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THIRD DIVISION

[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; SEABOARD-EASTERN 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.

Angara Abello Concepcion Regala for petitioners.

SYNOPSIS



This is a Petition For Review onCertiorari 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 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.AScHCD

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.

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."TIAEac

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 THE NIRC. — 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 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 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.EDSAac

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 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 construedstrictissimi 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."

D E C I S I O N

PANGANIBAN, Jp:

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? cdasia

The Case

These are the main questions raised in the Petition for Review onCertiorari before us, assailing the October 11, 1993 Decision 1 of

the Court of Appeals 2 in CA-GR SP 29502, which dismissed petitioners' appeal of the October 19, 1992 Decision 3 of the Court of

Tax Appeals 4 (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." 5

http://cdasiaonline.com/jurisprudences/11008?hits%5B%5D%5Bid%5D=11008&hits%5B%5D%5Btype%5D=Jurisprudence&path=%2Fjurisprudences%2Fsearch&q%5Bcitation_finder%5D=&q%5Bfull_text%5D=&q%5Bissue_no%5D=112675&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote1_0

















The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution 6 denying reconsideration.

The Facts

The antecedent facts, 7 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 corporation. The reinsurance treaties required petitioners to form a

[p]ool. Accordingly, a pool composed of the petitioners was formed on the same day.

"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:

Net income per information return P3,737,370.00

===========

Income tax due thereon P1,298,080.00

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

to 4/15/79 545,193.60

––––––––––––

TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE ===========

Dividend paid to Munich











Reinsurance Company P3,728,412.00

===========

35% withholding tax at source due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14

Compromise

penalty-non-filing of return 300.00

late payment 300.00

––––––––––––

TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P655,636.00

===========

10% withholding tax at

source due thereon P65,563.60

Add: 25% surcharge 16,390.90

14% interest from

1/25/76 to 1/25/79 6,884.18

Compromise

penalty-non-filing of return 300.00

late payment 300.00

––––––––––––

TOTAL AMOUNT DUE & P89,438.68



COLLECTIBLE ==========" 8

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 taxpayer cannot be located at the address given in

the information return filed." Hence, this Petition for Review before us. 9

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." 10

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.11 Hence, the

pool did not act or earn income as a reinsurer. 12 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."13




















Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same risk or solidary

liability; 14 (2) there was no common fund; 15 (3) the executive board of the pool did not exercise control and management of its

funds, unlike the board of directors of a corporation; 16 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."17

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, 18 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.19 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."20

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, 21 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.LLphil

xxx xxx xxx."

Thus, the Court inEvangelista v. Collector of Internal Revenue 22 held that Section 24 covered these unregistered partnerships and

even associations or joint accounts, which had no legal personalities apart from their individual members.23 The Court of Appeals

astutely appliedEvangelista: 24

". . . 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 inEvangelista 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." 25 Its

requisites are: "(1) mutual contribution to a common stock, and (2) a joint interest in the profits."26 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." 27 Meanwhile, an association implies associates who enter into a "joint enterprise . . . for the

transaction of business." 28

In the case before us, the ceding companies entered into a Pool Agreement 29 or an association 30 that would handle all the

insurance businesses covered under their quota-share reinsurance treaty 31 and surplus reinsurance treaty32 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. 33 This common fund pays for the administration and operation expenses of the pool. 34

(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.35

(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.36 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."37

The petitioners' reliance onPascual v. Commissioner 38 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. 39 The Court of Appeals did not err in applyingEvangelista, 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."40 Moreover,

petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it received from the pool cannot be

deemed dividends. 41 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, 42 as well as Article 7 of paragraph 143 and Article 5 of paragraph 544 of the

RP-West German Tax Treaty. 45









































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." 46 In the instant case, the pool is a taxable entity

distinct from the individual corporate entities of the ceding companies. The tax on itsincome is obviously different from the tax on

thedividends 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." 47 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) 48 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 taxesdividends, 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 49 and 1050 of the Quota-Share Reinsurance Treaty and Articles 3 51 and 10 52 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 construedstrictissimi juris,

and the statutory exemption claimed must be expressed in a language too plain to be mistaken.53

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. 54 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. 55

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. 56

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,57 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." 58 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.cdasia

SO ORDERED.

||| (Afisco Insurance Corp. v. Court of Appeals, G.R. No. 112675, [January 25, 1999], 361 PHIL 671-691)











[G.R. No. 45425. April 29, 1939.]

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,vs. THE COLLECTOR OF INTERNAL

REVENUE, defendant-appellee.

Guillermo B. Reyesfor appellants.

Solicitor-General Tuasonfor appellee.

SYLLABUS

1. PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF PROPERTY; SWEEPSTAKES; INCOME TAX. —

According to the stipulated facts the plaintiffs organized a partnership of a civil nature because each of them put up money to

buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount

of P60,000 (article 166C, Civil Code). The partnership was not only formed, but upon the organization thereon and the winning

of the prize, J. G. personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as co-partner, as

such collected the prize, the office issued the check for P60,000 in favor of J. G. and company, and the said partner, in the

same capacity, collected the check. All these circumstances repel the idea that the plaintiffs organized and formed a community

of property only.

2. ID.; ID.; ID.; ID. — Having organized and constituted a partnership of a civil nature, the said entity is the one

bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by

section 2 of Act No. 3761. There is no merit in plaintiffs' contention that the tax should be prorated among them and paid

individually, resulting in their exemption from the tax.

D E C I S I O N

IMPERIAL, Jp:

The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of P1,863.44,

with legal interest thereon, which they paid under protest by way of income tax. They appealed from the decision rendered in



the case on October 23, 1936 by the Court of First Instance of the City of Manila, which dismissed the action with the costs

against them.

