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1. EVANGELISTA vs. COLLECTOR OF INTERNAL
REVENUE
G.R. No. L-9996, October 15, 1957
This is a petition filed by Eufemia Evangelista, Manuela
Evangelista and Francisca Evangelista, for review of a decision of
the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are
liable for the income tax, real estate dealer's tax and the residence
tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of
P6,878.34, which is hereby affirmed and the petition for review
filed by petitioner is hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of
P59,1400.00 which amount together with their personal monies
was used by them for the purpose of buying real properties;
2. That on February 2, 1943, they bought from Mrs. Josefina
Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon from the sum of P100,000.00; this
property has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus
21 parcels of land with an aggregate area of 3,718.40 sq. m.
including improvements thereon for P130,000.00; this property
has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular
Investments Inc., a lot of 4,353 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value
of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable
a lot of 8,371 sq. m. including improvements thereon for
P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed
their brother Simeon Evangelista to 'manage their properties
with full power to lease; to collect and receive rents; to issue
receipts therefor; in default of such payment, to bring suits
against the defaulting tenants; to sign all letters, contracts,
etc., for and in their behalf, and to endorse and deposit all
notes and checks for them;
7. That after having bought the above-mentioned real properties
the petitioners had the same rented or leases to various
tenants;
8. That from the month of March, 1945 up to an including
December, 1945, the total amount collected as rents on their
real properties was P9,599.00 while the expenses amounted
to P3,650.00 thereby leaving them a net rental income of
P5,948.33;
9. That on 1946, they realized a gross rental income of in the
sum of P24,786.30, out of which amount was deducted in the
sum of P16,288.27 for expenses thereby leaving them a net
rental income of P7,498.13; and,
10. That in 1948, they realized a gross rental income of
P17,453.00 out of the which amount was deducted the sum of
P4,837.65 as expenses, thereby leaving them a net rental
income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector
of Internal Revenue demanded the payment of income tax on
corporations, real estate dealer's fixed tax and corporation
residence tax for the years 1945-1949, computed, according to
assessment made by said officer, as follows:
Income taxes (including surcharge and compromise) = P6,157.09
Real estate dealer's fixed tax (including penalty) = P527.00
Residence taxes of corporation (including surcharge) = P6,878.34
ISSUE:
Whether or not 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.
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HELD:
With respect to the tax on corporations, the issue hinges on the
meaning of the terms "corporation" and "partnership," as used in
section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be
levied, assessed, collected, and paid annually upon the
total net income received in the preceding taxable year
from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter
how created or organized but not including duly
registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum
of the following: . . .
SEC. 84 (b). The term 'corporation' includes
partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en
participacion), associations or insurance companies, but
does not include duly registered general copartnerships.
(compañias colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons
bind themselves to contribute money, properly, or
industry to a common fund, with the intention of dividing
the profits among themselves.
Pursuant to the article, the essential elements of a partnership
are two, namely: (a) an agreement to contribute money, property
or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed
to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they
did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was
to engage in real estate transactions for monetary gain and then
divide the same among themselves, because:
1. Said common fund was not something they found already
in existence. It was not property inherited by them pro
indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to
establish said common fund.
2. They invested the same, not merely not merely in one
transaction, but in a series of transactions. On February
2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was
soon followed on April 23, 1944, by the acquisition of
another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14.
The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not
limited to the conservation and preservation of the
aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other
words, one cannot but perceive a character of habitually
peculiar to business transactions engaged in the purpose
of gain.
3. The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein.
The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that
there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the
management of one person, namely Simeon Evangelista,
with full power to lease, to collect rents, to issue receipts,
to bring suits, to sign letters and contracts, and to indorse
and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same
belonged to a corporation or business and enterprise
operated for profit.
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5. The foregoing conditions have existed for more than ten
(10) years, or, to be exact, over fifteen (15) years, since
the first property was acquired, and over twelve (12)
years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already
adverted to, or on the causes for its continued existence.
They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the
intent necessary to constitute a partnership, the collective effect of
these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only one or two
of the aforementioned circumstances were present in the cases
cited by petitioners herein, and, hence, those cases are not in
point.
Petitioners insist, however, that they are mere co-owners, not
copartners, for, in consequence of the acts performed by them, a
legal entity, with a personality independent of that of its members,
did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals. To begin with, the
tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships",
in the technical sense of the term. Thus, for instance, section 24
of said Code exempts from the aforementioned tax "duly registered
general partnerships which constitute precisely one of the most
typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need not
be undertaken in any of the standard forms, or in conformity with
the usual requirements of the law on partnerships, in order that
one could be deemed constituted for purposes of the tax on
corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal
personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general
copartnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may
not be amiss to add that petitioners' allegation to the effect that
their liability in connection with the leasing of the lots above
referred to, under the management of one person — even if true,
on which we express no opinion — tends to increase the similarity
between the nature of their venture and that corporations, and is,
therefore, an additional argument in favor of the imposition of said
tax on corporations.
