G.R. No.

L-9692 January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for
petitioner.

Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the assessment
and decision of petitioner Collector of Internal Revenue, later referred to as Collector, assessing and
demanding from the respondents Batangas Transportation Company, later referred to as Batangas
Transportation, and Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of
P54,143.54, supposed to represent the deficiency income tax and compromise for the years 1946 to
1949, inclusive, which amount, pending appeal in the C.T.A., but before the Collector filed his answer in
said court, was increased to P148,890.14.
The following facts are undisputed: 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. Batangas Transportation was organized in 1918, while Laguna Bus was organized in
1928. Each company now has a fully paid up capital of Pl,000,000. Before the last war, each company
maintained separate head offices, that of Batangas Transportation in Batangas, Batangas, while the
Laguna Bus had its head office in San Pablo Laguna. Each company also kept and maintained separate
books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities.
Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the
Laguna Bus. To show the connection and close relation between the two companies, it should be stated
that Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each
company. During the war, the American officials of these two corporations were interned in Santo Tomas,
and said companies ceased operations. They also lost their respective properties and equipment. After
Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the
United States Army, and the two companies diveded said equipment equally between
themselves,registering the same separately in their respective names. In March, 1947, after the
resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing
the Batangas Transportation, was appointed Manager of both companies by their respective Board of
Directors. The head office of the Laguna Bus in San Pablo City was made the main office of both
corporations. The placing of the two companies under one sole mangement was made by Max Blouse,
President of both companies, by virtue of the authority granted him by resolution of the Board of Directors
of the Laguna Bus on August 10, 1945, and ratified by the Boards of the two companies in their
respective resolutions of October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management,
which was called, "Joint Emergency Operation", was to economize in overhead expenses; that by means
of said joint operation, both companies had been able to save the salaries of one manager, one assistant
manager, fifteen inspectors, special agents, and one set of office of clerical force, the savings in one year
amounting to about P200,000 or about P100,000 for each company. At the end of each calendar year, all
gross receipts and expenses of both companies were determined and the net profits were divided fifty-
fifty, and transferred to the book of accounts of each company, and each company "then prepared its own
income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities
thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes
thereon separately".
Under the theory that the two companies had pooled their resources in the establishment of the Joint
Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that there
was due from them the amount of P422,210.89 as deficiency income tax and compromise for the years
1946 to 1949, inclusive. Since the Collector caused to be restrained, seized, and advertized for sale all
the rolling stock of the two corporations, respondent companies had to file a surety bond in the same
amount of P422,210.89 to guarantee the payment of the income tax assessed by him.
After some exchange of communications between the parties, the Collector, on January 8, 1955, informed
the respondents "that after crediting the overpayment made by them of their alleged income tax liabilities
for the aforesaid years, pursuant to the doctrine of equitable recoupment, the income tax due from the
`Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the total amount of P54,143.54."
The respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals,
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 per cent". That corrected and increased
reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals.
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. After hearing, the C.T.A. found and held, citing authorities, that the
Joint Emergency Operation or joint management of the two companies "is not a corporation within the
contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership,
association or insurance company", and therefore was not subject to the income tax under the provisions
of section 24 of the same Code, separately and independently of respondent companies; so, it reversed
the decision of the Collector assessing and demanding from the two companies the payment of the
amount of P54,143.54 and/or the amount of P148,890.14. The Tax Court did not pass upon the question
of whether or not in the appeal taken to it by respondent companies, the Collector could change his
original assessment by increasing the same from P54,143.14 to P148,890.14, to correct an error
committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income
taxes paid by the respondent companies for the years 1946 to 1949, inclusive, by reason of the principle
of equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal are: (1) whether the two
transportation companies herein involved are liable to the payment of income tax as a corporation on the
theory that the Joint Emergency Operation organized and operated by them is a corporation within the
meaning of Section 84 of the Revised Internal Revenue Code, and (2) whether the Collector of Internal
Revenue, after the appeal from his decision has been perfected, and after the Court of Tax Appeals has
acquired jurisdiction over the same, but before said Collector has filed his answer with that court, may still
modify his assessment subject of the appeal by increasing the same, on the ground that he had
committed error in good faith in making said appealed assessment.
