Lorenzo Oña vs.
CIR corresponding income taxes on their respective
GR No. L -19342 | May 25, 1972 | J. Barredo
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 reconsideration, which was denied hence
this petition for review from CTA’s decision.
Issue:
W/N there was a co-ownership or an unregistered
partnership
W/N the petitioners are liable for the deficiency
corporate income tax
Ruling:
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
shares.
Yes. For tax purposes, the co-ownership of
inherited properties is automatically converted into
an unregistered partnership the moment the said
common properties and/or the incomes derived
therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their
respective shares in the inheritance as determined
in a project partition either duly executed in an
extrajudicial settlement or approved by the court in
the corresponding testate or intestate proceeding.
The reason is simple. From the moment of such
partition, the heirs are entitled already to their
respective definite shares of the estate and the
incomes thereof, for each of them to manage and
dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly, he
becomes liable individually for all taxes in
connection therewith. If after such partition, he
allows his share to be held in common with his co-
heirs under a single management to be used with
the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no
document or instrument were executed, for the
purpose, for tax purposes, at least, an unregistered
partnership is formed.
For purposes of the tax on corporations, our
National Internal Revenue Code includes these
partnerships —
The term “partnership”
includes a syndicate, group, pool,
joint venture or other unincorporated
organization, through or by means of
which any business, financial
operation, or venture is carried on…
(8 Merten’s Law of Federal Income
Taxation, p. 562 Note 63; emphasis
ours.)
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. Judgment affirmed.
Pascual and Dragon v. CIR,
G.R. No. 78133, October 18, 1988 | J. Gancayco
Facts:
Petitioners bought two (2) parcels of land
and a year after, they bought another three (3)
parcels of land. Petitioners subsequently sold the
said lots in 1968 and 1970, and realized net profits.
The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years. However, the
Acting BIR Commissioner assessed and required
Petitioners to pay a total amount of P107,101.70 as
alleged deficiency corporate income taxes for the
years 1968 and 1970. Petitioners protested the said
assessment asserting that they had availed of tax
amnesties way back in 1974. In a reply, respondent
Commissioner informed petitioners that in the years
1968 and 1970, petitioners as 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.
Issue:
Whether the Petitioners should be treated as an
unregistered partnership or a co-ownership for the
purposes of income tax.
Ruling:
The Petitioners are simply under the regime
of co-ownership and not under unregistered
partnership.
By the contract of partnership two or more
persons bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing the profits among themselves
(Art. 1767, Civil Code of the Philippines). In the
present case, there is no evidence that petitioners
entered into an agreement to contribute money,
property or industry to a common fund, and that
they intended to divide the profits among
themselves. The sharing of returns does not in itself
establish a partnership whether or not the persons
sharing therein have a joint or common right or
interest in the property. There must be a clear
intent to form a partnership, the existence of a
juridical personality different from the individual
partners, and the freedom of each party to transfer
or assign the whole property. Hence, there is no
adequate basis to support the proposition that they
thereby formed an unregistered partnership. The
two isolated transactions whereby they purchased
properties and sold the same a few years thereafter
did not thereby make them partners. They shared
in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed
of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have
formed an unregistered partnership which is
thereby liable for corporate income tax, as the
respondent commissioner proposes.
Obillos vs. CIR
G.R. No. L-68118, October 29, 1985
Summary: The four children of Jose Obillos
acquired two lots from the latter for residential
purposes. Subsequently, they sold these properties
and split the profits amongst them. The CIR
imposed several taxes on top of the income tax
already given claiming that the four children had
formed an unregistered partnership or joint venture.
The court held that they did not create a
partnership. One must look at the intention of the
parties in order to determine whether they indeed
created a partnership.
Facts:
On March 2, 1973 Jose Obillos, Sr. bought
two lots with areas of 1,124 and 963 square meters
of located at Greenhills, San Juan, Rizal. The next
day he transferred his rights to his four children, the
petitioners, to enable them to build their residences.
The Torrens titles issued to them showed that they
were co-owners of the two lots.
In 1974, or after having held the two lots for
more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz
Canada 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.
In April, 1980, 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. 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 The petitioners
contested the assessments. Two Judges of the Tax
Court sustained the same. Hence, the instant
appeal.