For purposes of the tax on corporations, our National Internal
Revenue Code, includes these partnerships — with the exception
only of duly registered general copartnerships — within the purview
of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is
concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of
Commonwealth Act No. 465 provides in part:
Entities liable to residence tax. - Every corporation, no
matter how created or organized, whether domestic or
resident foreign, engaged in or doing business in the
Philippines shall pay an annual residence tax of five
pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with
the following schedule: . . .
The term 'corporation' as used in this Act includes
joint-stock company, partnership, joint account (cuentas
en participacion), association or insurance company, no
matter how created or organized.
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Lastly, the records show that petitioners have habitually engaged
in leasing the properties above mentioned for a period of over
twelve years, and that the yearly gross rentals of said properties
from June 1945 to 1948 ranged from P9,599 to P17,453. Thus,
they are subject to the tax provided in section 193 (q) of our
National Internal Revenue Code, for "real estate dealers," inasmuch
as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in
the business of buying, selling, exchanging, leasing, or
renting property or his own account as principal and
holding himself out as a full or part time dealer in real
estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of
three thousand pesos or more a year. . .
2. ROSALES v. RALLOS
G.R. No. 1147. September 24, 1903
CONTRACT; PARTNERSHIP; WHAT CONSTITUTES. — An
agreement between two persons to operate a cockpit, by which one is
to contribute his services and the other to provide the capital, the profits
to be divided between them, constitutes a partnership.
FACTS:
The plaintiff-appellant claimed that he, the defendant, and one Castro
were partners in the management of a cockpit. The defendant denied
this. The court found that no such partnership existed and ordered
judgment for the defendant. The plaintiff moved for a new trial, which
was denied.
It is not contradicted that the plaintiff sent defendant a demand letter for
the settlement of their accounts. These demands the defendant
answered with the following letter:
MY DEAR BOY: I am working at these accounts. Perhaps I will
have them ready tomorrow morning. But I have no money,
unless Mr. Spitz comes on one of these boats, when we will
have funds.
Yours, FLORENTINO RALLOS.
April 13, 1902.
On May 7 the defendant wrote another letter to the plaintiff which is in
part as follows:
CEBU, May 7, 1902.
Señor Don Escolastico Duterte.
DEAR BOY: In your letter which I received this afternoon, you
designate me as a little less than embezzler. I have in my
possession the money of no one but myself. If I have not called
you an embezzler or something worse on account of all that you
have done and are doing with me, reflect whether you have
reason to write me in the manner you do. I have done you a
favor in admitting you into the cockpit partnership, as the only
manner in which I might collect what you owe me. I think you
have made a mistake, and I will frankly refresh your memory.
You are indebted to me clearly one thousand pesos, advanced
for your former market contract.
In the preceding year, the defendant sent to the plaintiff statements of
the business for the months of June, July, and August. They are in legal
effect the same. It shows net share of the profits of Ticoy which is 1/3
of the net receipts. Ticoy stands for the plaintiff. He rendered services
in the management of the cockpit, and that the defendant paid him
money on account of the cockpit.
The defendant, after denying that the plaintiff was his partner, testified,
among other things, that indeed profits were divided but not as partners.
A portion was given to Señor Duterte, the plaintiff, solely because he
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was a friend who aided and encouraged the cockpit. According to him,
he did not have an agreement with them. As a private individual, plaintiff
had no duty to perform, except when he had to preside at the cockpit.
Further, he is not aware that they, or either of them, rendered other
services. He pays them out of pleasure, as friends. Hence, plaintiff has
no legal interest in the cockpit.
Castro, the other supposed partner, and a witness for the defendant,
denied that he was such a partner.
ISSUE:
Whether or not there was a partnership based on evidence and
testimony.
RULING:
YES. We have, then, the testimony of the plaintiff that he made a verbal
contract of partnership with the defendant for this business,
uncontradicted evidence that he performed services in connection with
it; that the defendant paid him the money on account thereof and sent
him accounts for three months showing his interest to be one-third of
the profits in addition to the $5 each day, and wrote him a letter in which
he said that he admitted the plaintiff into the partnership in order to
collect what the plaintiff owed him on another transaction.
The reason which the defendant gives for paying the plaintiff money is
not credible.We see no way of explaining the accounts submitted by
the defendant to plaintiff on any theory other than that there was a
partnership between them up to September 1, 1901, at least. The letter
of the defendant, in which he says that he admitted the plaintiff into the
partnership, can be explained on no other theory.
That there was an agreement to share the profits is clearly proved by
the accounts submitted. The plaintiff testified that the profits and losses
were to be shared equally. But even omitting this testimony, the case is
covered by article 1689 of the Civil Code, which provides that, in the
absence of agreement as to the losses, they shall be shared as the
gains are.
Article 1668 of the Civil Code is not applicable to the case. No real
estate was contributed by any member. The partnership did not
become the owner of the cockpit. It is undisputed that this was owned
by the defendant and that the partnership paid him ten dollars a day for
the use of it.
3. Ona v. CIR
45 scra 74
Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña
and her five children. A civil case was instituted for the settlement of
her state, in which Oña was appointed administrator and later on the
guardian of the three heirs who were still minors when the project for
partition was approved. This shows that the heirs have undivided ½
interest in 10 parcels of land, 6 houses and money from the War
Damage Commission.
