case digest tax after midterm

8/10/2019 Case Digest Tax After Midterm

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Commissioner of Internal Revenue vs. St Luke's Medical CenterFacts:St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non -stock and non-profitcorporation. St. Lukes accepts both paying and non -paying patients. The BIR assessed St. Lukesdeficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and withholding tax. TheBIR claimed that St. Lukes should be liable for income tax at a preferential rate of 10% as provided forby Section 27(B). Further, the BIR claimed that St. Lukes was actually operating for profit in 1998becau se only 13% of its revenues came from charitable purposes. Moreover, the hospitals board oftrustees, officers and employees directly benefit from its profits and assets.On the other hand, St. Lukes maintained that it is a non -stock and non-profit institution for charitableand social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It arguedthat the making of profit per se does not destroy its income tax exemption.Issue:

The sole issue is whether St. Lukes is liable for deficiency income tax in 1998 under Section 27(B)of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profithospitals.Ruling:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profithospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on theother hand, can be construed together without the removal of such tax exemption.Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications forhospitals are that they must be proprietary and non- profit. Proprietary me ans private, following thedefinition of a proprietary educational institution as any private school maintained andadministered by private individuals or groups with a government permit. Non -profit means no netincome or asset accrues to or benefits any member or specific person, with all the net income or assetdevoted to the institutions purposes and all its activities conducted not for profit. Non -profit does not necessarily mean charitable. In Collector of Internal Revenue v. Club Fili pino Inc.

de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment ofits stockholders and members. The club was primarily funded by membership fees and dues. If it hadprofits, they were used for overhead expenses and improving its golf course. The club was non-profitbecause of its purpose and there was no evidence that it was engaged in a profit-makingenterprise.The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Courtdefined charity in Lung Center of the Philippines v. Quezon City as a gift, to be appliedconsistently with existing laws, for the benefit of an indefinite number of persons, either by bringingtheir minds and hearts under the influence of education or religion, by assisting them to establishthemselves in life or *by+ otherwise lessening the burden of government. However, despite its being atax exempt institution, any income such institution earns from activities conducted for profit is taxable,as expressly provided in the last paragraph of Sec. 30.To be a charitable institution, however, an organization must meet the substantive test of charity inLung Center. The issue in Lung Center concerns exemption from real property tax and not incometax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to anindefinite number of persons which lessens the burden of government. In other words, charitableinstitutions provide for free goods and services to the public which would otherwise fall on theshoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which shouldhave been spent to address public needs, because certain private entities already assume a part ofthe burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes


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by the government is compensated by its relief from doing public works which would have been fundedby appropriations from the TreasuryThe Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congressdecided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) ofthe NIRC is materially different from Section 28(3), Article VI of the Constitution.Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On theother hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, butrequires that the institution actually, directly and exclusively use the property for a charitablepurpose.To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that acharitable institution use the property actually, directly and exclusively for charitable purposes.To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution mustbe organized and operated exclusively for charitable purposes. Likewise, to be exempt from incometaxes, Section 30(G) of the NIRC requires that the institution be operated exclusively for social welfare.However, the last paragraph of Section 30 of the NIRC qualifies the words organized and operatedexclusively by providing that: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character

of the foregoing organizations from any of their properties, real or personal, or from any of theiractivities conducted for profit regardless of the disposition made of such income, shall be subject totax imposed under this Code.In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conductsany activity for profit, such activity is not tax exempt even as its not -for-profit activities remain taxexempt.Thus, even if the charitable institution must be organized and operated exclusively for charitablepurposes, it is nevertheless allowed to engage in activities conducted for profit without losing its taxexempt status for its not-for- profit activities. The only consequence is that the income of whateverkind and character of a charitable institution from any of its activities conducted for profit,regardless of the disposition made of such income, shall be subject to tax. Prior to the introduction of

Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rateunder Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.The C ourt finds that St. Lukes is a corporation that is not operated exclusively for charitable or socialwelfare purposes insofar as its revenues from paying patients are concerned. This ruling is based notonly on a strict interpretation of a provision granting tax exemption, but also on the clear and plain textof Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be operatedexclusively for charitable or social welfare purposes to be completely exempt from income tax. Aninstitution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profitactivities. Such income from for-profit activities, under the last paragraph of Section 30, is merelysubject to income tax, previously at the ordinary corporate rate but now at the preferential 10% ratepursuant to Section 27(B).St. Lukes fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely taxexempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) ofthe NIRC as long as it does not distribute any of its profits to its members and such profits are reinvestedpursuant to its corpo rate purposes. St. Lukes, as a proprietary non -profit hospital, is entitled to thepreferential tax rate of 10% on its net income from its for-profit activities.St. Lukes is therefore liable for deficiency income tax in 1998 under Section 27(B) of the N IRC. However,St. Lukes has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.Lukes is a corporation for purely charitable and social welfare purposes and thus exempt from incometax.


