[G.R. No. 12287. August 7, 1918.

]
VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, vs. JAMES
J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of
Internal Revenue, defendants-appellees.

Gregorio Araneta, for appellants.

Assistant Attorney Round, for appellees.
SYLLABUS
1. TAXATION; INCOME TAX; PURPOSES. The Income Tax Law of the United States in force in the
Philippine Islands has selected income as the test of faculty in taxation. The aim has been to mitigate the
evils arising from the inequalities of wealth by a progressive scheme of taxation, which places the burden
on those best able to pay. To carry out this idea, public considerations have demanded an exemption
roughly equivalent to the minimum of subsistence. With these exceptions, the Income Tax Law is supposed
to reach the earnings of the entire non-governmental property of the country.
2. ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY. Income as contrasted with capital or
property is to be the test. The essential difference between capital and income is that capital is a fund;
income is a flow. Capital is wealth, while income is the service of wealth. "The fact is that property is a tree,
income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." (Waring vs. City of
Savannah [1878], 60 Ga., 93.)
3. ID.; ID.; "INCOME:," DEFINED. Income means profits or gains.
4. ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in Nable Jose vs. Nable Jose [1916],
16 Off. Gaz., 871, and Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265, approved and
followed. The provisions of the Civil Code concerning conjugal partnerships have no application to the
Income Tax Law.
5. ID.; ID.; ID. M and P were legally married prior to January 1, 1914. The marriage was contracted
under the provisions concerning conjugal partnerships. The claim is submitted that the income shown on
the form presented for 1914 was in fact the income of the conjugal partnership existing between M and P,
and that in computing and assessing the additional income tax, the income declared by M should be divided
into two equal parts, one-half to be considered the income of M and the other half the income of P. Held:
That P, the wife of M, has an inchoate right in the property of her husband M during the life of the conjugal
partnership, but that P has no absolute right to one-half of the income of the conjugal partnership.
6. ID.; ID.; ID. The higher schedules of the additional tax provided by the Income Tax Law directed at
the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership. The aims and purposes of the Income Tax Law must be given effect.
7. ID.; ID.; ID. The Income Tax Law does not look on the spouses as individual partners in an ordinary
partnership.
8. ID.; ID.; STATUTORY CONSTRUCTION. The Income Tax Law, being a law of American origin and
being peculiarly intricate in its provisions, the authoritative decision of the official charged with enforcing it
has peculiar force for the Philippines. Great weight should be given to the construction placed upon a
revenue law, whose meaning is doubtful, by the department charged with its execution
DECISION
MALCOLM, J p:
1

This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the
Civil Code, a law of Spanish origin.
STATEMENT OF THE CASE
Vicente Madrigal and Susana Paterno Were legally married prior to January 1, 1914. The marriage was
contracted under the provisions of law concerning conjugal partnerships (sociedad de gananciales) . On
February 25, 1915, Vicente Madrigal filed a sworn declaration on the prescribed form with the Collector of
Internal Revenue, showing, as his total net income for the year 1914, the sum of P296,302.73.
Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his income for the
year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of
Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two equal
parts, one-half to be considered the income of Vicente Madrigal and the other half the income of Susana
Paterno. The general question had in the meantime been submitted to the Attorney-General of the
Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner Madrigal. The revenue
officers being still unsatisfied, the correspondence together with this opinion was forwarded to Washington
for a decision by the United States Treasury Department. The United States Commissioner of Internal
Revenue reversed the opinion of the Attorney-General, and thus decided against the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector
of Internal Revenue, action was begun by VicenteMadrigal and his wife Susana Paterno in the Court of First
Instance of the city of Manila against the Collector of Internal Revenue and the Deputy Collector of Internal
Revenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally assessed
and collected by the defendants from the plaintiff, VicenteMadrigal, under the provisions of the Act of
Congress known as the Income Tax Law. The burden of the complaint was that if the income tax for the
year 1914 had been correctly and lawfully computed there would have been due and payable by each of
the plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18 instead of
P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that
plaintiff Madrigal has paid ' as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due
and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the
stipulation, sets forth the basis of defendants' stand in the following way: The income of
Vicente Madrigal and his wife Susana Paterno for the year 1914 was made up of three items: (1)
P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50, the
profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by
Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income
of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in
the sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the
normal tax of one per cent on the net income there were allowed as specific deductions the following: (1)
P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the specific exemption granted
to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the sum upon
which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the
Income Tax Law. The trial court in an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely with the additional income tax, is that it
should be divided into two equal parts, because of the conjugal partnership existing between them. The
2

learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad
de gananciales. The counter contentions of appellees are that the taxes imposed by the Income Tax Law
are as the name implies taxes upon income and not upon capital and property; that the fact
that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal
partnership, has no bearing on income considered as income, and that the distinction must be drawn
between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting
from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given in the
course of history. The final stage has been the selection of income as the norm of taxation. (See Seligman,
"The Income Tax," Introduction.) The Income Tax Law of the United States, extended to the Philippine
Islands, is the result of an effect on the part of legislators to put into statutory form this canon of taxation
and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea,
public considerations have demanded an exemption roughly equivalent to the minimum of subsistence.
With these exceptions, the income tax is supposed to reach the earnings of the entire non governmental
property of the country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between capital and
income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is
wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The
Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that
property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit."
(Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as
here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C.,
26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's
Income Tax, second edition [1915.], Chapter IV; Black on Income Taxes, second edition [1915], Chapter
VIII; Gibbons vs. Mahon [1890], 136 U. S., 549; and Towne vs. Eisner, decided by the United States
Supreme Court, January 7, 1918.)

A regulation of the United States Treasury Department relative to returns by the husband and wife not
living apart, contains the following:
"The husband, as the head and legal representative of the household and general custodian of its income,
should make and render the return of the aggregate income of himself and wife, and for the purpose of
levying the income tax it is assumed that he can ascertain the total amount of said income. If a wife has a
separate estate managed by herself as her own separate property, and receives an income of more than
$3,000, she may make return of her own income, and if the husband has other net income, making the
aggregate of both incomes more than $4,000, the wife's return should be attached to the return of her
husband, or his income should be included in her return, in order that a deduction of $4,000 may be made
from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of
the aggregate income of both as shall exceed $4,000. If either husband or wife separately has an income
equal to or in excess of $3,000, a return of annual net income is required under the law, and such return
must include the income of both, and in such case the return must be made even though the combined
income of both be less than $4,000. If the aggregate net income of both exceeds $4,000, an annual return
3

of their combined incomes must be made in the manner stated, although neither one separately has an
income of $3,000 per annum. They are jointly and separately liable for such return and for the payment of
the tax. The single or married status of the person claiming the specific exemption shall be determined as
of the time of claiming such exemption if such claim be made within the year for which return is made,
otherwise the status at the close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn
for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in
two elaborate decisions in which a long line of Spanish authorities were cited, this court, in speaking of the
conjugal partnership, decided that "prior to the liquidation, the interest of the wife, and in case of her
death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until there appears that there are assets in the community as
a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916], 15 Off. Gaz., 871; Manuel
and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband
Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income after such income has become capital.
Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized
of a separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and income, actually and
legally vested in her and entirely distinct from her husband's property, the income cannot properly be
considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income
Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and
wife are only entitled to the exemption of P8,000, specifically granted by the law. The higher schedules of
the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on
provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income
Tax Law. The aims and purposes of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the Philippine
Islands and the United States Treasury Department. The decision of the latter overruling the opinion of the
Attorney-General is as follows:
"TREASURY DEPARTMENT, Washington.
"Income Tax.
"FRANK MCINTYRE,

"Chief, Bureau of Insular Affairs, War Department,

"Washington, D.C.

"SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence 'from the
Philippine authorities relative to the method of submission of income tax returns by married persons.'
"You advise that 'The Governor-General, in forwarding the papers to the Bureau, advises that the Insular
Auditor has been authorized to suspend action on the warrants in question until an authoritative decision
on the points raised can be secured from the Treasury Department.'
4

"From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an
income of an amount sufficient to require the imposition of the additional tax provided by the statute; that
the net income was properly computed and then both income and deductions and the specific exemption
were divided in half and two returns made, one return for each half in the names respectively of the
husband and wife, so that under the returns as filed there would be an escape from the additional tax; that
Araneta claims the returns are correct on the ground that under the Philippine law his wife is entitled to half
of his earnings; that Araneta has dominion over the income and under the Philippine law, the right to
determine its use and disposition; that in this case the wife has no 'separate estate' within the
contemplation of the Act of October 3, 1913, levying an income tax.
"It appears further from the correspondence that upon the foregoing explanation, tax was assessed against
the entire net income against Gregorio Araneta; that the tax was paid and an application for refund made,
and that the application for refund was rejected, whereupon the matter was submitted to the AttorneyGeneral of the Islands who holds that the returns were correctly rendered, and that the refund should be
allowed; and thereupon the question at issue is submitted through the Governor-General of the Islands and
Bureau of Insular Affairs for the advisory opinion of this office.
"By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as
in the United States but by the appropriate internal-revenue officers of the Philippine Government. You are
therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of
October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, both for the normal
and additional tax, and that the application for refund was properly rejected.
"The separate estate of a married woman within the contemplation of the Income Tax Law is that which
belongs to her solely and separate and apart from her husband, and over which her husband has no right
in equity. It may consist of lands or chattels.
"The statute and the regulations promulgated in accordance therewith provide that each person of lawful
age (not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a
return showing the facts; that from the net income so shown there shall be deducted $3,000 where the
person making the return is a single person, or married and not living with consort, and $1,000 additional
where the person making the return is married and living with consort; but that where the husband and
wife both make returns (they living together), the amount of deduction from the aggregate of their several
incomes shall not exceed $4,000.
"The only occasion for a wife making a return is where she has income from a sole and separate estate in
excess of $3,000, or where the husband and wife neither separately have an income of $3,000, but
together they have an income in excess of $4,000, in which latter event either the husband or wife may
make the return but not both. In all instances the income of husband and wife whether from separate
estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a
separate estate and makes return thereof, or where her income is separately shown in the return made by
her husband, while the incomes are added together for the purpose of the normal tax they are taken
separately for the purpose of the additional tax. In this case, however, the wife has no separate income
within the contemplation of the Income Tax Law.
"Respectfully,
"DAVID A. GATES,
"Acting Commissioner."

In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law
was drafted by the Congress of the United States and has been by the Congress extended to the Philippine
Islands. Being thus a law of American origin and being peculiarly intricate in its provisions, the authoritative
decision of the official who is charged with enforcing it has peculiar force for the Philippines. It has come to
be a well-settled rule that great weight should be given to the construction placed upon a revenue law,
whose meaning is doubtful, by the department charged with its execution. (U. S. vs. Cerecedo Hermanos y
Cia. [1907], 209 U. S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands vs.
Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.)
We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered
||| (Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918)

[G.R. No. 48532. August 31, 1992.]

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,
ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN,
and JAIME A. SOQUES, petitioners, vs. THE HONORABLE COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
[G.R. No. 48533. August 31, 1992.]
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-LIACO,
MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T.
ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A.
SOQUES,petitioners, vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.

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

SYLLABUS
1. TAXATION; INCOME TAX; INCOME; DEFINED. Income may be defined as an amount of money
coming to a person or corporation within a specified time, whether as payment for services, interest or
profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be
thought of as a flow of the fruits of one's labor.
2. ID.; ID.; FOREIGN EXCHANGE TRANSACTION; DOLLAR EARNED ARE NOT RECEIPTS DERIVED
THEREFROM. Petitioners are correct as to their claim that their dollar earnings are not receipts derived
from foreign exchange transactions. For a foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another." When petitioners were assigned to
the foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and
were ALSO spending in said currency. There was no conversion, therefore, from one currency to another.
3. ID.; ID.; EXCHANGE RATE TO DETERMINE THE PESO EQUIVALENT OF FOREIGN EARNINGS; RULE.
What exchange rate should be used to determine the peso equivalent of the foreign earnings of petitioners
for income tax purposes. Petitioners claim that since the dollar earnings do not fall within the classification
of foreign exchange transactions, there occurred no actual inward remittances, and, therefore, they are not
included in the coverage of Central Bank Circular No. 289 which provides for the specific instances when
the par value of the peso shall not be the conversion rate used. They conclude that their earnings should
be converted for income tax purposes using the par value of the Philippine peso. Respondent Commissioner
6

argues that CB Circular No. 289 speaks of receipts for export products, receipts of sale of foreign exchange
or foreign borrowings and investments but not income tax. He also claims that he had to use the prevailing
free market rate of exchange in these cases because of the need to ascertain the true and correct amount
of income in Philippine peso of dollar earners for Philippine income tax purposes. A careful reading of said
CB Circular No. 289 shows that the subject matters involved therein are export products, invisibles, receipts
of foreign exchange, foreign exchange payments, new foreign borrowing and investments nothing by
way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289
does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.
4. ID.; SECRETARY OF FINANCE; EMPOWERED TO PROMULGATE RULES AND REGULATIONS FOR THE
PROPER ENFORCEMENT OF THE NATIONAL INTERNAL REVENUE CODE. And in the implementation for
the proper enforcement of the National Internal Revenue Code, Section 338 thereof empowers the
Secretary of Finance to "promulgate all needful rules and regulations" to effectively enforce its provisions.
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to prescribe a
uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for
the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the authority given to
the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And these are
presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself.
DECISION
NOCON, J p:
Petitioners pray that this Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner
of Internal Revenue to refund to them their income taxes which they claim to have been erroneously or
illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation,
with offices at Sarmiento Building Ayala Avenue, Makati, Rizal. Said corporation is a subsidiary of Procter &
Gamble, a foreign corporation based in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners
were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines,
during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments.
(Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and 2594, Exhs. D, D-1 to D-19). When
petitioners in C.T.A. Case No. 2511 filed their income tax returns for the year 1970, they computed the tax
due by applying the dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling
No. 70-027 dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U S. $1.00
Petitioners in C.T.A Case No. 2594 likewise used the above conversion rate in converting their dollar income
for 1971 to Philippine peso. However, on February 8, 1973 and October 8, 1973, petitioners in said cases
filed with the office of the respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in
relation to Section 6 of Commonwealth Act No. 699 as the basis for converting their respective dollar
income into Philippine pesos for purposes of computing and paying the corresponding income tax due from
7

them. The aforesaid computation as shown in the amended income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filed
with respondent Commissioner. Without awaiting the resolution of the Commissioner of Internal Revenue
on their claims, petitioners filed their petitions for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A. Case No. 2511 on
July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common question of law and
facts, the respondent Court of Tax Appeals heard the cases jointly. In its decision dated September 26,
1977, the respondent Court of Tax Appeals held that the proper conversion rate for the purpose of
reporting and paying the Philippine income tax on the dollar earnings of petitioners are the rates prescribed
under Revenue Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or tax
credit of petitioners in the above-entitled cases was denied and the petitions for review dismissed, with
costs against petitioners. Hence, this petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes is the prevailing free
market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into
Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two cases are Philippine income tax for the
calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should be
governed by the provisions of the National Internal Revenue Code and its implementing rules and
regulations, and not by the provisions of Central Bank Circular No. 42 dated May 21, 1953, as contended by
petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by Presidential Decrees Nos. 69
and 323 which took effect on January 1, 1973 and January 1, 1974, respectively, imposed a tax upon the
taxable net income received during each taxable year from all sources by a citizen of the Philippines,
whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their employment. Thus,
in their income tax returns for the period involved herein, they gave their legal residence/address as c/o
Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes 'A' to 'A-8', and Annexes 'C' to 'C-8', Petition for
Review, CTACases Nos. 2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be converted into Philippine
pesos in computing the income tax due therefrom, in accordance with the provisions of Revenue
Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and Revenue Memorandum
Circular No. 41-71 dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027
dated May 4, 1970, to wit:

