondent court are supported by substantial evidence, hence binding upon this
Court.
With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:
". . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and
or correspondent foreign travel agencies and paid to local host hotels form part of the taxable
gross receipts for purposes of the 3% contractor's tax." (Rollo, p. 45)
The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant to Section
191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the entire gross
receipts of a taxpayer undiminished by any amount. According to the petitioner, this interpretation is in
consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementing Section 191 of the Tax Code)
which states that the 3% contractor's tax prescribed by Section 191 of the Tax Code is imposed on the gross
receipts of the contractor, "no deduction whatever being allowed by said law " The petitioner contends that the
only exception to this rule is when there is a law or regulation which would d exempt such gross receipts from
being subjected to the 3% contractor's tax citing the case of Commissioner of Internal Revenue v. Manila

21

Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the petitioner argues that since there is no law or regulation that
money entrusted, earmarked and paid for hotel room charges should not form part of the gross receipts, then
the said hotel room charges are included in the private respondent's gross receipts for purposes of the 3%
contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner
appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the Manila
Jockey Club, a duly constituted corporation authorized to hold horse races in Manila. The facts of the case
show that the monies sought to be taxed never really belonged to the club. The decision shows that during the
period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its commission but without
including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the Board of Races,
the owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that the amusement tax
was payable by the operator on its "gross receipts". The Manila Jockey Club, however, did not consider as part
of its "gross receipts" subject to amusement tax the amounts which it had to deliver to the Board on Races, the
horse owners and the jockeys. This view was fully sustained by three opinions of the Secretary of Justice, to
wit: cdll
"There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered
by the Totalizer. This portion represents its share or commission in the total amount of money it
handles and goes to the funds thereof as its own property which it may legally disburse for its
own purposes. The 5% does not belong to the club. It is merely held in trust for distribution as
prizes to the owners of winning horses. It is destined for no other object than the payment of
prizes and the club cannot otherwise appropriate this portion without incurring liability to the
owners of winning horses. It cannot be considered as an item of expense because the sum
used for the payment of prizes is not taken from the funds of the club but from a certain portion
of the total bets especially earmarked for that purpose.
"In view of all the foregoing, I am of the opinion that in the submission of the returns for the
amusement tax of 10% (now it is 20% of the 'gross receipts', provided for in Section 260 of the
National Internal Revenue Code), the 5% of the total bets that is set aside for prizes to owners
of winning horses should not be included by the Manila Jockey Club, Inc."
The Collector of the Internal Revenue, however had a different opinion on the matter and demanded payment of
amusement taxes. The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
"The Secretary's opinion was correct. The Government could not have meant to tax as gross
receipt of the Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board
on Races. The latter being a Government institution, there would be double taxation, which
should be avoided unless the statute admits of no other interpretation. In the same manner, the
Government could not have intended to consider as gross receipt the portion of the funds which
it directed the Club to give, or knew the Club would give, to winning horses and jockeys
admittedly 5%. It is true that the law says that out of the total wager funds 12-1/2% shall be set
aside as the 'commission' of the race track owner, but the law itself takes official notice, and

22

actually approves or directs payment of the portion that goes to owners of horses as prizes and
bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2% commission. As it did
not at that time contemplate the application of 'gross receipts' revenue principle, the law in
making a distribution of the total wager funds, took no trouble of separating one item from the
other; and for convenience, grouped three items under one common denomination. cdphil
"Needless to say, gross receipts of the proprietor of the amusement place should not include
any money which although delivered to the amusement place has been especially earmarked
by law or regulation for some person other than the proprietor." (The situation thus differs from
one in which the owner of the amusement place, by a private contract, with its employees or
partners, agrees to reserve for them a portion of the proceeds of the establishment. (See Wong
& Lee v. Coll. 104 Phil. 469; 55 Off Gaz. [51] 10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off
Gaz., [6] 896)."
In the second case, the facts of the case are:
"The Manila Jockey Club holds once a year a so called 'special Novato race', wherein only
'novato' horses, (i.e. horses which are running for the first time in an official [of the club] race),
may take part. Owners of these horses must pay to the Club an inscription fee of P1.00, and a
declaration fee of P1.00 per horse. In addition, each of them must contribute to a common fund
(P10.00 per horse). The Club contributes an equal amount (P10.00 per horse) to such common
fund, the total amount of which is added to the 5% participation of horse owners already
described herein-above in the first case.
"Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never
paid amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it
entertained the belief that in accordance with the three opinions of the Secretary of Justice
herein-above described, such contributions never formed part of its gross receipts. On the
inscription fee of the P1.00 per horse, it paid the tax. It did not on the declaration fee of P1.00
because it was imposed by the Municipal Ordinance of Manila and was turned over to the City
officers.
"The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on
such contributed fund P10.00 per horse in the special novato race, holding they were part of its
gross receipts. The Manila Jockey Club protested and resorted to the Court of Tax Appeals,
where it obtained favorable judgment on the same grounds sustained by said Court in
connection with the 5% of the total wager funds in the herein-mentioned first case; they were
not receipts of the Club." prLL
We resolved the issue in the following manner:
"We think the reasons for upholding the Tax Court's decision in the first case apply to this one.
The ten-peso contribution never belonged to the Club. It was held by it as a trust fund. And
then, after all, when it received the ten-peso contribution, it at the same time contributed ten
pesos out of its own pocket, and thereafter distributed both amounts as prizes to horse owners.

23

It would seem unreasonable to regard the ten-peso contribution of the horse owners as taxable
receipt of the Club, since the latter, at the same moment it received the contribution necessarily
lost ten pesos too."
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's
benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and
receipts within the meaning of gross receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not form
part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private
respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier,
this arrangement was only to accommodate the foreign travel agencies. cdll
Another objection raised by the petitioner is to the respondent court's application of Presidential Decree
31 which exempts foreign tourists from payment of hotel room tax.Section 1 thereof provides:
"Sec. 1. Foreign tourists and travelers shall be exempt from payment of any and all hotel
room tax for the entire period of their stay in the country."
The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under Section
191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the privilege to engage in
business as a contractor and that it is imposed on, and collectible from the person exercising the privilege. He
sums his arguments by stating that "while the burden may be shifted to the person for whom the services are
rendered by the contractor, the latter is not relieved from payment of the tax." (Rollo, p. 28)
The same arguments were submitted by the Commissioner of Internal Revenue in the case of Commissioner of
Internal Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his imposition of the 3%
contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts John Gotamco
& Sons, Inc., realized from the construction of the World Health Organization (WHO) office building in Manila.
We rejected the petitioner's arguments and ruled:
"We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the
respondent court:
"'In context, direct taxes are those that are demanded from the very person who,
it is intended or desired, should pay them; while indirect taxes are those that are
demanded in the first instance from one person in the expectation and intention that he
can shift the burden to someone else. (Pollock v. Farmers, L & T Co., 1957 US 429, 15
S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course payable by the contractor
but in the last analysis it is the owner of the building that shoulders the burden of the tax
because the same is shifted by the contractor to the owner as a matter of selfpreservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because,
although it is payable by the petitioner, the latter can shift its burden on the WHO. In the
last analysis it is the WHO that will pay the tax indirectly through the contractor and it
certainly cannot be said that 'this tax has no bearing upon the World Health
Organization.'"

24

"Petitioner claims that under the authority of the Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly
on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that
the said case is not controlling in this case, since the Host Agreement specifically exempts the
WHO from 'indirect taxes.' We agree. The Philippine Acetylene case involved a tax on sales of
goods which under the law had to be paid by the manufacturer or producer; the fact that the
manufacturer or producer might have added the amount of the tax to the price of the goods did
not make the sales tax 'a tax on the purchaser.' The Court held that the sales tax must be paid
by the manufacturer or producer even if the sale is made to tax-exempt entities like the National
Power Corporation, an agency of the Philippine Government, and to the Voice of America, an
agency of the United States Government. LexLib
"The Host Agreement, in specifically exempting the WHO from 'indirect taxes,' contemplates
taxes which, although not imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it."
Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room charges
of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court aptly stated:
". . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as
what respondent would want to do in this case, that would in effect do indirectly what P.D.
31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax.
Although, respondent may claim that the 3% contractor's tax is imposed upon a different
incidence, i.e. the gross receipts of petitioner tourist agency which he asserts includes the hotel
room charges entrusted to it, the effect would be to impose a tax, and though different, it
nonetheless imposes a tax actually on room charges. One way or the other, it would not have
the effect of promoting tourism in the Philippines as that would increase the costs or expenses
by the addition of a hotel room tax in the overall expenses of said tourists." (Rollo, pp. 51-52).
WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
||| (Commr. v. Tours Specialists, Inc., G.R. No. 66416, March 21, 1990)
[G.R. No. 78953. July 31, 1991.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and
THE COURT OF TAX APPEALS, respondents.
Elison G. Natividad for accused-appellant.
SYLLABUS
1. TAXATION; INCOME TAX; SURCHARGES FOR RENDERING FALSE AND FRAUDULENT RETURN.
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity
or fraud.

