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.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
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 Code and, in
G.R. No. 109446, the validity of Section 6, 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:
1
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 taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without
due process of law, nor shall any person be denied the equal protection of
the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93,
argue that public respondents have exceeded their rule-making authority in applying SNIT
to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the
Court's directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No.
7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income
Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No.
109289).
The full text of the title actually reads:
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:
Sec. 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 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 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
2
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.
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 support of the whole act, (b) to avoid surprises or even fraud 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 52).
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
3
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 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 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 of 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 professional partnership, which is tax exempt, but on the partners themselves in their
4
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:
Sec. 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 extent 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. 4Here, 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 on their respective and distributive shares of profits. In
the determination of the tax liability, a partner does so as an individual, and there is no
choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-
through entity in the generation of income by, and the ultimate distribution of such income
to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above
standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their 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.
5
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
VISAYAN ELECTRIC COMPANY and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General for petitioner.
Jesus P. Garcia for respondents.
SANCHEZ, J.:
The problems cast in legal setting in this petition for review 1 of the judgment of the Court of
Tax Appeals are:
Is Visayan Electric Company liable for deficiency income tax on dividends from the
stock investment of its employees' reserve fund for pensions?
Is it also liable for 25% surcharge on alleged late payment of franchise tax?
Respondent company is the holder of a legislative franchise, Act 3499 of the Philippine
Legislature, to operate and maintain an electric light, heat, and power system in the City of
Cebu, certain municipalities in the Province of Cebu, and other surrounding places.
In a board of directors' meeting held on March 14, 1949, respondent company established a
pension fund, known as the "Employees' Reserve for Pensions." Said fund is for the benefit
of its "present and future" employees, in the event of retirement, accident or disability. Every
month thereafter an amount has been set aside for this purpose. It is taken from the gross
operating receipts of the company. This reserve fund was later invested by the company in
stocks of San Miguel Brewery, Inc., for which dividends have been regularly received. But
these dividends were not declared for tax purposes.
It was in a letter dated August 9, 1957 that the Auditor General gave notice that as the
company has retained full control of the fund, therefore, the dividends are not tax exempt;
but that such dividends may be excluded from gross receipts for franchise tax purposes,
provided the same are declared for income tax purposes.
In pursuance of the above letter, the Provincial Auditor of Cebu allowed the company the
option to declare the dividends either as part of the company's income for income tax
purposes or as part of its income for franchise tax purposes. The company elected the
latter.2
The Revenue Examiner of Cebu, however, conducted a separate investigation for the
Bureau of Internal Revenue. His report dated September 17, 1959 likewise revealed that
the "company itself is the custodian or has the complete control of the fund." That report
disagreed with the action of the Provincial Auditor, instead considered the dividends as
subject to corporate income tax under Section 24 of the National Internal Revenue Code.
Said report further disclosed that: (a) during the years 1957, 1958 and 1959, some
payments of the franchise tax were made after fifteen days although within twenty days
 of the month following the end of each calendar quarter, allegedly contrary to Section
259 of the Tax Code, which imposes a 25% surcharge if the franchise faxes "remain unpaid
for fifteen days from and after the date on which they must be paid"; and (b) from 1954 to
1959, the company had not paid additional residence tax imposed by Section 2 of Act 465.
With the foregoing report as basis, the Commissioner of Internal Revenue, in two letters of
demand dated September 7 and 15, 1960, assessed the following amounts against the
company: (a) P2,443.30 representing deficiency income tax for the years 1953 to 1958, plus
interest and 50% surcharge; (b) P3,850.00 as additional residence tax from 1954 to 1959;
and (c) P35,419.05 as 25% surcharge for late payment of franchise taxes for the years
1957, 1958 and 1959. Reconsideration having been denied, the company went to the Court
of Tax Appeals on petition for review.
On January 31, 1964, the Court of Tax Appeals sustained the correctness of the additional
residence tax assessments3 but freed the company from liability for deficiency income tax
and the 25% surcharge for late payment of franchise taxes.
It is now the turn of the Commissioner of Internal Revenue to appeal to this Court.
1. Admittedly, the investment of the fund in shares of stocks of the San Miguel Brewery, Inc.
is not a part of respondent company's business. Neither is it necessary or incidental to its
operation under its franchise. And yet those dividends were assessed by petitioner as part
of the income of respondent company. The tax court joins petitioner in this, but applied the
following provision in Section 8, Act 3499 the company's legislative franchise in
holding that the dividends are not subject to income tax, viz.:
SEC. 8. The grantee shall pay the same taxes as are now or may hereafter be
required by law from other persons, on its real estate, buildings, plant, machinery,
and other personal property, except property declared exempt in this section. In
consideration of the franchise and rights hereby granted, the grantee shall pay into
the municipal treasury of each municipality in which it is supplying electricity to the
public under this franchise, a tax equal to two per centum of the gross earnings for
electric current sold under this franchise in each of the respective
municipalities. Said percentage shall be due and payable quarterly and shall be in
lieu of all taxes of any kind levied, established or collected by any authority
whatsoever, now or in the future, on its poles, wires, insulators, switches,
transformers and other structures, installations, conductors and accessories, placed
in and over the public streets, avenues, roads, thoroughfares, squares, bridges, and
other places and on its franchises, rights, privileges, receipts, revenues and profits,
from which taxes the grantee is hereby expressly exempted.4
We perceive incorrectness of this approach by the Tax Court. What is envisioned in the
statute granting exemption, so far as is pertinent to this case, is the last underscored portion
thereof which speaks of its receipts, revenues and profits, "from which taxes the grantee is
hereby expressly exempted." The heavy accent is on the word its. Plain import of this word,
taken in context, is that the receipts, revenues and profits, which could be tax-exempt under
6
the statute, must be the company's not somebody else's. No doubt this provision should
not be broadened so as to include situations which by fail intendment are excluded
therefrom. To do so is to take too loose a view of the statute.
The disputed income are not receipts, revenues or profits of the company. They do not go to
the general fund of the company. They are dividends from the San Miguel Brewery, Inc.
investment which form part of and are added to the reserve pension fund which is solely for
the benefit of the employees,5 "to be distributed among the employees."6
Not escaping notice is that by the resolution of respondent company's board and the setting
aside of monthly amounts from its gross operating receipts for that fund, said company was
merely acting, with respect to such fund, as trustee for its employees. For, indeed, the
intention to establish a trust in favor of the employees is clear. A valid express trust has thus
been created.7 And, for tax purposes, the employees' reserve fund is a separate taxable
entity.8 Respondent company then, while retaining legal title and custody 9 over the property,
holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the
absence of any condition therein which would, in effect, destroy the intention to create a
trust.10
Given the fact that the dividends are returns of the trust estate and not of the grantor
company, we must say that petitioner misconceived the import of the law when he assessed
said dividends as part of the income of the company. Similarly, the tax court should not have
considered them at all as the company's "receipts, revenues and profits" which are exempt
from income tax.
2. As we look back at the resolution creating the employees' reserve fund and having in
mind the company's admission that it is "solely for the benefit of the employees" and that
the company is holding said fund "merely as trustee of its employees," 11 we reach the
conclusion that the fund may not be diverted for other purposes, and that the trust so
created is irrevocable. For, really nothing in respondent company's acts suggests that it
reserved the power to revoke that fund or for that matter appropriate it for itself. The trust
binds the company to its employees. The trust created is not therefore a revocable trust a
provided in Section 59 of the Tax Code.12 Nor is it a trust contemplated in Section 60, the
income from which is for the benefit of the grantor.13
This state of facts calls for inquiry into the applicability of Section 56 of the Tax Code, which
in part reads:
SEC. 56. Imposition of tax (a) Application of tax. The taxes imposed by this
Title upon individuals shall apply to the income of estate or of any kind of property
held in trust, including
(1) Income accumulated in trust for the benefit of unborn or unascertained person or
persons with contingent interests and income accumulated or held for future
distribution under the terms of the will or trust;
xxx xxx xxx
(c) Computation and payment
 (1) In general. The tax shall be computed upon the net income of the estate or
trust and shall be paid by the fiduciary, except as provided in Section fifty-nine
(relating to revocable trust) and section sixty (relating to income for the benefit of
the grantor);
xxx xxx x x x14
Of interest here is that an amendment to Section 56 Republic Act 1983, 15 approved on
June 22, 1957 singles out employees' trust for tax exemption in the following language:
(b) Exception. The tax imposed by this Title shall not apply to employees' trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if contributions are made to the trust
by such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other then for the exclusive benefit of
his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee. 16
A dig into the legislative history unearths the fact that this exemption in Republic Act 1983
was conceived in order to encourage the formation of pension trust systems for the benefit
of laborers and employees outside the Social Security Act.17
Understandably, the second requirement in paragraph (b) of Section 56 of the Tax Code as
it was inserted by Republic Act 1983 non-diversion of fund was written into the statute
the better to insure that the trust fund and its income will be used "for the exclusive benefit"
of the employees.
Of importance is the employment of the word plan as it is applied to pension set forth in the
first part of paragraph (b) aforesaid. Worth mentioning is that a sizeable portion of our Tax
Code has been lifted from the United States Internal Revenue Code. To be sure, Republic
Act 1983 which amends Section 56 of our Tax Code is substantially similar in terms to
Section 165 of the United States Internal Revenue Code of 1939. 18 It is thus permissible for
this Court to look into the interpretations of the American counterpart in an effort to
determine the congressional scheme in exempting employees' trust from taxation.
In the American jurisdiction, the word plan is emphasized. To qualify for exemption, the
employees' trust must refer to a definite program, scheme or plan. It must be set up in good
faith. It must be acturially sound. Under such plan, employees generally are to be extended
retirement and pension benefits. But why? The fund is not thereafter to be controlled or
used for the benefit of the company in any way.19 A trust device used to disguise added
compensation to the shareholders and officers of a company and thereby avoid present
payment of income tax thereon instead of providing for future security of the employees
7
in general will not qualify under the exemption.20 Hubbell vs. Commissioner of Internal
Revenue, 150 F. 2d 516, 161 A.L.R. 764, 773, which was decided under the 1939 version,
confirms this view. There, the United States Circuit Court of Appeals took into account the
direction of the amendments in construing congressional purpose, and held that the 1942
amendment which added the requirement of non-discrimination in favor of shareholders,
officials, or highly-compensated employees presents no apparent change in congressional
purpose: "to insure that ... pension ... plans are operated for the welfare of employees in
general, and to prevent the trust device from being used for the benefit of shareholders,
officials, or highly paid employees...."
This is not to say, of course, that the employees' trust fund established by private
respondent is a device calculated to unserve its purpose and serve tax evasion.
Unquestionably, the trust fund was created in good faith. It is meant as it was intended to
mean for the employees' welfare.
But wanting are sufficient data which would justify this Court to make a conclusive
statement that the trust qualifies under Section 56 (b) as it was inserted into the Tax Code
by Republic Act 1963. The only written evidence of record of the creation of the pension
trust is the minutes of the board of directors' meeting of March 14, 1949, the pertinent
portion of which reads:
3. Upon motion duly seconded, the following resolution was unanimously passed:
RESOLVED, that the sum of FOUR HUNDRED FIFTEEN THOUSAND PESOS
(P415,000.00) be appropriated from the surplus of the company arising from prewar
operations in order to cover the payments of backpay and payment of reasonable
compensations to those persons who have materially aided the Company in its
Organization and Rehabilitation and in the preparation and prosecution of the
Company's claims. This appropriation shall cover a reserve fund for pensions for all
the present and future employees of the firm in the amount of SIXTY THOUSAND
PESOS (P60,000.00), Reserve Fund for Employees' Welfare to the amount of
FIFTY THOUSAND PESOS (P50,000.00). Reserve Funds for Medical
Hospitalization, etc. to the amount of THIRTY THOUSAND PESOS (P30,000.00).
Reserve Fund for Insurance and Accident to the amount of TWENTY FOUR
THOUSAND PESOS (P24,000.00) and a Reserve Fund for Bonuses Payable to the
amount of FIFTY THOUSAND PESOS (P50,000.00).
4. Upon motion by Mr. Jesus Moraza, duly seconded by Mr. Juan Coromina, it was
resolved further that the committee consisting of Dr. Mamerto Escano, as Chairman
and Messrs. Gil Garcia and Salvador E. Sala as members be constituted, as it is
hereby constituted, to study the details of all the above resolutions and give effect
thereto. The said committee is hereby empowered to immediately put into effect the
above resolutions.
We have the admitted fact also that every month thereafter an amount has been set aside
for the fund and the investment thereof in stocks of San Miguel Brewery, Inc.
And yet, something is amiss. For one, there is the admission made on page 3 of
respondents' brief that:
... It is, of course, admitted by the respondent Company that the strict requirements
of Section 56 (b) of the Tax Code on the formation of employees' trust funds for
pension had not been strictly complied with, although said funds and their returns
are exclusively for the benefit of respondent Company's employees.
And then, nothing extant in the record will show a pension plan actuarially sound. Correctly
did the Court of Tax Appeals find that "[i]t does not appear, however, that said pension trust
was created in accordance with the provision of Section 56 (b) of the Revenue Code." 21
The absence of such plan prevents us from taking a view which fits the purpose of the
statute. Coming into play then is the specific provision in paragraph (a), Section 56,
heretofore transcribed, which directs that the "taxes imposed by this Title upon
individuals shall apply to the income ... of any kind of property held in trust." For which
reason, the income received by the employees' trust fund from January 1, 1957 is subject to
the income tax prescribed for individuals under Section 21 of the Tax Code.
To follow a different construction would run "smack against the familiar rules that exemption
from taxation is not favored,22 and that exemptions in tax statutes are never
presumed,"23 and these "are but statements in adherence to the ancient rule that
exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority."24
3. Having reached the conclusion that the assessment made by petitioner and the ruling of
the Court of Tax Appeals on lack of income tax liability were on a mistaken premise, but that
the trust established by respondent should pay the taxes imposed upon individuals, we are
now faced with the mechanics of tax collection.
The problem of prescription comes in. By Section 331 of the Tax Code, internal revenue
taxes shall be assessed within five years after the return is filed. Here, no return was filed
upon a belief in good faith that no tax liability attaches. Add to this the fact that the
Commissioner of Internal Revenue made an assessment of income tax but upon the
mistaken assumption that the tax payable was upon the basis of a corporate tax and not
individual tax, and the picture is complete. Good faith in one, and honest mistake in the
other. Both petitioner and respondent company are on the same footing. It is because of this
that we rule that Section 332 (a) of the Tax Code finds application. It reads:
SEC. 332. Exceptions as to period of limitation of assessment and collection of
taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of
a failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud, or omission.
Assessment should have as starting point the known figures. From 1953 to 1958, the
following amounts were dividends received on the San Miguel Brewery, Inc. investment:
1953 ................................... P4,430.00
8
1954 ................................... 4,384.00
1955 ................................... 6,240.00
1956 ................................... 8,000.00
1957 ................................... 8,009.60
1958 ................................... 7,999.20
As far as we could read from the record, on the 1953 to 1956 dividends, payments under
protest were made as follows:
1. Deficiency franchise tax .................................. P468.14
2. 25% surcharge .................................................. 117.04
3. Compromise penalty ........................................ 50.00
Total ............................................ P635.18
On the 1957 dividends, the following were paid under protest:
1. Deficiency franchise tax .................................. P166.85
2. 25% surcharge .................................................. 41.71
3. Compromise ...................................................... 10.00
Total ............................................ P218.56
The 1958 dividends were included in the franchise tax return for the first quarter of 1959, the
tax for which was paid on April 16, 1959.
In the determination of the taxes due, the 50% surcharge sought by petitioner should not be
included. To subject a taxpayer to the payment of 50% surcharge provided for in Section 72
of the National Internal Revenue Code, the State must show either that there was a wilful
neglect to file a return or that a case of a false or fraudulent return wilfully made exists.
There is total absence of proof, and petitioner does not allege, that respondent company
wilfully neglected to file a return or that it made a false or fraudulent return. In fact, this
Court's pronouncement was necessary to determine whether such dividends are taxable at
all, and if so, under what law. In Yutivo Sons Hardware Company vs. Commissioner,25 our
ruling is that where a man "honestly believes" that the method employed by him in
computing his tax liability is correct, he does not incur any fraud; in which case, no fraud
penalty attaches under Section 72 of the Tax Code, which in part reads:
 SEC. 72. Surcharges for failure to render return and for rendering false and
fraudulent returns.
... In case of wilful neglect to file the return or list within the time prescribed by law,
or in case a false or fraudulent return or list is wilfully made, the Commissioner of
Internal Revenue shall add to the tax or to the deficiency tax, in case any payment
has been made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax....
Absent the specifics exacted in Section 72, no 50% surcharge is collectible.
4. Was respondent company late in the payment of its franchise taxes?
We first go to the controlling statutes. Section 259, paragraph (2) of the National Internal
Revenue Code reads:
SEC. 259. Tax on corporate franchises. ....
The taxes, charges, and percentages on corporate franchises, shall be due and
payable as specified in the particular franchise, or in case no time limit is specified
therein, the provisions of section one hundred and eighty-three shall apply; and if
such taxes, charges, and percentages remain unpaid for fifteen days from and after
the date on which they must be paid, twenty-five per centum shall be added to the
amount of such taxes, charges, and percentages, which increase shall form part of
the tax.26
Section 183 (a) mentioned in Section 259 of the same Code in turn partly reads:
SEC. 183. Payment of percentage taxes. (a) In general. It shall be the duty of
every person conducting a business on which a percentage tax is imposed under
this Title, to make a true and complete return of the amount of his, her or its gross
monthly sales, receipts or earnings, or gross value of output actually removed from
the factory or mill warehouses and within twenty days after the end of each month,
pay the tax due thereon:....
Upon the other hand, the company's franchise provides:
... Said percentage shall be due and payable quarterly.
The quintessence of petitioner's argument is that the phrase "due and payable quarterly" in
the franchise of the company means that the tax is immediately demandable at the end of
each calendar quarter; and that since the franchise itself sets the time limit for the payment
of the franchise tax, Section 183 just quoted finds no application. In which case, so
petitioner avers, the 25% surcharge would be collectible if the percentage taxes remain
unpaid after fifteen days from the end of each calendar quarter.
Decisive of the question is the meaning of the term "due and payable quarterly." Resort to
the following definitions may help in clearing up the issue:
(1) The word "due" is only equivalent to or synonymous with "payable." 27
(2) The word "due" with reference to taxes, implies that such taxes are then "owing,
collectible or matured."28
9
(3) "The word 'due' in one sense means that the debt or obligation to which it is
applied has by contract of operation of law become immediately payable, but in
another sense it denotes the existence of a simple indebtedness, without reference
to the time of payment, in which it is synonymous with 'owing' and includes all debts
whether payable in praesenti or in futuro."29
(4) "Unless context clearly indicates a contrary meaning, the phrase 'due and
payable' on a specified date means the debt or obligation to which it is applicable is
then immediately payable."30
In line with the foregoing definitions, the term "due and payable on the first day of each
month" was interpreted to mean that payment on any day during the month other than the
first day would constitute non-compliance.31
In our opinion, the term "due and payable quarterly" in this case merely indicates the
frequency of payment of the franchise tax, viz., very three months. It does not refer to the
time limit or, in the precise language of Section 259, "the date on which they (the
taxes) must be paid."
Under Section 183(a) in relation to Section 259, second paragraph, the law has opted to
collect the tax within twenty days after it becomes due and payable, namely, the last day of
each quarter. The time limit or the date on which the percentage tax must be paid by the
company is the twentieth day after the last day of each quarter. Section 259 grants another
grace period of fifteen days from the termination of this time limit before imposing the 25%
surcharge.
To say that Section 183(a) is not applicable simply because, as amended, it provides for
monthly payment while the company's charter speaks of quarterly payment, is to hang so
heavy a meaning on too slender a frame. Prior to its amendment by R.A. 1612 on August
24, 1956, said Section 183(a) prescribed quarterly payment of percentage
taxes.32 Accurately read, the amendment merely changed the manner or frequency of
payment of the tax, whereas Section 259 makes reference to Section 183(a) with respect to
the time limit for payment of percentage taxes. The amendment does not nullify the
applicability of Section 183(a) to franchises which do not set any time limit for payment
although providing for a different manner or frequency of payment. Common sense dictates
that it be so. For, if the law has chosen to allow a fifteen-day grace period to taxpayers
paying every month, no cogent reason exists why the same period if not longer should
be denied taxpayers paying every three months. The latter require more time for preparation
their return covers a longer period. The tax court is correct. 33
Really, the tax cannot be immediately demandable at the end of each calendar quarter.
Reason for this is that transactions on the last day of the quarter must have to be
included in the computation of the taxpayer's return for each particular quarter. It is well-nigh
impossible for the taxpayer to add up his income, write down the deductions, and compute
the net amount taxable as of the last working hour of the last day of the quarter, and at the
same time go to the nearest revenue office, submit the quarterly return and pay the tax. This
accounts for the fact that Section 183(a) of the National Internal Revenue Code gives the
taxpayer a leeway of twenty days after the end of each quarter to do all of these. And by
Section 259, it is only upon failure to pay for fifteen days "from and after the date on which
they must be paid" that the twenty-five per centum shall be added to the amount of "taxes,
charges, and percentages," on corporate franchises. Statutes are not to be so narrowly read
as to beget unreasonableness.
We accordingly rule that the franchise tax "must be paid" within "twenty days after the end"
of each quarter and that if such tax remains unpaid for 15 days "from and after the date on
which they must be paid," then twenty-five per centum shall be added to the amount due.
No surcharge for late payment of respondent company's franchise taxes accrues.
For the reasons given
The judgment under review is hereby AFFIRMED insofar as it reverses petitioner's
assessment of surcharge for late payment of respondent company's franchise tax; 34 and
Said judgment is hereby REVERSED insofar as it exempts respondent company from the
payment of deficiency income tax, in the sense that respondent company, in its capacity as
fiduciary of its employees' reserve fund, is hereby declared liable for the payment of
individual income tax set forth in Section 56(a) in connection with Section 21 of the National
Internal Revenue Code; and
Conformably to the opinion expressed herein, let the record of this case be returned to the
Court of Tax Appeals with instructions to hear and determine the tax liability of the trust
known as "Employees' Reserve for Pensions" and/or tax refund, if any, to respondent
Visayan Electric Company, upon the dividends received during the years 1953 to 1958 on
the investment of its employees' reserve fund for pensions, and tax payments made by
reason thereof, said tax to be computed in accordance with Section 56(a) and (c) of the
National Internal Revenue Code in relation to Section 21 of the same Code.
