Tax-cases-2-full.docx

[G.R. No. 148187. April 16, 2008.] PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION YNARES-SANTIAGO, J p: This is a petition for review on certiorari of the June 30, 2000 Decision of the Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April 3, 2001 Resolution denying the motion for reconsideration. The facts of the case are as follows: On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an agreement with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and operate the latter's mining claim, known as the Sto. Niño mine, located in Atok and Tublay, Benguet Province. The parties' agreement was denominated as "Power of Attorney" and provided for the following terms: 4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to time may be required by the MANAGERS within the said 3year period, for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the owner's account in the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be added to such owner's account. 5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in accordance with the following arrangements:

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(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino PROJECT as a special fund to be known as the MANAGERS' account. (b) The total of the MANAGERS' account shall not exceed P11,000,000.00, except with prior approval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the MANAGERS' account. (c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until termination of this Agency. (d) The MANAGERS' account shall not accrue interest. Since it is the desire of the PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of this Agency, the ratio which the MANAGERS' account has to the owner's account will be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that such transferred assets shall not include mine development, roads, buildings, and similar property which will be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the other hand, require at their option that property originally transferred by them to the Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to the MANAGERS, this Agency shall remain subsisting. xxx xxx xxx 12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS' compensation. xxx xxx xxx 16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as 1

security for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS' account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS. CHaDIT 17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS' withdrawal. xxx xxx xxx In the course of managing and operating the project, Philex Mining made advances of cash and property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years which resulted to petitioner's withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of mine operations on February 20, 1982. Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in Payment" wherein Baguio Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Gold's tangible assets to petitioner, transferring to the latter Baguio Gold's equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio Gold may acquire in the future. On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in Payment" where the parties determined that Baguio Gold's indebtedness to petitioner actually amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A. This time, Baguio Gold undertook Taxation 1 Cases Set 2

to pay petitioner in two segments by first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00. Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations. In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and allowances." However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39. Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the taxable year when it was determined to be worthless. Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed part of Baguio Gold's "pecuniary obligations" to petitioner. It also included payments made by petitioner as guarantor of Baguio Gold's long-term loans which legally entitled petitioner to be subrogated to the rights of the original creditor. Petitioner also asserted that due to Baguio Gold's irreversible losses, it became evident that it would not be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless, petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is 2

enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable means to collect. On October 28, 1994, the BIR denied petitioner's protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid fifty percent (50%) of the project's net profit.

What petitioner did was to pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was merely demanding payment of the installment and interests due. Moreover, Citibank imposed and collected a "pre-termination penalty" for the pre-payment.

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

I. The Court of Appeals erred in construing that the advances made by Philex in the management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a loan.

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED. SEcTHA ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus 20% delinquency interest due computed from February 10, 1995, which is the date after the 20-day grace period given by the respondent within which petitioner has to pay the deficiency amount . . . up to actual date of payment. SO ORDERED. The CTA rejected petitioner's assertion that the advances it made for the Sto. Nino mine were in the nature of a loan. It instead characterized the advances as petitioner's investment in a partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the "Power of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from petitioner's gross income. HcaDIA The CTA likewise held that the amount paid by petitioner for the longterm loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since its loans were not yet due and demandable. Taxation 1 Cases Set 2

The Court of Appeals affirmed the decision of the CTA. Hence, upon denial of its motion for reconsideration, petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:

II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a partnership. III. The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the advances made by Philex. IV. The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-off. Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should not only rely on the "Power of Attorney", but also on the subsequent "Compromise with Dation in Payment" and "Amended Compromise with Dation in Payment" that the parties executed in 1982. These documents, allegedly 3

evinced the parties' intent to treat the advances and payments as a loan and establish a creditor-debtor relationship between them. The petition lacks merit. The lower courts correctly held that the "Power of Attorney" is the instrument that is material in determining the true nature of the business relationship between petitioner and Baguio Gold. Before resort may be had to the two compromise agreements, the parties' contractual intent must first be discovered from the expressed language of the primary contract under which the parties' business relations were founded. It should be noted that the compromise agreements were mere collateral documents executed by the parties pursuant to the termination of their business relationship created under the "Power of Attorney". On the other hand, it is the latter which established the juridical relation of the parties and defined the parameters of their dealings with one another. The execution of the two compromise agreements can hardly be considered as a subsequent or contemporaneous act that is reflective of the parties' true intent. The compromise agreements were executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by which petitioner could recover the advances and payments it made under the "Power of Attorney". The parties entered into the compromise agreements as a consequence of the dissolution of their business relationship. It did not define that relationship or indicate its real character. An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed intended by the parties. Under a 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. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership: The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally understood to mean an organization formed for some temporary purpose. . . . It is in fact hardly distinguishable from the partnership, since their elements are Taxation 1 Cases Set 2

similar — community of interest in the business, sharing of profits and losses, and a mutual right of control. . . . The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. . . . This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. . . . It would seem therefore that under Philippine law, a joint venture is a form of partnership and should be governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others. . . . (Citations omitted) Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property and industry to the common fund known as the Sto. Niño mine. In this regard, we note that there is a substantive equivalence in the respective contributions of the parties to the development and operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold would contribute P11M under its owner's account plus any of its income that is left in the project, in addition to its actual mining claim. Meanwhile, petitioner's contribution would consist of its expertise in the management and operation of mines, as well as the manager's account which is comprised of P11M in funds and property and petitioner's "compensation" as manager that cannot be paid in cash. 4

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold because it did not "bind" itself to contribute money or property to the project; that under paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIÑO MINE.” The wording of the parties' agreement as to petitioner's contribution to the common fund does not detract from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph 5 (c) which prohibits petitioner from withdrawing the advances until termination of the parties' business relations. As can be seen, petitioner became bound by its contributions once the transfers were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to exercise its option under paragraph 5. There is no merit to petitioner's claim that the prohibition in paragraph 5 (c) against withdrawal of advances should not be taken as an indication that it had entered into a partnership with Baguio Gold; that the stipulation only showed that what the parties entered into was actually a contract of agency coupled with an interest which is not revocable at will and not a partnership. In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and agent. In this case, the non-revocation or non-withdrawal under paragraph 5 (c) applies to the advances made by petitioner who is supposedly the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that the parties' relation under the agreement is one of agency coupled with an interest and not a partnership. Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties was one of agency and not a partnership. Although the said provision states that "this Agency shall Taxation 1 Cases Set 2

be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS' account", it does not necessarily follow that the parties entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold. It should be stressed that the main object of the "Power of Attorney" was not to confer a power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and Baguio Gold, in which the former was to manage and operate the latter's mine through the parties' mutual contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is the agent's ability to represent his principal and bring about business relations between the latter and third persons. Where representation for and in behalf of the principal is merely incidental or necessary for the proper discharge of one's paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but some other agreement depending on the ultimate undertaking of the parties. In this case, the totality of the circumstances and the stipulations in the parties' agreement indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio Gold. First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties' business relations, "the ratio which the MANAGER'S account has to the owner's account will be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims" shall be transferred to petitioner. As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mine's assets upon dissolution of the parties' business relations. There was nothing in the agreement that would require Baguio Gold to make payments of the advances to petitioner as would be recognized as an item of obligation or "accounts payable" for Baguio Gold. Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto. Niño mine upon termination, a 5

provision that is more consistent with a partnership than a creditordebtor relationship. It should be pointed out that in a contract of loan, a person who receives a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and quality. In this case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and property that it had advanced, but only the return of an amount pegged at a ratio which the manager's account had to the owner's account. In this connection, we find no contractual basis for the execution of the two compromise agreements in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their business relations over the Sto. Niño mine. The "Power of Attorney" clearly provides that petitioner would only be entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the manager's account had to the owner's account. Except to provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and above the proportion agreed upon in the "Power of Attorney". Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the advances were not loans but capital contributions to a partnership. The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety of the parties' contractual stipulations simply leads to no other conclusion than that petitioner's "compensation" is actually its share in the income of the joint venture. Taxation 1 Cases Set 2

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business." Petitioner asserts, however, that no such inference can be drawn against it since its share in the profits of the Sto Niño project was in the nature of compensation or "wages of an employee", under the exception provided in Article 1769 (4) (b). On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will be paid "wages" pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the project and had put substantial sums into the venture in order to ensure its viability and profitability. By pegging its compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard to believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary employee. Consequently, we find that petitioner's "compensation" under paragraph 12 of the agreement actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold. It is not surprising that petitioner was to receive a 50% share in the net profits, considering that the "Power of Attorney" also provided for an almost equal contribution of the parties to the St. Niño mine. The "compensation" agreed upon only serves to reinforce the notion that the parties' relations were indeed of partners and not employer-employee. All told, the lower courts did not err in treating petitioner's advances as investments in a partnership known as the Sto. Niño mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same to the former under the "Power of Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold's creditors, we find no reason to depart from the tax court's factual finding that Baguio Gold's debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold's 6

outstanding loans to its bank creditors and this conclusion is supported by the evidence on record. In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction. WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20% delinquency interest computed from February 10, 1995, which is the due date given for the payment of the deficiency income tax, up to the actual date of payment. SO ORDERED. [G.R. No. 109289. October 3, 1994.] RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents. [G.R. No. 109446. October 3, 1994.] CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents. DECISION VITUG, J p:

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These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following provisions of the Constitution: "Article VI, Section 26 (1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof." "Article VI, Section 28 (1) — The rule of the taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." "Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws." In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships. The Solicitor General espouses the position taken by public respondents. The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda. G.R. No. 109289 Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289). The full text of the title actually reads: 7