25

2. ID.; ID.; FILING OF FRAUDULENT RETURN; MUST BE ACTUAL AND INTENTIONAL THROUGH WILLFUL
AND DELIBERATE MISLEADING OF THE GOVERNMENT AGENCY. InAznar v. Court of Tax Appeals (L20569, promulgated on August 23, 1974, 58 SCRA 519), fraud in relation to the filing of income tax return, was
discussed in this manner: . . . The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to
evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding
the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both
petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the
returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good
faith. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.
3. ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. In the case at bar, there was no actual and intentional
fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal
Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and
place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities
because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to
collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the
fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps
even for greed by spending most of the money he received, but the records lack a clear showing of fraud
committed because he did not conceal the fact that he had received an amount of money although it was a
"subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud
penalty by the petitioner against the private respondent in the deficiency assessment should be deleted.
DECISION
SARMIENTO, J p:
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his
income tax return that a sum of money that he erroneously received and already spent is the subject of a
pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent
return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July
27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben
B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50%
surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:

26

xxx xxx xxx

2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private
respondent herein), received from the Prudential Bank and Trust Company in Pasay City the
amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in
the United States, among which is Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the
petitioner (private respondent herein), his wife and other defendants, claiming that its remittance
of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying
that the excess amount of US$999,000.00 be returned on the ground that the defendants are
trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and
continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with
the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private
respondent herein) and his wife with the crime of estafa, alleging that they misappropriated,
misapplied, and converted to their own personal use and benefit the amount of US$999,000.00
which they received under an implied trust for the benefit of Mellon Bank and as a result of the
mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax
Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of
P48,053.88 and stating in the footnote of the return that "Taxpayer was recipient of some
money received from abroad which he presumed to be a gift but turned out to be an error and is
now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a
letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together
with income assessment notices for the years 1976 and 1977, demanding that petitioner
(private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and
P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of
Internal Revenue that he was paying the deficiency income assessment for the year 1976 but
denying that he had any undeclared income for the year 1977 and requested that the
assessment for 1977 be made to await final court decision on the case filed against him for
filing an allegedly fraudulent return . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply
to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance
which you were able to dispose, is definitely taxable.". . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.

27

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding
portion:
We note that in the deficiency income tax assessment under consideration, respondent
(petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge as
provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of
P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income
tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by
respondent (petitioner) because he considered the return filed false or fraudulent. This
additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in his 1977 return as footnote that "Taxpayer was
recipient of some money received from abroad which he presumed to be gift but turned out to
be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of
deception willfully and deliberately done or resorted to by petitioner (private respondent) in
order to induce the Government to give up some legal right, or the latter, due to a false return,
was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for respondent to examine. Error or
mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.).
Besides, Section 29 is not too plain and simple to understand. Since the question involved in
this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge
imposed in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to
us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD
PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held
him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted
in the same memorandum "that the issue may be raised in the case not for the purpose of correcting or setting
aside the decision which held him liable for deficiency income tax, but only to show that there is no basis for the
imposition of the surcharge." This subsequent disavowal therefore renders moot and academic the posturings
articulated in his Comment 10 on the non-taxability of the amount he erroneously received and the bulk of which
he had already disbursed. In any event, an appeal at that time (of the filing of the Comments) would have been
already too late to be seasonable. llcd
The petitioner, through the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is
self-convinced, and so acted, that he is the beneficial owner, and of which reason is liable to

28

tax. Put another way, the studied insinuation that private respondent may not be the beneficial
owner of the money or income flowing to him as enhanced by the studied claim that the amount
is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as
witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for
the amount of private respondent's wife was $999,000.00 after opening a dollar account with
Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste and
dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977,
effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or
P7,020,000.00 . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the
"mistaken remittance" in his income tax return and by merely making a footnote thereon which
read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation." It is respectfully submitted that the
said return was not fraudulent. The footnote was practically an invitation to the petitioner to
make am investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F
[2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would
be sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from
the fraud penalty. (Frank A. Neddas, 40 BTA 572). The following circumstances attendant to the
case at bar show that in filing the questioned return, the private respondent was guided, not by
that "willful and deliberate intent to prevent the Government from making a proper assessment"
which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance"
was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case"
was given very, very wide publicity by media; and only one who is not in his right mind would
have entertained the idea that the BIR would not make an assessment if the amount in question
was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression
in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the
authorities are not unanimous in holding that similar receipts are subject to the income tax. It
should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very
case before this Honorable Court, one out of three Judges of the respondent Court was of the
opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to
declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being
sued by the Mellon Bank for the return of the money, and was being prosecuted by the

29

Government for estafa committed allegedly by his failure to return the money and by converting
it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition)
and could not have been paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his income tax return that the amount
received was still under litigation. If he had paid the tax, would that not constitute estafa for
using the funds for his own personal benefit? and would the Government refund it to him if the
courts ordered him to refund the money to the Mellon Bank? 12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity
or fraud. LibLex
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the
return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return
filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to
be a gift but turned out to be an error and is now subject of litigation," that it was an "error or mistake of fact or
law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had
literally "laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return, was discussed in this
manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, .whether slight or gross, is not equivalent to the fraud
with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with
the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be
considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal
Revenue committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be unfair to treat
the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good
faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be.
Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake

30

of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly
commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts.
Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received,
but the records lack a clear showing of fraud committed because he did not conceal the fact that he had
received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax
Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the
deficiency assessment should be deleted. prcd
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED.
No costs.
SO ORDERED.
||| (Commr. v. Javier, Jr., G.R. No. 78953, July 31, 1991)
[G.R. No. 21186. February 27, 1924.]
FREDERICK C. FISHER, plaintiff-appellee, vs. WENCESLAO TRINIDAD, Collector of
Internal Revenue, defendant-appellant.
Attorney-General Villa-Real for appellant.
Fisher, DeWitt, Perkins & Brady and Johns R. McFie, jr., for appellee.
SYLLABUS
LEGAL EFFECT OF WITHDRAWAL OF PROTEST. Where an income tax is paid under protest,
and pending an action brought to recover the money paid, the protestant withdraws his protest, in the
absence of a counterclaim, the legal effect of the withdrawal is to dismiss the action and leave the parties in
the same situation as if no protest was ever made.
STATEMENT
October 19, 1920, the plaintiff, a resident of the City of Manila, filed a complaint against the
defendant as Collector Internal Revenue, in which he alleged that he was a shareholder in the PhilippineAmerican Drug Company, a domestic corporation; that in the year 1919, he received from the drug company
certificates of shares of the par value of P24,800, as his proportionate share of a stock dividend, duly and
lawfully declared by the company; that the defendant erroneously and unlawfully, and against the will and
protest of the plaintiff, required him to pay an income tax on such stock dividend in the amount of P899.91;
that the plaintiff paid the tax under protest, and made a written demand upon the defendant for its return,
which was refused, and plaintiff prays for judgment for the amount, with interest and costs.
A demurrer was filed to the complaint upon the ground that it "does not state facts sufficient to
constitute a cause of action," which was sustained by the trial court, and the plaintiff, refusing to plead
further, the complaint was dismissed. From which ruling the plaintiff appealed to this court where the
decision of the lower court was reversed by this court, 1 and the case was remanded to the lower court for
further proceedings not inconsistent with the opinion.
The defendant filed an answer, denying all of the material allegations of the complaint, and as a
further and special defense, alleged that the stock dividend in question "represented and was accrued to the
said Philippine-American Drug Company since March 1, 1913, and distributed by said corporation among its
stockholders;" that the par value of the stock "did not exceed the amount of the earnings and profits actually

