CIR v Batangas Tayabas Bus Co.October 1958Montemayor, J.DIGEST BY Cocoy Licaros

TOPIC and Provisions: Taxpayers Corporations

Doctrine: Although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or 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.

Facts: To economize their overhead expenses and to recoup losses incurred during the war, BTC and LTBC entered into a joint management contract called Joint Emergency Operation which allowed the two companies to save on salaries for one manager, one assistance manager, fifteen inspectors, special agents and an entire office worth of clerical workers. The savings for one year amounted to around 200k, or about 100k for each company. At the end of each calendar year, all gross receipts and expenses by both were determined and the net profits were divided 50-50, and then reflected on the books of account for each company. The two companies still prepared separate income tax returns, reflective of this 50-50 share in net profits The Collector assessed both bus companies the amount of 422,210 as deficiency income tax for the years 1946-1949, operating under the theory that their joint management contract was a joint venture. As a joint venture, the two companies were a single corporation, distinct from their individual identities, for the purposes of taxation. (Sec. 24, NIRC) The companies appealed this assessment, claiming that they were not a corporation pursuant to their joint emergency operations. The CTA granted their appeal. Hence this case by the Collector.

Issue: WON the two companies are liable to pay income tax as a corporation, pursuant to their joint emergency operation?Held: YES, the joint emergency operation involved the creation of a corporation within the meaning of the NIRC, so as to make them liable as such for income taxes.Dispositive: CTA reversed.

Ratio: Eufemia Evangelista et al. v CIR 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 view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different provinces or territories, under different franchises, 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. What was actually done in this case was that, although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or 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.

Ona v. CIRMay 25, 1972BarredoDigest by PS Magno

Topic : Taxpayers: Corporations

Facts: Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her five children. In 1948, a civil case was instituted in the CFI of Manila for the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was appointed administrator of the estate. A project of partition was submitted and approved. Lorenzo Ona was also appointed as guardian for his three minor children/heirs. The project of partition shows that the heirs have undivided one-half (1/2) interest in: ten parcels of land with a total assessed value of P87,860, six houses with a total assessed value of P17,590.00 an undetermined amount to be collected from the War Damage Commission. Later, the heirs received from said Commission the amount of P50,000, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common. Of the ten parcels of land aforementioned, two were acquired after the death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173. The estate also shares equally with Lorenzo T. Oa in the obligation of P94,973, consisting of loans contracted by the latter. The properties were not divided and remained under the management of Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956. From said investments and properties, the heirs derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests. The said incomes are recorded in the books of account kept by Lorenzo T. Oa where the corresponding shares of the petitioners in the net income for the year are also known. Every year, the heirs returned for [individual] income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them. However, the heirs did not actually receive their shares in the yearly income. The income was always left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and securities. Commissioner of Internal Revenue decided that the heirs formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the heirs the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively[footnoteRef:1]. The heirs asked for reconsideration but this was denied. [1: Income tax due + 25% surcharge + compromise for non-filing. Later, the 25% surcharge was deleted. Compromise for non filing is compromise in lieu of the criminal liability for failure of petitioners to file the corporate income tax returns for said years.]

CTA affirmed.

Issue: WoN the heirs should be considered as co-owners of the properties inherited by them from the deceased Julia Buales and the profits derived from transactions involving the same, or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code.Held: The heirs formed an UNREGISTERED PARTNERSHIP (which is considered a corporation under the NIRC). Thus they are subject to corporate income tax.Dispositive: CTA decision AFFIRMED.

Ratio: The heirs formed an UNREGISTERED PARTNERSHIP (which is considered a corporation under the NIRC). Thus they are subject to corporate income tax. DOCTRINE: For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment 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 properties and investments increased steadily each year under the management of Ona. And all these became possible because, admittedly, the heirs never actually received any share of the income or profits from Lorenzo T. Oa and instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the profits of their common business as reported by the said Lorenzo T. Oa. The heirs did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among the heirs proportionately in accordance with their respective shares in the inheritance. In these circumstances, from the moment the heirs allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Article 1769, paragraph (3)[footnoteRef:2], of the Civil Code distinguished from Sec. 24 and 84(b) of the NIRC accdg to CJ. Concepcion in Evangelista case: [2: 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]

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 arenot necessarily"partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Codeexemptsfrom the aforementioned tax "duly registered general partnerships," which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships,no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among others, "joint accounts" and "associations", none of which has a legal personality of its own, independent of that of its members. American law providesits own conceptof a partnership. Under the term "partnership" it includes not only a partnership as known in common law but, as well, a syndicate, group, pool,joint venture, or other unincorporated organization which carries on any business, financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation 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."

OTHER CONTENTIONS: Heirs claim that the income from the inherited properties should not be included in the tax assessment. Only income from properties subsequently acquired should be included. WRONG. It is admitted that the inherited properties and the income derived therefrom were used in the business of buying and selling other real properties and corporate securities. Accordingly, the partnership income must include not only the income derived from the purchase and sale of other properties but also the income of the inherited properties. the income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered partnership. Heirs claim that they already paid their individual income tax. The amount they paid must be deducted from the corporate tax assessment. WRONG. Its the other way around. The corporate tax assessed would be deducted from the individual income tax. Therefore, the heirs overpaid. But the individual income tax is not in issue in this case so the Court did not decide on this matter. Heirs are worried that if the income tax they paid is not credited, an action to recover the same would already have prescribed. SC says this is a case of a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously paid. However, the period to ask for reimbursement has already lapsed.