"An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended." The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide: "Section 21. Tax on citizens or residents. — xxx xxx xxx "(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. — A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule: "Not over P10,000 3% Over P10,000 but not over P30,000 P300 + 9% of excess over P10,000 Over P30,000 but not over P120,000 P2,100 + 15% of excess over P30,000 Over P120,000 but not over P350,000 P15,600 + P20% of excess over P120,000 Over P350,000 P61,600 + 30% of excess over P350,000" "SECTION 29. Deductions from gross income. — In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: "(a) Raw materials, supplies and direct labor; "(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; "(c) Telecommunications, electricity, fuel, light and water; "(d) Business rentals; Taxation 1 Cases Set 2

"(e) Depreciation; "(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and "(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business. "For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be." On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in the support of the whole act, (b) to avoid surprises or even fruad upon the legislature , and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate. Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single 8

proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 771). What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate. Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us. Taxation 1 Cases Set 2

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. G.R No 109446 The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496. The questioned regulation reads: "Sec. 6 General Professional Partnership — The general professional partnership (GPP) and the partners comprising the GPP are covered byR.A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income." The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of the Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly: "'MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression on this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return? 9

'MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.' "(See Deliberations on H.B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours) "'Other deliberations support this position, to wit: 'MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable? 'MR. PEREZ. That is correct, Mr. Speaker.' "(Id. at 6:40 P.M.; Emphasis ours) "In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus: "'This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals.' (Emphasis ours)" The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit: "SECTION 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. Taxation 1 Cases Set 2

"(b) In determining his distributive share in the net income of the partnership, each partner — "(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extend provided by the pertinent provisions of this Code, and "(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions." There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income). 10

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax. "Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual, capacity computed their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their noncompensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. Taxation 1 Cases Set 2

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs. SO ORDERED. Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur. Padilla and Bidin, JJ., is on leave. Footnotes 1.Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp. 146-147, citing with approval Cooley on Constitutional Limitations. 2.A system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer. 3.A system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. 4.A general professional partnership, in this context, must be formed for the sole purpose of exercising a common profession, no part of the income of which is derived from its engaging in any trade business; otherwise, it is subject to tax as an ordinary business partnership or, which is to say, as a corporation and thereby subject to the corporate income tax. The only other exempt partnership is a joint venture for undertaking construction projects or engaging in petroleum operations pursuant to an operating agreement under a service contract with the government (see Sections 20, 23 and 24, National Internal Revenue Code). [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. DECISION AQUINO, J p:

11

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. 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 coowners of the two lots. 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 on P16,792. 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 paycorporate 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. Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "distributive dividend" taxable in full (not a mere capital gain of which 1/2 is taxable) and required them to pay deficiency income taxes 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 totalling P127,781.76 on their profit of P134, 336, in addition to the tax on capital gains already paid by them.

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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). The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal. 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. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the coownership 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? "El criterio diferencial — seg'un la doctrina m s generalizada — est : por raz"n del origen, en que la sociedad presupone necesariamente la convencion, mientras que la comunidad puede existir y existe ordinariamente sin ella; y por raz"n del fin u objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es 12

s'olo mantener en su integridad la cosa comun y favorecer su conservacion. "Reflejo de este criterio es la sentencia de 15 de octubre de 1940, en la que se dice que si en nuestro Derecho positivo 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 o 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 Español, 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. The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Ona vs. 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. 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 Taxation 1 Cases Set 2

property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership. 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. 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. Footnotes **This view is supported by the following rulings of respondent Commissioner: "Co-ownership 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. Arañas, CTA Case No. 653, July 31, 1963). "All co-ownerships are not deemed unregistered partnership. — Coheirs 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 13

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. CIR, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

[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. The Solicitor General for respondents. SYLLABUS 1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. — 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. 2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR NOT LIABLE FOR THE PAYMENT THEREOF. — 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. 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.

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DECISION GANCAYCO, J p: The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition. 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 to Marenir 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. 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. Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974. 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 14

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.

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.)

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, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners.

The petition is meritorious. The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista.

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. 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 them liable for corporate income tax under the Tax Code. 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. 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. C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

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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. 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: '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 (companias colectivas), a tax upon such income equal to the sum of the following: . . .' 'Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or organized, joint—stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companias colectivas).' 15

"Article 1767 of the Civil Code of the Philippines provides: '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.' "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: 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 P18,000.00. 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 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.

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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 circumstance 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." 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 coowners thereof. 16

In Evangelista, 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. 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. 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. 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; '(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; '(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;' "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 Taxation 1 Cases Set 2

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 Floyd D. Mechem, 2nd Ed., section 83, p. 74.) '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.) '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 plaintiff's 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 17

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.)"

WHEREFORE, 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. SO ORDERED.

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co-owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes. And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership. However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom. Taxation 1 Cases Set 2

[G.R. No. L-19342. May 25, 1972.] LORENZO T. OÑA, and HEIRS OF JULIA BUNALES, 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. Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Purificacion Ureta for respondent. SYLLABUS 1. TAXATION; INTERNAL REVENUE CODE; CORPORATE TAX; UNREGISTERED PARTNERSHIP; FORMATION THEREOF WHERE INCOME FROM SHARES OF CO-HEIRS CONTRIBUTED TO COMMON FUND. — 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 (who managed the properties) as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamount to actually 18

contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the provisions of the Tax Code. 2. ID.; ID.; ID.; WHEN HEIRS NOT CONSIDERED AS UNREGISTERED COPARTNERS AND NOT SUBJECT TO SUCH TAX. — In cases of inheritance, there is a period when the heirs can be considered as coowners rather than unregistered co-partners within the contemplation of our corporate tax laws. 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. 3. ID.; ID.; ID.; CIRCUMVENTIONS OF SECTIONS 24 AND 84(b) OF TAX CODE WHEN HEIRS CONTINUE AS CO-OWNERS. — For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership, for it is easily conceivable that after knowing their respective shares in the partition, they (heirs) 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 not so, 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. 4. ID.; ID.; ID., HEIRS AS UNREGISTERED CO-PARTNERS; PARTNERSHIP CONTEMPLATED IN CIVIL CODE NOT APPLICABLE. — Petitioners' reliance on Article 1769, par. (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 (102 Phil. 140), 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.

Taxation 1 Cases Set 2

5. ID.; ID.; ID.; ID.; SEGREGATION OF INCOME FROM BUSINESS FROM THAT OF INHERITED PROPERTIES, NOT PROPER. — Where the inherited properties and the income derived therefrom were used in business of buying and selling other real properties and corporate securities, 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. 6. ID.; ID.; INCOME TAX; ACTION FOR REIMBURSEMENT SUBJECT TO PRESCRIPTION. — A taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate, 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. DECISION 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. 2343and 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. 19

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. 34-31, 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 Taxation 1 Cases Set 2

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 P 87,860 P 17,590.00 1950 P 24,657.65 128,566.72 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 20

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 17,361.25 ========== (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. 13, Annex C to Petition). Petitioners have assigned the following as alleged errors of the Tax Court: Taxation 1 Cases Set 2

"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 IN VESTED 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 21

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 Taxation 1 Cases Set 2

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 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 tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the abovementioned 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 22

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 "[i]t 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 Taxation 1 Cases Set 2

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 conformity 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 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 copartnerships' — which are possessed of the aforementioned 23

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 as 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 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." 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 coownership 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 Taxation 1 Cases Set 2

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 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 allege: '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 Honor able 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. 24

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 affirmed, with costs against petitioners.

Footnotes Taxation 1 Cases Set 2

1.In other words, the assessment was affirmed except for the sum of P100.00 which was the total of two P50-items purportedly for "Compromise for non-filing" which the Tax Court held h be unjustified, since there was no compromise agreement to speak of.

[G.R. No. L-9996. October 15, 1957.] EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA EVANGELISTA, petitioners, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, 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" 25

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 Codeincludes 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 p: 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: "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." It appears from the stipulation submitted by the parties: Taxation 1 Cases Set 2

"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." It further appears that on September 24, 1954, respondent Collector of Internal Revenue demanded the payment of income tax on 26

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: 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 Taxation 1 Cases Set 2

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: "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: . . . ." "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)." Article 1767 of the Civil Code of the Philippines provides: "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." 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: 27

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.

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.

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.

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.

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. Taxation 1 Cases Set 2

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 28

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 Taxation 1 Cases Set 2

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: "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 29

with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain."

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:

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

"'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. Separate Opinions BAUTISTA ANGELO, J., concurring: I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of engaging in real estate business for profit. The series of transactions which they had undertaken attest to this. This appears in the following portion of of the decision: "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. On April 3, 1944, they purchased 21 lots for P18,000. This was soon followed on April 23, 1944, by the acquisition of another real estate for P108,825. 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 afore-mentioned common fund or even of the property acquired by petitioner in February, 1943. In other Taxation 1 Cases Set 2

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 30

principal proprietors in the business itself which the proceeds derived." (Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.) "A joint purchase of land, by two, does not constitute a copartnership 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 S. Ct. 327, 35 L. Ed., 1157.) "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 plaintiff's commissions, 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 a 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 Ill. 470.) "The common ownership of property does not itself create a partnership between the owners, though they may use it for 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.) This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances (referring to the series of transactions) such as to leave no room for doubt on the existence of said intent in petitioners herein."

