 Lorenzo Ona vs. CIR (G.R No.

L-19342, May 25, 1972)

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:

Whether or not, the petitioners are liable for the deficiency of corporate
income tax?

Held:

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…

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. 

 Evangelista vs. CIR and CTA (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.

Held:

The Supreme Court held, yes and cited the essential elements of a
partnership so the 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.

 Afisco Insurance Corporation vs. Court of Appeals, January 28,

1999

Facts:

AFISCO and 40 other non-life insurance companies entered into a Quota

Share Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation, to cover for All Risk Insurance Policies over machinery erection,
breakdown and boiler explosion.

The treaties required petitioners to form a pool, to which AFISCO and the
others complied. On April 14, 1976, the pool of machinery insurers submitted
a financial statement and filed an “Information Return of Organization Exempt
from Income Tax” for the year ending 1975, on the basis of which, it was
assessed by the commissioner of Internal Revenue deficiency corporate
taxes.

A protest was filed but denied by the CIR.

Petitioners contend that they cannot be taxed as a corporation, because (a)
the reinsurance policies were written by them individually and separately, (b)
their liability was limited to the extent of their allocated share in the original
risks insured and not solidary, (c) there was no common fund, (d) the
executive board of the pool did not exercise control and management of its
funds, unlike the board of a corporation, (e) the pool or clearing house was
not and could not possibly have engaged in the business of reinsurance from
which it could have derived income for itself.

They further contend that remittances to Munich are not dividends and to
subject it to tax would be tantamount to an illegal double taxation, as it would
result to taxing the same premium income twice in the hands of the same
taxpayer. Finally, petitioners argue that the government’s right to assess and
collect the subject Information Return was filed by the pool on April 14, 1976.

On the basis of this return, the BIR telephoned petitioners on November 11,
1981 to give them notice of its letter of assessment dated March 27, 1981.
Thus, the petitioners contend that the five-year prescriptive period then
provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an
assessment.

Issue:
Whether or not, the petitioner is considered a corporation for taxation
purpose?

Held:

A pool is considered a corporation for taxation purposes. Citing the case of

Evangelista v. CIR, the court held that Sec. 24 of the NIRC covered these
unregistered partnerships and even associations or joint accounts, which had
no legal personalities apart from individual members. Further, the pool is a
partnership as evidence by a common fund, the existence of executive board
and the fact that while the pool is not in itself, a reinsurer and does not issue
any insurance policy, its work is indispensable, beneficial and economically
useful to the business of the ceding companies and Munich, because without
it they would not have received their premiums.

As to the claim of double taxation, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the said
companies. Clearly, there is no double taxation.

As to the argument on prescription, the prescriptive period was totaled under

the Section 333 of the NIRC, because the taxpayer cannot be located at the
address given in the information return filed and for which reason there was
delay in sending the assessment. Further, the law clearly states that the
prescriptive period will be suspended only if the taxpayer informs the CIR of
any change in the address.

 CIR vs. Batangas Tayabas Bus Company

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 BatangasTranspo and Laguna Busthe amount
of Php54,143.54 which represent deficiency income tax and compromise for
the year 1946-1949. Pending then appeal to the CTA, the assessment was
increased to P148,890.14.

Respondent bus companies are 2 distinct and separate corporations,

engaged in the business of land transportation by means of motor busses and
operating distinct and separate lines.

During the war, the two companies lost their respective businesses. Post-war,
they were able to acquire56 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 jointmanagement 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 profitwere divided 50-50 then transferred to the
book of accounts of each company, and each company prepares its own
income tax return from their 50% share.The CIR theorizes that the 2
companies pooled their resources in the establishment of the JointEmergency
Operation thereby forming a joint venture. He believes that a corporation
exists, distinct fromthe 2 respondent companies.

The CTA held that the Joint Emergency Operation is not a corporation within
the contemplation of the NIRC, much less a partnership, association or
insurance company, and therefore was not subject to income tax separately
and independently of respondent companies.

Issue:

Whether or not the two transportation companies involved are liable to the
payment of income tax as acorporation 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
Ruling:

Yes. although no legal personality may have been created by the Joint
Emergency Operation, nevertheless said joint venture or joint management
operated the business affairs of the 2 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 Evangelista, et.
al v. CIR – agency case.