31

earned by the corporation;" and that by reason thereof the defendant levied the tax in question, which was
paid under protest.
The case was tried and submitted upon an agreed statement of facts, and the court rendered
judgment in favor of the plaintiff for the amount of P899.91, without interest and costs, from which decision
the defendant appeals, contending:
"I. The court below erred in holding that the Philippine Legislature had no power to tax a stock
dividend as income in an income tax law.
"II. The court below erred in not passing on the constitutional question raised.
"III. The court below erred in rendering judgment for the plaintiff."
DECISION
JOHNS, J p:
December 14, 1923, after the appeal was perfected, the plaintiff wrote the defendant a letter in which
he said:
"Please be advised that I hereby withdraw the protest heretofore made by on the 30th
day of March, 1920, in connection with income tax in the amount of P899.91 assessed by you
on shares of the Philippine-American Drug Company of the par value of P24,800."
This was later confirmed by another letter addressed to this court stating in substance that the
plaintiff had withdrawn and did not rely upon his protest because he had since sold the stock in question.
Notwithstanding that fact, the Attorney-General insists upon a decision by this court on the merits, and in
particular as to the constitutionality of the law and the legal right of the defendant to levy and collect the tax
in question.
The plaintiff contends that the record now presents a moot case, and for such reason there is nothing
left for this court to decide. That contention must be sustained. The payment of the money under protest
was the basis of plaintiff's action, without which it could not be sustained. His protest is not withdrawn. The
legal effect of it is to withdraw his complaint and to place the whole matter in the same position as if no
protest had ever been made. It must be conceded that in the absence of a protest the action could not be
maintained. In other words, the plaintiff is now in court seeking to recover money which was not paid under
protest. It is true that the plaintiff obtained judgment against the defendant in the lower court, but in legal
effect the withdrawal of the protest was a waiver of all of plaintiff's rights under that judgment. For such
reason, there is nothing left for this court to decide.
Without passing upon the merits of the question involved or the constitutionality of the act or the right
of the defendant to levy the tax in question, the judgment of the lower court is reversed, and plaintiff's
complaint is dismissed, with judgment for costs in both this and the lower court against the plaintiff and in
favor of the defendant. So ordered.
||| (Fisher v. Trinidad, G.R. No. 21186, February 27, 1924)
[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.]

32

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.
DECISION
VITUG, J p:
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 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 the 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 SelfEmployed 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:
"Section 21. Tax on citizens or residents.

33

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 selfemployed or practices his profession herein, determined in accordance with the following
schedule:
"Not over P10,000 3%
Over P10,000 but not over P30,000 P300 + 9% of excess over P10,000
Over P30,000 but not over P120,000 P2,100 + 15% of excess over P30,000
Over P120,000 but not over P350,000 P15,600 + P20% of excess over P120,000
Over P350,000 P61,600 + 30% of excess over P350,000"
"SECTION 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

34

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
the support of the whole act, (b) to avoid surprises or even fruad 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 771).
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 approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 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

35

The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgatingSection 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 the 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 on 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

36

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:
"SECTION 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 extend 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).

37

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. 4 Here, 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 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.
||| (Tan v. Del Rosario, Jr., G.R. No. 109289, 109446, October 03, 1994) [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.
Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for the respondents.
SYLLABUS
1. TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT
NECESSARY PARTNERSHIP. "Corporations" strictly speaking are distinct and different from
"partnership". When our Internal Revenue Code includes "partnership" among the entities subject to the tax

38

on "corporations", it must be allude to organization which are not necessarily "partnership" in the technical
sense of the term.
2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX UPON
CORPORATIONS. Section 24 of the Internal Revenue Code exempts from the tax imposed upon
corporations "duly registered general partnership", which constitute precisely one of the most typical form of
partnership in this jurisdiction.
3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. As defined
in section 84 (b) of the Internal Revenue Code "the term corporation includes partnership, no matter how
created or organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standards form, or conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for the purposes of the tax on corporations.
4. ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT LEGAL
PERSONALITY. Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporations"
includes, among the others, "joint accounts (cuenta en participacion)" and "associations", none of which has
a legal personality of its own independent of that of its members. For purposes of the tax on
corporations, our National Internal Revenue Code includes these partnership. with the exception only of
duly registered general partnership. within the purview of the term "corporations." Held: That the
petitioners in the case at bar, who are engaged in real estate transactions for monetary gain and divide the
same among themselves, constitute a partnership, so far as the said Code is concerned, and are subject to
the income tax for the corporation.
5. ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO
RESIDENCE TAX ON CORPORATION. The pertinent part of the provision of Section 2
of Commonwealth Act No. 465 which says: "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." is analogous to that of Section 24 and 84 (b) of our Internal Revenue
Code which was approved the day immediately after the approval of said Commonwealth Act No. 565.
Apparently, the terms "corporation" and "Partnership" are used both statutes with substantially the same
meaning, Held: That the petitioners are subject to the residence tax corporations.
DECISION
CONCEPCION, J p:
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 petitioners 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 P59,140.00 which amount
together with their personal monies was used by them for the purpose of buying real properties;

39

"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 for 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 P18,000.00; this
property has an assessed value of P8,255.00 as of 1948;
"4. That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of
4,358 sq. m. including improvements thereon for P108,825.00. This property has an assessed
value of P4,983.00 as of 1943;
"5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.14. 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 tenant;
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 leased to various tenants;
"8. That from the month of March, 1945 up to and 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 in 1946, they realized a gross rental income in the sum of P24,786.30, out of
which amount was deducted 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 the assessments made by said officer, as follows:
INCOME TAXES
1945...........................................................P614.84
1946...........................................................1,144.71
1947..............................................................910.34
1948...........................................................1,912.30
1949...........................................................1,575.90
_______________
Total including surcharge and compromise P6,157.09

40

REAL ESTATE DEALER'S FIXED TAX

1946.................................................................P37.50
1947.................................................................150.00
1948.................................................................150.00
1949.................................................................150.00
____________
Total including penalty P527.50
RESIDENCE TAXES OF CORPORATION
1945................................................................P38.75
1946..................................................................38.75
1947..................................................................38.75
1948..................................................................38.75
1949..................................................................38.75
______________
Total including surchage P193.75
TOTAL TAXES DUE P6,878.34
Said letter of demand and the 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 rendered 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 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 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 (compaias
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 (compaias
colectivas)."
Article 1767 of the Civil Code of the Philippines provides:

41

"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
P18,000.000. 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
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 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 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

42

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 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 copartner ships" which are possessed of the
aforementioned personality have been expresslyexcluded 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 of 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 provision 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 designated 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
interinsurance exchange operating through an attorney in fact, a partnership association, and

43

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 Merten's Law of Federal Income Taxation,
p. 788; italics ours.)
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 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; italics 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; italics
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.
As regards the residence 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." (italics ours.)
Considering that the pertinent part of this provision is analogous to that of sections 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 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

44

or offered to rent for an aggregate amount of three thousand pesos or more a year. . . .." (Italics
ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
||| (Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, October 15, 1957) [G.R. No. L-19342. May
25, 1972.]
LORENZO T. OA, and HEIRS OF JULIA BUNALES, namely: RODOLFO B. OA,
MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA, and LORENZO B. OA,
JR.,petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney
Purificacion Ureta for respondent.
SYLLABUS
1. TAXATION; INTERNAL REVENUE CODE; CORPORATE TAX; UNREGISTERED PARTNERSHIP;
FORMATION THEREOF WHERE INCOME FROM SHARES OF CO-HEIRS CONTRIBUTED TO COMMON
FUND. From the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa (who managed the
properties) 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 tantamount to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered partnership within the purview of the
provisions of the Tax Code.
2. ID.; ID.; ID.; WHEN HEIRS NOT CONSIDERED AS UNREGISTERED CO-PARTNERS AND NOT SUBJECT
TO SUCH TAX. In cases of inheritance, there is a period when the heirs can be considered as co-owners
rather than unregistered co-partners within the contemplation of our corporate tax laws. 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.
3. ID.; ID.; ID.; CIRCUMVENTIONS OF SECTIONS 24 AND 84(b) OF TAX CODE WHEN HEIRS CONTINUE
AS CO-OWNERS. For tax purposes, the co-ownership of inherited properties is automatically converted into
an unregistered partnership, for it is easily conceivable that after knowing their respective shares in the partition,
they (heirs) 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 not so, 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.
4. ID.; ID.; ID., HEIRS AS UNREGISTERED CO-PARTNERS; PARTNERSHIP CONTEMPLATED IN CIVIL
CODE NOT APPLICABLE. Petitioners' reliance on Article 1769, par. (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 (102 Phil. 140), this Court