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In Michael J. Lhuillier, Inc. v . Commissioner of Internal Revenue, the Court said that good faith andhonest belief that one is not subject to tax on the basis of previous interpretation of governmentagencies tasked to implement the tax law, are sufficient justification to delete the imposition ofsurcharges and interest. WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998based on the 10% preferential income tax rate under Section 27(8) of the National Internal RevenueCode. However, it is not liable for surcharges and interest on such deficiency income tax underSections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision andResolution of the Court of Tax Appeals are AFFIRMED.

Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26,2012

Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc.

G.R. No. 195909 September 26, 2012

In a nutshell:

St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non -stock and non-profitcorporation. St. Lukes accepts both paying and non -paying patients. With respect to its non-payingpatients, St. Lukes is exempted from income tax pursuant to Sec. 30 (E) and (G) of the NIRC for being anon-stock corporation or organization operated exclusively for charitable or social welfare purposes.Accepting paying patients does not destroy the exemption of St. Lukes under Sec. 30 of the NIRC.Instead, the last p aragraph of Sec. 30 of the NIRC provides that St. Lukes activities conducted for profit,regardless of the disposition of such income, shall be subject to tax imposed under this Code.

What is the income tax rate to be applied to St. Lukes activities con ducted for profit? With respect to its

paying patients, St. Lukes is subject to the 10% preferential tax rate of proprietary non -profit hospitalsunder Section 27(B).

Relevant Sections:

Before discussing the case, let us take a look at the relevant sections of the law in question.

Section 27(B) of the National Internal Revenue Code (NIRC) states:

(B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions andhospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except thosecovered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, businessor other activity exceeds fifty percent (50%) of the total gross income derived by such educationalinstitutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed onthe entire taxable income. For purposes of this Subsection, the term unrelated trade, business or otheractivity means any trade, business or othe r activity, the conduct of which is not substantially related tothe exercise or performance by such educational institution or hospital of its primary purpose orfunction. A proprietary educational institution is any private school maintained and ad ministered by


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private individuals or groups with an issued permit to operate from the Department of Education,Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Educationand Skills Development Authority (TESDA), as the case may be, in accordance with existing laws andregulations. (Emphasis supplied)

In comparison, Section 30(E) and Section 30(G) state:

Sec. 30. Exemptions from Tax on Corporations. The following organizations shall not be taxedunder this Title in respect to income received by them as such:

x x x x

(E) Nonstock corporation or association organized and operated exclusively for religious,charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its netincome or asset shall belong to or inure to the benefit of any member, organizer, officer or any specificperson;

x x x x

(G) Civic League or organization not organized for profit but operated exclusively for thepromotion of social welfare

x x x x

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind andcharacter of the foregoing organizations from any of their properties, real or personal, or from any oftheir activities conducted for profit regardless of the disposition of such income, shall be subject to taximposed under this Code.

(Emphasis supplied)

CASE DIGESTFacts:

St. Lukes Medical Center, Inc. (St. Lukes) is a hospital organized as a non -stock and non-profitcorporation.

The BIR assessed St. Lukes deficiency taxes for 1998 comprised of deficiency income tax, value -addedtax, and withholdi ng tax. The BIR claimed that St. Lukes should be liable for income tax at a preferentialrate of 10% as provided for by Section 27(B). Further, the BIR claimed that St. Lukes was actuallyoperating for profit in 1998 because only 13% of its revenues came from charitable purposes.Moreover, the hospitals board of trustees, officers and employees directly benefit from its profits andassets.

On the other hand, St. Lukes maintained that it is a non -stock and non-profit institution for charitableand social welfare purposes exempt from income tax under Section 30(E) and (G) of the NIRC. It arguedthat the making of profit per se does not destroy its income tax exemption.

Issue:


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The sole issue is whether St. Lukes is liable for deficie ncy income tax in 1998 under Section 27(B)

of the NIRC, which imposes a preferential tax rate of 10^ on the income of proprietary non-profithospitals.

Ruling:

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profithospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on theother hand, can be construed together without the removal of such tax exemption.

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications forhospitals are that they must be proprietary and non- profit. Proprietary means private, following the definition of a proprietary educational institution as any private school maintained andadministered by private individuals or groups with a government permit. Non -profit means no netincome or asset accrues to or benefits any member or specific person, with all the net income or assetdevoted to the institutions purposes and all its activities conducted not for profit.