The case was submitted for decision upon the following stipulation of facts:

"Come now the parties to the above-mentioned case, through their respective undersigned

attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the following

statement of facts:

"1. That plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that defendant is the

Collector of Internal Revenue of the Philippines;

"2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one

sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as follows:

1. Jose Gatchalian P0.18

2. Gregoria Cristobal .18

3. Saturnina Silva .08

4. Guillermo Tapia .13

5. Jesus Legaspi .15

6. Jose Silva .07

7. Tomasa Mercado .08

8. Julio Gatchalian .18

9. Emiliana Santiago .18

10. Maria C. Legaspi .16

11. Francisco Cabral .13

12. Gonzalo Javier .14

13. Maria Santiago .17

14. Buenaventura Guzman .13

15. Mariano Santos .14

——

Total 2.00



"3. That immediately thereafter but prior to December 16, 1934, plaintiffs purchased, in the ordinary

course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one

ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the name of

Jose Gatchalian and Company;

"4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-

mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the

corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity

Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which

check was cashed during the latter part of December, 1934 by Jose Gatchalian & Company;

"5 That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo

David to file the corresponding income tax return covering the prize won by Jose Gatchalian & Company and

that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is

enclosed as Exhibit A and made a part hereof;

"6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian &

Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan,

Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said

amount of P1,499.94, a copy of which letter marked Exhibit B is inclosed and made a part hereof;

"7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy

of which marked Exhibit C is attached and made a part hereof, requesting exemption from the payment of the

income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed

separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibits D-1 to D-

15, respectively, in order of their names listed in the caption of this case and made parts hereof; a statement

of sale signed by Jose Gatchalian showing the amounts put up by each of the plaintiffs to cover up the cost

price of P2 of said ticket, copy of which statement is attached and marked as Exhibit E and made a part

hereof; and a copy of the affidavit signed by Jose Gatchalian dated December 29, 1934 is attached and

marked Exhibit F and made part hereof;

"8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is

enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated

his demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10,

1935 within which to pay the said tax;



"9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,

notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on March

23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a warrant of

distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed

and made a part hereof;

"10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said

plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under

protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan, as

evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof,

and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and penalties

by monthly installments;

"11. That plaintiffs' request to pay the balance of the tax and penalties was granted by defendant

subject to the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt

payment of each installments as it becomes due;

"12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is inclosed and

made a part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly

installments at the rate of P118.70 a month, the first payment under protest to be effected on or before July

31, 1935;

"13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of

P602.51, a copy of which protest is attached and marked Exhibit L but that defendant in his letter dated

August 1, 1936 overruled the protest and denied the request for refund of the plaintiffs;

"14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with

the terms and conditions of the bond filed by them, the defendant in his letter dated July 23, 1935, copy of

which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute within

five days the warrant of distraint and levy issued against the plaintiffs on March 13, 1935;

"15. That in order to avoid annoyance and embarrassment arising from the levy of their property,

the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano

Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan. the sum of P1,260.93

representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by

income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and that on



September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said amount and

requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof; but that

on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of which is

attached and marked Exhibit P and made a part hereof; and

"16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight

hundred and sixty-three pesos and forty-four centavos (P1,863.44) paid under protest by them but that

defendant refused and still refuses to refund ,the said amount notwithstanding the plaintiffs' demands.

"17. The parties hereto reserve the right to present other and additional evidence if necessary."

Exhibit E referred to in the stipulation is of the following tenor:

"To whom it my concern:

"I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th

day of August, 1934, I sold parts of my share on ticket No. 178637 to the persons and for the amount

indicated below and the part of my share remaining is also shown to wit:

Purchaser Amount Address

1. Mariano Santos P0.14 Pulilan, Bulacan.

2. Buenaventura Guzman .13 Do.

3. Maria Santiago .17 Do.

4. Gonzalo Javier .14 Do.

5. Francisco Cabral .13 Do.

6. Maria C. Legaspi .16 Do.

7. Emiliana Santiago .13 Do.

8. Julio Gatchalian .13 Do.

9. Jose Silva .07 Do.

10. Tomasa Mercado .08 Do.

11. Jesus Legaspi .16 Do.

12. Guillermo Tapia .18 Do.

13. Saturnina Silva .08 Do.

14. Gregoria Cristobal .18 Do.



15. Jose Gatchalian .18 Do.

——

2.00

Total cost of said ticket; and that, therefore, the persons named above are entitled to the parts of whatever

prize that might be won by said ticket.

"Pulilan, Bulacan, P. I.

(Sgd.) "JOSE GATCHALIAN"

And a summary of Exhibits D-1 to D-15 inserted in the bill of exceptions as follows:

"RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19,

1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Exhibit Purchase Price Net

Name No. Price won Expenses prize

1. Jose Gatchalian D-1 P0.18 P4,425 P480 3,945

2. Gregoria Cristobal D-2 .18 4,575 2,000 2,575

3. Saturnina Silva D-3 .08 1,875 360 1,515

4. Guillermo Tapia D-4 .13 3,325 360 2,965

5. Jesus Legaspi by Maria

Cristobal D-5 .15 3,825 720 3,105

6. Jose Silva D-6 .08 1,875 360 1,615

7. Tomasa Mercado D-7 .07 1,875 360 1,515

8. Julio Gatchalian by Bea

triz Guzman D-8 .13 3,150 240 2,910

9. Emiliana Santiago D-9 .13 3,325 360 2,966

10. Maria C. Legaspi D-10 .16 4,100 960 3,140

11. Francisco Cabral D-11 .13 3,325 360 2965

12. Gonzalo Javier D-12 .14 3,325 360 2,965

13. Maria Santiago D-13 .17 4,350 360 3,990

14. Buenaventura Guzman D-14 .13 3,325 360 2,965



15. Mariano Santos D-15 .14 3,325 360 2,965

—— ——— —— ——

2.00 50,000"