45

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.
5. ID.; ID.; ID.; ID.; SEGREGATION OF INCOME FROM BUSINESS FROM THAT OF INHERITED
PROPERTIES, NOT PROPER. Where the inherited properties and the income derived therefrom were used
in business of buying and selling other real properties and corporate securities, 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.
6. ID.; ID.; INCOME TAX; ACTION FOR REIMBURSEMENT SUBJECT TO PRESCRIPTION. A taxpayer
who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate,
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.
DECISION
BARREDO, J p:
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled
as above, holding that petitioners have constituted an unregistered partnership and are, therefore, subject to
the payment of the deficiency corporate income taxes assessed against them by respondent Commissioner
of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1%
monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal
Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as
the resolution of said court denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
"Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa
and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance
of Manila for the settlement of her estate. Later, Lorenzo T. Oa, the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April
14, 1949, the administrator submitted the project of partition, which was approved by the Court
on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo,
Jr., all surnamed Oa, were still minors when the project of partition was approved, Lorenzo T.
Oa, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the
Court of First Instance of Manila for appointment as guardian of said minors. On November 14,
1949, the Court appointed him guardian of the persons and property of the aforenamed minors
(See p. 3, BIR rec.).
"The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of
P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined
amount to be collected from the War Damage Commission. Later, they received from said

46

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. 34-31, BIR rec.).
"The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
"Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oa who used said properties in business by leasing or selling them
and investing the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the
following year-end balances:
"Year Investment Land Building
Account Account Account
1949 P 87,860 P 17,590.00
1950 P 24,657.65 128,566.72 96,076.26
1951 51,301.31 120,349.28 110,605.11
1952 67,927.52 87,065.28 152,674.39
1953 61,258.27 84,925.68 161,463.83
1954 63,623.37 99,001.20 167,962.04
1955 100,786.00 120,249.78 169,262.52
1956 175,028.68 135,714.68 169,262.52
(See Exhibits 3 & K; t.s.n., pp. 22, 25-26, 40, 50, 102-104)
"From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests
(see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the
books of account kept by Lorenzo T. Oa, where the corresponding shares of the petitioners in
the net income for the year are also known. Every year, petitioners returned for income tax
purposes their shares in the net income derived from said properties and securities and/or from
transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income
was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in
real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
"On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided
that petitioners formed an unregistered partnership and therefore, subject to the corporate
income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly,

47

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 17,361.25
==========
(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

48

"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 IN VESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE
LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;.
"V
"ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID
BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF
THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP."
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court
of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactions involving the same, or, must they be deemed
to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the
sense that they invested as a common fund the profits earned by the properties owned by them in common and
the loans granted to them upon the security of the said properties, with the result that as far as their respective
shares in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for the same years 1955 and 1956 as
individual income taxes on their respective shares of the profits accruing from the properties they owned in
common be deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered
partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor
in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their
inheritance since those dates admittedly under the administration or management of the head of the family, the
widower and father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We
believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent
Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only

49

from 1955 that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and We see no
reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners
and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld. Truth to tell,
petitioners should find comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal
Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant
to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oa
who used said properties in business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account"
in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building
account" in 1956 And all these became possible because, admittedly, petitioners never actually received any
share of the income or profits from Lorenzo T. Oa, and instead, they allowed him to continue using said shares
as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis
of their respective shares of the profits of their common business as reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding
the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of
the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo
T. Oa, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed not only
the incomes from their respective shares of the inheritance but even the inherited properties themselves to be
used by Lorenzo T. Oa as a common fund in undertaking several transactions or in business, with the intention
of deriving profit to be shared by them proportionally, such act was tantamount 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 coowners 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

50

they found already in existence" and that "[i]t 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 conformity 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 other, '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

51

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 as 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 co-partnerships 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.

52

Likewise, the third question of petitioners appears to have 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 allege:
'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 Honor able 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 affirmed, with
costs against petitioners.
||| (O, G.R. No. L-19342, May 25, 1972) [G.R. No. L-24020-21. July 29, 1968.]

53

FLORENCIO REYES and ANGEL REYES, petitioners, vs. COMMISSIONER OF INTERNAL

REVENUE and HON. COURT OF TAX APPEALS, respondents.
Jose W . Diokno and Domingo Sandoval for petitioners.
Solicitor General for respondents.
SYLLABUS
1. TAXATION; INCOME TAX ON CORPORATIONS IMPOSABLE ON PARTNERSHIP, EXCEPT DULY
REGISTERED GENERAL CO-PARTNERSHIPS. For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception only of duly registered general copartnerships.
2. ID.; RULING IN EVANGELISTA v. COLLECTOR OF INTERNAL REVENUE APPLIED. Where petitioners
(father and son) purchased the lot and building for P835,000.00 of which they paid the sum of P375,000.00
leaving a balance of P460,000.00 representing the mortgage obligation of the vendors with the China Banking
Corporation which was assumed by petitioners; that such initial payment was shared equally by petitioners; that
administration of the building was entrusted to an administrator who collected the rents, kept its books and
records and rendered statements of accounts to petitioners, negotiated leases and made repairs and disbursed
payments; and where petitioners divided equally the income derived from the building after deducting expenses
of operation and maintenance, petitioners are not only co-owners but partners. And since under Section 84(b)
of the Revenue 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. Pursuant to the same Section 84(b), the
term 'corporation' includes among other, joint accounts (cuentas en participacion) and associations, none of
which has a legal personality of its own, independent of that of its members. The lawmaker could not have
regarded personality as a condition precedent to the existence of partnerships referred to therein.
3. ID.; ID.; SLIGHT DIFFERENCES DO NOT CALL FOR A DIFFERENT RULING. In the Evangelista case
the following circumstances were found to exist: a common fund created purposely, the investment of the same
not merely in one transaction but in a series of transactions, the lots not being devoted to residential purposes
or to other personal purposes, the properties being under the management of one person with full power to
lease, collect rents, issue receipts, bring suits and that all these conditions existed for over 10 years. In the
case at bar, petitioners could claim that this was only one transaction, that their intention was to house in that
building purchased their respective enterprises and to effect a division in 10 years. But while the purchase was
made in 1950, as late as 1965, or almost 15 years later, there was no allegation of such division and the facts
show that the building continued to be leased by other parties with petitioners dividing equally the income after
deducting operational expenses. Differences of such slight significance do not call for a different ruling. They do
not suffice to preclude the applicability of the Evangelista decision.
4. ID.; COURT OF TAX APPEALS; FINDINGS ENTITLED TO RESPECT OWING TO ITS EXPERTISE ON
SUBJECT. As a matter of principle, it is not advisable for the appellate Court to set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of its authority.

54

DECISION
FERNANDO, J p:
Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment
subsequently reduced to P37,528.00. This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another assessment was made
against petitioners, this time for back income taxes plus surcharge and compromise in the total sum of
P25,973.75, covering the years 1955 and 1956. There being a failure on their part to have such
assessments reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals. The two
cases 1 involving as they did identical issues and ultimately traceable to facts similar in character were
heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954 was
reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the
partnership formed" by petitioners. 2 The reduction was due to the elimination of surcharge, the failure to file the
income tax return being accepted as due to petitioners' honest belief that no such liability was incurred as well
as the compromise penalties for such failure to file. 3 A reconsideration of the aforesaid decision was sought
and denied by respondent Court of Tax Appeals. Hence this petition for review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence, must
be respected 4 follow: "On October 31, 1950, petitioners, father and son, purchased a lot and building, known
as the Gibbs Building, situated at 671 Dasmarias Street, Manila, for P835,000.00, of which they paid the sum
of P375,000.00, leaving a balance of P460,000.00, representing the mortgage obligation of the vendors with the
China Banking Corporation, which mortgage obligations was assumed by the vendees. The initial payment of
P375,000.00 was shared equally by petitioners. At the time of the purchase, the building was leased to various
tenants, whose rights under the lease contracts with the original owners the purchasers, petitioners herein,
agreed to respect. The administration of the building was entrusted to an administrator who collected the rents;
kept its books and records and rendered statements of accounts to the owners; negotiated leases; made
necessary repairs and disbursed payments, whenever necessary, after approval by the owners; and performed
such other functions necessary for the conservation and preservation of the building. Petitioners divided equally
the income derived from the building after deducting the expenses of operation and maintenance. The gross
income from rentals of the building amounted to about P90,000.00 annually." 5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the National
Internal Revenue Code, the first of which imposes an income tax on corporations "organized in, or existing
under the laws of the Philippines, no matter how created or organized but not including duly registered general
co-partnerships (companias colectivas), . . ." 6 a term, which according to the second provision cited, includes
partnership "no matter how created or organized, . . .," 7 and applying the leading case of
Evangelista v. Collector of Internal Revenue, 8 sustained the action of respondent Commissioner of Internal
Revenue, but reduced the tax liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is dissimilar.
Consequently, they allege that the reliance by respondent Court of Tax Appeals was unwarranted and the