Although the project of partition was approved by the Court, no attempt
was made to divide the properties and they remained under the
management of Oña who used said properties in business by leasing
or selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As a
result, petitioners’ properties and investments gradually increased.
Petitioners returned for income tax purposes their shares in the net
income but they did not actually receive their shares because this left
with Oña who invested them.
Based on these facts, CIR decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate income
tax, particularly for years 1955 and 1956. Petitioners asked for
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reconsideration, which was denied hence this petition for review from The term “partnership” includes a syndicate, group, pool, joint venture
CTA’s decision. or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on” with the
Issue:
exception only of duly registered general copartnerships — within the
W/N there was a co-ownership or an unregistered partnership purview of the term “corporation.” It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is
W/N the petitioners are liable for the deficiency corporate income tax concerned, and are subject to the income tax for corporations.
Held: Judgment affirmed.

Unregistered partnership. The Tax Court found that instead of actually

distributing the estate of the deceased among themselves pursuant to
the project of partition, the heirs allowed their properties to remain
under the management of Oña and let him use their shares as part of
the common fund for their ventures, even as they paid corresponding 4. Pascual and Dragon vs. CIR
income taxes on their respective shares. 166 scra 560
Yes. For tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment
the said common properties and/or the incomes derived therefrom are
Facts:
used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined  1965: Pascual and Dragon bought two parcels of land
in a project partition either duly executed in an extrajudicial settlement Three years later (or in 1968), they sold them to a corporation.
or approved by the court in the corresponding testate or intestate
proceeding. The reason is simple. From the moment of such partition,  1966: They bought another three parcels of land
the heirs are entitled already to their respective definite shares of the Four years later (or in 1970) sold those parcels of land.
estate and the incomes thereof, for each of them to manage and  Pascual and Dragon realized net profits in 1968 and 1970.
dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes in  Pascual and Dragon shared their gross profits.
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  They paid capital gains tax n 1973 and 1974 by availing of the
used with the intent of making profit thereby in proportion to his share, tax amnesties granted in those said years.
there can be no doubt that, even if no document or instrument were
 1979: Acting BIR Commissioner Plana assessed and required
executed, for the purpose, for tax purposes, at least, an unregistered to pay deficiency corporate income taxes for the years 1968 and
partnership is formed. 1970 (the years they sold the parcels of land).
For purposes of the tax on corporations, our National Internal Revenue
 Pascual and Dragon protested and used the 1974 tax
Code includes these partnerships — amnesties by way of defense.

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CIR’s contention:
- Commissioner informed petitioners that in the years 1968 and
1970, petitioners Pascual and Dragon as co-owners in the real
estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its
income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code 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.
Provisions the CIR relies on:
- Sec. 24. Rate of the tax on corporations.—There shall be levied,
assessed, collected, and paid annually upon the total net
income received in the preceding taxable year from all sources
by every corporation organized in, or existing under the laws
of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companies
collectives), a tax upon such income equal to the sum of the
following: ...
- Sec. 84(b). The term "corporation" includes partnerships,
no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participation), associations or
insurance companies, but does not include duly registered
general co-partnerships (companies colectivas).
CTA ruled in favor of CIR, relying on the ruling of Evangelista v.
Collector (discussion of distinctions between Evangelista and Pascual
vs. CIR later)
Issue:
WON the real estate transactions Pascual and Dragon entered into
formed an unregistered partnership or joint venture taxable as a
corporation
Held:
NO
There is a co-ownership, not a partnership taxable as a corporation
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.
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.
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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. 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.
Distinctions between Evangelista and Pascual vs. CIR:
Pascual vs. CIR:
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.
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.
Pascual vs. CIR:
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.
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.
5. OBILLOS v CIR
G.R. No. L-68118 October 29, 1985
FACTS:
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas &
Co., Ltd. on two lots. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The
company sold the two lots to petitioners for P178,708.12 on March 13.
Presumably, the Torrens titles issued to them would show that they
were co-owners of the two lots.
After having held the two lots for more than a year, the petitioners resold
them to the Walled City Securities Corporation and Olga Cruz Canda
for the total sum of P313,050. They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated the profit as
a capital gain and paid an income tax on one-half thereof or of P16,792.
ONe day before the expiration of the five-year prescriptive period, the
Commissioner of Internal Revenue required the four petitioners to pay
corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof. He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and
P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
He considered the share of the profits of each petitioner in the sum of
P33,584 as a " taxable in full (not a mere capital gain of which ½ is
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taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes
and penalties totalling P127,781.76 on their profit of P134,336, in
addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had
formed an unregistered partnership or joint venture within the meaning
of sections 24(a) and 84(b) of the Tax Code (Collector of Internal
Revenue vs. Batangas Trans. Co., 102 Phil. 822).
ISSUE:
Whether or not the petitioners formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax
Code.
HELD:
No.