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two following:

(1) Whether the plaintiffs formed a partnership, or merely a community of property without a personality of its own; in the first

case it is admitted that the partnership thus formed is liable for the payment of income tax, whereas if there was merely a

community of property, they are exempt from such payment; and (2) whether they should pay the tax collectively or whether the

latter should be prorated among them and paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2

of Act No. 3761, reading as follows:

"SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net

income received in the preceding calendar year from all sources by every corporation, joint-stock company,

partnership, joint account (cuenta en participacion), association or insurance company, organized in the

Philippine Islands, no matter how created or organized, but not including duly registered general co-

partnerships (compañias colectivas), a tax of three per centum upon such income; and a like tax shall be

levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar

year from all sources within the Philippine Islands by every corporation, joint-stock company, partnership,

joint account (cuenta en participacion), association, or insurance company organized, authorized, or existing

under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligations

of residents, corporate or otherwise:Provided, however, That nothing in this section shall be construed as

permitting the taxation of the income derived from dividends or net profits on which the normal tax has been

paid.

"The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock

company, partnership, joint account (cuenta en participacion), association, or insurance company, or

property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of section

two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-

nine hundred and twenty-six.



"The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-

stock company, partnership, joint account (cuenta en participacion), associations or insurance company in

the calendar year nineteen hundred and twenty and in each year thereafter."

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of

income tax under the law. But according to the stipulated facts the plaintiffs organized a partnership of a civil nature because

each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win,

as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the

organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippine Charity

Sweepstakes, in his capacity as co-partner, as such collected the prize, the office issued the check for P50,000 in favor of Jose

Gatchalian and company, and the said partner. in the same capacity, collected the said check. All these circumstances repel

the idea that the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income

tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761.

There is no merit in plaintiffs' contention that the tax should be prorated among them and paid individually, resulting in their

exemption from the tax.

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiff. appellants.

So ordered.

Avanceña, C.J., Villa-Real, Diaz, Laurel, ConcepcionandMoran, JJ., concur.

||| (Gatchalian v. Collector of Internal Revenue, G.R. No. 45425, [April 29, 1939], 67 PHIL 666-674)



[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.

Santiago F. Alidioand Angel S. Dakila, Jr. for petitioner.

Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umaliand Solicitor Felicisimo R. Rosete for

the respondents.

SYLLABUS

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

PARTNERSHIP. — "Corporations" strictly speaking are distinct and different from "partnership". When our Internal Revenue

Code includes "partnership" among the entities subject to the tax on "corporations", it must be allude to organization which

arenot necessarily "partnership" in the technical sense of the term.

2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX UPON

CORPORATIONS. — Section 24 of the Internal Revenue Code exempts from the tax imposed upon corporations "duly

registered general partnership", which constitute precisely one of the most typical form of partnership in this jurisdiction.

3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. — As defined in section 84

(b) of the Internal Revenue Code "the term corporation includes partnership,no matter how created or organized." This

qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standards form, or conformity

with the usual requirements of the law on partnerships, in order that one could be deemed constituted for the purposes of the

tax on corporations.

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

— Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporations" includes, among the others, "joint accounts

(cuenta en participacion)" and "associations", none of which has a legal personality of its own independent of that of its

members. For purposes of the tax on corporations,our National Internal Revenue Code includes these partnership. — with the

exception only of duly registered general partnership. — within the purview of the term "corporations."Held:That the petitioners

in the case at bar, who are engaged in real estate transactions for monetary gain and divide the same among themselves,

constitute a partnership, so far as the said Code is concerned, and are subject to the income tax for the corporation.



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

CORPORATION. — The pertinent part of the provision of Section 2 of Commonwealth Act No. 465 which says: "The term

corporation as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association

or insurance company, no matter how created or organized." is analogous to that of Section 24 and 84 (b) of our Internal

Revenue Code which was approved the day immediately after the approval of said Commonwealth Act No. 565. Apparently, the

terms "corporation" and "Partnership" are used both statutes with substantially the same meaning,Held:That the petitioners

are subject to the residence tax corporations.

D E C I S I O N

CONCEPCION, Jp:

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:

"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 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 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:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro

indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said

common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they

bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.000. This was soon followed, on April 23,

1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for

P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,

particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the

conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February,

1943. In other words, one cannot but perceive a character ofhabitualitypeculiar tobusiness transactions engaged in for

purposes of gain.



3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The

properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by

way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in

the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista,

with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit

notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or

business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since

the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already

adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the

collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners

herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence,

those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed

by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the

characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and

different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on

"corporations", said Code must allude, therefore, to organizations which arenot necessarily"partnerships", in the technical

sense of the term. Thus, for instance, section 24 of said Codeexempts from the aforementioned tax "duly registered general

partnerships", which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in

section 84(b) of said Code, "the term corporation includes partnerships,no matter how created or organized." This qualifying

expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the

usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on

corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, "joint accounts, (cuentas en

participacion)" and "associations",none of which has a legal personality of its own, independent of that of its

members.Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the



partnerships therein referred to. In fact, as above stated, "duly registered general copartner ships" —which are possessed of

the aforementioned personality— have been expresslyexcluded 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, areconducted 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.

". . . providesits own concept of a partnership. Under the term 'partnership' it includes not only a

partnership as known at common law but, as well, a syndicate, group, pool, joint venture, or other

unincorporated organization which carries on any business, financial operation, or venture, and which is not,

within the meaning of the Code, a trust, estate, or a corporation. . . .." (7A Merten's Law of Federal Income

Taxation, p. 789; italics ours.)