Obillos (Jose, Sarah, Romeo, Remedios, all surnamed Obillos) v. CIR and CTAOctober 29, 1985Aquino, J.Digest by: Kara Marcelo

Topic: Taxpayers; Corporations; Partnership, Co-ownership, GPP

FACTS: March 2, 1973: Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lotsin Greenhills, San Juan, Rizal. He transferred his rights to his children (Ps) for them to build their residences. Company sold the 2 lots to Ps for P178,708.23. 1974: Ps resold them to Walled City Securities Corp. and Olga Cruz Canda for P313,050. From the sale, they earned P134,341.88 (P33,584 for each of them) as profit which they treated as capital gain and paid an income tax on thereof or P16,792. April 1980 (one day before expiration of 5-yr prescriptive period): CIR assessed corporate income tax on the total profit (P37,018 corporate income tax, and other fees). CIR also asked Ps to pay deficiency income taxes since he treated the share of the profits of each of them not as a mere capital gain (of which is taxable) but as taxable in full. CIR acted on the theory that Ps had formed an unregistered partnership of joint venture within the meaning of Secs. 24(a) and 84(b) of the Tax Code. As a result, Ps 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. CTA: 2 judges for Ps; one judge dissented. Hence, present appeal.

ISSUE:WON CIR was correct in considering Ps as having formed a partnership

HELD:NO!

DISPOSITIVE:WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

RATIO:It is error to consider the petitioners as having formed a partnership under Art. 1767, CC 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.

Art. 1769(3), CC 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.

Florencio Reyes and Angel Reyes v. Commissioner of Internal Revenue and CTAJuly 29, 1968J. FernandoOrtiz

Topic: Partnership; Co-ownership; GPP

Facts:

- Ps, father and son, purchased a lot and building, known as the Gibbs Building, situated at 671 Dasmarias Street, Manila, for PhP 835k, of which they paid the sum of PhP 375k leaving a balance of PhP 460k, representing the mortgage obligation of the vendors with the China Banking Corporation, which mortgage obligations were assumed by the vendees Initial payment of PhP 375k was shared equally by the Ps At the time of the purchase, building was leased to various tenants, whose rights under the lease contracts with the original owners, the purchasers, petitioners herein, agreed to respect. The administration of the building was entrusted to an administrator who collected the rents; kept its books and records and rendered statements of accounts to the owners; negotiated leases; made necessary repairs and disbursed payments, whenever necessary, after approval by the owners; and performed such other functions necessary for the conservation and preservation of the building. Petitioners divided equally the income of operation and maintenance. The gross income from rentals of the building amounted to about P90,000.00 annually.

- Ps were assessed by R Commissioner of Internal Revenue the sum of P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment subsequently reduced to P37,528.00. Another assessment was made against Ps, this time for back income taxes plus surcharge and compromise in the total sum of P25,973.75, covering the years 1955 and 1956.

- CTA: Tax liability for the years 1951 to 1954 was reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the partnership formed" by petitioners. Reduction was due to the elimination of surcharge, the failure to file the income tax return being accepted as due to petitioners honest belief that no such liability was incurred as well as the compromise penalties for such failure to file

- CTA cited Evangelista v. Collector, wherein the court ruled that the term corporation in Sec. 24, NIRC includes partnerships Essential elements: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties Case involved real estate transactions for monetary gain and then divide the same among themselves Issue narrows down to their intent in acting as they did. Common fund being created purposely not something already found in existence, the investment of the same not merely in one transaction but in a series of transactions "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."

Issue: WON Ps in this case are partners in a partnership, as contemplated by the NIRC

Held: YES

Dispositive: WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums of P37,128.00 as income tax due from the partnership formed by herein petitioners for the years 1951 to 1954 and P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision becomes final, plus the corresponding surcharge and interest in case of delinquency," is affirmed. With costs against petitioners.

Ratio:

- P: it was only for a single transaction. In the Evangelista case, there were a series of transactions. Evangelista should not apply to us. We should not be considered partners, thus no tax Court: Although there is only a single transaction. There is still a common fund created for the division of income after deducting expenses of operation and maintenance

- 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

- Section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." Other inclusions in the corporation: includes, among others, "joint accounts, (cuentas en participacion)" and "associations", none of which has a legal personality of its own, independent of that of its members Legal personality = not a condition precedent to the existence of the partnerships therein referred to

- 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.

JOSE GATCHALIAN, ET AL., plaintiffs-appellants, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee

April 29, 1939Imperial, JDigest by: Jonathan Pabillore

Topic and Provisions: Taxpayers; Corporations

Facts: Plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector of Internal Revenue of the Philippines. They (15 all in all) contributed money in varying amounts to buy a sweepstakes ticket worth P2.00. The said ticket was registered in the name of Jose Gatchalian and Company. The above-mentioned ticket won one of the third prizes in the amount of P50,000 and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian & Company. (Swerte ng mga gago. Gawin rin natin toh, baka Manalo tayo sa grand prize. Free photocopies for life at magtayo tayo ng Block-C library, na may complete and updated SCRA with commentaries, codals, at subscription sa Playb, este, Harvard Law Review). On January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company requesting the payment of the sum of P1,499.94. The plaintiffs paid in protest.

