FIRST DIVISION

[G.R. No. L-9692. January 6, 1958.]

COLLECTOR OF INTERNAL REVENUE, Petitioner, v. BATANGAS TRANSPORTATION

COMPANY and LAGUNA - TAYABAS BUS COMPANY, Respondents.

Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for Petitioner.

Ozaeta, Lichauco & Picazo for Respondents.

SYLLABUS

1. TAXATION; WHAT CONSTITUTE CORPORATION WITHIN THE MEANING OF THE TAX CODE;
LIABILITY FOR INCOME TAX; CASE AT BAR. — The Tax Code defines the term "corporation" as including
partnership no matter how created or organized, thereby indicating a joint venture need not be undertaken in any
of the standards forms, or in conformity with the usual requirements of the law on partnership, in order that one
could be deemed constituted for the purposes of the tax on corporations. In the case at bar, while the two
respondent companies were registered and operating separately, they were placed under one sole management
called the "Joint Emergency Operation" for the purpose of economizing in overhead expenses. Although no legal
personality may have been created by the Joint Emergency Operation, nevertheless, said 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 venture, therefore, 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.

2. ID.; APPEAL FROM THE DECISION OF COLLECTOR; AUTHORITY TO INCREASE ASSESSMENT

AFTER APPEAL HAS BEEN PERFECTED. — The Collector of Internal Revenue, after appeal from his
decision to the Court of Tax Appeals has been perfected, and after the Tax Court has acquired jurisdiction over
the appeal, but before the answer is filed with the court, may still modify his assessment, subject of the appeal,
by increasing the same. 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 suit which the law does not encourage.

3. ID.; PENALTY; FAILURE TO FILE INCOME TAX RETURN FOR AND IN BEHALF OF AN ENTITY,
WHEN JUSTIFIED. — 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 to be imposed and collected.

DECISION

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 P1,000,000. Before the last war, each company maintained separate head offices, that of
Batangas Transportation being 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 divided 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 management 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 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 books 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 advertised 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 Emergency 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., v. 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 thereon for the sum of P100,000 in 1943, parcels
of land with a total area of almost 4,000 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 surrounding 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 gross 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 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 or deaths occasioned 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 naturally
causes expense to the operator. At other times, the operator is denounced by competitors before the Public Service
Commission for violation of its franchise or franchises, for making unauthorized trips, for temporary
abandonment 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 at
the end of each year, the gross receipts and income and 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 v. 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 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 alone 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:jgc:chanrobles.com.ph

"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 or 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."cralaw virtua1aw library

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 return, is not warranted. 1

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 case 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
same 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 or 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.
FIRST DIVISION

[G.R. No. L-9996. October 15, 1957.]

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA, Petitioners, v. THE

COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, Respondents.

Santiago F. Alidio and Angel S. Dakila, Jr. for Petitioner.

Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R. Rosete for the
respondents.

SYLLABUS

1. TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT NECESSARY

PARTNERSHIP. — "Corporations" strictly speaking are distinct and different from "partnership." When our Internal
Revenue Code includes "partnership" among the entities subject to the tax on "corporations", it must be allude to
organization which are not necessarily "partnership" in the technical sense of the term.

2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX UPON
CORPORATIONS. — Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations "duly
registered general partnership", which constitute precisely one of the most typical form of partnership in this jurisdiction.

3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. — As defined in section 84 (b)
of the Internal Revenue Code "the term corporation includes partnership, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standards form, or
conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for the
purposes of the tax on corporations.

4. ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT LEGAL

PERSONALITY. — Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporations" includes, among the
others, "joint accounts (cuenta en participacion)" and "associations", none of which has a legal personality of its own
independent of that of its members. For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnership. — with the exception only of duly registered general partnership. — within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are engaged in real estate transactions for monetary gain
and divide the same among themselves, constitute a partnership, so far as the said Code is concerned, and are subject to the
income tax for the corporation.

5. ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO RESIDENCE TAX ON

CORPORATION. — The pertinent part of the provision of Section 2 of Commonwealth Act No. 465 which says: "The term
corporation as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion),
association or insurance company, no matter how created or organized." is analogous to that of Section 24 and 84 (b) of our
Internal Revenue Code which was approved the day immediately after the approval of said Commonwealth Act No. 565.
Apparently, the terms "corporation" and "Partnership" are used both statutes with substantially the same meaning, Held:
That the petitioners are subject to the residence tax corporations.

DECISION
CONCEPCION, J.:

This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of
the Court of Tax Appeals, the dispositive part of which reads:jgc:chanrobles.com.ph

"FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer’s tax and the
residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent’s assessment for the same in the total
amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioners is hereby dismissed with costs
against petitioners."cralaw virtua1aw library

It appears from the stipulation submitted by the parties:jgc:chanrobles.com.ph

"1. That the petitioners borrowed from their father the sum of P59,140.00 which amount together with their personal monies
was used by them for the purpose of buying real properties;

"2. That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon for the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

"3. That 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 P18,000.00; this property has an assessed value of P8,255.00 as of 1948;

"4. That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of 4,358 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1943;

"5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m. including improvements thereon for
P237,234.14. This property has an assessed value of P59,140.00 as of 1948;

"6. That 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 tenant; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes
and checks for them;

"7. That after having bought the above-mentioned real properties, the petitioners had the same rented or leased to various
tenants;

"8. That from the month of March, 1945 up to and 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;

"9. That in 1946, they realized a gross rental income in the sum of P24,786.30, out of which amount was deducted the sum
of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;

"10. That in 1948 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."cralaw virtua1aw library

It further appears that on September 24, 19a4, 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, computed,
according to the assessments made by said officer, as follows:chanrob1es virtual 1aw library
INCOME TAXES

1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P614.84

1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,144.71

1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .910.34

1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,912.30

1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,575.90

_______________

Total including surcharge and compromise P6,157.09

REAL ESTATE DEALER’S FIXED TAX

1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P37.50

1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150.00

1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150.00

1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150.00

____________

Total including penalty P527.50

RESIDENCE TAXES OF CORPORATION

1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .P38.75

1946. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38.75

1947. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38.75

1948. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38.75

1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38.75

______________

Total including surchage P193.75

TOTAL TAXES DUE P6,878.34

Said letter of demand and the corresponding assessments were delivered to petitioners on December 3, 1954, whereupon
they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in
his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in
question, with costs against the Respondent.
After appropriate proceedings, the Court of Tax Appeals rendered the above-mentioned decision for the respondent, and, a
petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the
instance of the petitioners.

The issue in this case is whether 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 tax. With respect to the tax on corporations, the issue hinges on the meaning
of the terms "corporation" and "partnership", as used in sections 24 and 84 of said Code, the pertinent parts of which
read:jgc:chanrobles.com.ph

"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 (compañias
colectivas), a tax upon such income equal to the sum of the following: . . . ."cralaw virtua1aw library

"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 (compañias colectivas)."cralaw virtua1aw library

Article 1767 of the Civil Code of the Philippines provides:jgc:chanrobles.com.ph

"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."cralaw virtua1aw library

Pursuant to this article, 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:chanrob1es virtual 1aw library

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro
indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish
said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a
lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.000. This was soon followed, on April 23, 1944,
by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged
in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties
were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of
rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes
and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to,
or on the causes for its continued existence. They did not even try to offer an explanation therefor.

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. Only
one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases
are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them,
a legal entity, with a personality independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax
Appeals.