The first question has already been passed upon and determined by this Tribunal in the case of Eufemia
Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L-9996, promulgated on October 15,
1957. Considering the views and rulings embodied in our decision in that case penned by Mr. Justice
Roberto Concepcion, we deem it unnecessary to extensively discuss the point. Briefly, the facts in that
case are as follows: The three Evangelista sisters borrowed from their father about P59,000 and adding
thereto their own personal funds, bought real properties, such as a lot with improvements for the sum of
P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters with improvements
thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000
in the same year. The relatively large amounts invested may be explained by the fact that purchases were
made during the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters
appointed their brother to manage their properties, with full power to lease, to collect and receive rents,
on default of such payment, to bring suits against the defaulting tenants, to sign all letters and contracts,
etc. The properties therein involved were rented to various tenants, and the sisters, through their brother
as manager, realized a net rental income of P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other things, payment of income tax
on corporations from the year 1945 to 1949, in the total amount of P6,157, including surcharge and
compromise. Dissatisfied with the said assessment, the three sisters appealed to the Court of Tax
Appeals, which court decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed
the decision of the Tax Court. We found and held that considering all the facts and circumstances
sorrounding the case, the three sisters had the purpose to engage in real estate transactions for
monetary gain and then divide the same among themselves; that they contributed to a common fund
which they invested in a series of transactions; that the properties bought with this common fund had
been under the management of one person with full power to lease, to collect rents, issue receipts, bring
suits, sign letters and contracts, etc., in such a manner that the affairs relative to said properties have
been handled as if the same belonged to a corporation or business enterprise operated for profit; and that
the said sisters had the intention to constitute a partnership within the meaning of the tax law. Said sisters
in their appeal insisted that they were mere co-owners, not co-partners, for the reason that their acts did
not create a personality independent of them, and that some of the characteristics of partnerships were
absent, but we held that 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. The decision
cites 7A Merten's Law of Federal Income Taxation.
In the present case, the two companies contributed money to a common fund to pay the sole general
manager, the accounts and office personnel attached to the office of said manager, as well as for the
maintenance and operation of a common maintenance and repair shop. Said common fund was also
used to buy spare parts, and equipment for both companies, including tires. Said common fund was also
used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and
mechanics, and at the end of each year, the gross income or receipts of both companies were merged,
and after deducting therefrom the gross expenses of the two companies, also merged, the net income
was determined and divided equally between them, wholly and utterly disregarding the expenses incurred
in the maintenance and operation of each company and of the individual income of said companies.
From the standpoint of the income tax law, this procedure and practice of determining the net income of
each company was arbitrary and unwarranted, disregarding as it did the real facts in the case. There can
be no question that the receipts and gross expenses of two, distinct and separate companies operating
different lines and in some cases, different territories, and different equipment and personnel at least in
value and in the amount of salaries, can at the end of each year be equal or even approach equality.
Those familiar with the operation of the business of land transportation can readily see that there are
many factors that enter into said operation. Much depends upon the number of lines operated and the
length of each line, including the number of trips made each day. Some lines are profitable, others break
above even, while still others are operated at a loss, at least for a time, depending, of course, upon the
volume of traffic, both passenger and freight. In some lines, the operator may enjoy a more or less
exclusive exclusive operation, while in others, the competition is intense, sometimes even what they call
"cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result of money
claims based on physical injuries ar deaths occassioned by accidents or collisions, but litigations before
the Public Service Commission, initiated by the operator itself to acquire new lines or additional service
and equipment on the lines already existing, or litigations forced upon said operator by its competitors.
Said litigation causes expense to the operator. At other times, operator is denounced by competitors
before the Public Service Commission for violation of its franchise or franchises, for making unauthorized
trips, for temporary abandonement of said lines or of scheduled trips, etc. 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.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal
Revenue case, supra, we believe and hold that the Joint Emergency Operation or sole management or
joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and
consequently, it is liable to income tax provided for in section 24 of the same code.