'For internal revenue tax purposes, the free market rate of conversion (Revenue Circulars Nos. 7-71 and 4171) should be applied in order to determine the true and correct value in Philippine pesos of the income of
petitioners.' 3
After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are
inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus
vote to deny the petition.
This is basically an income tax case. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. 4
Income can also be thought of as a flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another."6 When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one currency to another.
Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell
under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall
within the classification of foreign exchange transactions, there occurred no actual inward remittances, and,
therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for the
specific instances when the par value of the peso shall not be the conversion rate used. They conclude that
their earnings should be converted for income tax purposes using the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts
of sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims that
he had to use the prevailing free market rate of exchange in these cases because of the need to ascertain
the true and correct amount of income in Philippine peso of dollar earners for Philippine income tax
purposes.
A careful reading of said CB Circular No. 289 8 8a shows that the subject matters involved therein are
export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing and investments nothing by way of income tax payments. Thus, petitioners are in error by
concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
years as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every individual, whether a citizen of the Philippines
residing therein or abroad or an alien residing in the Philippines, determined in accordance with the
following schedule:
9

xxx xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribe a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the
authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code.
And these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance
himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that
they are citizens of the Philippines, and their income, within or without, and in these cases wholly without,
are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long
standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax. prLL
WHEREFORE, the petitions are denied for lack of merit. The dismissal by the respondent Court of Tax
Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED.
Costs against petitioners.
SO ORDERED.
||| (Conwi v. CTA, G.R. No. 48532, 48533, August 31, 1992)

Eisner vs MaComber
FACTS
-Mrs. Macomber owned 2,200 shares in Standard Oil. Standard Oil declared a 50% stock dividend and she
received 1,100 additional shares, of which about $20,000 in par value represented earnings accumulated by
the companyrecapitalized rather than distributedsince the effective date of the original tax law.
-Current statute expressly included stock dividends in income, and the government contended that those
certificates should be taxed as income to Mrs. Macomber as though the corporation had distributed money
to her.
-Mrs. Macomber sued Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.
ISSUE
-Whether in legal or accounting terms the stock dividend was to be regarded as a taxable event.
HOLDING
-This stock dividend was not a realization of income by the taxpayer-shareholder for purposes of the
Sixteenth Amendment
RULES
10

-"We are clear that not only does a stock dividend really take nothing from the property of the corporation
and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced
thereby, while indicating that the shareholder is richer because of an increase of his capital, at the same
time shows he has not realized or received any income in the transaction."
ANALYSIS
-In Towne v. Eisner, court stated that stock dividends were not income, as nothing of value was received
by Towne - the company was not worth any less than it was when the dividend was declared, and the total
value of Towne's stock had not changed.
-Although the Eisner v. Macomber Court acknowledged the power of the Federal Government to tax income
under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax as
income anything other than income, i.e., that Congress did not have the power to re-define the term
income as it appeared in the Constitution:
-Throughout the argument of the Government, in a variety of forms, runs the fundamental error already
mentioned, a failure to appraise correctly the force of the term "income" as used in the Sixteenth
Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax "is levied
on income derived from corporate earnings," when in truth the stockholder has "derived" nothing except
paper certificates which, so far as they have any effect, deny him [or "her" in this case, Mrs. Macomber]
present participation in such earnings. It [the government] contends that the tax may be laid when
earnings "are received by the stockholder," whereas [s]he has received none; that the profits are
"distributed by means of a stock dividend," although a stock dividend distributes no profits; that under the
Act of 1916 "the tax is on the stockholder's share in corporate earnings," when in truth a stockholder has
no such share, and receives none in a stock dividend; that "the profits are segregated from his [her] former
capital, and [s]he has a separate certificate representing his [her] invested profits or gains," whereas there
has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain,
since the certificates, new and old, are alike in what they representa capital interest in the entire
concerns of the corporation.
CONCLUSION
The Court ordered that Macomber be refunded the tax she overpaid.

Raytheon vs CIR
Brief Fact Summary. Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of antitrust acts destroyed the profitable interstate and foreign commerce of Raytheon and cause in excess of $3
million in damage.
Synopsis of Rule of Law. Damages recovered for violations of anti-trust acts are treated as income when
they represent compensation for loss of profits.
Facts. Raytheon, Taxpayer, alleged that the illegal conduct of R.C.A. in violation of anti-trust acts
destroyed the profitable interstate and foreign commerce of Raytheon and cause in excess of $3 million in
damage.
Issue. Is the settlement required to be included in Taxpayers gross income?
Held. Circuit Judge Mahoney issued the opinion for the United States First Circuit Court of Appeals in
holding that the compensation for Taxpayers loss of good will in excess of its cost is gross income.
Discussion. The Court of Appeals notes that the question to be asked is what was the nature of the
recovery? There was nothing to indicate that the recovery by Taxpayer was for lost profits. Rather, the
evidence showed that the recovery was for the value of the goodwill and the busine
144 F.2d 110 (1944)
11

RAYTHEON PRODUCTION CORPORATION

v.
COMMISSIONER OF INTERNAL REVENUE.
No. 3956.
Circuit Court of Appeals, First Circuit.
July 28, 1944.
Writ of Certiorari Denied November 20, 1944.
*111 Edward C. Thayer, of Boston, Mass., for petitioner.
Newton K. Fox, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and J. Louis
Monarch, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.
Writ of Certiorari Denied November 20, 1944. See 65 S.Ct. 192.
MAHONEY, Circuit Judge.
This case presents the question whether an amount received by the taxpayer in compromise settlement of
a suit for damages under the Federal Anti-Trust Laws, 15 U.S.C.A. 1 et seq., is a non-taxable return of
capital or income. If the recovery is non-taxable, there is a second question as to whether the Tax Court
erred in holding that there was insufficient evidence to enable it to determine what part of the lump sum
payment received by the taxpayer was properly allocable to compromise of the suit and what part was
allocable to payment for certain patent license rights which were conveyed as a part of the settlement.
Petitioner, Raytheon Production Corporation, came into existence as a result of a series of what both
parties as well as the Tax Court have treated as tax free reorganizations. Since we think such is the proper
treatment, we shall simplify the facts by referring to any one of the original and successor companies as
Raytheon. The original Raytheon Company was a pioneer manufacturer of a rectifying tube which made
possible the operation of a radio receiving set on alternating current instead of on batteries. In 1926 its
profits were about $450,000; in 1927 about $150,000; and in 1928, $10,000. The Radio Corporation of
America had many patents covering radio circuits and claimed control over almost all of the practical
circuits. Cross-licensing agreements had been made among several companies including R.C.A., General
Electric Company, Westinghouse, and American Telephone & Telegraph Company. R.C.A. had developed a
competitive tube which produced the same type of rectification as the Raytheon tube. Early in 1927, R.C.A.
began to license manufacturers of radio sets and in the license agreement it incorporated "Clause 9", which
provided that the licensee was required to buy its tubes from R.C.A. In 1928 practically all manufacturers
were operating under R.C.A. licenses. As a consequence of this restriction, Raytheon was left with only
replacement sales, which soon disappeared. When Raytheon found it impossible to market its tubes in the
early part of 1929, it obtained a license from R.C.A. to manufacture tubes under the letters patent on a
royalty basis. The license agreement contained a release of all claims of Raytheon against R.C.A. by reason
of the illegal acts of the latter under Clause 9 but by a side agreement such claims could be asserted if
R.C.A. should pay similar claims to others. The petitioner was informed of instances in which R.C.A. had
settled claims against it based on Clause 9. On that ground it considered itself released from the agreement
not to enforce its claim against R.C.A. and consequently, on December 14, 1931, the petitioner caused its
predecessor, Raytheon, to bring suit against R.C.A. in the District Court of Massachusetts alleging that the
plaintiff had by 1926 created and then possessed a large and valuable good will in interstate commerce in
rectifying tubes for radios and had a large and profitable established business therein so that the net profit
12

for the year 1926 was $454,935; that the business had an established prospect of large increases and that
the business and good will thereof was of a value of exceeding $3,000,000; that by the beginning of 1927
the plaintiff was doing approximately 80% of the business of rectifying tubes of the entire United States;
that the defendant conspired to destroy the business of the plaintiff and others by a monopoly of such
business and did suppress *112 and destroy the existing companies; that the manufacturers of radio sets
and others ceased to purchase tubes from the plaintiffs; that by the end of 1927 the conspiracy had
completely destroyed the profitable business and that by the early part of 1928 the tube business of the
plaintiff and its property and good will had been totally destroyed at a time when it had a present value in
excess of $3,000,000, and thereby the plaintiff was injured in its business and property in a sum in excess
of $3,000,000. The action against R.C.A. was referred to an auditor who found that Clause 9 was not the
cause of damage to the plaintiff but that the decline in plaintiff's business was due to advancement in the
radio art and competition. The auditor, however, also found that if it should be decided that Clause 9 had
turned the development of the radio art away from plaintiff's type of tube, then the damages would be
$1,000,000.
In the spring of 1938, after the auditor's report and just prior to the time for the commencement of the trial
before a jury, the Raytheon affiliated companies began negotiations for the settlement of the litigation with
R.C.A. In the meantime a suit brought by R.C.A. against the petitioner for the non-payment of royalties
resulted in a judgment of $410,000 in favor of R.C.A. R.C.A. and the petitioner finally agreed on the
payment by R.C.A. of $410,000 in settlement of the anti trust action. R.C.A. required the inclusion in the
settlement of patent license rights and sublicensing rights to some thirty patents but declined to allocate
the amount paid as between the patent license rights and the amount for the settlement of the suit. The
agreement of settlement contained a general release of any and all possible claims between the parties.
The officers of the Raytheon companies testified that $60,000 of the $410,000 received from R.C.A. was
the maximum worth of the patents, basing their appraisal on the cost of development of the patents and
the fact that few of them were then being used and that no royalties were being derived from them. In its
income tax return the petitioner returned $60,000 of the $410,000 as income from patent licenses and
treated the remaining $350,000 as a realization from a chose in action and not as taxable income. The
Commissioner determined that the $350,000 constituted income on the following ground contained in the
statement attached to his notice of deficiency: "It is the opinion of this office that the amount of $350,000
constitutes income under 22(a) of the Revenue Act of 1936. There exists no clear evidence of what the
amount was paid for so that an accurate apportionment can be made as to a specific consideration for
patent rights transferred to Radio Corporation of America and a consideration for damages. The amount of
$350,000 has therefore been included in your taxable income."
The pertinent sections of the statute are set out in the margin.[1]
Adverting to the question of whether *113 that part of the $410,000 which was paid by R.C.A. to
Raytheon to settle the anti trust suit was a return of capital or ordinary income, we must observe that the
auditor's report is immaterial on that issue. Despite the fact that the auditor found that the loss was not
caused by Clause 9, it was open to the jury to come to a different conclusion on the question of liability,
and to avoid this R.C.A. settled the suit by compromise.
Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital. As in other
types of tort damage suits, recoveries which represent a reimbursement for lost profits are income.
Swastika Oil & Gas Co. v. Commissioner, 6 Cir., 1941, 123 F.2d 382, certiorari denied 1943, 317 U.S. 639,
63 S.Ct. 30, 87 L.Ed. 515; H. Liebes & Co. v. Commissioner, 9 Cir., 1937, 90 F.2d 932; Sternberg v.
Commissioner, 1935, 32 B.T.A. 1039. The reasoning is that since the profits would be taxable income, the
proceeds of litigation which are their substitute are taxable in like manner.
13

Damages for violation of the anti-trust acts are treated as ordinary income where they represent
compensation for loss of profits. Commercial Electrical Supply Co. v. Commissioner, 1927, 8 B.T.A. 986; see
Park v. Gilligan, D.C.S.D.Ohio 1921, 293 F. 129, 130.
The test is not whether the action was one in tort or contract but rather the question to be asked is "In lieu
of what were the damages awarded?" Farmers' & Merchants' Bank v. Commissioner, 6 Cir., 1932, 59 F.2d
912; Swastika Oil & Gas Co. v. Commissioner, supra; Central R. Co. of New Jersey v. Commissioner, 3 Cir.,
1935, 79 F.2d 697, 101 A.L.R. 1448. See United States v. Safety Car Heating & Lighting Co., 1936, 297 U.S.
88, 98, 56 S.Ct. 353, 80 L.Ed. 500. Plumb, "Income Tax on Gains and Losses in Litigation" (1940) 25
Cornell L. Q. 221. Where the suit is not to recover lost profits but is for injury to good will, the recovery
represents a return of capital and, with certain limitations to be set forth below, is not taxable. Farmers' &
Merchants' Bank v. Commissioner, supra. Plumb, supra, 25 Cornell L. Q. 221, 225. "Care must certainly be
taken in such cases to avoid taxing recoveries for injuries to good will or loss of capital". 1 Paul and
Mertens Law of Federal Income Taxation 6.48.
Upon examination of Raytheon's declaration in its anti-trust suit we find nothing to indicate that the suit
was for the recovery of lost profits. The allegations were that the illegal conduct of R.C.A. "completely
destroyed the profitable interstate and foreign commerce of the plaintiff and thereby, by the early part of
1928, the said tube business of the plaintiff and the property good will of the plaintiff therein had been
totally destroyed at a time when it then had a present value in excess of three million dollars and thereby
the plaintiff was then injured in its business and property in a sum in excess of three million dollars." This
was not the sort of antitrust suit where the plaintiff's business still exists and where the injury was merely
for loss of profits. The allegations and evidence as to the amount of profits were necessary in order to
establish the value of the good will and business since that is derived by a capitalization of profits. A
somewhat similar idea was expressed in Farmers' & Merchants' Bank v. Commissioner, supra, *114 59
F.2d at page 913. "Profits were one of the chief indications of the worth of the business; but the usual
earnings before the injury, as compared with those afterward, were only an evidential factor in determining
actual loss and not an independent basis for recovery." Since the suit was to recover damages for the
destruction of the business and good will, the recovery represents a return of capital. Nor does the fact that
the suit ended in a compromise settlement change the nature of the recovery; "the determining factor is
the nature of the basic claim from which the compromised amount was realized." Paul Selected Studies in
Federal Taxation, Second Series, pp. 328-9, footnote 76; Helvering v. Safe Deposit & Trust Co. of
Baltimore, 1941, 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513; Lyeth v. Hoey, 1938, 305 U.S.
188, 59 S.Ct. 155, 83 L.Ed. 119, 119 A.L.R. 410; Central R. of New Jersey v. Commissioner, supra; Farmers'
& Merchants' Bank v. Commissioner, supra; Megargel v. Commissioner, 1944, 3 T.C. 238.
But, to say that the recovery represents a return of capital in that it takes the place of the business good
will is not to conclude that it may not contain a taxable benefit. Although the injured party may not be
deriving a profit as a result of the damage suit itself, the conversion thereby of his property into cash is a
realization of any gain made over the cost or other basis of the good will prior to the illegal interference.
Thus A buys Blackacre for $5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A sues
and recovers $50,000 tort damages from B. Although no gain was derived by A from the suit, his prior gain
due to the appreciation in value of Blackacre is realized when it is turned into cash by the money damages.
Compensation for the loss of Raytheon's good will in excess of its cost is gross income. See Magill Taxable
Income, p. 339. 1 Mertens, Law of Federal Income Taxation, 5.21, footnote 82. Plumb, supra, 25 Cornell
L. Q. 225, 6.
Since we assume with the parties that the petitioner secured the original Raytheon's assets through a series
of tax free reorganizations, petitioner's basis for the good will is the same as that of the original Raytheon.
As the Tax Court pointed out, the record is devoid of evidence as to the amount of that basis and "in the
14