Issue:
Whether the petitioners had indeed formed a
partnership or joint venture and thus liable for
corporate tax.
Ruling:
The Supreme Court held that the petitioners
should not be considered to have formed a
partnership just because they allegedly contributed
P178,708.12 to buy the two lots, resold the same
and divided the profit among themselves. To regard
so 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.
*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.*
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.
They did not contribute or invest additional '
capital to increase or expand the properties, nor
was there an unmistakable intention to form
partnership or joint venture.
WHEREFORE, the judgment of the Tax Court is
reversed and set aside. The assessments are
cancelled. No costs.
Notes:***
All co-ownerships are not deemed
unregistered partnership.—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.
As compared to other cases:
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.
This case is 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.
Evangelista vs. CIR
G.R. No. L-9996, October 15, 1957
Facts:
Petitioners borrowed sum of money from
their father and together with their own personal
funds they used said money to buy several real
properties. They then appointed their brother
(Simeon) as manager of the said real properties
with powers and authority to sell, lease or rent out
said properties to third persons. They realized
rental income from the said properties for the
period 1945-1949.
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. The letter of demand and
corresponding assessments were delivered to
petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax
Appeals, with a prayer that "the decision of the
respondent contained in his letter of demand dated
September 24, 1954" be reversed, and that they be
absolved from the payment of the taxes in question.
CTA denied their petition and subsequent MR and
New Trials were denied. Hence this petition.
Issue:
Whether or not petitioners have formed a
partnership and consequently, 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.
Ruling:
YES. 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.
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 of the
following observations, among others: (1) Said
common fund was not something they found
already in existence; (2) They invested the same,
not merely in one transaction, but in a series of
transactions; (3) The aforesaid lots were not
devoted to residential purposes, or to other
personal uses, of petitioners herein.
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.
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.
AIR CANADA v. CIR
G.R. 169507 January 11, 2016
Facts:
Air Canada is a foreign corporation
organized and existing under the laws of Canada.
On April 24, 2000, it was granted an authority to
operate as an offline carrier by the Civil Aeronautics
Board, subject to certain conditions, which authority
would expire on April 24, 2005. As an off-line
carrier, Air Canada does not have flights originating
from or coming to the Philippines and does not
operate any airplane in the Philippines.
On July 1, 1999, Air Canada engaged the
services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines. Aerotel sells
Air Canada’s passage documents in the
Philippines.
For the period ranging from the third quarter
of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income
tax returns and paid the income tax on Gross
Philippine Billings in the total amount of
₱5,185,676.77.
On November 28, 2002, Air Canada filed a
written claim for refund of alleged erroneously paid
income taxes amounting to ₱5,185,676.77 before
the Bureau of Internal Revenue (BIR). It’s basis
was found in the revised definition of Gross
Philippine Billings under Section 28(A)(3)(a) of the
1997 National Internal Revenue Code (NIRC)1.
The CTA denied the petition. It found that
Air Canada was engaged in business in the
Philippines through a local agent that sells airline
tickets on its behalf. As such, it held that while Air
Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate
income tax on income derived from the sale of
airline tickets within the Philippines pursuant to
Section 28(A)(1). On appeal, the CTA En Banc
affirmed the ruling of the CTA First Division.
Issues and Ruling:
1) Whether Air Canada is subject to the 2½%
tax on Gross Philippine Billings pursuant to
Section 28(A)(3).
NO. Air Canada is not liable to tax on Gross
Philippine Billings under Section 28(A)(3). The
tax attaches only when the carriage of persons,
excess baggage, cargo, and mail originated
from the Philippines in a continuous and
uninterrupted flight, regardless of where the
passage documents were sold. Not having
flights to and from the Philippines, petitioner is
clearly not liable for the Gross Philippine
Billings tax.
2) If not, whether Air Canada is a resident
foreign corporation engaged in trade or
business and thus, can be subject to the
regular corporate income tax of 32%
pursuant to Section 28(A)(1);
YES. Petitioner falls within the definition of
resident foreign corporation under Section
28(A)(1)2, thus, it may be subject to 32% tax on
its taxable income.