55

decision should be set aside. If their interpretation of the authoritative doctrine therein set forth commands
assent, then clearly what respondent Court of Tax Appeals did fails to find shelter in the law. That is the crux of
the matter. A perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether petitioners are
subject to the tax on corporations provided for in section 24 ofCommonwealth Act No. 466, otherwise known as
the National Internal Revenue Code, . . ." 9 After referring to another section of the National Internal Revenue
Code, which explicitly provides that the term corporation "includes partnerships" and then to Article 1767 of the
Civil Code of the Philippines, defining what a contract of partnership is, the opinion goes on to state that "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, . . ."
10
In support of the above conclusion, reference was made to the following circumstances, namely, the common
fund being created purposely not something already found in existence, the investment of the same not merely
in one transaction but in a series of transactions; the lots thus acquired not being devoted to residential
purposes or to other personal uses of petitioners in that case; such properties having been under the
management of one person with full power to lease, to collect rents, to issue receipts, to bring suits, to sign
letters and contracts and to endorse notes and checks; the above conditions having existed for more than 10
years since the acquisition of the above properties; and no testimony having been introduced as to the purpose
"in creating the set up already adverted to, or on the causes for its continued existence." 11 The conclusion that
emerged had all the imprint of inevitability. Thus: "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." 12
It may be said that there could be a differentiation made between the circumstances above detailed and those
existing in the present case. It does not suffice though to preclude the applicability of the Evangelista decision.
Petitioners could harp on these being only one transaction. They could stress that an affidavit of one of them
found in the Bureau of Internal Revenue records would indicate that their intention was to house in the building
acquired by them the respective enterprises, coupled with a plan of effecting a division in 10 years. It is a little
surprising then that while the purchase was made on October 31, 1950 and their brief as petitioners filed on
October 20, 1965, almost 15 years later, there was no allegation that such division as between them was in fact
made. Moreover, the facts as found and as submitted in the brief made clear that the building in question
continued to be leased by other parties with petitioners dividing "equally the income . . . after deducting the
expenses of operation and maintenance . . . " 13 Differences of such slight significance do not call for a different
ruling.

56

It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be deemed
successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of an authoritative
decision; it recognized its binding character. There is clearly no merit to the second error assigned by
petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in acquiring the
Gibbs Building, established a partnership subject to income tax as a corporation under the National Internal
Revenue Code is likewise untenable. In their discussion in their brief of this alleged error, stress is laid on their
being co-owners and not partners. Such an allegation was likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly
rejected by the Court of Tax Appeals." 14 Then came the explanation why: "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 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'." 15 The opinion went on to summarize the matter aptly: "For purposes of
the tax on corporations, our National Internal Revenue Code, include these partnerships with the exception
only of duly registered general co-partnerships 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." 16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter
incorrectly. There is no warrant for the assertion that it failed to apply the settled law to uncontroverted facts. Its
decision cannot be successfully assailed. Moreover, an observation made in Alhambra Cigar & Cigarette
Manufacturing Co. v. Commissioner of Internal Revenue, 17 is well-worth recalling. Thus: "Nor as a matter of
principle is it advisable for this Court to set aside the conclusion reached by an agency such as the Court of Tax
Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless, as did not happen here, there has
been an abuse or improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums of
P37,128.00 as income tax due from the partnership formed by herein petitioners for the years 1951 to 1954 and

57

P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision becomes final, plus the
corresponding surcharge and interest in case of delinquency," is affirmed. With costs against petitioners.
||| (Reyes v. Commr., G.R. No. L-24020-21, July 29, 1968) [G.R. No. 45425. April 29, 1939.]
JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs. THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Solicitor-General Tuason for appellee.
SYLLABUS
1. PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF PROPERTY; SWEEPSTAKES;
INCOME TAX. According to the stipulated facts the plaintiffs organized a partnership of a civil nature
because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the
prize which they may win, as they did in fact in the amount of P60,000 (article 166C, Civil Code). The
partnership was not only formed, but upon the organization thereon and the winning of the prize, J. G.
personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as co-partner, as
such collected the prize, the office issued the check for P60,000 in favor of J. G. and company, and the said
partner, in the same capacity, collected the check. All these circumstances repel the idea that the plaintiffs
organized and formed a community of property only.
2. ID.; ID.; ID.; ID. Having organized and constituted a partnership of a civil nature, the said entity
is the one bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of
Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiffs' contention that the
tax should be prorated among them and paid individually, resulting in their exemption from the tax.
DECISION
IMPERIAL, J p:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum
of P1,863.44, with legal interest thereon, which they paid under protest by way of income tax. They
appealed from the decision rendered in the case on October 23, 1936 by the Court of First Instance of the
City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
"Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable Court the
case upon the following statement of facts:
"1. That plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal Revenue of the Philippines;
"2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:
1. Jose Gatchalian P0.18
2. Gregoria Cristobal .18

58

3. Saturnina Silva .08

4. Guillermo Tapia .13
5. Jesus Legaspi .15
6. Jose Silva .07
7. Tomasa Mercado .08
8. Julio Gatchalian .18
9. Emiliana Santiago .18
10. Maria C. Legaspi .16
11. Francisco Cabral .13
12. Gonzalo Javier .14
13. Maria Santiago .17
14. Buenaventura Guzman .13
15. Mariano Santos .14

Total 2.00
"3. That immediately thereafter but prior to December 16, 1934, plaintiffs purchased, in
the ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the
said ticket was registered in the name of Jose Gatchalian and Company;
"4. That as a result of the drawing of the sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of
P50,000 and that the corresponding check covering the above-mentioned prize of P50,000 was
drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company
against the Philippine National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;
"5 That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by Jose
Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose
Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof;
"6. That on January 8, 1935, the defendant made an assessment against Jose
Gatchalian & Company requesting the payment of the sum of P1,499.94 to the deputy
provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January
20, 1935 within which to pay the said amount of P1,499.94, a copy of which letter marked
Exhibit B is inclosed and made a part hereof;
"7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is attached and made a part hereof, requesting
exemption from the payment of the income tax to which reply there were enclosed fifteen (15)
separate individual income tax returns filed separately by each one of the plaintiffs, copies of

59

which returns are attached and marked Exhibits D-1 to D-15, respectively, in order of their
names listed in the caption of this case and made parts hereof; a statement of sale signed by
Jose Gatchalian showing the amounts put up by each of the plaintiffs to cover up the cost price
of P2 of said ticket, copy of which statement is attached and marked as Exhibit E and made a
part hereof; and a copy of the affidavit signed by Jose Gatchalian dated December 29, 1934 is
attached and marked Exhibit F and made part hereof;
"8. That the defendant in his letter dated January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the
payment of tax and reiterated his demand for the payment of the sum of P1,499.94 as income
tax and gave plaintiffs until February 10, 1935 within which to pay the said tax;
"9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the
defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs through
their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on
May 13, 1935 issued a warrant of distraint and levy against the property of the plaintiffs, a copy
of which warrant marked Exhibit I is enclosed and made a part hereof;
"10. That to avoid embarrassment arising from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and
Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is
attached and marked Exhibit J and made a part hereof, and requested defendant that plaintiffs
be allowed to pay under protest the balance of the tax and penalties by monthly installments;
"11. That plaintiffs' request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two solvent
persons to guarantee prompt payment of each installments as it becomes due;
"12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is
inclosed and made a part hereof, to guarantee the payment of the balance of the alleged tax
liability by monthly installments at the rate of P118.70 a month, the first payment under protest
to be effected on or before July 31, 1935;
"13. That on July 16, 1935 the said plaintiffs formally protested against the payment of
the sum of P602.51, a copy of which protest is attached and marked Exhibit L but that
defendant in his letter dated August 1, 1936 overruled the protest and denied the request for
refund of the plaintiffs;
"14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of the bond filed by them, the defendant in his letter
dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered the municipal
treasurer of Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued
against the plaintiffs on March 13, 1935;
"15. That in order to avoid annoyance and embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria

60

Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan,
Bulacan. the sum of P1,260.93 representing the unpaid balance of the income tax and penalties
demanded by defendant as evidenced by income tax receipt No. 35811 which is attached and
marked Exhibit N and made a part hereof; and that on September 3, 1936, the plaintiffs formally
protested to the defendant against the payment of said amount and requested the refund
thereof, copy of which is attached and marked Exhibit O and made part hereof; but that on
September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of
which is attached and marked Exhibit P and made a part hereof; and
"16. That plaintiffs demanded upon defendant the refund of the total sum of one
thousand eight hundred and sixty-three pesos and forty-four centavos (P1,863.44) paid under
protest by them but that defendant refused and still refuses to refund ,the said amount
notwithstanding the plaintiffs' demands.
"17. The parties hereto reserve the right to present other and additional evidence if
necessary."
Exhibit E referred to in the stipulation is of the following tenor:
"To whom it my concern:
"I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on
the 11th day of August, 1934, I sold parts of my share on ticket No. 178637 to the persons and
for the amount indicated below and the part of my share remaining is also shown to wit:
Purchaser Amount Address
1. Mariano Santos P0.14 Pulilan, Bulacan.
2. Buenaventura Guzman .13 Do.
3. Maria Santiago .17 Do.
4. Gonzalo Javier .14 Do.
5. Francisco Cabral .13 Do.
6. Maria C. Legaspi .16 Do.
7. Emiliana Santiago .13 Do.
8. Julio Gatchalian .13 Do.
9. Jose Silva .07 Do.
10. Tomasa Mercado .08 Do.
11. Jesus Legaspi .16 Do.
12. Guillermo Tapia .18 Do.
13. Saturnina Silva .08 Do.
14. Gregoria Cristobal .18 Do.
15. Jose Gatchalian .18 Do.

61

2.00 Total cost of said ticket; and that, therefore, the persons named above are entitled to the
parts of whatever prize that might be won by said ticket.
"Pulilan, Bulacan, P. I.
(Sgd.) "JOSE GATCHALIAN"
And a summary of Exhibits D-1 to D-15 inserted in the bill of exceptions as follows:
"RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
Exhibit Purchase Price Net
Name No. Price won Expenses prize
1. Jose Gatchalian D-1 P0.18 P4,425 P480 3,945
2. Gregoria Cristobal D-2 .18 4,575 2,000 2,575
3. Saturnina Silva D-3 .08 1,875 360 1,515
4. Guillermo Tapia D-4 .13 3,325 360 2,965
5. Jesus Legaspi by Maria
Cristobal D-5 .15 3,825 720 3,105
6. Jose Silva D-6 .08 1,875 360 1,615
7. Tomasa Mercado D-7 .07 1,875 360 1,515
8. Julio Gatchalian by Bea
triz Guzman D-8 .13 3,150 240 2,910
9. Emiliana Santiago D-9 .13 3,325 360 2,966
10. Maria C. Legaspi D-10 .16 4,100 960 3,140
11. Francisco Cabral D-11 .13 3,325 360 2965
12. Gonzalo Javier D-12 .14 3,325 360 2,965
13. Maria Santiago D-13 .17 4,350 360 3,990
14. Buenaventura Guzman D-14 .13 3,325 360 2,965
15. Mariano Santos D-15 .14 3,325 360 2,965

2.00 50,000"
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to
the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without
a personality of its own; in the first case it is admitted that the partnership thus formed is liable for the
payment of income tax, whereas if there was merely a community of property, they are exempt from such
payment; and (2) whether they should pay the tax collectively or whether the latter should be prorated
among them and paid individually.
The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:

62

"SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding calendar year from all sources by every corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association or
insurance company, organized in the Philippine Islands, no matter how created or organized,
but not including duly registered general co-partnerships (compaias colectivas), a tax of three
per centum upon such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding calendar year from all sources
within the Philippine Islands by every corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance company organized, authorized, or
existing under the laws of any foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or otherwise: Provided, however, That
nothing in this section shall be construed as permitting the taxation of the income derived from
dividends or net profits on which the normal tax has been paid.
"The gain derived or loss sustained from the sale or other disposition by a corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association, or
insurance company, or property, real, personal, or mixed, shall be ascertained in accordance
with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred and
thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six.
"The foregoing tax rate shall apply to the net income received by every taxable
corporation, joint-stock company, partnership, joint account (cuenta en participacion),
associations or insurance company in the calendar year nineteen hundred and twenty and in
each year thereafter."
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from
the payment of income tax under the law. But according to the stipulated facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole
purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000
(article 1665, Civil Code). The partnership was not only formed, but upon the organization thereof and the
winning of the prize, Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the office issued the check for
P50,000 in favor of Jose Gatchalian and company, and the said partner. in the same capacity, collected the
said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as
amended by section 2 of Act No. 3761. There is no merit in plaintiffs' contention that the tax should be
prorated among them and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the
plaintiff. appellants. So ordered.

63

||| (Gatchalian v. Collector of Internal Revenue, G.R. No. 45425, April 29, 1939) [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.
SYLLABUS
1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. 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.
2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR NOT LIABLE FOR THE
PAYMENT THEREOF. 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. 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.
DECISION
GANCAYCO, J p:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes
is the issue in this petition. prLL
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 to Marenir 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. LLphil
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

64

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. Cdpr
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 them
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. 1213, 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:

65

"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 (companias
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,
jointstock companies, joint accounts (cuentas en participation), associations or insurance
companies, but does not include duly registered general co-partnerships (companias
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 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 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.

66

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 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 circumstance 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 Evangelista, 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:

67

"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 coowners 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 Floyd 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 plaintiff's 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.)

68

'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. 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.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of
March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
||| (Pascual v. Commr., G.R. No. 78133, October 18, 1988) [G.R. No. L-46029. June 23, 1988.]
N.V.
REEDERIJ
"AMSTERDAM"
and
ROYAL
INTEROCEAN
LINES, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
GANCAYCO, J p:
The issue posed in this petition is the income tax liability of a foreign shipping corporation which called on
Philippine ports to load cargoes for foreign destination on two occasions in 1963 and 1964, respectively, and
which collected freight fees on these transactions.
From March 27 to April 30, 1963, MV "Amstelmeer," and from September 24 to October 28, 1964, MV
"Amstelkroon," both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports
to load cargoes for foreign destination. The freight fees for these transactions were paid abroad in the amount
of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean

69

Lines acted as husbanding agent for a fee or commission on said vessels. No income tax appears to have been
paid by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding income tax
returns for and in behalf of the former under Section 15 of the National Internal Revenue Code. Applying the
then prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij
"Amsterdam" for 1963 and 1964 amounted to P382,882.50 and P535.052.00, respectively. On June 30, 1967,
respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and P262,904.94 as
deficiency income tax for 1963 and 1964, respectively, as a non-resident foreign corporation not engaged in
trade or business in the Philippines under Section 24 (b) (1) of the Tax Code. LibLex
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the
Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the
aforementioned vessels computed at the exchange rate of P2.00 to US$1.00 1 and paid the tax thereon in the
amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e)
of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the same two dates,
petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" filed a
written protest against the abovementioned assessment made by the respondent Commissioner which protest
was denied by said respondent in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a petition
for review with the respondent Court of Tax Appeals praying for the cancellation of the subject assessment.
After due hearing, the respondent court, on December 1, 1976, rendered a decision modifying said
assessments by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioners filed a
motion for reconsideration of said decision but this was denied by the respondent court. Hence, this petition for
review where petitioners raised the following issues:
"A. WHETHER N.V. REEDERIJ 'AMSTERDAM,' NOT HAVING ANY OFFICE OR PLACE OF
BUSINESS IN THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS
FOR THE PURPOSE OF LOADING CARGOES ONLY TWICE ONE IN 1963 AND
ANOTHER IN 1964 SHOULD BE TAXED AS A FOREIGN CORPORATION NOT ENGAGED
IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (1) OF THE TAX
CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE OR
BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO SECTION 37
(e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM"
SHOULD BE CONVERTED INTO PHILIPPINE PESOS AT THE OFFICIAL RATE OF P2.00 TO
US$1.00, OR AT P3.90 TO US$1.00."
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij "AMSTERDAM" is a nonresident foreign corporation because it allegedly disregarded Section 163 of Revenue Regulations No. 2
(providing for the determination of the net income of foreign corporations doing business in the Philippines) and
in holding that the foreign exchange receipts of said petitioner for purposes of computing its income tax should
be converted into Philippine pesos at the rate of P3.90 to US$1.00 instead of P2.00 to US$1.00.
The petition is devoid of merit.