Issue: WON the plaintiffs are exempted from.Held: NO, partnerships are liable for income tax under the law.Dispositive: In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs appellants. So ordered.

Ratio:SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company, partnership (section 10 of Act No. 2833)

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of income tax under the law. But according to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually, resulting in their exemption from the tax.

Eufemia, Manuela and Francisca Evangelista v. CIR and the CTA October 15, 1957ConcepcionDigest by Arrow Pabiona

Topic: Taxpayers; Corporations

Facts:

Petition filed by for a review of the decision of the CTA, making petitioners liable for income, real estate dealer and residence tax for 1945-1949 at 6,8678.34

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. 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. 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. 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; on the same day 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;

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;

After having bought the above-mentioned real properties the petitioners had the same rented or leases to various tenants; 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

In 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. In1948, 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.

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 said assessments were delivered to petitioners, December 1954. They subsequently filed a case with the Court of Tax Appeals.

Issue: WON 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 taxHeld: YES

Dispositive: Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so ordered.

Ratio:

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 (compaias colectivas), a tax upon such income equal to the sum of the following: . . .SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general copartnerships. (compaias colectivas).Article 1767 of the Civil Code of the Philippines provides: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.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: Theyjointly borroweda substantial portion thereof inorderto establish said common fund, invested the same, not merely not merely in one transaction, but in aseriesof transactions, the aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein, the affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit with the appointment of an agent,

As defined in section 84 (b) of the Internal Revenue Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Partnership, as has been defined in the civil code refers to two or more persons who bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves. Thus, petitioners, being engaged in the real estate transactions for monetary gain and dividing the same among themselves constitute a partnership so far as the Code is concerned and are subject to income tax for corporation.

Since Sec 2 of the Code in defining corporations also includes joint-stock company, partnership, joint account, association or insurance company, no matter how created or organized, it follows that petitioners, regardless of how their partnership was created is also subject to the residence tax for corporations.

Collector of Internal Revenue v Batangas Transportation Co. and Laguna Tayabas Bus Co. January 6, 1958Montemayor, J.Digest by: P Plaza (Thanks Mai & Aby)

DOCTRINE: The Joint Emergency Operation joint venture, or 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 Emergency Operation falls under the provisions of Section 84 (b) the NIRC and is liable for income tax under Section 24.

FACTS Respondent 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 Each company now has a fully paid up capital of Pl,000,000. Before the last war, each company maintained separate head offices Max Blouse was the President of both corporations and owned about 30% of the stock in each company During the war, the American officials of these two corporations ceased operations and they lost their respective properties and equipment After Liberation, the two companies were able to acquire 56 auto buses and the two companies divided the equipment equally The head office of the Laguna Bus in San Pablo City was made the main office of both corporations, both of which were placed under common management This "Joint Emergency Operation", was to economize in overhead expenses. The joint fund was used for common operation and maintenance, 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. The Collector believed that they formed a joint venture since they pooled their resources in the establishment of the Joint Emergency Operation, thus he wrote the bus companies that there was due from them the amount of 422k as deficiency income tax and compromise for the years 1946 to 1949, inclusive. He later changed this the amount demanded to 54k after crediting overpayment. The Corps. Appealed to the CTA; but before filing his answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of P148,890.14, claiming that he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by them from the Joint Operation as a domestic corporation are returnable to the extent of 25 % The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code CTA rejected this argument; also held that the Collector cannot change his assessment after CTA has acquired jurisdiction

ISSUES AND HELD: W/N the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code. YES W/N the Collector can change his assessment after the taxpayer has appealed to the CTA, w/c acquired jurisdiction. YES

DISPOSITIVE: In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and so is liable to income tax under section 24 of the code; that pending appeal in the Court of Tax Appeals 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, redetermine the assessment; that 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 be imposed and collected. The respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs.

RATIO :

POINT #1: The Joint Emergency Operation is liable for tax as a corporation The question has already been passed upon in Evangelista v CIR: 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 partnershipsno matter how createdor 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" 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 maintenance, a common repair shop, all the salaries of the personnel of both companies 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 although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or 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

POINT #2: Pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed assessment the Government is not bound by the errors committed by its agents and tax collectors in making tax assessments, specially when due to a misinterpretation or application of the tax laws, more so when done in good faith

POINT #3: The 2 corps. Are not liable for the 25% surcharge (included in the P148,890.14) due to their failure to file an income tax return for the Joint Emergency Operation the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause, the honest belief of respondent companies that there was no such corporation within the meaning of the Tax Code, and that their separate income tax return was sufficient compliance with the law

Tan v. CIR (Ramon del Rosario, SoF and Jose Ong, CIR)October 3, 1994Vitug, J.Digest by Ron Reodica

Topic: Corporation

Facts Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation for the NIRC (RA 7496 Simplified Net Income Taxation Scheme SNIT) GR 109289: Petitioners claim that it contravenes Art VI S 26(1) and S 28(1) of the Constitution. Also violates the due process clause/EPC. Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. GR 109446: Petitioners claim that public respondents have exceeded their rule-making authority.