No costs. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
10
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT
PLAN, represented by its Trustee-Director, respondents.
MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the amount involved is insignificant, the
Solicitor General avers that there are about 85 claims of the same nature pending in the
Court of Tax Appeals and Bureau of Internal Revenue totalling approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of
respondent Court of Appeals, dated August 27, 1990, in CA-G.R. SP No. 20426, entitled
"Commissioner of Internal Revenue vs. GCL Retirement Plan, represented by its Trustee-
Director and the Court of Tax Appeals," which affirmed the Decision of the latter Court,
dated 15 December 1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to
the GCL Retirement Plan representing the withholding tax on income from money market
placements and purchase of treasury bills, imposed pursuant to Presidential Decree No.
1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan
(GCL, for brevity) is an employees' trust maintained by the employer, GCL Inc., to provide
retirement, pension, disability and death benefits to its employees. The Plan as submitted
was approved and qualified as exempt from income tax by Petitioner Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917. 1
In 1984, Respondent GCL made investsments and earned therefrom interest income from
which was witheld the fifteen per centum (15%) final witholding tax imposed by Pres.
Decree No. 1959, 2 which took effect on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 234,632.75 9,815.89 1,472.38
11/19/84 225,886.51 10,629.22 1,594.38
11/23/84 344,448.64 17,313.33 2,597.00
 12/05/84 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15
However, it also allowed a specific exemption in its Section 53, as follows:
P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the
amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by
Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the
amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the
collection of the 15% final withholding tax from the interest income as it is an entity fully
exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56
(b) 3 of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the matter to
respondent Court of Tax Appeals (CTA). The latter ruled in favor of GCL, holding that
employees' trusts are exempt from the 15% final withholding tax on interest income and
ordering a refund of the tax withheld. Upon appeal, originally to this Court, but referred to
respondent Court of Appeals, the latter upheld the CTA Decision. Before us now, Petitioner
assails that disposition.
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec.
56 (b) of the National Internal Revenue Code (Tax Code, for brevity), employees' trusts
were exempt from income tax. That law provided:
Sec. 56 Imposition of tax. (a) Application of tax. The taxes imposed by
this Title upon individuals shall apply to the income of estates or of any kind
of property held in trust, including
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employees'
trust which forms a part of a pension, stock bonus or profit-sharing plan of
an employer for the benefit of some or all of his employees (1) if
contributions are made to trust by such employer, or employees, or both, for
the purpose of distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such
plan, . . .
11
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from
the interest on bank deposits at the source of a tax of fifteen per cent (15%) of said interest.
Sec. 53. Withholding of tax at source.
xxx xxx xxx
(c) Withholding tax on interest on bank deposits. (1) Rate of withholding
tax. Every bank or banking institution shall deduct and withhold from the
interest on bank deposits (except interest paid or credited to non-
resident alien individuals and foreign corporations), a tax equal to fifteen
per cent of the said interest: Provided, however, That no withholding of tax
shall be made if the aggregate amount of the interest on all deposit
accounts maintained by a depositor alone or together with another in any
one bank at any time during the taxable period does not exceed three
hundred fifty pesos a year or eighty-seven pesos and fifty centavos per
quarter. For this purpose, interest on a deposit account maintained by two
persons shall be deemed to be equally owned by them.
(2) Treatment of bank deposit interest. The interest income shall be
included in the gross income in computing the depositor's income tax
liability in according with existing law.
(3) Depositors enjoying tax exemption privileges or preferential tax
treatment. In all cases where the depositor is tax-exempt or is enjoying
preferential income tax treatment under existing laws, the withholding tax
imposed in this paragraph shall be refunded or credited as the case may be
upon submission to the Commissioner of Internal Revenue of proof that the
said depositor is a tax-exempt entity or enjoys a preferential income tax
treatment.
xxx xxx xxx
This exemption and preferential tax treatment were carried over in Pres. Decree No. 1739,
effective on 17 September 1980, which law also subjected interest from bank deposits and
yield from deposit substitutes to a final tax of twenty per cent (20%). The pertinent
provisions read:
Sec. 2. Section 21 of the same Code is hereby amended by adding a new
paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents.
xxx xxx xxx
Sec. 9. Section 53(e) of the same Code is hereby amended to read as
follows:
Interest from Philippine Currency bank deposits and yield
from deposit substitutes whether received by citizens of the
Philippines or by resident alien individuals, shall be subject
to the final tax as follows: (a) 15% of the interest on
savings deposits, and (b) 20% of the interest on time
deposits and yield from deposit substitutes, which shall be
collected and paid as provided in Sections 53 and 54 of
this Code. Provided, That no tax shall be imposed if the
aggregate amount of the interest on all Philippine Currency
deposit accounts maintained by a depositor alone or
together with another in any one bank at any time during
the taxable period does not exceed Eight Hundred Pesos
(P800.00) a year or Two Hundred Pesos (P200.00) per
quarter. Provided, further, That if the recipient of such
interest is exempt from income taxation, no tax shall be
imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so
provided shall be imposed (Emphasis supplied).
Sec. 3. Section 24 of the same Code is hereby amended by adding a new
subsection (cc) between subsections (c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield from
deposit substitutes. Interest on Philippine Currency bank
deposits and yield from deposit substitutes received by
domestic or resident foreign corporations shall be subject
to a final tax on the total amount thereof as follows: (a)
12
15% of the interest on savings deposits; and (b) 20% of the
interest on time deposits and yield from deposit substitutes
which shall be collected and paid as provided in Sections
53 and 54 of this Code. Provided, That if the recipient of
such interest is exempt from income taxation, no tax shall
be imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so
provided shall be imposed (Emphasis supplied).
Se. 53(e) Withholding of final tax on interest on bank
deposits and yield from deposit substitutes.
(1) Withholding of final tax. Every bank or non-bank
financial intermediary shall deduct and withhold from the
interest on bank deposits or yield from deposit substitutes a
final tax equal to fifteen (15%) per cent of the interest on
savings deposits and twenty (20%) per cent of the interest
on time deposits or yield from deposit
substitutes: Provided, however, That no withholding tax
shall be made if the aggregate amount of the interest on all
deposit accounts maintained by a depositor alone or
together with another in any one bank at any time during
the taxable period does not exceed Eight Hundred Pesos a
year or Two Hundred Pesos per quarter. For this purpose,
interest on a deposit account maintained by two persons
shall be deemed to be equally owned by them.
(2) Depositors or placers/investors enjoying tax exemption
privileges or preferential tax treatment. In all cases
where the depositor or placer/investor is tax exempt or is
enjoying preferential income tax treatment under existing
laws, the withholding tax imposed in this paragraph shall
be refunded or credited as the case may be upon
submission to the Commissioner of Internal Revenue of
 proof that the said depositor, or placer/investor is a tax
exempt entity or enjoys a preferential income tax treatment.
Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued, amending
the aforestated provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended
to read as follows:
(d) On interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust
fund and similar arrangements. Interest from Philippine
Currency Bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and
similar arrangements whether received by citizens of the
Philippines, or by resident alien individuals, shall be subject
to a 15% final tax to be collected and paid as provided in
Sections 53 and 54 of this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is hereby further
amended to read as follows:
(cc) Rates of tax on interest from deposits and yield or any
other monetary benefit from deposit substitutes and from
trust fund and similar arrangements. Interest on
Philippine Currency Bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust
fund and similar arrangements received by domestic or
resident foreign corporations shall be subject to a 15% final
tax to be collected and paid as provided in Section 53 and
54 of this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as
follows:
Sec. 53 (d) (1). Withholding of Final Tax. Every bank or
non-bank financial intermediary or commercial. industrial,
13
finance companies, and other non-financial companies
authorized by the Securities and Exchange Commission to
issue deposit substitutes shall deduct and withhold from
the interest on bank deposits or yield or any other
monetary benefit from deposit substitutes a final tax equal
to fifteen per centum (15%) of the interest on deposits or
yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements.
It is to be noted that the exemption from withholding tax on interest on bank deposits
previously extended by Pres. Decree No. 1739 if the recipient (individual or corporation) of
the interest income is exempt from income taxation, and the imposition of the preferential
tax rates if the recipient of the income is enjoying preferential income tax treatment, were
both abolished by Pres. Decree No. 1959. Petitioner thus submits that the deletion of the
exempting and preferential tax treatment provisions under the old law is a clear
manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from
deposits, deposit substitutes, trust funds and similar arrangements, regardless of the tax
status or character of the recipients thereof. In short, petitioner's position is that from 15
October 1984 when Pres. Decree No. 1959 was promulgated, employees' trusts ceased to
be exempt and thereafter became subject to the final withholding tax.
Upon the other hand, GCL contends that the tax exempt status of the employees' trusts
applies to all kinds of taxes, including the final withholding tax on interest income. That
exemption, according to GCL, is derived from Section 56(b) and not from Section 21 (d) or
24 (cc) of the Tax Code, as argued by Petitioner.
The sole issue for determination is whether or not the GCL Plan is exempt from the final
withholding tax on interest income from money placements and purchase of treasury bills
required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan was qualified as exempt from
income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917
approved on 17 June 1967. This law specifically provided:
 Sec. 1. Any provision of law to the contrary notwithstanding, the retirement
benefits received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be
liable to attachment, levy or seizure by or under any legal or equitable
process whatsoever except to pay a debt of the official or employee
concerned to the private benefit plan or that arising from liability imposed in
a criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision should be taken in
relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.
1983, supra, which took effect on 22 June 1957. This provision specifically exempted
employee's trusts from income tax and is repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed
by this Title upon individuals shall apply to the income of estates or of any
kind of property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of
property held in trust, springs from the foregoing provision. It is unambiguous. Manifest
therefrom is that the tax law has singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts.
Employees' trusts or benefit plans normally provide economic assistance to employees
upon the occurrence of certain contingencies, particularly, old age retirement, death,
sickness, or disability. It provides security against certain hazards to which members of the
Plan may be exposed. It is an independent and additional source of protection for the
working group. What is more, it is established for their exclusive benefit and for no other
purpose.
14
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to
encourage the formation and establishment of such private Plans for the benefit of laborers
and employees outside of the Social Security Act. Enlightening is a portion of the
explanatory note to H.B. No. 6503, now R.A. 1983, reading:
Considering that under Section 17 of the social Security Act, all
contributions collected and payments of sickness, unemployment,
retirement, disability and death benefits made thereunder together with the
income of the pension trust are exempt from any tax, assessment, fee, or
charge, it is proposed that a similar system providing for retirement, etc.
benefits for employees outside the Social Security Act be exempted from
income taxes. (Congressional Record, House of Representatives, Vol. IV,
Part. 2, No. 57, p. 1859, May 3, 1957; cited in Commissioner of Internal
Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23
SCRA 715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund. This would run
afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and
preferential tax rates under the old law, therefore, can not be deemed to extent to
employees' trusts. Said Decree, being a general law, can not repeal by implication a specific
provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption
from income tax to employees' trusts. Rep. Act 1983, which excepted employees' trusts in
its Section 56 (b) was effective on 22 June 1957 while Rep. Act No. 4917 was enacted on
17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A
subsequent statute, general in character as to its terms and application, is not to be
construed as repealing a special or specific enactment, unless the legislative purpose to do
so is manifested. This is so even if the provisions of the latter are sufficiently comprehensive
to include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30
September 1971, 41 SCRA 190).
Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on
"Income Tax." Section 21 (d), as amended by Rep. Act No. 1959, refers to the final tax on
individuals and falls under Chapter II; Section 24 (cc) to the final tax on corporations under
Chapter III; Section 53 on withholding of final tax to Returns and Payment of Tax under
Chapter VI; and Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section
56 (b), taken in conjunction with Section 56 (a), supra, explicitly excepts employees' trusts
from "the taxes imposed by this Title." Since the final tax and the withholding thereof are
embraced within the title on "Income Tax," it follows that said trust must be deemed exempt
therefrom. Otherwise, the exception becomes meaningless.
There can be no denying either that the final withholding tax is collected from income in
respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code).
The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by
requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt
status from income, we see no logic in withholding a certain percentage of that income
which it is not supposed to pay in the first place.
Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and
Bureau of Internal Revenue Ruling No. 027-e-000-00-005-85, dated 14 January 1985, as
authorities for the argument that Pres. Decree No. 1959 withdrew the exemption of
employees' trusts from the withholding of the final tax on interest income. Said Circular and
Ruling pronounced that the deletion of the exempting and preferential tax treatment
provisions by Pres. Decree No. 1959 is a clear manifestation that the single 15% tax rate is
imposable on all interest income regardless of the tax status or character of the recipient
thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of
revoking the tax exemption enjoyed by employees' trusts, reliance on those authorities is
now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent
Court of Appeals, affirming that of the Court of Tax Appeals is UPHELD. No costs.
SO ORDERED.
CATALINA BUAN VDA. DE ESCONDE, CONSTANCIA ESCONDE VDA. DE PERALTA,
ELENITA ESCONDE and BENJAMIN E SCONDE, petitioners, vs. HONORABLE
COURT OF APPEALS and PEDRO ESCONDE, respondents.
DECISION
15
ROMERO, J.:
This petition for review on certiorari seeks the reversal of the January 22,
1992 decision[1] in CA G.R. CV No. 26795 of the Court of Appeals affirming the Decision of
the Regional Trial Court of Bataan, Branch 2. [2] The lower court declared that petitioners
action for reconveyance of real property based on an implied trust has been barred by
prescription and laches.
Petitioners Constancia, Benjamin and Elenita, and private respondent Pedro, are the
children of the late Eulogio Esconde and petitioner Catalina Buan. Eulogio Esconde was
one of the children[3] and heirs of Andres Esconde. Andres is the brother of Estanislao
Esconde, the original owner of the disputed lot who died without issue on April 1942.
Survived by his only brother, Andres, Estanislao left an estate consisting of four (4) parcels
of land in Samal, Bataan, namely: (a) Lot No. 1865 with 22,712 square meters; (b) Lot No.
1902 with 54,735 square meters; (c) Lot No. 1208 with 20,285 square meters; and (d) Lot
No. 1700 with 547 square meters.
Eulogio died in April, 1944 survived by petitioners and private respondent. At that time,
Lazara and Ciriaca, Eulogios sisters, had already died without having partitioned the estate
of the late Estanislao Esconde.
On December 5, 1946, the heirs of Lazara, Ciriaca and Eulogio executed a deed of
extrajudicial partition,[4] with the heirs of Lazara identified therein as the Party of the First
Part, that of Ciriaca, the Party of the Second Part and that of Eulogio, the Party of the Third
Part. Since the children of Eulogio, with the exception of Constancia, were then all minors,
they were represented by their mother and judicial guardian, petitioner Catalina Buan vda.
de Esconde who renounced and waived her usufructuary rights over the parcels of land in
favor of her children in the same deed. Salient provisions of the deed state as follows:
1. TO ARTURO DOMINGUEZ, minor, Party of the First Part is adjudicated:
(a) Lot No. 1865 of Samal Cadastre;
(b) Portion of Lot No. 1208, Samal Cadastre, which portion has an area of FIVE (5) Luang;
2. TO JOVITA BUAN, RICARDO BUAN, and MELODY and LEOPOLDO OCONER, are
adjudicated Lot No. 1902 Samal Cadastre, and to de (sic) divided as follows:
(a) Jovita Buan - Undivided one-third (1/3) share;
(b) Ricardo Buan - Undivided one-third (1/3) share;
(c) Melody Oconer - Undivided one-sixth (1/6) share;
(d) Leopoldo Oconer - Undivided one-sixth (1/6) share;
3. TO CONSTANCIA, PEDRO, BENJAMIN and ELENITA, all Surnamed ESCONDE, are
adjudicated, in undivided equal shares each, the following:
(a) Lot No. 1208 Samal Cadastre, subject to the encumbrance of the right of ownership of Arturo
Dominguez on the FIVE LUANG;
4. TO PEDRO ESCONDE is adjudicated exclusively Lot No. 1700 of the Cadastral Survey of Samal;
(Italics supplied.)
The deed bears the thumbmark of Catalina Buan and the signature of Constancia
Esconde, as well as the approval and signature of Judge Basilio Bautista. [5]
Pursuant to the same deed, transfer certificates of title were issued to the new owners
of the properties.[6] Transfer Certificate of Title No. 394 for Lot No. 1700 was issued
on February 11, 1947 in the name of private respondent but Catalina kept it in her
possession until she delivered it to him in 1949 when private respondent got married.
Meanwhile, Benjamin constructed the family home on Lot No. 1698-B [7] which is
adjacent to Lot No. 1700. A portion of the house occupied an area of twenty (20) square
meters, more or less, of Lot No. 1700. Benjamin also built a concrete fence and a common
gate enclosing the two (2) lots, as well as an artesian well within Lot No. 1700.
Sometime in December, 1982, Benjamin discovered that Lot No. 1700 was registered
in the name of his brother, private respondent. Believing that the lot was co-owned by all the
children of Eulogio Esconde, Benjamin demanded his share of the lot from private
respondent.[8] However, private respondent asserted exclusive ownership thereof pursuant
to the deed of extrajudicial partition and, in 1985 constructed a buho fence to segregate Lot
No. 1700 from Lot No. 1698-B.
16
Hence, on June 29, 1987, petitioners herein filed a complaint before the Regional Trial
Court of Bataan against private respondent for the annulment of TCT No. 394. They further
prayed that private respondent be directed to enter into a partition agreement with them,
and for damages (Civil Case No. 5552).
In its decision of July 31, 1989, the lower court dismissed the complaint and the
counterclaims. It found that the deed of extrajudicial partition was an unenforceable contract
as far as Lot No. 1700 was concerned because petitioner Catalina Buan vda. de Esconde,
as mother and judicial guardian of her children, exceeded her authority as such in donating
the lot to private respondent or waiving the rights thereto of Benjamin and Elenita in favor of
private respondent. Because of the unenforceability of the deed, a trust relationship was
created with private respondent as trustee and Benjamin and Elenita as beneficiaries. The
court said:
Although the parties to the partition did not either contemplate or express it in said document,
the resulting trust arose or was created by operation of Article 1456 of the new Civil Code, which
reads: If property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the property
comes. The persons from whom the two-thirds portion of Lot 1700 came are plaintiffs Benjamin and
Elenita Esconde and the trustee was defendant Pedro Esconde, who acquired such portion
through mistake by virtue of the subject partition. The mistake was the allotment or assignment of
such portion to Pedro Esconde although it had rightfully belonged to said two plaintiffs more than
two (2) years before.[9]
However, the lower court ruled that the action had been barred by both prescription
and laches. Lot No. 1700 having been registered in the name of private respondent on
February 11, 1947, the action to annul such title prescribed within ten (10) years on
February 11, 1957 or more than thirty (30) years before the action was filed on June 29,
1987. Thus, even if Art. 1963 of the old Civil Code providing for a 30-year prescriptive period
for real actions over immovable properties were to be applied, still, the action would have
prescribed on February 11, 1977.
Hence, petitioners elevated the case to the Court of Appeals which affirmed the lower
courts decision. The appellate court held that the deed of extrajudicial partition established
an implied trust arising from the mistake of the judicial guardian in favoring one heir by
giving him a bigger share in the hereditary property. It stressed that an action for
reconveyance based on implied or constructive trust prescribes in ten (10) years counted
from the registration of the property in the sole name of the co-heir.[10]
Petitioners are now before this Court charging the Court of Appeals with having erred
in: (a) denying their appeal by reason of prescription and laches, and (b) not reversing the
decision of the lower court insofar as awarding them damages is concerned.
Trust is the legal relationship between one person having an equitable ownership in
property and another person owning the legal title to such property, the equitable ownership
of the former entitling him to the performance of certain duties and the exercise of certain
powers by the latter.[11] Trusts are either express or implied. An express trust is created by
the direct and positive acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust.[12] No particular words are required for the creation
of an express trust, it being sufficient that a trust is clearly intended. [13]
On the other hand, implied trusts are those which, without being expressed, are
deducible from the nature of the transaction as matters of intent or which are superinduced
on the transaction by operation of law as matters of equity, independently of the particular
intention of the parties.[14] In turn, implied trusts are either resulting or constructive
trusts. These two are differentiated from each other as follows:
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal title
determines the equitable title or interest and are presumed always to have been contemplated by the
parties.They arise from the nature or circumstances of the consideration involved in a transaction
whereby one person thereby becomes invested with legal title but is obligated in equity to hold his
legal title for the benefit of another. On the other hand, constructive trusts are created by the
construction of equity in order to satisfy the demands of justice and prevent unjust enrichment. They
arise contrary to intention against one who, by fraud, duress or abuse of confidence, obtains or holds
the legal right to property which he ought not, in equity and good conscience, to hold.[15]
While the deed of extrajudicial partition and the registration of Lot No. 1700 occurred in
1947 when the Code of Civil Procedure or Act No. 190 was yet in force, we hold that the trial
court correctly applied Article 1456. In Diaz, et al. v. Gorricho and Aguado,[16] the Court
categorically held that while it is not a retroactive provision of the new Civil Code, Article
1456 merely expresses a rule already recognized by our courts prior to the Codes
promulgation. This article provides:
17
Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law,
considered a trustee of an implied trust for the benefit of the person from whom the property comes.
Construing this provision of the Civil Code, in Philippine National Bank v. Court of
Appeals, the Court stated:
A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a typical
trust, confidence is reposed in one person who is named a trustee for the benefit of another who is
called the cestui que trust, respecting property which is held by the trustee for the benefit of
the cestui que trust. A constructive trust, unlike an express trust, does not emanate from, or generate a
fiduciary relation.While in an express trust, a beneficiary and a trustee are linked by confidential or
fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary relation to
speak of and the so-called trustee neither accepts any trust nor intends holding the property for the
beneficiary.[17]
In the case at bench, petitioner Catalina Buan vda. de Esconde, as mother and legal
guardian of her children, appears to have favored her elder son, private respondent, in
allowing that he be given Lot No. 1700 in its entirety in the extrajudicial partition of the
Esconde estate to the prejudice of her other children. Although it does not appear on record
whether Catalina intentionally granted private respondent that privileged bestowal, the fact
is that, said lot was registered in private respondents name. After TCT No. 394 was handed
to him by his mother, private respondent exercised exclusive rights of ownership therein to
the extent of even mortgaging the lot when he needed money.
If, as petitioners insist, a mistake was committed in allotting Lot No. 1700 to private
respondent, then a trust relationship was created between them and private
respondent. However, private respondent never considered himself a trustee. If he allowed
his brother Benjamin to construct or make improvements thereon, it appears to have been
out of tolerance to a brother.Consequently, if indeed, by mistake,[18] private respondent was
given the entirety of Lot No. 1700, the trust relationship between him and petitioners was
a constructive, not resulting, implied trust. Petitioners, therefore, correctly questioned
private respondents exercise of absolute ownership over the property. Unfortunately,
however, petitioners assailed it long after their right to do so had prescribed.
The rule that a trustee cannot acquire by prescription ownership over property
entrusted to him until and unless he repudiates the trust, applies to express trusts [19] and
resulting implied trusts.[20] However, in constructive implied trusts, prescription may
supervene[21] even if the trustee does not repudiate the relationship. Necessarily, repudiation is obliged by law to indemnify his brother, petitioner Benjamin Esconde, for whatever
of the said trust is not a condition precedent to the running of the prescriptive period. expenses the latter had incurred.