The second important question to determine is whether or not the Collector of Internal Revenue, after
appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax Court Appeals
has acquired jurisdiction over the appeal, but before the Collector has filed his answer with the court, may
still modify his assessment, subject of the appeal, by increasing the same. This legal point, interesting
and vital to the interests of both the Government and the taxpayer, provoked considerable discussion
among the members of this Tribunal, a minority of which the writer of this opinion forms part, maintaining
that for the information and guidance of the taxpayer, there should be a definite and final assessment on
which he can base his decision whether or not to appeal; that when the assessment is appealed by the
taxpayer to the Court of Tax Appeals, the collector loses control and jurisdiction over the same, the
jurisdiction being transferred automatically to the Tax Court, which has exclusive appellate jurisdiction
over the same; that the jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it can
act only upon the amount of assessment subject of the appeal to determine whether it is valid and correct
from the standpoint of the taxpayer-appellant; that the Tax Court may only correct errors committed by the
Collector against the taxpayer, but not those committed in his favor, unless the Government itself is also
an appellant; and that unless this be the rule, the Collector of Internal Revenue and his agents may not
exercise due care, prudence and pay too much attention in making tax assessments, knowing that they
can at any time correct any error committed by them even when due to negligence, carelessness or gross
mistake in the interpretation or application of the tax law, by increasing the assessment, naturally to the
prejudice of the taxpayer who would not know when his tax liability has been completely and definitely
met and complied with, this knowledge being necessary for the wise and proper conduct and operation of
his business; and that lastly, while in the United States of America, on appeal from the decision of the
Commissioner of Internal Revenue to the Board or Court of Tax Appeals, the Commissioner may still
amend or modify his assessment, even increasing the same the law in that jurisdiction expressly
authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment appealed to it.
The majority, however, holds, not without valid arguments and reasons, that 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; that the tax laws
provide for a prescriptive period within which the tax collectors may make assessments and
reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal
Revenue is not allowed to amend his assessment before the Court of Tax Appeals, and since he may
make a subsequent reassessment to collect additional sums within the same subject of his original
assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which
the law does not encourage; that since the Collector of Internal Revenue, in modifying his assessment,
may not only increase the same, but may also reduce it, if he finds that he has committed an error against
the taxpayer, and may even make refunds of amounts erroneously and illegally collected, the taxpayer is
not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax
Court is authorized to receive evidence, summon witnesses, and give both parties, the Government and
the taxpayer, opportunity to present and argue their sides, so that the true and correct amount of the tax
to be collected, may be determined and decided, whether resulting in the increase or reduction of the
assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that
pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his
appealed assessment, as he has done in the present case.
There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely, the
liability of the two respondent transportation companies for 25 per cent surcharge due to their failure to
file an income tax return for the Joint Emergency Operation, which we hold to be a corporation within the
meaning of the Tax Code. We understand that said 25 per cent surcharge is included in the assessment
of P148,890.14. The surcharge is being imposed by the Collector under the provisions of Section 72 of
the Tax Code, which read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return
or list within the time prescribed by law, or in case a false or fraudulent return or list is willfully made the
collector of internal revenue shall add to the tax or to the deficiency tax, in case any payment has been
made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per
centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return list
within the time prescribed by law or by the Collector or other internal revenue officer, not due to willful
neglect, the Collector, shall add to the tax twenty-five per centum of its amount, except that, when the
return is voluntarily and without notice from the Collector or other officer filed after such time, it is shown
that the failure was due to a reasonable cause, no such addition shall be made to the tax. The amount so
added to any tax shall be collected at the same time in the same manner and as part of the tax unless the
tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added
shall be collected in the same manner as the tax.
We are satisfied that 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. That this belief was not entirely without foundation and that it was entertained in good faith, is shown
by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation
was not a corporation, and so sustained the contention of respondents. Furthermore, there are authorities
to the effect that belief in good faith, on advice of reputable tax accountants and attorneys, that a
corporation was not a personal holding company taxable as such constitutes "reasonable cause" for
failure to file holding company surtax returns, and that in such a case, the imposition of penalties for
failure to file holding company surtax returns, and that in such a case, the imposition of penalties for
failure to file return is not warranted1
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 incom
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.

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA,
LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as
above, holding that petitioners have constituted an unregistered partnership and are, therefore, subject to
the payment of the deficiency corporate income taxes assessed against them by respondent
Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5%
surcharge and 1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e)
(2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the
suit,1 as well as the resolution of said court denying petitioners' motion for reconsideration of said
decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five
children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed administrator of the
estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted
the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because three
of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the project
of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a petition in
Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors.
On November 14, 1949, the Court appointed him guardian of the persons and property of the aforenamed
minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-
half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total
assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties owned by them in
common (t.s.n., p. 46). 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 P72,173.00
(t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the administrator
thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of
the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T.