The Court in Commissioner of Internal
Revenue v. British Overseas Airways
Corporation declared British Overseas Airways
Corporation, an international air carrier with no
landing rights in the Philippines, as a resident
foreign corporation engaged in business in the
Philippines through its local sales agent that
sold and issued tickets for the airline company.
An offline carrier is “any foreign air carrier
not certificated by the Civil Aeronautics Board,
but who maintains office or who has designated
or appointed agents or employees in the
Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier
and/or others, or negotiate for, or holds itself
out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges
for such transportation
Petitioner is undoubtedly “doing business”
or “engaged in trade or business” in the
 Philippines. In the case at hand, Aerotel
performs acts or works or exercises functions
that are incidental and beneficial to the purpose
of petitioner’s business. The activities of Aerotel
bring direct receipts or profits to petitioner.
Further, petitioner was issued by the Civil
Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of
five years. Petitioner is, therefore, a resident
foreign corporation that is taxable on its income
derived from sources within the Philippines.
Sec. 28. Rates of Income Tax on Foreign
Corporations. (A) Tax on Resident Foreign
Corporations. ---
(3) International Carrier. - An international
carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2
1/2%) on its ‘Gross Philippine Billings’ as
defined hereunder:
(a) International Air Carrier. - ‘Gross
Philippine Billings’ refers to the amount of
gross revenue derived from carriage of
persons, excess baggage, cargo and
mail originating from the Philippines in
a continuous and uninterrupted flight,
irrespective of the place of sale or
issue and the place of payment of the
ticket or passage document: Provided,
That tickets revalidated, exchanged
and/or indorsed to another international
airline form part of the Gross Philippine
Billings if the passenger boards a plane in
a port or point in the Philippines: Provided,
further, That for a flight which originates
from the Philippines, but transshipment of
passenger takes place at any port outside
the Philippines on another airline, only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment
shall form part of Gross Philippine Billings.
(Emphasis supplied)
4) Whether petitioner Air Canada is entitled to
3) Whether the Republic of the Philippines-
Canada Tax Treaty is enforceable;
YES. While petitioner is taxable as a
resident foreign corporation under Section
28(A)(1) on its taxable income from sale of
airline tickets in the Philippines, it could only be
taxed at a maximum of 1½% of gross revenues,
pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to
petitioner as a “foreign corporation organized
and existing under the laws of Canada.”
Our Constitution provides for adherence to
the general principles of international law as
part of the law of the land. The timehonored
international principle of pacta sunt servanda
demands the performance in good faith of
treaty obligations on the part of the states that
enter into the agreement. Every treaty in force
is binding upon the parties, and obligations
under the treaty must be performed by them in
good faith. More importantly, treaties have the
force and effect of law in this jurisdiction.
(Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue).
Sec. 28. Rates of Income Tax on Foreign
Corporations.
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise
provided in this Code, a corporation
organized, authorized, or existing
under the laws of any foreign country,
engaged in trade or business within
the Philippines, shall be subject to an
income tax equivalent to thirty-five
percent (35%) of the taxable income
derived in the preceding taxable year
from all sources within the
Philippines: Provided, That effective
January 1, 1998, the rate of income tax
shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall
be thirty-three percent (33%); and
effective January 1, 2000 and thereafter,
the rate shall be thirty-two percent (32%).
(Emphasis supplied)
the refund.
NO. As discussed in South African Airways,
the grant of a refund is founded on the
assumption that the tax return is valid, that is,
the facts stated therein are true and correct.
The deficiency assessment, although not yet
final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the
facts stated in said return which, by itself and
without unquestionable evidence, cannot be the
basis for the grant of the refund.
In this case, the P5,185,676.77 Gross
Philippine Billings tax paid by petitioner was
computed at the rate of 1 ½% of its gross
revenues amounting to P345,711,806.08149
from the third quarter of 2000 to the second
quarter of 2002. It is quite apparent that the tax
imposable under Section 28(A)(l) of the 1997
NIRC 32% of taxable income, that is, gross
income less deductions will exceed the
maximum ceiling of 1 ½% of gross revenues as
decreed in Article VIII of the Republic of the
Philippines-Canada Tax Treaty. Hence, no
refund is forthcoming.