MADRIGAL v RAFFERTY

FACTS
In 1915, Vicente Madrigal fled a !"rn declarati"n !it# t#e CIR #"!ing a t"tal net
inc"$e %"r t#e &ear 191' t#e ($ "% )*9+,- .e clai$ed t#at t#e a$"(nt did n"t
re/reent #i "!n inc"$e %"r t#e &ear 191', 0(t t#e inc"$e "% t#e c"n1(gal
/artner#i/
e2iting 0et!een #i$ and #i !i%e, S(ana )atern"- .e c"ntended t#at ince t#ere
e2it (c# c"n1(gal /artner#i/, t#e inc"$e declared #"(ld 0e divided int" *
e3(al
/art in c"$/(ting and aeing t#e additi"nal inc"$e ta2 /r"vided 0& t#e Act "%
C"ngre "% 1914- T#e Att"rne&5General "% t#e )#ili//ine "/ined in %av"r "%
Madrigal,
0(t Ra6ert&, t#e 7S CIR, decided againt Madrigal-
A%ter #i /a&$ent (nder /r"tet, Madrigal intit(ted an acti"n t" rec"ver t#e ($ "%
)4,899 alleged t" #ave 0een !r"ng%(ll& and illegall& aeed and c"llected, (nder
t#e /r"vii"n "% t#e Inc"$e Ta2 La!- ."!ever, t#i !a "//"ed 0& Ra6ert&,
c"ntending t#at ta2e i$/"ed 0& t#e Inc"$e Ta2 La! are ta2e (/"n inc"$e, n"t
(/"n ca/ital "r /r"/ert&, and t#at t#e c"n1(gal /artner#i/ #a n" 0earing "n
inc"$e
c"nidered a inc"$e-
T#e CFI r(led in %av"r "% t#e de%endant, Ra6ert&-
ISS7E
:#et#er Madrigal; inc"$e #"(ld 0e divided int" * e3(al /art in t#e ae$ent
and c"$/(tati"n "% #i ta2
.ELD
<=- S(ana )atern", !i%e "% Vicente Madrigal, till #a an inc#"ate rig#t in t#e
/r"/ert& "% #er #(0and d(ring t#e li%e "% t#e c"n1(gal /artner#i/- S#e #a an
interet
in t#e (lti$ate /r"/ert& rig#t and in t#e (lti$ate "!ner#i/ "% /r"/ert& ac3(ired a
inc"$e a%ter (c# inc"$e #a 0ec"$e ca/ital- S(ana #a n" a0"l(te rig#t t"
"ne#al%
t#e inc"$e "% t#e c"n1(gal /artner#i/- <"t 0eing ei>ed "% a e/arate etate, #e
cann"t $a?e a e/arate ret(rn in "rder t" receive t#e 0eneft "% e2e$/ti"n, !#ic#
c"(ld arie 0& rea"n "% t#e additi"nal ta2- A #e #a n" etate and inc"$e,
act(all&
and legall& veted in #er and entirel& e/arate %r"$ #er #(0and; /r"/ert&, t#e
inc"$e cann"t 0e c"nidered t#e e/arate inc"$e "% t#e !i%e %"r /(r/"e "%
additi"nal ta2-
Inc"$e, a c"ntrated !it# ca/ital and /r"/ert&, i t" 0e t#e tet- T#e eential
di6erence 0et!een ca/ital and inc"$e i t#at ca/ital i a %(nd@ inc"$e i a A"!- A
%(nd
"% /r"/ert& e2iting at an intant "% ti$e i called ca/ital- A A"! "% ervice
rendered
0& t#at ca/ital 0& t#e /a&$ent "% $"ne& %r"$ it "r an& "t#er 0eneft rendered 0& a
%(nd
"% ca/ital in relati"n t" (c# %(nd t#r"(g# a /eri"d "% ti$e i called inc"$e- Ca/ital
i
!ealt#, !#ile inc"$e i t#e ervice "% !ealt#- A ta2 "n inc"$e i n"t ta2 "n
/r"/ert&-
Fi#er v- Trinidad BG-R- <"- L51C518 =ct"0er 49, 19**D
)"t (nder cae diget, C"$$ercial La! at :edneda&, Marc# *1, *91* )"ted 0&
Sc#i>"/#renic Mind
FactE )#ili//ine A$erican Dr(g C"$/an& !a a c"r/"rati"n d(l& "rgani>ed and
e2iting (nder t#e la! "% t#e )#ili//ine Iland, d"ing 0(ine in t#e Cit& "%
Manila- Fi#er !a a t"c?#"lder in aid c"r/"rati"n- Said c"r/"rati"n, a re(lt "%
t#e 0(ine %"r t#at &ear, declared a Ft"c? dividendF and t#at t#e /r"/"rti"nate
#are "% aid t"c? divided "% Fi#er !a )*',899- Said t#e t"c? dividend %"r t#at
a$"(nt !a i(ed t" Fi#er- F"r t#i rea"n, Trinidad de$anded /a&$ent "% inc"$e
ta2 %"r t#e t"c? dividend received 0& Fi#er- Fi#er /aid (nder /r"tet t#e ($ "%
)889-91 a inc"$e ta2 "n aid t"c? dividend- Fi#er fled an acti"n %"r t#e rec"ver&
"% )889-91- Trinidad de$(rred t" t#e /etiti"n (/"n t#e gr"(nd t#at it did n"t tate
%act (Gcient t" c"ntit(te ca(e "% acti"n- T#e de$(rrer !a (tained and Fi#er
a//ealed-
I(eE :#et#er "r n"t t#e t"c? dividend !a an inc"$e and t#ere%"re ta2a0le-
.eldE <"- Generall& /ea?ing, t"c? dividend re/reent (nditri0(ted increae in
t#e ca/ital "% c"r/"rati"n "r fr$, 1"int t"c? c"$/anie, etc-, etc-, %"r a /artic(lar
/eri"d- T#e invent"r& "% t#e /r"/ert& "% t#e c"r/"rati"n %"r /artic(lar /eri"d #"!
