3rd Batch Tax Cases

8/12/2019 3rd Batch Tax Cases

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FIRST DIVISION

[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. Alidio andAngel S. Dakila, Jr.for petitioner.

Solicitor General Ambrosio Padilla, Assistant Solicitor General

Esmeraldo Umali andSolicitor Felicisimo R. Rosetefor the

respondents.

SYLLABUS

1.TAXATION; TAX ON CORPORATIONS INCLUDES

ORGANIZATION WHICH ARE NOT NECESSARY PARTNERSHIP.

"Corporations" strictly speaking are distinct and different from

"partnership". When our Internal Revenue Code includes

"partnership" among the entities subject to the tax on "corporations",

it must be allude to organization which are not

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

2.ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE

EXEMPTED FROM THE TAX UPON CORPORATIONS. Section 24 of

the Internal Revenue Code exempts from the tax imposed upon

corporations "duly registered general partnership", which constitute


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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 dayimmediately 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,J p:

This is a petition, filed by Eufemia Evangelista, Manuela

Evangelista and Francisca Evangelista, for review of a decision of the

Court of Tax Appeals, the dispositive part of which reads:

"FOR ALL THE FOREGOING, we hold that the petitioners areliable 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;


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"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 anassessed 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 theirproperties 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 tovarious 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


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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 thesum 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 compromiseP6,157.09

REAL ESTATE DEALER'S FIXED TAX

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

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

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


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

____________

Total including penaltyP527.50

RESIDENCE TAXES OF CORPORATION

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

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

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

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

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

______________

Total including surchageP193.75

TOTAL TAXES DUEP6,878.34

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


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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 notincluding duly registered general co-partnerships (compaias

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 registeredgeneral copartnerships (compaias 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,


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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 realestate 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 theyjointly borroweda

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 oflots (24) acquired and transactions undertaken, as well as the brief

interregnum between each, particularly the last three purchases, is

strongly indicative of a pattern or common design that was not

limited to the conservation and preservation of the aforementioned

common fund or even of the property acquired by petitioners in

February, 1943. In other words, one cannot but perceive a character

of habitualitypeculiar to businesstransactions 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


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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, oron 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


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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 Code exemptsfrom 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 thatpersonality as a condition essential to the existence of the

partnerships therein referred to. In fact, as above stated, "duly

registered general copartner ships" which are possessed of the

aforementioned personality have been expressly excludedby law


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(sections 24 and 84 [b]) from the connotation of the term

"corporation." It may not be amiss to add that petitioners' allegation

to the effect that their liability in connection with the leasing of the

lots above referred to, under the management of one person even if true, on which we express no opinion tends to increase the

similarity between the nature of their venture and that of

corporations, and is, therefore, an additional argument in favor of

the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States,

"corporations" are taxed differently from "partnerships". By specific

provision of said laws, such "corporations" include "associations,

joint-stock companies and insurance companies." However, the term

"association" is not used in the aforementioned laws

". . . in any narrow or technical sense. It includes any

organization, created for the transaction of designated affairs,

or the attainment of some object, which, like a corporation,

continues notwithstanding that its members or participants

change, and the affairs of which, like corporate affairs,

are conducted by a single individual,a committee, a board, or

some other group, acting in a representative capacity. It is

immaterial whether such organization is created by an

agreement, a declaration of trust, a statute, or otherwise. It

includes a voluntary association, a joint-stock corporation or

company, a 'business' trusts a 'Massachusetts' trust, a 'common

law' trust, and 'investment' trust (whether of the fixed or the

management type), an interinsurance exchange operating

through an attorney in fact, a partnership association, and any

other type of organization (by whatever name known) which is

not, within the meaning of the Code, a trust or an estate, or a


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partnership." (7A Merten's Law of Federal Income Taxation, p.

788; italics ours.)

Similarly, the American Law.

". . . provides its own conceptof 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 partnershipswith the exceptiononly 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


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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 enparticipacion), 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 principal and holding himselfout 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.)


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Wherefore, the appealed decision of the Court of Tax Appeals

is hereby affirmed with costs against the petitioners herein. It is so

ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Reyes, J. B. L.,

Endenciaand Felix, JJ.,concur.