"The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated

organization, through or by means of which any business, financial operation, or venture is carried on,. . .." (8

Merten's Law of Federal Income Taxation, p. 562 Note 63; italics ours.)

For purposes of the tax on corporations,our National Internal Revenue Code, includes these partnerships — with the

exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to



our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax

for corporations.

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

"Entities liable to residence tax. — Every corporation,no matter how created or organized, whether

domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence

tax of five pesos and an annual additional tax which, in no case, shall exceed one thousand pesos, in

accordance with the following schedule: . . .

"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account

(cuentas en participacion), association or insurance company,no matter how created or organized."(italics

ours.)

Considering that the pertinent part of this provision is analogous to that of sections 24 and 84(b) of our National

Internal Revenue Code (Commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately

after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and

"partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the

residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a

period of over twelve years, and that the yearly gross rentals of said properties from 1945 to 1948 ranged from P9,599 to

P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate

dealers," inasmuch as, pursuant to section 194(s) thereof:

"'Real estate dealer' includes any person engaged in the business of buying, selling,

exchanging, leasing, or renting property or his own account as principaland 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.

||| (Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, [October 15, 1957], 102 PHIL 140-152)



[G.R. No. L-68118. October 29, 1985.]

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS,

brothers and sisters, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX

APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

D E C I S I O N

AQUINO, Jp:

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 co-owners of the two lots.LexLib

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 ofP71,074 56. LexLib

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

aggregatingP56,707.20 including the 50% fraud surcharge and the accumulated interest.



Thus, the petitioners are being held liable for deficiency income taxes and penalties totallingP127,781.76 on their profit ofP134,

336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered 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 co-ownership which was in the nature of things a temporary state.

It had to be terminated sooner or later. Castan Tobeñas says:

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

"El criterio diferencial — seg'un la doctrina m s generalizada — est : por raz"n delorigen, en que la sociedad

presupone necesariamente la convencion, mientras que la comunidad puede existir y existe ordinariamente

sin ella; y por raz"n delfin uobjecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la

indivision es 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, ymera 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. Cdpr

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 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.

||| (Obillos, Jr. v. Commissioner of Internal Revenue, G.R. No. L-68118, [October 29, 1985])

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[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 Velascofor petitioners.

Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Purificacion Uretafor

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 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 CO-PARTNERS AND NOT SUBJECT TO SUCH TAX. —

In cases of inheritance, there is a period when the heirs can be considered as co-owners 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.

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.

D E C I S I O N

BARREDO, Jp:

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,

holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of the

deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for the years 1955

and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the

provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs

of the suit, 1 as well as the resolution of said court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

"Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five

children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement

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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 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 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. 1-3, Annex C to Petition).

Petitioners have assigned the following as alleged errors of the Tax Court:

"I



"THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN

UNREGISTERED PARTNERSHIP;

"II

"THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-

OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS

THEREFROM (sic);

"III

"THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR

CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

"IV

"ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP,

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN

UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY 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 profits earned by the properties owned by them in

common and the loans granted to them upon the security of the said properties, with the result that as far as their respective shares

in the inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the unregistered

partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various amounts already



paid by them for the same years 1955 and 1956 as individual income taxes on their respective shares of the profits accruing from

the properties they owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such

unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in interest died way

back on March 23, 1944 and the project of partition of her estate was judicially approved as early as May 16, 1949, and presumably

petitioners have been holding their respective shares in their inheritance since those dates admittedly under the administration or

management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in question refers to the later years

1955 and 1956. We believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent

Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he

considered them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier

assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is easily

understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the purposes of the impugned

assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by

the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of

partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said properties in

business by leasing or selling them and investing the income derived therefrom and the 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 above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than

unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of

the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby

unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually

and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they

might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen

by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any

inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants therein to be

unregistered co-partners for tax purposes, that their common fund "was not something they found already in existence" and that "[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,

thatergo, in all instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As already

indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the

moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce

profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed

in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is

simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the

incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and,

accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held

in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his

share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an

unregistered partnership is formed. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of gross returns

does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any

property from which the returns are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.

In Evangelista,supra, this Court clearly differentiated the concept of partnerships under theCivil 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 arenot

necessarily 'partnerships', in the technical sense of the term. Thus, for instance, section 24 of said

Codeexempts 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 co-partnerships' — which are possessed of the

aforementioned personality — have been expresslyexcluded by law (sections 24 and 84 [b]) from the

connotation of the term 'corporation.' . . .

xxx xxx xxx

"Similarly, the American Law

'. . . providesits own concept of a partnership. Under the term 'partnership' it includesnot 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 co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in question, of

their inherited properties from those acquired by them subsequently, We consider as justified the following ratiocination of the Tax

Court in denying their motion for reconsideration:

"In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding

should be limited to the business engaged in apart from the properties inherited by petitioners. In other

words, the taxable income of the partnership should be limited to the income derived from the acquisition and

sale of real properties and corporate securities and should not include the income derived from the inherited

properties. It is admitted that the inherited properties and the income derived therefrom were used in the

business of buying and selling other real properties and corporate securities. Accordingly, the partnership

income must include not only the income derived from the purchase and sale of other properties but also the

income of the inherited properties."

Besides, as already observed earlier, the income derived from inherited properties may be considered as individual income of

the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their

respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that

the income of such shares should be considered as the part of the taxable income of an unregistered partnership. This, We

hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have 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. 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.

Makalintal, Zaldivar, Fernando, Makasiar and Antonio, JJ., concur.