Non -profit does not necessarily mean charitable. In Collector of Internal Revenue v. Club Filipino Inc.de Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment ofits stockholders and members. The club was primarily funded by membership fees and dues. If it hadprofits, they were used for overhead expenses and improving its golf course. The club was non-profitbecause of its purpose and there was no evidence that it was engaged in a profit-makingenterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Courtdefine d charity in Lung Center of the Philippines v. Quezon City as a gift, to be applied

consistently with existing laws, for the benefit of an indefinite number of persons, either by bringingtheir minds and hearts under the influence of education or religion, by assisting them to establishthemselves in life or *by+ otherwise lessening the burden of government. However, despite its being atax exempt institution, any income such institution earns from activities conducted for profit is taxable,as expressly provided in the last paragraph of Sec. 30.

To be a charitable institution, however, an organization must meet the substantive test of charity inLung Center. The issue in Lung Center concerns exemption from real property tax and not incometax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to anindefinite number of persons which lessens the burden of government. In other words, charitableinstitutions provide for free goods and services to the public which would otherwise fall on theshoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which shouldhave been spent to address public needs, because certain private entities already assume a part ofthe burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxesby the government is compensated by its relief from doing public works which would have been fundedby appropriations from the Treasury

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congressdecided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) ofthe NIRC is materially different from Section 28(3), Article VI of the Constitution. (Emphasis supplied)


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Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On theother hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, butrequires that the institution actually, directly and exclusively use the property for a charitablepurpose. (Emphasis supplied)

To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that acharitable institution use the property actually, directly and exclusively for charitable purposes.(Emphasis supplied)

To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution mustbe organized and operated exclusively for charitable purposes. Likewise, to be exempt from incometaxes, Section 30(G) of the NIRC requires that the institution be operated exclusively for social welfare.(Emphasis supplied)

However, the last paragraph of Section 30 of the NIRC qualifies the words organized and operatedexclusively by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and characterof the foregoing organizations from any of their properties, real or personal, or from any of theiractivities conducted for profit regardless of the disposition made of such income, shall be subject totax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conductsany activity for profit, such activity is not tax exempt even as its not -for-profit activities remain taxexempt.

Thus, even if the charitable institution must be organized and operated exclusively for charitable

purposes, it is nevertheless allowed to engage in activities conducted for profit without losing its taxexempt status for its not-for- profit activities. The only consequence is that the income of whateverkind and character of a charitable institution from any of its activities conducted for profit,regardless of the disposition made of such income, shall be subject to tax. Prior to the introduction ofSection 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rateunder Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%. (Emphasissupplied)

The Court finds that St. Lukes is a corporation that is not operated exclusively for charitable or socia lwelfare purposes insofar as its revenues from paying patients are concerned. This ruling is based notonly on a strict interpretation of a provision granting tax exemption, but also on the clear and plain textof Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be operatedexclusively for charitable or social welfare purposes to be completely exempt from income tax. Aninstitution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profitactivities. Such income from for-profit activities, under the last paragraph of Section 30, is merelysubject to income tax, previously at the ordinary corporate rate but now at the preferential 10% ratepursuant to Section 27(B). (Emphasis supplied)

St. Lukes fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely taxexempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of


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the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvestedpursuant to its corporate purposes. St. Lukes, as a proprietary non -profit hospital, is entitled to thepreferential tax rate of 10% on its net income from its for-profit activities.

St. Lukes is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However,St. Lukes has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.Lukes is a corporation for purely charitable and social welfare purposes and thus exempt from incometax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that good faith andhonest belief that one is not subject to tax on the basis of previous interpretation of governmentagencies tasked to implement the tax law, are sufficient justification to delete the imposition ofsurcharges and interest.

WHEREFORE, St. Lukes Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998based on the 10% preferential income tax rate under Section 27(8) of the National Internal RevenueCode. However, it is not liable for surcharges and interest on such deficiency income tax under

Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision andResolution of the Court of Tax Appeals are AFFIRMED.

CONWI vs. CTA213 SCRA 83NOCON, August 31, 1992NATUREPetition for Review on CertiorariFACTS-Petitioners were Filipino citizens who wereemployees of P & G Phils. During 1970 to 1971, theywereassigned to other subsidiaries of P & G outsideRP, thus, were paid in US dollars as compensation