an increae in it ca/ital, " t#at t#e t"c? t#eret"%"re i(ed d"e n"t #"! t#e real
val(e "% t#e t"c?#"lderH interet, and additi"nal t"c? i i(ed #"!ing t#e
increae in t#e act(al ca/ital, "r /r"/ert&, "r aet "% t#e c"r/"rati"n-
Li$/an v CIR
Fact
Li$/an Invet$ent C"r/ i a d"$etic c"r/"rati"n engaged in t#e 0(ine "%
leaing real /r"/ertie- A$"ng it real /r"/ertie are l"t and 0(ilding in Manila
and )aa& Cit& ac3(ired %r"$ Ia0el" Li$ and #i $"t#er- A%ter fling ta2 ret(rn %"r
195+, 195C, t#e e2a$iner "% IIR dic"vered t#at t#e c"r/"rati"n #a (ndertated
it rental inc"$e 0& *9? and 81? d(ring aid &ear a !ell a clai$ed e2ceive
de/reciati"n a$"(nting t" *9? and 1+?- T#e CIR de$anded /a&$ent %"r defcienc&
ta2 and (rc#arge- )etiti"ner arg(e t#at t#ee a$"(nt !ere eit#er de/"ited !it#
t#e c"(rt 0& t#e tenant "r #ave &et t" 0e received-
I(eE
:J< t#ere !a (ndeclared inc"$e
.eldE
Ye, /etiti"ner ad$itted t#at it #ad (ndeclared $"re t#an #al% "% t#e a$"(nt,
t#ere%"re it !a inc($0ent (/"n t#e c"r/"rati"n t" eta0li# t#e re$ainder "% it
/reteni"n 0& clear and c"nvincing evidence !#ic# !a lac?ing in t#i cae-
T#e !it#dra!al in 1958 "% t#e de/"it in c"(rt /ertaining t" t#e 195C rental inc"$e
i n" (Gcient 1(tifcati"n %"r t#e n"n5declarati"n "% aid inc"$e in 195C ince t#e
de/"it !a re"rted d(e t" t#e re%(al "% /etiti"ner t" acce/t t#e a$e, and !a
n"t t#e %a(lt "% it tenant@ #ence, /etiti"ner i dee$ed t" #ave c"ntr(ctivel&
received (c# rental in 195C-
T#e /a&$ent 0& t#e (05tenant #"(ld #ave 0een re/"rted a rental inc"$e in aid
&ear a it in till inc"$e regardle "% t#e "(rce-
C"n!i, et-al- v- CTA and CIR
)"t (nder cae diget, Ta2ati"n at T#(rda&, Kan(ar& *+, *91* )"ted 0&
Sc#i>"/#renic Mind
FactE )etiti"ner are e$/l"&ee "% )r"cter and Ga$0le L)#ili//ine Man(%act(ring
C"r/"rati"n, (0idiar& "% )r"cter M Ga$0le, a %"reign c"r/"rati"nN-D(ring t#e &ear
19C9 and 19C1, /etiti"ner !ere aigned t" "t#er (0idiarie "% )r"cter M Ga$0le
"(tide t#e )#ili//ine, %"r !#ic# /etiti"ner !ere /aid 7S d"llar a c"$/enati"n-
)etiti"ner fled t#eir ITR %"r 19C9 and 19C1, c"$/(ting ta2 d(e 0& a//l&ing t#e
d"llar5t"5/e" c"nveri"n 0aed "n t#e A"ating rate (nder IIR R(ling <"- C959*C- In
19C4, /etiti"ner fled a$ened ITR %"r 19C9 and 19C1, t#i ti$e (ing t#e /ar
val(e "% t#e /e" a 0ai- T#i re(lted in t#e alleged "ver/a&$ent, re%(nd andJ"r
ta2 credit, %"r !#ic# clai$ %"r re%(nd !ere fled-
CTA #eld t#at t#e /r"/er c"nveri"n rate %"r t#e /(r/"e "% re/"rting and /a&ing
t#e )#ili//ine inc"$e ta2 "n t#e d"llar earning "% /etiti"ner are t#e rate
/recri0ed (nder Reven(e Me$"rand($ Circ(lar <"- C5C1 and '15C1- T#e re%(nd
clai$ !ere denied-
I(eE
L1N :#et#er "r n"t /etiti"nerH d"llar earning are recei/t derived %r"$ %"reign