Oña who used said properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in
1956 as can be gleaned from the following year-end balances:
Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from installment sales
of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p.
32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T.
Oña where the corresponding shares of the petitioners in the net income for the year are also known.
Every year, petitioners returned for income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26).
However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98,
100). The income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out, invested
them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that
petitioners 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
petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested
against the assessment and asked for reconsideration of the ruling of respondent that they have formed
an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17,
p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89


Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the
Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the
questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the
"Compromise for non-filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years. (See Exh. 17, page
86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-
OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR
CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE
PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS
INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM
THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the
Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them
from the deceased Julia Buñales 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? (2) Assuming they have formed an unregistered partnership,
should this not be only in the sense that they invested as a common fund the profits earned by the
properties owned by them in common and the loans granted to them upon the security of the said
properties, with the result that as far as their respective shares in the inheritance are concerned, the total
income thereof should be considered as that of co-owners and not of the unregistered partnership? And
(3) assuming again that they are taxable as an unregistered partnership, should not the various amounts
already paid by them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was
judicially approved as early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue
did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such being the case, and We see no
reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-
owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be
upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier
by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves
pursuant to the project of partition approved in 1949, "the properties remained under the management of
Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income
derived therefrom and the proceed from the sales thereof in real properties and securities," as a result of
which said properties and investments steadily increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all these became possible because,
admittedly, petitioners never actually received any share of the income or profits from Lorenzo T. Oña 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. Oña.
It is thus incontrovertible that petitioners 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. Oña, in the purchase and sale of corporate securities. It is likewise admitted that
all the profits from these ventures were divided among petitioners proportionately in accordance with their
respective shares in the inheritance. In these circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their respective shares of the inheritance but even
the inherited properties themselves to be used by Lorenzo T. Oña 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 tantamonut to actually contributing such incomes to a common fund and, in
effect, they thereby formed an unregistered partnership within the purview of the above-mentioned
provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as
co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws
aforementioned. 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. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not
something they found already in existence" and that "it was not a property inherited by them pro indiviso,"
but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances
where an inheritance is not actually divided, there can be no unregistered co-partnership. As already
indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an
unregistered partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for
this is simple. From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed for the purpose, for
tax purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners
in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing 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," and, for
that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this
Court clearly differentiated the concept of partnerships under the Civil Code from that of unregistered
partnerships which are considered as "corporations" under Sections 24 and 84(b) of the National Internal
Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct
and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the
entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are
not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered general partnerships," which constitute
precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in 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,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated, "duly registered general co-
partnerships" — which are possessed of the aforementioned personality — have been expressly
excluded by law (sections 24 and 84[b]) from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of 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. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried on. ... .
(8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships
— with the exception only of duly registered general copartnerships — within the purview of the term
"corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as
said Code is concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R.
Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership
pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently, We
consider as justified the following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered partnership, the
holding should be limited to the business engaged in apart from the properties inherited by petitioners. In
other words, the taxable income of the partnership should be limited to the income derived from the
acquisition and sale of real properties and corporate securities and should not include the income derived
from the inherited properties. 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.
Besides, as already observed earlier, 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. This, We hold, is the clear
intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in
the aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein petitioners have formed an
unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the petitioners
in their individual income tax returns reported their shares of the profits of the unregistered partnership.
We think it only fair and equitable that the various amounts paid by the individual petitioners as income
tax on their respective shares of the unregistered partnership should be deducted from the deficiency
income tax found by this Honorable Court against the unregistered partnership. (page 7, Memorandum
for the Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the partnership must be reduced
by the amounts of income tax paid by each petitioner on his share of partnership profits. This is not
correct; rather, it should be the other way around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in
question, but the income tax due from the partnership has been correctly assessed. Since the individual
income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass
upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid
as individual income tax cannot be credited as part payment of the taxes herein in question. It is argued
that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same
income, and, worse, considering the time that has lapsed since they paid their individual income taxes,
they may already be barred by prescription from recovering their overpayments in a separate action. We
do not agree. As We see it, the case of petitioners as regards the point under discussion is simply that 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, but the law is very clear that the claim and action for such reimbursement are subject to the bar of
prescription. And since the period for the recovery of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem right to virtually disregard prescription merely upon the
ground that the reason for the delay is precisely because the taxpayers failed to make the proper return
and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-
vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm
with costs against petitioners.