Taxation 1 Cases Set 2

[G.R. No. 112675. January 25, 1999.] AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION; COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION; DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE COMPANY; EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY & SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS' INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.; MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION; PARAMOUNT INSURANCE CORPORATION; PEOPLE'S TRANS-EAST ASIA INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT INSURANCE COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO., INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY & INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARDEASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.; SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC. — all assessed as "POOL OF MACHINERY INSURERS," petitioners, vs. COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

SYNOPSIS This is a Petition For Review on Certiorari assailing the Decision of the Court of Appeals dismissing petitioners' appeal of the Decision of the Court of Tax Appeals which had sustained petitioners' liability for 31

deficiency income tax, interest and withholding tax. Petitioners contended that the Court of Appeals erred in finding that the pool or clearing house was an informal partnership, which was taxable as a corporation under the NIRC. Petitioners further claimed that the remittances of the pool to the ceding companies and Munich are not dividends subject to tax. They insisted that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation. Moreover, petitioners argued that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be deemed dividends. However, even if such remittances were treated as dividends, they would have been exempt under the previously mentioned sections of the 1977 NIRC,as well as Article 7 of paragraph 1 and Article 5 of the RP-West German Tax Treaty. Petitioners likewise contended that the Internal Revenue Commissioner was already barred by prescription from making an assessment. In the present case, the ceding companies entered into a Pool Agreement or association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. Petitioner's allegation of double taxation is untenable. The pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is different from the tax on the dividends received by the said companies. The tax exemptions claimed by petitioners cannot be granted. The sections of the 1977 NIRC which petitioners cited are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the Internal Revenue Commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. Petitioners likewise failed to comply with the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The Resolutions of the Court of Appeals are affirmed. Taxation 1 Cases Set 2

SYLLABUS 1. REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF INTERNAL REVENUE IS ACCORDED WEIGHT AND EVEN FINALITY IN THE ABSENCE OF SHOWING THAT IT IS PATENTLY WRONG. — The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently wrong, particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals. Indeed, "[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is 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." 2. CIVIL LAW; PARTNERSHIP; REQUISITES. — Article 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." Its requisites are: "(1) mutual contribution to a common stock, and (2) a joint interest in the profits." In other words, a partnership is formed when persons contract "to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves." Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction of business." 3. ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP OR ASSOCIATION TAXABLE AS A CORPORATION UNDER SECTION 24 OF THENIRC. — In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and 32

operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool's formation. 4. TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED PARTNERSHIPS AND ASSOCIATIONS ARE CONSIDERED AS CORPORATIONS FOR TAX PURPOSES. — This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC,as worded in the year ending 1975, provides: "SEC. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is hereby imposed upon the taxable net income received during each 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-partnership (compañias colectivas), general professional partnerships, private educational institutions, and building and loan associations . . . ." Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NLRC's inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997, which amended the Tax Code.The Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more than ten years, as in the case before us. 5. ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE AT BAR. — Double taxation means taxing the same property twice when it should be taxed only once. That is, ". . . taxing the same Taxation 1 Cases Set 2

person twice by the same jurisdiction for the same thing." In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here. 6. ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT BAR; REASONS. — The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right." Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Referring to the 1975 version of the counterpart sections of the NIRC,the Court still cannot justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid the tax . . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their own. 7. ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN INSURANCE CORPORATION IN CASE AT BAR; REASONS; TAX EXEMPTION CONSTRUEDSTRICTISSIMI JURIS. — Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of said pool. Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest from a reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty 33

and Articles 3 and 10 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken. 8. ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR; REASON. — The petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984. 9. ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION; CHANGE IN THE ADDRESS OF THE TAXPAYER WILL NOT TOLL THE RUNNING OF THE PRESCRIPTIVE PERIOD UNLESS THE COMMISSIONER OF INTERNAL REVENUE HAS BEEN INFORMED OF SAID CHANGE. — The CA and the CTA categorically found that the prescriptive period was tolled under then Section 333 of the NIRC,because "the taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in sending the assessment." Indeed, whether the government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA and the CTA. Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool changed its address, for they stated that the pool's information return filed in 1980 indicated therein its "present address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the Commissioner of Internal Revenue of any change in the address." Taxation 1 Cases Set 2

DECISION PANGANIBAN, J p: Pursuant to "reinsurance treaties," a number of local insurance firms formed themselves into a "pool" in order to facilitate the handling of business contracted with a nonresident foreign reinsurance company. May the "clearing house" or "insurance pool" so formed be deemed a partnership or an association that is taxable as a corporation under the National Internal Revenue Code (NIRC)? Should the pool's remittances to the member companies and to the said foreign firm be taxable as dividends? Under the facts of this case, has the government's right to assess and collect said tax prescribed? The Case These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11, 1993 Decision of the Court of Appeals in CA-GR SP 29502, which dismissed petitioners' appeal of the October 19, 1992 Decision of the Court of Tax Appeals (CTA) which had previously sustained petitioners' liability for deficiency income tax, interest and withholding tax. The Court of Appeals ruled: "WHEREFORE, the petition is DISMISSED, with costs against petitioners." The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution denying reconsideration. The Facts The antecedent facts, as found by the Court of Appeals, are as follows: "The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance 34

corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.

Add: 25% surcharge 14% interest from 1/25/76 to 1/25/79

"On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co. "On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and with[h]olding tax, itemized as follows:

P3,737,370.00 ===========

Income tax due thereon

P1,298,080.00

penalty-non-filing of return

300.00

late payment

300.00 ––––––––––––

TOTAL AMOUNT DUE & COLLECTIBLE Dividend paid to Pool Members

545,193.60 ––––––––––––

TOTAL AMOUNT DUE & COLLECTIBLE

===========

Taxation 1 Cases Set 2

P655,636.00

10% withholding tax at

Add: 25% surcharge

P65,563.60 16,390.90

14% interest from 1/25/76 to 1/25/79

6,884.18

penalty-non-filing of return

300.00

late payment

300.00 ––––––––––––

TOTAL AMOUNT DUE & COLLECTIBLE

P3,728,412.00 ===========

35% withholding tax at source due thereon

===========

===========

P1,843,273.60

Dividend paid to Munich Reinsurance Company

P1,768,799.39

Compromise

Add: 14% Int. fr. 4/15/76 to 4/15/79

137,019.14

Compromise

source due thereon Net income per information return

326,236.05

P1,304,944.20

P89,438.68 =========="

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter's collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because "the 35

taxpayer cannot be located at the address given in the information return filed." Hence, this Petition for Review before us.

The Issues Before this Court, petitioners raise the following issues: "1. Whether or not the Clearing House, acting as a mere agent and performing strictly administrative functions, and which did not insure or assume any risk in its own name, was a partnership or association subject to tax as a corporation; "2. Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were "dividends" subject to tax; and "3. Whether or not the respondent Commissioner's right to assess the Clearing House had already prescribed." The Court's Ruling The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation, and that the government's right to assess and collect the taxes had not prescribed. First Issue: Pool Taxable as a Corporation Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an informal partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were written by them "individually and separately," and that their liability was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool Taxation 1 Cases Set 2

did not act or earn income as a reinsurer. Its role was limited to its principal function of "allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc." Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same risk or solidary liability; (2) there was no common fund; (3) the executive board of the pool did not exercise control and management of its funds, unlike the board of directors of a corporation; and (4) the pool or clearing house "was not and could not possibly have engaged in the business of reinsurance from which it could have derived income for itself." The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently wrong, particularly in this case where the findings and conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals. Indeed, "[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is 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." This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC,as worded in the year ending 1975, provides: "SEC. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. — A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the 36

Philippines, no matter how created or organized, but not including duly registered general co-partnership (compañias colectivas), general professional partnerships, private educational institutions, and building and loan associations . . . ." Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Parenthetically, the NLRC's inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997, which amended the Tax Code.Pertinent provisions of the new law read as follows: "SEC. 27. Rates of Income Tax on Domestic Corporations. — (A) In General. — Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation . . . ." "SEC. 22. Definition. — When used in this Title: xxx xxx xxx (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract without the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. xxx xxx xxx." Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered partnerships and even associations or joint accounts, which had no legal personalities apart Taxation 1 Cases Set 2

from their individual members. The Court of Appeals astutely applied Evangelista: ". . . Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for purposes of the tax in Sec. 24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said: '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)'" Article 1767 of the Civil Code recognizes the creation of a contract of partnership when "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." Its requisites are: "(1) mutual contribution to a common stock, and (2) a joint interest in the profits." In other words, a partnership is formed when persons contract "to devote to a common purpose either money, property, or labor with the intention of dividing the profits between themselves." Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the transaction of business." In the case before us, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. (2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial and 37

economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share "in the business ceded to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool's formation. As aptly found by the CTA: ". . . The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or coaction was indispensable [to] the transaction of the business. . . If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted." The petitioners' reliance on Pascual v. Commissioner is misplaced, because the facts obtaining therein are not on all fours with the present case. InPascual, there was no unregistered partnership, but merely a co-ownership which took up only two isolated transactions. The Court of Appeals did not err in applying Evangelista, which involved a partnership that engaged in a series of transactions spanning more than ten years, as in the case before us. Second Issues: Pool's Remittances Are Taxable Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and "would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the hands of the same taxpayer." Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be Taxation 1 Cases Set 2

deemed dividends. They add that even if such remittances were treated as dividends, they would have been exempt under the previously mentioned sections of the 1977 NIRC, as well as Article 7 of paragraph 1 and Article 5 of paragraph 5 of the RP-West German Tax Treaty. Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing." In the instant case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no double taxation here. The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right." Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were not yet in effect when the income was earned and when the subject information return for the year ending 1975 was filed. Referring to the 1975 version of the counterpart sections of the NIRC,the Court still cannot justify the exemptions claimed. Section 255 provides that no tax shall ". . . be paid upon reinsurance by any company that has already paid the tax . . . ." This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former as their own. On the other hand, Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax Code,because the same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. 38

Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the creation of said pool. Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest from a reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too plain to be mistaken. Finally, the petitioners' claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect. Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on December 14, 1984. Third Issue: Prescription Petitioners also argue that the government's right to assess and collect the subject tax had prescribed. They claim that the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by prescription from making an assessment. We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled under then Section 333 of the NIRC, because " the taxpayer cannot be located at the address given in the information return filed and for which reason there was Taxation 1 Cases Set 2

delay in sending the assessment." Indeed, whether the government's right to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not overturn the factual findings of the CA and the CTA. Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool changed its address, for they stated that the pool's information return filed in 1980 indicated therein its "present address." The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the said period will be suspended only "if the taxpayer informs the Commissioner of Internal Revenue of any change in the address." WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners. SO ORDERED. [G.R. No. L-53961. June 30, 1987.] NATIONAL COMPANY, petitioner, vs. COMMISSIONER REVENUE, respondent.