Concepcion, C. J., is on official leave.

Reyes, J.B.L., Actg. C. J., andTeehankee, JJ., in the result.

Castro, J., took no part.

||| (Oña v. Commissioner of Internal Revenue, G.R. No. L-19342, [May 25, 1972], 150-A PHIL 419-432)



[G.R. No. 143340. August 15, 2001.]

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,vs. LAMBERTO T. CHUA, respondent.

Manuel T. Chanfor petitioners.

Pacatang Law Officefor respondent.

SYNOPSIS

On June 22, 1992, respondent filed a complaint against petitioner Lilibeth Sunga Chan and Cecilia Sunga, daughter and wife,

respectively of the deceased Jacinto L. Sunga, for "Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of

Shares and Damages with Writ of Preliminary Attachment" with the Regional Trial Court of Sindangan, Zamboanga del Norte.

Respondent claimed that he verbally entered into a partnership with Jacinto. The partnership allegedly had Jacinto as manager,

assisted by Josephine Sy, a sister of the wife of the respondent. Upon Jacinto's death, petitioners took over the operations of the

business without respondent's consent. Despite respondent's repeated demands upon petitioners for accounting, inventory,

appraisal, winding up and restitution of his net shares in the partnership, petitioners failed to comply.

Petitioners filed a Motion to Dismiss on the ground of lack of jurisdiction. The trial court denied the motion to dismiss. Petitioners

then filed their Answer with Compulsory Counterclaim denying any liability. Petitioners' second Motion to Dismiss was likewise

denied. Petitioners' Petition forCertiorari, Prohibition andMandamus filed with the Court of Appeals was also denied by the appellate

court.HaTISE

Respondent presented documentary and testimonial evidence to prove the partnership. He offered the testimony of Josephine to

establish the existence of a partnership between him and Jacinto. The trial court eventually rendered a judgment in favor of

respondent. Petitioners' appeal and motion for reconsideration were dismissed by the Court of Appeals. Petitioners sought recourse

before the Supreme Court.

Invoking the "Dead Man's Statute" or "Survivorship Rule", petitioners contended that the testimonies of respondent and that of his

witness, Josephine, were inadmissible to prove certain claims against Jacinto, a deceased person.

In denying the petition, the Court held that the "Dead Man's Statute" was inapplicable to this case. Petitioners' filing of a compulsory

claim and counterclaim effectively removed this case from the ambit of the "Dead Man's Statute". Well entrenched is the rule that

when it is the executor or administrator or representatives of the estate that sets up the counterclaim, the plaintiff, herein respondent,

may testify to occurrences before the death of the deceased to defeat the counterclaim. Moreover, as defendant in the counterclaim,



respondent was not disqualified from testifying as to matters of fact occurring before the death of the deceased, said action not

having been brought against but by the estate or representatives of the deceased. Moreover, the testimony of Josephine was not

covered by the "Dead Man's Statute" because she was not "a party or assignor of a party to a case or persons in whose behalf a

case is prosecuted." Josephine was merely a witness of respondent, the latter being the party plaintiff. Moreover, petitioners' reliance

alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail over the factual findings of the trial court and the

Court of Appeals that a partnership was established between respondent and Jacinto.

SYLLABUS

1. CIVIL LAW; PARTNERSHIP; MAY BE CONSTITUTED IN ANY FORM; EXCEPTION; REQUISITES TO PROVE EXISTENCE OF

PARTNERSHIP. — A partnership may be constituted in any form, except where immovable property or real rights are contributed

thereto, in which case a public instrument shall be necessary. Hence, based on the intention of the parties, as gathered from the

facts and ascertained from their language and conduct, a verbal contract of partnership may arise. The essential points that must be

proven to show that a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest in the

profits. Understandably so, in view of the absence of a written contract of partnership between respondent and Jacinto, respondent

resorted to the introduction of documentary and testimonial evidence to prove said partnership.

2. ID.; ID.; ACTION FOR ACCOUNTING; PRESCRIPTION. — With regard to petitioners' insistence that laches and/or prescription

should have extinguished respondent's claim, we agree with the trial court and the Court of Appeals that the action for accounting

filed by respondent three (3) years after Jacinto's death was well within the prescribed period. The Civil Code provides that an action

to enforce an oral contract prescribes in six (6) years while the right to demand an accounting for a partner's interest as against the

person continuing the business accrues at the date of dissolution, in the absence of any contrary agreement. Considering that the

death of a partner results in the dissolution of the partnership, in this case, it was after Jacinto's death that respondent as the

surviving partner had the right to an account of his interest as against petitioners. It bears stressing that while Jacinto's death

dissolved the partnership, the dissolution did not immediately terminate the partnership. The Civil Code expressly provides that upon

dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business, culminating

in its termination.

3. ID.; ID.; REGISTRATION REQUIREMENT IS NOT MANDATORY; NON-REGISTRATION OF THE CONTRACT OF

PARTNERSHIP DOES NOT INVALIDATE THE PARTNERSHIP; CASE AT BAR. — In a desperate bid to cast doubt on the validity of

the oral partnership between respondent and Jacinto, petitioners maintain that said partnership that had an initial capital of

P200,000.00 should have been registered with the Securities and Exchange Commission (SEC) since registration is mandated by

the Civil Code. True, Article 1772 of the Civil Code requires that partnerships with a capital of P3,000.00 or more must register with



the SEC, however, this registration requirement is not mandatory. Article 1768 of the Civil Code explicitly provides that the

partnership retains its juridical personality even if it fails to register. The failure to register the contract of partnership does not

invalidate the same as among the partners, so long as the contract has the essential requisites, because the main purpose of

registration is to give notice to third parties, and it can be assumed that the members themselves knew of the contents of their

contract. In the case at bar, non-compliance with this directory provision of the law will not invalidate the partnership considering that

the totality of the evidence proves that respondent and Jacinto indeed forged the partnership in question.n