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
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. Again, pursuant to said section 84(b), the term "corporation" includes, among other,
"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 copartner ships" — 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." It may not be amiss to add that petitioners’ allegation to the effect that their liability
in connection with the leasing of the lots above referred to, under the management of one person — even if true, on which
we express no opinion tends to increase the similarity between the nature of their venture and that of corporations, and is,
therefore, an additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships." By specific
provision of said laws, such "corporations" include "associations, joint-stock companies and insurance companies."
However, the term "association" is not used in the aforementioned laws

". . . in any narrow or technical sense. It includes any organization, created for the transaction of designated affairs, or the
attainment of some object, which, like a corporation, continues notwithstanding that its members or participants change, and
the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group,
acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of
trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation or company, a ‘business’ trusts a
‘Massachusetts’ trust, a ‘common law’ trust, and ‘investment’ trust (whether of the fixed or the management type), an
interinsurance exchange operating through an attorney in fact, a partnership association, and any other type of organization
(by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership." (7A
Merten’s Law of Federal Income Taxation, p. 788; italics ours.)

Similarly, the American Law.

". . . provides its own concept of a partnership. Under the term ‘partnership’ it includes not only a partnership as known at
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; italics 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; italics 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.

As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in
part:jgc:chanrobles.com.ph

"Entities liable to residence tax. — Every corporation, no matter how created or organized, whether domestic or resident
foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual
additional tax which, in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . .

"The term ‘corporation’ as used in this Act includes joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how created or organized." (italics ours.)

Considering that the pertinent part of this provision is analogous to that of sections 24 and 84(b) of our National Internal
Revenue Code (Commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after
the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to
the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of
over twelve years, and that the yearly gross rentals of said properties from 1945 to 1948 ranged from P9,599 to P17,453.
Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers,"
inasmuch as, pursuant to section 194(s) thereof:jgc:chanrobles.com.ph

"‘Real estate dealer’ includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property
or his own account as principal and holding himself out as a full or part- time dealer in real estate or as an owner of rental
property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . . . ." (Italics
ours.)

Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against the petitioners herein. It
is so ordered.
EN BANC

[G.R. No. L-24020-21. July 29, 1968.]

FLORENCIO REYES and ANGEL REYES, Petitioners, v. COMMISSIONER OF INTERNAL

REVENUE and HON. COURT OF TAX APPEALS, Respondents.

Jose W . Diokno and Domingo Sandoval, for Petitioners.

Solicitor General for Respondents.

SYLLABUS

1. TAXATION; INCOME TAX ON CORPORATIONS IMPOSABLE ON PARTNERSHIP, EXCEPT DULY

REGISTERED GENERAL CO-PARTNERSHIPS. — For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception only of duly registered general co-partnerships.

2. ID.; RULING IN EVANGELISTA v. COLLECTOR OF INTERNAL REVENUE APPLIED. — Where

petitioners (father and son) purchased the lot and building for P835,000.00 of which they paid the sum of
P375,000.00 leaving a balance of P460,000.00 representing the mortgage obligation of the vendors with the China
Banking Corporation which was assumed by petitioners; that such initial payment was shared equally by
petitioners; that administration of the building was entrusted to an administrator who collected the rents, kept its
books and records and rendered statements of accounts to petitioners, negotiated leases and made repairs and
disbursed payments; and where petitioners divided equally the income derived from the building after deducting
expenses of operation and maintenance, petitioners are not only co-owners but partners. And since under Section
84(b) of the 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. Pursuant to the same Section 84(b), the term
‘corporation’ includes among other, joint accounts (cuentas en participacion) and associations, none of which has
a legal personality of its own, independent of that of its members. The lawmaker could not have regarded
personality as a condition precedent to the existence of partnerships referred to therein.