Since the action for the annulment of private respondents title to Lot No. 1700 accrued
during the effectivity of Act No. 190, Section 40 of Chapter III thereof applies. It provides:
Sec. 40. Period of prescription as to real estate. - An action for recovery of title to, or possession of,
real property, or an interest therein, can only be brought within ten years after the cause of such
action accrues.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the
questioned decision AFFIRMED subject to the modification that private respondent shall
indemnify petitioner Benjamin Esconde the expenses the latter had incurred for the
improvements on Lot No. 1700. No costs.
SO ORDERED.

Thus, in Heirs of Jose Olviga v. Court of Appeals,[22] the Court ruled that the ten-year Regalado, Puno and Mendoza, JJ., concur.
prescriptive period for an action for reconveyance of real property based on implied or
constructive trust which is counted from the date of registration of the property, applies FIRST DIVISION
when the plaintiff is not in possession of the contested property. In this case, private
respondent, not petitioners who instituted the action, is in actual possession of Lot No.
1700. Having filed their action only on June 29, 1987, petitioners action has been barred by GILBERT G. GUY, Petitioner, G.R. No. 165849
prescription.

Not only that. Laches has also circumscribed the action for, whether the implied trust is - versus -
constructive or resulting, this doctrine applies.[23] As regards constructive implied trusts, the
Court held in Diaz, et al. v. Gorricho and Aguado[24] that: THE COURT OF APPEALS (8THDIVISION),
NORTHERN ISLANDS CO., INCORPORATED,
x x x in constructive trusts (that are imposed by law), there is neither promise nor fiduciary relation; SIMNY G. GUY, GERALDINE G. GUY, GLADYS
the so-called trustee does not recognize any trust and has no intent to hold for the beneficiary; G. YAO, and EMILIA TABUGADIR,
therefore, the latter is not justified in delaying action to recover his property. It is his fault if he Respondents.
delays; hence, he may be estopped by his own laches. x--------------------------x
IGNACIO AND IGNACIO LAW OFFICES, G.R. No. 170185
It is tragic that a land dispute has once again driven a wedge between Petitioner,
brothers. However, credit must be given to petitioner Benjamin Esconde [25] for resorting to all
means possible in arriving at a settlement between him and his brother in accordance with
- versus -
Article 222 of the Civil Code. [26] Verbally and in two letters,[27] he demanded that private
respondent give him and his sisters their share in Lot No. 1700. He even reported the
matter to the barangay authorities for which three conferences were held. [28] Unfortunately, THE COURT OF APPEALS (7THDIVISION),
his efforts proved fruitless. Even the action he brought before the court was filed too late. NORTHERN ISLANDS CO., INCORPORATED,
SIMNY G. GUY, GERALDINE G. GUY, GLADYS
On the other hand, private respondent should not be unjustly enriched by the G. YAO, and EMILIA A. TABUGADIR,
improvements introduced by his brother on Lot No. 1700 which he himself had tolerated. He Respondents.

18
x--------------------------x G.R. No. 170186
SMARTNET PHILIPPINES, Petitioner, SANDOVAL-GUTIERREZ, J.:

Before us are five (5) consolidated cases which stemmed from Civil Case No. 04-109444
- versus - filed with the Regional Trial Court (RTC), Branch 24, Manila, subsequently re-raffled to Branch
46[1] and eventually to Branch 25.[2]
The instant controversies arose from a family dispute. Gilbert Guy is the son of Francisco and Simny
THE COURT OF APPEALS (7THDIVISION), Guy. Geraldine, Gladys and Grace are his sisters. The family feud involves the ownership and control
NORTHERN ISLANDS CO., INCORPORATED, of 20,160 shares of stock of Northern Islands Co., Inc. (Northern Islands) engaged in the
SIMNY G. GUY, GERALDINE G. GUY, GLADYS manufacture, distribution, and sales of various home appliances bearing the 3-D trademark.
Simny and her daughters Geraldine, Gladys and Grace, as well as Northern Islands and Emilia
G. YAO, and EMILIA A. TABUGADIR, Tabugadir, have been impleaded as respondents in the above-entitled cases. Northern Islands is a
Respondents. family-owned corporation organized in 1957 by spouses Francisco and respondent Simny Guy. In
x--------------------------x G.R. No. 171066 November 1986, they incorporated Lincoln Continental Development Corporation, Inc. (Lincoln
LINCOLN CONTINENTAL DEVELOPMENT CO., Continental) as a holding company of the 50% shares of stock of Northern Islands in trust for their
INC., three (3) daughters, respondents Geraldine, Gladys and Grace. Sometime in December 1986, upon
Petitioner, instruction of spouses Guy, Atty. Andres Gatmaitan, president of Lincoln Continental, indorsed in
blank Stock Certificate No. 132 (covering 8,400 shares) and Stock Certificate No. 133 (covering
- versus - 11,760 shares) and delivered them to Simny.
NORTHERN ISLANDS CO., INCORPORATED, In 1984, spouses Guy found that their son Gilbert has been disposing of the assets of their
SIMNY G. GUY, GERALDINE G. GUY, GRACE G. corporations without authority. In order to protect the assets of Northern Islands, Simny surrendered
CHEU, GLADYS G. YAO, and EMILIA A. Stock Certificate Nos. 132 and 133 to Emilia Tabugadir, an officer of Northern Islands. The 20,160
TABUGADIR, shares covered by the two Stock Certificates were then registered in the names of respondent sisters,
Respondents. G.R. No. 176650 thus enabling them to assume an active role in the management of Northern Islands.
x--------------------------x On January 27, 2004, during a special meeting of the stockholders of Northern Islands, Simny was
LINCOLN CONTINENTAL DEVELOPMENT Present: elected President; Grace as Vice-President for Finance; Geraldine as Corporate Treasurer; and Gladys
COMPANY, INC., as Corporate Secretary. Gilbert retained his position as Executive Vice President. This development
Petitioner, PUNO, C.J., Chairperson, started the warfare between Gilbert and his sisters.
*
YNARES-SANTIAGO, On March 18, 2004, Lincoln Continental filed with the RTC, Branch 24, Manila a Complaint for
- versus - SANDOVAL-GUTIERREZ, Annulment of the Transfer of Shares of Stock against respondents, docketed as Civil Case No. 04-
CORONA, and 109444. The complaint basically alleges that Lincoln Continental owns 20,160 shares of stock
NORTHERN ISLANDS CO., INCORPORATED, AZCUNA, JJ. of Northern Islands; and that respondents, in order to oust Gilbert from the management of Northern
SIMNY G. GUY, GERALDINE G. GUY, GRACE G. Islands, falsely transferred the said shares of stock in respondent sisters names. Lincoln Continental
CHEU, GLADYS G. YAO, and EMILIA A. Promulgated: then prayed for an award of damages and that the management of Northern Islands be restored to
TABUGADIR, Gilbert. Lincoln also prayed for the issuance of a temporary restraining order (TRO) and a writ of
Respondents. December 10, 2007 preliminary mandatory injunction to prohibit respondents from exercising any right of ownership
over the shares.
x -----------------------------------------------------------------------------------------x On June 16, 2004, Lincoln Continental filed a Motion to Inhibit the Presiding Judge of Branch 24,
RTC, Manila on the ground of partiality. In an Order dated June 22, 2004, the presiding judge granted
DECISION