e2c#ange tranacti"n@ <=-
L*N :#et#er "r n"t t#e /r"/er rate "% c"nveri"n "% /etiti"nerH d"llar earning %"r
ta2 /(r/"e in t#e /revailing %ree $ar?et rate "% e2c#ange and n"t t#e /ar val(e "%
t#e /e"@ YES-
.eldE F"r t#e /r"/er re"l(ti"n "% inc"$e ta2 cae, inc"$e $a& 0e defned a an
a$"(nt "% $"ne& c"$ing t" a /er"n "r c"r/"rati"n !it#in a /ecifed ti$e,
!#et#er a /a&$ent %"r ervice, interet "r /r"ft %r"$ invet$ent- 7nle
"t#er!ie /ecifed, it $ean ca# "r it e3(ivalent- Inc"$e can al" 0e t#"(g# "%
a A"! "% t#e %r(it "% "neH la0"r-
)etiti"ner are c"rrect a t" t#eir clai$ t#at t#eir d"llar earning are n"t recei/t
derived %r"$ %"reign e2c#ange tranacti"n- F"r a %"reign e2c#ange tranacti"n i
i$/l& t#at O a tranacti"n in %"reign e2c#ange, %"reign e2c#ange 0eing Ft#e
c"nveri"n "% an a$"(nt "% $"ne& "r c(rrenc& "% "ne c"(ntr& int" an e3(ivalent
a$"(nt "% $"ne& "r c(rrenc& "% an"t#er-F :#en /etiti"ner !ere aigned t" t#e
%"reign (0idiarie "% )r"cter M Ga$0le, t#e& !ere earning in t#eir aigned
nati"nH c(rrenc& and !ere ALS= /ending in aid c(rrenc&- T#ere !a n"
c"nveri"n, t#ere%"re, %r"$ "ne c(rrenc& t" an"t#er-
T#e d"llar earning "% /etiti"ner are t#e %r(it "% t#eir la0"r in t#e %"reign
(0idiarie "% )r"cter M Ga$0le- It !a a defnite a$"(nt "% $"ne& !#ic# ca$e t"
t#e$ !it#in a /ecifed /eri"d "% ti$e "% t!" &ear a /a&$ent %"r t#eir ervice-
And in t#e i$/le$entati"n %"r t#e /r"/er en%"rce$ent "% t#e <ati"nal Internal
Reven(e C"de, Secti"n 448 t#ere"% e$/"!er t#e Secretar& "% Finance t"
F/r"$(lgate all need%(l r(le and reg(lati"nF t" e6ectivel& en%"rce it /r"vii"n
/(r(ant t" t#i a(t#"rit&, Reven(e Me$"rand($ Circ(lar <"- C5C1 and '15C1
!ere i(ed t" /recri0ed a (ni%"r$ rate "% e2c#ange %r"$ 7S d"llar t" )#ili//ine
/e" %"r I<TER<AL REVE<7E TAP )7R)=SES %"r t#e &ear 19C9 and 19C1,
re/ectivel&- Said reven(e circ(lar !ere a valid e2ercie "% t#e a(t#"rit& given t"
t#e Secretar& "% Finance 0& t#e Legilat(re !#ic# enacted t#e Internal Reven(e
C"de- And t#ee are /re($ed t" 0e a valid inter/retati"n "% aid c"de (ntil rev"?ed
0& t#e Secretar& "% Finance #i$el%-
)etiti"ner are citi>en "% t#e )#ili//ine, and t#eir inc"$e, !it#in "r !it#"(t, and in
t#ee cae !#"ll& !it#"(t, are (01ect t" inc"$e ta2- Sec- *1, <IRC, a a$ended,
d"e n"t 0r""? an& e2e$/ti"n-
DE<IED F=R LAC, =F MERIT-
IaQa Kr- v- C"(rt "% A//eal BG-R- <"- 19*9+C- Fe0r(ar& 19, *999D
)etiti"ner entered int" a deed "% ale /(r/"rtedl& "n intall$ent- .e dic"(nted t#e
/r"$i"r& n"te c"vering t#e %(t(re intall$ent %"r /(r/"e "% ta2ati"n-
ISS7E
:#et#er "r n"t t#e /r"$i"r& n"te #"(ld 0e declared ca# tranacti"n %"r
/(r/"e "% ta2ati"n-
R7LI<G