Issue: WON RA 7496 is ConstitutionalHeld: Yes. It is Constitutional. Dispositive: WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

Ratio: The allowance for deductible items have been significantly reduced by the questioned law in comparison with that which has prevailed prior to the amendment. Allowable deductions from gross income is not discordant with the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class. The legislative intent to shift the income tax system towards the scheduler approach in the income taxation of individual taxpayers and to maintain the present global treatment on taxable corporation is not arbitrary and inappropriate. A general professional partnership, unlike an ordinary business partnership which is treated as a corporation for income tax purposes and so subject to the corporate income tax, is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. There is no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. The Code classifies taxpayers into 1) individuals; 2) Corporations; 3) Estates under Judicial Settlement; and 4) irrevocable trusts. Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations.

PASCUAL v. CIR18 October 1988Gancayco, J.Digest by VILLAMIN

Topic: INCOME TAX > Taxpayers > Corporations> Partnership / Co-ownership / GPPProvisions: Article 1767, NCC. 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.

Two or more persons may also form a partnership for the exercise of a profession.

Article 1769, NCC. In determining whether a partnership exists, these rules apply: xxx(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;xxx

Facts1. After having bought 5 parcels of land, petitioners Mariano Pascual and Renato Dragon sold two of those lands in 1968 to Marenir Development Corporation and the remaining three lands in 1970 to Erlinda Reyes and Maria Samson. Net profit realized from 1968 sale: P165,224.70; Net profit realized from 1970 sale: P60,000.00 The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

1. However, according to then Acting BIR Commissioner Plana, petitioners were assessed and required to pay a total amount of P107, 101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested the said assessment and asserted that they had availed of tax amnesties.

1. Planas reply In 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,NIRC. An unregistered partnership is subject to corporate income tax whereas profits derived from the partnership is subject to individual income tax After availing of the tax amnesty under P.D. No. 23, as amended, petitioners were relieved 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.

1. CTA affirmed the decision and action taken by respondent commissioner with costs against petitioners. An unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners. Dissent (Roaquin) no adequate basis for concluding that petitioners formed an unregistered partnership

Issue/ Held WON petitioners formed an unregistered partnership that is subject to corporate income tax / NO.

DispositiveWHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

Ratio Pursuant to Article 1767, NCC 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.

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

Unlike in the Evangelista case cited by the court, the character of habituality peculiar to business transactions engaged in for the purpose of gain was not present in this case. After petitioners bought the parcels of land in 1965 and 1966, they did not sell the same nor make any improvements thereon. It was only in 1968 and in 1970 when they sold the land. They did not make any additional or new purchase. The transactions were isolated.

Given Article 1769, NCC, the sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership.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

AFISCO INSURANCE CORP v CIRJanuary 25, 1999Panganiban, J.By Cate Alegre

Taxpayers Corporations (Partnership)

Facts Petitioners are 41 local insurance firms which entered into Reinsurance Treaties with Munich, a non-resident foreign insurance corporation. The reinsurance treaties required them to form an insurance pool or clearing house in order to facilitate the handling of the business they contracted with Munich. The CIR assessed the insurance pool deficiency corporate taxes and withholding taxes on the dividends paid on Munich and to the petitioners respectively. The assessments were protested by petitioners CA Insurance pool was a partnership taxable as a corporation and that the latters collection of premiums on behalf of its members was taxable income Petitioners - not a partnership! The reinsurers didnt share the same risk or solidary liability, there was no common fund, the executive board of the pool didnt exercise control and management of the funds and the pool wasnt engaged in business of reinsurance

Issue1. WON the Insurance Pool is a partnership or association that is taxable as a corporationHeldYES! The insurance pool is taxable as a corporation!DispositiveWHEREFORE, the petition isDENIED.The Resolutions of the Court of Appeals dated October 11, 1993 and November 15, 1993 are herebyAFFIRMED.Costs against petitioners.

Ratio Here the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich.

(Doctrine) There are unmistakable indicators that it is a partnership or an association covered by NIRC:1. The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. 1. The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. 1. Though the pool itself is not a reinsurer, its work is indispensable, beneficial and economically useful to the business of ceding companies and Munich because without it they wouldnt have received premiums. Profit motive or business is therefore the primordial reason for the pools formation.

The fact that the pool doesnt retain any profit or income doesnt obliterate an antecedent fact that of the pool is being used in the transaction of business for profit. It is apparent and petitioners admit that their association was indispensable to the transaction of the business.