We hold that it is error to consider the petitioners as having formed a
partnership under article 1767 of the Civil Code simply because they
allegedly contributed P178,708.12 to buy the two lots, resold the same
and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered
partnership would result in oppressive taxation and confirm the dictum
that the power to tax involves the power to destroy. That eventuality
should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were
co-owners pure and simple. To consider them as partners would
obliterate the distinction between a co-ownership and a partnership.
The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential purposes. If
later on they found it not feasible to build their residences on the lots
because of the high cost of construction, then they had no choice but
to resell the same to dissolve the co-ownership. The division of the
profit was merely incidental to the dissolution of the co-ownership which
was in the nature of things a temporary state. It had to be terminated
sooner or later.
Article 1769(3) of the Civil Code provides that "the sharing of gross
returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue,
67 Phil. 666, where 15 persons contributed small amounts to purchase
a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties
engaged in joint ventures for profit. Thus, in Oña vs.
** This view is supported by the following rulings of respondent
Commissioner:
Co-owership distinguished from partnership.—We find that the case at
bar is fundamentally similar to the De Leon case. Thus, like the De Leon
heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso
from their deceased parents; they did not contribute or invest additional
' capital to increase or expand the inherited properties; they merely
continued dedicating the property to the use to which it had been put
by their forebears; they individually reported in their tax returns their
corresponding shares in the income and expenses of the 'hacienda',
and they continued for many years the status of co-ownership in order,
as conceded by respondent, 'to preserve its (the 'hacienda') value and
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to continue the existing contractual relations with the Central Azucarera
de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653,
July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.—Co-
Ownership who own properties which produce income should not
automatically be considered partners of an unregistered partnership, or
a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all co-ownerships of
inherited properties to the tax on corporations, inasmuch as if a property
does not produce an income at all, it is not subject to any kind of income
tax, whether the income tax on individuals or the income tax on
corporation. (De Leon vs. CI R, CTA Case No. 738, September 11,
1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp.
77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA
74, where after an extrajudicial settlement the co-heirs used the
inheritance or the incomes derived therefrom as a common fund to
produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal
Revenue, 24 SCRA 198, where father and son purchased a lot and
building, entrusted the administration of the building to an administrator
and divided equally the net income, and from Evangelista vs. Collector
of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters
bought four pieces of real property which they leased to various tenants
and derived rentals therefrom. Clearly, the petitioners in these two
cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated
was whether the father donated the two lots to the petitioners and
whether he paid the donor's tax (See Art. 1448, Civil Code). We are not
prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside.
The assessments are cancelled.
6. Collector of Internal Revenue v
Batangas Transport Company (1958)
54 OG 6274
Doctrines :
TAXATION; WHAT CONSTITUTE CORPORATION WITHIN THE
MEANING OF THE TAX CODE; LIABILITY FOR INCOME TAX; CASE
AT BAR. The Tax Code defines the term "corporation" as including
partnership no matter how created or organized, thereby indicating a
joint venture need not be undertaken in any of the standards forms, or
in conformity with the usual requirements of the law on partnership, in
order that one could be deemed constituted for the purposes of the tax
on corporations. In the case at bar, while the two respondent
companies were registered and operating separately, they were placed
under one sole management called the "Joint Emergency Operation"
for the purpose of economizing in overhead expenses. Although no
legal personality may have been created by the Joint Emergency
Operation, nevertheless, said joint management operated the business
affairs of the two companies as though they constituted a single entity,
company or partnership, thereby obtaining substantial economy and
profits in the operation. The joint venture, therefore, falls under the
provisions of section 84 (b) of the Internal Revenue Code, and
consequently, it is liable to income tax provided for in Section 24 of the
same Code.
APPEAL FROM THE DECISION OF COLLECTOR; AUTHORITY TO
INCREASE ASSESSMENT AFTER APPEAL HAS BEEN
PERFECTED. The Collector of Internal Revenue, after appeal from his
decision to the Court of Tax Appeals has been perfected, and after the
Tax Court has acquired jurisdiction over the appeal, but before the
answer is filed with the court, may still modify his assessment, subject
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of the appeal, by increasing the same. If the Collector of Internal
Revenue is not allowed to amend his assessment before the Court of
Tax Appeals, and since he may make a subsequent reassessment to
collect additional sums within the same subject of his original
assessment, provided it is done within the prescriptive period, that
would lead to multiplicity of suit which the law does not encourage.
PENALTY; FAILURE TO FILE INCOME TAX RETURN FOR AND IN
BEHALF OF AN ENTITY, WHEN JUSTIFIED. ” Where the failure to file
an income tax return for and in behalf of an entity which is later found
to be a corporation within the meaning of Section 84 (b) of the Tax Code
was due to a reasonable cause, such as an honest belief based on the
advice of its attorneys and accountants, a penalty in the form of a
surcharge should not to be imposed and collected.
FACTS:
This case is an appeal of the CTA decision which reversed the
assessment and decision of the COLLECTOR of Internal Revenue
(CIR) assessing and demanding from respondents Batangas Transpo
and Laguna Bus the amount of P54,134.54 which represent deficiency
income tax and compromise for the year 1946-1949. Pending the
appeal to the CTA, the assessment was increased to P148,890.14
Respondent bus companies are two distinct and separate corporations,
engaged in the business of land transportation by means of motor
buses and operating distinct and separate lines.