forservices in their foreign assignments. So when theyfiled their income tax returns (ITR) for 1970,theycomputed the tax due by applying the dollar-to-pesoconversation on the basis of the floatingrateordained under BIR Ruling No. 70-27 (rates underRevenue Memorandum Circulars Nos. 7-71 and 41-71)dated May 14, 19701.The same conversionrate was used for their 1971 ITR.-However, on February 8, 1973, the petitionersfiledwith CIR an amended ITR for 1970 & 1971 whichused par value of the peso as prescribed in RA265,Sec.48 in relation to CA 699, Sec.6 for convertingtheir dollar income into pesos for purposes ofcomputing and paying the corresponding income taxdue from them. The amended ITR resultedintoalleged overpayments/refund and/or tax credit. Therefore, the petitioners claimed for refundfromCIR.-CTA: the proper conversion rate for the purpose of reporting and paying the Philippine incometax onthe dollar earnings of petitioners are therates prescribed under RMC Nos. 7-71 and 41-71.Claim for refund denied.ISSUEWON the petitioners are entitled to refund (Whatexchange rate should be used to determine thepesoequivalent of the foreign earnings of petitioners forincome tax purposes)HELDNO.Reasoning.


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Definition of Income:an amount of money comingto a person or corporation within a specified time,whether as payment forservices, interest or profitfrom investment. Unless otherwise specified, itmeans cash or its equivalent.Income can also bethought of as a flow of the fruits of one's labor.Definition of foreign exchange transactions(petitioners claim that their dollar earnings were notforeign exchange transactions): a transaction in1From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;From February 21 toDecember 31, 1970 at the conversion rate of P6.25 to U S. $1.00foreign exchange, foreign exchange being "theconversion of an amount of money or currency of onecountry into an equivalent amount of money orcurrency of another." There was noconversion(petitioners earned dollars, also spent dollars duringtheir stay abroad) so no foreignexchangetransactionOn what should be the basis for conversion:RMCs 7-71 and 41-71CB Circular No. 289:shows that the subjectmatters involved therein are

export products,invisibles, receipts of foreign exchange, foreignexchange payments, new foreignborrowing and investments nothing by way of income tax payments.Thus, petitioners are in error byconcluding that since C.B. Circular No. 289 does notapply to them, thepar value of the peso should bethe guiding rate used for income tax purposes.RMCs 7-71 and 41-71: issued to prescribe auniform rate of exchange from US dollars toPhilippine pesos for INTERNALREVENUE TAXPURPOSES for the years 1970 and 1971,respectively. Said revenue circulars were avalidexercise of the authority given to the Secretary of Finance by the Legislature which enactedtheInternal Revenue Code. And these are presumed tobe a valid interpretation of said code untilrevoked bythe Secretary of Finance himself. Petitioners, whowere arguing that there were noremittances andacceptances of their salaries and wages in US dollarsinto RP, they are exempt from the

coverage of theRMCs, are NOT EXEMPT from the RMCs as they arecitizens of the Philippines, and theirincome,withinor without,and in these cases wholly without, aresubject to income tax. Sec. 21, NIRC2, as amended,does not brook any exemption.Disposition.WHEREFORE" the petitions are deniedfor lack of merit. The dismissal by the respondentCourt of TaxAppeals of petitioners' claims for taxrefunds for the income tax period for 1970 and 1971is AFFIRMED.Costs against petitioners.SO ORDERED.*Para di magulo footnotes*RMC 7-71SUBJECT: Prescribing a uniform rate for U.S. Dollars toPhilippine Pesos for Internal Revenue TaxPurposes. TO: All Internal Revenue Officers and others concerned:2Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon thetaxable net incomereceived during each taxable year from all sources by every individual,whether a citizen of thePhilippines residing therein or abroad or an alien residing in thePhilippines, determined in accordancewith the following schedule:xxx xxx xxxAnd in the implementation for the proper enforcement of the


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National Internal RevenueCode, Section 338 thereof empowers the Secretary of Finance to "promulgateall needfulrules and regulations" to effectively enforce its provisions.For the Purpose of establishing a uniform rate of exchange toU.S. dollars to Philippine pesos for internalrevenue taxpurposes for the year 1970, the following schedule of exchange rates are hereby prescribedfor reference andguidelines of all concerned;Schedule of Exchange Rates1. In all cases of transactionsinvolving remittancesand acceptances of U.S. dollars occurring during the periodfrom January 1 toFebruary 20, 1970, the official rate of exchange of P3.90 to $1.00 shall be used.2. The case oftransactions involving remittances oracceptance of U.S. dollars occurring after February 20, 1970thefollowing rules shall govern:(a) In the case of regular or habitual transactionsinvolving remittances andacceptances of U.S. dollars, suchas salaries, royalty payments and the like, the uniform rateof P6.25 toU.S. $1.00 shall be used; provided however, thatan the case of transactions involving the computation ofadvance sales or compensating taxes, the rates used by theBureau of Customs at the time of thepayment of such taxesshall prevail.(b) In the case of an isolated or casual transactioninvolvingremittances or acceptances of U.S. dollars, such asdividends, occasional sales of property and the liketheexchange rate quoted by the Foreign Exchange Departmentof the Central bank of the Philippinesprevailing at the timeof such remittances or acceptance shall be used.Enforcement and PublicityAllinternal revenue officers and others charged withthe enforcement of internal revenue laws are enjoined