YES- A neg"tia0le intr($ent i dee$ed a (0tit(te %"r $"ne& and %"r val(e-
Acc"rding t" Sec- *5 "% <ILE Rval(e i an& c"niderati"n (Gcient t" (//"rt a
i$/le c"ntract- An antecedent "r /re5e2iting de0t c"ntit(te val(e@ and i
dee$ed (c# !#et#er t#e intr($ent i /a&a0le "n de$and "r at a %(t(re ti$eS-
Alt#"(g# t#e /r"ceed "% a dic"(nted /r"$i"r& n"te i n"t c"nidered /art "% t#e
initial /a&$ent, it i till ta2a0le inc"$e %"r t#e &ear it !a c"nverted int" ca#-
)A<SAC=LA v- CIR
FactE )etiti"ner )anac"la fled #i inc"$e ta2 ret(rn %"r t#e ta2a0le &ear 199C t#at
reAected an "ver/a&$ent "% )5959- In it #e clai$ed t#e increaed a$"(nt "%
/er"nal and additi"nal e2e$/ti"n, alt#"(g# #i certifcate "% inc"$e ta2 !it##eld
"n c"$/enati"n indicated t#e leer all"!ed a$"(nt "n t#ee e2e$/ti"n- .e
clai$ed a re%(nd !#ic# !a denied- T#e CTA al" denied t#e clai$, a&ing t#at it
!"(ld 0e a0(rd t" all"! t#e ded(cti"n %r"$ a ta2/a&er; gr" inc"$e earned "n a
certain &ear "% e2e$/ti"n availing "n a di6erent ta2a0le &ear- )etiti"ner; rec"n
!a denied- CA denied #i a//eal, #ence t#e /etiti"n-
I(eE C"(ld e2e$/ti"n (nder Sec- 45 "% <IRC !#ic# t""? e6ect "n Kan(ar& 1, 1998
0e availed "% %"r ta2a0le &ear 199CT
.eldE <"- :#at t#e la! c"nider %"r t#e /(r/"e "% deter$ining t#e ta2 d(e %r"$
an individ(al ta2/a&er i #i tat( and 3(alifed de/endent at t#e cl"e "% t#e
ta2a0le &ear and n"t at t#e ti$e t#e ret(rn i fled and t#e ta2 d(e t#ere"n i /aid-
T#e <IRC t""? e6ect "n Kan(ar& 1, 1998, #ence t#e increaed a$"(nt "% /er"nal
and additi"nal e2e$/ti"n can "nl& 0e all"!ed a ded(cti"n %r"$ t#e individ(al
ta2/a&er; gr" "r net inc"$e %"r t#e ta2a0le &ear 1998 t" 0e fled in 1999- T#e
<IRC $ade n" re%erence t#at t#e increae #all a//l& "n inc"$e earned /ri"r t"
1998- <"r !a t#ere an& /r"vii"n t#at t#e it #a a retr"active e6ect-
T#e reliance "% /etiti"ner "n RA C1+C "n ad1(t$ent "% /er"nal and
additi"nal e2e$/ti"n acc"rding t" /"vert& t#re#"ld i $i/laced- Said la! i a
"cial legilati"n, (nli?e t#e "ne in t#e cae at 0ar-
7$ali v- Etanila" Ma& *9, 199*
FactE C"ngre enacted Re/(0lic Act C1+C a$ending t#e <IRC Lad1(ting t#e 0aic
and additi"nal e2e$/ti"n all"!a0le t" individ(al %"r inc"$e ta2 /(r/"e t" t#e
/"vert& t#re#"ld levelN- T#e aid Act !a igned and a//r"ved 0& t#e )reident "n
19 Dece$0er 1991 and /(0li#ed "n 1' Kan(ar& 199* in FMala&aF a ne!/a/er "%
general circ(lati"n- =n *+ Dece$0er 1991, t#e CIR /r"$(lgated Reven(e
Reg(lati"n <"- 159* tating t#at t#e reg(lati"n #all ta?e e6ect "n c"$/enati"n
inc"$e %r"$ Kan(ar& 1, 199*- )etiti"ner fled a /etiti"n %"r $anda$( t" c"$/el
t#e CIR t" i$/le$ent RA C1+C in regard t" inc"$e earned "r received in 1991, and
/r"#i0iti"n t" en1"in t#e CIR %r"$ i$/le$enting t#e reven(e reg(lati"n-