absence of evidence of the basis of the business and good will of Raytheon, the amount of any nontaxable
capital recovery cannot be ascertained." 1 T.C. 952. Cf. Sterling v. Commissioner, 2 Cir., 1937, 93 F.2d 304.
Where the cost basis that may be assigned to property has been wholly speculative, the gain has been held
to be entirely conjectural and not taxable. In Strother v. Commissioner, 4 Cir., 1932, 55 F.2d 626, affirmed
on other grounds, 1932, 287 U.S. 308, 53 S.Ct. 150, 77 L.Ed. 325, a trespasser had taken coal and then
destroyed the entries so that the amount of coal taken could not be determined. Since there was no way of
knowing whether the recovery was greater than the basis for the coal taken, the gain was purely
conjectural and not taxed. Magill explains the result as follows: "as the amount of coal removed could not
be determined until a final disposition of the property, the computation of gain or loss on the damages
must await that disposition." Taxable Income, pp. 339-340. The same explanation may be applied to
Farmers' & Merchants' Bank v. Commissioner, supra, which relied on the Strother case in finding no gain.
The recovery in that case had been to compensate for the injury to good will and business reputation of the
plaintiff bank inflicted by defendant reserve banks' wrongful conduct in collecting checks drawn on the
plaintiff bank by employing "agents who would appear daily at the bank with checks and demand payment
thereof in cash in such a manner as to attract unfavorable public comment". Since the plaintiff bank's
business was not destroyed but only injured and since it continued in business, it would have been difficult
to require the taxpayer to prove what part of the basis of its good will should be attributed to the recovery.
In the case at bar, on the contrary, the entire business and good will were destroyed so that to require the
taxpayer to prove the cost of the good will is no more impractical than if the business had been sold.[2]
Inasmuch as we conclude that the portion of the $410,000 attributable to the suit is taxable income, the
second question as *115 to allocation between this and the ordinary income from patent licenses is not
present.
The decision of the Tax Court is affirmed.

[G.R. No. 66416. March 21, 1990.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOURS SPECIALISTS, INC., and THE
COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for private respondent.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; FINDINGS OF FACTS OF COURT OF TAX APPEALS; BINDING WITH
THE SUPREME COURT IF SUPPORTED BY SUBSTANTIAL EVIDENCE. The well-settled doctrine is that the
findings of facts of the Court of Tax Appeals are binding on this Court and absent strong reasons for this
Court to delve into facts, only questions of law are open for determination. (Nilsen v. Commissioner of
Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444 [1967]; Raymundo v. De Joya, 101 SCRA
495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164 SCRA 524 [1988]), we ruled that the
factual findings of the Court of Tax Appeals are binding upon this court and can only be disturbed on
appeal if not supported by substantial evidence.
2. TAXATION; CONTRACTOR'S TAX; HOTEL ROOM CHARGES HELD IN TRUST BY TRAVEL AGENCY FOR
FOREIGN TOURIST AND PAID TO LOCAL HOST HOTEL; NOT SUBJECT THEREOF. Goss receipts subject
to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong
to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or
15

regulation which would exempt such monies and receipts within the meaning of gross receipts under the
Tax Code. Parenthetically, the room charges entrusted by the foreign travel agencies to the private
respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts
never belonged to the private respondent. The private respondent never benefited from their payment to
the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.
3. ID.; ID.; PRES. DECREE NO. 31; PURPOSE. The significance of P.D. 31 is clearly established in
determining whether or not hotel room charges of foreign tourists in local hotels are subject to the 3%
contractor's tax. As the respondent court aptly stated: ". . . Of the hotel room charges entrusted to
petitioner will be subjected to 3% contractor's tax as what respondent would want to do in this case, that
would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be
subjected to hotel room tax. Although, respondent may claim that the 3% contractor's tax is imposed upon
a different incidence, i.e. the gross receipts of petitioner tourist agency which he asserts includes the hotel
room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless
imposes a tax actually on room charges. One way or the other, it would not have the effect of promoting
tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax
in the overall expenses of said tourists."
DECISION
GUTIERREZ, JR., J p:
This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that the
money entrusted to private respondent Tours Specialists, Inc., earmarked and paid for hotel room charges
of tourists, travelers and/or foreign travel agencies does not form part of its gross receipts subject to the
3% independent contractor's tax under the National Internal Revenue Code of 1977. LLjur
We adopt the findings of facts of the Court of Tax Appeals as follows:
"For the years 1974 to 1976, petitioner (Tours Specialists, Inc.) had derived income from its activities as a
travel agency by servicing the needs of foreign tourists and travelers and Filipino 'Balikbayans' during their
stay in this country. Some of the services extended to the tourists consist of booking said tourists and
travelers in local hotels for their lodging and board needs; transporting these foreign tourists from the
airport to their respective hotels, and from the latter to the airport upon their departure from the
Philippines, transporting them from their hotels to various embarkation points for local tours, visits and
excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment,
shopping and recreational activities.
"In order to ably supply these services to the foreign tourists, petitioner and its correspondent counterpart
tourist agencies abroad have agreed to offer a package fee for the tourists. Although the fee to be paid by
said tourists is quoted by the petitioner, the payments of the hotel room accommodations, food and other
personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their
foreign travel agencies to the local hotels (Pp. 77, t.s.n., Feb. 2, 1981; Exhs. O & O-1, p. 29, CTA rec.; pp.
2425, t.s.n., ibid) and restaurants or shops, as the case may be. prcd
"It is also the case that some tour agencies abroad request the local tour agencies, such as the petitioner in
the case, that the hotel room charges, in some specific cases, be paid through them. (Exh. Q, Q-1, p. 29
CTA rec., p. 25, T.s.n., ibid., pp. 5-6, 17-18, t.s.n., Aug. 20, 1981.; See also Exh. "U", pp. 22-23, t.s.n., Oct.
9, 1981, pp. 3-4, 11., t.s.n., Aug. 10, 1982). By this arrangement, the foreign tour agency entrusts to the
petitioner Tours Specialists, Inc., the fund for hotel room accommodation, which in turn is paid by
petitioner tour agency to the local hotel when billed. The procedure observed is that the billing hotel sends
the bill to the petitioner. The local hotel identifies the individual tourist, or the particular groups of tourists
16

by code name or group designation and also the duration of their stay for purposes of payment. Upon
receipt of the bill, the petitioner then pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency. cdll
"Despite this arrangement, respondent Commissioner of Internal Revenue assessed petitioner for deficiency
3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross
receipts from services for the years 1974 to 1976. Consequently, on December 6, 1979, petitioner received
from respondent the 3% deficiency independent contractor's tax assessment in the amount of P122,946.93
for the years 1974 to 1976, inclusive, computed as follows:
1974 deficiency percentage tax
per investigation P3,995.63
15% surcharge for late payment 998.91
_________
P4,994.54
14% interest computed by quarters
up to 12-28-79 3,953.18 P8,847.72
1975 deficiency percentage tax
per investigation P8,427.39
25% surcharge for late payment 2,106.85
__________
P10,534.24
14% interest computed by
quarters up to 12-28-79 6,808.47 P17,342.71
1976 deficiency percentage
tax per investigation P54,276.42
25% surcharge for late payment 13,569.11
__________
P67,845.53
14% interest computed by quarters
up to 12-28-79 28,910.97 P96,756.50
_________ __________
Total amount due P122,946.93
=========
"In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise
penalty of P500.00.
"Subsequently, on December 11, 1979, petitioner formally protested the assessment made by respondent
on the ground that the money received and entrusted to it by the tourists, earmarked to pay hotel room
17

charges, were not considered and have never been considered by it as part of its taxable gross receipts for
purposes of computing and paying its contractor's tax. prLL
"During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in
charge of the Accounting Department of petitioner, had testified, her credibility not having been destroyed
on cross examination, categorically stated that the amounts entrusted to it by the foreign tourist agencies
intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion
thereof being diverted to its own funds. (t.s.n., Feb. 2, 1981, pp. 7, 25; t.s.n., Aug 20, 1981, pp. 5-9, 1718). The testimony of Serafina Sazon was corroborated by Gerardo Isada, General Manager of petitioner,
declaring to the effect that payments of hotel accommodation are made through petitioner without any
increase in the room charged (t.s.n., Oct. 9, 1981, pp. 21-25) and that the reason why tourists pay their
room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from
hotel room tax under P.D. 31. (t.s.n., Ibid., pp. 25-29.) Witness Isada stated, on cross-examination, that if
their payment is made, thru petitioner's tour agency, the hotel cost or charges 'is only an act of
accommodation on our (its) part' or that the 'agent abroad instead of sending several telexes and saving on
bank charges they take the option to send money to us to be held in trust to be endorsed to the hotel.' (pp.
3-4, t.s.n. Aug 10, 1982.).
"Nevertheless, on June 2, 1980, respondent without deciding the petitioner's written protest, caused the
issuance of a warrant of distraint and levy. (p. 51, BIR Rec.) And later, respondent had petitioner's bank
deposits garnished. (pp. 49-50, BIR Rec.)
"Taking this action of respondent as the adverse and final decision on the disputed assessment, petitioner
appealed to this Court." (Rollo, pp. 40-45)
The petitioner raises the lone issue in this petition as follows:
"WHETHER AMOUNTS RECEIVED BY A LOCAL TOURIST AND TRAVEL AGENCY INCLUDED IN A PACKAGE
FEE FROM TOURISTS OR FOREIGN TOUR AGENCIES, INTENDED OR EARMARKED FOR HOTEL
ACCOMMODATIONS FORM PART OF GROSS RECEIPTS SUBJECT TO 3% CONTRACTOR'S TAX." (Rollo, p.
23)
The petitioner premises the issue raised on the following assumptions:
"Firstly, the ruling overlooks the fact that the amounts received, intended for hotel room accommodations,
were received as part of the package fee and, therefore, form part of 'gross receipts' as defined by law.

Secondly, there is no showing and is not established by the evidence, that the amounts received and
'earmarked' are actually what had been paid out as hotel room charges. The mere possibility that the
amounts actually paid could be less than the amounts received is sufficient to destroy the validity of the
ruling." (Rollo, pp. 26-27)

In effect, the petitioner's lone issue is based on alleged error in the findings of facts of the respondent
court.
The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this Court
and absent strong reasons for this Court to delve into facts, only questions of law are open for
determination. (Nilsen v. Commissioner of Customs, 89 SCRA 43 [1979]; Balbas v. Domingo, 21 SCRA 444
[1967]; Raymundo v. De Joya, 101 SCRA 495 [1980]). In the recent case of Sy Po v. Court of Appeals, (164
SCRA 524 [1988]), we ruled that the factual findings of the Court of Tax Appeals are binding upon this
court and can only be disturbed on appeal if not supported by substantial evidence.
18

In the instant case, we find no reason to disregard and deviate from the findings of facts of the Court of
Tax Appeals.
As quoted earlier, the Court of Tax Appeals sufficiently explained the services of a local travel agency, like
the herein private respondent, rendered to foreign customers. The respondent differentiated between the
package fee offered by both the local travel agency and its correspondent counterpart tourist agencies
abroad and the requests made by some tour agencies abroad to local tour agencies wherein the hotel room
charges in some specific cases, would be paid to the local hotels through them. In the latter case, the
correspondent court found as a fact ". . . that the foreign tour agency entrusts to the petitioner Tours
Specialists, Inc. the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to
the local hotel when billed." (Rollo, p. 42) The following procedure is followed: The billing hotel sends the
bill to the respondent; the local hotel then identifies the individual tourist, or the particular group of tourists
by code name or group designation plus the duration of their stay for purposes of payment; upon receipt of
the bill the private respondent pays the local hotel with the funds entrusted to it by the foreign tour
correspondent agency. Cdpr
Moreover, evidence presented by the private respondent shows that the amounts entrusted to it by the
foreign tourist agencies to pay the room charges of foreign tourists in local hotels were not diverted to its
funds; this arrangement was only an act of accommodation on the part of the private respondent. This
evidence was not refuted.
In essence, the petitioner's assertion that the hotel room charges entrusted to the private respondent were
part of the package fee paid by foreign tourists to the respondent is not correct. The evidence is clear to
the effect that the amounts entrusted to the private respondent were exclusively for payment of hotel room
charges of foreign tourists entrusted to it by foreign travel agencies.
As regards the petitioner's second assumption, the respondent court stated:
". . . [C]ontrary to the contention of respondent, the records show, firstly, in the Examiners' Worksheet
(Exh. T, p. 22, BIR Rec.), that from July to December 1976 alone, the following sums made up the hotel
room accommodations:
July 1976 P102,702.97
Aug. 1976 121,167.19
Sept. 1976 53,209.61

P282,079.77
==========
Oct. 1976 P 71,134.80
Nov. 1976 409,019.17
Dec. 1976 142,761.55
__________
622,915.51

Grand Total P904,995.29

19

==========
"It is not true, therefore, as stated by respondent, that there is no evidence proving the amounts
earmarked for hotel room charges. Since the BIR examiners could not have manufactured the above figures
representing 'advances for hotel room accommodations,' these payments must have certainly been taken
from the records of petitioner, such as the invoices, hotel bills, official receipts and other pertinent
documents." (Rollo, pp. 48-49) LLjur
The factual findings of the respondent court are supported by substantial evidence, hence binding upon this
Court.
With these clarifications, the issue to be threshed out is as stated by the respondent court, to wit:
". . . [W]hether or not the hotel room charges held in trust for foreign tourists and travelers and or
correspondent foreign travel agencies and paid to local host hotels form part of the taxable gross receipts
for purposes of the 3% contractor's tax." (Rollo, p. 45)
The petitioner opines that the gross receipts which are subject to the 3% contractor's tax pursuant
to Section 191 (Section 205 of the National Internal Revenue Code of 1977) of the Tax Code include the
entire gross receipts of a taxpayer undiminished by any amount. According to the petitioner, this
interpretation is in consonance with B.I.R. Ruling No. 68-027, dated 23 October, 1968 (implementing
Section 191 of the Tax Code) which states that the 3% contractor's tax prescribed by Section 191 of the
Tax Code is imposed on the gross receipts of the contractor, "no deduction whatever being allowed by said
law " The petitioner contends that the only exception to this rule is when there is a law or regulation which
would d exempt such gross receipts from being subjected to the 3% contractor's tax citing the case
of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (108 Phil. 821 [1960]). Thus, the
petitioner argues that since there is no law or regulation that money entrusted, earmarked and paid for
hotel room charges should not form part of the gross receipts, then the said hotel room charges are
included in the private respondent's gross receipts for purposes of the 3% contractor's tax.
In the case of Commissioner of Internal Revenue v. Manila Jockey Club, Inc. (supra), the Commissioner
appealed two decisions of the Court of Tax Appeals disapproving his levy of amusement taxes upon the
Manila Jockey Club, a duly constituted corporation authorized to hold horse races in Manila. The facts of the
case show that the monies sought to be taxed never really belonged to the club. The decision shows that
during the period November 1946 to 1950, the Manila Jockey Club paid amusement tax on its commission
but without including the 5-1/2% which pursuant to Executive Order 320 and Republic Act 309 went to the
Board of Races, the owner of horses and jockeys. Section 260 of the Internal Revenue Code provides that
the amusement tax was payable by the operator on its "gross receipts". The Manila Jockey Club, however,
did not consider as part of its "gross receipts" subject to amusement tax the amounts which it had to
deliver to the Board on Races, the horse owners and the jockeys. This view was fully sustained by three
opinions of the Secretary of Justice, to wit: cdll
"There is no question that the Manila Jockey, Inc., owns only 7-1/2% of the total bets registered by the
Totalizer. This portion represents its share or commission in the total amount of money it handles and goes
to the funds thereof as its own property which it may legally disburse for its own purposes. The 5% does
not belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It
is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this
portion without incurring liability to the owners of winning horses. It cannot be considered as an item of
expense because the sum used for the payment of prizes is not taken from the funds of the club but from a
certain portion of the total bets especially earmarked for that purpose.