Batangas Transportation was organized in 1918, while Laguna Bus was
organized in 1928. Each company now has a fully paid up capital of
P1,000,000. Before the last war, each company maintained separate
head offices, that of Batangas Transportation being in Batangas,
Batangas, while the Laguna Bus had its head office in San Pablo
Laguna. Each company also kept and maintained separate books,
fleets of buses, management, personnel, maintenance and repair
shops, and other facilities. Joseph Benedict managed the Batangas
Transportation, while Martin Olson was the manager of the Laguna Bus.
To show the connection and close relation between the two companies,
it should be stated that Max Blouse was the President of both
corporations and owned about 30 % of the stock in each company.
During the war, the two companies lost their respective businesses.
Post war, they were able to acquire 56 auto busses from the US Army
which they divided equally.
Two years later, Martin Olsen resigned as manager and Joseph
Benedict was appointed as manager of both companies by their
respective Board of Directors. According to Benedict, the purpose of
the joint management called “Joint Emergency Operation” was to
economize in overhead expenses. At the end of each calendar year, all
gross receipts and expenses of both companies are determined and
the net profit were divided 50-50 the transferred to the book of accounts
of each company, and each company prepares its own income tax
return for their 50% share.
The CIR theorizes that the 2 companies pooled their resources in the
establishment of the Joint Emergency Operation thereby forming a joint
venture. He believes that a corporation exists, distinct from the 2
respondent companies.
ISSUES:
1. Whether or not the two transportation companies involved are
liable to the payment of income tax as a corporation on the
theory that the joint emergency operation organized and
operated by them is a corporation within the meaning of Sec 84
of the Revised Internal Revenue Code.
2. Whether or not the CIR, after the appeal from his decision has
been perfected, and after the CTA has acquired jurisdiction over
the same, but before the CIR has filed an answer with the court,
may still modify his assessment subject of the appeal by
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increasing the same, on the ground that he committed error in
good faith in making said appealed assessment.
RULING:
1.) Yes. Although no legal personality may have been created by
the Joint Emergency Operation, nevertheless, said joint
management operated the business affairs of the two
companies as though they constituted a single entity, company
or partnership, thereby obtaining substantial economy and
profits in the operation.
The court ruled on this issue by citing the case of Eufemia v
Evangelista, et al v CIR- agency case. This involved the 3
sisters who borrowed from their father money which they
invested in land and then improved upon and later sold. The
sisters also hired their brother to oversee the buy-and-sell land.
Contrary to their claim that said operation was merely a co-
ownership, the Court ruled that considering the facts and
circumstances surrounding the said case, the 3 sisters had
purpose to engage in real estate transactions for monetary gain
and divide profits among themselves, making them co partners.
When the Tax Code includes "partnerships" among the entities
subject to the tax on corporations, it must refer to organizations
which are not necessarily partnerships in the technical sense of
the term, and that furthermore, said law defined the term
"corporation" as including partnerships no matter how created
or organized, thereby indicating that "a joint venture need not
be undertaken in any of the standard forms, or in conformity with
the usual requirements of the law on partnerships, in order that
one could be deemed constituted for purposes of the tax on
corporations" ; that besides, said section 84 (b) provides that
the term "corporation" includes "joint accounts" (cuentas en
participacion) and "associations", none of which has a legal
personality independent of that of its members.
In the present case, the two companies contributed money to a
common fund to pay the sole general manager, the accounts
and office personnel attached to the office of said manager, as
well as for the maintenance and operation of a common
maintenance and repair shop. Said common fund was also used
to buy spare parts, and equipment for both companies, including
tires. Said common fund was also used to pay all the salaries of
the personnel of both companies, such as drivers, conductors,
helpers and mechanics, and at the end of each year, the gross
income or receipts of both companies were merged, and after
deducting therefrom the gross expenses of the two companies,
also merged, the net income was determined and divided
equally between them, wholly and utterly disregarding the
expenses incurred in the maintenance and operation of each
company and of the individual income of said companies.
From the standpoint of the income tax law, this procedure and
practice of determining the net income of each company was
arbitrary and unwarranted. After all, the two companies
operates in 2 different lines, in different provinces or territories,
with different equipment and personnel it cannot possibly be
true and correct to say that the end of each year, the gross
receipts and income and expenses of two companies are
exactly the same for the purposes of the payment of income tax.
Thus, the Court held that the Joint Emergency Operation or sole
management or joint venture in this case falls under the
provisions of section 84 (b) of the Internal Revenue Code, and
consequently, it is liable to income tax provided for in section 24
of the same code.
(Note: they were exempted from paying 25% surcharge for
failure to file a tax return, because of their honest belief that they
are not required to do so.)
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2. Yes, pending appeal in the CTA of an assessment made by the
Collector of Internal Revenue, the Collector, pending hearing before
said court, may amend his appealed assessment and include the
amendment in his answer before the court, and the latter may on the
basis of the evidence presented before it, re determine the assessment.
tion, and the taxes collected pursuant thereto must be refunded.