Solidbank vs. CIR (CTA case No. 4868)June 19, 1997CTAAzoresTopic: Taxpayers Partnership; Co-ownership

FACTS: Solidbank Corporation (SBC) and Susana Reality Inc (SRI), in a "Deed of Sale With Option and Agreement for Administration of Property" became co- owners of 3 parcels of land together with a 4 storey building thereon when SBC acquired from SRI ownership and interest of SRI and for which earnest money of P50,000.00 was paid for by SBC to SRI SBC filed complaint with the RTC for Partition. As co- owner, SBC demanded the portion of the property owned in common pursuant to CC Art. 494 because physical division of the building and improvements thereon would not be compatible to the best interest of the parties and that a more practical solution is "Buy- Out" or "Sell- Out" of the share of one to the other co-owner or sale to any party After several hearings, realizing the futility of their claims and the adverse effect the case may bring on their respective business establishments and business reputations, SBC and SRI agreed to settle the case amicably The Court approved the compromise agreement and terminated the co- ownership of the parties and vesting the sole, absolute, exclusive and indefeasible title in favor of SBC a former employee of SRI became an informer (perhaps to collect reward through NIRC Sec. 281) filed an information denouncing SBC and SRI. The informer opined that as a result of said amicable settlement, SRI and SBC waived and completely gave away their claims against each other and are therefore subject to and Iiable for donors tax prescribed under NIRC Sections 120 and 121 (now 91 and 92) Note: Art. 3 of the deed of sale was an agreement for administration of property, giving SBC shall administer the property (collect rents from tenants, advertise vacant space, do repairs, etc.)Relevant issue to the topic: WON petitioners formed an unregistered partnership which is subject to corporate income tax prescribed under Sec. 24(a) in relation to Sect i on 20(b) of the Tax CodeHELD: No. They formed a co-ownership, not a partnershipRATIO: They formed a co-ownership, not a partnership. The agreement for administration of property (Art. 3 of deed of sale) is but a mere incident of the co-ownership and not an act reflective of their intention to engage in a mutual fund for profit or business. CC 1767 prescribes two essential elements of a partnership, 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. At first glance, SRI and SBC seem to fulfil the above essential elements, however, after an exhaustive study, it is apparent that no agreement, direct or implied was reached by SRI and SBC to purposely contribute money, property or industry to a common fund, and that, no such intent to divide the profits arising from the use of the common fund in a business activity was ever contemplated by the parties. The deed of sale gave SBC the option to buy ownership and interest of SRI over the property within 5 years from execution. The real intention of the parties was to sell SRIs share to SBC SBC even demolished portion of the building and built a new 10-storey building for itself SRI and SBC only entered into an isolated transaction. They simply bought and co-owned the four-storey building inclusive of the land where it stands and invested nothing more. The act of leasing the building cannot be deemed as a series of transactions indicating habituality in a business either, SBC mainly occupied the rentable areas thereof (85%) for nearly 20 years for its own personal use. THEREFORE, since the agreement between SBC and SRI DID NOT produce a partnership with a separate juridical personality, they cannot be assessed for withholding tax for inter-corporate dividends. Re assessment of doners tax: SRI availed of a tax amnesty under EO 41 as amended by EO 64 since the donation arose by virtue of a compromise agreement between the two parties.

BAHJIN Winship vs. Philippine Trust Co. Marubeni v CIRSept 14, 1989FernanDigest by Janine

Topic: Taxpayers Corporations Resident Foreign Corporation

Doctrine: A resident foreign corporation is one that is "engaged in trade or business" within the Philippines. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.

Facts:Marubeni Corporation is a foreign corporation existing under the laws of Japan and licensed to engage in business in the Philippines. It has a branch office in Manila. Petitioner has equity investments in AG&P of Manila. AG&P declared and paid cash dividends to petitioner and withheld 10% as final intercorporate dividend tax. AG&P directly remitted the cash dividends to petitioners head office in Tokyo and also withheld 15% profit remittance tax after deducting the 10% final withholding tax.Marubeni sought a ruling from the BIR on WON the dividends received from AG&P are effectively connected with its business in the PH to be considered branch profits subject to 15% profit remittance tax. Acting Commissioner Ancheta ruled that the dividends received from AG&P are not income arising from the business in which Marubeni is engaged, thus not subject to 15%Marubeni claimed for refund or issuance of tax credits. Commissioner denied the claim. While it is true that it was not subject to the 10% and 15%, being a non-resident stockholder, said dividend income is subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and Japan. CTA affirmed.

Issue/Held: WON Marubeni is a resident or non-resident foreign corporation NON- RESIDENT WITH RESPECT TO THE TRANSACTION IN QUESTION

Dispositive: The decision of the CTA, which affirmed the denial by respondent Commissioner of Internal Revenue of petitioners claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144, 452.40 representing overpayment of taxes on dividends received.

Ratio:The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan, which is a separate and distinct income taxpayer from the branch in the Philippines.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations, which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. Petitioner is entitled to a refund on the transaction in questionCIR v. BRITISH OVERSEAS AIRWAYS CORP and CTA April 30, 1987Melencio-Herrera, J.Digest by: KY Bautista

Topic: Income Taxation - Taxpayers - CorporationsDoctrine: The term resident foreign corporation [is one] engaged in trade or business within the Philippines or having an office or place of business therein. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. The term implies a continuity of commercial dealings and arrangements, and contemplates the performance of acts or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. BOAC has a general sales agent here, in exercise of the functions normally incident to the main purpose of an international air carrier. It is a resident foreign corp. It is subject to tax upon its total net income received in the preceding taxable year from all sources within the Phils