20

"In view of all the foregoing, I am of the opinion that in the submission of the returns for the amusement
tax of 10% (now it is 20% of the 'gross receipts', provided for in Section 260 of the National Internal
Revenue Code), the 5% of the total bets that is set aside for prizes to owners of winning horses should not
be included by the Manila Jockey Club, Inc."
The Collector of the Internal Revenue, however had a different opinion on the matter and demanded
payment of amusement taxes. The Court of Tax Appeals reversed the Collector.
We affirmed the decision of the Court of Tax Appeals and stated:
"The Secretary's opinion was correct. The Government could not have meant to tax as gross receipt of the
Manila Jockey Club the 1/2% which it directs same Club to turn over to the Board on Races. The latter
being a Government institution, there would be double taxation, which should be avoided unless the statute
admits of no other interpretation. In the same manner, the Government could not have intended to
consider as gross receipt the portion of the funds which it directed the Club to give, or knew the Club would
give, to winning horses and jockeys admittedly 5%. It is true that the law says that out of the total
wager funds 12-1/2% shall be set aside as the 'commission' of the race track owner, but the law itself takes
official notice, and actually approves or directs payment of the portion that goes to owners of horses as
prizes and bonuses of jockeys, which portion is admittedly 5% out of that 12-1/2% commission. As it did
not at that time contemplate the application of 'gross receipts' revenue principle, the law in making a
distribution of the total wager funds, took no trouble of separating one item from the other; and for
convenience, grouped three items under one common denomination. cdphil
"Needless to say, gross receipts of the proprietor of the amusement place should not include any money
which although delivered to the amusement place has been especially earmarked by law or regulation for
some person other than the proprietor." (The situation thus differs from one in which the owner of the
amusement place, by a private contract, with its employees or partners, agrees to reserve for them a
portion of the proceeds of the establishment. (See Wong & Lee v. Coll. 104 Phil. 469; 55 Off Gaz. [51]
10539; Sy Chuico v. Coll., 107 Phil., 428; 59 Off Gaz., [6] 896)."
In the second case, the facts of the case are:
"The Manila Jockey Club holds once a year a so called 'special Novato race', wherein only 'novato' horses,
(i.e. horses which are running for the first time in an official [of the club] race), may take part. Owners of
these horses must pay to the Club an inscription fee of P1.00, and a declaration fee of P1.00 per horse. In
addition, each of them must contribute to a common fund (P10.00 per horse). The Club contributes an
equal amount (P10.00 per horse) to such common fund, the total amount of which is added to the 5%
participation of horse owners already described herein-above in the first case.

"Since the institution of this yearly special novato race in 1950, the Manila Jockey Club never paid
amusement tax on the moneys thus contributed by horse owners (P10.00 each) because it entertained the
belief that in accordance with the three opinions of the Secretary of Justice herein-above described, such
contributions never formed part of its gross receipts. On the inscription fee of the P1.00 per horse, it paid
the tax. It did not on the declaration fee of P1.00 because it was imposed by the Municipal Ordinance of
Manila and was turned over to the City officers.
"The Collector of Internal Revenue required the Manila Jockey Club to pay amusement tax on such
contributed fund P10.00 per horse in the special novato race, holding they were part of its gross receipts.
The Manila Jockey Club protested and resorted to the Court of Tax Appeals, where it obtained favorable
judgment on the same grounds sustained by said Court in connection with the 5% of the total wager funds
in the herein-mentioned first case; they were not receipts of the Club." prLL
21

We resolved the issue in the following manner:

"We think the reasons for upholding the Tax Court's decision in the first case apply to this one. The tenpeso contribution never belonged to the Club. It was held by it as a trust fund. And then, after all, when it
received the ten-peso contribution, it at the same time contributed ten pesos out of its own pocket, and
thereafter distributed both amounts as prizes to horse owners. It would seem unreasonable to regard the
ten-peso contribution of the horse owners as taxable receipt of the Club, since the latter, at the same
moment it received the contribution necessarily lost ten pesos too."
As demonstrated in the above-mentioned case, gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt
such monies and receipts within the meaning of gross receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondent do not
form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the
private respondent. The private respondent never benefited from their payment to the local hotels. As
stated earlier, this arrangement was only to accommodate the foreign travel agencies. cdll
Another objection raised by the petitioner is to the respondent court's application of Presidential Decree
31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides:
"Sec. 1. Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for
the entire period of their stay in the country."
The petitioner now alleges that P.D. 31 has no relevance to the case. He contends that the tax under
Section 191 of the Tax Code is in the nature of an excise tax; that it is a tax on the exercise of the privilege
to engage in business as a contractor and that it is imposed on, and collectible from the person exercising
the privilege. He sums his arguments by stating that "while the burden may be shifted to the person for
whom the services are rendered by the contractor, the latter is not relieved from payment of the tax."
(Rollo, p. 28)
The same arguments were submitted by the Commissioner of Internal Revenue in the case
of Commissioner of Internal Revenue v. John Gotamco & Son., Inc. (148 SCRA 36 [1987]), to justify his
imposition of the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the
gross receipts John Gotamco & Sons, Inc., realized from the construction of the World Health Organization
(WHO) office building in Manila. We rejected the petitioner's arguments and ruled:
"We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent
court:
"'In context, direct taxes are those that are demanded from the very person who, it is intended or desired,
should pay them; while indirect taxes are those that are demanded in the first instance from one person in
the expectation and intention that he can shift the burden to someone else. (Pollock v. Farmers, L & T Co.,
1957 US 429, 15 S. Ct. 673, 39 Law. ed. 759). The contractor's tax is of course payable by the contractor
but in the last analysis it is the owner of the building that shoulders the burden of the tax because the
same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax.
And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its
burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor
and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization.'"
"Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of
Internal Revenue, et al., (127 Phil. 461) the 3% contractor's tax falls directly on Gotamco and cannot be
22

shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this
case, since the Host Agreement specifically exempts the WHO from 'indirect taxes.' We agree. The
Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the
manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the
tax to the price of the goods did not make the sales tax 'a tax on the purchaser.' The Court held that the
sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like
the National Power Corporation, an agency of the Philippine Government, and to the Voice of America, an
agency of the United States Government. LexLib
"The Host Agreement, in specifically exempting the WHO from 'indirect taxes,' contemplates taxes which,
although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by
it."
Accordingly, the significance of P.D. 31 is clearly established in determining whether or not hotel room
charges of foreign tourists in local hotels are subject to the 3% contractor's tax. As the respondent court
aptly stated:
". . . If the hotel room charges entrusted to petitioner will be subjected to 3% contractor's tax as what
respondent would want to do in this case, that would in effect do indirectly what P.D. 31 would not like
hotel room charges of foreign tourists to be subjected to hotel room tax. Although, respondent may claim
that the 3% contractor's tax is imposed upon a different incidence, i.e. the gross receipts of petitioner
tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to
impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the
other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs
or expenses by the addition of a hotel room tax in the overall expenses of said tourists." (Rollo, pp. 51-52).
WHEREFORE, the instant petition is DENIED. The decision of the Court of Tax Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
||| (Commr. v. Tours Specialists, Inc., G.R. No. 66416, March 21, 1990)

[G.R. No. 78953. July 31, 1991.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE
COURT OF TAX APPEALS, respondents.

Elison G. Natividad for accused-appellant.

SYLLABUS
1. TAXATION; INCOME TAX; SURCHARGES FOR RENDERING FALSE AND FRAUDULENT RETURN. Under
the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the
deficiency tax in case payment has been made on the basis of the return filed before the discovery of the
falsity or fraud.
2. ID.; ID.; FILING OF FRAUDULENT RETURN; MUST BE ACTUAL AND INTENTIONAL THROUGH WILLFUL
AND DELIBERATE MISLEADING OF THE GOVERNMENT AGENCY. In Aznar v. Court of Tax Appeals (L20569, promulgated on August 23, 1974, 58 SCRA 519), fraud in relation to the filing of income tax return,
was discussed in this manner: . . . The fraud contemplated by law is actual and not constructive. It must be
23

intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole
object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent
intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in
making entries in the returns and in the assessment, respectively, under the inventory method of
determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith. Fraud is never imputed and the courts never sustain
findings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of
a tax is not itself proof of fraud for the purpose of tax evasion.
3. ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. In the case at bar, there was no actual and intentional
fraud through willful and deliberate misleading of the government agency concerned, the Bureau of
Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal
right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's
zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the
imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of
swindling charges, perhaps even for greed by spending most of the money he received, but the records
lack a clear showing of fraud committed because he did not conceal the fact that he had received an
amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the
50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency
assessment should be deleted.
DECISION
SARMIENTO, J p:
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in
his income tax return that a sum of money that he erroneously received and already spent is the subject of
a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a
fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1
dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier,
Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion
of the 50% surcharge from Javier's deficiency income tax assessment on his income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for
Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or
imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and
incorporated in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted
by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank,
N.A.

24

3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of
Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private
respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a
clerical error and should have been US$1,000.00 only, and praying that the excess amount of
US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the
benefit of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the
moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then
Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein)
and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their
own personal use and benefit the amount of US$999,000.00 which they received under an implied trust for
the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in
the footnote of the return that "Taxpayer was recipient of some money received from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from
the acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment
notices for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or
before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the
years 1976 and 1977 respectively . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal
Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had
any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await
final court decision on the case filed against him for filing an allegedly fraudulent return . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his
December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were
able to dispose, is definitely taxable.". . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the
concluding portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here)
further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72
of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since
petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was
imposed, in all probability, by respondent (petitioner) because he considered the return filed false or
fraudulent. This additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in his 1977 return as footnote that "Taxpayer was recipient of some
money received from abroad which he presumed to be gift but turned out to be an error and is now subject
of litigation."

25

From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully
and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government
to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100,
April 28, 1956.). Besides, Section 29 is not too plain and simple to understand. Since the question involved
in this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge imposed
in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter
to us, by the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which
held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he
submitted in the same memorandum "that the issue may be raised in the case not for the purpose of
correcting or setting aside the decision which held him liable for deficiency income tax, but only to show
that there is no basis for the imposition of the surcharge." This subsequent disavowal therefore renders
moot and academic the posturings articulated in his Comment 10 on the non-taxability of the amount he
erroneously received and the bulk of which he had already disbursed. In any event, an appeal at that time
(of the filing of the Comments) would have been already too late to be seasonable. llcd

The petitioner, through the office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is selfconvinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put another
way, the studied insinuation that private respondent may not be the beneficial owner of the money or
income flowing to him as enhanced by the studied claim that the amount is "subject of litigation" is belied
by the record and clearly exposed as a fraudulent ploy, as witness what transpired upon receipt of the
amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount
of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the
amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven
(11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the
said dollar account in the sum of $975,000.00 or P7,020,000.00 . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the "mistaken
remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was
the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and
is now subject of litigation." It is respectfully submitted that the said return was not fraudulent. The
footnote was practically an invitation to the petitioner to make am investigation, and to make the proper
assessment.
26

The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782),
that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain
a judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A.
Neddas, 40 BTA 572). The following circumstances attendant to the case at bar show that in filing the
questioned return, the private respondent was guided, not by that "willful and deliberate intent to prevent
the Government from making a proper assessment" which constitute fraud, but by an honest doubt as to
whether or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given
very, very wide publicity by media; and only one who is not in his right mind would have entertained the
idea that the BIR would not make an assessment if the amount in question was indeed subject to the
income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this
jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not
unanimous in holding that similar receipts are subject to the income tax. It should be noted that the
decision in the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one
out of three Judges of the respondent Court was of the opinion that the amount in question is not taxable.
Thus, even without the footnote, the failure to declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the
Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa
committed allegedly by his failure to return the money and by converting it to his personal benefit. The
basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using
part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in
his income tax return that the amount received was still under litigation. If he had paid the tax, would that
not constitute estafa for using the funds for his own personal benefit? and would the Government refund it
to him if the courts ordered him to refund the money to the Mellon Bank? 12
xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code),
a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of
the deficiency tax in case payment has been made on the basis of the return filed before the discovery of
the falsity or fraud. LibLex
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of
the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income
tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation," that it was an "error or
mistake of fact or law" not constituting fraud, that such notation was practically an invitation for
investigation and that Javier had literally "laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return, was discussed in
this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, .whether slight or gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It
necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner
and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and
27

in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair
to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good
faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most,
create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of
tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be. Rick v.
U.S., App. D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of
the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to prevent
its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or
mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to
Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified
by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of
the money he received, but the records lack a clear showing of fraud committed because he did not conceal
the fact that he had received an amount of money although it was a "subject of litigation." As ruled by
respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against
the private respondent in the deficiency assessment should be deleted. prcd
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is
AFFIRMED. No costs.
SO ORDERED.
||| (Commr. v. Javier, Jr., G.R. No. 78953, July 31, 1991)

[G.R. No. 17518. October 30, 1922.]

FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal
Revenue, defendant-appellee.

Fisher & Dewitt and Antonio M. Opisso for appellant.