3. ID.; ID.; SLIGHT DIFFERENCES DO NOT CALL FOR A DIFFERENT RULING. — In the Evangelista
case the following circumstances were found to exist: a common fund created purposely, the investment of the
same not merely in one transaction but in a series of transactions, the lots not being devoted to residential purposes
or to other personal purposes, the properties being under the management of one person with full power to lease,
collect rents, issue receipts, bring suits — and that all these conditions existed for over 10 years. In the case at
bar, petitioners could claim that this was only one transaction, that their intention was to house in that building
purchased their respective enterprises and to effect a division in 10 years. But while the purchase was made in
1950, as late as 1965, or almost 15 years later, there was no allegation of such division and the facts show that
the building continued to be leased by other parties with petitioners dividing equally the income after deducting
operational expenses. Differences of such slight significance do not call for a different ruling. They do not suffice
to preclude the applicability of the Evangelista decision.

4. ID.; COURT OF TAX APPEALS; FINDINGS ENTITLED TO RESPECT OWING TO ITS EXPERTISE ON
SUBJECT. — As a matter of principle, it is not advisable for the appellate Court to set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of its authority.
 DECISION

FERNANDO, J.:

Petitioners in this case were assessed by respondent 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. This assessment sought to be reconsidered unsuccessfully was the subject of an appeal to respondent
Court of Tax Appeals. Thereafter, another assessment was made against petitioners, this time for back income
taxes plus surcharge and compromise in the total sum of P25,973.75, covering the years 1955 and 1956. There
being a failure on their part to have such assessments reconsidered, the matter was likewise taken to the respondent
Court of Tax Appeals. The two cases 1 involving as they did identical issues and ultimately traceable to facts
similar in character were heard jointly with only one decision being rendered.

In that joint decision of respondent Court of Tax Appeals, the 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. 2 The 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. 3 A reconsideration of the aforesaid decision was sought and denied by
respondent Court of Tax Appeals. Hence this petition for review.

The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence, must be
respected 4 follow: "On October 31, 1950, Petitioners, father and son, purchased a lot and building, known as the
Gibbs Building, situated at 671 Dasmariñas Street, Manila, for P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00, representing the mortgage obligation of the vendors with the
China Banking Corporation, which mortgage obligations was assumed by the vendees. The initial payment of
P375,000.00 was shared equally by petitioners. At the time of the purchase, the 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 derived
from the building after deducting the expenses of operation and maintenance. The gross income from rentals of
the building amounted to about P90,000.00 annually." 5

From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the National
Internal Revenue Code, the first of which imposes an income tax on corporations "organized in, or existing under
the laws of the Philippines, no matter how created or organized but not including duly registered general co-
partnerships (companias colectivas), . . ." 6 a term, which according to the second provision cited, includes
partnership "no matter how created or organized, . . .," 7 and applying the leading case of Evangelista v. Collector
of Internal Revenue, 8 sustained the action of respondent Commissioner of Internal Revenue, but reduced the tax
liability of petitioners, as previously noted.

Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is dissimilar.
Consequently, they allege that the reliance by respondent Court of Tax Appeals was unwarranted and the decision
should be set aside. If their interpretation of the authoritative doctrine therein set forth commands assent, then
clearly what respondent Court of Tax Appeals did fails to find shelter in the law. That is the crux of the matter. A
perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether 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, . . ." 9 After referring to another section of the National Internal Revenue
Code, which explicitly provides that the term corporation "includes partnerships" and then to Article 1767 of the
Civil Code of the Philippines, defining what a contract of partnership is, the opinion goes on to state that "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, . . ." 10

In support of the above conclusion, reference was made to the following circumstances, namely, the 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; the lots thus acquired not being devoted to residential purposes or
to other personal uses of petitioners in that case; such properties having been under the management of one person
with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts and to endorse
notes and checks; the above conditions having existed for more than 10 years since the acquisition of the above
properties; and no testimony having been introduced as to the purpose "in creating the set up already adverted to,
or on the causes for its continued existence." 11 The conclusion that emerged had all the imprint of inevitability.
Thus: "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." 12