4. REMEDIAL LAW; EVIDENCE; DEAD MAN'S STATUTE; APPLICABILITY. — The "Dead Man's Statute" provides that if one party

to the alleged transaction is precluded from testifying by death, insanity, or other mental disabilities, the surviving party is not entitled

to the undue advantage of giving his own uncontradicted and unexplained account of the transaction. But before this rule can be

successfully invoked to bar the introduction of testimonial evidence, it is necessary that: "1. The witness is a party or assignor of a

party to a case or persons in whose behalf a case is prosecuted. 2. The action is against an executor or administrator or other

representative of a deceased person or a person of unsound mind; 3. The subject-matter of the action is a claim or demand against

the estate of such deceased person or against person of unsound mind; 4. His testimony refers to any matter of fact which occurred

before the death of such deceased person or before such person became of unsound mind."

5. ID.; ID.; ID.; NOT APPLICABLE IN CASE AT BAR. — Two reasons forestall the application of the "Dead Man's Statute" to this

case. First, petitioners filed a compulsory counterclaim against respondent in their answer before the trial court, and with the filing of

their counterclaim, petitioners themselves effectively removed this case from the ambit of the "Dead Man's Statute." Well entrenched

is the rule that when it is the executor or administrator or representatives of the estate that sets up the counterclaim, the plaintiff,

herein respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim. Moreover, as defendant

in the counterclaim, respondent is not disqualified from testifying as to matters of fact occurring before the death of the deceased,

said action not having been brought against but by the estate or representatives of the deceased. Second, the testimony of

Josephine is not covered by the "Dead Man's Statute" for the simple reason that she is not "a party or assignor of a party to a case

or persons in whose behalf a case is prosecuted." Records show that respondent offered the testimony of Josephine to establish the

existence of the partnership between respondent and Jacinto. Petitioners' insistence that Josephine is the alter ego of respondent

does not make her an assignor because the term "assignor" of a party means "assignor of a cause of action which has arisen, and

not the assignor of a right assigned before any cause of action has arisen." Plainly then, Josephine is merely a witness of

respondent, the latter being the party plaintiff.

6. ID.; ID.; CREDIBILITY OF WITNESSES; NOT AFFECTED BY RELATIONSHIPPER SE. — We are not convinced by petitioners'

allegation that Josephine's testimony lacks probative value because she was allegedly coerced by respondent, her brother-in-law, to

testify in his favor. Josephine merely declared in court that she was requested by respondent to testify and that if she were not

requested to do so she would not have testified. We fail to see how we can conclude from this candid admission that Josephine's



testimony is involuntary when she did not in any way categorically say that she was forced to be a witness of respondent. Also, the

fact that Josephine is the sister of the wife of respondent does not diminish the value of her testimony since relationship per se,

without more, does not affect the credibility of witnesses.DcCITS

7. ID.; ID.; FACTUAL FINDINGS OF TRIAL COURT AND COURT OF APPEALS OF THE EXISTENCE OF PARTNERSHIP,

CANNOT BE INQUIRED INTO BY THE SUPREME COURT ON REVIEW. — Petitioners' reliance alone on the "Dead Man's Statute"

to defeat respondent's claim cannot prevail over the factual findings of the trial court and the Court of Appeals that a partnership was

established between respondent and Jacinto. Based not only on the testimonial evidence, but the documentary evidence as well, the

trial court and the Court of Appeals considered the evidence for respondent as sufficient to prove the formation of a partnership,

albeit an informal one. Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial

precedents, a factual matter like the finding of the existence of a partnership between respondent and Jacinto cannot be inquired

into by this Court on review. This Court can no longer be tasked to go over the proofs presented by the parties and analyze, assess

and weigh them to ascertain if the trial court and the appellate court were correct in according superior credit to this or that piece of

evidence of one party or the other. It must be also pointed out that petitioners failed to attend the presentation of evidence of

respondent. Petitioners cannot now turn to this Court to question the admissibility and authenticity of the documentary evidence of

respondent when petitioners failed to object to the admissibility of the evidence at the time that such evidence was offered.

D E C I S I O N

GONZAGA-REYES, Jp:

Before us is a petition for review oncertiorari under Rule 45 of the Rules of Court of the Decision1 of the Court of Appeals dated

January 31, 2000 in the case entitled "Lamberto T. Chua vs. Lilibeth Sunga Chan and Cecilia Sunga" and of the Resolution dated

May 23, 2000 denying the motion for reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga (hereafter

collectively referred to as petitioners).

The pertinent facts of this case are as follows:

On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth Sunga Chan (hereafter petitioner

Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter

Jacinto), for "Winding Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of

Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte.






Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the distribution of Shellane Liquefied

Petroleum Gas (LPG) in Manila. For business convenience, respondent and Jacinto allegedly agreed to register the business name

of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole proprietorship.

Respondent allegedly delivered his initial capital contribution of P100,000.00 to Jacinto while the latter in turn produced P100,000.00

as his counterpart contribution, with the intention that the profits would be equally divided between them. The partnership allegedly

had Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife of respondent, Erlinda Sy. As

compensation, Jacinto would receive a manager's fee or remuneration of 10% of the gross profit and Josephine would receive 10%

of the net profits, in addition to her wages and other remuneration from the business.

Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation went quite well and was profitable.