Acting Attorney-General Tuason for appellee.
SYLLABUS
1. INCOME DEFINED AS THAT WORD IN THE INTERNAL REVENUE LAW. An income may be defined as
the amount or money coming to a person or corporation within a specified time, whether as payment for
services, interest, or profit from investment. A mere advance in the value of the property of a person or
corporation in no sense constitutes the "income specified in the revenue law. Such advance constitutes and
can be treated merely as an increase of capital. An income means cash received or its equivalent; it does
not mean chooses in action or unrealized increments in the value of the property. The revenue law with
reference to the income tax employs the term "income" in its natural and obvious sense, as importing
something distinct from principal or capital.
2. DIVIDENDS OF CORPORATIONS, DEFINED. A dividend is defined as a corporate profit set aside,
declared, and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Until
28

the dividend is declared, the corporate profits belong to the corporation and not to the stockholders, and
are liable for the payment of the debts of the corporation.
3. STOCK DIVIDENDS. DEFINED. A stock dividend, when declared, is merely a certificate of stock which
evidences the interest of the stockholder in the increased capital of the corporation. There is a clear
distinction between a cash dividend and a stock dividend. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation parts irrevocably with all interest therein; the other involves no
disbursement by the corporation; the corporation parts with nothing to its stockholder. When a cash
dividend is declared and paid to stockholders, such cash becomes the absolute property of the stockholders
and cannot be reached by the creditors of corporation in the absence of fraud. The property represented by
a stock dividend, however, still being the property of corporation, and not of the stockholder, it may be
reached by an execution against the corporation, and sold as a part of the property of the corporation. In
such a case, if all of the property of the corporation is sold under execution, then the stockholders certainly
could not be charged with having received an income by virtue of the issuance of the stock dividend. If the
ownership of the property represented by a stock dividend is still in the corporation and not in the holder of
such stock, certainly such stock cannot be regarded as income to the stockholder. The stockholder has
received nothing but a representation of an interest in the property of the corporation and, as a matter of
fact, he may never receive anything, depending upon the final outcome of the business of the corporation.
DECISION
JOHNSON, J p:
The only question presented by this appeal is: Are the "stock dividends" in the present case "income" and
taxable as such under the provisions of section 25 of Act No. 2833? While the appellant presents other
important questions, under the view which we have taken of the facts and the law applicable to the present
case, we deem it unnecessary to discuss them now.
The defendant demurred to the petition in the lower court. The facts are therefore admitted. They are
simple and may be stated as follows:
That during the year 1919 the Philippine American Drug Company was a corporation duly organized and
existing under the laws of the Philippine Islands, doing business in the city of Manila; that the appellant was
a stockholder in said corporation; that said corporation, as a result of the business for that year, declared a
"stock dividend;" that the proportionate share of said stock dividend of the appellant was P24,800; that the
stock dividend for that amount was issued to the appellant; that thereafter, in the month of March, 1920,
the appellant, upon demand of the appellee, paid, under protest, and involuntarily, unto the appellee the
sum of P889.91 as income tax on said stock dividend. For the recovery o that sum (P889.91) the present
action was instituted. The defendant demurred to the petition upon the ground that it did not state facts
sufficient to constitute cause of action. The demurrer was sustained and the plaintiff appealed.
To sustain his appeal the appellant cites and relies on some decisions of the Supreme Court of the United
States as well as the decisions of the supreme courts of some of the states of the Union, in which the
question before us, based upon similar statutes, was discussed. Among the most important decisions may
be mentioned the following: Towne vs. Eisner, 245 U. S., 418; Doyle vs. Mitchell Bros. Co., 247 U. S., 179;
Eisner vs. Macomber, 252 U. S., 189; Dekoven vs. Alsop, 205 Ill., 309; 63 L. R. A., 587; Kaufman vs.
Charlottesville Woolen Mills, 93 Va., 673.
In each of said cases an effort was made to collect an "income tax" upon "stock dividends" and in each
case it was held that "stock dividends" were capital and not an "income" and therefore not subject to the
"income tax law.
29

The appellee admits the doctrine established in the case of Eisner vs. Macomber (252 U.S., 189), that a
"stock dividend" is not "income" but argues that said Act No. 2833, in imposing the tax on the stock
dividend, does not violate the provisions of the Jones Law. The appellee further argues that the statute of
the United States providing for tax upon stock dividends is different from the statute of the Philippine
Islands, and therefore the decision of the Supreme Court of the United States should not be followed in
interpreting the statute in force here.
For the purpose of ascertaining the difference in the said statutes (United States and Philippine Islands),
providing for an income tax in the United States as well as that in the Philippine Islands, the two statutes
are here quoted for the purpose of determining the difference, if any, in the language of the two statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides for the collection an "income
tax." Section 2 of said Act attempts to define what is an income. The definition follows:
"That the term 'dividends' as used in this title shall be held to mean any distribution made or ordered to be
made by a corporation, . . . out of its earning or profits out of its earnings or profits accrued since March
first, nineteen hundred and thirteen, and payable to its shareholders whether in cash or in stock of the
corporation, . . . which stock dividend shall be considered income, to the amount of its cash value."
Act No. 2833 of the Philippine Legislature is an Act establishing "an income tax." Section 25 of said Act
attempts to define the application of the income tax. The definition follows:
"The term 'dividends' as used in this law shall be held to mean any distribution made or ordered to be
made by a corporation, . . . out of its earnings or profits accrued since March first, nineteen hundred and
thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, . . . Stock dividend
shall be considered income, to the amount of the earnings or profits distributed."
It will be noted from a reading of the provisions of the two laws above quoted that the writer of the law of
the Philippine Islands must have had before him the statute of the United States. No important argument
can be based upon the slight difference in the wording of the two sections.
It is further argued by the appellee that there are no constitutional limitations upon the power of the
Philippine Legislature such as exist in he United States, and, in support of that contention, he cites a
number of decisions. There is no question that he Philippine Legislature may provide for the payment of an
income tax, but it cannot, under the guise of an income tax, collect a tax on property which is not an
"income." The Philippine Legislature cannot impose a tax upon "property" under a law which provides for a
tax upon "income" only. The Philippine Legislature has no power to provide a tax upon "automobiles" only,
and under that law collect a tax upon a carreton or bull cart. Constitutional limitations upon the power of
the Legislature are no stronger than statutory limitations, that is to say, a statute expressly adopted for one
purpose cannot, with our amendment, be applied to another purpose which is entirely distinct and
different. A statute providing for an income tax cannot be construed to cover property which is not, in fact,
income. The Legislature cannot, by a statutory declaration, change the real nature of a tax which it
imposes. A law which imposes an importation tax on rice only cannot be construed to impose an
importation tax on corn.
It is true that the statute in question provides for an income tax and contains a further provision that "stock
dividends" shall be considered income and are therefore subject to income tax provided for in said law. If
"stock dividends" are not "income" then the law permits a tax upon something not within the purpose and
intent of the law.
It becomes necessary in this connection to ascertain what is an "income" in order that we may be able to
determine whether "stock dividends" are "income" in the sense that word is used in the statute. Perhaps it
would be more logical to determine first what are "stock dividends" in order to "income." Generally
30

speaking, stock dividends represent undistributed increase in the capital of corporations of firms, joint stock
companies, etc., for a particular period. They are used to show the increased interest or proportional share
in the capital of each stockholder. In other words, the inventory of the property of the corporation, etc., for
a particular period shows an increase in its capital, so that the stock theretofore issued does not show the
real value of the stockholder's interest, and additional stock is issued showing the increase in the
actual capital, or property, or asset of the corporation, etc.

To illustrate: A and B form a corporation with an authorized capital of P10,000 for the purpose of opening
and conducting a drug store, with assets of the value of P2,000, and each contributes P1,000. Their entire
assets are invested in drugs and put upon the shelves in their place of business. They commence business
without a cent in the treasury. Every dollar contributed is invested. Shares of stock to the amount of P1,000
are issued to each of the incorporators, which represent the actual investment and entire assets of the
corporation. business for the first year is good. Merchandise is sold, and purchased, to meet the demands
of the growing trade. At the end of the first year an inventory of the assets of the corporation is made, and
it is then ascertained that the assets or capital of the corporation on hand amount to P4,000, with no debts,
and still not a cent in the treasury. All of the receipts during the year have been reinvested in the business.
Neither of the stockholders have withdrawn a penny from the business during the year. Every peso
received for the sale of merchandise was immediately used in the purchase of new stock new supplies.
At the close of the year there is not a centavo in the treasury, with which either A or B could buy a cup of
coffee or a pair of shoes for his family. At the beginning of the year the assets were P2,000 and at the end
of the year they were P4,000, and neither of the stockholders have received a centavo from the business
during the year. At the close of the year, when it is discovered that the assets are P4,000 and not P2,000,
instead of selling the extra merchandise on hand and thereby reducing the business to its original capital,
they agree among themselves to increase the capital issued and for that purpose issue additional stock in
the form of "stock dividends" or additional stack of P1,000, each which represents the actual increase of
the year each stockholder held one half interest in the capital. At the close of the year, and after the issue
of the said stock dividends, they each still have one-half interest in the business. The capital of the
corporation increased during the year, but has either of them received an income? It is not denied, for the

purposed of ordinary taxation, that the taxable property of the corporation at the beginning of the year was
P2,000, that at the close of the year it was P4,000, and that the tax rolls should be changed in accordance
with the changed conditions in the business. In other words, the ordinary tax should be increased by
P2,000.
Another illustration: C and D organized a corporation for agricultural purposes with an authorized capital
stock of P20,000 each contributing P5,000. With that capital they purchased a farm and, with it, one
hundred head of cattle. Every peso contributed is invested. There is no money in the treasury. Much time
and labor was expended during the year by the stockholders on the farm in the way of improvements.
Neither received a centavo during the year from the farm or the cattle. At the beginning of the year the
assets of the corporation, including the farm and the cattle, were P10,000, and at the close of the year an
inventory of the property of the corporation is made, and it is then found that they have the same farm
with its improvements and two hundred head of cattle by natural increase. At the end of the year it is also
discovered that, by reason of business changes, the farm and the cattle both have increased in value, and
that the value of the corporate property is now P20,000 instead of P10,000 as it was at the beginning of
the year. The incorporators instead of reducing the property to its original capital, by selling off a part of it,
issue to themselves "stock dividends" to represent the proportional value or interest of each of the
stockholders in the increased capital at the close of the year. There is still not a centavo in the treasury and
Neither has withdrawn a peso from the business during the year. No part of the farm or cattle has been
31

sold and not a single peso was received out of the rents or profits of the capital of the corporation by the
stockholders.
Another illustration: A, and individual farmer, buys a farm with one hundred head of cattle for the sum of
P10,000. At the end of the first year, by reason of business conditions and the increase of the value of both
the real estate and personal property, it is discovered that the value of the farm and the cattle is P20,000.
A, during the year, has received nothing from the farm or the cattle. His books at the beginning of the year
show that he had property of the value of P10,000. His books at the close of the year show that he has
property of the value of P20,000. A is not a corporation. The assets of his business are not shown therefore
by certificates of stock. His books, however, show that the value of his property has increased during the
year by P10,000. Can the P10,000, under any theory of business or law, be regarded as an "income" upon
which the farmer can be required to pay an income tax? Is there any difference in law in the condition of A
in this illustration and the condition of A and B in the immediately preceding illustration? Can the increase
of the Value of the property in either case be regarded as an "income" and be subjected to the payment of
the income tax under the law?
Each of the foregoing illustrations, it is asserted, is analogous to the case before us and, in view of that
fact, let us ascertain how lexicographers and the courts have defined an "income." The New Standard
Dictionary, edition of 1915, defines an income as "the amount of money coming to a person or corporation
within a specified time whether as payment for services, interest, or profit from investment." Webster's
International Dictionary defines an income as "the receipts, salary; especially, the annual receipts of a
private person or a corporation from property." Bouvier, in his law dictionary, says that an "income" in the
federal constitution and income tax act, is used in its common or ordinary meaning and not in its technical
or economic sense. (146 Nortwestern Reporter, 812,) Mr. Black in his law dictionary, says: "An income is
the return in money from one's business, labor, or capital invested; gains, profit, or private revenue." "An
income tax is a tax on the yearly profits arising from property, professions, trades, and offices."
The Supreme Court of the United States, in the case of Gray vs. Darlington (82 U. S., 63), said in speaking
of income that mere advance in value in no sense constitutes the "income" specified in the revenue law as
"income" of the owner for the year in which the sale of the property was made. Such advance constitutes
and can be treated merely as an increase of capital. (In re Graham's Estate, 198 Pa., 216; Appeal of Braun,
105 Pa., 414.)
Mr. Justice Hughes, later Associate Justice of the Supreme Court of the United States and now Secretary of
State of the United States, in his argument before the Supreme Court of the United States in the case of
Towne vs. Eisner, supra, defined an "income" in an income tax law, unless it is otherwise specified, to
mean cash or its equivalent. It does not mean chooses in action or unrealized increments in the value of
the property, and cities in support of that definition, the definition given by the Supreme Court in the case
of Gray vs. Darlington, supra.
In the case of Towne vs. Eisner, supra, Mr. Justice Holmes, speaking for the court, said: "Notwithstanding
the thoughtful discussion that the case received below, we cannot doubt that the dividend was capital as
well for the purposes of the Income Tax Law. . . . "A stock dividend really takes nothing from the property
of the corporation, and adds nothing to the interests of the shareholder. Its property is not diminished and
their interests are not increased. . . . The proportional interest of each shareholder remains the same. . . . '
In short, the corporation is no poorer and the stockholder is no richer than they were before." (Gibbons vs.
Mahon, 136 U. S., 549, 559, 560; Logan Country vs. U. S., 169 U. S., 255, 261.)
In the case of Doyle vs. Mitchell Bros. Co. (247 U. S., 179), Mr. Justice Pitney, speaking for the court, said
that the act employs the term "income" in its natural and obvious sense, as importing something distinct
from principal or capital and conveying the idea of gain or increase arising from corporate activity.
32

Mr. Justice Pitney, in the case of Eisner vs. Macomber (252 U. S., 189), again speaking for the court, said:
"An income may be defined as the gain derived from capital, from labor, or from both combined, provided it
be understood to include profit gained through a sale or conversion of capital assets."
For bookkeeping purposes, when stock dividends are declared, the corporation or company acknowledges a
liability, in form, to the stockholders, equivalent to the aggregate par value of their stock, evidenced by a
"capital stock account." If profits have been made by the corporation during a particular period and not
divided, they create additional bookkeeping liabilities under the head of "profit and loss," "undivided
profits," "surplus account," etc., or the like. None of these, however, gives to the stockholders as a body,
much less to any one of them, either a claim against the going concern or corporation, for any particular
sum of money, or a right to any particular portion of the asset, or any share unless or until the directors
conclude that dividends shall be made and a part of the company's assets segregated from the common
fund for that purpose. The dividend normally is payable in money and when so paid, then only does the
stockholder realize a profit or gain, which becomes his separate property, and thus derive an income from
the capital that he has invested. Until that is done the increased assets belong to the corporation and not to
the individual stockholders.
When a corporation or company issues "stock dividends" it shows that the company's accumulated profits
have been capitalized, instead of distributed to the stockholder or retained as surplus available for
distribution, in money or in kind, should opportunity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets, and no longer is available for actual distribution. The essential and
controlling fact is that the stockholder has received nothing our of the company's assets for his separate
use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions
and accumulations resulting from employment of his money and that of the other stockholders in the
business of the company, still remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance
and not to form, the stockholder by virtue of the stock dividend has in fact received nothing that answers
the definition of an "income." (Eisner vs. Macomber, 252 U. S., 189, 209, 211.)