toenforce the provisions of this circular accordingly and to giveas wide a publicity as possible.(Sgd.)MISAEL P. VERACommissioner of Internal RevenueAPPROVED:(Sgd.) CESAR VIRATASecretary of Finance"RMC 41-71SUBJECT: Prescribing a uniform exchange rate for U.S.dollars to Philippine pesos for internal revenue taxpurposes. TO: All Internal Revenue Officers and othersconcerned:For the purpose of establishing auniform rate of exchange to U.S. dollars or other foreign currencies toPhilippine pesos for internalrevenue tax purposes for theyear 1971, the following schedule of exchange rates arehereby prescribedfor reference and guidelines of allconcerned:Schedule of Exchange RatesIn all cases of transactionsinvolving remittances andacceptances of U.S. dollars and other foreign currenciesoccurring during theyear 1971, the following rules shallgovern:(a) In the case of regular or habitual transactionsinvolvingremittances or acceptances of US dollars or otherforeign currencies such as salaries, wages, fees or

otherrenominations for personal services, royalties, rents,

interests or other fixed or determinable annual or periodicalincome, the uniform rate of P6.25 to U.S.$1.00 shall beused.(b) In the case of transactions involving thecomputation of advance sales orcompensating taxes, therate of exchange used by the Bureau of Customs at the timeof the payment ofsuch taxes shall prevail.(c) In the case of an isolated or casual transactioninvolving remittances ofacceptances of U.S. dollars or otherforeign currencies such as dividends, interests, capital gainsor othergains from occasional sales of property and the like,the exchange rate quoted by the ForeignExchangeDepartment of the Central Bank of the Philippines prevailingat the time of such remittances oracceptances shall beused.(d) Where the currency involved is other than U.S.dollars, the foreign currencyshall first be converted to U.S.dollars at the prevailing rate of exchange between the twocurrencies. Theresulting amount shall then be converted toPhilippine pesos in accordance with the above-promulgatedrules.All internal revenue officers and others charged withthe enforcement of internalrevenue laws are enjoined toenforce the provisions of this circular accordingly and to giveit as wide apublicity as possible.(SGD.) MISAEL P. VERACommissioner of Internal Revenue.APPROVED: (SGD.) CESARVIRATASecretary of Finance

Republic of the PhilippinesSUPREME COURT


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Manila

SECOND DIVISION

G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIMEA. SOQUES, petitioners,vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 48533 August 31, 1992

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACCO

MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, petitioners,vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order theCommissioner of Internal Revenue to refund to them their income taxes which they claim to have beenerroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine ManufacturingCorporation, with offices at Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is asubsidiary of Procter & Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble,outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for servicesin their foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs.D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floatingrate ordained under B.I.R. Ruling No. 70-027 dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25 to U.S. $1.00


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Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in converting their dollarincome for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973, petitioners insaid cases filed with the office of the respondent Commissioner, amended income tax returns for theabove-mentioned years, this time using the par value of the peso as prescribed in Section 48 of RepublicAct No. 265 in relation to Section 6 of Commonwealth Act No. 265 in relation to Section 6 ofCommonwealth Act No. 699 as the basis for converting their respective dollar income into Philippinepesos for purposes of computing and paying the corresponding income tax due from them. Theaforesaid computation as shown in the amended income tax returns resulted in the allegedoverpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filedwith respondent Commissioner. Without awaiting the resolution of the Commissioner of the InternalRevenue on their claims, petitioners filed their petitioner for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No. 2511 onJuly 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common question of law

and facts, that respondent Court of Tax Appeals heard the cases jointly. In its decision dated September26, 1977, the respondent Court of Tax Appeals held that the proper conversion rate for the purpose ofreporting and paying the Philippine income tax on the dollar earnings of petitioners are the ratesprescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim forrefund and/or tax credit of petitioners in the above-entitled cases was denied and the petitions forreview dismissed, with costs against petitioners. Hence, this petition for review on certiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in theprevailing free market rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposesinto Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rateused.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims asfollows:

At the outset, it is submitted that the subject matter of these two cases are Philippine income tax for thecalendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should begoverned by the provisions of the National Internal Revenue Code and its implementing rules andregulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as contendedby petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos.69 and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax uponthe taxable net income received during each taxable year from all sources by a citizen of the Philippines,whether residing here or abroad.