Facts: BOAC is a corp 100% British-owned. It operates air transportation service and sells air transport tickets. During the periods covered by the disputed tax assessments, BOAC admits that it had nolanding rights for traffic purposes in the Phils, and was not granted a certificate of public convenience to operate in the Philippines (except for a nine-month period, when it was granted a temporary landing permit). It did not carry passengers and cargo to or from the Philippines, although during the period covered by the assessments, it says a general sales agent in the Phils (Wamer Barnes and later Qantas Airways) was responsible for selling BOAC tickets. Then there were 2 CTA cases where BOAC appealed CIR decisions assessing it with deficiency income tax and penalties. Tax Court: held that the proceeds of sales of BOAC passage tickets in the Phils by the general sales agent do not constitute BOAC income from Philippine sources "since no service of carriage of passengers or freight was performed by BOAC within the Philippines" therefore said income is not subject to Philippine income tax. The Tax Court ordered CIR to credit BOAC with P858k and cancel the deficiency income tax assessments against BOAC.

Hence, this Petition for Review on Certiorari.

Issues/Held: 1. Whether the revenue derived by BOAC from sales of tickets in the Phil for air transportation, while having no landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.

SC: Yes, the income derived is from passage documentations which were sold in the Phils, and the revenue was derived from activity regularly pursued in the Phils. Source conveys one essential idea: origin.

1. Whether, during the fiscal years in question, BOAC was a resident foreign corporation doing business in the Philippines (or has an office or place of business in the Philippines).

SC: BOAC is a resident foreign corp

Dispositive: CTA decision set aside. BOAC ordered to pay deficiency income tax + penalties.

Ratio:

Under Section 20 of the 1977 Tax Code:(h) the term resident foreign corporation [is one] engaged in trade or business within the Philippines or having an office or place of business therein.(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade or business within the Philippines and not having any office or place of business therein

BOAC is a resident foreign corp. It is subject to tax upon its total net income received in the preceding taxable year from all sources within the Phils There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. The term implies a continuity of commercial dealings and arrangements, and contemplates the performance of acts or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. BOAC maintained a general sales agent. Those acts of the agent were in exercise of the functions normally incident to the main purpose (as an international air carrier). Sec. 24. Rates of tax on corporations ... (b) Tax on foreign corporations ... (2) Resident corporations. A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign fife insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year fromall sources within the Philippines.

Tax Code defn of gross income is broad and includes proceeds from sales of transport documents. "Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal service of whatever kind and in whatever form paid, or from profession, vocations, trades,business, commerce,sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interests, rents, dividends, securities, or thetransactions of any business carried on for gain or profile,or gains, profits, andincome derived from any source whatever[Sec. 29(3)] As used in our income tax law, "income" refers to the flow of wealth.

Now the question is, did such flow of wealth come from within the Phils?

The source of an income is the property, activity or service that produced the income.For the source of income to be considered as coming from the Phils, it is sufficient that the income is derived from ACTIVITY WITHIN the Phils. For BOAC, the sale of tickets is the income-producing activity. Therefore, the flow of wealth proceeded from, and occurred within, Phil territory. Although Sec 37(a) of the Tax Code, enumerates items of gross income from sources within the Philippines: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, and does not mention income from the sale of tickets for international transportation, it does not mean that it is not an income from sources within the Phils. Sec 37 enumeration is not exclusive. It merely directs that the types of income listed are to be treated as income from sources within the Phils. The test of taxability is the "source"; and the source of an income is that activity which produced the income. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Phils.

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Teehankee concurs, but says that the conflict as to the proper characterization of the taxable income become moot after November 1972 (PD 69 promulgation). International carriers such as BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.

Feliciano dissents:He says that the liability of BOAC to Philippine income tax depends, not on BOAC's status as a "resident foreign corporation" but on whether such income is derived from "source within the Philippines."

For purposes of income tax, the "source of income" relatesnot to the physical sourcing of a flow of money or the physical situs of payment, rather, to the "property, activity, or service which produced the income."

Income may be derived from three possible sources only:(1)capitaland/or (2)laborand/or (3) the sale of capital assets. 1. If the income is from labor (services)the place where the labor is doneshould be decisive1. If the income is from capital,the place where the capital is employedshould be decisive1. If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive

Therefore,if income is taxed, the recipient must be a resident within the jurisdiction, orthe property or activities out of which the income issue or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in the country. The underlying theory is that the consideration for tax isprotection of life and propertyand that the income rightly to be levied uponto defray the burdens of the US Governmentis that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection.

In this case, there are 2 source of income rules: 1. The source rule applicable in respect of contracts of service; and 1. The source rule applicable in respect ofsales of personal property.

For Contracts of Service:

For contract for service, the applicable source rule: the income is sourced in the place where the service contracted for is rendered.Sec 37 (e) of our Tax Code was derived from the US Tax Code which was based on a recognition that transportation was a service and that the source of the income derived therefrom was to be treated as being the place where the service of transportation was rendered.

For Sales of Personal Property:

Income from the sale of personal property will be regarded as sourcedentirely within or entirely withoutthe Philippines depending upon two factors: (a) the place where the sale of such personal property occurs; and (b) the place where such personal property was produced.