The stockholder who receives a stock dividend has received nothing but a representation of this increased
interest in the capital of the corporation. There has been no separation or segregation of his interest. All
the property or capital of the corporation still belongs to the corporation. There has been no separation of
the interest of the stockholder from the general capital of the corporation. The stockholder, by virtue of the
stock dividend, has no separate or individual control over the interest represented thereby, further than he
had before the stock dividend was issued. He cannot use it for the reason that it is still the property of the
corporation and not the property of the individual holder of the stock dividend. A certificate of stock
represented by the stock dividend is simply a statement of his proportional interest or participation in the
capital of the corporation. For bookkeeping purposes, a corporation, by issuing stockholders, evidenced by
a capital stock account. The receipt of a stock dividend in no way increases the money received by the
stockholder nor his cash account at the close of the year. It simply shows that there has been an increase
in the amount of the capital of the corporation during the particular period, which may be due to an
increased business or to a natural increase of the value of the capital due to business, economic, or another
reason. We believe that the Legislature, when it provided for an "income tax," intended to tax only the
"income" of corporations, firms, or individuals, as that term is generally used in its common acceptation;
that is, that the income means money received, common to a person or corporation for services, interest,
or profit from investments. We do not believe that the Legislature intended that a mere increase in the

33

value of the capital or assets of a corporation, firm, or individual, should be taxed as "income." Such
property can be reached under the ordinary form of taxation.
Mr. Justice Pitney, in the case of Eisner vs. Macomber supra, said in discussing the difference between
"capital" and "income": "That the fundamental relation of 'capital' to 'income' has been much discussed by
economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former
depicted as a reservoir supplied from springs; the latter as the outlet stream, to be measured by its flow
during a period of time." It may be argued that a stockholder might sell the stock dividend which he had
acquired. If he does, then he has received in fact, an income and such income, like any other profit which
he realizes from the business, is an income and he may be taxed thereon.
There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock
dividends declared, as in the present case. The one is a disbursement to the stockholder of accumulated
earnings, and the corporation at once parts irrevocably with all interest thereon. The other involves no
disbursement by the corporation. It parts with nothing to the stockholder. The latter receives, not an actual
dividend, but certificate of stock which simply evidences his interest in the entire capital, including such as
by investment of accumulated profits has been added to the original capital. They are not income to him,
but represent additions to the source of his income, namely, his invested capital. (De Koven vs. Alsop, Ill.,
309; 63 L. R. A., 587.) Such a person is in the same position, so far as his income is concerned, as the
owner of a young domestic animal, one year old at the beginning of the year, which is worth P50 and,
which, at the end of the year, and by reason of its growth, is worth P100. The value of his property has
increased, but has he had an income during the year? It is true that he had taxable property at the
beginning of the year of the value of P50, and the same taxable property at another period, of the value of
P100, but he has had no income in the common acceptation of that word. The increase in the value of the
property should taken account of on the tax duplicate for the purpose of ordinary taxation, but not as
income for he has had none.
The question whether stock dividends are income, or capital, or assets has frequently come before the
courts in another form in cases of inheritance. A is a stockholder in a large corporation. He dies leaving a
will, by the terms of which he gives to B during his lifetime the "income" from said stock, with a further
provision that C shall, at B's death, become the owner of his share in the corporation. During B's life the
corporation issues a stock dividend. Does the stock dividend belong to B as an income, or does it finally
belong to C as a part of his share in the capital or assets of the corporation, which had been left to him as
a remainder by A? While there has been some difference of opinion on that question, we believe that a
great weight of authorities hold that the stock dividend is capital or assets belonging to C and not an
income belonging to B. In the case of D'Ooge vs. Leeds (176 Mass., 558, 560) it was held that stock
dividends in such cases were regarded as capital and not as income. (Gibbons vs. Mahon, 136 U. S., 549.)
In the case Gibbons vs. Mahon, supra, Mr. Justice Gray said: "The distinction between the title of a
corporation, and the interest of its members or stockholder in the property of the corporation, is familiar
and well settled. The ownership of that property is in the corporation, and not in the holders of shares of its
stock. The interest of each stockholders consist in the right to a proportionate part of the profits whenever
dividends are declared by the corporation, during its existence, under its charter, and to a like proportion of
the property remaining, upon the termination or dissolution of the corporation, after payment of its debts."
(Minot vs. Paine, 99 Mass., 101; Greff vs. Equitable Life Assurance Society, 160 N. Y., 19.)
In the case of DeKoven vs. Alsop (205 Ill., 309; 63 L. R. A., 587) Mr. Justice Wilkin said: "A dividend is
defined as 'a corporate profit set aside , declared, and ordered by the directors to be paid to the
stockholders on demand or at a fixed time. Until the dividend is declared, these corporate profits belong to
the corporation, not to the stockholders, and are liable for corporate indebtedness.'"
34

There is a clear distinction between an extraordinary cash dividend, no matter when earned, and stock
dividends declared. The one is a disbursement to the stockholders of accumulated earning, and the
corporation at once parts irrevocably with all interest therein. The other involves no disbursement by the
corporation. It parts with nothing to the stockholders. The latter receives, not an actual dividend, but
certificates of stock which evidence in a new proportion his interest in the entire capital. When a cash
dividend is declared and paid to the stock holders, such cash dividend is declared and paid to the
stockholder, such cash becomes the absolute property of the stockholder and cannot be reached by the
creditors of the corporation in the absence of fraud. A stock dividend, however, still being the property of
the corporation, and not of the stockholder, it may be reached by an execution against the corporation, and
sold as a part of the property of the corporation. In such a case, if all of the property of the corporation is
sold, then the stockholder certainly could not be charged with having received an income by virtue of the
issuance of the stock dividend. Until the dividend is declared and paid, the corporate profits still belong to
the corporation, not to the stockholders, and are liable for corporate indebtedness. The rule is well
established that cash dividends, whether large or small, are regarded as "income" and all stock dividends,
as capital or assets. (Cook on Corporations, Chapter 32, secs. 534, 536; Davis vs. Jackson, 152 Mass., 58;
Mills vs. Britton, 64 Conn., 4;5 Am. and Eng. Encycl. of Law, 2d ed., p. 738.)
If the ownership of the property represented by a stock dividend is still in the corporation and not in the
holder of such stock, then it is difficult to understand how it can be regarded as income to the stockholder
and not as a part of the capital or assets of the corporation. (Gibbons vs. Mahon, supra.) The stockholder
has received nothing but a representation of an interest in the property of the corporation and, as a matter
of fact, he may never receive anything, depending upon the final outcome of the business of the
corporation. The entire assets of the corporation may be consumed by mismanagement, or eaten up by
debts and obligations, in which case the holder of the stock dividends will never have received an income
from his investment in the corporation. A corporation may be solvent and prosperous today and issue stock
dividends in representation of its increased assets, and tomorrow be absolutely insolvent by reason of
changes in business conditions, and in such a case the stockholder would have received nothing from his
investment. In such a case, if the holder of the stock dividend is required to pay an income tax on the
same, the result would be that he has paid a tax upon an income which he never received. Such a
conclusion is absolutely contradictory to the idea of an income. An income subject to taxation under the law
must be and actual income and not a promised or prospective income.
The appellee argues that there is nothing in section 25 of Act No. 2833 which contravenes the provisions of
the Jones Law. That may be admitted. He further argues that the Act of Congress (U. S. Revenue Act of
1918) expressly authorized the Philippine Legislature to provide for an income tax. That fact may also be
admitted. But a careful reading of that Act will show that, while it permitted a tax upon income, the same
provided that income shall include gains, profits, and income derived from salaries, wages, or compensation
for personal services, as well as from interest, rent, dividends, securities, etc. The appellee emphasizes the
"income from dividends." Of course, income received as dividends is taxable as an income, but an income
from dividends" is a very different thing from a receipt of a "stock dividend." One is an actual receipt of
profits; the other is receipt of a representation of the increased value of the assets of a corporation.

In all of the foregoing arguments we have not overlooked the decisions of a few of the courts in different
parts of the world, which have reached a different conclusion from the one which we have arrived at in the
present case. Inasmuch, however, as appeals may be taken from this court to the Supreme Court of the
United States, we feel bound to follow the same doctrine announced by that court.
Having reached the conclusion, supported by the great weight of authority, that "stock dividends" are not
"income," the same cannot be taxed under that provision of Act No. 2833 which provides for a tax upon
35

income. Under the guise of an income tax, property which is not an income cannot be taxed. When the
assets of a corporation have increased so as to justify the issuance of a stock dividend, the increase of the
assets should be taken account of by the Government in the ordinary tax duplicates for the purposes of
assessment and collection of an additional tax. For all of the foregoing reasons, we are of the opinion, and
so decide, that the judgment of the lower court should be revoked, and without any finding as to costs, it is
so ordered.
||| (Fisher v. Trinidad, G.R. No. 17518, October 30, 1922)

[G.R. No. 109289. October 3, 1994.]

RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE &
JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE,respondents.
[G.R. No. 109446. October 3, 1994.]
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O.
CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R.
DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
VITUG, J p:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation
Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following
provisions of the Constitution:
"Article VI, Section 26 (1) Every bill passed by the Congress shall embrace only one subject which shall
be expressed in the title thereof."
"Article VI, Section 28 (1) The rule of the taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation."
"Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws."
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional
partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's directive,
have filed their respective memoranda.

G.R. No. 109289

36

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the
Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No.109289).
The full text of the title actually reads:
"An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal
Revenue Code, as Amended."
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as
now amended, provide:
"Section 21. Tax on citizens or residents.
xxx xxx xxx
"(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of
Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27 received
during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of
this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines
who is self-employed or practices his profession herein, determined in accordance with the following
schedule:
"Not over P10,000 3%
Over P10,000 but not over P30,000 P300 + 9% of excess over P10,000
Over P30,000 but not over P120,000 P2,100 + 15% of excess over P30,000
Over P120,000 but not over P350,000 P15,600 + P20% of excess

over P120,000

Over P350,000 P61,600 + 30% of excess over P350,000"

"SECTION 29. Deductions from gross income. In computing taxable income subject to tax under Sections
21(a), 24(a), (b) and (c); and 25 (a) (1), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax
under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the
following direct costs shall be allowed as deductions:
"(a) Raw materials, supplies and direct labor;
"(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or
practice of their profession;
"(c) Telecommunications, electricity, fuel, light and water;
"(d) Business rentals;
"(e) Depreciation;
"(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of
calamity stricken areas declared by the President; and
"(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions
which must be proven to have been incurred in connection with the conduct of a taxpayer's profession,
trade or business.
37

"For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per
cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional
expenses as the case may be."
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still
retained the net income, taxation scheme. The allowance for deductible items, it is true, may have
significantly been reduced by the questioned law in comparison with that which has prevailed prior to the
amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor
opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by
no means inconsequential, continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in the support of
the whole act, (b) to avoid surprises or even fruad upon the legislature , and (c) to fairly apprise the
people, through such publications of its proceedings as are usually made, of the subjects of
legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the law which could not have been the
intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation
"shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on corporations and partnerships. The
contention clearly forgets, however, that such a system of income taxation has long been the prevailing
rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna
Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the
standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi
Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 771).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those
who are not. With the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve
into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax
measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not
hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional
proscriptions. This stage, however, has not been demonstrated to have been reached within any
appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when
38

there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No
such transgression is so evident to us.

G.R No 109446
The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.
The questioned regulation reads:
"Sec. 6 General Professional Partnership The general professional partnership (GPP) and the partners
comprising the GPP are covered by R.A. No. 7496. Thus, in determining the net profit of the partnership,
only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses
paid or incurred by partners in their individual capacities in the practice of their profession which are not
reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his
gross income."

The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable
Hernando B. Perez, minority floor leader of the House of the Representatives, in the latter's privilege
speech by way of commenting on the questioned implementing regulation of public respondents following
the effectivity of the law, thusly:
"'MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression on this bill. Do we speak here
of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an
income tax return?
'MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.'
"(See Deliberations on H.B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours)
"'Other deliberations support this position, to wit:
'MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned and to make collection of taxes equitable?
'MR. PEREZ. That is correct, Mr. Speaker.'
"(Id. at 6:40 P.M.; Emphasis ours)
"In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:
"'This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect
to individuals and professionals.' (Emphasis ours)"
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and partners in
general professional partnerships. The fact of the matter is that a general professional partnership, unlike
an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject
to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the
39

professional partnership, which is tax exempt, but on the partners themselves in their individual capacity
computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not
been amended at all by Republic Act 7496, is explicit:
"SECTION 23. Tax liability of members of general professional partnerships. (a) Persons exercising a
common profession in general partnership shall be liable for income tax only in their individual capacity,
and the share in the net profits of the general professional partnership to which any taxable partner would
be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.
"(b) In determining his distributive share in the net income of the partnership, each partner
"(1) Shall take into account separately his distributive share of the partnership's income, gain, loss,
deduction, or credit to the extend provided by the pertinent provisions of this Code, and
"(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of
the gross income undiminished by his share of the deductions."
There is, then and now, no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax
on passive investment income, under the present income tax system all individuals deriving income from
any source whatsoever are treated in almost invariably the same manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No.
7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as only forming part of, and subject
to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code.
To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of
residence, and resident aliens subject to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base (that can subject non-resident aliens
and foreign corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under
Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within
the context of, and so legally contemplated as, corporations. Except for few variances, such as in the
application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to
both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the
discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A general professional partnership is
such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file
an income tax return [mainly for administration and data]), are liable for the payment of income tax in
their individual, capacity computed their respective and distributive shares of profits. In the determination
of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under
40

the Tax Code on income taxation, the general professional partnership is deemed to be no more than a
mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of
such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable
to all individual income taxpayers on their non-compensation income. There is no evident intention of the
law, either before or after the amendatory legislation, to place in an unequal footing or in significant
variance the income tax treatment of professionals who practice their respective professions individually
and of those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
||| (Tan v. Del Rosario, Jr., G.R. No. 109289, 109446, October 03, 1994)

[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 and Angel S. Dakila, Jr. for petitioner.

Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R.
Rosete for the respondents.
SYLLABUS
1. TAXATION; TAX ON CORPORATIONS INCLUDES ORGANIZATION WHICH ARE NOT NECESSARY
PARTNERSHIP. "Corporations" strictly speaking are distinct and different from "partnership". When our
Internal Revenue Code includes "partnership" among the entities subject to the tax on "corporations", it
must be allude to organization which are not necessarily "partnership" in the technical sense of the term.
2. ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE EXEMPTED FROM THE TAX UPON
CORPORATIONS. Section 24 of the Internal Revenue Code exempts from the tax imposed upon
corporations "duly registered general partnership", which constitute precisely one of the most typical form
of partnership in this jurisdiction.
3. ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER HOW ORGANIZED. As defined in section
84 (b) of the Internal Revenue Code "the term corporation includes partnership, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any
of the standards form, or conformity with the usual requirements of the law on partnerships, in order that
one could be deemed constituted for the purposes of the tax on corporations.
4. ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND ASSOCIATIONS WITHOUT LEGAL
PERSONALITY. Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporations"
includes, among the others, "joint accounts (cuenta en participacion)" and "associations", none of which
has a legal personality of its own independent of that of its members. For purposes of the tax on
corporations, our National Internal Revenue Code includes these partnership. with the exception only of
duly registered general partnership. within the purview of the term "corporations." Held: That the
petitioners in the case at bar, who are engaged in real estate transactions for monetary gain and divide the
41

same among themselves, constitute a partnership, so far as the said Code is concerned, and are subject to
the income tax for the corporation.
5. ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL PERSONALITY SUBJECT TO RESIDENCE TAX ON
CORPORATION. The pertinent part of the provision of Section 2 of Commonwealth Act No. 465 which
says: "The term corporation as used in this Act includes joint-stock company, partnership, joint account
(cuentas en participacion), association or insurance company, no matter how created or organized." is
analogous to that of Section 24 and 84 (b) of our Internal Revenue Code which was approved the day
immediately after the approval of said Commonwealth Act No. 565. Apparently, the terms "corporation" and
"Partnership" are used both statutes with substantially the same meaning, Held: That the petitioners are
subject to the residence tax corporations.
DECISION
CONCEPCION, J p:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of
a decision of the Court of Tax Appeals, the dispositive part of which reads:
"FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's
tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's
assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for
review filed by petitioners is hereby dismissed with costs against petitioners."
It appears from the stipulation submitted by the parties:
"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;
42

"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
43

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 (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 registered general 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, 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 of habitualitypeculiar
to business transactions engaged in for purposes of gain.