DEVELOPMENT OF INTERNAL

DECISION CRUZ, J p: We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous, We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm. Reduced to simplest terms, the background facts are as follows. The National Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 39

twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by the Central Bank. The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty. The NDC then came to this Court in a petition for certiorari. The petition must fail for the following reasons. The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus: "SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; xxx xxx xxx The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in Tokyo. The law, however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila. As the Tax Court put it: "It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business Taxation 1 Cases Set 2

within the Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the (interest) income flowed had its situs' in the Philippines. The law specifies: `Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the `act or activity' of nonresident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk 8: Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867. Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor. (See Mertens, Id., Vol. 8, p. 124.) "Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promissory notes, which are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.). "The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a 40

corporation duly organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code." There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows: "SEC. 29. Gross Income. — . . . (b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied). The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities. It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:

Taxation 1 Cases Set 2

"Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note." There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. Any doubt concerning this question must be resolved in favor of the taxing power. Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government in consonance with and certainly not against the following provisions of the Tax Code: "Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnerships (companies colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical gains, profits and income of any nonresident alien individual, not engaged in trade or business within the Philippines and not having any office or place of business therein, shall (except in the cases provided for in subsection (a) of this section deduct and withhold from such annual or periodical gains, profits and income a tax equal to twenty (now 30%)per centum thereof: . . . ." "Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in trade or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in section fifty-three a tax equal to thirty (now 35%) per centum thereof, and such tax shall be returned and paid in the same 41

manner and subject to the same conditions as provided in that section: . . . ." Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws. In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus: "Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on of before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)" In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents: Taxation 1 Cases Set 2

"In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon remmit the amount of tax withheld." (2nd par., Sec. 200, Income Tax Regulations). "Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris." The petitioner was remiss in the discharge of its obligation as the withholding agent of the government and so should be held liable for its omission.WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered. [G.R. No. 137377. December 18, 2001.] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent. SYNOPSIS Petitioner Commissioner of Internal Revenue assailed the decision of the CA and the Court of Tax Appeals (CTA), ruling that respondent's deficiency tax liabilities are deemed cancelled and extinguished upon the respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64. Petitioner claimed the respondent is disqualified from availing of the amnesties because the latter falls under the exception in Sec. 4(b) of E.O. No. 41. On appeal, the Supreme Court held for a taxpayer not to be disqualified under Sec. 4(b) of E.O. No. 41, there must have been no income tax cases filed in court against him when E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning respondent's 1985 deficiency income and contractor's tax assessments was filed with the CTA on September 26, 1986. Insofar as respondent's deficiency income tax is concerned, respondent did 42

not fall under the exception in Sec. 4(b) of E.O. No. 41. However, insofar as the contractor's tax which is a tax on business covered by E.O. No. 64 is concerned, respondent already fell under the exception in Sec. 4(b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted therein. SYLLABUS 1. TAXATION; AMNESTY COVERAGE UNDER E.O. NOS. 41 & 64; PERSONS ENTITLED THERETO; EXCEPTION; CASE AT BAR. — Petitioner's claim cannot be sustained. Section 4(b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as of the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4(b) there must have been no income tax cases filed in court against him when E.O. No. 41 took efect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for filing. E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in Section 4(b), hence, respondent was not disqualified from availing of the amnesty for income tax under E.O. No. 41. The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit remittance tax is defined and imposed in Section 24(b)(2)(ii), Title II, Chapter III of the National Internal Revenue Code. In the tax code,this tax falls under Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4(b) when it filed for amnesty of its deficiency branch profit remittance tax assessment. 2. ID.; ID.; STATUTE AMENDING A TAX LAW IS NOT GENERALLY GIVEN RETROACTIVE EFFECT; CASE AT BAR. — By virtue of Section 8 of E.O. No. 64, the provisions of E.O. No. 41 not contrary to or inconsistent Taxation 1 Cases Set 2

with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As to what Executive Order the exception refers to, respondent argues that because of the words "income" and "hereof," they refer to Executive Order No. 41. In view of the amendment introduced by E.O. No. 64, Section 4(b) cannot be construed to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. While an amendment is generally construed as becoming a part of the original act as if it had always been contained therein, it may not be given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired. There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not merely change provisions inE.O. No. 41. It supplements the original act by adding other taxes not covered in the first. It has been held that where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. In an amendatory act, every case of doubt must be resolved against its retroactive effect. 3. ID.; ID.; TERMS OF TAX AMNESTY MUST BE STRICTLY CONSTRUED AGAINST THE TAXPAYER; CASE AT BAR. — E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the 43

taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. In the instant case, the vagueness in Section 4(b) brought about by E.O. No. 64 should therefore be construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4(b) of E.O. No. 41 should be November 17, 1986. Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the exception in Section 4(b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted therein. DECISION PUNO, J p:

I.

In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended. Respondent Marubeni Corporation is Add: a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila. Taxation 1 Cases Set 2

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate. On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter dated June 5, 1986. On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of surcharge and interest, were as follows: HAIDcE DEFICIENCY INCOME TAX FY ended March 31, 1985 Undeclared gross income (Philphos and NDC construction projects) Less: Cost and expenses (50%)

P967,269,811.14 483,634,905.57 ———————

Net undeclared income

483,634,905.57

Income tax due thereon

169,272,217.00

50% surcharge

84,636,108.50

20% int. p.a.fr. 7-15-85 to 8-15-86

36,675,646.90 44

Add: TOTAL AMOUNT DUE

———————

50% surcharge for non-declaration

19,345,396.00

P290,583,972.40

20% surcharge for late payment

9,672,698.00

============ DEFICIENCY

BRANCH PROFIT REMITTANCE Add: TAX

——————— Sub-total

67,708,886.00 20% int. p.a. fr. 4-21-85 to 8-15-86

FY ended March 31, 1985

———————

Undeclared gross income from Philphos

and

Less: Income tax thereon

NDC constructionP483,634,905.57 projects 169,272,217.00 IV. ———————

Amount subject to Tax

TOTAL AMOUNT DUE

Tax due thereon 50% surcharge

DEFICIENCY COMMERCIAL BROKER'S TAX FY ended March 31, 1985 Undeclared share from commission income

47,154,403.00

(denominated as "subsidy from Home

23,577,201.50

Office")

to 8-15-86

12,305,360.66 Add:

TOTAL AMOUNT DUE

Tax due thereon 50% surcharge for non-declaration

814,284.50

P83,036,965.16

20% surcharge for late payment

407,142.25 ———————

Sub-total

DEFICIENCY CONTRACTOR'S TAX Add:

FY ended March 31, 1985

2,849,995.75 20% int. p.a. fr. 4-21-85 to 8-15-86

Undeclared gross receipts/gross income from

Taxation 1 Cases Set 2

1,628,569.00

———————

============

NDC constructionP967,269,811.14 projects ———————

Contractor's tax due thereon (4%)

P24,683,114.50 ———————

20% int. p.a. fr. 4-26-85

and

P85,563,625.46 ============

314,362,688.57 ———————

Philphos

17,854,739.46

38,690,792.00

751,539.98 ———————

TOTAL AMOUNT DUE

P3,600,535.68 ============

45

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid taxable revenues while the 25% surcharge was imposed because of your client's failure to pay on time the above deficiency percentage taxes. xxx xxx xxx." Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes. The assessment letter further stated that the same was petitioner's final decision and that if respondent disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment. On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter. Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 declaring a one-time amnesty covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985. In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Taxation 1 Cases Set 2

Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and 1986. The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986. On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on business under Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges underE.O. No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities. The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated December 17, 1986. On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase of its net worth between 1981 and 1986. On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as follows: 46

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the amnesty under Executive Order No. 41, as amended." Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of Appeals. On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court of Tax Appeals. Hence, this recourse. Before us, petitioner raises the following issues: "(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64. (2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractor's taxes assessed by petitioner." The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41. Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz: "Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein granted: a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14; Taxation 1 Cases Set 2

b) Those with income tax cases already filed in Court as of the effectivity hereof; c) Those with criminal cases involving violations of the income tax law already filed in court as of the effectivity hereof; d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar as the said liabilities are concerned; e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof as a result of information furnished under Section 316 of the National Internal Revenue Code, as amended; f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan; g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended." Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41. Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as of the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline for filing. E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in Section 4 (b), hence, respondent was not 47

disqualified from availing of the amnesty for income tax under E.O. No. 41. The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit remittance tax is defined and imposed inSection 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code. 6 In the tax code,this tax falls under Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit remittance tax assessment. The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64expanded the coverage of E.O. No. 41 by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax Codewhile business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is therefore a tax on business. When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided that: "Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this amendatory Executive Order shall remain in full force and effect." By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As to what Executive Order the exception refers to, respondent argues that because of the words "income" and "hereof," they refer to Executive Order No. 41. Taxation 1 Cases Set 2

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. While an amendment is generally construed as becoming a part of the original act as if it had always been contained therein, it may not be given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired. There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not covered in the first. It has been held that where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. In an amendatory act, every case of doubt must be resolved against its retroactive effect. Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague 48

implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state. In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986. Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted therein. It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes. Before going into respondent's arguments, it is necessary to discuss the background of the two contracts, examine their pertinent provisions and implementation. The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign markets. The Philphos plant complex which was envisioned to be the largest phosphatic Taxation 1 Cases Set 2

fertilizer operation in Asia, and among the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/port complex was intended to be one of the major facilities for the industrial plants at the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar), and other industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in Japan. Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project Between National Development Company and Marubeni Corporation." The Port Development Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile equipment, spare parts and other related facilities. The scope of the works under the contract covered turn-key supply, which included grants of licenses and the transfer of technology and know-how, and: ". . . the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design and construction of other facilities around the site. The scope of works shall also include any activity, work and supply necessary for, incidental to or appropriate under present international industrial port practice, for the timely and successful implementation of the object of this 49