Separate Opinions

BAUTISTA ANGELO, J., concurring:I agree with the opinion that petitioners have actually

contributed money to a common fund with express purpose of

engaging in real estate business for profit. The series of transactions

which they had undertaken attest to this. This appears in the

following portion of of the decision:

"2.They invested the same, not merely in one transaction,

but in a seriesof transactions. On February 2, 1943, they

bought a lot for P100,000. On April 3, 1944, they purchased 21

lots for P18,000. This was soon followed on April 23, 1944, by

the acquisition of another real estate for P108,825. Five (5) days

later (April 28, 1944), they got a fourth lot for P237,234.14. The

number of lots (24) acquired and transactions undertaken, as

well as the brief interregnum between each, particularly the last

three purchases, is strongly indicative of a pattern or commondesign that was not limited to the conservation and

preservation of the afore-mentioned common fund or even of

the property acquired by petitioner in February, 1943. In other

words, one cannot but perceive a character


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of habitualitypeculiar to businesstransactions engaged in for

purposes of gain."

I wish however to make the following observation: Article 1769

of the new Civil Code lays down the rule for determining when atransaction should be deemed a partnership or a co-ownership. Said

article paragraphs 2 and 3, provides:

"(2)Co-ownership or co-possession does not of itself

establish a partnership, whether such co-owners or co-

possessors do or do not share any profits made by the use of

the property;

"(3)The sharing of gross returns does not of itself

establish a partnership, whether or not the persons sharing

them have a joint or common right or interest in any property

from which the returns are derived;"

From the above it appears that the fact that those who agree

to form a co-ownership share or do not share any profits made by

the use of the property held in common does not convert their

venture into a partnership Or the sharing of the gross returns does

not of itself establish a partnership whether or not the persons

sharing therein have a joint or common right or interest in the

property. This only means that, aside from the circumstance of profit,

the presence of other elements constituting partnership is necessary,

such as the clear intent to form a partnership, the existence of a

juridical personality different from that of the individual partners, andthe freedom to transfer or assign any interest in the property by one

with the consent of the others (Padilla, Civil Code of the Philippines

Annotated, Vol. I, 1953 ed., pp. 635-636).


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It is evident that an isolated transaction whereby two or more

persons contribute funds to buy certain real estate for profit in the

absence of other circumstances showing a contrary intention cannot

be considered a partnership.

"Persons who contribute property or funds for a

common enterprise and agree to share the gross returns of

that enterprise in proportion to their contribution, but who

severally retain the title to their respective contribution, are not

thereby rendered partners. They have no common stock or

capital, and no community of interest as principal proprietors in

the business itself which the proceeds derived." (Elements ofthe law of Partnership by Floyd R. Mechem, 2n Ed., section 83,

p. 74.)

"A joint purchase of land, by two, does not constitute a

copartnership in respect thereto; nor does an agreement to

share the profits and losses on the sale of land create a

partnership; the parties are only tenants in common."

(Clark vs.Sideway, 142 U. S. 682, 12 S. Ct. 327, 35 L. Ed., 1157.)"Where plaintiff, his brother, and another agreed to

become owners of a single tract of realty, holding as tenants in

common, and to divide the profits of disposing of it, the

brother and the other not being entitled to share in plaintiff's

commissions, no partnership existed as between the three

parties, whatever their relation may have been as to third

parties." (Magee vs.Magee, 123 N. E. 673, 233 Mass. 341.)

"In order to constitute a partnership inter sese there

must be: (a) An intent to form the same; (b) generally a

participating in both profits and losses; (c) and such a

community of interest, as far as third persons are concerned as


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CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT

INSURANCE & SURETY CORPORATION; DOMESTIC

INSURANCE COMPANY OF THE PHILIPPINES; EASTERN

ASSURANCE COMPANY & SURETY CORP.; EMPIREINSURANCE 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


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& INSURANCE CO., INC.; SUMMA INSURANCE

CORPORATION; TABACALERA INSURANCE CO., INC.

all assessed as "POOL OF MACHINERY

INSURERS,"petitioners, vs. COURT OF APPEALS, COURTOF TAX APPEALS and COMMISSIONER OF INTERNAL

REVENUE,respondents.

Angara Abello Concepcion Regalafor petitioners.

SYNOPSIS

This is a Petition For Review on Certiorariassailing 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


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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 exemptionsclaimed 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 informationreturn 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


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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 revenuecommissioner 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 profitsamong 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


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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 othervaluables 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, UNREGISTEREDPARTNERSHIPS 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 duringeach 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

(compaias colectivas), general professional partnerships, private


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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 ofsuch 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


24/564

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 ataxable 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; TAXEXEMPTION CONSTRUED STRICTISSIMI 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 anassociate of the ceding companies in the entity formed, pursuant to

their reinsurance treaties which required the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared

in their income and loss. This is manifest from a reading of Articles 3

and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of

the Surplus Reinsurance Treaty. The foregoing interpretation of Section

24 (b) (1) is in line with the doctrine that a tax exemption must be

construed strictissimi juris, and the statutory exemption claimed must

be expressed in a language too plain to be mistaken.