I(eE A($ing t#at Re/- Act C1+C t""? e6ect "n 49 Kan(ar& 199* L15 da&
a%ter it /(0licati"n in RMala&aSN, !#et#er "r n"t t#e aid la! n"net#ele c"ver "r
a//lie t" c"$/enati"n inc"$e earned "r received d(ring calendar &ear 1991-
Rati"E T#e C"(rt i "% t#e c"nidered vie! t#at Re/- Act C1+C #"(ld c"ver "r e2tend
t" c"$/enati"n inc"$e earned "r received d(ring calendar &ear 1991- Sec- *9,
/ar- BLD, Ite$ <"- ' "% t#e <ati"nal Internal Reven(e C"de, a a$ended, /r"videE
7/"n t#e rec"$$endati"n "% t#e Secretar& "% Finance, t#e )reident #all
a(t"$aticall& ad1(t n"t $"re "%ten t#an "nce ever& t#ree &ear, t#e /er"nal and
additi"nal e2e$/ti"n ta?ing int" acc"(nt, a$"ng "t#er, t#e $"ve$ent in
c"n($er /rice indice, level "% $ini$($ !age, and 0are (0itence level-
T#e e2e$/ti"n !ere lat ad1(ted in 198+- T#e /reident c"(ld #ave ad1(ted it in
1989 0(t did n"t d" "- T#e /"vert& t#re#"ld level re%er t" t#e level at t#e ti$e
Re/- Act C1+C !a enacted 0& C"ngre- T#e Act i a "cial legilati"n intended t"
alleviate in /art t#e /reent ec"n"$ic /lig#t "% t#e l"!er inc"$e ta2/a&er-
Re/- Act C1+C a& t#at t#e increaed /er"nal e2e$/ti"n #all 0e availa0le a%ter
t#e la! #all #ave 0ec"$e e6ective- T#ee e2e$/ti"n are availa0le (/"n t#e fling
"% /er"nal inc"$e ta2 ret(rn, d"ne n"t later t#an t#e 15t# da& "% A/ril a%ter t#e
end "% a calendar &ear- T#(, (nder Re/- Act C1+C, !#ic# 0eca$e e6ective, "n 49
Kan(ar& 199*, t#e increaed e2e$/ti"n are literall& availa0le "n "r 0e%"re 15 A/ril
199* Bt#"(g# n"t 0e%"re 49 Kan(ar& 199*D- I(t t#ee increaed e2e$/ti"n can 0e
availa0le "n 15 A/ril 199* "nl& in re/ect "% c"$/enati"n inc"$e earned "r
received d(ring t#e calendar &ear 1991- T#e /er"nal e2e$/ti"n a increaed 0&
Re/- Act C1+C are n"t availa0le in re/ect "% c"$/enati"n inc"$e received d(ring
t#e 1999 calendar &ear@ t#e ta2 d(e in re/ect "% aid inc"$e #ad alread& accr(ed,
and 0een /re($a0l& /aid LT#e la! d"e n"t tate retr"active a//licati"nN- T#e
/er"nal e2e$/ti"n a increaed 0& Re/- Act C1+C cann"t 0e regarded a availa0le
a t" c"$/enati"n inc"$e received d(ring 199* 0eca(e it !"(ld in e6ect
/"t/"ne t#e availa0ilit& "% t#e increaed e2e$/ti"n t" 1 Kan(ar&515 A/ril 1994-
T#e i$/le$enting reg(lati"n c"llide !it# Secti"n 4 "% Re/- Act C1+C !#ic# tate
t#at t#e tat(te F#all ta?e e6ect (/"n it a//r"valS-
T#e reven(e reg(lati"n #"(ld ta?e e6ect "n c"$/enati"n inc"$e earned "r
received %r"$ 1 Kan(ar& 1991- Since t#i decii"n i /r"$(lgated a%ter 15 A/ril
199*, t#"e ta2/a&er !#" #ave alread& /aid are entitled t" re%(nd "r credit-
AFISC= I<S7RA<CE C=R)- et al- v- C=7RT =F A))EALS
FACTSE
T#e /etiti"ner are '1 n"n5li%e d"$etic in(rance c"r/"rati"n- T#e& i(ed ri?