Contract, whether or not abovementioned Annex I."

expressly

referred

to

in

the

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In the contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese government as assistance to foreign governments to promote economic development. The OECF extended to the Philippine Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and authorized the NDC to implement the same. The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-contractors. Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were further broken down and subdivided according to the materials, equipment and services rendered on the project. The price breakdown and the corresponding materials, equipment and services were contained in a list attached as Annex III to the contract. A few months after execution of the NDC contract, Philphos opened for public bidding a project to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation." The object of the contract was to establish and place in operating condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the receipt and storage of liquid anhydrous ammonia and for the Taxation 1 Cases Set 2

delivery of ammonia to an integrated fertilizer plant adjacent to the storage complex and to vessels at the dock. The storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading system, transfer pumps, ammonia heating system, firefighting system, area lighting, spare parts, and other related facilities. The scope of the works required for the completion of the ammonia storage complex covered the supply, including grants of licenses and transfer of technology and know-how, and: ". . . the design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning of the Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex through the Owner with the design and construction of other facilities at and around the Site. The scope of works shall also include any activity, work and supply necessary for, incidental to or appropriate under present international industrial practice, for the timely and successful implementation of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I.” The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the price was divided into three portions. The price in Japanese currency was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the three portions were further broken down into the corresponding materials, equipment and services required for the project and their individual prices. Like the NDC contract, the breakdown in the Philphos contract is contained in a list attached to the latter as Annex III. The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the two contracts corresponds to the two parts into which the contracts were classified — the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to the Foreign 50

Offshore Portion. Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax on the income from the two projects. In fact respondent claims, which petitioner has not denied, that the income it derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes thereon already paid to the Philippine government. It is with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments subject of this case arose. Petitioner argues that since the two agreements are turn-key, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondent's entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply Co. A contractor's tax is imposed in the National Internal Revenue Code (NIRC)as follows: "Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation: (a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566; xxx xxx xxx (q) Other independent contractors. The term "independent contractors" includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical Taxation 1 Cases Set 2

or mental faculties of such contractors or their employees. It does not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region. xxx xxx xxx." Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word "contractor" refers to a person who, in the pursuit of independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details. A contractor's tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district. In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts. Respondent, however, argues that the work therein were not all performed in the Philippines because some of them were completed in Japan in accordance with the provisions of the contracts. An examination of Annex III to the two contracts reveals that the materials and equipment to be made and the works and services to be performed by respondent are indeed classified into two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides: 51

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of materials and equipment which will be shipped to Leyte as units and lots. This subdivision of price is to be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as follows: xxx xxx xxx." The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the construction and installation work on the project. In other words, the supplies for the project are listed under Portion I while labor and other supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation of the two projects, testified that all the machines and equipment listed under Japanese Yen Portion I in Annex III were manufactured in Japan. The machines and equipment were designed, engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of subcontractors in the technical appendices to each contract. Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication, engineering and manufacture thereof; Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the mobile equipment; and B.S. Japan for the supply of radio equipment. The engineering and design works made by Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the design in accordance with the specifications given by respondent. All sub-contractors and manufacturers are Japanese corporations and are based in Japan and all engineering and design works were performed in that country. The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2) sets of ship unloader and loader; several boats and mobile equipment. The ship unloader unloads bags or bulk products from the ship to the port while the ship loader Taxation 1 Cases Set 2

loads products from the port to the ship. The unloader and loader are big steel structures on top of each is a large crane and a compartment for operation of the crane. Two sets of these equipment were completely manufactured in Japan according to the specifications of the project. After manufacture, they were rolled on to a barge and transported to Isabel, Leyte. Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the spot where they were installed. Their installation simply consisted of bolting them onto the pier. Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once unloaded at the port, they were ready to be driven and perform what they were designed to do. In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration building and a security building. Most of the materials consist of steel sheets, steel pipes, channels and beams and other steel structures, navigational and communication as well as electrical equipment. In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the ammonia storage tanks and refrigeration units. The steel plates for the tank were manufactured and cut in Japan according to drawings and specifications and then shipped to Isabel. Once there, respondent's employees put the steel plates together to form the storage tank. As to the refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel. The units were simply installed there. Annex III to the Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia storage 52

tank, incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material and spare parts. All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment in accordance with the terms of the contracts. The inspection was made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private consultancy firm to verify the correctness of the tests on the machines and equipment while Philphos sent a representative to Japan to inspect the storage equipment. The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese and English. Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. Between Marubeni and the two Philippine corporations, payments for all materials and equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of respondent through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent documents, released the amount in the letters of credit in favor of respondent and credited the amount therein to respondent's account within the same bank. Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan and the Philippines. While the construction and Taxation 1 Cases Set 2

installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax. Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering Equipment & Supply Co is not in point. In that case, the Court found that Engineering Equipment, although an independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines. Engineering Equipment designed, supplied and installed centralized air-conditioning systems for clients who contracted its services. Engineering, however, did not manufacture all the materials for the air-conditioning system. It imported some items for the system it designed and installed. The issues in that case dealt with services performed within the local taxing jurisdiction. There was no foreign element involved in the supply of materials and services. With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties. IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed. SO ORDERED.

53

[G.R. No. L-22074. April 30, 1965.] THE PHILIPPINE GUARANTY CO., INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS,respondents. SYLLABUS 1. TAXATION; INCOME TAX; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS SUBJECT TO WITHHOLDING TAX. — Reinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not doing business in the Philippines are subject to withholding tax. 2. ID.; ID.; REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED INCOME FROM PHILIPPINE SOURCES. — Where the reinsurance contracts show that the activities that constituted the undertaking to reinsure a domestic insurer against losses arising from the original insurances in the Philippines were performed in the Philippines, the reinsurance premiums are considered as coming from sources within the Philippines and are subject to Philippine Income Tax. 3. ID.; ID.; ID.; PLACE OF ACTIVITY CREATING INCOME CONTROLLING. — Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income. 4. ID.; ID.; SECTION 37 OF TAX CODE NOT ALL INCLUSIVE ENUMERATION. — Section 37 of the Tax Code is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise. 5. ID.; ID.; NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTS. — The defense of reliance in good faith on rulings of the Commissioner of Internal Revenue requiring no withholding of the Taxation 1 Cases Set 2

tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. 6. ID.; ID.; WITHHOLDING TAX ON REINSURANCE PREMIUMS COMPUTED ON TOTAL AMOUNT CEDED. — The withholding tax on reinsurance premiums should be computed on the total amount ceded instead of on the amount actually remitted to foreign reinsurers. Sections 53 and 54 of the Tax Code allow no deduction from the income therein enumerated in determining the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premiums no deduction shall be recognized. DECISION BENGZON, J.P., J p: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various dates, with foreign insurance companies not doing business in the Philippines, namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza, Tokio Marine & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurances it has originally underwritten in the Philippines, in consideration for the assumption by the latter of liability on an equivalent portion of the risks insured. Said reinsurance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which was signed by both parties in Switzerland. The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers were entered, and entry therein was binding upon 54

the reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc. in an amount equal to 5% of the reinsurance premiums. Conflicts and or differences between the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by the laws of the Philippines. Pursuant to the aforesaid reinsurance contracts Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following premiums: 1953 P842,466.71 1954 721,471.85 Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus: 1953 Gross premium per investigation P768,580.00 Withholding tax due thereon at 24% P184,459.00 25% surcharge 46,114.00 Compromise for non-filing of withholding income tax return 100.00 ————— TOTAL AMOUNT DUE & COLLECTIBLE P230,673.00 ========= 1954 Gross premium per investigation P780,880.68 Withholding tax due thereon at 24% P187,411.00 25% surcharge 46,853.00 Compromise for non-filing of withholding income tax return 100.00 Taxation 1 Cases Set 2

————— TOTAL AMOUNT DUE & COLLECTIBLE P234,364.00 ========= Philippine Guaranty Co., Inc. protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals. On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion: "IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus the statutory delinquency penalties thereon. With costs against petitioner." Philippine Guaranty Co., Inc., has appealed, questioning the legality of the Commissioner of Internal Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers. Petitioner maintains that the reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office here. The reinsurance contracts however show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against losses arising from the original insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign reinsurers, localizing in the Philippines the actual cession of the risks and premiums and assumption of the reinsurance 55

undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 255 of the Tax Code for the privilege of doing insurance business in the Philippines were payable by the foreign reinsurers when the same were not recoverable from the original assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and management by the latter of the affairs of the former in the Philippines in regard to their reinsurance activities here. Disputes and differences between the parties were subject to arbitration in the City of Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the same specifically provided that its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention of the parties to subject themselves to Philippine laws. Section 24 of the Tax Code subjects foreignn corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the income. 1 The reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss under original insurances. Such undertaking, as explained above, took place in the Philippines. These insurance premiums therefore came from sources within the Philippines and, hence, are subject to corporate income tax. The foreign insurers place of business should not be confused with their place of activity. Business implies continuity and progression of transactions 2 whileactivity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income. Taxation 1 Cases Set 2

Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state. Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner may free it from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents. In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject to withholding tax under Sections 53 and 54 of the Tax Code, suffice it to state that this question has already been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19392, April 14, 1965. 56