70

Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business in the
Philippines. It does not have a branch office in the Philippines and it made only two calls in Philippine ports, one
in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or
business, its business transactions must be continuous. A casual business activity in the Philippines by a
foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines
for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court
"A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax,
corporations are classified into (a) domestic corporations and (b) foreign corporations. (Sec.
24(a) and (b), Tax Code.) Foreign corporations are further classified into (1) resident foreign
corporations and (2) non-resident foreign corporations. (Sec. 24(b) (1) and (2). Tax Code.) A
resident foreign corporation is a foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein (Sec. 84(g), Tax Code) while a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and without the Philippines,
but a foreign corporation is taxed only on its income from sources within the Philippines. (Sec.
24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However, while a foreign corporation doing
business in the Philippines is taxable on income solely from sources within the Philippines, it is
permitted to claim deductions from gross income but only to the extent connected with income
earned in the Philippines (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign
corporations not doing business in the Philippines are taxable on income 'from all sources within
the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical
or casual gains, profits and income and capital gains.' The tax is 30% (now 35%) of such gross
income. (Sec. 24 (b) (1), Tax Code.)
At the time material to this case, certain corporations were given special treatment, namely,
building and loan associations operating as such in accordance with Section 171 of the
Corporation Law, educational institutions, domestic life insurance companies and foreign life
insurance companies doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.) It bears
emphasis, however, that foreign life insurance companies which were not doing business in the
Philippines were taxable as other foreign corporations not authorized to do business in the
Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij 'Amsterdam' is a non-resident foreign
corporation, organized and existing under the laws of The Netherlands with principal office in
Amsterdam and not licensed to do business in the Philippines. (pp. 8-81, CTA records.) As a
non-resident foreign corporation, it is thus a foreign corporation, not engaged in trade or
business within the Philippines and not having any office or place of business therein. (Sec.
84(h), Tax Code.) As stated above, it is therefore taxable on income from all sources within the

71

Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations,

remunerations, emoluments, or other fixed or determinable annual or periodical or casual gains,
profits and income and capital gains, and the tax is equal to thirty per centum of such amount,
under Section 24(b) (1) of the Tax Code. The accent is on the words 'of such amount.'
Accordingly, petitioner N. V. Reederij 'Amsterdam' being a non-resident foreign corporation, its
taxable income for purposes of our income tax law consists of its gross income from all sources
within the Philippines. prLL
The law seems clear and specific. It thus calls for its application as worded as it leaves no
leeway for interpretation. The applicable provision imposes a tax on foreign corporations falling
under the classification of non-resident corporations without any exceptions or conditions, unlike
in the case of foreign corporations engaged in trade or business within the Philippines which
contained (at the time material to this case) an exception with respect to foreign life insurance
companies. Adherence to the provision of the law, which specifies and determines the taxable
income of, and the rate of income tax applicable to, non-resident foreign corporations, without
mentioning any exceptions, would therefore lead to the conclusion that petitioner N.V. Reederij
'Amsterdam' is subject to income tax on gross income from all sources within the Philippines."
A foreign corporation engaged in trade or business within the Philippines, or which has an office or place of
business therein, is taxed on its total net income received from all sources within the Philippines at the rate of
25% upon the amount but which taxable net income does not exceed P100,000.00, and 35% upon the amount
but which taxable net income exceeds P100,000.00. 2 On the other hand, a foreign corporation not engaged in
trade or business within the Philippines and which does not have any office or place of business therein is taxed
on income received from all sources within the Philippines at the rate of 35% of the gross income. 3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section 163 of
the Income Tax Regulations but these provisions refer to a foreign corporation engaged in trade or business in
the Philippines and not to a foreign corporation not engaged in trade or business in the Philippines like
petitioner-ship-owner herein. Thus, the respondent court aptly ruled:
"It must be stressed, however, that Section 37 (e) of the Code, as implemented by Section 163
of the Regulations, provides the rule of the determination of the net income taxable in the
Philippines of a foreign steamship company doing business in the Philippines. To assure that
non-resident foreign steamship companies not engaged in business in the Philippines and not
having any office or place of business herein are not covered therein, the regulations explicitly
and clearly provide that 'the net income of a foreign steamship company doing business in or
from this country is ascertained,' under the formula contained therein, 'for the purpose of the
income tax.' The reason is easily discernible. As stated above, the taxable income of nonresident foreign corporations consists of its gross income from all sources within the Philippines.
Accordingly, a foreign steamship corporation derives income partly from sources within and
partly from sources without the Philippines if it is carrying on a business of transportation
service between points in the Philippines and points outside the Philippines. (Vol. 3, 1965,

72

Federal Taxes, Par. 16389.) Only then does Section 37 (e) of the Tax Code, as implemented by
Section 163 of the Regulations, apply in computing net income subject to tax. There is no basis
therefore for an assertion 'that Section 37 (e) does not distinguish between a foreign corporation
engaged in business in the Philippines and a foreign corporation not engaged in business in the
Philippines.'" (p. 84, C.T.A. records.) (Decision, pp. 11-12.)
The conversion rate of P2.00 to US$1.00 which petitioners claim should be applicable to the income of
petitioners for income tax purposes instead of P3.90 to $1.00 is likewise untenable. The transactions involved in
this case are for the taxable years 1963 and 1964. Under Rep. Act no. 2609, the monetary board was
authorized to fix the legal conversion rate for foreign exchange. The free market conversion rate during those
years was P3.90 to US$1.00. LLpr
'This conversion rate issue was definitely settled by this Court in the case of Commissioner of
Internal Revenue vs. Royal Interocean Lines and the Court of Tax Appeals, 4 to wit:
"It should be noted that on July 16, 1959, the policy incorporated in Circular No. 20 and
implemented in subsequent circulars was relaxed with the enactment of Republic Act No.
2609 which directed the monetary authorities to take steps for the adoption of a four-year
program of gradual decontrol, during which the Monetary Board, with the approval of the
President, could and did fix the conversion rate of the Philippine peso to the US dollar at a ratio
other than that prescribed in Section 48 of Republic Act 265. During the period involved in the
case at bar, the free market conversion rate ranged from P3.47 to P3.65 to a US dollar at which
rate the freight fees in question were computed in the contested assessment. Inasmuch as said
fees were revenues derived from 'foreign exchange' transactions, it follows necessarily that the
petitioner was fully justified in computing the taxpayer's receipts at said free market rates.
xxx xxx xxx
"The case of the United States Lines, on which the appealed decision of the Court
of Tax Appeals is anchored, refers to transactions that took place before the approval
of Republic Act 2609 on July 16, 1959 when the only legal rate of exchange obtaining in
the Philippines was P2 to US$1, and all foreign exchange had to be surrendered to the
Central Bank subject to its disposition pursuant to its own rules and regulations. Upon the
other hand, the present case refers to transactions that took place during the effectivity
of Republic Act 2609 when there was, apart from the parity rate, a legal free market
conversion rate for foreign exchange transactions, which rate had been fixed in open
trading, such as those involved in the case at bar."
Indeed, in the course of the investigation conducted by the Commissioner on the accounting records of
petitioner Royal Interocean Lines, it was verified that when said petitioner paid its agency fees for services
rendered as husbanding agent of the said vessels, it used the conversion rate of P3.90 to US$1.00. 5 It is now
estopped from claiming otherwise in this case.
WHEREFORE, the petition is DENIED with costs against petitioners. This decision is immediately executory
and no extension of time to file motion for reconsideration shall be entertained.
SO ORDERED.