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Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment.Thus, in their tax returns for the period involved herein, they gave their legal residence/address as c/oProcter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A" to "A-8" and Annexes "C" to "C-8",Petition for Review, CTA Nos. 2511 and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be converted intoPhilippine pesos in computing the income tax due therefrom, in accordance with the provisions ofRevenue Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and RevenueMemorandum Circular No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIRRuling No. 70-027 dated May 4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of conversion (Revenue Circulars Nos. 7-71 and41-71) should be applied in order to determine the true and correct value in Philippine pesos of theincome of petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We

are inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue andthus vote to deny the petition.

This basically an income tax case. For the proper resolution of these cases income may be defined as anamount of money coming to a person or corporation within a specified time, whether as payment forservices, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent.4 Income can also be though of as flow of the fruits of one's labor. 5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreignexchange transactions. For a foreign exchange transaction is simply that a transaction in foreignexchange, foreign exchange being "the conversion of an amount of money or currency of one country

into an equivalent amount of money or currency of another." 6 When petitioners were assigned to theforeign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and wereALSO spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitionerfell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreignearnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do notfall within the classification of foreign exchange transactions, there occurred no actual inwardremittances, and, therefore, they are not included in the coverage of Central Bank Circular No. 289which provides for the specific instances when the par value of the peso shall not be the conversion rateused. They conclude that their earnings should be converted for income tax purposes using the parvalue of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products,receipts of sale of foreign exchange or foreign borrowings and investments but not income tax. He alsoclaims that he had to use the prevailing free market rate of exchange in these cases because of the needto ascertain the true and correct amount of income in Philippine peso of dollar earners for Philippineincome tax purposes.


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A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein areexport products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreignborrowing andinvestments nothing by way of income tax payments. Thus, petitioners are in error by concluding thatsince C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rateused for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &Gamble. It was a definite amount of money which came to them within a specified period of time of twoyeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net incomereceived during each taxable year from all sources by every individual, whether a citizen of thePhilippines residing therein or abroad or an alien residing in the Philippines, determined in accordance

with the following schedule:

xxx xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section338 thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" toeffectively enforce its provisions. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued toprescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAXPURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the

authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code.And these are presumed to be a valid interpretation of said code until revoked by the Secretary ofFinance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages inUS dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forgetthat they are citizens of the Philippines, and their income, within or without, and in these cases whollywithout, are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate ofexchange prescribed under the aforestated Revenue Memorandum Circulars, there is no reason forrespondent Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars,being of long standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of thegovernment" and one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of TaxAppeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED.Costs against petitioners.


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SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Melo, J., took no part.

Footnotes

1 Judge Amante Filler, ponente, concurred in by Judge Constantino C. Roaquin.

2 Rollo, pp. 98-100.

3 Id., pp. 100-101.

4 Fisher vs. Trinidad, 43 Phil. 973.

5 Madrigal vs. Rafferty, 38 Phil. 414.

6 Janda vs. Lepanto Consolidated Mining Co., 99 Phil. 197, 204.

7 Sec. 2. The following are foreign exchange transactions and as required by Central BankCircular No. 20 are subject to prior licensing by or on behalf of the Central Bank:

xxx xxx xxx

(f) Any transaction by which a resident performs any service for a non-resident other than touristsor temporary visitors. If the proper license is obtained, the former shall demand and obtain payment forsuch service within ninety days in U.S. dollars or in any other foreign currency acceptable to the CentralBank;

(g) Any transaction by which a resident performs for another resident service rendered in abusiness or profession of the latter located outside the Philippines. If proper license is obtained, theformer shall demand and obtain payment of the fair value of such service within ninety days from thedate of the performance of the aforesaid service, in U.S. dollar or in any other foreign currencyacceptable to the Central Bank;

xxx xxx xxx

(m) Any other transactions involving international financial implications.

8 Pursuant to the provisions of Republic Act No. 265, the Monetary Board, by unanimous vote andwith the approval of the President of the Philippines, and in accordance with existing executive andinternational agreement to which the Republic of the Philippines is a party, hereby promulgates thefollowing regulations on foreign exchange transactions.


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Sec. 1. Eighty (80) per cent of all receipts from the leading export products, i.e., exports whose annualaverage value exceeded $75 million in the base period 1966-68, shall be surrendered to the CentralBank at the par value. The par value shall not apply to the remaining twenty (20) per cent, which shall beheld to authorized agent banks at the prevailing free market rate. For purposes of this section, thefollowing are considered as the leading export products: logs, centrifugal sugar, copra and copper (oreor concentrates).