44

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
Code exempts from the aforementioned tax "duly registered general partnerships", which constitute
precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be
deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, "joint accounts, (cuentas en participacion)" and "associations", none
of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly registered general copartner ships" which are
possessed of the aforementioned personality have been expressly excluded by law (sections 24 and 84
[b]) from the connotation of the term "corporation." It may not be amiss to add that petitioners' allegation
to the effect that their liability in connection with the leasing of the lots above referred to, under the
management of one person even if true, on which we express no opinion tends to increase the similarity
between the nature of their venture and that of corporations, and is, therefore, an additional argument in
favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provision of said laws, such "corporations" include "associations, joint-stock
45

companies and insurance companies." However, the term "association" is not used in the aforementioned
laws
". . . in any narrow or technical sense. It includes any organization, created for the transaction of
designated affairs, or the attainment of some object, which, like a corporation, continues notwithstanding
that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a
single individual, a committee, a board, or some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or
otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsurance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is not, within the
meaning of the Code, a trust or an estate, or a partnership." (7A Merten's Law of Federal Income Taxation,
p. 788; italics ours.)
Similarly, the American Law.
". . . provides its own concept of a partnership. Under the term 'partnership' it includes not only a
partnership as known at common law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. . . .." (7A Merten's Law of Federal
Income Taxation, p. 789; italics ours.)
"The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated

organization, through or by means of which any business, financial operation, or venture is carried on, . .
.." (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; italics ours.)
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the purview of
the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:

"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:
46

"'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or
renting property or his own account as principal and holding himself out as a full or part- time dealer in real
estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year. . . .." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.
||| (Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, October 15, 1957)

[G.R. No. L-19342. May 25, 1972.]

LORENZO T. OA, and HEIRS OF JULIA BUNALES, namely: RODOLFO B. OA, MARIANO B.
OA, LUZ B. OA, VIRGINIA B. OA, and LORENZO B. OA, JR., petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney
Purificacion Ureta for respondent.
SYLLABUS
1. TAXATION; INTERNAL REVENUE CODE; CORPORATE TAX; UNREGISTERED PARTNERSHIP; FORMATION
THEREOF WHERE INCOME FROM SHARES OF CO-HEIRS CONTRIBUTED TO COMMON FUND. From the
moment petitioners allowed not only the incomes from their respective shares of the inheritance but even
the inherited properties themselves to be used by Lorenzo T. Oa (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
47

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.
DECISION
BARREDO, J p:
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as
above, holding that petitioners have constituted an unregistered partnership and are, therefore, subject to
the payment of the deficiency corporate income taxes assessed against them by respondent Commissioner
of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the
Internal Revenue Code, as amended by Section 8 of Republic Act No. 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 Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa and her five
children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the
settlement of her estate. Later, Lorenzo T. Oa, 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 Oa, were still minors when the project of
partition was approved, Lorenzo T. Oa, 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 onehalf (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.).

48

"The project of partition also shows that the estate shares equally with Lorenzo T. Oa, 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.
Oa 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. Oa,
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. Oa 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
49

"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

50

"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 Buales 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. Oa, 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. Oa 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,
51

petitioners never actually received any share of the income or profits from Lorenzo T. Oa, 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. Oa.
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. Oa, 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. Oa 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, that ergo, in all
instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into
an unregistered partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly executed in an extrajudicial
settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for
this is simple. From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his
own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making profit thereby in proportion to his share,
there can be no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in
this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that:
"The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the returns are derived," and, for
52

that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this
Court clearly differentiated the concept of partnerships under the Civil Code from that of unregistered
partnerships which are considered as "corporations" under Sections 24 and 84(b) of the National Internal
Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:

"To begin with, the tax in question is one imposed upon 'corporations', which, strictly speaking, are distinct
and different from 'partnerships'. When our Internal Revenue Code includes 'partnerships' among the
entities subject to the tax on 'corporations', said Code must allude, therefore, to organizations which
are not necessarily 'partnerships', in the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax 'duly registered general partnerships', which constitute
precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, 'the term corporation includes partnerships, no matter how created or organized.' This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be
deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b), the term
'corporation' includes, among other, 'joint accounts, (cuentas en participacion)' and 'associations', none of
which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, 'duly registered general co-partnerships' which are
possessed of the aforementioned personality have been expressly excluded by law (sections 24 and 84
[b]) from the connotation of the term 'corporation.' . . .
xxx xxx xxx
"Similarly, the American Law
'. . . provides its own concept of a partnership. Under the term 'partnership' it includes not only a
partnership as known 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
53

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
54

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.
||| (O, G.R. No. L-19342, May 25, 1972)

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

FLORENCIO REYES and ANGEL REYES, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE
and HON. COURT OF TAX APPEALS, respondents.

Jose W . Diokno and Domingo Sandoval for petitioners.

Solicitor General for respondents.
SYLLABUS
1. TAXATION; INCOME TAX ON CORPORATIONS IMPOSABLE ON PARTNERSHIP, EXCEPT DULY
REGISTERED GENERAL CO-PARTNERSHIPS. For purposes of the tax on corporations, the National
Internal Revenue Code includes partnerships, with the exception only of duly registered general copartnerships.
2. ID.; RULING IN EVANGELISTA v. COLLECTOR OF INTERNAL REVENUE APPLIED. Where petitioners
(father and son) purchased the lot and building for P835,000.00 of which they paid the sum of P375,000.00
leaving a balance of P460,000.00 representing the mortgage obligation of the vendors with the China
Banking Corporation which was assumed by petitioners; that such initial payment was shared equally by
petitioners; that administration of the building was entrusted to an administrator who collected the rents,
kept its books and records and rendered statements of accounts to petitioners, negotiated leases and made
repairs and disbursed payments; and where petitioners divided equally the income derived from the
building after deducting expenses of operation and maintenance, petitioners are not only co-owners but
partners. And since under Section 84(b) of the Revenue Code, the term corporation includes partnerships
no matter how created or organized, this qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms or in conformity with the usual requirements of the law on
partnerships. Pursuant to the same Section 84(b), the term 'corporation' includes among other, joint
accounts (cuentas en participacion) and associations, none of which has a legal personality of its own,
independent of that of its members. The lawmaker could not have regarded personality as a condition
precedent to the existence of partnerships referred to therein.
3. ID.; ID.; SLIGHT DIFFERENCES DO NOT CALL FOR A DIFFERENT RULING. In the Evangelista case the
following circumstances were found to exist: a common fund created purposely, the investment of the
same not merely in one transaction but in a series of transactions, the lots not being devoted to residential
purposes or to other personal purposes, the properties being under the management of one person with
full power to lease, collect rents, issue receipts, bring suits and that all these conditions existed for over
10 years. In the case at bar, petitioners could claim that this was only one transaction, that their intention
was to house in that building purchased their respective enterprises and to effect a division in 10 years. But
while the purchase was made in 1950, as late as 1965, or almost 15 years later, there was no allegation of
such division and the facts show that the building continued to be leased by other parties with petitioners
dividing equally the income after deducting operational expenses. Differences of such slight significance do
not call for a different ruling. They do not suffice to preclude the applicability of the Evangelista decision.
55

4. ID.; COURT OF TAX APPEALS; FINDINGS ENTITLED TO RESPECT OWING TO ITS EXPERTISE ON
SUBJECT. As a matter of principle, it is not advisable for the appellate Court to set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function,
dedicated exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or improvident exercise of its authority.
DECISION
FERNANDO, J p:
Petitioners in this case were assessed by respondent Commissioner of Internal Revenue the sum of
P46,647.00 as income tax, surcharge and compromise for the years 1951 to 1954, an assessment
subsequently reduced to P37,528.00. This assessment sought to be reconsidered unsuccessfully was the
subject of an appeal to respondent Court of Tax Appeals. Thereafter, another assessment was made
against petitioners, this time for back income taxes plus surcharge and compromise in the total sum of
P25,973.75, covering the years 1955 and 1956. There being a failure on their part to have such
assessments reconsidered, the matter was likewise taken to the respondent Court of Tax Appeals. The two
cases 1 involving as they did identical issues and ultimately traceable to facts similar in character were
heard jointly with only one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the tax liability for the years 1951 to 1954 was
reduced to P37,128.00 and for the years 1955 and 1956, to P20,619.00 as income tax due "from the
partnership formed" by petitioners. 2 The reduction was due to the elimination of surcharge, the failure to
file the income tax return being accepted as due to petitioners' honest belief that no such liability was
incurred as well as the compromise penalties for such failure to file. 3 A reconsideration of the aforesaid
decision was sought and denied by respondent Court of Tax Appeals. Hence this petition for review.
The facts as found by respondent Court of Tax Appeals, which being supported by substantial evidence,
must be respected 4 follow: "On October 31, 1950, petitioners, father and son, purchased a lot and
building, known as the Gibbs Building, situated at 671 Dasmarias Street, Manila, for P835,000.00, of which
they paid the sum of P375,000.00, leaving a balance of P460,000.00, representing the mortgage obligation
of the vendors with the China Banking Corporation, which mortgage obligations was assumed by the
vendees. The initial payment of P375,000.00 was shared equally by petitioners. At the time of the
purchase, the building was leased to various tenants, whose rights under the lease contracts with the
original owners the purchasers, petitioners herein, agreed to respect. The administration of the building
was entrusted to an administrator who collected the rents; kept its books and records and rendered
statements of accounts to the owners; negotiated leases; made necessary repairs and disbursed payments,
whenever necessary, after approval by the owners; and performed such other functions necessary for the
conservation and preservation of the building. Petitioners divided equally the income derived from the
building after deducting the expenses of operation and maintenance. The gross income from rentals of the
building amounted to about P90,000.00 annually." 5
From the above facts, the respondent Court of Tax Appeals applying the appropriate provisions of the
National Internal Revenue Code, the first of which imposes an income tax on corporations "organized in, or
existing under the laws of the Philippines, no matter how created or organized but not including duly
registered general co-partnerships (companias colectivas), . . ." 6 a term, which according to the second
provision cited, includes partnership "no matter how created or organized, . . .," 7and applying the leading
case of Evangelista v. Collector of Internal Revenue, 8 sustained the action of respondent Commissioner of
Internal Revenue, but reduced the tax liability of petitioners, as previously noted.
Petitioners maintain the view that the Evangelista ruling does not apply; for them, the situation is dissimilar.
Consequently, they allege that the reliance by respondent Court of Tax Appeals was unwarranted and the
56

decision should be set aside. If their interpretation of the authoritative doctrine therein set forth commands
assent, then clearly what respondent Court of Tax Appeals did fails to find shelter in the law. That is the
crux of the matter. A perusal of the Evangelista decision is therefore unavoidable.
As noted in the opinion of the Court, penned by the present Chief Justice, the issue was whether petitioners
are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise
known as the National Internal Revenue Code, . . ." 9 After referring to another section of the National
Internal Revenue Code, which explicitly provides that the term corporation "includes partnerships" and then
to Article 1767 of the Civil Code of the Philippines, defining what a contract of partnership is, the opinion
goes on to state that "the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary
gain and then divide the same among themselves, . . ." 10
In support of the above conclusion, reference was made to the following circumstances, namely, the
common fund being created purposely not something already found in existence, the investment of the
same not merely in one transaction but in a series of transactions; the lots thus acquired not being devoted
to residential purposes or to other personal uses of petitioners in that case; such properties having been
under the management of one person with full power to lease, to collect rents, to issue receipts, to bring
suits, to sign letters and contracts and to endorse notes and checks; the above conditions having existed
for more than 10 years since the acquisition of the above properties; and no testimony having been
introduced as to the purpose "in creating the set up already adverted to, or on the causes for its continued
existence." 11 The conclusion that emerged had all the imprint of inevitability. Thus: "Although, taken
singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective
effect of these circumstances is such as to leave no room for doubt on the existence of said intent in
petitioners herein." 12

It may be said that there could be a differentiation made between the circumstances above detailed and
those existing in the present case. It does not suffice though to preclude the applicability of the Evangelista
decision. Petitioners could harp on these being only one transaction. They could stress that an affidavit of
one of them found in the Bureau of Internal Revenue records would indicate that their intention was to
house in the building acquired by them the respective enterprises, coupled with a plan of effecting a
division in 10 years. It is a little surprising then that while the purchase was made on October 31, 1950 and
their brief as petitioners filed on October 20, 1965, almost 15 years later, there was no allegation that such
division as between them was in fact made. Moreover, the facts as found and as submitted in the brief
made clear that the building in question continued to be leased by other parties with petitioners dividing
"equally the income . . . after deducting the expenses of operation and maintenance . . . " 13 Differences
of such slight significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax Appeals acted correctly. It yielded to the command of an
authoritative decision; it recognized its binding character. There is clearly no merit to the second error
assigned by petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a partnership subject to income tax as a corporation under the
57

National Internal Revenue Code is likewise untenable. In their discussion in their brief of this alleged error,
stress is laid on their being co-owners and not partners. Such an allegation was likewise made in the
Evangelista case.
This is the way it was disposed of in the opinion of the present Chief Justice: "This pretense was correctly
rejected by the Court of Tax Appeals." 14 Then came the explanation why: "To begin with, the tax in
question is one imposed upon 'corporations', which, strictly speaking, are distinct and different from
'partnerships'. When our Internal Revenue Code includes 'partnerships' among the entities subject to the
tax on 'corporations', said Code must allude, therefore, to organizations which arenot
necessarily 'partnerships', in the technical sense of the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax 'duly registered general partnerships', which constitute
precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, 'the term corporation includes partnerships, no matter how created or organized.' This
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be
deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term
'corporation' includes, among other, 'joint accounts, (cuentas en participacion)' and 'associations',none of
which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the partnerships
therein referred to. In fact, as above stated, 'duly registered general co-partnerships which are
possessed of the aforementioned personality have been expressly excluded by law (sections 24 and 84
[b]) from the connotation of the term 'corporation'." 15 The opinion went on to summarize the matter
aptly: "For purposes of the tax on corporations, our National Internal Revenue Code, include these
partnerships with the exception only of duly registered general co-partnerships within the purview of
the term 'corporation'. It is, therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for corporations." 16
In the light of the above, it cannot be said that the respondent Court of Tax Appeals decided the matter
incorrectly. There is no warrant for the assertion that it failed to apply the settled law to uncontroverted
facts. Its decision cannot be successfully assailed. Moreover, an observation made in Alhambra Cigar &
Cigarette Manufacturing Co. v. Commissioner of Internal Revenue, 17 is well-worth recalling. Thus: "Nor as
a matter of principle is it advisable for this Court to set aside the conclusion reached by an agency such as
the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject, unless, as did not
happen here, there has been an abuse or improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of Tax Appeals ordering petitioners "to pay the sums of
P37,128.00 as income tax due from the partnership formed by herein petitioners for the years 1951 to 1954
and P20,619.00 for the years 1955 and 1956 within thirty days from the date this decision becomes final,
plus the corresponding surcharge and interest in case of delinquency," is affirmed. With costs against
petitioners.
||| (Reyes v. Commr., G.R. No. L-24020-21, July 29, 1968)

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

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

Guillermo B. Reyes for appellants.