25/564

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 onthe 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 thegovernment'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 informationreturn 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


26/564

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,J p:

Pursuant to "reinsurance treaties," a number of local insurance firms

formed themselves into a "pool" in order to facilitate the handling of

business contracted with a nonresident foreign reinsurance company.

May the "clearing house" or "insurance pool" so formed be deemed a

partnership or an association that is taxable as a corporation under the

National Internal Revenue Code (NIRC)? Should the pool's remittances

to the member companies and to the said foreign firm be taxable as

dividends? Under the facts of this case, has the government's right to

assess and collect said tax prescribed?cdasia

The Case

These are the main questions raised in the Petition for Review

on Certioraribefore us, assailing the October 11, 1993 Decision1of the

Court of Appeals2in CA-GR SP 29502, which dismissed petitioners'

appeal of the October 19, 1992 Decision3of 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
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27/564

The petition also challenges the November 15, 1993 Court of Appeals

(CA) Resolution6denying reconsideration.

The Facts

The antecedent facts,7as 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:
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28/564

Net income per information returnP3,737,370.00

===========

Income tax due thereonP1,298,080.00

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

to 4/15/79545,193.60

TOTAL AMOUNT DUE &P1,843,273.60

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

Dividend paid to MunichReinsurance CompanyP3,728,412.00

===========

35% withholding tax at source due thereonP1,304,944.20

Add: 25% surcharge326,236.05

14% interest from

1/25/76 to 1/25/79137,019.14

Compromise

penalty-non-filing of return300.00

late payment300.00

TOTAL AMOUNT DUE &P1,768,799.39

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

Dividend paid to Pool MembersP655,636.00

===========


29/564

10% withholding tax at

source due thereonP65,563.60

Add: 25% surcharge16,390.90

14% interest from

1/25/76 to 1/25/796,884.18

Compromise

penalty-non-filing of return300.00

late payment300.00

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,
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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.11Hence, the pool did not act or earnincome as a reinsurer.12Its 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;16and (4) the pool or clearing
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75&q%5Bponente%5D=&q%5Bsyllabus%5D=&q%5Btitle%5D=&q%5Butf8%5D=%E2%9C%93&q%5Byear_end%5D=&q%5Byear_start%5D=#footnote15_0http://online.cdasia.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=#footnote15_0http://online.cdasia.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=#footnote15_0http://online.cdasia.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=#footnote16_0http://online.cdasia.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=#footnote16_0http://online.cdasia.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=#footnote16_0http://online.cdasia.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=#footnote16_0http://online.cdasia.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=#footnote15_0http://online.cdasia.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=#footnote14_0http://online.cdasia.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=#footnote13_0http://online.cdasia.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=#footnote12_0http://online.cdasia.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=#footnote11_0http://online.cdasia.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=#footnote10_0


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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,18particularly 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.19Indeed,

"[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 (compaias

colectivas), general professional partnerships, private
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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 1997,21which 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, anincome 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
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income of which is derived from engaging in any trade or

business. LLphil

xxx xxx xxx."

Thus, the Court in Evangelista v.Collector of Internal Revenue22held

that Section 24 covered these unregistered partnerships and even

associations or joint accounts, which had no legal personalities apart

from their individual members.23The Court of Appeals astutely

applied Evangelista:24

". . . Accordingly, a pool of individual real property owners

dealing in real estate business was considered a corporation forpurposes of the tax in Sec. 24 of the Tax Code in Evangelista

v.Collector of Internal Revenue, supra. The Supreme Court said:

'The term 'partnership' includes a syndicate, group, pool,

joint venture or other unincorporated organization,

through or by means of which any business, financial

operation, or venture is carried on . . . (8 Merten's Law of

Federal Income Taxation, p. 562 Note 63)'"

Article 1767 of the Civil Code recognizes the creation of a contract of

partnership when "two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of

dividing the profits among themselves."25Its requisites are: "(1) mutual

contribution to a common stock, and (2) a joint interest in the

profits."26In 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."27Meanwhile, an association implies associates who enter

into a "joint enterprise . . . for the transaction of business."28
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