Sec. 2. The par value likewise shall not apply to all receipts from all other export products as well asfrom invisibles, which shall be sold to authorized agents of the Central Bank of the Philippines at theprevailing free market rate.

Sec. 3. All receipts of foreign exchange by resident persons, firms, companies or corporations shallrepresent not less than the full value of the transactions involved. All such receipts shall be sold toauthorized agents of the Central Bank of the Philippines by the recipients within three business daysfollowing the receipt of such foreign exchange and must be received in currencies prescribed to formpart of the international reserve. Resident persons, firms, companies or corporations shall not delaytaking ownership of their foreign exchange earnings except when such delay is customary.

Sec. 4. The par value likewise shall not apply to all foreign exchange payments, which shall benegotiated at the prevailing free market rate, except for outstanding foreign obligations and letters ofcredit covered by forward exchange contracts. Only authorized agent banks may sell foreign exchangefor imports and invisible disbursements.

Sec. 5. Authorized agent banks may sell foreign exchange for imports except those falling under UC,SUC and NEC categories, without prior specific approval of the Central Bank. Such imports may befinanced by letters of credit, or under D/A and open account arrangements subject or rules to bepromulgated by the Monetary Board. Monthly ceiling on foreign currency letters of credit and specialtime deposit requirements (STD) are hereby lifted. Existing STDS shall be released as they mature.

Sec. 6. The sale of foreign exchange for current invisible payments by authorized agent banks shall beallowed, without prior specific approval of the Central Bank, provided that amounts of more than$100.00 are substantiated by documentary evidence attesting to the veracity of the purpose and theamount applied for, and provided further that travel, remittance for educational expenses and studentmaintenance, maintenance of dependents abroad of Philippine residents, remittance of profits,dividends, and interests, royalties, film and other rentals shall be subject to the regulations to bepromulgated by the Monetary Board.

Sec. 7. New foreign borrowing and investments, and transfer of assets by emigrants shall be subject toregulations to be promulgated by the Monetary Board.

Sec. 8. The free market rate shall not be administratively fixed but shall be determined throughtransactions in the foreign exchange market on a day-to-day basis. The authorities shall not intervene inthe market except to the extent necessary to compensate for excessive fluctuations but shall notoperate against the trend in the market.

Sec. 9. All provisions of existing circulars, memorandum and regulations of the Central Bank governingtransactions in foreign exchange inconsistent with the provisions hereafter are hereby revoked.


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Sec. 10. Strict observance of the provisions of this Circular is hereby enjoined, and any person, firm,company or corporation, whether residing and/or located in the Philippines or not, who, being bound tothe observance of said provisions, or of such other rules, terms and conditions, or directives which maybe issued by the Central Bank in the implementation of this Circular, shall fail or refuse to comply with orabide by, or shall violate the same, shall be subject to the penal sanctions of the Central Bank Act.

Sec. 11. This Circular shall take effect immediately.

FOR THE MONETARY BOARD:(SGD) G.S. LICAROSGovernor

February 21, 1970.

9 Section 338, National Internal Revenue Code (1970), as amended; Philippine Lawyer'sAssociation vs. Agrava, 105 Phil. 173.

10 SUBJECT: Prescribing a uniform rate for U.S. Dollars to Philippine Pesos for InternalRevenue Tax Purposes.

TO: All Internal Revenue Officers and other concerned:

For the Purpose of establishing a uniform rate of exchange to U.S. dollars to Philippine pesos for internalrevenue tax purposes for the year 1970, the following schedule of exchange rates are hereby prescribedfor reference and guidelines of all concerned;

Schedule of Exchange Rates

1. In all cases of transactions involving remittances and acceptance of U.S. dollars occurring duringthe period from January 1 to February 20, 1970, the official rate of exchange of P3.90 to $1.00 shall beused.

2. In the case of transactions involving remittances or acceptance of U.S. dollars occurring afterFebruary 20, 1970 the following rules shall govern:

(a) In the case of regular or habitual transactions involving remittances and acceptances of U.S.dollars, such as salaries, royalty payments and the like, the uniform rate of P6.25 to U.S. $1.00 shall beused; provided however, that in the case of transactions involving the computation of advance sales orcompensating taxes, the rates used by the Bureau of Customs at the time of the payment of such taxesshall prevail.

(b) In the case of an isolated or casual transaction involving remittances or acceptance of U.S.dollars, such as dividends, occasional sales of property and the like the exchange rate quoted by theForeign Exchange Department of the Central bank of the Philippines prevailing at the time of suchremittances or acceptance shall be used.

Enforcement and Publicity


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All internal revenue officers and others charged with the enforcement of internal revenue laws areenjoined to enforce the provisions of this circular accordingly and to give as wide a publicity as possible.