Respondent claimed that he could attest to the success of their business because of the volume of orders and deliveries of filled

Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished respondent with the merchandise

inventories, balance sheets and net worth of Shellite from 1977 to 1989, respondent however suspected that the amount indicated in

these documents were understated and undervalued by Jacinto and Josephine for their own selfish reasons and for tax

avoidance.aEAcHI

Upon Jacinto's death in the later part of 1989, his surviving wife, petitioner Cecilia and particularly his daughter, petitioner Lilibeth,

took over the operations, control, custody, disposition and management of Shellite without respondent's consent. Despite

respondent's repeated demands upon petitioners for accounting, inventory, appraisal, winding up and restitution of his net shares in

the partnership, petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of Shellite, converting to her own

use and advantage its properties.

On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and reasons to evade respondent's demands,

she disbursed out of the partnership funds the amount of P200,000.00 and partially paid the same to respondent. Petitioner Lilibeth

allegedly informed respondent that the P200,000.00 represented partial payment of the latter's share in the partnership, with a

promise that the former would make the complete inventory and winding up of the properties of the business establishment. Despite

such commitment, petitioners allegedly failed to comply with their duty to account, and continued to benefit from the assets and

income of Shellite to the damage and prejudice of respondent.

On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities and Exchange Commission (SEC) in

Manila, not the Regional Trial Court in Zamboanga del Norte had jurisdiction over the action. Respondent opposed the motion to

dismiss.

On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied the motion to dismiss.



On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending that they are not liable for

partnership shares, unreceived income/profits, interests, damages and attorney's fees, that respondent does not have a cause of

action against them, and that the trial court has no jurisdiction over the nature of the action, the SEC being the agency that has

original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorney's fees and expenses of litigation.

On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the claim for winding up of partnership

affairs, accounting and recovery of shares in partnership affairs, accounting and recovery of shares in partnership assets/properties

should be dismissed and prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.

On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.HIcTDE

On November 26, 1993, petitioners filed their Petition forCertiorari, Prohibition andMandamus with the Court of Appeals docketed

as CA-G.R. SP No. 32499 questioning the denial of the motion to dismiss.

On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial Conference.

On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.

On November 15, 1994, the Court of Appeals denied the petition for lack of merit.

On January 16, 1995, this Court denied the petition for review oncertiorari filed by petitioner, "as petitioners failed to show that a

reversible error was committed by the appellate court."2

On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was remanded to the trial court on April 26,

1995.DSTCIa

On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of the case on January 17, 1996.

Respondent presented his evidence while petitioners were considered to have waived their right to present evidence for their failure

to attend the scheduled date for reception of evidence despite notice.

On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive portion of the Decision reads:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and

standards of the properties, assets, income and profits of the Shellite Gas Appliance Center since

the time of death of Jacinto L. Sunga, from whom they continued the business operations including

all businesses derived from the Shellite Gas Appliance Center; submit an inventory, and appraisal





of all these properties, assets, income, profits, etc. to the Court and to plaintiff for approval or

disapproval;

(2) ORDERING them to return and restitute to the partnership any and all properties, assets,

income and profits they misapplied and converted to their own use and advantage that legally

pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of

this petition as basis;

(3) DIRECTING them to restitute and pay to the plaintiff 1/2 shares and interest of the plaintiff in the

partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on pages 4-

5 of the petition;

(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the

partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the

sum of P35,000.00 per month, with legal rate of interest until fully paid;

(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities

pursuant to law, after delivering to the plaintiff all the 1/2 interest, shares, participation and equity in

the partnership, or the value thereof in money or money's worth, if the properties are not physically

divisible;HEScID

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold

them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney's (sic) and

P25,00.00 as litigation expenses.

NO special pronouncements as to COSTS.

SO ORDERED." 3

On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case to the Court of Appeals.TSIDEa

On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the Decision reads:

"WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all respects." 4

On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.









Hence, this petition wherein petitioner relies upon the following grounds:

"1. The Court of Appeals erred in making a legal conclusion that there existed a partnership between

respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latter's invitation and offer

and that upon his death the partnership assets and business were taken over by petitioners.

2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did not apply in

the instant case.

3. The Court of Appeals erred in making the legal conclusion that there was competent and credible evidence

to warrant the finding of a partnership, and assumingarguendo that indeed there was a

partnership, the finding of highly exaggerated amounts or values in the partnership assets and

profits." 5

Petitioners question the correctness of the finding of the trial court and the Court of Appeals that a partnership existed between

respondent and Jacinto from 1977 until Jacinto's death. In the absence of any written document to show such partnership between

respondent and Jacinto, petitioners argue that these courts were proscribed from hearing the testimonies of respondent and his

witness, Josephine, to prove the alleged partnership three years after Jacinto's death. To support this argument, petitioners invoke

the "Dead Man's Statute" or "Survivorship Rule" under Section 23, Rule 130 of the Rules of Court that provides:

"SECTION 23.Disqualification by reason of death or insanity of adverse party. — Parties or assignors of

parties to a case, or persons in whose behalf a case is prosecuted, against an executor or administrator or

other representative of a deceased person, or against a person of unsound mind, upon a claim or demand

against the estate of such deceased person, or against such person of unsound mind, cannot testify as to

any matter of fact occurring before the death of such deceased person or before such person became of

unsound mind."

Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego, Josephine, should not have been

admitted to prove certain claims against a deceased person (Jacinto), now represented by petitioners.

We are not persuaded.

A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case

a public instrument shall be necessary. 6 Hence, based on the intention of the parties, as gathered from the facts and ascertained

from their language and conduct, a verbal contract of partnership may arise.7 The essential points that must be proven to show that

a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint interest in the

profits. 8 Understandably so, in view of the absence of a written contract of partnership between respondent and Jacinto,















respondent resorted to the introduction of documentary and testimonial evidence to prove said partnership. The crucial issue to

settle then is whether or not the "Dead Man's Statute" applies to this case so as to render inadmissible respondent's testimony and

that of his witness, Josephine.