This involved the 3 sisters who borrowed from their father money which they
invested inland and then improved upon and later sold. The sisters also hired
their brother to oversee the buy-and-sell of 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 then divide the profits among themselves, making them
co-partners.

When the Tax Code included “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. Further, from the standpoint of income tax law, the
procedure and practice of the 2 bus companies in determining the net income
of each was arbitrary and unwarranted.

After all, the 2 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 in
the gross expenses of two companies are exactly the same for 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.

 Jose Obillios vs. CIR and CTA (G.R No. L-68118) October 29, 1985

Facts:

This case is about the income tax liability of four brothers and sisters who sold
two parcels of land which they had acquired from their father.
Jose Obillos, Sr. (Father) completed payment to Ortigas & Co., Ltd. on two
lots with areas of 1,124 and 963 square meters located at Greenhills, San
Juan, Rizal.

The next day he transferred his rights to his four children, the petitioners, to
enable them to build their residences. The company sold the two lots to
petitioners, the Torrens titles issued to them would show that they were co-
owners of the two lots.

Petitioners resold them to the Walled City Securities Corporation and Olga
Cruz Canda.

They treated the profit as a capital gain and paid an income tax.

One day before the expiration of the five-year prescriptive period, the CIR
required the four petitioners to pay corporate income tax on the total profit, in
addition to individual income tax on their shares thereof. Not only that. He
considered the share of the profits of each as a "taxable in full”

Thus, the petitioners are being held liable for deficiency income taxes and
penalties on their profit, 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.

Petitioners contested. CTA sustained CIR.

Hence, this appeal.

Issue:

Whether or not, there was an unregistered partnership formed among

petitioner, hence liable to corporate income?

Held:

Supreme Court 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 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.
In the case, ss 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.

Hence, in 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.

 Reyes vs. Commissioner 24 SCRA 198

Facts:

By virtue of a sworn affidavit for reward by one Abad, an investigation was

conducted by BIR on the estate of the deceased Maria Tancinco who died in
1993 leaving a residential lot and old house in Dasma. Without submitting a
preliminary finding report, an LOA was issued and received by Reyes, one of
the heirs on March 14, 1997

Then on February 12, 1998, a PAN was issued against the estate, and a FAN
as well as demand letter was issued on April 22, 1998. For the assessment of
14.9M for estate of Maria Taninco.

March 11, 1999, the heirs proposed a compromise settlement of

P1,000,000M, during those dates, RA 8424 Tax Reform Act, was already in
effect. RA 8424 stated that the taxpayer must be informed of both the law and
and facts on which the assessment was based. The notice required under the
old law was no longer sufficient under the new law.

First, RA 8424 has already amended the provisions of Section 229, on

protesting an assessment. The old requirement of merely notifying the
taxpayer of the CIR’s findings was changed in 1998, to informing the taxpayer
of not only the law, but also of the facts on which an assessment would be
made; otherwise, the assessment itself would be invalid.

Due to failure to pay tax on the deadline, BIR noticed on June 6, 2000, that
the subject property would be sold at public auction on August 8, 2000. Reyes
filed a protest with the BIR. Hence the petition for review filed by Reyes in
CTA and a TRO to desist and refrain from proceeding with the auction sale of
the subject property of from issuing a warrant pending a determination of the
case and/or unless a contrary order is issued;

CIR filed a motion saying CTA has no jurisdiction since the assessment
against the estate is already final and executory and the petition was filed out
of time.

Issue:

Whether or not, the assessment against the estate is valid?

Held:

No, Under the present provision of the Tax Code and pursuant to elementary
due process, taxpayers must be informed in writing of the law and the facts
upon which a tax assessment is based; otherwise, the assessment is void. –
being invalid, the assessment cannot in turn be used as a basis for the
perfection of a tax compromise. This was clear and mandatory under Section
228.

In the case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made, she was merely
notified on the findings by the CIR, who had simply relied upon the provisions
of former Section 229 prior to its amendment by RA 8424 otherwise known as
Tax Reform Act of 1997

To be simply informed in writing of the investigation being conducted and of

the recommendations for the assessment of the estate taxes due is nothing
but a perfunctory discharge of the tax function of correctly assessing a
taxpayer.