It may be said that there could be a differentiation made between the circumstances above detailed and those
existing in the present case. It does not suffice though to preclude the applicability of the Evangelista decision.
Petitioners could harp on these being only one transaction. They could stress that an affidavit of one of them
found in the Bureau of Internal Revenue records would indicate that their intention was to house in the building
acquired by them the respective enterprises, coupled with a plan of effecting a division in 10 years. It is a little
surprising then that while the purchase was made on October 31, 1950 and their brief as petitioners filed on
October 20, 1965, almost 15 years later, there was no allegation that such division as between them was in fact
made. Moreover, the facts as found and as submitted in the brief made clear that the building in question continued
to be leased by other parties with petitioners dividing "equally the income . . . after deducting the expenses of
operation and maintenance . . ." 13 Differences of such slight significance do not call for a different ruling.

It is obvious that petitioners’ effort to avoid the controlling force of the Evangelista ruling cannot be deemed
successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of an authoritative
decision; it recognized its binding character. There is clearly no merit to the second error assigned by petitioners,
who would deny its applicability to their situation.

The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in acquiring the
Gibbs Building, established a partnership subject to income tax as a corporation under the National Internal
Revenue Code is likewise untenable. In their discussion in their brief of this alleged error, stress is laid on their
being co-owners and not partners. Such an allegation was likewise made in the Evangelista case.

This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly rejected
by the Court of Tax Appeals." 14 Then came the explanation why: "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 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. Again, pursuant to said section 84(b),
the term ‘corporation’ includes, among other, ‘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’." 15 The opinion went on to summarize the matter aptly: "For purposes of the tax on corporations,
our National Internal Revenue Code, include these partnerships — with the exception only of duly registered
general co-partnerships — within the purview of the term ‘corporation’. It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations." 16

In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter incorrectly.
There is no warrant for the assertion that it failed to apply the settled law to uncontroverted facts. Its decision
cannot be successfully assailed. Moreover, an observation made in Alhambra Cigar & Cigarette Manufacturing
Co. v. Commissioner of Internal Revenue, 17 is well-worth recalling. Thus: "Nor as a matter of principle is it
advisable for this Court to set aside the conclusion reached by an agency such as the Court of Tax Appeals which
is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless, as did not happen here, there has been an abuse or
improvident exercise of its authority."cralaw virtua1aw library

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.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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.
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,
brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, Respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they
had acquired from their father.chanroblesvirtualawlibrarychanrobles virtual law library
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124
and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners
for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would
show that they were co-owners of the two lots.chanroblesvirtualawlibrary chanrobles virtual law library
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from
the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and
paid an income tax on one-half thereof or of P16,792.chanroblesvirtualawlibrary chanrobles virtual law library
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509
as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of
P71,074.56.chanroblesvirtualawlibrary chanrobles virtual law library
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in
full (not a mere capital gain of which � is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.chanroblesvirtualawlibrary chanrobles virtual law library
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.chanroblesvirtualawlibrary
chanrobles virtual law library
The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).chanroblesvirtualawlibrary chanrobles virtual law library
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.chanroblesvirtualawlibrary chanrobles virtual law library
We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided
the profit among themselves.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary chanrobles virtual law library
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.chanroblesvirtualawlibrary
chanrobles virtual law library
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. Castan
Tobeñas says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad? chanrobles virtual law
library
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin
ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision
es solo mantener en su integridad la cosa comun y favorecer su
conservacion.chanroblesvirtualawlibrarychanrobles virtual law library
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho
positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato
de sociedad, la moderna orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados:
lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived". There must be an unmistakable intention to form a partnership or joint
venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide
the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an
unregistered partnership.chanroblesvirtualawlibrary chanrobles virtual law library
The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in
Oña vs.chanroblesvirtualawlibrary chanrobles virtual law library
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.-We find that the case at bar is fundamentally similar to the De
Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from
their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited
properties; they merely continued dedicating the property to the use to which it had been put by their forebears;
they individually reported in their tax returns their corresponding shares in the income and expenses of the
'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent,
'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the Central
Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.-Co-Ownership who own properties which produce
income should not automatically be considered partners of an unregistered partnership, or a corporation, within
the purview of the income tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an
income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income
tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce
profits for themselves, it was held that they were taxable as an unregistered
partnership.chanroblesvirtualawlibrary chanrobles virtual law library
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered
partnership.chanroblesvirtualawlibrary chanrobles virtual law library
In the instant case, what the Commissioner should have investigated was whether the father donated the two lots
to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this
matter. It might have already prescribed.chanroblesvirtualawlibrary chanrobles virtual law library
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No
costs.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
 FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, Petitioners, vs. THE COMMISSIONER OF