in(rance /"licie %"r $ac#ine- T#e /etiti"ner in 19+5 entered int" a U("ta S#are
Rein(rance Treat& and a S(r/l( Rein(rance Treat& !it# t#e M(nc#ener
R(c?veric#er(ng5Geelc#a%t L#erea%ter called M(nic#N, a n"n5reident %"reign
in(rance c"r/"rati"n- T#e rein(rance treatie re3(ired /etiti"ner t" %"r$ a /""l,
!#ic# t#e& c"$/lied !it#-
In 19C+, t#e /""l "% $ac#iner& in(rer (0$itted a fnancial tate$ent and fled an
RIn%"r$ati"n Ret(rn "% =rgani>ati"n E2e$/t %r"$ Inc"$e Ta2S %"r 19C5- =n t#e
0ai "% t#i, t#e CIR aeed a defcienc& "% )1,8'4,*C4-+9, and !it##"lding ta2e
in t#e a$"(nt "% )1,C+8,C99-49 and )89,'48-+8 "n dividend /aid t" M(nic# and t"
t#e /etiti"ner, re/ectivel&-
T#e C"(rt "% Ta2 A//eal (tained t#e /etiti"nerH lia0ilit&- T#e C"(rt "% A//eal
di$ied t#eir a//eal-
T#e CA r(led in t#at t#e /""l "% $ac#iner& in(rer !a a /artner#i/ ta2a0le a a
c"r/"rati"n, and t#at t#e latter; c"llecti"n "% /re$i($ "n 0e#al% "% it $e$0er,
t#e ceding c"$/anie, !a ta2a0le inc"$e-
ISS7EJSE
:#et#er "r n"t t#e /""l i ta2a0le a a c"r/"rati"n-
.ELDE
1N YeE )""l ta2a0le a a c"r/"rati"n
Arg($ent "% )etiti"nerE T#e rein(rance /"licie !ere !ritten 0& t#e$ Rindivid(all&
and e/aratel&,S and t#at t#eir lia0ilit& !a li$ited t" t#e e2tent "% t#eir all"cated
#are in t#e "riginal ri? t#( rein(red- .ence, t#e /""l did n"t act "r earn inc"$e
a a rein(rer- It r"le !a li$ited t" it /rinci/al %(ncti"n "% Rall"cating and
ditri0(ting t#e ri?LN ariing %r"$ t#e "riginal in(rance a$"ng t#e ignat"rie t"
t#e treat& "r t#e $e$0er "% t#e /""l 0aed "n t#eir a0ilit& t" a0"r0 t#e ri?LN
cededB@D a !ell a t#e /er%"r$ance "% incidental %(ncti"n, (c# a rec"rd,
$aintenance, c"llecti"n and c(t"d& "% %(nd, etc-S
Arg($ent "% SCE Acc"rding t" Secti"n *' "% t#e <IRC "% 19C5E
RSEC- *'- Rate "% ta2 "n c"r/"rati"n- 55 LaN Ta2 "n d"$etic c"r/"rati"n- 55 A
ta2 i #ere0& i$/"ed (/"n t#e ta2a0le net inc"$e received d(ring eac# ta2a0le
&ear %r"$ all "(rce 0& ever& c"r/"rati"n "rgani>ed in, "r e2iting (nder t#e la!
"% t#e )#ili//ine, n" $atter #"! created "r "rgani>ed, 0(t n"t incl(ding d(l&
regitered general c"5/artner#i/ Lc"$/aQia c"lectivaN, general /r"%ei"nal
/artner#i/, /rivate ed(cati"nal intit(ti"n, and 0(ilding and l"an a"ciati"n
222-S
Inel(di0l&, t#e )#ili//ine legilat(re incl(ded in t#e c"nce/t "% c"r/"rati"n t#"e
entitie t#at ree$0led t#e$ (c# a (nregitered /artner#i/ and a"ciati"n-
Interetingl&, t#e <IRC; incl(i"n "% (c# entitie in t#e ta2 "n c"r/"rati"n !a
$ade even clearer 0& t#e Ta2 Re%"r$ Act "% 199C Sec- *C read t"get#er !it# Sec-
** readE
RSEC- *C- Rate "% Inc"$e Ta2 "n D"$etic C"r/"rati"n- 55
LAN In General- 55 E2ce/t a "t#er!ie /r"vided in t#i C"de, an inc"$e ta2 "%
t#irt&5fve /ercent L45VN i #ere0& i$/"ed (/"n t#e ta2a0le inc"$e derived d(ring
eac# ta2a0le &ear %r"$ all "(rce !it#in and !it#"(t t#e )#ili//ine 0& ever&
c"r/"rati"n, a defned in Secti"n ** LIN "% t#i C"de, and ta2a0le (nder t#i Title a
a c"r/"rati"n 222-S
RSEC- **- 55 Defniti"n- 55 :#en (ed in t#i TitleE
222 222 222
LIN T#e ter$ Wc"r/"rati"n; #all incl(de /artner#i/, n" $atter #"! created "r