19
the motion and inhibited himself from further hearing Civil Case No. 04-109444. It was then re-
raffled to Branch 46 of the same court.
On July 12, 2004, Branch 46 set the continuation of the hearing on Lincoln Continentals application
for a TRO.
On July 13, 2004, respondents filed with the Court of Appeals a Petition
for Certiorari and Mandamus, docketed as CA-G.R. SP No. 85069, raffled off to the Tenth
Division. Respondents alleged that the presiding judge of Branch 24, in issuing the Order dated June
22, 2004 inhibiting himself from further hearing Civil Case No. 04-109444, and the presiding judge
of Branch 46, in issuing the Order dated July 12, 2004 setting the continuation of hearing on Lincoln
Continentals application for a TRO, acted with grave abuse of discretion tantamount to lack or excess
of jurisdiction.
Meanwhile, on July 15, 2004, the trial court issued the TRO prayed for by Lincoln Continental
directing respondents to restore to Gilbert the shares of stock under controversy. In the same Order,
the trial court set the hearing of Lincoln Continentals application for a writ of preliminary injunction
on July 19, 20, and 22, 2004.
On July 16, 2004, the Court of Appeals (Tenth Division) issued a TRO enjoining Branch 46,
RTC, Manila from enforcing, maintaining, or giving effect to its Order of July 12, 2004 setting the
hearing of Lincoln Continentals application for a TRO.
Despite the TRO, the trial court proceeded to hear Lincoln Continentals application for a writ of
preliminary injunction. This prompted respondents to file in the same CA-G.R. SP No. 85069 a
Supplemental Petition for Certiorari, Prohibition, and Mandamus seeking to set aside the Orders of
the trial court setting the hearing and actually hearing Lincoln Continentals application for a writ of
preliminary injunction. They prayed for a TRO and a writ of preliminary injunction to enjoin the trial
court (Branch 46) from further hearing Civil Case No. 04-109444.
On September 17, 2004, the TRO issued by the Court of Appeals (Tenth Division) in CA-G.R. SP
No. 85069 expired.
On September 20, 2004, Gilbert filed a Motion for Leave to Intervene and Motion to Admit
Complaint-in-Intervention in Civil Case No. 04-109444. In its Order dated October 4, 2004, the trial
court granted the motions.
Meantime, on October 13, 2004, the trial court issued the writ of preliminary mandatory injunction
prayed for by Lincoln Continental in Civil Case No. 04-109444.
On October 20, 2004, the Court of Appeals (Tenth Division) denied respondents application for
injunctive relief since the trial court had already issued a writ of preliminary injunction in favor of
Lincoln Continental. Consequently, on October 22, 2004, respondents filed with the Tenth Division a
Motion to Withdraw Petition and Supplemental Petition in CA-G.R. SP No. 85069.
On October 26, 2004, respondents filed a new Petition for Certiorari with the Court of Appeals,
docketed as CA-G.R. SP No. 87104, raffled off to the Eighth Division. They prayed that the TRO and
writ of preliminary injunction issued by the RTC, Branch 46, Manila be nullified and that an
injunctive relief be issued restoring to them the management of Northern Islands. They alleged that
Gilbert has been dissipating the assets of the corporation for his personal gain.
20
On October 28, 2004, the Court of Appeals Eighth Division issued a TRO enjoining the
implementation of the writ of preliminary injunction dated October 13, 2004 issued by the trial court
in Civil Case No. 04-109444; and directing Lincoln Continental to turn over the assets and records
of Northern Islands to respondents.
On November 2, 2004, respondents filed with the appellate court (Eighth Division) an
Urgent Omnibus Motion praying for the issuance of a break-open Order to implement its TRO.
On November 4, 2004, the Eighth Division issued a Resolution granting respondents
motion. Pursuant to this Resolution, respondents entered the Northern Islands premises at No. 3
Mercury Avenue, Libis, Quezon City.
On November 18, 2004, Gilbert filed with this Court a petition for certiorari, docketed as G.R. No.
165849, alleging that the Court of Appeals (Eighth Division), in granting an injunctive relief in favor
of respondents, committed grave abuse of discretion tantamount to lack or in excess of
jurisdiction. The petition also alleges that respondents resorted to forum shopping.
Meanwhile, on December 16, 2004, Smartnet Philippines, Inc. (Smartnet) filed with the Metropolitan
Trial Court (MeTC), Branch 35, Quezon City a complaint for forcible entry against respondents,
docketed as Civil Case No. 35-33937. The complaint alleges that in entering
the Northern Islands premises, respondents took possession of the area being occupied by Smartnet
and barred its officers and employees from occupying the same.
Likewise on December 16, 2004, Ignacio and Ignacio Law Offices also filed with Branch 37, same
court, a complaint for forcible entry against respondents, docketed as Civil Case No. 34106. It alleges
that respondents forcibly occupied its office space when they took over the premises
of Northern Islands.
On December 22, 2004, the Eighth Division issued the writ of preliminary injunction prayed for by
respondents in CA-G.R. SP No. 87104.
Subsequently, the presiding judge of the RTC, Branch 46, Manila retired. Civil Case No. 04-109444
was then re-raffled to Branch 25.
On January 20, 2005, respondents filed with the Eighth Division of the appellate court a
Supplemental Petition for Certiorari with Urgent Motion for a Writ of Preliminary Injunction to
Include Supervening Events. Named as additional respondents were 3-D Industries, Judge Celso D.
Lavia, Presiding Judge, RTC, Branch 71, Pasig City and Sheriff Cresencio Rabello, Jr. This
supplemental petition alleges that Gilbert, in an attempt to circumvent the injunctive writ issued by
the Eighth Division of the appellate court, filed with the RTC, Branch 71, Pasig City a complaint for
replevin on behalf of 3-D Industries, to enable it to take possession of the assets and records
of Northern Islands. The complaint was docketed as Civil Case No. 70220. On January 18, 2005, the
RTC issued the writ of replevin in favor of 3-D Industries.
On April 15, 2005, respondents filed with the Eighth Division a Second Supplemental Petition
for Certiorari and Prohibition with Urgent Motion for the Issuance of an Expanded Writ of
Preliminary Injunction. Impleaded therein as additional respondents were Ignacio and Ignacio Law
Offices, Smartnet, Judge Maria Theresa De Guzman, Presiding Judge, MeTC, Branch 35, Quezon
City, Judge Augustus C. Diaz, Presiding Judge, MeTC, Branch 37, Quezon City, Sun Fire Trading
Incorporated, Zolt Corporation, Cellprime Distribution Corporation, Goodgold Realty and
Development Corporation, John Does and John Doe Corporations. Respondents alleged in the main
that the new corporations impleaded are alter egos of Gilbert; and that the filing of the forcible entry
cases with the MeTC was intended to thwart the execution of the writ of preliminary injunction
dated December 22, 2004 issued by the Court of Appeals (Eighth Division) in CA-G.R. SP No.
87104.
On April 26, 2005, the Eighth Division issued a Resolution admitting respondents new
pleading. On August 19, 2005, the Eighth Division (now Seventh Division) rendered its Decision in
CA-G.R. SP No. 87104, the dispositive portion of which reads:
WHEREFORE, premises considered, the petition is hereby GRANTED and the
October 13, 2004 Order and the October 13, 2004 Writ of Preliminary Mandatory
Injunction issued by Branch 46 of the Regional Trial Court of Manila are hereby
REVERSED and SET ASIDE. The December 17, 2004 Order and Writ of
Preliminary Injunction issued by this Court of Appeals are hereby MADE
PERMANENT against all respondents herein.
SO ORDERED.
Meanwhile, in a Decision[3] dated September 19, 2005, the RTC, Branch 25, Manila dismissed the
complaint filed by Lincoln Continental and the complaint-in-intervention of Gilbert in Civil Case No.
04-109444, thus:
WHEREFORE, in view of the foregoing, the Complaint and the Complaint-in-
Intervention are hereby DISMISSED. Plaintiff and plaintiff-intervenor are hereby
ordered to jointly and severally pay defendants the following:
(a) Moral damages in the amount of Php2,000,000.00 each for
defendants Simny Guy, Geraldine Guy, Grace Guy-Cheu and
Gladys Yao;
(b) Moral damages in the amount of Php200,000.00 for defendant
Emilia Tabugadir;
(c) Exemplary damages in the amount of Php2,000,000.00 each for
defendants Simny Guy, Geraldine Guy, Grace Guy-Cheu, and
Gladys Yao;
(d) Exemplary damages in the amount of Php200,000.00 for
defendant Emilia Tabugadir;
(e) Attorneys fees in the amount of Php2,000.000.00; and
(f) Costs of suit.
SO ORDERED.
21
The trial court held that Civil Case No. 04-109444 is a baseless and an unwarranted suit
among family members; that based on the evidence, Gilbert was only entrusted to hold the disputed
shares of stock in his name for the benefit of the other family members; and that it was only when
Gilbert started to dispose of the assets of the familys corporations without their knowledge that
respondent sisters caused the registration of the shares in their respective names.
Both Lincoln Continental and Gilbert timely appealed the RTC Decision to the Court of
Appeals, docketed therein as CA-G.R. CV No. 85937.
On September 15, 2005, 3-D Industries, Inc. filed a petition for certiorari, prohibition,
and mandamus with this Court assailing the Decision of the Court of Appeals in CA-G.R. SP No.
87104 setting aside the writ of preliminary injunction issued by the RTC, Branch 46. The petition
was docketed as G.R. No. 169462 and raffled off to the Third Division of this Court.
On October 3, 2005, the Third Division of this Court issued a Resolution [4] dismissing the
petition of 3-D Industries in G.R. No. 169462. 3-D Industries timely filed its motion for
reconsideration but this was denied by this Court in its Resolution[5] dated December 14, 2005.
Meanwhile, on October 10, 2005, Gilbert, petitioner in G.R. No. 165849 for certiorari, filed
with this Court a Supplemental Petition for Certiorari, Prohibition, and Mandamus with Urgent
Application for a Writ of Preliminary Mandatory Injunction challenging the Decision of the Court of
Appeals (Seventh Division), dated August 19, 2005, in CA-G.R. SP No. 87104. This Decision set
aside the Order dated October 13, 2004 of the RTC, Branch 46 granting the writ of preliminary
injunction in favor of Lincoln Continental.
On November 8, 2005, Ignacio and Ignacio Law Offices and Smartnet filed with this Court
their petitions for certiorari, docketed as G.R. Nos. 170185 and 170186, respectively.
On February 27, 2006, Lincoln Continental filed with this Court a petition for review
on certiorari challenging the Decision of the Court of Appeals (Seventh Division) in CA-G.R. CV
No. 85937, docketed as G.R. No. 171066.
On March 20, 2006, we ordered the consolidation of G.R. No. 171066 with G.R. Nos.
165849, 170185, and 170186.
In the meantime, in a Decision dated November 27, 2006 in CA-G.R. CV No. 85937, the
Court of Appeals (Special Second Division) affirmed the Decision in Civil Case No. 04-109444 of
the RTC (Branch 25) dismissing Lincoln Continentals complaint and Gilberts complaint-in-
intervention, thus:
WHEREFORE, the appeals are dismissed and the assailed decision
AFFIRMED with modifications that plaintiff and plaintiff-intervenor are ordered to
pay each of the defendants-appellees Simny Guy, Geraldine Guy, Grace Guy-Cheu
and Gladys Yao moral damages of P500,000.00, exemplary damages
of P100,000.00 and attorneys fees of P500,000.00.
SO ORDERED.
 Lincoln Continental and Gilbert filed their respective motions for reconsideration, but they
were denied in a Resolution promulgated on February 12, 2007.
Lincoln Continental then filed with this Court a petition for review on certiorari assailing the
Decision of the Court of Appeals (Former Special Second Division) in CA-G.R. CV No. 85937. This
petition was docketed as G.R. No. 176650 and raffled off to the Third Division of this Court.
In our Resolution dated June 6, 2007, we ordered G.R. No. 176650 consolidated with G.R.
Nos. 165849, 170185, 170186, and 171066.
THE ISSUES
In G.R. Nos. 165849 and 171066, petitioners Gilbert and Lincoln Continental raise the
following issues: (1) whether respondents are guilty of forum shopping; and (2) whether they are
entitled to the injunctive relief granted in CA-G.R. SP No. 87104.
In G.R. Nos. 170185 and 170186, the pivotal issue is whether the Court of Appeals
committed grave abuse of discretion amounting to lack or excess of jurisdiction in ruling that
petitioners Ignacio and Ignacio Law Offices and Smartnet are also covered by its Resolution granting
the writ of preliminary injunction in favor of respondents.
In G.R. No. 176650, the core issue is whether the Court of Appeals (Special Second
Division) erred in affirming the Decision of the RTC, Branch 25, Manila dated September 19,
2005 dismissing the complaint of Lincoln Continental and the complaint-in-intervention of Gilbert in
Civil Case No. 04-109444.
THE COURTS RULING
A. G.R. Nos. 165849 and 171066
On the question of forum shopping, petitioners Gilbert and Lincoln Continental contend that the acts
of respondents in filing a petition for certiorari and mandamus in CA-G.R. SP No. 85069 and
withdrawing the same and their subsequent filing of a petition for certiorari in CA-G.R. SP No.
87104 constitute forum shopping; that respondents withdrew their petition in CA-G.R. SP No. 85069
after the Tenth Division issued a Resolution dated October 20, 2004 denying their application for a
writ of preliminary injunction; that they then filed an identical petition in CA-G.R. SP No. 87104
seeking the same relief alleged in their petition in CA-G.R. SP No. 85069; and that by taking
cognizance of the petition in CA-G.R. SP No. 87104, instead of dismissing it outright on the ground
of forum shopping, the Court of Appeals committed grave abuse of discretion tantamount to lack or
excess of jurisdiction.
A party is guilty of forum shopping when he repetitively avails of several judicial remedies in
different courts, simultaneously or successively, all substantially founded on the same transactions
and the same essential facts and circumstances, and all raising substantially the same issues either
pending in, or already resolved adversely by some other court. [6] It is prohibited by Section 5, Rule 7
of the 1997 Rules of Civil Procedure, as amended, which provides:
SECTION 5. Certification against forum shopping. The plaintiff or principal party
shall certify under oath in the complaint or other initiatory pleading asserting a
claim for relief, or in a sworn certification annexed thereto and simultaneously
22
filed therewith: (a) that he has not theretofore commenced any action or filed any
other claim involving the same issues in any court, tribunal, or quasi-judicial
agency and, to the best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other pending action or claim, a complete statement of
the present status thereof; and (c) if he should thereafter learn that the same or
similar action has been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or initiatory pleading
has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion
and hearing. The submission of a false certification or non-compliance with any
of the undertakings therein shall constitute indirect contempt of court, without
prejudice to the corresponding administrative and criminal actions. If the acts of
the party or his counsel clearly constitute willful and deliberate forum shopping,
the same shall be ground for summary dismissal with prejudice and shall
constitute direct contempt, as well as a cause for administrative sanctions.
Forum shopping is condemned because it unnecessarily burdens our courts with heavy caseloads,
unduly taxes the manpower and financial resources of the judiciary and trifles with and mocks
judicial processes, thereby affecting the efficient administration of justice. [7] The primary evil sought
to be proscribed by the prohibition against forum shopping is, however, the possibility of conflicting
decisions being rendered by the different courts and/or administrative agencies upon the same issues.
[8]
Forum shopping may only exist where the elements of litis pendentia are present or where a final
judgment in one case will amount to res judicata in the other.[9] Litis pendentiaas a ground for
dismissing a civil action is that situation wherein another action is pending between the same parties
for the same cause of action, such that the second action is unnecessary and vexatious. The elements
of litis pendentia are as follows: (a) identity of parties, or at least such as representing the same
interest in both actions; (b) identity of rights asserted and the relief prayed for, the relief being
founded on the same facts; and (c) the identity of the two cases such that judgment in one, regardless
of which party is successful, would amount to res judicata in the other.[10] From the foregoing, it is
clear that sans litis pendentia or res judicata, there can be no forum shopping.
While the first element of litis pendentia identity of parties is present in both CA-G.R. SP No. 85069
and CA-G.R. SP No. 87104, however, the second element, does not exist.The petitioners in CA-G.R.
SP No. 85069 prayed that the following Orders be set aside:
(1) the Order of inhibition dated June 22, 2004 issued by the presiding judge
of the RTC of Manila, Branch 24; and
 (2) the Order dated July 12, 2004 issued by Branch 46 setting Gilberts
application for preliminary injunction for hearing.
In their petition in CA-G.R. SP No. 87104, respondents prayed for the annulment of the writ
of preliminary injunction issued by the RTC, Branch 46 after the expiration of the TRO issued by the
Tenth Division of the Court of Appeals. Evidently, this relief is not identical with the relief sought by
respondents in CA-G.R. SP No. 85069. Clearly, the second element of litis pendentia the identity of
reliefs sought - is lacking in the two petitions filed by respondents with the appellate court. Thus, we
rule that no grave abuse of discretion amounting to lack or excess of jurisdiction may be attributed to
the Court of Appeals (Eighth Division) for giving due course to respondents petition in CA-G.R. SP
No. 87104.
On the second issue, Section 3, Rule 58 of the 1997 Rules of Civil Procedure, as amended provides:
SECTION 3. Grounds for issuance of preliminary injunction. A preliminary
injunction may be granted when it is established:
(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or
in requiring the performance of an act or acts, either for a
limited period or perpetually;
(b) That the commission, continuance, or non-performance of
the act or acts complained of during the litigation would
probably work injustice to the applicant; or
(c) That a party, court, agency, or a person is doing, threatening,
or is attempting to do, or is procuring or suffering to be done,
some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding,
and tending to render the judgment ineffectual.
For a party to be entitled to an injunctive writ, he must show that there exists a right to be
protected and that the acts against which the injunction is directed are violative of this right. [11] In
granting the respondents application for injunctive relief and making the injunction permanent, the
Court of Appeals (Seventh Division) found that they have shown their clear and established right to
the disputed 20,160 shares of stock because: (1) they have physical possession of the two stock
certificates equivalent to the said number of shares; (2) Lincoln Continental is a mere trustee of the
Guy family; and (3) respondents constitute a majority of the board of directors of Northern Islands,
and accordingly have management and control of the company at the inception of Civil Case No. 94-
109444. The appellate court then ruled that the trial court committed grave abuse of discretion in
issuing a writ of preliminary mandatory injunction in favor of Guy. The writ actually reduced the
membership of Northern Islands board to just one member - Gilbert Guy. Moreover, he failed to
establish by clear and convincing evidence his ownership of the shares of stock in question. The
23
Court of Appeals then held there was an urgent necessity to issue an injunctive writ in order to
prevent serious damage to the rights of respondents and Northern Islands.
We thus find no reason to depart from the findings of the Court of Appeals. Indeed, we
cannot discern any taint of grave abuse of discretion on its part in issuing the assailed writ of
preliminary injunction and making the injunction permanent.
B. G.R. Nos. 170185 & 170186
Ignacio and Ignacio Law Offices and Smartnet, petitioners, claim that the Court of Appeals
never acquired jurisdiction over their respective persons as they were not served with summons,
either by the MeTC or by the appellate court in CA-G.R. SP No. 87104. Thus, they submit that the
Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction
when it included them in the coverage of its injunctive writ.
Jurisdiction is the power or capacity given by the law to a court or tribunal to entertain, hear,
and determine certain controversies.[12] Jurisdiction over the subject matter of a case is conferred by
law.
Section 9 (1) of Batas Pambansa Blg. 129,[13] as amended, provides:
SEC. 9. Jurisdiction. The Court of Appeals shall exercise:
(1) Original jurisdiction to issue writs of mandamus,
prohibition, certiorari, habeas corpus, and quo warranto, and auxiliary writs or
processes, whether or not in aid of its appellate jurisdiction.
Rule 46 of the 1997 Rules of Civil Procedure, as amended, governs all cases originally
filed with the Court of Appeals. The following provisions of the Rule state:
SEC. 2. To what actions applicable. This Rule shall apply to original
actions for certiorari, prohibition, mandamus and quo warranto.
Except as otherwise provided, the actions for annulment of judgment shall
be governed by Rule 47, for certiorari, prohibition, and mandamus by Rule 65, and
for quo warranto by Rule 66.
xxx
SEC. 4. Jurisdiction over person of respondent, how acquired. The court
shall acquire jurisdiction over the person of the respondent by the service on him of
its order or resolution indicating its initial action on the petition or by his voluntary
submission to such jurisdiction.
SEC. 5. Action by the court. The court may dismiss the petition outright
with specific reasons for such dismissal or require the respondent to file a comment
on the same within ten (10) days from notice. Only pleadings required by the court
shall be allowed. All other pleadings and papers may be filed only with leave of
court.
 It is thus clear that in cases covered by Rule 46, the Court of Appeals acquires jurisdiction
over the persons of the respondents by the service upon them of its order or resolution indicating its
initial action on the petitions or by their voluntary submission to such jurisdiction. [14] The reason for
this is that, aside from the fact that no summons or other coercive process is served on respondents,
their response to the petitions will depend on the initial action of the court thereon. Under Section 5,
the court may dismiss the petitions outright, hence, no reaction is expected from respondents and
under the policy adopted by Rule 46, they are not deemed to have been brought within the courts
jurisdiction until after service on them of the dismissal order or resolution.[15]
Records show that on April 27, 2005, petitioners in these two forcible entry cases, were
served copies of the Resolution of the Court of Appeals (Seventh Division) dated April 26, 2005 in
CA-G.R. SP No. 87104.[16] The Resolution states:
Private respondents SMARTNET PHILIPPINES, INC., IGNACIO &
IGNACIO LAW OFFICE, SUNFIRE TRADING, INC., ZOLT CORPORATION,
CELLPRIME DISTRIBUTION CORPO., GOODGOLD REALTY &
DEVELOPMENT CORP., are hereby DIRECTED to file CONSOLIDATED
COMMENT on the original Petition for Certiorari, the First Supplemental Petition
for Certiorari, and the Second Supplemental Petition for Certiorari (not a Motion to
Dismiss) within ten (10) days from receipt of a copy of the original, first and
second Petitions for Certiorari.[17]
Pursuant to Rule 46, the Court of Appeals validly acquired jurisdiction over the persons of
Ignacio and Ignacio Law Offices and Smartnet upon being served with the above Resolution.
But neither of the parties bothered to file the required comment. Their allegation that they
have been deprived of due process is definitely without merit. We have consistently held that when a
party was afforded an opportunity to participate in the proceedings but failed to do so, he cannot
complain of deprivation of due process for by such failure, he is deemed to have waived or forfeited
his right to be heard without violating the constitutional guarantee.[18]
On the question of whether the Court of Appeals could amend its Resolution directing the
issuance of a writ of preliminary injunction so as to include petitioners, suffice to state that having
acquired jurisdiction over their persons, the appellate court could do so pursuant to Section 5 (g),
Rule 135 of the Revised Rules of Court, thus:
SEC. 5. Inherent powers of courts. Every court shall have power:
xxx
(g) To amend and control its process and orders so as to make
them conformable to law and justice.
In Villanueva v. CFI of Oriental Mindoro[19] and Eternal Gardens Memorial Parks Corp. v.
Intermediate Appellate Court,[20] we held that under this Rule, a court has inherent power to amend its
judgment so as to make it conformable to the law applicable, provided that said judgment has not yet
acquired finality, as in these cases.
24
C. G.R. No. 176650
The fundamental issue is who owns the disputed shares of stock in Northern Islands.
We remind petitioner Lincoln Continental that what it filed with this Court is a petition for
review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended. It is a rule in
this jurisdiction that in petitions for review under Rule 45, only questions or errors of law may be
raised.[21] There is a question of law when the doubt or controversy concerns the correct application
of law or jurisprudence to a certain set of facts, or when the issue does not call for an examination of
the probative value of the evidence presented. There is a question of fact when the doubt arises as to
the truth or falsehood of facts or when there is a need to calibrate the whole evidence considering
mainly the credibility of the witnesses, the existence and relevancy of specific surrounding
circumstances, as well as their relation to each other and to the whole, and the probability of the
situation.[22] Obviously, the issue raised by the instant petition for review on certiorari, involves a
factual matter, hence, is outside the domain of this Court. However, in the interest of justice and in
order to settle this controversy once and for all, a ruling from this Court is imperative.
One thing is clear. It was established before the trial court, affirmed by the Court of
Appeals, that Lincoln Continental held the disputed shares of stock of Northern Islands merely
in trust for the Guy sisters. In fact, the evidence proffered by Lincoln Continental itself supports
this conclusion. It bears emphasis that this factual finding by the trial court was affirmed by the Court
of Appeals, being supported by evidence, and is, therefore, final and conclusive upon this Court.
Article 1440 of the Civil Code provides that:
ART. 1440. A person who establishes a trust is called the trustor; one in
whom confidence is reposed as regards property for the benefit of another person is
known as the trustee; and the person for whose benefit the trust has been created is
referred to as the beneficiary.
In the early case of Gayondato v. Treasurer of the Philippine Islands,[23] this Court defines
trust, in its technical sense, as a right of property, real or personal, held by one party for the benefit of
another. Differently stated, a trust is a fiduciary relationship with respect to property, subjecting the
person holding the same to the obligation of dealing with the property for the benefit of another
person.[24]
Both Lincoln Continental and Gilbert claim that the latter holds legal title to the shares in
question. But record shows that there is no evidence to support their claim.Rather, the evidence
on record clearly indicates that the stock certificates representing the contested shares are in
respondents possession. Significantly, there is no proof to support his allegation that the transfer of
the shares of stock to respondent sisters is fraudulent. As aptly held by the Court of Appeals, fraud is
never presumed but must be established by clear and convincing evidence. [25] Gilbert failed to
discharge this burden. We, agree with the Court of Appeals that respondent sisters own the shares of
stocks, Gilbert being their mere trustee. Verily, we find no reversible error in the challenged Decision
of the Court of Appeals (Special Second Division) in CA-G.R. CV No. 85937.
WHEREFORE, we DISMISS the petitions in G.R. Nos. 165849, 170185, 170186 and 176650; Reconsideration. In the assailed decision, the CA affirmed the Court of Tax Appeals (CTA)
and DENY the petitions in G.R. Nos. 171066 and 176650. The Resolutions of the Court of Appeals Decision[4]dated 24 October 2000. The CTA denied petitioners claim for refund of withheld creditable
(Eighth Division), dated October 28, 2004 and November 4, 2004, as well as the Decision tax of P3,037,500 arising from the sale of real property of which petitioner claims to be a co-owner
dated October 10, 2005 of the Court of Appeals (Seventh Division) in CA-G.R. SP No. 87104 as trustee of the employees trust or retirement funds.
are AFFIRMED. We likewise AFFIRM IN TOTO the Decision of the Court of Appeals (Special
Second Division), dated November 27, 2006 in CA-G.R. CV No. 85937. Costs against petitioners. The Facts
SO ORDERED.
MIGUEL J. OSSORIO PENSION G.R. No. 162175 Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to
FOUNDATION, INCORPORATED, and administering the employees trust or retirement funds (Employees Trust Fund) established for the
Petitioner, Present: benefit of the employees of Victorias Milling Company, Inc. (VMC). [5]Petitioner, as trustee, claims
that the income earned by the Employees Trust Fund is tax exempt under Section 53(b) of the
CARPIO, J., Chairperson, National Internal Revenue Code (Tax Code).
- versus - PERALTA, Petitioner alleges that on 25 March 1992, petitioner decided to invest part of the Employees Trust
ABAD, Fund to purchase a lot[6]in the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner
PEREZ,*and bought the MBP lot through VMC.[7]Petitioner alleges that its investment in the MBP lot came about
MENDOZA, JJ. upon the invitation of VMC, which also purchased two lots. Petitioner claims that its share in the
COURT OF APPEALS and MBP lot is 49.59%. Petitioners investment manager, the Citytrust Banking Corporation (Citytrust),
[8]
COMMISSIONER OF INTERNAL in submitting its Portfolio Mix Analysis, regularly reported the Employees Trust Funds share in the
REVENUE, MBP lot.[9]The MBP lot is covered by Transfer Certificate of Title No. 183907 (TCT 183907) with
Respondents. Promulgated: VMC as the registered owner.[10]
June 28, 2010
Petitioner claims that since it needed funds to pay the retirement and pension benefits of VMC
employees and to reimburse advances made by VMC, petitioners Board of Trustees authorized the
sale of its share in the MBP lot.[11]
On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust
Company, Inc. (Metrobank) for P81,675,000, but the consummation of the sale was withheld.[12]On
26 March 1997, VMC eventually sold the MBP lot to Metrobank. VMC, through its Vice President
Rolando Rodriguez and Assistant Vice President Teodorico Escober, signed the Deed of Absolute
x--------------------------------------------------x Sale as the sole vendor.

Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR) P6,125,625 as
DECISION withholding tax on the sale of real property.

CARPIO, J.:
The Case
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition
for Certiorari[1]with Prayer for the Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction to reverse the Court of Appeals (CA) Decision [2]dated 30 May 2003 in CA-
G.R. SP No. 61829 as well as the Resolution [3]dated 7 November 2003 denying the Motion for
Petitioner alleges that the parties who co-owned the MBP lot executed a notarized Memorandum of
Agreement as to the proceeds of the sale, the pertinent provisions of which state:[13]
2. The said parcels of land are actually co-owned by the following:
BLOCK 4, LOT 1 COVERED BY TCT NO. 183907
% SQ.M. AMOUNT

25
 MJOPFI 49.59% 450.00 P 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30
3. Since Lot 1 has been sold for P81,675,000.00 (gross of 7.5% withholding tax and
3% brokers commission, MJOPFIs share in the proceeds of the sale
is P40,500,000.00 (gross of 7.5% withholding tax and 3% brokers commission.
However, MJO Pension Fund is indebted to VMC representing pension benefit
advances paid to retirees amounting to P21,425,141.54, thereby leaving a balance
of P14,822,358.46 in favor of MJOPFI. Check for said amount of P14,822,358.46
will therefore be issued to MJOPFI as its share in the proceeds of the sale of Lot 1.
The check corresponding to said amount will be deposited with MJOPFIs account
with BPI Asset Management & Trust Group which will then be invested by it in the
usual course of its administration of MJOPFI funds.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees Trust Fund, based
on the notarized Memorandum of Agreement presented before the appellate courts. Petitioner asserts
that VMC has confirmed that petitioner, as trustee of the Employees Trust Fund, is VMCs co-owner
of the MBP lot. Petitioner maintains that its ownership of the MBP lot is supported by the excerpts of
the minutes and the resolutions of petitioners Board Meetings. Petitioner further contends that there
is no dispute that the Employees Trust Fund is exempt from income tax. Since petitioner, as
trustee, purchased 49.59% of the MBP lot using funds of the Employees Trust Fund, petitioner
asserts that the Employees Trust Fund's 49.59% share in the income tax paid (or P3,037,697.40
rounded off to P3,037,500) should be refunded.[14]
Petitioner maintains that the tax exemption of the Employees Trust Fund rendered the payment
of P3,037,500 as illegal or erroneous. On 5 May 1997, petitioner filed a claim for tax refund. [15]
On 14 August 1997, the BIR, through its Revenue District Officer, wrote petitioner stating that under
Section 26 of the Tax Code, petitioner is not exempt from tax on its income from the sale of real
property. The BIR asked petitioner to submit documents to prove its co-ownership of the MBP lot
and its exemption from tax.[16]
On 2 September 1997, petitioner replied that the applicable provision granting its claim for tax
exemption is not Section 26 but Section 53(b) of the Tax Code. Petitioner claims that its co-
ownership of the MBP lot is evidenced by Board Resolution Nos. 92-34 and 96-46 and the
memoranda of agreement among petitioner, VMC and its subsidiaries. [17]
Since the BIR failed to act on petitioners claim for refund, petitioner elevated its claim to the
Commissioner of Internal Revenue (CIR) on 26 October 1998. The CIR did not act on petitioners
26
claim for refund. Hence, petitioner filed a petition for tax refund before the CTA. On 24 October
2000, the CTA rendered a decision denying the petition.[18]
On 22 November 2000, petitioner filed its Petition for Review before the Court of Appeals. On 20
May 2003, the CA rendered a decision denying the appeal. The CA also denied petitioners Motion for
Reconsideration.[19]
Aggrieved by the appellate courts Decision, petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
The CTA held that under Section 53(b) [20][now Section 60(b)] of the Tax Code, it is not petitioner that
is entitled to exemption from income tax but the income or earnings of the Employees Trust Fund.
The CTA stated that petitioner is not the pension trust itself but it is a separate and distinct entity
whose function is to administer the pension plan for some VMC employees. [21] The CTA, after
evaluating the evidence adduced by the parties, ruled that petitioner is not a party in interest.
To prove its co-ownership over the MBP lot, petitioner presented the following documents:
a. Secretarys Certificate showing how the purchase and eventual sale of the
MBP lot came about.
b. Memoranda of Agreement showing various details:
i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;
ii. That VMC held the property in trust for North Legaspi Land Development
Corporation, North Negros Marketing Co., Inc., Victorias Insurance Factors
Corporation, Victorias Science and Technical Foundation, Inc. and Canetown
Development Corporation.
iii. That the previous agreement (ii) was cancelled and it showed that the MBP
lot was co-owned by petitioner, VMC and Victorias Insurance Factors
Corporation (VFC).[22]
The CTA ruled that these pieces of evidence are self-serving and cannot by themselves
prove petitioners co-ownership of the MBP lot when the TCT, the Deed of Absolute Sale, and the
Monthly Remittance Return of Income Taxes Withheld (Remittance Return) disclose otherwise. The
CTA further ruled that petitioner failed to present any evidence to prove that the money used to
purchase the MBP lot came from the Employees' Trust Fund.[23]
The CTA concluded that petitioner is estopped from claiming a tax exemption. The CTA pointed out
that VMC has led the government to believe that it is the sole owner of the MBP lot through its
execution of the Deeds of Absolute Sale both during the purchase and subsequent sale of the MBP lot
and through the registration of the MBP lot in VMCs name. Consequently, the tax was also paid in
VMCs name alone. The CTA stated that petitioner may not now claim a refund of a portion of the tax
paid by the mere expediency of presenting Secretarys Certificates and memoranda of agreement in
order to prove its ownership. These documents are self-serving; hence, these documents merit very
little weight.[24]
The Ruling of the Court of Appeals
The CA declared that the findings of the CTA involved three types of documentary evidence that
petitioner presented to prove its contention that it purchased 49.59% of the MBP lot with funds from
the Employees Trust Fund: (1) the memoranda of agreement executed by petitioner and other VMC
subsidiaries; (2) Secretarys Certificates containing excerpts of the minutes of meetings conducted by
the respective boards of directors or trustees of VMC and petitioner; (3) Certified True Copies of the
Portfolio Mix Analysis issued by Citytrust regarding the investment of P5,504,748.25 in Madrigal
Business Park I for the years 1994 to 1997.[25]
The CA agreed with the CTA that these pieces of documentary evidence submitted by petitioner are
largely self-serving and can be contrived easily. The CA ruled that these documents failed to show
that the funds used to purchase the MBP lot came from the Employees Trust Fund. The CA
explained, thus:
We are constrained to echo the findings of the Court of Tax Appeals in regard to the
failure of the petitioner to ensure that legal documents pertaining to its investments,
e.g. title to the subject property, were really in its name, considering its awareness
of the resulting tax benefit that such foresight or providence would produce; hence,
genuine efforts towards that end should have been exerted, this notwithstanding the
alleged difficulty of procuring a title under the names of all the co-owners. Indeed,
we are unable to understand why petitioner would allow the title of the property to
be placed solely in the name of petitioner's alleged co-owner, i.e. the VMC,
although it allegedly owned a much bigger (nearly half), portion thereof. Withal,
petitioner failed to ensure a fix so to speak, on its investment, and we are not
impressed by the documents which the petitioner presented, as the same apparently
allowed mobility of the subject real estate assets between or among the petitioner,
the VMC and the latter's subsidiaries. Given the fact that the subject parcel of land
was registered and sold under the name solely of VMC, even as payment of taxes
27
was also made only under its name, we cannot but concur with the finding of the
Court of Tax Appeals that petitioner's claim for refund of withheld creditable tax is
bereft of solid juridical basis.[26]
The Issues
The issues presented are:
1. Whether petitioner or the Employees Trust Fund is estopped from claiming that the
Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot and that
VMC merely held 49.59% of the MBP lot in trust for the Employees Trust Fund.
2. If petitioner or the Employees Trust Fund is not estopped, whether they have
sufficiently established that the Employees Trust Fund is the beneficial owner of
49.59% of the MBP lot, and thus entitled to tax exemption for its share in the
proceeds from the sale of the MBP lot.
The Ruling of the Court
We grant the petition.
The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate
share in the name of his co-owner (second co-owner) in whose name the entire land is registered. The
second co-owner serves as a legal trustee of the first co-owner insofar as the proportionate share of
the first co-owner is concerned. The first co-owner remains the owner of his proportionate share and
not the second co-owner in whose name the entire land is registered. Article 1452 of the Civil Code
provides:
Art. 1452. If two or more persons agree to purchase a property and by common
consent the legal title is taken in the name of one of them for the benefit of all, a
trust is created by force of law in favor of the others in proportion to the interest
of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is common consent among
the purchasing co-owners to put the legal title to the purchased property in the name of one co-owner
for the benefit of all. Once this common consent is shown, a trust is created by force of law. The
BIR has no option but to recognize such legal trust as well as the beneficial ownership of the real
owners because the trust is created by force of law. The fact that the title is registered solely in the
name of one person is not conclusive that he alone owns the property.

Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the
Employees Trust Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC
shall jointly purchase the MBP lot and put the title to the MBP lot in the name of VMC for the benefit
petitioner, VMC and VFC.
We rule that petitioner, as trustee of the Employees Trust Fund, has more than sufficiently established
that it has an agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP
lot solely in the name of VMC for the benefit of petitioner, VMC and VFC.
Factual findings of the CTA will be reviewed
when judgment is based on a misapprehension of facts.
Generally, the factual findings of the CTA, a special court exercising expertise on the subject of tax,
are regarded as final, binding and conclusive upon this Court, especially if these are substantially
similar to the findings of the CA which is normally the final arbiter of questions of fact. [27] However,
there are recognized exceptions to this rule, [28]such as when the judgment is based on a
misapprehension of facts.
Petitioner contends that the CA erred in evaluating the documents as self-serving instead of
considering them as truthful and genuine because they are public documents duly notarized by a
Notary Public and presumed to be regular unless the contrary appears. Petitioner explains that the CA
erred in doubting the authenticity and genuineness of the three memoranda of agreement presented as
evidence. Petitioner submits that there is nothing wrong in the execution of the three memoranda of
agreement by the parties.Petitioner points out that VMC authorized petitioner to administer its
Employees Trust Fund which is basically funded by donation from its founder, Miguel J. Ossorio,
with his shares of stocks and share in VMC's profits.[29]
Petitioner argues that the Citytrust report reflecting petitioners investment in the MBP lot is concrete
proof that money of the Employees Trust Funds was used to purchase the MBP lot. In fact, the CIR
did not dispute the authenticity and existence of this documentary evidence. Further, it would be
unlikely for Citytrust to issue a certified copy of the Portfolio Mix Analysis stating that petitioner
invested in the MBP lot if it were not true.[30]
Petitioner claims that substantial evidence is all that is required to prove petitioners co-ownership and
all the pieces of evidence have overwhelmingly proved that petitioner is a co-owner of the MBP lot
to the extent of 49.59% of the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by the excerpts of the minutes
and the resolutions of the Board of Trustees of the petitioner and those of VMC. All
these documents showed that as far as March 1992, petitioner already expressed
28
intention to be co-owner of the said property. It then decided to invest the
retirement funds to buy the said property and culminated in it owning 49.59%
thereof. When it was sold to Metrobank, petitioner received its share in the
proceeds from the sale thereof. The excerpts and resolutions of the parties'
respective Board of Directors were certified under oath by their respective
Corporate Secretaries at the time. The corporate certifications are accorded verity
by law and accepted as prima facie evidence of what took place in the board
meetings because the corporate secretary is, for the time being, the board itself. [31]
Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC registered the land solely in
its name, it does not make VMC the absolute owner of the whole property or deprive petitioner of its
rights as a co-owner.[32]Petitioner argues that under the Torrens system, the issuance of a TCT does
not create or vest a title and it has never been recognized as a mode of acquiring ownership.[33]
The issues of whether petitioner or the Employees Trust Fund is estopped from claiming 49.59%
ownership in the MBP lot, whether the documents presented by petitioner are self-serving, and
whether petitioner has proven its exemption from tax, are all questions of fact which could only be
resolved after reviewing, examining and evaluating the probative value of the evidence presented.
The CTA ruled that the documents presented by petitioner cannot prove its co-ownership over the
MBP lot especially that the TCT, Deed of Absolute Sale and the Remittance Return disclosed that
VMC is the sole owner and taxpayer.
However, the appellate courts failed to consider the genuineness and due execution of the notarized
Memorandum of Agreement acknowledging petitioners ownership of the MBP lot which provides:
2. The said parcels of land are actually co-owned by the following:
BLOCK 4, LOT 1 COVERED BY TCT NO. 183907
% SQ.M. AMOUNT
MJOPFI 49.59% 450.00 P 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30
Thus, there is a common consent or agreement among petitioner, VMC and VFC to co-own the MBP
lot in the proportion specified in the notarized Memorandum of Agreement.
In Cuizon v. Remoto,[34]we held:

Documents acknowledged before notaries public are public documents and public
documents are admissible in evidence without necessity of preliminary proof as to
their authenticity and due execution. They have in their favor the presumption of
regularity, and to contradict the same, there must be evidence that is clear,
convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the notarized
Memorandum of Agreement is fictitious or has no legal effect. Likewise, VMC, the registered owner,
did not repudiate petitioners share in the MBP lot. Further, Citytrust, a reputable banking institution,
has prepared a Portfolio Mix Analysis for the years 1994 to 1997 showing that petitioner
invested P5,504,748.25 in the MBP lot. Absent any proof that the Citytrust bank records have been
tampered or falsified, and the BIR has presented none, the Portfolio Mix Analysis should be given
probative value.
The BIR argues that under the Torrens system, a third person dealing with registered property need
not go beyond the TCT and since the registered owner is VMC, petitioner is estopped from claiming
ownership of the MBP lot. This argument is grossly erroneous. The trustor-beneficiary is not
estopped from proving its ownership over the property held in trust by the trustee when the purpose
is not to contest the disposition or encumbrance of the property in favor of an innocent third-party
purchaser for value. The BIR, not being a buyer or claimant to any interest in the MBP lot, has not
relied on the face of the title of the MBP lot to acquire any interest in the lot. There is no basis for the
BIR to claim that petitioner is estopped from proving that it co-owns, as trustee of the Employees
Trust Fund, the MBP lot. Article 1452 of the Civil Code recognizes the lawful ownership of the
trustor-beneficiary over the property registered in the name of the trustee. Certainly, the Torrens
system was not established to foreclose a trustor or beneficiary from proving its ownership of a
property titled in the name of another person when the rights of an innocent purchaser or lien-holder
are not involved. More so, when such other person, as in the present case, admits its being a mere
trustee of the trustor or beneficiary.
The registration of a land under the Torrens system does not create or vest title, because registration
is not one of the modes of acquiring ownership. A TCT is merely an evidence of ownership over a
particular property and its issuance in favor of a particular person does not foreclose the possibility
that the property may be co-owned by persons not named in the certificate, or that it may be held in
trust for another person by the registered owner.[35]
No particular words are required for the creation of a trust, it being sufficient that a trust is clearly
intended.[36]It is immaterial whether or not the trustor and the trustee know that the relationship which
they intend to create is called a trust, and whether or not the parties know the precise characteristic of
29
the relationship which is called a trust because what is important is whether the parties manifested an
intention to create the kind of relationship which in law is known as a trust.[37]
The fact that the TCT, Deed of Absolute Sale and the Remittance Return were in VMCs name does
not forestall the possibility that the property is owned by another entity because Article 1452 of the
Civil Code expressly authorizes a person to purchase a property with his own money and to
take conveyance in the name of another.
In Tigno v. Court of Appeals, the Court explained, thus:
An implied trust arises where a person purchases land with his own money and
takes conveyance thereof in the name of another. In such a case, the property is
held on resulting trust in favor of the one furnishing the consideration for the
transfer, unless a different intention or understanding appears. The trust which
results under such circumstances does not arise from a contract or an agreement of
the parties, but from the facts and circumstances; that is to say, the trust results
because of equity and it arises by implication or operation of law. [38]
In this case, the notarized Memorandum of Agreement and the certified true copies of the Portfolio
Mix Analysis prepared by Citytrust clearly prove that petitioner invested P5,504,748.25, using funds
of the Employees' Trust Fund, to purchase the MBP lot. Since the MBP lot was registered in VMCs
name only, a resulting trust is created by operation of law. A resulting trust is based on the
equitable doctrine that valuable consideration and not legal title determines the equitable interest and
is presumed to have been contemplated by the parties. [39] Based on this resulting trust, the Employees
Trust Fund is considered the beneficial co-owner of the MBP lot.
Petitioner has sufficiently proven that it had a common consent or agreement with VMC and VFC to
jointly purchase the MBP lot. The absence of petitioners name in the TCT does not prevent petitioner
from claiming before the BIR that the Employees Trust Fund is the beneficial owner of 49.59% of the
MBP lot and that VMC merely holds 49.59% of the MBP lot in trust, through petitioner, for the
benefit of the Employees Trust Fund.
The BIR has acknowledged that the owner of a land can validly place the title to the land in the name
of another person. In BIR Ruling [DA-(I-012) 190-09] dated 16 April 2009, a certain Amelia Segarra
purchased a parcel of land and registered it in the names of Armin Segarra and Amelito Segarra as
trustees on the condition that upon demand by Amelia Segarra, the trustees would transfer the land in
favor of their sister, Arleen May Segarra-Guevara. The BIR ruled that an implied trust is deemed
created by law and the transfer of the land to the beneficiary is not subject to capital gains tax or
creditable withholding tax.
Income from Employees Trust Fund is Exempt from Income Tax
Petitioner claims that the Employees Trust Fund is exempt from the payment of income tax.
Petitioner further claims that as trustee, it acts for the Employees Trust Fund, and can file the claim
for refund. As trustee, petitioner considers itself as the entity that is entitled to file a claim for refund
of taxes erroneously paid in the sale of the MBP lot.[40]
The Office of the Solicitor General argues that the cardinal rule in taxation is that tax exemptions are
highly disfavored and whoever claims a tax exemption must justify his right by the clearest grant of
law. Tax exemption cannot arise by implication and any doubt whether the exemption exists is
strictly construed against the taxpayer.[41]Further, the findings of the CTA, which were affirmed by
the CA, should be given respect and weight in the absence of abuse or improvident exercise of
authority.[42]
Section 53(b) and now Section 60(b) of the Tax Code provides:
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not apply to employees trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer
for the benefit of some or all of his employees (1) if contributions are made to the
trust by such employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of
his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
Petitioners Articles of Incorporation state the purpose for which the corporation was formed:
Primary Purpose
To hold legal title to, control, invest and administer in the manner provided,
pursuant to applicable rules and conditions as established, and in the interest and
for the benefit of its beneficiaries and/or participants, the private pension plan as
established for certain employees of Victorias Milling Company, Inc., and
other pension plans of Victorias Milling Company affiliates and/or
subsidiaries, the pension funds and assets, as well as accruals, additions and
increments thereto, and such amounts as may be set aside or accumulated for the
30
benefit of the participants of said pension plans; and in furtherance of the foregoing
and as may be incidental thereto.[43](Emphasis supplied)
Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner
invested P5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot. When
the MBP lot was sold, the gross income of the Employees Trust Fund from the sale of the MBP lot
was P40,500,000. The 7.5% withholding tax of P3,037,500 and brokers commission were deducted
from the proceeds. In Commissioner of Internal Revenue v. Court of Appeals,[44] the Court explained
the rationale for the tax-exemption privilege of income derived from employees trusts:
It is evident that tax-exemption is likewise to be enjoyed by the income of the
pension trust. Otherwise, taxation of those earnings would result in a diminution of
accumulated income and reduce whatever the trust beneficiaries would receive out
of the trust fund. This would run afoul of the very intendment of the law.
In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal Revenue,[45]the CTA held
that petitioner is entitled to a refund of withholding taxes paid on interest income from direct loans
made by the Employees' Trust Fund since such interest income is exempt from tax. The CTA, in
recognizing petitioners entitlement for tax exemption, explained:
In or about 1968, Victorias Milling Co., Inc. established a retirement or pension
plan for its employees and those of its subsidiary companies pursuant to a 22-page
plan. Pursuant to said pension plan, Victorias Milling Co., Inc. makes a (sic)
regular financial contributions to the employee trust for the purpose of distributing
or paying to said employees, the earnings and principal of the funds accumulated
by the trust in accordance with said plan. Under the plan, it is imposable, at any
time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be used for, or diverted to, purposes
other than for the exclusive benefit of said employees. Moreover, upon the
termination of the plan, any remaining assets will be applied for the benefit of all
employees and their beneficiaries entitled thereto in proportion to the amount
allocated for their respective benefits as provided in said plan.
The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a
Memorandum of Understanding, whereby they agreed that petitioner would
administer the pension plan funds and assets, as assigned and transferred to it in
trust, as well as all amounts that may from time to time be set aside by Victorias
Milling Co., Inc. For the benefit of the Pension Plan, said administration is to be
strictly adhered to pursuant to the rules and regulations of the Pension Plan and of
the Articles of Incorporation and By Laws of petitioner.

The pension plan was thereafter submitted to the Bureau of Internal Revenue for
registration and for a ruling as to whether its income or earnings are exempt from
income tax pursuant to Rep. Act 4917, in relation to Sec. 56(b), now Sec. 54(b), of
the Tax Code.
In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the
Bureau of Internal Revenue ruled that the income of the trust fund of your
retirement benefit plan is exempt from income tax, pursuant to Rep. Act 4917 in
relation to Section 56(b) of the Tax Code.
In accordance with petitioners Articles of Incorporation (Annex A), petitioner
would hold legal title to, control, invest and administer, in the manner provided,
pursuant to applicable rules and conditions as established, and in the interest
and for the benefit of its beneficiaries and/or participants, the private pension
plan as established for certain employees of Victorias Milling Co., Inc. and other
pension plans of Victorias Milling Co. affiliates and/or subsidiaries, the pension
funds and assets, as well as the accruals, additions and increments thereto, and
such amounts as may be set aside or accumulated of said pension plans.
Moreover, pursuant to the same Articles of Incorporations, petitioner is
empowered to settle, compromise or submit to arbitration, any claims, debts or
damages due or owing to or from pension funds and assets and other funds and
assets of the corporation, to commence or defend suits or legal proceedings and
to represent said funds and assets in all suits or legal proceedings.
Petitioner, through its investment manager, the City Trust Banking
Corporation, has invested the funds of the employee trust in treasury bills,
Central Bank bills, direct lending, etc. so as to generate income or earnings for
the benefit of the employees-beneficiaries of the pension plan. Prior to the
effectivity of Presidential Decree No. 1959 on October 15, 1984, respondent did
not subject said income or earning of the employee trust to income tax because
they were exempt from income tax pursuant to Sec. 56(b), now Sec. 54(b) of the Tax
Code and the BIR Ruling dated January 18, 1984 (Annex D). (Boldfacing supplied;
italicization in the original)
xxx
It asserted that the pension plan in question was previously submitted to the Bureau
of Internal Revenue for a ruling as to whether the income or earnings of the
retirement funds of said plan are exempt from income tax and in a letter dated
January 18,1984, the Bureau ruled that the earnings of the trust funds of the
31
pension plan are exempt from income tax under Sec. 56(b) of the Tax Code.
(Emphasis supplied)
A close review of the provisions of the plan and trust instrument
disclose that in reality the corpus and income of the trust fund are
not at no time used for, or diverted to, any purpose other than for
the exclusive benefit of the plan beneficiaries. This fact was
likewise confirmed after verification of the plan operations by the
Revenue District No. 63 of the Revenue Region No. 14, Bacolod
City. Section X also confirms this fact by providing that if any
assets remain after satisfaction of the requirements of all the
above clauses, such remaining assets will be applied for the
benefits of all persons included in such classes in proportion to
the amounts allocated for their respective benefits pursuant to the
foregoing priorities.
In view of all the foregoing, this Office is of the opinion, as it
hereby holds, that the income of the trust fund of your retirement
benefit plan is exempt from income tax pursuant to Republic Act
4917 in relation to Section 56(b) of the Tax Code. (Annex D of
Petition)
This CTA decision, which was affirmed by the CA in a decision dated 20 January 1993, became final
and executory on 3 August 1993.
The tax-exempt character of petitioners Employees' Trust Fund is not at issue in this case. The tax-
exempt character of the Employees' Trust Fund has long been settled. It is also settled that petitioner
exists for the purpose of holding title to, and administering, the tax-exempt Employees Trust Fund
established for the benefit of VMCs employees. As such, petitioner has the personality to claim tax
refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v.
Commissioner of Internal Revenue,[46] the CTA granted Citytrusts claim for refund on withholding
taxes paid on the investments made by Citytrust in behalf of the trust funds it manages, including
petitioner.[47] Thus:
In resolving the second issue, we note that the same is not a case of first
impression. Indeed, the petitioner is correct in its adherence to the clear ruling laid
by the Supreme Court way back in 1992 in the case of Commissioner of Internal
 Revenue vs. The Honorable Court of Appeals, The Court of Tax Appeals and GCL
Retirement Plan, 207 SCRA 487 at page 496, supra, wherein it was succinctly held:
xxx
There can be no denying either that the final withholding tax is
collected from income in respect of which employees trusts are
declared exempt (Sec. 56(b), now 53(b), Tax Code). The
application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by
requiring its payment at the source. If an employees trust like the
GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not
supposed to pay in the first place.
xxx
Similarly, the income of the trust funds involved herein is exempt from the payment
of final withholding taxes.
This CTA decision became final and executory when the CIR failed to file a Petition for Review
within the extension granted by the CA.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it
from the payment of withholding tax on the sale of the land by various BIR-approved trustees and
tax-exempt private employees' retirement benefit trust funds [48]represented by Citytrust. The BIR
ruled that the private employees benefit trust funds, which included petitioner, have met the
requirements of the law and the regulations and therefore qualify as reasonable retirement benefit
plans within the contemplation of Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The
income from the trust fund investments is therefore exempt from the payment of income tax and
consequently from the payment of the creditable withholding tax on the sale of their real property.[49]
Thus, the documents issued and certified by Citytrust showing that money from the Employees Trust
Fund was invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the
light of previous cases holding that Citytrust was indeed handling the money of the Employees Trust
Fund. These documents, together with the notarized Memorandum of Agreement, clearly establish
that petitioner, on behalf of the Employees Trust Fund, indeed invested in the purchase of the MBP
lot. Thus, the Employees' Trust Fund owns 49.59% of the MBP lot.
32
Since petitioner has proven that the income from the sale of the MBP lot came from an investment by
the Employees' Trust Fund, petitioner, as trustee of the Employees Trust Fund, is entitled to claim the
tax refund of P3,037,500 which was erroneously paid in the sale of the MBP lot.
WHEREFORE, we GRANT the petition and SET ASIDE the Decision of 30 May 2003 of the
Court of Appeals in CA-G.R. SP No. 61829. Respondent Commissioner of Internal Revenue is
directed to refund petitioner Miguel J. Ossorio Pension Foundation, Incorporated, as trustee of the
Employees Trust Fund, the amount of P3,037,500, representing income tax erroneously paid.
SO ORDERED.
LORENZO T. OA and HEIRS OF JULIA BUALES, 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.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete, and Special Attorney Purificacion Ureta for respondent.
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
1952 67,927.52 87,065.28 152,674.39
guardian of the persons and property of the aforenamed minors (See p. 3,
BIR rec.). 1953 61,258.27 84,925.68 161,463.83
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that
the heirs have undivided one-half (1/2) interest in ten parcels of land with a 1954 63,623.37 99,001.20 167,962.04
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 1955 100,786.00 120,249.78 169,262.52
Damage Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided among 1956 175,028.68 135,714.68 169,262.52
them but was used in the rehabilitation of properties owned by them in
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were
From said investments and properties petitioners derived such incomes as
acquired after the death of the decedent with money borrowed from the
profits from installment sales of subdivided lots, profits from sales of stocks,
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit
dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n.,
3, pp. 31-34 BIR rec.).
pp. 37-38). The said incomes are recorded in the books of account kept by
The project of partition also shows that the estate shares equally with
Lorenzo T. Oa where the corresponding shares of the petitioners in the net
Lorenzo T. Oa, the administrator thereof, in the obligation of P94,973.00,
income for the year are also known. Every year, petitioners returned for
consisting of loans contracted by the latter with the approval of the Court
income tax purposes their shares in the net income derived from said
(see p. 3 of Exhibit K; or see p. 74, BIR rec.).
properties and securities and/or from transactions involving them (Exhibit
Although the project of partition was approved by the Court on May 16,
3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive
1949, no attempt was made to divide the properties therein listed. Instead,
their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
the properties remained under the management of Lorenzo T. Oa who
income was always left in the hands of Lorenzo T. Oa who, as heretofore
used said properties in business by leasing or selling them and investing
pointed out, invested them in real properties and securities. (See Exhibit 3,
the income derived therefrom and the proceeds from the sales thereof in
t.s.n., pp. 50, 102-104).
real properties and securities. As a result, petitioners' properties and
On the basis of the foregoing facts, respondent (Commissioner of Internal
investments gradually increased from P105,450.00 in 1949 to P480,005.20
Revenue) decided that petitioners formed an unregistered partnership and
in 1956 as can be gleaned from the following year-end balances:
therefore, subject to the corporate income tax, pursuant to Section 24, in
Y Invest Lan Buil relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
e ment d din the petitioners the amounts of P8,092.00 and P13,899.00 as corporate
a g income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by
r Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that
Accou Acc Acc they have formed an unregistered partnership. Finding no merit in
nt oun oun petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
t t (See pp. 1-4, Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1949 P87,860.00 P17,590.00 1955
Net income as per investigation ................ P40,209.89
1950 P24,657.65 128,566.72 96,076.26
Income tax due thereon ............................... 8,042.00
1951 51,301.31 120,349.28 110,605.11
25% surcharge .............................................. 2,010.50

33
 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 ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated
in line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously referring
to the compromise in lieu of the criminal liability for failure of petitioners to
file the corporate income tax returns for said years. (See Exh. 17, page 86,
BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED
AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM
(sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR
1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS
ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN
COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
34
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 proceed from the sales
thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in
"building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all these became possible
because, admittedly, petitioners never actually received any share of the income or profits
from Lorenzo T. 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 tantamonut 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 "it 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
35
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes,
the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share to be held in common
with his co-heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived," and, for that matter, on any other provision of
said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under 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
confirmity 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 others, "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 in 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 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.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled
against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those
acquired by them subsequently, We consider as justified the following ratiocination of the
Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other
words, the taxable income of the partnership should be limited to the
income derived from the acquisition and sale of real properties and
36
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 been 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 alleges:
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 Honorable
Court against the unregistered partnership. (page 7,
Memorandum for the Petitioner in Support of Their Motion
for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners
in his individual capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been correctly assessed.
Since the individual income tax liabilities of petitioners are not in issue in
this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they
might have paid as individual income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do not agree. As
We see it, the case of petitioners as regards the point under discussion is simply that of a
taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right to be reimbursed what
he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not
seem right to virtually disregard prescription merely upon the ground that the reason for the
delay is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their
conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed
from is affirm with costs against petitioners.
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.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo
Umali and Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
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
petitioner 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 P59,1400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties,.
37
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 from 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
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. 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 tenants; 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 leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total
amount collected as rents on their real properties was P9,599.00 while the
expenses amounted to P3,650.00 thereby leaving them a net rental income of
P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30,
out of which amount was deducted in 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 assessment
made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
 After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for
1948 1,912.30
the respondent, and a petition for reconsideration and new trial having been subsequently
1949 1,575.90 denied, the case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for
Total including surcharge and P6,157.09 in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal
compromise 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
REAL ESTATE DEALER'S FIXED TAX terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the
pertinent parts of which read:
1946 P37.50 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
1947 150.00 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
1948 150.00 general co-partnerships (compaias colectivas), a tax upon such income equal to
the sum of the following: . . .
1949 150.00 SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
Total including penalty P527.00 associations or insurance companies, but does not include duly registered general
copartnerships. (compaias colectivas).
RESIDENCE TAXES OF CORPORATION Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
1945 P38.75 money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.
1946 38.75
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an
1947 38.75 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
1948 38.75 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
1949 38.75 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
Total including surcharge P193.75 and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not
TOTAL TAXES DUE P6,878.34. 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
Said letter of demand and corresponding assessments were delivered to petitioners on
fund.
December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals,
2. They invested the same, not merely not merely in one transaction, but in
with a prayer that "the decision of the respondent contained in his letter of demand dated
a series of transactions. On February 2, 1943, they bought a lot for P100,000.00.
September 24, 1954" be reversed, and that they be absolved from the payment of the taxes
On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on
in question, with costs against the respondent.
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