INTERNAL REVENUE and COURT OF TAX APPEALS, Respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.chanrobles virtual law library

The Solicitor General for respondents

chanrobles virtual law library

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes
is the issue in this petition.chanroblesvirtualawlibrarychanrobles virtual law library

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners
to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968
in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.chanroblesvirtualawlibrary chanrobles virtual law library

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. 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.chanroblesvirtualawlibrary chanrobles virtual law library

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.chanroblesvirtualawlibrary chanrobles virtual law library

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable
as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of
the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax; and
that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership.
Hence, the petitioners were required to pay the deficiency income tax assessed.chanroblesvirtualawlibrary
chanrobles virtual law library

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045.
In due course, the respondent court by a majority decision of March 30, 1987, 2affirmed the decision and action
taken by respondent commissioner with costs against petitioners.chanroblesvirtualawlibrary chanrobles virtual
law library
It ruled that on the basis of the principle enunciated in Evangelista 3 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.chanroblesvirtualawlibrary chanrobles virtual law library

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of
this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income
tax under the Tax Code.chanroblesvirtualawlibrary chanrobles virtual law library

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent
court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT

COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.chanroblesvirtualawlibrary
chanrobles virtual law library

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT

AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN
BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP
EXISTS.chanroblesvirtualawlibrary chanrobles virtual law library

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA
CASE.chanroblesvirtualawlibrarychanrobles virtual law library

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT
OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.chanroblesvirtualawlibrary chanrobles virtual law library

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4chanrobles
virtual law library

In the said case, petitioners borrowed a sum of money from their father which together with their own personal
funds they used in buying several real properties. They appointed their brother to manage their properties with
full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants
for several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue
demanded the payment of income tax on a corporation, among others, from them.chanroblesvirtualawlibrary
chanrobles virtual law library

In resolving the issue, this Court held as follows:

The issue in this case is whether 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 tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said
Code, the pertinent parts of which read: chanrobles virtual law library

Sec. 24. Rate of the 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 (companies collectives), a tax upon such income equal to the sum of the following:
...chanroblesvirtualawlibrarychanrobles virtual law library

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies colectivas).chanroblesvirtualawlibrary chanrobles virtual
law library

Article 1767 of the Civil Code of the Philippines provides: chanrobles virtual law library

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.chanroblesvirtualawlibrary
chanrobles virtual law library

Pursuant to this article, 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: chanrobles virtual law library

1. Said common fund was not something they found already in existence. It was not a property inherited by them
pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in
order to establish said common fund.chanroblesvirtualawlibrary chanrobles virtual law library

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943,
they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon
followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April
28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken,
as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and preservation of the aforementioned
common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein.
The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum
of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest
that there has been any change in the utilization thereof.chanroblesvirtualawlibrarychanrobles virtual law library

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise operated for profit. chanrobles virtual
law library

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years,
since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the
manager.chanroblesvirtualawlibrary chanrobles virtual law library
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already
adverted to, or on the causes for its continued existence. They did not even try to offer an explanation
therefor.chanroblesvirtualawlibrary chanrobles virtual law library

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. Only one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5

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.chanroblesvirtualawlibrary
chanrobles virtual law library

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that
the purpose was not limited to the conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of
gain was present.chanroblesvirtualawlibrary chanrobles virtual law library