"rgani>ed, 1"int5t"c? c"$/anie, 1"int acc"(nt Lc(enta en /artici/aci"nN,
a"ciati"n, "r in(rance c"$/anie, 0(t d"e n"t incl(de general /r"%ei"nal
/artner#i/ B"rD a 1"int vent(re "r c"n"rti($ %"r$ed %"r t#e /(r/"e "%
(nderta?ing c"ntr(cti"n /r"1ect "r engaging in /etr"le($, c"al, ge"t#er$al and
"t#er energ& "/erati"n /(r(ant t" an "/erating "r c"n"rti($ agree$ent (nder a
ervice c"ntract !it#"(t t#e G"vern$ent- WGeneral /r"%ei"nal /artner#i/; are
/artner#i/ %"r$ed 0& /er"n %"r t#e "le /(r/"e "% e2erciing t#eir c"$$"n
/r"%ei"n, n" /art "% t#e inc"$e "% !#ic# i derived %r"$ engaging in an& trade "r
0(ine-
T#(, t#e C"(rt in Evangelita v- C"llect"r "% Internal Reven(e #eld t#at Secti"n *'
c"vered t#ee (nregitered /artner#i/ and even a"ciati"n "r 1"int acc"(nt,
!#ic# #ad n" legal /er"nalitie a/art %r"$ t#eir individ(al $e$0er-
F(rt#er$"re, )""l Agree$ent "r an a"ciati"n t#at !"(ld #andle all t#e in(rance
0(inee c"vered (nder t#eir 3("ta5#are rein(rance treat& and (r/l(
rein(rance treat& !it# M(nic# $a& 0e c"nidered a /artner#i/ 0eca(e it c"ntain
t#e %"ll"!ing ele$entE L1N T#e /""l #a a c"$$"n %(nd, c"niting "% $"ne& and
"t#er val(a0le t#at are de/"ited in t#e na$e and credit "% t#e /""l- T#i c"$$"n
%(nd /a& %"r t#e ad$initrati"n and "/erati"n e2/ene "% t#e /""l- L*N T#e /""l
%(ncti"n t#r"(g# an e2ec(tive 0"ard, !#ic# ree$0le t#e 0"ard "% direct"r "% a
c"r/"rati"n, c"$/"ed "% "ne re/reentative %"r eac# "% t#e ceding c"$/anie- L4N
:#ile, t#e /""l itel% i n"t a rein(rer and d"e n"t i(e an& /"licie@ it !"r? i
indi/ena0le, 0enefcial and ec"n"$icall& (e%(l t" t#e 0(ine "% t#e ceding
c"$/anie and M(nic#, 0eca(e !it#"(t it t#e& !"(ld n"t #ave received t#eir
/re$i($ /(r(ant t" t#e agree$ent !it# M(nic#- )r"ft $"tive "r 0(ine i,
t#ere%"re, t#e /ri$"rdial rea"n %"r t#e /""l; %"r$ati"n-
)ASC7AL v- C"$$ii"ner "% InternalReven(e X19 I7S=RG

FACTSE
=n K(ne **, 19+5, /etiti"ner 0"(g#t t!" L*N/arcel "% land %r"$ Santiag"
Iernardin", et al-and "n Ma& *8, 19++, t#e& 0"(g#t an"t#ert#ree L4N /arcel "% land
%r"$ K(an R"3(e- T#efrt t!" /arcel "% land !ere "ld 0& /etiti"nerin 19+8 t"
Marenir Devel"/$ent C"r/"rati"n,!#ile t#e t#ree /arcel "% land !ere "ld
0&/etiti"ner t" Erlinda Re&e and Maria Sa$"n"n Marc# 19,19C9- )etiti"ner
reali>ed a net/r"ft in t#e ale $ade in 19+8 in t#e a$"(nt "% )1+5, **'-C9, !#ile
t#e& reali>ed a net /r"ft "% )+9,999 in t#e ale $ade in 19C9- T#ec"rre/"nding
ca/ital gain ta2e !ere /aid 0&/etiti"ner in 19C4 and 19C' -Re/"ndent
C"$$ii"ner in%"r$ed /etiti"nert#at in t#e &ear 19+8 and 19C9, /etiti"ner
ac"5"!ner in t#e real etate tranacti"n %"r$edan (nregitered /artner#i/ "r
1"int vent(reta2a0le a a c"r/"rati"n (nder Secti"n *9L0Nand it inc"$e !a (01ect
t" t#e ta2e/recri0ed (nder Secti"n *', 0"t# "% t#e<ati"nal Internal Reven(e C"de@
t#at t#e(nregitered /artner#i/ !a (01ect t"c"r/"rate inc"$e ta2 a
diting(i#ed %r"$/r"ft derived %r"$ t#e /artner#i/ 0& t#e$!#ic# i (01ect t"
individ(al inc"$e ta2-
ISS7EE
:#et#er /etiti"ner %"r$ed an (nregitered/artner#i/ (01ect t" c"r/"rate inc"$e
ta2L/artner#i/ v- c"5"!ner#i/N
R7LI<GE
Article 1C+9 "% t#e ne! Civil C"de la& d"!n t#er(le %"r deter$ining !#en a