58

Solicitor-General Tuason for 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.
DECISION
IMPERIAL, J p:
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
59

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 D15, 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;
60

"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:
61

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

62

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 copartnerships (compaias 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
63

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.
||| (Gatchalian v. Collector of Internal Revenue, G.R. No. 45425, April 29, 1939)

[G.R. No. 78133. October 18, 1988.]

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents.
SYLLABUS
1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party to transfer or assign the whole
property.
2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR NOT LIABLE FOR THE
PAYMENT THEREOF. In the present case, there is clear evidence ofco-ownership between the
64

petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They shared in the gross profits as co-owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent commissioner proposes. As petitioners have
availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
DECISION
GANCAYCO, J p:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition. prLL
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land were
sold by petitioners to Erlinda Reyes and Maria Samson on March 19, 1970. Petitioners realized a net profit
in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in
the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by
availing of the tax amnesties granted in the said years. LLphil
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes
for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed
under Section 24, both of the National Internal Revenue Code; 1 that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by
petitioners relieved petitionersof their individual income tax liabilities but did not relieve them from the tax
liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income
tax assessed. Cdpr
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No.
3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista, 3 an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that
imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners, there
was no adequate basis for the conclusion that they thereby formed an unregistered partnership which
made them liable for corporate income tax under the Tax Code.
65

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
"A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN
OPPOSITION THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED, THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW
THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE
SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY." (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage their
properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or
leased to various tenants for several years and they gained net profits from the rental income. Thus, the
Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from
them.
In resolving the issue, this Court held as follows:
"The issue in this case is whether petitioners are subject to the tax on corporations provided for in section
24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to
the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on
corporations, the issue hinges on the meaning of the terms 'corporation' and 'partnership' as used in
sections 24 and 84 of said Code, the pertinent parts of which read:
'Sec. 24. Rate of the tax on corporations. There shall be levied, assessed, collected, and paid annually
upon the total net income received in the preceding taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (companias colectivas), a tax upon such income equal to
the sum of the following: . . .'
'Sec. 84(b). The term 'corporation' includes partnerships, no matter how created or organized, jointstock
companies, joint accounts (cuentas en participation), associations or insurance companies, but does not
include duly registered general co-partnerships (companias 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
66

have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary
gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property inherited by
them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2,
1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was
soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days
later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the conservation

and preservation of the aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners
herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do
not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon
Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have
been handled as if the same belonged to a corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15)
years since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became
the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued existence. They did not even try to offer an
explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership,
the collective effect of these circumstance is such as to leave no room for doubt on the existence of said
intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases
cited by petitioners herein, and, hence, those cases are not in point." 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/or his representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common fund or
even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose ofgain was present.
67

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make
any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was
only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new
purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The
character of habituality peculiar to business transactions for the purpose ofgain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
"I wish however to make the following observation: Article 1769 of the new Civil Code lays down the rule
for determining when a transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;
'(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or copossessors 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, and the freedom to transfer or assign any interest in the property by one
with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635636)
"It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real

estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a
partnership.
'Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to their
respective contribution, are not thereby rendered partners. They have no common stock or capital, and no
community of interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Floyd D. Mechem, 2nd Ed., section 83, p. 74.)
'A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an
agreement to share the profits and losses on the sale of land create a partnership; the parties are only
tenants in common.' (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
'Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as
tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled
to share in plaintiff's commission, no partnership existed as between the three parties, whatever their
relation may have been as to third parties.' (Magee vs. Magee, 123 N.E. 673, 233 Mass. 341.)
'In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally

participating in both profits and losses; (c) and such a community of interest, as far as third persons are
68

concerned as enables each party to make contract, manage the business and dispose of the whole
property.' Municipal Paving Co. vs. Herring, 150 P. 1067, 50 III 470.)
'The common ownership of property does not itself create a partnership between the owners, though they
may use it for the purpose of making gains; and they may, without becoming partners, agree among
themselves as to the management, and use of such property and the application of the proceeds
therefrom.' (Spurlock vs. Wilson, 142 S.W. 363, 160 No. App. 14.)" 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co-owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as
the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with assets
that can be held liable for said deficiency corporate income tax, then petitioners can be held individually
liable as partners for this unpaid obligation of the partnership. 7 However, as petitioners have
availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of Tax
Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered
relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
||| (Pascual v. Commr., G.R. No. 78133, October 18, 1988)

[G.R. No. L-46029. June 23, 1988.]

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners, vs. COMMISSIONER
OF INTERNAL REVENUE, respondent.
DECISION
GANCAYCO, J p:
The issue posed in this petition is the income tax liability of a foreign shipping corporation which called on
Philippine ports to load cargoes for foreign destination on two occasions in 1963 and 1964, respectively,
and which collected freight fees on these transactions.
From March 27 to April 30, 1963, MV "Amstelmeer," and from September 24 to October 28, 1964, MV
"Amstelkroon," both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine
ports to load cargoes for foreign destination. The freight fees for these transactions were paid abroad in the
amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal
69

Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax
appears to have been paid by petitioner N.V. Reederij "AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding income tax
returns for and in behalf of the former under Section 15 of the National Internal Revenue Code. Applying
the then prevailing market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V.
Reederij "Amsterdam" for 1963 and 1964 amounted to P382,882.50 and P535.052.00, respectively. On
June 30, 1967, respondent Commissioner assessed said petitioner in the amounts of P193,973.20 and
P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as a non-resident foreign
corporation not engaged in trade or business in the Philippines under Section 24 (b) (1) of the Tax
Code. LibLex
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the
Philippines, on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the
aforementioned vessels computed at the exchange rate of P2.00 to US$1.00 1 and paid the tax thereon in
the amount of P1,835.52 and P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section
37 (B) (e) of the National Internal Revenue Code and Section 163 of Revenue Regulations No. 2. On the
same two dates, petitioner Royal Interocean Lines as the husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the abovementioned assessment made by the respondent
Commissioner which protest was denied by said respondent in a letter dated March 3, 1969: On March 31,
1969, petitioners filed a petition for review with the respondent Court of Tax Appeals praying for the
cancellation of the subject assessment. After due hearing, the respondent court, on December 1, 1976,
rendered a decision modifying said assessments by eliminating the 50% fraud compromise penalties
imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but this was denied
by the respondent court. Hence, this petition for review where petitioners raised the following issues:
"A. WHETHER N.V. REEDERIJ 'AMSTERDAM,' NOT HAVING ANY OFFICE OR PLACE OF BUSINESS IN THE
PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE OF LOADING
CARGOES ONLY TWICE ONE IN 1963 AND ANOTHER IN 1964 SHOULD BE TAXED AS A FOREIGN
CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (1)
OF THE TAX CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION ENGAGED IN TRADE OR
BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO SECTION 37 (e) OF THE
SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM" SHOULD BE
CONVERTED INTO PHILIPPINE PESOS AT THE OFFICIAL RATE OF P2.00 TO US$1.00, OR AT P3.90 TO
US$1.00."
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij "AMSTERDAM" is a
non-resident foreign corporation because it allegedly disregarded Section 163 of Revenue Regulations No. 2
(providing for the determination of the net income of foreign corporations doing business in the Philippines)
and in holding that the foreign exchange receipts of said petitioner for purposes of computing its income
tax should be converted into Philippine pesos at the rate of P3.90 to US$1.00 instead of P2.00 to US$1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business in
the Philippines. It does not have a branch office in the Philippines and it made only two calls in Philippine
ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in
trade or business, its business transactions must be continuous. A casual business activity in the Philippines
by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the
Philippines for income tax purposes.
70

The Court reproduces with approval the following disquisition of the respondent court
"A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax, corporations
are classified into (a) domestic corporations and (b) foreign corporations. (Sec. 24(a) and (b), Tax Code.)
Foreign corporations are further classified into (1) resident foreign corporations and (2) non-resident
foreign corporations. (Sec. 24(b) (1) and (2). Tax Code.) A resident foreign corporation is a foreign
corporation engaged in trade or business within the Philippines or having an office or place of business
therein (Sec. 84(g), Tax Code) while a non-resident foreign corporation is a foreign corporation not
engaged in trade or business within the Philippines and not having any office or place of business therein.
(Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and without the Philippines, but a foreign
corporation is taxed only on its income from sources within the Philippines. (Sec. 24(a), Tax Code; Sec. 16,
Rev. Regs. No. 2.) However, while a foreign corporation doing business in the Philippines is taxable on
income solely from sources within the Philippines, it is permitted to claim deductions from gross income but
only to the extent connected with income earned in the Philippines (Secs. 24(b) (2) and 37, Tax Code.) On
the other hand, foreign corporations not doing business in the Philippines are taxable on income 'from all
sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical or casual
gains, profits and income and capital gains.' The tax is 30% (now 35%) of such gross income. (Sec. 24 (b)
(1), Tax Code.)
At the time material to this case, certain corporations were given special treatment, namely, building and
loan associations operating as such in accordance with Section 171 of the Corporation Law, educational
institutions, domestic life insurance companies and foreign life insurance companies doing business in the
Philippines. (Sec. 24(a) & (c), Tax Code.) It bears emphasis, however, that foreign life insurance companies
which were not doing business in the Philippines were taxable as other foreign corporations not authorized
to do business in the Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij 'Amsterdam' is a non-resident foreign corporation,
organized and existing under the laws of The Netherlands with principal office in Amsterdam and not
licensed to do business in the Philippines. (pp. 8-81, CTA records.) As a non-resident foreign corporation, it
is thus a foreign corporation, not engaged in trade or business within the Philippines and not having any
office or place of business therein. (Sec. 84(h), Tax Code.) As stated above, it is therefore taxable on
income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical
or casual gains, profits and income and capital gains, and the tax is equal to thirty per centum of such
amount, under Section 24(b) (1) of the Tax Code. The accent is on the words 'of such amount.'
Accordingly, petitioner N. V. Reederij 'Amsterdam' being a non-resident foreign corporation, its taxable
income for purposes of our income tax law consists of its gross income from all sources within the
Philippines. prLL
The law seems clear and specific. It thus calls for its application as worded as it leaves no leeway for
interpretation. The applicable provision imposes a tax on foreign corporations falling under the classification
of non-resident corporations without any exceptions or conditions, unlike in the case of foreign corporations
engaged in trade or business within the Philippines which contained (at the time material to this case) an
exception with respect to foreign life insurance companies. Adherence to the provision of the law, which
specifies and determines the taxable income of, and the rate of income tax applicable to, non-resident
foreign corporations, without mentioning any exceptions, would therefore lead to the conclusion that
petitioner N.V. Reederij 'Amsterdam' is subject to income tax on gross income from all sources within the
Philippines."
71

A foreign corporation engaged in trade or business within the Philippines, or which has an office or place of
business therein, is taxed on its total net income received from all sources within the Philippines at the rate
of 25% upon the amount but which taxable net income does not exceed P100,000.00, and 35% upon the
amount but which taxable net income exceeds P100,000.00. 2 On the other hand, a foreign corporation not
engaged in trade or business within the Philippines and which does not have any office or place of business
therein is taxed on income received from all sources within the Philippines at the rate of 35% of the gross
income. 3

Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section 163
of the Income Tax Regulations but these provisions refer to a foreign corporation engaged in trade or
business in the Philippines and not to a foreign corporation not engaged in trade or business in the
Philippines like petitioner-ship-owner herein. Thus, the respondent court aptly ruled:
"It must be stressed, however, that Section 37 (e) of the Code, as implemented by Section 163 of the
Regulations, provides the rule of the determination of the net income taxable in the Philippines of a foreign
steamship company doing business in the Philippines. To assure that non-resident foreign steamship
companies not engaged in business in the Philippines and not having any office or place of business herein
are not covered therein, the regulations explicitly and clearly provide that 'the net income of a foreign
steamship company doing business in or from this country is ascertained,' under the formula contained
therein, 'for the purpose of the income tax.' The reason is easily discernible. As stated above, the taxable
income of non-resident foreign corporations consists of its gross income from all sources within the
Philippines. Accordingly, a foreign steamship corporation derives income partly from sources within and
partly from sources without the Philippines if it is carrying on a business of transportation service between
points in the Philippines and points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.) Only
then does Section 37 (e) of the Tax Code, as implemented by Section 163 of the Regulations, apply in
computing net income subject to tax. There is no basis therefore for an assertion 'that Section 37 (e) does
not distinguish between a foreign corporation engaged in business in the Philippines and a foreign
corporation not engaged in business in the Philippines.'" (p. 84, C.T.A. records.) (Decision, pp. 11-12.)
The conversion rate of P2.00 to US$1.00 which petitioners claim should be applicable to the income of
petitioners for income tax purposes instead of P3.90 to $1.00 is likewise untenable. The transactions
involved in this case are for the taxable years 1963 and 1964. Under Rep. Act no. 2609, the monetary
board was authorized to fix the legal conversion rate for foreign exchange. The free market conversion rate
during those years was P3.90 to US$1.00. LLpr
'This conversion rate issue was definitely settled by this Court in the case of Commissioner of Internal
Revenue vs. Royal Interocean Lines and the Court of Tax Appeals,4 to wit:
"It should be noted that on July 16, 1959, the policy incorporated in Circular No. 20 and implemented in
subsequent circulars was relaxed with the enactment ofRepublic Act No. 2609 which directed the monetary
authorities to take steps for the adoption of a four-year program of gradual decontrol, during which the
Monetary Board, with the approval of the President, could and did fix the conversion rate of the Philippine
peso to the US dollar at a ratio other than that prescribed in Section 48 of Republic Act 265. During the
period involved in the case at bar, the free market conversion rate ranged from P3.47 to P3.65 to a US
dollar at which rate the freight fees in question were computed in the contested assessment. Inasmuch as
said fees were revenues derived from 'foreign exchange' transactions, it follows necessarily that the
petitioner was fully justified in computing the taxpayer's receipts at said free market rates.
xxx xxx xxx
72

"The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is
anchored, refers to transactions that took place before the approval of Republic Act 2609 on July 16, 1959
when the only legal rate of exchange obtaining in the Philippines was P2 to US$1, and all foreign exchange
had to be surrendered to the Central Bank subject to its disposition pursuant to its own rules and
regulations. Upon the other hand, the present case refers to transactions that took place during the
effectivity of Republic Act 2609 when there was, apart from the parity rate, a legal free market conversion
rate for foreign exchange transactions, which rate had been fixed in open trading, such as those involved in
the case at bar."
Indeed, in the course of the investigation conducted by the Commissioner on the accounting records of
petitioner Royal Interocean Lines, it was verified that when said petitioner paid its agency fees for services
rendered as husbanding agent of the said vessels, it used the conversion rate of P3.90 to US$1.00. 5 It is
now estopped from claiming otherwise in this case.
WHEREFORE, the petition is DENIED with costs against petitioners. This decision is immediately executory
and no extension of time to file motion for reconsideration shall be entertained.
SO ORDERED.
||| (N.V. Reederij "Amsterdam" v. Commr., G.R. No. L-46029, June 23, 1988)

73