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.chanroblesvirtualawlibrarychanrobles
virtual law library

In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances
are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.chanroblesvirtualawlibrary
chanrobles virtual law library

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for
determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2
and 3, provides; chanrobles virtual law library

(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; chanrobles virtual law library

(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;

From the above it appears that the fact that those who agree to form a co- ownership share or do not share any
profits made by the use of the property held in common does not convert their venture into a partnership. Or the
sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only means that, aside from the circumstance of
profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a
partnership, the existence of a juridical personality different from that of the individual partners, and the
freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real
estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a
partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that
enterprise in proportion to their contribution, but who severally retain the title to their respective contribution,
are not thereby rendered partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by
Flord D. Mechem 2nd Ed., section 83, p. 74.) chanrobles virtual law library

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an agreement
to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common.
(Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.) chanrobles virtual law library

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants
in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in
plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally
participating in both profits and losses; (c) and such a community of interest, as far as third persons are
concerned as enables each party to make contract, manage the business, and dispose of the whole property.-
Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they may
use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to
the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson,
142 S.W. 363,160 No. App. 14.) 6chanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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 p. 7However, 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.chanroblesvirtualawlibrary chanrobles virtual law library

WHEREFROM, 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.chanroblesvirtualawlibrary chanrobles virtual law library

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents.

San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.

FERNAN, J.:

Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals in CTA
No. 1275 dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency income tax and
interest for the calendar year 1957 and P150.00 as real estate dealer's fixed tax.

Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in Cainta,
Rizal, containing a total area of 1,678,000 square meters. In order to liquidate her inheritance, Ursula Calasanz
had the land surveyed and subdivided into lots. Improvements, such as good roads, concrete gutters, drainage
and lighting system, were introduced to make the lots saleable. Soon after, the lots were sold to the public at a
profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March 31, 1958,
petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per
centum thereof or P15,530.03 as taxable capital gains.

Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners engaged in
business as real estate dealers, as defined in Section 194 [s] 1 of the National Internal Revenue Code, required
them to pay the real estate dealer's tax 2 and assessed a deficiency income tax on profits derived from the sale of
the lots based on the rates for ordinary income.

On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:

a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate dealer's fixed
tax of P150.00 and P10.00 compromise penalty for late payment; and

b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on ordinary
gain of P3,018.00 plus interest of P 543.24.

On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting the
aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the assessment
regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the same cannot be collected
in the absence of a valid and binding compromise agreement.

Hence, the present appeal.

The issues for consideration are:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed tax; and

b. Whether the gains realized from the sale of the lots are taxable in full as ordinary income or
capital gains taxable at capital gain rates.

The issues are closely interrelated and will be taken jointly.

Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of the lots
under Section 34 [b] [2] 3 of the Tax Code.

The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of Section
34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to have engaged in the
real estate business and may not be denied the preferential tax treatment given to gains from sale of capital
assets, merely because he disposed of it in the only possible and advantageous way.

Petitioners averred that the tract of land subject of the controversy was sold because of their intention to effect a
liquidation. They claimed that it was parcelled out into smaller lots because its size proved difficult, if not
impossible, of disposition in one single transaction. They pointed out that once subdivided, certainly, the lots
cannot be sold in one isolated transaction. Petitioners, however, admitted that roads and other improvements
were introduced to facilitate its sale. 4

On the other hand, respondent Commissioner maintained that the imposition of the taxes in question is in
accordance with law since petitioners are deemed to be in the real estate business for having been involved in a
series of real estate transactions pursued for profit. Respondent argued that property acquired by inheritance
may be converted from an investment property to a business property if, as in the present case, it was
subdivided, improved, and subsequently sold and the number, continuity and frequency of the sales were such
as to constitute "doing business." Respondent likewise contended that inherited property is by itself neutral and
the fact that the ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer
did with the property. Respondent concluded that since the lots are ordinary assets, the profits realized
therefrom are ordinary gains, hence taxable in full.