(Sgd.) MISAEL P. VERACommissioner of Internal Revenue

APPROVED(Sgd.) CESAR VIRATASecretary of Finance

11 SUBJECT: Prescribing a uniform exchange rate of U.S. dollars to Philippine pesos forinternal revenue tax purposes.

TO: All Internal Revenue Officers and others concerned:

For the purpose of establishing a uniform rate of exchange to U.S. dollars or other foreign currencies toPhilippine pesos for internal revenue tax purposes for the year 1971, the following schedule of exchange

rates are hereby prescribed for reference and guidelines of all concerned:

Schedule of Exchange Rates

In all cases of transactions involving remittances and acceptance of U.S. dollars and other foreigncurrencies occurring during the year 1971, the following rules shall govern:

(a) In the case of regular or habitual transactions involving remittances or acceptances of US dollarsor other foreign currencies such as salaries, wages, fees or other renominations for personal services,royalties, rents, interests or other fixed or determinable annual or periodical income, the uniform rate ofP6.25 to U.S. $1.00 shall be used.

(b) In the case of transactions involving the computation of advance sales or compensating taxes,the rate of exchange used by the Bureau of Customs at the time of the payment of such taxes shallprevail.

(c) In the case of an isolated or casual transaction involving remittances of acceptances of U.S.dollars or other foreign currencies such as dividends, interests, capital gains or other gains fromoccasional sales of property and the like, the exchange rate quoted by the Foreign ExchangeDepartment of the Central Bank of the Philippines prevailing at the time of such remittances oracceptance shall be used.

(d) Where the currency involved is other than U.S. dollars, the foreign currency shall first beconverted to U.S. dollars at the prevailing rate of exchange between the two currencies. The resultingamount shall then be converted to Philippine pesos in accordance with the above-promulgated rules.

All internal revenue officers and others charged with the enforcement of internal revenue laws areenjoined to enforce the provisions of this circular accordingly and to give it as wide a publicity aspossible.

(SGD.) MISAEL P. VERA


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Commissioner of Internal Revenue

APPROVED:(SGD.) CESAR VIRATASecretary of Finance

12 Hilado vs. Collector of Internal Revenue, 100 Phil. 288.

13 Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95.

Republic of the PhilippinesSUPREME COURTManila

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 andsisters, petitionersvs.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 whichthey had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rightsto his four children, the petitioners, to enable them to build their residences. The company sold the twolots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrenstitles issued to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to theWalled 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 theprofit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner ofInternal Revenue required the four petitioners to pay corporate income tax on the total profit ofP134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate


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income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total ofP71,074.56.

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 incometaxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totallingP127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnershipor joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of InternalRevenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. JudgeRoaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 ofthe Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold thesame and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result inoppressive taxation and confirm the dictum that the power to tax involves the power to destroy. Thateventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. Toconsider them as partners would obliterate the distinction between a co-ownership and a partnership.The petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it notfeasible to build their residences on the lots because of the high cost of construction, then they had nochoice but to resell the same to dissolve the co-ownership. The division of the profit was merelyincidental to the dissolution of the co-ownership which was in the nature of things a temporary state. Ithad to be terminated sooner or later. Castan Tobeas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedadpresupone necesariamente la convencion, mentras que la comunidad puede existir y existeordinariamente 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 suconservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestroDerecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad debienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica seala como notafundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la


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finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion yaprovechamiento 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 apartnership, whether or not the persons sharing them have a joint or common right or interest in anyproperty from which the returns are derived". There must be an unmistakable intention to form apartnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 personscontributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that theywould divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable forincome tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit.Thus, in Oa vs.

** 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 tothe 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 orexpand the inherited properties; they merely continued dedicating the property to the use to which ithad been put by their forebears; they individually reported in their tax returns their correspondingshares in the income and expenses of the 'hacienda', and they continued for many years the status ofco-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and tocontinue 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 whichproduce income should not automatically be considered partners of an unregistered partnership, or acorporation, within the purview of the income tax law. To hold otherwise, would be to subject theincome of allco-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does notproduce an income at all, it is not subject to any kind of income tax, whether the income tax onindividuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961,cited in Araas, 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 extrajudicialsettlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund toproduce profits for themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father andson purchased a lot and building, entrusted the administration of the building to an administrator anddivided 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 varioustenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed anunregistered partnership.


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In the instant case, what the Commissioner should have investigated was whether the father donatedthe two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We arenot prejudging this matter. It might have already prescribed.

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

SO ORDERED.

Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.

Concepcion, Jr., is on leave.

case digest tax after midterm

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