The "Dead Man's Statute" provides that if one party to the alleged transaction is precluded from testifying by death, insanity, or other

mental disabilities, the surviving party is not entitled to the undue advantage of giving his own uncontradicted and unexplained

account of the transaction.9 But before this rule can be successfully invoked to bar the introduction of testimonial evidence, it is

necessary that:

"1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is

prosecuted.EDCIcH

2. The action is against an executor or administrator or other representative of a deceased person or a

person of unsound mind;

3. The subject-matter of the action is a claim or demand against the estate of such deceased person or

against person of unsound mind;

4. His testimony refers to any matter of fact which occurred before the death of such deceased person or

before such person became of unsound mind."10

Two reasons forestall the application of the "Dead Man's Statute" to this case.

First, petitioners filed a compulsory counterclaim 11 against respondent in their answer before the trial court, and with the filing of

their counterclaim, petitioners themselves effectively removed this case from the ambit of the "Dead Man's Statute". 12 Well

entrenched is the rule that when it is the executor or administrator or representatives of the estate that sets up the counterclaim, the

plaintiff, herein respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim. 13 Moreover, as

defendant in the counterclaim, respondent is not disqualified from testifying as to matters of fact occurring before the death of the

deceased, said action not having been brought against but by the estate or representatives of the deceased. 14

Second, the testimony of Josephine is not covered by the "Dead Man's Statute" for the simple reason that she is not "a party or

assignor of a party to a case or persons in whose behalf a case is prosecuted". Records show that respondent offered the testimony

of Josephine to establish the existence of the partnership between respondent and Jacinto. Petitioners' insistence that Josephine is

the alter ego of respondent does not make her an assignor because the term "assignor" of a party means "assignor of a cause of

action which has arisen, and not the assignor of a right assigned before any cause of action has arisen." 15 Plainly then, Josephine

is merely a witness of respondent, the latter being the party plaintiff.
























We are not convinced by petitioners' allegation that Josephine's testimony lacks probative value because she was allegedly coerced

by respondent, her brother-in-law, to testify in his favor. Josephine merely declared in court that she was requested by respondent to

testify and that if she were not requested to do so she would not have testified. We fail to see how we can conclude from this candid

admission that Josephine's testimony is involuntary when she did not in any way categorically say that she was forced to be a

witness of respondent. Also, the fact that Josephine is the sister of the wife of respondent does not diminish the value of her

testimony since relationship per se, without more, does not affect the credibility of witnesses.16

Petitioners' reliance alone on the "Dead Man's Statute" to defeat respondent's claim cannot prevail over the factual findings of the

trial court and the Court of Appeals that a partnership was established between respondent and Jacinto. Based not only on the

testimonial evidence, but the documentary evidence as well, the trial court and the Court of Appeals considered the evidence for

respondent as sufficient to prove the formation of a partnership, albeit an informal one.

Notably, petitioners did not present any evidence in their favor during trial. By the weight of judicial precedents, a factual matter like

the finding of the existence of a partnership between respondent and Jacinto cannot be inquired into by this Court on review.17 This

Court can no longer be tasked to go over the proofs presented by the parties and analyze, assess and weigh them to ascertain if the

trial court and the appellate court were correct in according superior credit to this or that piece of evidence of one party or the

other. 18 It must be also pointed out that petitioners failed to attend the presentation of evidence of respondent. Petitioners cannot

now turn to this Court to question the admissibility and authenticity of the documentary evidence of respondent when petitioners

failed to object to the admissibility of the evidence at the time that such evidence was offered. 19

With regard to petitioners' insistence that laches and/or prescription should have extinguished respondent's claim, we agree with the

trial court and the Court of Appeals that the action for accounting filed by respondent three (3) years after Jacinto's death was well

within the prescribed period. The Civil Code provides that an action to enforce an oral contract prescribes in six (6)

years20 while the right to demand an accounting for a partner's interest as against the person continuing the business accrues at

the date of dissolution, in the absence of any contrary agreement. 21 Considering that the death of a partner results in the

dissolution of the partnership 22 , in this case, it was after Jacinto's death that respondent as the surviving partner had the right to

an account of his interest as against petitioners. It bears stressing that while Jacinto's death dissolved the partnership, the

dissolution did not immediately terminate the partnership. The Civil Code 23 expressly provides that upon dissolution, the

partnership continues and its legal personality is retained until the complete winding up of its business, culminating in its

termination.24

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and Jacinto, petitioners maintain that said

partnership that had an initial capital of P200,000.00 should have been registered with the Securities and Exchange Commission

(SEC) since registration is mandated by the Civil Code. True, Article 1772 of the Civil Code requires that partnerships with a capital






























of P3,000.00 or more must register with the SEC, however, this registration requirement is not mandatory. Article 1768 of the Civil

Code 25 explicitly provides that the partnership retains its juridical personality even if it fails to register. The failure to register the

contract of partnership does not invalidate the same as among the partners, so long as the contract has the essential requisites,

because the main purpose of registration is to give notice to third parties, and it can be assumed that the members themselves knew

of the contents of their contract.26 In the case at bar, non-compliance with this directory provision of the law will not invalidate the

partnership considering that the totality of the evidence proves that respondent and Jacinto indeed forged the partnership in

question.

WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is AFFIRMED.

SO ORDERED.

Melo, Vitug, Panganiban andSandoval-Gutierrez, JJ., concur.

||| (Sunga-Chan v. Chua, G.R. No. 143340, [August 15, 2001], 415 PHIL 477-492)








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