Finally, petitioner contends that the withholding tax should be computed from the amount actually remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due. The pertinent section of the Tax Code states: "SEC. 54. Payment of corporation income tax at source. — In the case of foreign corporation subject to taxation under this Title not engaged in trade or business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items as is provided in section fifty-three a tax equal to twenty-four per centum thereof, and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section." The applicable portion of Section 53 provides: "(b) Non-resident aliens. — All persons, corporations and general copartnerships (companias colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any non-resident alien individual, not engaged in trade or business within the Philippines and not having any office or place of business therein, shall (except) in the cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to twelve per centum hereof: Provided, That no such deduction or withholding shall be required in the case of dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or business within the Philippines or has an office or place of business therein, and (2) more than eighty-fiveper centum of the gross income of such corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for Taxation 1 Cases Set 2

such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of section thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent." The above-quoted provisions allow no deduction from the income therein enumerated in determining the amount to be withheld. Accordingly, in computing the withholding tax due on the reinsurance premiums in question, no deduction shall be recognized. WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within 30 days from the date this judgment becomes final, there shall be collected a surcharge of 5% on the amount unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. With costs against petitioner. [G.R. No. L-19392. April 14, 1965.] ALEXANDER HOWDEN & CO., LTD., H. G. CHESTER & OTHERS, ET AL., petitioners, vs. THE COLLECTOR (NOW COMMISSIONER) OF INTERNAL REVENUE, respondent. SYLLABUS 1. TAXATION; INSURANCE; REINSURANCE PREMIUMS REMITTED TO FOREIGN INSURANCE COMPANIES TAXABLE WITHIN PHILIPPINES. — The portions of premiums earned from insurance locally underwritten by domestic corporations, ceded to and received by non-resident foreign reinsurance companies, through a non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, are subject to income tax locally. 57

2. ID.; ID.; SUBJECT TO WITHHOLDING TAX. — The reinsurance premiums remitted by local insurance companies to foreign reinsurance companies are subject to withholding tax on income under Sections 53 and 54 of the National Internal Revenue Code.

in the lower court, are content to raise it for the first before the Supreme Court, it is held that they may not be heard to complain on this point after the trial judge has given his opinion on the merits of the case.

3. ID.; INCOME FROM SOURCES WITHIN THE PHILIPPINES; REINSURANCE PREMIUMS. — Reinsurance premiums remitted by domestic insurance corporation to foreign reinsurance companies are considered income of the latter derived from sources within the Philippines.

DECISION BENGZON, J. P., J p:

4. ID.; PREMIUMS UNDER SECTION 53 OF TAX CODE INCLUDE ALL PREMIUMS CONSTITUTING INCOME. — Since Section 53 of the Tax Code subjects to withholding tax various specified income, among them, "premiums, the generic connotation of each and every word or phrase composing the enumeration in subsection (b) thereof is income. Perforce, the word "premiums", which is neither qualified nor defined by the law itself, should mean income and should include all premiums constituting income, whether they be insurance or reinsurance premiums. 5. ID.; REINSURANCE PREMIUMS CONSIDERED DETERMINABLE AND PERIODICAL INCOME. — Under Section 53 of the Tax Code, reinsurance premiums are determinable and periodical income: determinable, because they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as they were earned and remitted from time to time. 6. ID.; PRINCIPLE OF LEGISLATIVE PRE-ENACTMENT; WHEN NOT APPLICABLE. — The principle of legislative re-enactment is not applicable where the sections of the law in question were not reenacted but merely amended and the administrative rulings were merely contained in letters to taxpayers and never published, and were not regulations to implement a law but only opinions on queries submitted. 7. COURTS; APPEALS; DISQUALIFICATION OF TRIAL JUDGE MAY NOT BE RAISED FOR FIRST TIME ON APPEAL. — Where appellants, instead of asking for the trial judge's disqualification by raising their objection Taxation 1 Cases Set 2

In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into reinsurance contracts with 32 British insurance companies not engaged in trade or business in the Philippines, whereby the former agreed to cede to them a portion of the premiums on insurance on fire, marine and other risks it has underwritten in the Philippines. Alexander Howden & Co., Ltd., also a British corporation not engaged in business in this country, represented the aforesaid British insurance companies. The reinsurance contracts were prepared and signed by the foreign reinsurers in England and sent to Manila where Commonwealth Insurance Co. signed them. Pursuant to the aforesaid contracts, Commonwealth Insurance Co., in 1951, remitted P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums. In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co. filed in April 1952 an income tax return declaring the sum of P798,297.47, with accrued interest thereon in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s gross income for calendar year 1951. It also paid the Bureau of Internal Revenue P66,112.00 as income tax thereon. On May 12, 1954, within the two-year period provided for by law, Alexander Howden & Co., Ltd., fled with the Bureau of Internal Revenue a claim for refund of the P66,112.00, later reduced to P65,115.00, because Alexander Howden & Co., Ltd., agreed to the payment of P997.00 as income tax on the P4,985.77 accrued interest. A ruling of the Commissioner of Internal Revenue, dated December 8, 1953 was invoked, stating that it exempted from withholding tax reinsurance premiums received from domestic insurance companies by foreign insurance companies not authorized to do business in the Philippines. Subsequently, Alexander Howden & Co., Ltd. instituted 58

an action in the Court of First Instance of Manila for the recovery of the aforesaid amount claimed. Pursuant to Section 22 of Republic Act 1125 the case was certified to the Court of Tax Appeals. On November 24, 1961, the Tax Court denied the claim.

In the first place, the reinsured, the liabilities insured and the risks originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines.

Plaintiffs have appealed, thereby squarely raising the following issues: (1) Are portions of premiums earned from insurances locally underwritten by a domestic corporation, ceded to and received by non- resident foreign reinsurance companies, thru a non-resident foreign insurance broker, pursuant to reinsurance contracts signed by the reinsurers abroad but signed by the domestic corporation in the Philippines, subject to income tax or not? (2) If subject thereto, may or may not the income tax on reinsurance premiums be withheld pursuant to Sections 53 and 54 of the National Internal Revenue Code? Section 24 of the National Internal Revenue Code subjects to tax a non-resident foreign corporation's income from sources within the Philippines. The first issue therefore hinges on whether or not the reinsurance premiums in question came from sources within the Philippines.

Secondly, contrary to appellants' view, the reinsurance contracts were perfected in the Philippines, for Commonwealth Insurance Co. signed them last in Manila. The American cases cited are inapplicable to this case because in all of them the reinsurance contracts were signed outside the jurisdiction of the taxing State. And, thirdly, the parties to the reinsurance contracts in question evidently intended Philippine law to govern. Article 11 thereof provided for arbitration in Manila, according to the laws of the Philippines, of any dispute arising between the parties in regard to the interpretation of said contracts or rights in respect of any transaction involved. Furthermore, the contracts provided for the use of Philippine currency as the medium of exchange and for the payment of Philippine taxes. Appellants should not confuse activity that creates income with business in the course of which an income is realized. An activity may consist of a single act; while business implies continuity of transactions. 2 An income may be earned by a corporation in the Philippines although such corporation conducts all itsbusiness abroad. Precisely, Section 24 of the Tax Code does not require a foreign corporation to be engaged in business in the Philippines, in order for its income from sources within the Philippines to be taxable. It subjects foreign corporations not doing business in the Philippines to tax for income from sources within the Philippines. If by source of income is meant the business of the taxpayer, foreign corporations not engaged in business in the Philippines would be exempt from taxation on their income from sources within the Philippines.

Appellants would impress upon this Court that the reinsurance premiums came from sources outside the Philippines, for these reasons: (1) The contracts of reinsurance, out of which the reinsurance premiums were earned, were prepared and signed abroad, so that their situs lies outside the Philippines; (2) The reinsurers, not being engaged in business in the Philippines, received the reinsurance premiums as income from their business conducted in England and, as such, taxable in England; and, (3) Section 37 of the Tax Code, enumerating what are income from sources within the Philippines, does not include reinsurance premiums. The source of an income is the property, activity or service that produced the income. 1 The reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly, had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability. Said undertaking is the activity that produced the reinsurance premiums, and the same took place in the Philippines. Taxation 1 Cases Set 2

Furthermore, as used in our income tax law, "income" refers to the flow of wealth. 3 Such flow, in the instant case, proceeded from the Philippines. Such income enjoyed the protection of the Philippine government. As wealth flowing from within the taxing jurisdiction of the Philippines and in consideration for protection accorded it by the 59

Philippines, said income should properly share the burden of maintaining the government.

periodical gains, profits, and income"; that, therefore, they are not items of income subject to withholding tax.

Appellants further contend that reinsurance premiums not being among those mentioned in Section 37 of the Tax Code as income from sources within the Philippines, the same should not be treated as such. Section 37, however, is not an all-inclusive enumeration. It states that "the following items of gross income shall be treated as gross income from sources within the Philippines". It does not state or imply that an income not listed therein is necessarily from sources outside the Philippines.

The argument of appellants is that "premiums", as used in Section 53 (b), is preceded by "rents, salaries, wages" and followed by "annuities, compensations, remunerations" which connote periodical income payable to the recipient on account of some investment or for personal services rendered. "Premiums" should, therefore, in appellants' view, be given a meaning kindred to the other terms in the enumeration and be understood in its broadest sense as "a reward or recompense for some act done; a bonus; compensation for the use of money; a price for a loan; a sum in addition to interest."