38
 (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 the
petitioners in February, 1943. In other words, one cannot but perceive a character
of habitually peculiar to business transactions engaged in the purpose 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 and 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 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
39
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 participation)" and "associations," none of which
has a legal personality of its own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a condition essential to the existence
of the partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" which are possessed of the aforementioned 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 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 provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance companies." However, the term
"association" is not used in the aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the
transaction of designed 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
interinsuarance 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
Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
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 organizations 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 supplied.)
 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 supplied.) .
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 of 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. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 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 June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject
to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate
dealers," inasmuch as, pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding
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. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs
against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
40
BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually contributed money to a common fund
with express purpose of engaging in real estate business for profit. The series of
transactions which they had undertaken attest to this. This appears in the following portion
of the decision:
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000. On April 3, 1944,
they purchase 21 lots for P18,000. This was soon followed on April 23, 1944, by the
acquisition of another real state for P108,825. Five (5) days later (April 28, 1944),
they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common design that
was not limited to the conservation and preservation of the aforementioned
common fund or even of the property acquired by the petitioner in February, 1943,
In other words, we cannot but perceive a character of habitually peculiar
to business transactions engaged in for purposes of gain.
I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides:
(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by
the use of the property;
(3) The sharing of gross returns does not of itself establish partnership, whether or
not the person 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 shared
or do not share any profits made by the use of 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 judicial personality different from that of the
individual partners, and the freedom to transfer or assign any interest in the property by one
with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953
ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute funds to
buy certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
 Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered
partners. They have no common stock or capital, and no community of interest as
principal proprietors in the business itself which the proceeds derived. (Elements of
the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in
respect thereto; nor does not agreement to share the profits and loses on the sale
of land create a partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract
of reality, holding as tenants in common, and to divide the profits of disposing of it,
the brother and the other not being entitled to share in plaintiff's commissions, no
partnership existed as between the parties, whatever relation may have been as to
third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form
the same; (b) generally a participating in both profits and losses; (c) and such a
community of interest, as far as third persons are concerned as enables each party
to make contract, manage the business, and dispose of the whole property.
(Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for purpose of making gains; and they may, without
becoming partners, agree among themselves as to the management and use of
such property and the application of the proceeds therefrom. (Spurlock vs. Wilson,
142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly,
they might not suffice to establish the intent necessary to constitute a partnership, the
collective effect of these circumstances (referring to the series of transactions) such as to
leave no room for doubt on the existence of said intent in petitioners herein."
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
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et
al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque.
The first two parcels of land were sold by petitioners in 1968 toMarenir Development
Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and
Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968
in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale
made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and
1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they
had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an
unregistered partnership or joint venture taxable as a corporation under Section 20(b) and
its income was subject to the taxes prescribed under Section 24, both of the National
Internal Revenue Code 1 that the unregistered partnership was subject to corporate income
tax as distinguished from profits derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of 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.
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

41
30, 1987, 2 affirmed the decision and action taken by respondent commissioner with costs
against petitioners.
3
It ruled that on the basis of the principle enunciated in Evangelista 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 "hem liable for corporate income tax under
the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors
of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION
OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT
TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF
OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED
THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE
EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
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.)
42
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
(companies collectives), a tax upon such income equal to the sum of the
following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies 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 P18,000.00. 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 transcations
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
43
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 Evangelists, 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 Evangelists 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. 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 Evangelists, there was a series of transactions where petitioners purchased twenty-four
(24) lots showing that the purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. The character of habituality peculiar
to business transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the
same nor make any improvements thereon. In 1966, they bought another three (3) parcels
of land from one seller. It was only 1968 when they sold the two (2) parcels of land after
which they did not make any additional or new purchase. The remaining three (3) parcels
were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business
was under the management of one of the partners. Such condition existed for over fifteen
(15) years. None of the circumstances are present in the case at bar. The co-ownership
started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the
property held in common does not convert their venture into a 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
44
consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol.
I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a
partnership.
Persons who contribute property or funds for a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the Law of
Partnership by Flord 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
plaintiffs 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 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 p. 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.
WHEREFROM, 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.
AFISCO INSURANCE CORPORATION; CCC INSURANCE CORPORATION; CHARTER
INSURANCE CO., INC.; CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY; CONSOLIDATED INSURANCE
CO., INC.; DEVELOPMENT INSURANCE & SURETY CORPORATION;
45
DOMESTIC INSURANCE COMPANY OF THE PHILIPPINES; EASTERN
ASSURANCE COMPANY & SURETY CORP.; EMPIRE INSURANCE COMPANY;
EQUITABLE INSURANCE CORPORATION; FEDERAL INSURANCE
CORPORATION INC.; FGU INSURANCE CORPORATION; FIDELITY &
SURETY COMPANY OF THE PHILS., INC.; FILIPINO MERCHANTS
INSURANCE CO., INC.; GOVERNMENT SERVICE INSURANCE SYSTEM;
MALAYAN INSURANCE CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.;
MERCANTILE INSURANCE CO., INC.; METROPOLITAN INSURANCE
COMPANY; METRO-TAISHO INSURANCE CORPORATION; NEW ZEALAND
INSURANCE CO., LTD.; PAN-MALAYAN INSURANCE CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLES TRANS-EAST ASIA
INSURANCE CORPORATION; PERLA COMPANIA DE SEGUROS, INC.;
PHILIPPINE BRITISH ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE
CO., INC.; PIONEER INSURANCE & SURETY CORP.; PIONEER
INTERCONTINENTAL INSURANCE CORPORATION; PROVIDENT
INSURANCE COMPANY OF THE PHILIPPINES; PYRAMID INSURANCE CO.,
INC.; RELIANCE SURETY & INSURANCE COMPANY; RIZAL SURETY &
INSURANCE COMPANY; SANPIRO INSURANCE CORPORATION; SEABOARD-
EASTERN INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH SEA
SURETY & INSURANCE CO., INC.; STATE BONDING & INSURANCE CO., INC.;
SUMMA INSURANCE CORPORATION; TABACALERA INSURANCE CO., INC.all
assessed as POOL OF MACHINERY INSURERS, petitioners, vs. COURT OF
APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
PANGANIBAN, J.:
Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign reinsurance
company.May the clearing house or insurance pool so formed be deemed a partnership or an
association that is taxable as a corporation under the National Internal Revenue Code
(NIRC)? Should the pools remittances to the member companies and to the said foreign firm be
taxable as dividends? Under the facts of this case, has the governments right to assess and collect said
tax prescribed?
 The Case
Net income per information

These are the main questions raised in the Petition for Review on Certiorari before us, assailing return P3,737,370.00
the October 11, 1993 Decision[1] of the Court of Appeals [2]in CA-GR SP 29502, which dismissed
petitioners appeal of the October 19, 1992 Decision [3] of the Court of Tax Appeals[4] (CTA) which had ===========
previously sustained petitioners liability for deficiency income tax, interest and withholding tax. The
Court of Appeals ruled: Income tax due thereon P1,298,080.00

WHEREFORE, the petition is DISMISSED, with costs against petitioners. [5] Add: 14% Int. fr. 4/15/76

The petition also challenges the November 15, 1993 Court of Appeals (CA) to 4/15/79 545,193.60
Resolution[6] denying reconsideration.
TOTAL AMOUNT DUE & P1,843,273.60
The Facts

COLLECTIBLE ===========
The antecedent facts,[7] as found by the Court of Appeals, are as follows:
Dividend paid to Munich
The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the
Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Reinsurance Company P3,728,412.00
ContractorsAll Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-
===========
Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the petitioners was
formed on the same day. 35% withholding tax at

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an source due thereon P1,304,944.20
Information Return of Organization Exempt from Income Tax for the year ending in 1975, on the
basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes Add: 25% surcharge 326,236.05
in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39
and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments 14% interest from
were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.
1/25/76 to 1/25/79 137,019.14
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the
petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and Compromise penalty-
with[h]oldingtax, itemized as follows:
non-filing of return 300.00

46
 The Issues
late payment 300.00

TOTAL AMOUNT DUE & P1,768,799.39 Before this Court, petitioners raise the following issues:

COLLECTIBLE =========== 1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative
functions, and which did not insure or assume any risk in its own name, was a partnership or
Dividend paid to Pool Members P 655,636.00 association subject to tax as a corporation;

=========== 2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of
reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, were
10% withholding tax at dividends subject to tax; and

source due thereon P 65,563.60 3.Whether or not the respondent Commissioners right to assess the Clearing House had already
prescribed.[10]
Add: 25% surcharge 16,390.90 The Courts Ruling

14% interest from

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is
taxable as a corporation, and that the governments right to assess and collect the taxes had not
1/25/76 to 1/25/79 6,884.18
prescribed.
Compromise penalty- First Issue:

non-filing of return 300.00 Pool Taxable as a Corporation

late payment 300.00

TOTAL AMOUNT DUE & P 89,438.68
COLLECTIBLE ===========[8]
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latters collection of premiums on behalf of its members, the ceding
companies, was taxable income. It added that prescription did not bar the Bureau of Internal Revenue
(BIR) from collecting the taxes due, because the taxpayer cannot be located at the address given in
the information return filed. Hence, this Petition for Review before us.[9]
Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house
was an informal partnership, which was taxable as a corporation under the NIRC. They point out that
the reinsurance policies were written by them individually and separately, and that their liability was
limited to the extent of their allocated share in the original risks thus reinsured. [11] Hence, the pool did
not act or earn income as a reinsurer.[12] Its role was limited to its principal function of allocating and
distributing the risk(s) arising from the original insurance among the signatories to the treaty or the
members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of
incidental functions, such as records, maintenance, collection and custody of funds, etc. [13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did
not share the same risk or solidary liability; [14] (2) there was no common fund;[15] (3) the executive