7. N.V. REEDERIJ "AMSTERDAM" and
ROYAL INTEROCEAN LINES vs. CIR
G.R. No. L-46029, June 23, 1988
Note: The rate applicable now is 30%.
FACTS:
From March 27 to April 30, 1963, M.V. 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 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. 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 USs1.00 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.
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 of the 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.
ISSUES:
1. Whether or not petitioner which called on Philippine ports to load
cargoes for foreign destination on two occasions in 1963 and
1964 should be taxed as foreign corporation not engaged in trade
or business.
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2. Whether or not the foreign exchange rate to be used is P3.90.
HELD:
1. Petitioner is a foreign corporation not engaged in trade or
business.
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 non- resident 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.)
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 nonresident
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
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.
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.
On the other hand, a foreign corporation not engaged in trade or
business within the Philippmes 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. 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-shipowner 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
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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 co 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 non-resident 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, Federal Taxes, Par. 16389.) Only then does
Section 37 (e) of the Tax Code, are 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.
2. The foreign exchange rate applicable id P3.90.
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.
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.
8. CIR v. PROCTER AND GAMBLE
G.R. No. L-66838 December 2, 1991
FACTS:
Procter and Gamble Philippines declared dividends payable to its
parent company and sole stockholder, P&G USA. Such dividends
amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax
to the BIR which amounted to Php 8.3M It subsequently filed a claim
with the Commissioner of Internal Revenue for a refund or tax credit,
claiming that pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only
15%.
There being no responsive action on the part of the Commissioner,
P&G-Phil filed a petition for review with public respondent CTA which
rendered a decision ordering petitioner Commissioner to refund or grant
the tax credit.
ISSUE:
1. Whether or not P&G-USA, and not private respondent P&G-
Phil., was the proper party to claim the refund or tax credit
2. Whether or not P&G is entitled to claim tax refund or tax credit
HELD:
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1. YES.
The term "taxpayer" is defined in our NIRC as referring to "any person
subject to tax imposed by the Title [on Tax on Income]." It thus becomes
important to note that under Section 53 (c) of the NIRC, the withholding
agent who is "required to deduct and withhold any tax" is made
" personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent
in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable for the correct amount
of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency
assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have
been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax"
and properly considered a "taxpayer." The terms liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax. It is
very difficult, indeed conceptually impossible, to consider a person who
is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in
interest, or as a person having sufficient legal interest, to bring a suit
for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, this Court pointed out that a withholding agent is in fact the
agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent. With respect to
the collection and/or withholding of the tax, he is the Government's
agent. In regard to the filing of the necessary income tax return and the
payment of the tax to the Government, he is the agent of the taxpayer.
The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and
his deputies are not made liable by law.
As agent for the P&G-USA, it is impliedly authorized to file the claim for
refund and the suit to recover such claim.
2.
YES. P&G Philippines may apply the lower dividend tax rate and is
therefore entitle to the tax refund.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be
applied to dividend remittances to non-resident corporate stockholders
of a Philippine corporation. This rate goes down to 15% ONLY IF the
country of domicile of the foreign stockholder corporation “shall allow”
such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. However, such tax
credit for “taxes deemed paid in the Philippines” MUST, as a minimum,
reach an amount equivalent to 20 percentage points which represents
the difference between the regular 35% dividend tax rate and the
reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a
tax credit for ”taxes deemed paid in the Philippines” applicable against
the US taxes of P&G USA, and such tax credit must reach at least 20
percentage points. Requirements were met.
The parent-corporation P&G-USA is "deemed to have paid" a portion
of the Philippine corporate income tax although that tax was actually
paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount
remittable as dividends to P&G-USA. In other words, US tax law treats
the Philippine corporate income tax as if it came out of the pocket, as it
were, of P&G-USA as a part of the economic cost of carrying on
business operations in the Philippines through the medium of P&G-Phil.
and here earning profits. What is, under US law, deemed paid by P&G-
USA are not "phantom taxes" but instead Philippine corporate income
taxes actually paid here by P&G-Phil., which are very real indeed.
Close examination of the provisions of the US Tax Code 7 shows the
following:
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a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for
the amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed
paid' tax credit for a proportionate part of the corporate income tax
actually paid to the Philippines by P&G-Phil.
In order to determine whether US tax law complies with the
requirements for applicability of the reduced or preferential fifteen
percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is
necessary:
(a) to determine the amount of the 20 percentage points dividend tax
waived by the Philippine government under Section 24 (b) (1), NIRC,
and which hence goes to P&G-USA;
(b) to determine the amount of the "deemed paid" tax credit which
US tax law must allow to P&G-USA; and
(c) to ascertain that the amount of the "deemed paid" tax credit allowed
by US law is at least equal to the amount of the dividend tax waived
by the Philippine Government.