As to appellants, contention that reinsurance premiums constitute "gross receipts" instead of "gross income", not subject to income tax, suffice it to say that, as correctly observed by the Court of Tax Appeals, "gross receipts" of amounts that do not constitute return of capital, such as reinsurance premiums, are part of the gross income of a taxpayer. At any rate, the tax actually collected in this case was computed not on the basis of gross premium receipts but on the net premium income that is, after deducting general expenses, payment of policies and taxes. The reinsurance premiums in question being taxable, we turn to the issues whether or not they are subject to withholding tax under Section 54 in relation to Section 53 of the Tax Code. Subsection (b) of Section 53 subjects to withholding tax the following: interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any non-resident alien individual not engaged in trade or business within the Philippines and not having any office or place of business therein. Section 54, by reference, applies this provision to foreign corporations not engaged in trade or business in the Philippines. Appellants maintain that reinsurance premiums are not "premiums" at all as contemplated by Subsection (b) of Section 53; that they are not within the scope of "other fixed or determinable annual or Taxation 1 Cases Set 2

We disagree with the foregoing proposition. Since Section 53 subjects to withholding tax various specified income, among them, "premiums", the generic connotation of each and every word or phrase composing the enumeration in Subsection (b) thereof is income. Perforce, the word "premiums", which is neither qualified nor defined by the law itself, should mean income and should include all premiums constituting income, whether they be insurance or reinsurance premiums. Assuming that reinsurance premiums are not within the word "premiums" in Section 53, still they may be classified as determinable and periodical incomeunder the same provision of law. Section 199 of the Income Tax Regulations defines fixed, determinable, annual and periodical income: "Income is fixed when it is to be paid in amounts definitely predetermined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. "The income need not be paid annually if it is paid periodically; that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with some one's will or with the happening of an event does not make the payments any the less determinable or periodical. . . ." 60

Reinsurance premiums, therefore, are determinable and periodical income; determinable, because they can be calculated accurately on the basis of the reinsurance contracts; periodical, inasmuch as they were earned and remitted from time to time. Appellants' claim for refund, as stated, invoked a ruling of the Commissioner of Internal Revenue dated December 8, 1953. Appellants' brief also cited rulings of the same official, dated October 13, 1953, February 7, 1955 and February 8, 1955, as well as the decision of the defunct Board of Tax Appeals in the case of Franklin Baker Co. 4 , thereby attempting to show that the prevailing administrative interpretation of Sections 53 and 54 of the Tax Code exempted from withholding tax reinsurance premiums ceded to nonresident foreign insurance companies. It is asserted that since Sections 53 and 54 were "substantially re-enacted" by Republic Acts 1065 (approved June 12, 1954), 1291 (approved June 15, 1955), 1505 (approved June 16, 1956) and 2343 (approved June 20, 1959) when the said administrative rulings prevailed, the rulings should be given the force of law under the principle of legislative approval by reenactment. The principle of legislative approval by re-enactment may briefly be stated thus: When a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the Legislature thereafter re-enacts the provisions with substantial charge, such action is to some extent confirmatory that the ruling carries out the legislative purpose. The aforestated principle, however, is not applicable to this case. Firstly, Sections 53 and 54 were never reenacted. Republic Acts 1065, 1291, 1505 and 2343were merely amendments in respect to the rate of tax imposed in Sections 53 and 54. Secondly, the administrative rulings of the Commissioner of Internal Revenue relied upon by the taxpayers were only contained in letters to taxpayers and never published, so that the Legislature is not presumed to know said rulings. Thirdly, in the case on which appellants rely, Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, 98 Phil. 290, January 31, 1956, what was declared to have acquired the force and Taxation 1 Cases Set 2

effect of law was a regulation promulgated to implement a law; whereas, in this case, what appellant would seek to have the force of law are opinions on queries submitted. It may not be amiss to note that in 1963, after the Tax Court rendered judgment in this case, Congress enacted Republic Act 3825, as an amendment to Sections 24 and 54 of the Tax Code, exempting from income taxes and withholding tax, reinsurance premiums received by foreign corporations not engaged in business in the Philippines. Republic Act 3825 in effect took out from Sections 24 and 54 something which formed a part of the subject matter therein, 6thereby affirming the taxability of reinsurance premiums prior to the aforestated amendment. Finally, appellant would argue that Judge Augusto M. Luciano, who penned the decision appealed from, was disqualified to sit in this case since he had appeared as counsel for the Commissioner of Internal Revenue and, as such, answered plaintiffs' complaint before the Court of First Instance of Manila. The Rules of Court provides that no judge shall sit in any case in which he has been counsel without the written consent of all the parties in interest, signed by them and entered upon the record. The party objecting to the judge's competency may file, in writing, with such judge his objection, stating therein the grounds for it. The judge shall thereupon proceed with the trial or withdraw therefrom, but his action shall be made in writing and made part of the record. Appellants, instead of asking for Judge Luciano's disqualification by raising their objection in the Court of Tax Appeals, are content to raise it for the first timebefore this Court. Such being the case they may not now be heard to complain on this point, when Judge Luciano has given his opinion on the merits of the case. A litigant cannot be permitted to speculate upon the action of the court and raise an objection of this nature after decision has been rendered. WHEREFORE, the judgment appealed from is hereby affirmed with costs against appellants. It is so ordered. 61

[CA-G.R. SP No. 31283. April 25, 1995.] (CTA Case No. 3504, 3743) PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, INC., ET AL., petitioner, vs. HON. COURT OF TAX APPEALS, AND THE COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION TAYAO-JAGUROS, J p: Before the Court is a petition for review filed by Philippine American Life Insurance Co., Inc. and American International Group, Inc. from the decision dated March 10, 1993 and resolution dated May 19, 1993 of the Court of Tax Appeals denying both petitions for review, and the subsequent motion for reconsideration, respectively, in C.T.A. Cases Nos. 3504 and 3943 entitled "The Phil. American Life Insurance Co., Inc., et al. vs. The Hon. Commissioner of Internal Revenue", involving claims for refund of an alleged erroneous payment of withholding tax at source for 1980 and an assessment for deficiency withholding tax at source for 1979. The respondent court has correctly stated the facts of this consolidated case, to wit: "This is a consolidated case involving a claim for the refund of the amount of P643,125.00 as allegedly erroneous payment of withholding tax at source for 1980 in C.T.A. Case No. 3504 and an assessment for the similar amount of P643,125.00 as deficiency withholding tax at source for 1979 as a result of the cancellation of a previously issued tax credit memo for the said amount in C.T.A. Case No. 3943. The case were consolidated as they involved the same issue and the same parties. The facts of the case are well recited in the memorandum of the respondent, as follows: "STATEMENT OF THE FACTS Petitioner Philippine American Life Insurance Co., Inc. (PHILAMLIFE) a domestic corporation entered into a Management Services Taxation 1 Cases Set 2

Agreement with American International Reinsurance Co., Inc. (AIRCO), a non-resident foreign corporation with principal place of business in Pembroke, Bermuda, whereby, effective January 1, 1972, for a fee of not exceeding $250,000.00 per annum, AIRCO shall perform for PHILAMLIFE the following services, to wit (Pages 9-10, BIR records; Exh. "D"). 'Investment Reporting on world monetary and investment trends and investigating, analyzing and making recommendations as to particular investment opportunities. Underwriting and Marketing (a) Providing advice and recommendations with respect to new products. (b) Providing assistance in the production of international business in the employee benefits, pension and other fields. (c) Providing assistance in the sale of ordinary life business. Education and Training (a) Providing training courses, seminars, and other educational programs for underwriters, actuaries and other personnel. (b) Providing scholarship program for personnel of PHILAMLIFE. Accounting and Auditing (a) Recommending standard accounting procedures and forms for financial and budgetary statements and other accounting devise. (b) Providing assistance with regard to data processing. (c) Arranging and supervising internal audits of PHILAMLIFE. (d) Providing recommendations with respect to systems and procedures. PHILAMLIFE U.S. Branch (a) Provide necessary services for the development of PHILAMLIFE's U.S. Branch. Corporate (a) Assuming certain foreign currency obligations on behalf of PHILAMLIFE personnel. (b) Compensating overseas Directors of PHILAMLIFE for work performed on behalf of PHILAMLIFE. (c) To continually study, consider and advise PHILAMLIFE with respect to its corporate structure. Personnel 62

(a) Providing the services of consulting architects, and other experts in the construction field. (b) Providing medical services, training and advise to PHILAMLIFE's Medical Department.' On September 30, 11978, AIRCO merged with petitioner American International Group, Inc. (AIGI) with the latter as the surviving corporation and successor-in-interest in AIRCO's Management services Agreement with PHILAMLIFE (page 8, BIR records). On November 18, 1980, respondent [Commissioner of Internal Revenue] issued in favor of PHILAMLIFE Tax Credit Memo (T.R. No. 141-80) in the amount of P643,125.00 representing erroneous payment of withholding tax at source on remittances to AIGI for services rendered abroad in 1979 (Pages 15-16, BIR records; Exh. "E"). On the basis of the aforesaid issuance of tax credit, PHILAMLIFE, in a letter dated March 12, 1981, filed with respondent a claim for the refund of the second erroneous tax payment of P643,125.00 which was made on December 16, 1980' (Page 14, BIR records). Said claim was followed up by another letter dated July 6, 1982 wherein PHILAMLIFE alleged that the 'claim for refund of the amount paid in 1980 is exactly the same subject matter as [in] the previous claim for refund in 1979" (Page 4, BIR records). Without waiting for respondent to resolve the claim for refund, petitioners filed with the Honorable Court on July 29, 1982 the petition docketed as C.T.A. Case No. 3540, seeking said refund. During the pendency of C.T.A Case No. 3540, respondent, in a letter dated April 15, 1985, denied PHILAMLIFE's claim for refund of P643,125.00 as withholding tax at source for 1980. Moreover, respondent cancelled the Tax Credit Memo (T.R. No. 141-80) in the amount of P643,125.00 previously issued to PHILAMLIFE on November 18, 1980 and requested the latter to pay the amount of P643,125.00 as deficiency withholding tax at source for 1979 plus increments (Pages 62-64, BIR records). Without protesting the assessment for the amount of P643,125.00 as deficiency withholding tax at source for 1979, petitioners filed with Taxation 1 Cases Set 2

this Honorable Court on June 14, 1985 the petition, docketed as C.T.A. Case No. 3943, seeking the annulment of said assessment." (pp. 1-5, Dec; pp. 112-115, Orig. Rec.) After trial on the merits, respondent tax court rendered the above decision on March 10, 1993. Subsequently, both petitioners and respondent filed their respective motions for reconsideration from said decision. On May 19, 1993, respondent tax court issued a resolution, to wit: "Both parties filed before this Court 'Motions for Reconsideration' of the decision dated March 10, 1993 on March 26, 1993 (respondent) and April 22, 1993 (petitioners). This Court, after careful consideration of the motions, hereby: 1. GRANTS the respondent's motion since the dispositive portion of the decision does not order the petitioner (PHILAMLIFE) to pay respondent the amount of P643,125.00; and 2. DENIES the motion of the petitioners as it raises no new matters not already considered and passed upon in the decision. IN VIEW OF THE FOREGOING, this Court hereby MODIFIES the dispositive portion of its decision as follows: "WHEREFORE, both petitions for review are hereby dismissed and petitioner PHILAMLIFE is hereby ordered to pay respondent the amount of P643,125.00 with interest at the rate of twenty (20) per centum per annum from March 9, 1981 until it is paid, without pronouncement as to cost." SO ORDERED." (pp. 137-138, id.) Hence, the instant petition for review filed before this Court by PHILAMLIFE and AIGI. In the petition, PHILAMLIFE and AIGI raise the following issues, to wit: "(1) Whether or not compensation for advisory services admittedly performed abroad by the personnel of a non-resident foreign corporation not doing business in the Philippines (AIGI) are subject to Philippines withholding income tax. 63