tranacti"n #"(ld0e dee$ed a /artner#i/ "r a c"5"!ner#i/-Said article
/aragra/# * and 4, /r"videEL*N C"5"!ner#i/ "r c"5/"ei"n d"e n"t itel%
eta0li# a /artner#i/, !#et#er (c# c"5"!ner"r c"5/"e"r d" "r d" n"t #are
an& /r"ft$ade 0& t#e (e "% t#e /r"/ert&@ L4N T#e#aring "% gr" ret(rn d"e n"t
"% itel% eta0li# a /artner#i/, !#et#er "r n"t t#e/er"n #aring t#e$ #ave a
1"int "r c"$$"nrig#t "r interet in an& /r"/ert& %r"$ !#ic# t#eret(rn are
derived@T#e #aring "% ret(rn d"e n"t in itel% eta0li# a /artner#i/ !#et#er "r
n"t t#e/er"n #aring t#erein #ave a 1"int "r c"$$"nrig#t "r interet in t#e
/r"/ert&- T#ere $(t 0ea clear intent t" %"r$ a /artner#i/, t#ee2itence "% a
1(ridical /er"nalit& di6erent %r"$t#e individ(al /artner, and t#e %reed"$ "%
eac#/art& t" tran%er "r aign t#e !#"le /r"/ert&-In t#e /reent cae, t#ere i clear
evidence "% c"5"!ner#i/ 0et!een t#e /etiti"ner- T#ere in" ade3(ate 0ai t"
(//"rt t#e /r"/"iti"nt#at t#e& t#ere0& %"r$ed an (nregitered/artner#i/- T#e
t!" i"lated tranacti"n!#ere0& t#e& /(rc#aed /r"/ertie and "ld t#ea$e a
%e! &ear t#erea%ter did n"t t#ere0&$a?e t#e$ /artner- T#e& #ared in t#e
gr"/r"ft a c"5 "!ner and /aid t#eir ca/ital gainta2e "n t#eir net /r"ft and
availed "% t#e ta2a$net& t#ere0&- 7nder t#e circ($tance, t#e&cann"t 0e
c"nidered t" #ave %"r$ed an(nregitered /artner#i/ !#ic# i t#ere0& lia0le%"r
c"r/"rate inc"$e ta2, a t#e re/"ndentc"$$ii"ner /r"/"e- And even
a($ing %"r t#e a?e "% arg($entt#at (c# (nregitered /artner#i/ a//ear
t"#ave 0een %"r$ed, ince t#ere i n" (c#e2iting (nregitered /artner#i/ !it# a
ditinct/er"nalit& n"r !it# aet t#at can 0e #eldlia0le %"r aid defcienc&
c"r/"rate inc"$e ta2,t#en /etiti"ner can 0e #eld individ(all& lia0le a/artner %"r
t#i (n/aid "0ligati"n "% t#e/artner#i/-
=0ill" v- C"$$ii"ner L149 SCRA '4+N
FactE T#e S(/re$e C"(rt, a//l&ing Art- 1C+9 "% t#e Civil C"de, aid t#at t#e #aring
"% gr" ret(rn d"e n"t itel% eta0li# a 1"int /artner#i/ !#et#er "r t#e /er"n
#aring t#e$ #ave a 1"int "r c"$$"n rig#t "r interet in t#e /r"/ert& %r"$ !#ic#
t#e ret(rn are derived- T#ere $(t, intead, 0e an (n$ita?a0le intenti"n t" %"r$
t#at /artner#i/ "r 1"int vent(re- A ale "% a c"5"!ner#i/ /r"/ert& at a /r"ft d"e
n"t necearil& eta0li# t#at intenti"n-
T#i i a0"(t t#e ta2 lia0ilit& "% ' 0r"t#er M iter !#" "ld * /arcel "% land !#ic#
t#e& #ad ac3(ired %r"$ t#eir %at#er- In 19C4, K"e =0ill" Sr 0"(g#t * /arcel "% land
%r"$ =rtiga M C" M tran%erred #i rig#t t" #i ' c#ildren t" ena0le t#e$ t" 0(ild
t#eir reidence- In 19C', t#e ' c#ildren re"ld t#e l"t t" :alled Cit& Sec(ritie
C"r/ M earned /r"ft- CIR aeed t#e ' c#ildren !it# c"r/"rate inc"$e ta2-
.ELDE It i err"r t" #"ld t#at /etiti"ner L=0ill"N #ave %"r$ed a ta2a0le
(nregitered /artner#i/ i$/l& 0eca(e t#e& c"ntri0(ted in 0(&ing t#e l"t, re"ld
t#e a$e M divided t#e /r"ft a$"ng t#e$elve- T#e& are i$/l& c"5"!ner- T#e&
!ere n"t engaged in an& 1"int vent(re 0& rea"n "% t#e i"lated tranacti"n- T#e
"riginal /(r/"e !a t" divide t#e l"t %"r reidential /(r/"e- T#e divii"n "% t#e
/r"ft !a $erel& incidental t" t#e di"l(ti"n "% t#e c"5"!ner#i/-