73

||| (N.V. Reederij "Amsterdam" v. Commr., G.R. No. L-46029, June 23, 1988) [G.R. No. 54908. January 22,
1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL
CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION
and the COURT OF TAX APPEALS, respondents.
[G.R. No. 80041. January 22, 1990.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MITSUBISHI METAL
CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION
and the COURT OF TAX APPEALS, respondents.
Gadioma Law Offices for respondents.
SYLLABUS
1. REMEDIAL LAW; APPEAL; FINDINGS OF FACT OF COURT OF APPEALS RESPECTED; EXCEPTION.
We have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only
be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error
or abuse on the part of the tax court.
2. ID.; ID.; ID.; ID.; CASE AT BAR. Ordinarily, we could give due consideration to the holding of respondent
court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these
cases, however, warrant a departure from said general rule, since we are convinced that there is a
misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative in nature.
3. TAXATION; EXEMPTION THEREFROM; STRICTLY CONSTRUED. It is too settled a rule in this
jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule
and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is
in fact covered by the exemption so claimed.
4. ID.; ID.; SECTION 29(b) (7) (4) OF THE TAX CODE; CASE AT BAR NOT COVERED. The principal issue
in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code and, therefore, exempt
from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of
Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are
exempt from taxes under the code. The loan and sales contract between Mitsubishi and Atlas does not contain
any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as
creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language
used in the document, one prestation was in consideration of the other. The specific terms and the reciprocal
nature of their obligations make it implausible, if not vacuous, to give credit to the cavalier assertion that
Mitsubishi was a mere agent in said transaction. Surely, Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being
procured would be used as a loan to and in consideration for importing copper concentrates from Atlas. Such
an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract
of agency. If that had been the purpose as respondent court believes, said corporations would have specifically

74

so stated, especially considering their experience and expertise in financial transactions, not to speak of the
amount involved and its purchasing value in 1970. Respondents postulate that Mitsubishi had to be a conduit
because Eximbank's charter prevents it from making loans except to Japanese individuals and corporations.
We are not impressed. Not only is there a failure to establish such submission by adequate evidence but it
posits the unfair and unexplained imputation that, for reasons subject only of surmise, said financing institution
would deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee. Definitely, the taxability of a party cannot be blandly
glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive
evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this
discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while
international comity is invoked in this case on the nebulous representation that the funds involved in the loans
are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the
violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract
for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with
their governments, could be availed of to take advantage of the tax exemption law under discussion.
DECISION
REGALADO, J p:
These cases, involving the same issue being contested by the same parties and having originated from the
same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein. cSIADa
The records reflect that on April 17,1970, Atlas Consolidated Mining and Development Corporation (hereinafter,
Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a
Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected
expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi
agreed to extend a loan to Atlas in the amount of $20,000,000.00, United States currency, for the installation of
a new concentrator for copper production. Atlas, in turn, undertook to sell to Mitsubishi all the copper
concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that
$9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank, for short) obviously for
purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of
Y4,320,000,000.00, at about the same time as the approval of its loan for Y2,880,000,000.00 from a consortium
of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at
the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the
loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to
Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back
the total amount of loan by September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter
totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of

75

P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal
Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be
applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of
Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest
in the claim for tax credit in favor of Atlas. 4
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition
for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the
claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and
financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the
basis for private respondents' claim for exemption from paying the tax on the interest payments on the loan as
earlier stated. It was further claimed that the interest payments on the loan from the consortium of Japanese
banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The
provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A), 6 which excludes from
gross income:
"(A) Income received from their investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign
governments, (2) financing institutions owned, controlled, or enjoying refinancing from them,
and (3) international or regional financing institutions established by governments."
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 16, 1977 but was later reset
upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being
reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16,
1976, the said division recommended to petitioner the approval of private respondent's claim. However, before
action could be taken thereon, respondent court scheduled the case for hearing on September 30, 1977, during
which trial private respondents presented their evidence while petitioner submitted his case on the basis of the
records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of
Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material
averments of private respondents when he supposedly prayed "for judgment on the pleadings without offering
proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers and documents
pertaining to the loan of Y4,320,000,000.00 obtained by Mitsubishi from Eximbank's show that this was the
same amount given to Atlas. It also observed that the money for the loans from the consortium of private
Japanese banks in the sum of Y2,880,000,000.00 "originated" from Eximbank. From these, respondent court
concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit
through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated
Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this
Court, docketed herein as G.R. No. 54908.

76

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of
P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to
the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for
exemption. prLL
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as
CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on
March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal
was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this
Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R.
No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by
Mitsubishi is excludible from gross income taxation pursuant to Section 29 (b) (7) (A) of the tax code and,
therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a
mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on
loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should
be deemed to have admitted the allegations of the private respondents when it submitted the case on the basis
of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner
nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its
allegations. The records of the Bureau of Internal Revenue relevant to the case were duly submitted and
admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not only on the pleadings but on the evidence
adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized
admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest
respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a
showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling
circumstances obtaining and proven in these cases, however, warrant a departure from said general rule, since
we are convinced that there is a misapprehension of facts on the part of the tax court to the extent that its
conclusions are speculative in nature. prLL
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to
Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas
as the seller of the copper concentrates. From the categorical language used in the document, one prestation
was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it

77

implausible, if not vacuous, to give credit to the cavalier assertion that Mitsubishi was a mere agent in said
transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in
its loan application with the former was that the amount being procured would be used as a loan to and in
consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of purpose could
not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as
respondent court believes, said corporations would have specifically so stated, especially considering their
experience and expertise in financial transactions, not to speak of the amount involved and its purchasing value
in 1970. LibLex
A thorough analysis of the factual and legal ambience of these eases impels us to give weight to the following
arguments of petitioner:
"The nature of the above contract shows that the same is not just a simple contract of loan. It is
not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and
MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at
the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to
MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the
installed concentrator.
"Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term
was the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in
order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans
from other sources. And from what sources, it is immaterial as far as ATLAS in concerned. In
this case, MITSUBISHI obtained the $20 million from the EXIMBANK of Japan and the
consortium of Japanese banks financed through the EXIMBANK of Japan.
"When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a
private entity and not as a conduit of the consortium of Japanese banks or the EXIMBANK of
Japan. While the loans were secured by MITSUBISHI primarily 'as a loan to and in
consideration for importing copper concentrates from ATLAS,' the fact remains that it was a
loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
"Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK that was intended to be benefited. It is MITSUBISHI which stood
to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only signatories to
the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that
MITSUBISHI acted for and in behalf of EXIMBANK of Japan nor of any entity, private or public,
for that matter.
"Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a
contract of loan is completed, the money ceases to be the property of the former owner and
becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).

78

"In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK of
Japan, said amount ceased to be the property of the bank and became the property of
MITSUBISHI.
"The conclusion is indubitable: MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan contract with
EXIMBANK of Japan.
"The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different
from the interest income paid by MITSUBISHI to EXIMBANK of Japan. What was the subject of
the 15% withholding tax is not the interest income paid by MITSUBISHI to EXIMBANK but the
interest income earned by MITSUBISHI from the loan to ATLAS. . . . " 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not
appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other
considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a month after
the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of
loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper
concentrates from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi, a
standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such
stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit.
Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual,
especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the
same are in line with the provisions and objectives of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making
loans except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to
establish such submission by adequate evidence but it posits the unfair and unexplained imputation that, for
reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to
accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real
obligee. prcd
The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth
thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore,
the remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's
obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner
or procedure for the payment of the latter's obligation is their own concern. It should also be noted that
Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishi's contract with
Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and
including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation
is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to

79

prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge.
Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax
code, are entitled to exemption and which should indispensably be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic
analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution
of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of
pervasive relevance at this time, that while international comity is invoked in this case on the nebulous
representation that the funds involved in the loans are those of a foreign government, scrupulous care must be
taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a
Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities,
which in turn will negotiate independently with their governments, could be availed of to take advantage of the
tax exemption law under discussion. cdphil
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18,
1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE. cIHSTC
SO ORDERED.
||| (Commr. v. Mitsubishi Metal Corp., G.R. No. 54908, 80041, January 22, 1990)