Illustration:
Amount (a), i.e., the amount of the dividend tax waived by the Philippine
government is arithmetically determined in the following manner:
P100.00 — Pretax net corporate income earned by
P&G-Phil.
x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-
USA
P65.00 — Dividends remittable to P&G-USA
x 35% — Regular Philippine dividend tax rate under
Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax
P65.00 — Dividends remittable to P&G-USA
x 15% — Reduced dividend tax rate under Section 24
(b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b)
(1), NIRC
-9.75 — Reduced dividend tax under Section 24 (b) (1),
NIRC
———
P13.00 — Amount of dividend tax waived by
Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax
net income earned by P&G-Phil. Amount (a) is also
the minimum amount of the "deemed paid" tax credit that US
tax law shall allow if P&G-USA is to qualify for the reduced or
preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax
credit which US tax law allows under Section 902, Tax Code,
may be computed arithmetically as follows:
P65.00 — Dividends remittable to P&G-USA
- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA
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P35.00 — Philippine corporate income tax paid by P&G- the US by the US subsidiary of a Philippine-parent corporation.
Phil. The Philippine parent or corporate stockholder is "deemed" under our
to the BIR NIRC to have paid a proportionate part of the US corporate income tax
paid by its US subsidiary, although such US tax was actually paid by
the subsidiary and not by the Philippine parent.

Dividends actually x corporate = P55.25 x = P29.75 The economic objectives sought to be achieved by the Philippine
remitted income tax P35 Government by reducing the thirty-five percent (35%) dividend rate to
Amount of accumulated paid P65 fifteen percent (15%) is to encourage more capital investment for
profits earned less income large projects. More simply put, Section 24 (b) (1), NIRC, seeks to
tax
promote the in-flow of foreign equity investment in the Philippines by
reducing the tax cost of earning profits here and thereby increasing the
Thus, for every P55.25 of dividends actually remitted (after withholding net dividends remittable to the investor. The foreign investor, however,
at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax would not benefit from the reduction of the Philippine dividend tax rate
credit of P29.75 is allowed by Section 902 US Tax Code for Philippine unless its home country gives it some relief from double taxation by
corporate income tax "deemed paid" by the parent but actually paid by allowing the investor additional tax credits which would be applicable
the wholly-owned subsidiary. against the tax payable to such home country. Accordingly, Section 24
(b) (1), NIRC, requires the home or domiciliary country to give the
Since P29.75 is much higher than P13.00 (the amount of dividend tax investor corporation a "deemed paid" tax credit at least equal in amount
waived by the Philippine government), Section 902, US Tax Code, to the twenty (20) percentage points of dividend tax foregone by the
specifically and clearly complies with the requirements of Section 24 (b) Philippines, in the assumption that a positive incentive effect would
(1), NIRC. thereby be felt by the investor.

We should not overlook the fact that the concept of "deemed paid" tax 9. CREBA v. The Hon. Executive
Secretary
credit, which is embodied in Section 902, US Tax Code, is exactly the
same "deemed paid" tax credit found in our NIRC and which Philippine
tax law allows to Philippine corporations which have operations abroad
(say, in the United States) and which, therefore, pay income taxes to
G.R. No. 160756. March 9, 2010
the US government.

Under Section 30 (c) (3) (a), NIRC, the BIR must give a tax credit to a
Facts: Petitioner Chamber of Real Estate and Builders’ Associations,
Philippine corporation for taxes actually paid by it to the US
government—e.g., for taxes collected by the US government on Inc. (CREBA), an association of real estate developers and builders in
dividend remittances to the Philippine corporation. This Section of the the Philippines, questioned the validity of Section 27(E) of the Tax Code
NIRC is the equivalent of Section 901 of the US Tax Code. which imposes the minimum corporate income tax (MCIT) on
corporations.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the
Under the Tax Code, a corporation can become subject to the MCIT at
US Tax Code. The BIR must give a tax credit to a Philippine parent
the rate of 2% of gross income, beginning on the 4th taxable year
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to

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immediately following the year in which it commenced its business
operations, when such MCIT is greater than the normal corporate
income tax. If the regular income tax is higher than the MCIT, the
corporation does not pay the MCIT.
CREBA argued, among others, that the use of gross income as MCIT
base amounts to a confiscation of capital because gross income, unlike
net income, is not realized gain.
CREBA also sought to invalidate the provisions of RR No. 2-98, as
amended, otherwise known as the Consolidated Withholding Tax
Regulations, which prescribe the rules and procedures for the collection
of CWT on sales of real properties classified as ordinary assets, on the
grounds that these regulations:
-Use gross selling price (GSP) or fair market value (FMV) as basis for
determining the income tax on the sale of real estate classified as
ordinary assets, instead of the entity’s net taxable income as provided
for under the Tax Code;
- Mandate the collection of income tax on a per transaction basis,
contrary to the Tax Code provision which imposes income tax on net
income at the end of the taxable period;
-Go against the due process clause because the government collects
income tax even when the net income has not yet been determined;
gain is never assured by mere receipt of the selling price; and
- Contravene the equal protection clause because the CWT is being
charged upon real estate enterprises, but not on other business
enterprises, more particularly, those in the manufacturing sector, which
do business similar to that of a real estate enterprise.
Issues: (1) Is the imposition of MCIT constitutional?
(2) Is the imposition of CWT on income from sales of real properties
classified as ordinary assets constitutional?