47
board of the pool did not exercise control and management of its funds, unlike the board of directors
of a corporation;[16] and (4) the pool or clearing house was not and could not possibly have engaged
in the business of reinsurance from which it could have derived income for itself. [17]
The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the
agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when
there is no showing that it is patently wrong, [18] particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently affirmed by the CTA, a
specialized body created for the exclusive purpose of reviewing tax cases, and the Court of Appeals.
[19]
Indeed,
[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-
judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or improvident exercise of its authority.[20]
This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained
the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, as worded
in the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compaias colectivas), general
professional partnerships, private educational institutions, and building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the NLRCs
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform Act of
1997,[21] which amended the Tax Code. Pertinent provisions of the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation xxx.
48
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term corporation shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or
insurance companies, but does not include general professional partnerships [or] a joint
venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. [23] The Court of Appeals astutely
applied Evangelista:[24]
xxx Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v.
Collector of Internal Revenue, supra. The Supreme Court said:
The term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is
carried on. * * * (8 Mertens Law of Federal Income Taxation, p. 562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or
more persons bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. [25] Its requisites are: (1) mutual contribution to a
common stock, and (2) a joint interest in the profits.[26] In other words, a partnership is formed when
persons contract to devote to a common purpose either money, property, or labor with the intention of
dividing the profits between themselves. [27] Meanwhile, an association implies associates who enter
into a joint enterprise x x x for the transaction of business.[28]
 In the case before us, the ceding companies entered into a Pool Agreement [29] or an
association[30] that would handle all the insurance businesses covered under their quota-share
reinsurance treaty[31]and surplus reinsurance treaty[32]with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. [33] This common fund pays for the
administration and operation expenses of the pool.[34]
(2) The pool functions through an executive board, which resembles the board of directors
of a corporation, composed of one representative for each of the ceding companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the business
of the ceding companies and Munich, because without it they would not have received
their premiums. The ceding companies share in the business ceded to the pool and in
the expenses according to a Rules of Distribution annexed to the Pool Agreement.
[36]
Profit motive or business is, therefore, the primordial reason for the pools
formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to]
the transaction of the business. x x x If together they have conducted business, profit must
have been the object as, indeed, profit was earned. Though the profit was apportioned
among the members, this is only a matter of consequence, as it implies that profit actually
resulted.[37]
The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts obtaining
therein are not on all fours with the present case. In Pascual, there was no unregistered partnership,
but merely a co-ownership which took up only two isolated transactions. [39] The Court of Appeals did
not err in applying Evangelista, which involved a partnership that engaged in a series of transactions
spanning more than ten years, as in the case before us.
Second Issue:
Pools Remittances Are Taxable
49
Petitioners further contend that the remittances of the pool to the ceding companies and Munich
are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24 (b)
(I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation, as it would
result in taxing the same premium income twice in the hands of the same taxpayer. [40] Moreover,
petitioners argue that since Munich was not a signatory to the Pool Agreement, the remittances it
received from the pool cannot be deemed dividends. [41] They add that even if such remittances were
treated as dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC,[42] as well as Article 7 of paragraph 1 [43] and Article 5 of paragraph 5[44] of the RP-West
German Tax Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice when
it should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction for
the same thing.[46] In the instant case, the pool is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who claims
tax exemption must be able to justify his claim or right. [47] Petitioners have failed to discharge this
burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these were
not yet in effect when the income was earned and when the subject information return for the year
ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot
justify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance
by any company that has already paid the tax xxx. This cannot be applied to the present case because,
as previously discussed, the pool is a taxable entity distinct from the ceding companies; therefore, the
latter cannot individually claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1) [48] pertains to tax on foreign corporations; hence, it cannot
be claimed by the ceding companies which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of the Tax Code, because the same
subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. Although
not a signatory to the Pool Agreement, Munich is patently an associate of the ceding companies in the
entity formed, pursuant to their reinsurance treaties which required the creation of said pool.
 Under its pool arrangement with the ceding companies, Munich shared in their income and
loss. This is manifest from a reading of Articles 3 [49] and 10[50] of the Quota Share Reinsurance Treaty
and Articles 3[51] and 10[52] of the Surplus Reinsurance Treaty. The foregoing interpretation of Section
24 (b) (1) is in line with the doctrine that a tax exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language too plain to be mistaken. [53]
Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax
Treaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for
corporate taxes on the basis of the information return it had submitted for the year ending 1975, a
taxable year when said treaty was not yet in effect. [54] Although petitioners omitted in their pleadings
the date of effectivity of the treaty, the Court takes judicial notice that it took effect only later, on
December 14, 1984.[55]
Third Issue: Prescription
Petitioners also argue that the governments right to assess and collect the subject tax had
prescribed. They claim that the subject information return was filed by the pool on April 14, 1976.
On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give them
notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that the five-
year statute of limitations then provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive
period was tolled under then Section 333 of the NIRC,[57] because the taxpayer cannot be located at
the address given in the information return filed and for which reason there was delay in sending the
assessment.[58] Indeed, whether the governments right to collect and assess the tax has prescribed
involves facts which have been ruled upon by the lower courts. It is axiomatic that in the absence of a
clear showing of palpable error or grave abuse of discretion, as in this case, this Court must not
overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of
Appeals that the pool changed its address, for they stated that the pools information return filed in
1980 indicated therein its present address. The Court finds that this falls short of the requirement of
Section 333 of the NIRC for the suspension of the prescriptive period. The law clearly states that the
said period will be suspended only if the taxpayer informs the Commissioner of Internal Revenue of
any change in the address.
50
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS
COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R.
Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the
assessment and decision of petitioner Collector of Internal Revenue, later referred to as
Collector, assessing and demanding from the respondents Batangas Transportation
Company, later referred to as Batangas Transportation, and Laguna-Tayabas Bus
Company, later referred to as Laguna Bus, the amount of P54,143.54, supposed to
represent the deficiency income tax and compromise for the years 1946 to 1949, inclusive,
which amount, pending appeal in the C.T.A., but before the Collector filed his answer in said
court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two distinct and separate
corporations engaged in the business of land transportation by means of motor buses, and
operating distinct and separate lines. Batangas Transportation was organized in 1918, while
Laguna Bus was organized in 1928. Each company now has a fully paid up capital of
Pl,000,000. Before the last war, each company maintained separate head offices, that of
Batangas Transportation in Batangas, Batangas, while the Laguna Bus had its head office
in San Pablo Laguna. Each company also kept and maintained separate books, fleets of
buses, management, personnel, maintenance and repair shops, and other facilities. Joseph
Benedict managed the Batangas Transportation, while Martin Olson was the manager of the
Laguna Bus. To show the connection and close relation between the two companies, it
should be stated that Max Blouse was the President of both corporations and owned about
30 per cent of the stock in each company. During the war, the American officials of these
two corporations were interned in Santo Tomas, and said companies ceased operations.
They also lost their respective properties and equipment. After Liberation, sometime in April,
1945, the two companies were able to acquire 56 auto buses from the United States Army,
and the two companies diveded said equipment equally between themselves,registering the
same separately in their respective names. In March, 1947, after the resignation of Martin
Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing the
Batangas Transportation, was appointed Manager of both companies by their respective
Board of Directors. The head office of the Laguna Bus in San Pablo City was made the
main office of both corporations. The placing of the two companies under one sole
mangement was made by Max Blouse, President of both companies, by virtue of the
authority granted him by resolution of the Board of Directors of the Laguna Bus on August
10, 1945, and ratified by the Boards of the two companies in their respective resolutions of
October 27, 1947.
According to the testimony of joint Manager Joseph Benedict, the purpose of the joint
management, which was called, "Joint Emergency Operation", was to economize in
overhead expenses; that by means of said joint operation, both companies had been able to
save the salaries of one manager, one assistant manager, fifteen inspectors, special agents,
and one set of office of clerical force, the savings in one year amounting to about P200,000
or about P100,000 for each company. At the end of each calendar year, all gross receipts
and expenses of both companies were determined and the net profits were divided fifty-fifty,
and transferred to the book of accounts of each company, and each company "then
prepared its own income tax return from this fifty per centum of the gross receipts and
expenditures, assets and liabilities thus transferred to it from the `Joint Emergency
Operation' and paid the corresponding income taxes thereon separately".
Under the theory that the two companies had pooled their resources in the establishment of
the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the bus
companies that there was due from them the amount of P422,210.89 as deficiency income
tax and compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be
restrained, seized, and advertized for sale all the rolling stock of the two corporations,
respondent companies had to file a surety bond in the same amount of P422,210.89 to
guarantee the payment of the income tax assessed by him.
51
After some exchange of communications between the parties, the Collector, on January 8,
1955, informed the respondents "that after crediting the overpayment made by them of their
alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable
recoupment, the income tax due from the `Joint Emergency Operation' for the years 1946 to
1949, inclusive, is in the total amount of P54,143.54." The respondent companies appealed
from said assessment of P54,143.54 to the Court of Tax Appeals, but before filing his
answer, the Collector set aside his original assessment of P54,143.54 and reassessed the
alleged income tax liability of respondents of P148,890.14, claiming that he had later
discovered that said companies had been "erroneously credited in the last assessment with
100 per cent of their income taxes paid when they should in fact have been credited with
only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by
them from the Joint Operation as a domestic corporation are returnable to the extent of 25
per cent". That corrected and increased reassessment was embodied in the answer filed by
the Collector with the Court of Tax Appeals.
The theory of the Collector is the Joint Emergency Operation was a corporation distinct from
the two respondent companies, as defined in section 84 (b), and so liable to income tax
under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A.
found and held, citing authorities, that the Joint Emergency Operation or joint management
of the two companies "is not a corporation within the contemplation of section 84 (b) of the
National Internal Revenue Code much less a partnership, association or insurance
company", and therefore was not subject to the income tax under the provisions of section
24 of the same Code, separately and independently of respondent companies; so, it
reversed the decision of the Collector assessing and demanding from the two companies
the payment of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax Court
did not pass upon the question of whether or not in the appeal taken to it by respondent
companies, the Collector could change his original assessment by increasing the same
from P54,143.14 to P148,890.14, to correct an error committed by him in having credited
the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by the
respondent companies for the years 1946 to 1949, inclusive, by reason of the principle
of equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal are: (1) whether
the two transportation companies herein involved are liable to the payment of income tax as
a corporation on the theory that the Joint Emergency Operation organized and operated by
them is a corporation within the meaning of Section 84 of the Revised Internal Revenue
Code, and (2) whether the Collector of Internal Revenue, after the appeal from his decision
has been perfected, and after the Court of Tax Appeals has acquired jurisdiction over the
same, but before said Collector has filed his answer with that court, may still modify his
assessment subject of the appeal by increasing the same, on the ground that he had
committed error in good faith in making said appealed assessment.
The first question has already been passed upon and determined by this Tribunal in the
case of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L-
9996, promulgated on October 15, 1957. Considering the views and rulings embodied in our
decision in that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary
to extensively discuss the point. Briefly, the facts in that case are as follows: The three
Evangelista sisters borrowed from their father about P59,000 and adding thereto their own
personal funds, bought real properties, such as a lot with improvements for the sum of
P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters with
improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and
still another lot for P237,000 in the same year. The relatively large amounts invested may be
explained by the fact that purchases were made during the Japanese occupation,
apparently in Japanese military notes. In 1945, the sisters appointed their brother to
manage their properties, with full power to lease, to collect and receive rents, on default of
such payment, to bring suits against the defaulting tenants, to sign all letters and contracts,
etc. The properties therein involved were rented to various tenants, and the sisters, through
their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in 1946,
and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other things, payment
of income tax on corporations from the year 1945 to 1949, in the total amount of P6,157,
including surcharge and compromise. Dissatisfied with the said assessment, the three
sisters appealed to the Court of Tax Appeals, which court decided in favor of the Collector of
Internal Revenue. On appeal to us, we affirmed the decision of the Tax Court. We found and
held that considering all the facts and circumstances sorrounding the case, the three sisters
had the purpose to engage in real estate transactions for monetary gain and then divide the
same among themselves; that they contributed to a common fund which they invested in a
series of transactions; that the properties bought with this common fund had been under the
management of one person with full power to lease, to collect rents, issue receipts, bring
suits, sign letters and contracts, etc., in such a manner that the affairs relative to said
properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit; and that the said sisters had the intention to constitute a
partnership within the meaning of the tax law. Said sisters in their appeal insisted that they
52
were mere co-owners, not co-partners, for the reason that their acts did not create a
personality independent of them, and that some of the characteristics of partnerships were
absent, but we held that when the Tax Code includes "partnerships" among the entities
subject to the tax on corporations, it must refer to organizations which are not necessarily
partnerships in the technical sense of the term, and that furthermore, said law defined the
term "corporation" as including partnerships no matter how created or organized, thereby
indicating 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"; that besides, said section
84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en
participacion) and "associations", none of which has a legal personality independent of that
of its members. The decision cites 7A Merten's Law of Federal Income Taxation.
In the present case, the two companies contributed money to a common fund to pay the
sole general manager, the accounts and office personnel attached to the office of said
manager, as well as for the maintenance and operation of a common maintenance and
repair shop. Said common fund was also used to buy spare parts, and equipment for both
companies, including tires. Said common fund was also used to pay all the salaries of the
personnel of both companies, such as drivers, conductors, helpers and mechanics, and at
the end of each year, the gross income or receipts of both companies were merged, and
after deducting therefrom the gross expenses of the two companies, also merged, the net
income was determined and divided equally between them, wholly and utterly disregarding
the expenses incurred in the maintenance and operation of each company and of the
individual income of said companies.
From the standpoint of the income tax law, this procedure and practice of determining the
net income of each company was arbitrary and unwarranted, disregarding as it did the real
facts in the case. There can be no question that the receipts and gross expenses of two,
distinct and separate companies operating different lines and in some cases, different
territories, and different equipment and personnel at least in value and in the amount of
salaries, can at the end of each year be equal or even approach equality. Those familiar
with the operation of the business of land transportation can readily see that there are many
factors that enter into said operation. Much depends upon the number of lines operated and
the length of each line, including the number of trips made each day. Some lines are
profitable, others break above even, while still others are operated at a loss, at least for a
time, depending, of course, upon the volume of traffic, both passenger and freight. In some
lines, the operator may enjoy a more or less exclusive exclusive operation, while in others,
the competition is intense, sometimes even what they call "cutthroat competition".
Sometimes, the operator is involved in litigation, not only as the result of money claims
based on physical injuries ar deaths occassioned by accidents or collisions, but litigations
before the Public Service Commission, initiated by the operator itself to acquire new lines or
additional service and equipment on the lines already existing, or litigations forced upon
said operator by its competitors. Said litigation causes expense to the operator. At other
times, operator is denounced by competitors before the Public Service Commission for
violation of its franchise or franchises, for making unauthorized trips, for temporary
abandonement of said lines or of scheduled trips, etc. In view of this, and considering that
the Batangas Transportation and the Laguna Bus operated different lines, sometimes in
different provinces or territories, under different franchises, with different equipment and
personnel, it cannot possibly be true and correct to say that the end of each year, the gross
receipts and income in the gross expenses of two companies are exactly the same for
purposes of the payment of income tax. What was actually done in this case was that,
although no legal personality may have been created by the Joint Emergency Operation,
nevertheless, said Joint Emergency Operation joint venture, or joint management operated
the business affairs of the two companies as though they constituted a single entity,
company or partnership, thereby obtaining substantial economy and profits in the operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of
Internal Revenue case, supra, we believe and hold that the Joint Emergency Operation or
sole management or joint venture in this case falls under the provisions of section 84 (b) of
the Internal Revenue Code, and consequently, it is liable to income tax provided for in
section 24 of the same code.
The second important question to determine is whether or not the Collector of Internal
Revenue, after appeal from his decision to the Court of Tax Appeals has been perfected,
and after the Tax Court Appeals has acquired jurisdiction over the appeal, but before the
Collector has filed his answer with the court, may still modify his assessment, subject of the
appeal, by increasing the same. This legal point, interesting and vital to the interests of both
the Government and the taxpayer, provoked considerable discussion among the members
of this Tribunal, a minority of which the writer of this opinion forms part, maintaining that for
the information and guidance of the taxpayer, there should be a definite and final
assessment on which he can base his decision whether or not to appeal; that when the
assessment is appealed by the taxpayer to the Court of Tax Appeals, the collector loses
control and jurisdiction over the same, the jurisdiction being transferred automatically to the
Tax Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction of
53
the Tax Court is not revisory but only appellate, and therefore, it can act only upon the
amount of assessment subject of the appeal to determine whether it is valid and correct
from the standpoint of the taxpayer-appellant; that the Tax Court may only correct errors
committed by the Collector against the taxpayer, but not those committed in his favor,
unless the Government itself is also an appellant; and that unless this be the rule, the
Collector of Internal Revenue and his agents may not exercise due care, prudence and pay
too much attention in making tax assessments, knowing that they can at any time correct
any error committed by them even when due to negligence, carelessness or gross mistake
in the interpretation or application of the tax law, by increasing the assessment, naturally to
the prejudice of the taxpayer who would not know when his tax liability has been completely
and definitely met and complied with, this knowledge being necessary for the wise and
proper conduct and operation of his business; and that lastly, while in the United States of
America, on appeal from the decision of the Commissioner of Internal Revenue to the Board
or Court of Tax Appeals, the Commissioner may still amend or modify his assessment, even
increasing the same the law in that jurisdiction expressly authorizes the Board or Court of
Tax Appeals to redetermine and revise the assessment appealed to it.
The majority, however, holds, not without valid arguments and reasons, that the
Government is not bound by the errors committed by its agents and tax collectors in making
tax assessments, specially when due to a misinterpretation or application of the tax laws,
more so when done in good faith; that the tax laws provide for a prescriptive period within
which the tax collectors may make assessments and reassessments in order to collect all
the taxes due to the Government, and that if the Collector of Internal Revenue is not allowed
to amend his assessment before the Court of Tax Appeals, and since he may make a
subsequent reassessment to collect additional sums within the same subject of his original
assessment, provided it is done within the prescriptive period, that would lead to multiplicity
of suits which the law does not encourage; that since the Collector of Internal Revenue, in
modifying his assessment, may not only increase the same, but may also reduce it, if he
finds that he has committed an error against the taxpayer, and may even make refunds of
amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing
before the Court of Tax Appeals partakes of a trial de novo and the Tax Court is authorized
to receive evidence, summon witnesses, and give both parties, the Government and the
taxpayer, opportunity to present and argue their sides, so that the true and correct amount
of the tax to be collected, may be determined and decided, whether resulting in the increase
or reduction of the assessment appealed to it. The result is that the ruling and doctrine now
being laid by this Court is, that pending appeal before the Court of Tax Appeals, the
Collector of Internal Revenue may still amend his appealed assessment, as he has done in
the present case.
There is a third question raised in the appeal before the Tax Court and before this Tribunal,
namely, the liability of the two respondent transportation companies for 25 per cent
surcharge due to their failure to file an income tax return for the Joint Emergency Operation,
which we hold to be a corporation within the meaning of the Tax Code. We understand that
said 25 per cent surcharge is included in the assessment of P148,890.14. The surcharge is
being imposed by the Collector under the provisions of Section 72 of the Tax Code, which
read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of willful
neglect to file the return or list within the time prescribed by law, or in case a false or
fraudulent return or list is willfully made the collector of internal revenue shall add to
the tax or to the deficiency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud, a surcharge of fifty per
centum of the amount of such tax or deficiency tax. In case of any failure to make
and file a return list within the time prescribed by law or by the Collector or other
internal revenue officer, not due to willful neglect, the Collector, shall add to the tax
twenty-five per centum of its amount, except that, when the return is voluntarily and
without notice from the Collector or other officer filed after such time, it is shown that
the failure was due to a reasonable cause, no such addition shall be made to the
tax. The amount so added to any tax shall be collected at the same time in the
same manner and as part of the tax unless the tax has been paid before the
discovery of the neglect, falsity, or fraud, in which case the amount so added shall
be collected in the same manner as the tax.
We are satisfied that the failure to file an income tax return for the Joint Emergency
Operation was due to a reasonable cause, the honest belief of respondent companies that
there was no such corporation within the meaning of the Tax Code, and that their separate
income tax return was sufficient compliance with the law. That this belief was not entirely
without foundation and that it was entertained in good faith, is shown by the fact that the
Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was
not a corporation, and so sustained the contention of respondents. Furthermore, there are
authorities to the effect that belief in good faith, on advice of reputable tax accountants and
attorneys, that a corporation was not a personal holding company taxable as such
constitutes "reasonable cause" for failure to file holding company surtax returns, and that in
54
such a case, the imposition of penalties for failure to file holding company surtax returns,
and that in such a case, the imposition of penalties for failure to file return is not warranted 1
In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax
Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved
in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue
Code, and so is liable to incom tax under section 24 of the code; that pending appeal in the
Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the
Collector, pending hearing before said court, may amend his appealed assessment and
include the amendment in his answer before the court, and the latter may on the basis of
the evidence presented before it, redetermine the assessment; that where the failure to file
an income tax return for and in behalf of an entity which is later found to be a corporation
within the meaning of section 84 (b) of the Tax Code was due to a reasonable cause, such
as an honest belief based on the advice of its attorneys and accountants, a penalty in the
form of a surcharge should not be imposed and collected. The respondents are therefore
ordered to pay the amount of the reassessment made by the Collector of Internal Revenue
before the Tax Court, minus the amount of 25 per cent surcharge. No costs.
Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix,
JJ., concur.
Reyes, A. J., concurs in the result.
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
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 plaintiff 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 ....................................................................................................
2. Gregoria Cristobal ...............................................................................................
3. Saturnina Silva ....................................................................................................
4. Guillermo Tapia ...................................................................................................
5. Jesus Legaspi ......................................................................................................
6. Jose Silva .............................................................................................................
7. Tomasa Mercado ................................................................................................
8. Julio Gatchalian ...................................................................................................
9. Emiliana Santiago ................................................................................................
10. Maria C. Legaspi ...............................................................................................
11. Francisco Cabral ...............................................................................................
12. Gonzalo Javier ....................................................................................................
13. Maria Santiago ...................................................................................................
14. Buenaventura Guzman ......................................................................................
15. Mariano Santos .................................................................................................
Total ........................................................................................................
3. That immediately thereafter but prior to December 15, 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-
55
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
P0.18 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
.18 return was signed by Jose Gatchalian, a copy of which return is enclosed as Exhibit
A and made a part hereof;
.08 6. That on January 8, 1935, the defendant made an assessment against Jose
.13 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 &
.15 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 enclosed and made a part hereof;
.07 7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant
.08 a reply, a copy of which marked Exhibit C is attached and made a part hereof,
requesting exemption from payment of the income tax to which reply there were
.13 enclosed fifteen (15) separate individual income tax returns filed separately by each
one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to
.13
D-15, respectively, in order of their names listed in the caption of this case and
.16 made parts hereof; a statement of sale signed by Jose Gatchalian showing the
amount put up by each of the plaintiffs to cover up the attached and marked as
.13 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
.14
part thereof;
.17 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
.13 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
.14
pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by
2.00 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 I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify,
part hereof, and requested defendant that plaintiffs be allowed to pay under protest that on the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637
the balance of the tax and penalties by monthly installments; to the persons and for the amount indicated below and the part of may share
11. That plaintiff's request to pay the balance of the tax and penalties was granted remaining is also shown to wit:
by defendant subject to the condition that plaintiffs file the usual bond secured by Purchaser Amount Address
two solvent persons to guarantee prompt payment of each installments as it
becomes due; 1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to guarantee the payment of the balance of the 2. Buenaventura Guzman ............................... .13 - Do -
alleged tax liability by monthly installments at the rate of P118.70 a month, the first 3. Maria Santiago ............................................ .17 - Do -
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 4. Gonzalo Javier .............................................. .14 - Do -
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, 1935 overruled the protest and 5. Francisco Cabral .......................................... .13 - Do -
denied the request for refund of the plaintiffs; 6. Maria C. Legaspi .......................................... .16 - Do -
14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of bond filed by them, the defendant in 7. Emiliana Santiago ......................................... .13 - Do -
his letter dated July 23, 1935, copy of which is attached and marked Exhibit M,
8. Julio Gatchalian ............................................ .13 - Do -
ordered the municipal treasurer of Pulilan, Bulacan to execute within five days the
warrant of distraint and levy issued against the plaintiffs on May 13, 1935; 9. Jose Silva ...................................................... .07 - Do -
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 10. Tomasa Mercado ....................................... .08 - Do -
Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal
11. Jesus Legaspi ............................................. .15 - Do -
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 12. Guillermo Tapia ........................................... .13 - Do -
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 13. Saturnina Silva ............................................ .08 - Do -
defendant against the payment of said amount and requested the refund thereof,
14. Gregoria Cristobal ....................................... .18 - Do -
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 15. Jose Gatchalian ............................................ .18 - Do -
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 2.00 Total cost of said
thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44) ticket; and that, therefore, the persons named above are entitled to the parts of
paid under protest by them but that defendant refused and still refuses to refund the whatever prize that might be won by said ticket.
said amount notwithstanding the plaintiffs' demands. Pulilan, Bulacan, P.I.
17. The parties hereto reserve the right to present other and additional evidence if (Sgd.) JOSE GATCHALIAN
necessary. And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:

56
 RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL 13. Maria
DATED JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL Santiago ...................................... D-13 .17 4,350 360 3,990
REVENUE. ....
Exhibit Purchase Price Net
Name Expenses 14. Buenaventura
No. Price Won prize D-14 .13 3,325 360 2,965
Guzman ...........................
1. Jose
Gatchalian ................................... D-1 P0.18 P4,425 P 480 3,945 15. Mariano
D-15 .14 3,325 360 2,965
....... Santos ........................................

2. Gregoria <="" td=""

D-2 .18 4,575 2,000 2,575 style="font-size:
Cristobal ......................................
14px; text-
3. Saturnina decoration: none;
D-3 .08 1,875 360 1,515
Silva ............................................. 2.00 50,000 color: rgb(0, 0,
128); font-
4. Guillermo family: arial,
D-4 .13 3,325 360 2,965
Tapia .......................................... verdana;">
5. Jesus Legaspi by Maria The legal questions raised in plaintiffs-appellants' five assigned errors may properly be
D-5 .15 3,825 720 3,105
Cristobal ......... 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
6. Jose partnership thus formed is liable for the payment of income tax, whereas if there was merely
Silva ............................................. D-6 .08 1,875 360 1,515 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
7. Tomasa individually.
D-7 .07 1,875 360 1,515 The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
Mercado .......................................
amended by section 2 of Act No. 3761, reading as follows:
8. Julio Gatchalian by Beatriz SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
D-8 .13 3,150 240 2,910
Guzman ....... total net income received in the preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account (cuenta en
9. Emiliana participacion), association or insurance company, organized in the Philippine
D-9 .13 3,325 360 2,965
Santiago ...................................... Islands, no matter how created or organized, but not including duly registered
10. Maria C. general copartnership (compaias colectivas), a tax of three per centum upon such
D-10 .16 4,100 960 3,140 income; and a like tax shall be levied, assessed, collected, and paid annually upon
Legaspi ......................................
the total net income received in the preceding calendar year from all sources within
11. Francisco the Philippine Islands by every corporation, joint-stock company, partnership, joint
D-11 .13 3,325 360 2,965
Cabral ...................................... account (cuenta en participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign country, including interest on
12. Gonzalo
D-12 .14 3,325 360 2,965 bonds, notes, or other interest-bearing obligations of residents, corporate or
Javier ..........................................
otherwise: Provided, however, That nothing in this section shall be construed as

57
 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), association, 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 stipulation 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 Philippines Charity Sweepstakes, in his
capacity as co-partner, as such collection 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 plaintiff's
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 plaintiffs appellants. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.
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.
Office of the Solicitor General for respondents.
58
FERNANDO, J.:
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 cases1 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 respected4 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 were 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 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
partnerships "no matter how created or organized, ...," 7 and 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.1wph1.t Consequently they allege that the reliance by respondent detailed and those existing in the present case. It does not suffice though to preclude the
Court of Tax Appeals was unwarranted and the 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
59
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
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 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 are not necessarily "partnerships", in the technical
sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships", which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual requirements of the
law on partnerships, in order that one could be deemed constituted for purposes of the tax
on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among others, "joint accounts, (cuentas en participacion)" and "associations", none of
which has a legal personality of its own, independent of that of its members. Accordingly,
the lawmaker could not have regarded that personality as a condition essential to the
existence of the partnerships therein referred to. In fact, as above stated, "duly registered
general copartnerships" which are possessed of the aforementioned 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
60
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 functions, 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.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Angeles,
JJ., concur.
Footnotes