(2) Whether or not respondent Commissioner is barred by prescription, laches, estoppel, or equitable considerations in cancelling the previous approval of petitioner's claim for refund more than 5 years thereafter, after it has determined, after investigation, that the advisory services were rendered/performed abroad by the personnel of AIGI, a non-resident foreign corporation not doing business in the Philippines. (3) Whether or not respondent Court can amend its decision, on a motion for reconsideration by respondent Commissioner, ordering petitioner Philamlife to pay P643,125.00 with interest at 20% per annum until paid 'on the presumption that it has utilized the tax credit memo already issued' (Ref. Decision, p. 14, line 7) and without any evidence being presented of actual usage of the tax credit memo." (pp. 4-5, Rollo) We find no merit in this petition. In their first assignment of error, petitioners insist that there is no legal nor factual bias for the respondent court to conclude that the compensation paid for advisory services rendered outside the Philippines to petitioner AIGI, a non-resident foreign corporation not engaged in trade or business in the Philippines, is considered "rentals and royalties from properties located in the Philippines" pursuant to Section 37 (a) (4) of the National Internal Revenue Code. Petitioners contend that petitioner AIGI is not covered by the above provision of the Tax Code considering that it has no properties located in the Philippines from which rentals and royalties can be derived. After a careful perusal of the facts and law of the case, we agree with respondent court's ruling which comprehensively discusses the above issue, to wit: "On the first issue, we quote the pertinent laws involved. Section 37. Income from Services within the Philippines, (a) Gross income from sources within the Philippines — the following items of gross income shall be treated as gross income from source within the Philippines. (1) ... (2) ... Taxation 1 Cases Set 2

(3) ... (4) Rentals and royalties — Rentals and royalties from properties located in the Philippines or from any interest in such property, including rentals or royalties for — (a) ... (b) ... (c) The supply of scientific, technical, industrial or commercial knowledge or informations; (d) The supply of any assistance that is auxiliary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any property, or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); or (e) ... (f) Technical advice, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project of scheme; and (g) ... (5) ... (6) ... A reading of the various management services enumerated in the said Management Services Agreement will show that they can easily fall under any of the aforequoted expanded meaning of royalties. Basically, from the heading 'Investments' to 'Personnel', the services call for the supply by the non-resident foreign corporation of technical and commercial information, knowledge, advice, assistance or services in connection with technical management or administration of an insurance business — a commercial undertaking. Therefore, the income derived for the services performed by AIGI for PHILAMLIFE under the said management contract shall be considered as income from services within the Philippines. AIGI being a non-resident foreign corporation not engaged in trade or business in the Philippines 'shall pay a tax equal to thirty-five (35%) percent of the gross income received during each taxable year from all sources within the Philippines as interest, dividends, rents, royalties (including remuneration for technical services), salaries, premiums, annuities, emoluments or other fixed 64

or determinable annual, periodical or casual gains, profits and income and capital gains: . . . (Section 12(6) (I) of the National Internal Revenue Code. (Underscoring for emphasis). As against the above legal provisions of law, petitioner in support of its stand cited the opinion of the Revenue Examiner as concurred [in] by the Chief of the Appellate division that the income may be considered as derived from sources without the Philippines and therefore not subject to Philippine tax because the services were performed outside the Philippines. Pursuant to Section 37 (a)(3) of the Tax Code, compensation for labor or personal services are considered from sources within the Philippines where the services are performed within the Philippines and since the services were ascertained by the Examiner to have been rendered outside the Philippines the same should not have been subjected to Philippine tax. The argument of the Petitioner may be true perhaps prior to the amendment of section 37(a)(4) by P.D. 1457 on June 11, 1978. Prior of said amendment, the term 'rentals or royalties' has a very limited meaning. It refers only to rentals or royalties for 'the use of or for the privilege of using in the Philippine patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brand, franchise and other like properties'. Prior to this amendment the jurisprudence cited by Petitioner and marked as Exh. 'B' would apply which states that 'in case of income derived from services, the factor which determines the source of income is not the residence of the payor or the place where the contract for the services is entered into or the place of payment. It is the place where the services are actually rendered' (Par. 45. 33, Vol VIII, Merten's Law of Federal Income Taxation). However, when the said provision of law was amended to include the expanded meaning of royalties, this jurisprudence is accordingly modified to exclude all the type of services enumerated in the amended law." (pp. 6-10, dec. pp. 117-121, Orig Rec.) Thus, this Court rules that while it is true petitioner AIGI has no properties in the Philippines, agreement with petitioner PHILAMLIFE necessary for the latter company's efficient operation and growth, Taxation 1 Cases Set 2

with petitioner AIGI deriving income form said agreement, petitioner AIGI is well-within the ambit of Section 37 (a)(7) of the Tax Code. In our jurisprudence, the test of taxability is the 'source', and the source of an income is "that activity . . . which produced the income" (Howden & Co., Ltd. vs. Collector of Internal Revenue, 13 SCRA 601, reiterated in Commissioner of Internal Revenue vs. Japan Air Lines, Inc., 202 SCRA 450). It is not the presence of any property from which one derives rentals and royalties that is controlling, but rather as expressed under the expanded meaning of "royalties", it includes " royalties for the supply of scientific, technical, industrial, or commercial knowledge or informations; and the technical advice, assistance or services rendered in connection with the technical management and administration of any scientific, industrial or commercial undertaking, venture, project or scheme", and others (Section 37 (a) (7) as amended by P.D. 1457). As to the second issue posited by petitioners, We find no compelling reason to differ with the correct observation of the lower court, to wit: "On the second issue, this Court believes that the rule on prescription of assessment and the filing of formal protest will not apply in the C.T.A. Case No. 3943. The decision of the Commissioner of Internal Revenue revoking the tax credit memo he has issued and issuing an assessment accordingly was actually a denial of the claim for refund covering the 1979 withholding tax at source which was previously granted. The original action that was filed by the Petitioner which precipitated the so refund filed by Petitioner. Therefore, the rules on prescription of action in the case of recovery of tax erroneously or illegally collected shall apply. Pursuant to Section 292 (now 230) of the NIRC 'no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment'. Although counting from the original date of payment of the tax on December 3, 1979, the filing of the instant Petition for Review on June 14, 1985 would appear to have been filed out of time, nevertheless, justice and equity demand that the period during which respondent approved the herein claim for refund up to the time it was subsequently cancelled should be 65

deducted from the counting of the two year prescriptive period. To interpret otherwise, will be opening an avenue for respondent to technically deprive any legitimate claimant-taxpayer of his erroneously or illegally paid taxes by simply granting the same at the start but only to be revoked later upon the expiration of the two year period. By deducting the period when Petitioner received the tax credit memo on March 9, 1981 to May 15, 1985 when the same was cancelled by the respondent only one year and four months had elapsed from the two year period of prescription when Petitioner filed CTA 3943 on June 4, 1985." (pp. 12-13, Dec. pp. 123-124, id.) Moreover, the Supreme Court in the recent case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377, ruled, to wit: "In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the government. Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in matters involving taxes. Thus, for example, the payment by the taxpayer of income taxes, pursuant to a BIR assessment does not preclude the government from making further assessments. The errors or omissions of certain administrative officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L14874, Sept. 30, 1960; Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963)."

portion of the decision did not order the petitioner PHILAMLIFE to pay public respondent the amount of P643,125.00 which amendment is supported by the findings of the respondent tax court. Finally, in the case of Commissioner of Internal Revenue v. C.A., 204 SCRA 182, the Supreme Court reiterated, to wit: "Moreover, it has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its function, is 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 authority or discretion, the decision of respondent court, affirming that of the Court of Tax Appeals, must consequently be upheld." This Court does not find any cogent reason to depart from the above ruling as applied in the instant case. WHEREFORE, the instant petition for review is DISMISSED by the Court for lack of merit. The respondent court's decision dated March 10, 1993 and order dated May 19, 1993 in C.T.A. Cases Nos. 3504 and 3943 are hereby Affirmed. Costs against petitioners. IT IS SO ORDERED.

Neither do We find error on the part of respondent tax court in amending its March 10, 1993 decision acting upon the timely motion for reconsiderations filed by both petitioner and respondent. Said decision having not attained its finality, the same may still be amended, corrected or modified by the Court (Adez Realty, Incorporated vs. Court of Appeals, 212 SCRA 623). As shown in its may 19, 1993 resolution, respondent tax court granted respondent Commissioner's motion for reconsideration since the dispositive Taxation 1 Cases Set 2

66