We agree with the respondent.

The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital assets. Section
34[a] [1] of the National Internal Revenue Code broadly defines capital assets as follows:

[1] Capital assets.-The term 'capital assets' means property held by the taxpayer [whether or not
connected with his trade or business], but does not include, stock in trade of the taxpayer or other
property of a kind which would properly be included, in the inventory of the taxpayer if on hand
at the close of the taxable year, or property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business, or property used in the trade or business of a
character which is subject to the allowance for depreciation provided in subsection [f] of section
thirty; or real property used in the trade or business of the taxpayer.
The statutory definition of capital assets is negative in nature. 5 If the asset is not among the exceptions, it is a
capital asset; conversely, assets falling within the exceptions are ordinary assets. And necessarily, any gain
resulting from the sale or exchange of an asset is a capital gain or an ordinary gain depending on the kind of
asset involved in the transaction.

However, there is no rigid rule or fixed formula by which it can be determined with finality whether property
sold by a taxpayer was held primarily for sale to customers in the ordinary course of his trade or business or
whether it was sold as a capital asset. 6 Although several factors or indices 7 have been recognized as helpful
guides in making a determination, none of these is decisive; neither is the presence nor the absence of these
factors conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances. 8

Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tend to show that the activity was in furtherance of or in the course of the
taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital gain or loss even though
the property has to be subdivided or improved or both to make it salable. However, if the inherited property is
substantially improved or very actively sold or both it may be treated as held primarily for sale to customers in
the ordinary course of the heir's business. 9

Upon an examination of the facts on record, We are convinced that the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling real estate.

One strong factor against petitioners' contention is the business element of development which is very much in
evidence. Petitioners did not sell the land in the condition in which they acquired it. While the land was
originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in the process converted into a
residential subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying
out of streets, construction of concrete gutters and installation of lighting system and drainage facilities, among
others, were undertaken to enhance the value of the lots and make them more attractive to prospective buyers.
The audited financial statements 11 submitted together with the tax return in question disclosed that a
considerable amount was expended to cover the cost of improvements. As a matter of fact, the estimated
improvements of the lots sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is
authority that a property ceases to be a capital asset if the amount expended to improve it is double its original
cost, for the extensive improvement indicates that the seller held the property primarily for sale to customers in
the ordinary course of his business. 12

Another distinctive feature of the real estate business discernible from the records is the existence of contracts
receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The sizable amount of
receivables in comparison with the sales volume of P446,407.00 during the same period signifies that the lots
were sold on installment basis and suggests the number, continuity and frequency of the sales. Also of
significance is the circumstance that the lots were advertised 13 for sale to the public and that sales and
collection commissions were paid out during the period in question.

Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner,14 the American court in clear and categorical terms rejected the liquidation test in
determining whether or not a taxpayer is carrying on a trade or business The court observed that the fact that
property is sold for purposes of liquidation does not foreclose a determination that a "trade or business" is being
conducted by the seller. The court enunciated further:

We fail to see that the reasons behind a person's entering into a business-whether it is to make
money or whether it is to liquidate-should be determinative of the question of whether or not the
gains resulting from the sales are ordinary gains or capital gains. The sole question is-were the
taxpayers in the business of subdividing real estate? If they were, then it seems indisputable that
 the property sold falls within the exception in the definition of capital assets . . . that is, that it
constituted 'property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business.

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise:

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale may be
conducted in the most advantageous manner to the seller and he will not lose the benefits of the
capital gain provision of the statute unless he enters the real estate business and carries on the
sale in the manner in which such a business is ordinarily conducted. In that event, the liquidation
constitutes a business and a sale in the ordinary course of such a business and the preferred tax
status is lost.

In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged in the
real estate business and accordingly, the gains from the sale of the lots are ordinary income taxable in full.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.

SO ORDERED.