In this case, BOAC may be considered either as sales of personal property (the tickets) or in the lease of services. "Sale of airline tickets," is not correct as a matter of tax law. The ticket is really theevidence of the contract of carriage.

Under PD 69 and 1355 (law governing taxation of international carriers), international carriers issuing compensation passage documentation in the Philippines, are not charged any Philippine incometax on their Philippine billings. Intl carriers who service ports in the Phils are treated in exactly the same way as international carriers not serving any port in the Philippines.

The source of income rule has been set aside. The Tax Code now imposes this 2 per cent tax computed on the basis of billings in respect of passengers and cargo originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2- per cent tax is effectively a tax on grossreceiptsor an excise or privilege tax andnota tax onincome.

Marubeni v CIRSept. 14, 1989Fernan, CJDigest by Jobar Buenagua

Topic and ProvisionsTaxpayers: Corporations

Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing laws of Japan and duly licensed to engage in business under Philippine laws. Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila. When the profits of AG&P were declared, a 10% final dividend tax was withheld from it, and another 15% profit remittance tax based on the remittable amount after the final 10% withholding tax were paid to the Bureau of Internal Revenue. Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its business in the Philippines as to be considered branch profits subject to profit remittance tax. The Acting Commissioner ruled that the dividends received by Marubeni are not income from the business activity in which it is engaged. Thus, the dividend if remitted abroad are not considered branch profits subject to profit remittance tax. Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance erroneously paid on the dividends remitted by AG& P. Respondent Commissioner denied the claim. It ruled that since Marubeni is a non resident corporation not engaged in trade or business in the Philippines it shall be subject to tax on income earned from Philippine sources at the rate of 35% of its gross income. On the other hand, Marubeni contends that, following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to final tax on dividends received from a domestic corporation.

Issue:1. WON Marubeni Corporation is a resident or non-resident foreign corporation.2. What should be the proper tax rate for Marubeni?

Held: Marubeni is a non-resident corporation. He should be taxed with a rate of 15%. .

Dispositive:WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12, 1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends received. No costs.

Ratio:1. Marubeni Corporation is a non-resident foreign corporation, with respect to the transaction. 0. The general rule is a foreign corporation is the same juridical entity as its branch office in the Philippines . The rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent.0. However, when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation.0. Thus, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is considered as a separate and distinct income taxpayer from the branch in the Philippines.0. Marubeni Corporations head office in Japan is a separate and distinct income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in the Philippines.1. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is taxed 35% of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to Marubeni Corporation on dividends received from Atlantic Gulf and Pacific Co. on the condition that Japan, its domicile state, extends in favor of Marubeni Corporation a tax credit of not less than 20% of the dividends received. This 15% tax rate imposed on the dividends received under Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.

December 2, 1991COMMISSIONER OF INTERNAL REVENUE vs. PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALSTopic: Taxpayers > Non-resident Foreign CorporationsFELICIANO,J.:Digest by ChuaFACTS: For two successive taxable years, P&G Phil. declared dividends payable to its parent company and sole stockholder, P&G-USA, from which thirty-five percent (35%) withholding tax at source was deducted. P&G Phil. filed for tax refund claiming that that rate applicable is 15% not 35%. CTA allowed refund. This was reversed on the ground that:1. P&G-USA was the proper party to claim the refund. 1. There is no provision that allows a credit against the tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax of 35% on corporations and the tax of 15% on dividends; and1. P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident parent company in the US may be subject to the preferential tax rate of 15% instead of 35%.ISSUE: WON P&G Phil is entitled to the tax refund. HELD: YES. DISPOSITIVE: WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.RATIO:1st Issue: NIRC defines taxpayer "any person subject to tax imposed by the Title on Tax on Income. It is significant to note that, the withholding agent who is "required to deduct and withhold any tax" is made personally liable for such tax. The withholding agent, P&G-Phil., isdirectly and independently liablefor the correct amount of the tax that should be withheld from the dividend remittances. A "person liable for tax" has been held to be a "person subject to tax". It is conceptually impossible then to consider a person who is statutorily made "liable for tax" asnot"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. InPhilippine Guaranty Company, Inc.v.Commissioner of Internal Revenue,it is 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: Thus, P&G-Phil. is properly regarded as a "taxpayer" and as such is impliedly authorized to file the claim for refund and the suit to recover such claim.2nd and 3rd Issues: NIRC provides that a foreign corporation not engaged in trade and business in the Philippines shall pay a tax equal to 35% of the gross income from all sources within the Philippines, as dividends. However, for dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax 35% on corporations and the tax 15% on dividends. Therefore, the reduced fifteen percent 15% dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty 20% which represents the difference between the 35% dividend tax rate and the preferred fifteen percent 15% dividend tax rate. The question arises: Did the US law comply with the above requirement? The US Intemal Revenue Code grants P&G-USAa tax credit for the amount of the dividend tax actuallypaid (i.e.,withheld) from the dividend remittances to P&G-USA; In short, it grants to P&G-USA a "deemed paid'tax creditfor a proportionate part of thecorporate income tax actually paidto the Philippines by P&G-Phil. US tax law treats the Philippine corporate income tax as if it came out of the pocket, 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. To determine whether it meets the conditions the amount of 20% dividend tax waived by Philippine Govt must be at least equal to the amount of the deemed paid tax credit allowed by USA. Following long computation, it was found out that atax creditof P29.75is allowed by US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary. Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), US Tax Code, specifically and clearly complies with the requirements of NIRC. Moreover, the concept of "deemed paid" tax credit, which is embodied in the US Tax Code, isexactly the same "deemed paid" tax credit found in ourNIRC 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 the US government.Purpose of the reduction: The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) is to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, NIRC requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