Held: (1) Yes. The imposition of the MCIT is constitutional. An income
tax is arbitrary and confiscatory if it taxes capital, because it is income,
and not capital, which is subject to income tax. However, MCIT is
imposed on gross income which is computed by deducting from gross
sales the capital spent by a corporation in the sale of its goods, i.e., the
cost of goods and other direct expenses from gross sales. Clearly, the
capital is not being taxed.
Various safeguards were incorporated into the law imposing MCIT.
Firstly, recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, the MCIT is imposed
only on the 4th taxable year immediately following the year in which the
corporation commenced its operations.
Secondly, the law allows the carry-forward of any excess of the MCIT
paid over the normal income tax which shall be credited against the
normal income tax for the three immediately succeeding years.
Thirdly, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.
(2) Yes. Despite the imposition of CWT on GSP or FMV, the income
tax base for sales of real property classified as ordinary assets remains
as the entity’s net taxable income as provided in the Tax Code, i.e.,
gross income less allowable costs and deductions. The seller shall file
its income tax return and credit the taxes withheld by the withholding
agent-buyer against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit.
The use of the GSP or FMV as basis to determine the CWT is for
purposes of practicality and convenience. The knowledge of the
withholding agent-buyer is limited to the particular transaction in which
he is a party. Hence, his basis can only be the GSP or FMV which
figures are reasonably known to him.
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Also, the collection of income tax via the CWT on a per transaction
basis, i.e., upon consummation of the sale, is not contrary to the Tax
Code which calls for the payment of the net income at the end of the
taxable period. The taxes withheld are in the nature of advance tax
payments by a taxpayer in order to cancel its possible future tax
obligation. They are installments on the annual tax which may be due
at the end of the taxable year. The withholding agent-buyer’s act of
collecting the tax at the time of the transaction, by withholding the tax
due from the income payable, is the very essence of the withholding tax
method of tax collection.
On the alleged violation of the equal protection clause, the taxing power
has the authority to make reasonable classifications for purposes of
taxation. Inequalities which result from singling out a particular class for
taxation, or exemption, infringe no constitutional limitation. The real
estate industry is, by itself, a class and can be validly treated differently
from other business enterprises.
What distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number
of transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts.
10. Cyanamid Philippines, Inc. v
CA G.R. 108607, Januar 20, 2007
Facts:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid
Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indenter.
 February 7, 1985, the CIR sent an assessment letter to petitioner
and demanded the payment of deficiency income tax of P119,817
for taxable year 1981.
 Petitioner protested the assessment.
The petitioner on March 4, 1985, protested particularly (1) 25%
surtax assessment of P3,774,867.50; (2) 1981 deficiency income
tax assessment of P119,817; (3) 1981 deficiency percentage
assessment of P3,346.72.
 CIR refused to allow the cancellation of the assessment notices.
During the pendency of the case on appeal to the CTA, both parties
agreed to compromise the 1981 deficiency income assessment of
P119,817 and reduced to P26,577 as compromise settlement. But the
surtax on improperly accumulated profits remained unresolved.
Petitioner claimed that the assessment representing the 25% surtax
had no legal basis for the following reasons: (a) petitioner accumulated
its earnings and profits for reasonable business requirements to meet
working capital needs and retirement of indebtedness, (b) petitioner is
wholly owned subsidiary of American Cyanamid Co., a corporation
organized under the laws of the State of Maine, in the USA, whose
shares of stock are listed and traded in New York Stock Exchange. This
being the case, no individual shareholder of petitioner could have
evaded or prevented the imposition of individual income taxes by
petitioner’s accumulation of earnings and profits, instead contribution of
the same.
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covered by the exemption so claimed; a burden which petitioner here
has failed to discharge.
 CTA denied said petition.

It said the law permits a stock corporation to set aside a portion of its
retained earnings for specified purposes. In the case at bar, petitioner's
purpose for accumulating its earnings does not fall within the ambit of
these specified purposes.
The Court ordered that Cyanamid pay the CIR representing 25% surtax
on improper accumulation of profits for 1981, plus 10% surcharge and
20% annual interest from January 30, 1985 to January 30, 1987.
Unless rebutted, all presumptions generally are indulged in favor of the
correctness of the CIR’s assessment against the taxpayer. With
petitioner’s failure to prove the CIR incorrect, clearly and conclusively,
this court is constrained to uphold the correctness of tax court’s ruling
as affirmed by the CA.

Issue: Whether or not petitioner is liable for the accumulated earning

tax for the year 1981?
Held:
Sec. 25 of the old National Internal Revenue Code of 1977 discouraged
tax avoidance through corporate surplus accumulation, when
corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on
improper accumulation of surplus is essentially a penalty tax designed
to compel corporation to distribute earnings so that the said earnings
by shareholders could, in turn, be taxed.
The amendatory provision of Sec. 25 of the 1977 NIRC, which was
PD1739, enumerated the corporations exempt from the imposition of
improperly accumulated tax: (a) banks, (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank to hold shares
of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the laws granting exemption form 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 the exemption to prove that it is, in fact,

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