DE GUZMAN CIR vs. Visayas Electric Commissioner of Internal Revenue vs CAMarch 23, 1992J. Melencio-HerreraDigest by De Veyra

Topic: Taxpayers > Estates and Trusts

Facts: Respondent, GCL Retirement Plan (GCL) is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917. In 1984, Respondent GCL made investments and earned therefrom interest income from which was withheld the fifteen per centum (15%) final witholding tax imposed by Pres. Decree No. 1959. GCL filed with CIR a claim for refund in the amounts withheld by Anscor Capital and Investment Corp., and Commercial Bank of Manila. It filed a second claim for refund withheld by Anscor, stating in both letters that it disagreed with the collection of the 15% final withholding tax from the interest income as it is an entity fully exempt from income tax asprovidedunder RA 4917 in relation to Section 56 (b)of the Tax Code. The refund was denied so GCL elevated the matter to CTA which ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income and ordering a refund of the tax withheld. CA upheld CTA CIRs claim It appears that under RA 1983, amending Sec. 56 (b) of the National Internal Revenue Code (Tax Code, for brevity), employees' trusts were exempt from income tax. PD 1156, on the other hand,provided, for the first time, for the withholding from the interest on bank deposits at the source of a tax of fifteen per cent (15%) of said interest. However, it also allowed a specific exemption in its Section 53, for depositors enjoying tax exemption privileges or preferential tax treatment. This exemption and preferential tax treatment were carried over in PD 1739, which law also subjected interest from bank deposits and yield from deposit substitutes to a final tax of twenty per cent (20%). Subsequently, however, PD 1959 was issued, amending the aforestated provisions. The exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the imposition of the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were both abolished by PD 1959. Thus, when PD 1959 was promulgated, employees' trusts ceased to be exempt and thereafter became subject to the final withholding tax.

Issue: WON the GCL Plan is exempt from the final withholding tax on interest income from money placements and purchase of treasury bills as required by Pres. Decree No. 1959.

Held: YES.

Dispositive: WHEREFORE, the Writ ofCertiorariprayed for is DENIED. The judgment of respondent Court of Appeals, affirming that of the Court of Tax Appeals is UPHELD. No costs.

Ratio:To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with RA 4917. In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No. 1983. This provision specifically exempted employee's trusts from income tax.

The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption.

And rightly so, by virtue of theraison de'etrebehind the creation of employees' trusts. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.

The tax advantage in RA 1983, Section 56(b), was conceived in order to encourage the formation and establishment of such private Plans for the benefit of laborers and employees outside of the Social Security Act. It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.

The deletion in PD 1959 of the provisos regarding tax exemption and preferential tax rates under the old law, therefore, cannot be deemed to extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a specific provision. A subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific enactment, unless the legislative purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive to include what was set forth in the special act.

DEL VALLE REAGAN vs. CIR CIR v. Frank and James Robertson, Robert Cathey, John Garrison, CTAAugust 12, 1986Paras, J. Digest by Doms Gana

Topic and Provision: Exempt Taxpayers Exempt Individuals

Facts: These are consolidated cases involving the tax exemption provision in Art. XII Par. 2 of the RP US Military Bases Agreement: No national of the United States serving in or employed in the Philippines in connection with the construction, maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources or sources other than US resources. CTA has found that the respondents are exempt under the aforementioned provision and do not have to pay the deficiency of income tax assessed against them for the taxable years of 1969-1972. Frank Robertson is an American citizen born in the Philippines. He resided in the Philippines until repatriated to the US in 1945. After he was employed by the U.S. Federal Government with a job at the U.S. Navy, wherein due to various installations overseas he assigned to U.S. Naval Ship Repair Facility at Subic Bay, Olongapo, Philippines. James Robertson was born in the Philippines and had since resided in this country until repatriated to the US in 1945 and there, established his domicile. He landed a job with the U.S. Navy Shipyard as a U.S. Federal Civil Service employee. He returned to the Philippines in 1958 with assignment at the U.S. Naval Base at Subic Bay, Olongapo, and has since remained thru 1972. Robert H. Cathey is a US born citizen who upon discharge from the military service in 1946 turned a U.S. Navy's civilian employee with station at Makati, Metro Manila. John Garrison is a Philippine born American citizen also repatriated to the US in 1945. Soon after he was employed by the U.S. Federal Government in its military installations. He returned to the Philippines in 1952 assigned at the U.S. Naval Base, Subic Bay, Philippines. All respondents are citizens of the US, holders of American passports and admitted as Special Temporary Visitors under Section 9 (a) visa of the Philippine Immigration Act of 1940; civilian employees in the U.S. Military Base in the Philippines in connection with its construction, maintenance, operation, and defense; and incomes are solely derived from salaries from the U.S. govern