monetary gain and then divide the same among
1. E VANGELISTA VS COM 102 PHIL 140, G.R.
N O . L-9996, O CTOBER 15, 1957
Facts: Petitioners borrowed money from their father, which
amount together with their personal monies was used by
them for the purpose of buying real properties in order to
rent out said properties. They appointed 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;
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. Court of Tax appeals ruled in favor of
respondents.
Issue: 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.
Ruling: Court of Tax Appeal Decision Affirmed.
Ratio: With respect to the tax on corporations, the issue
hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code,
the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be
levied, assessed, collected, and paid annually upon the
total net income received in the preceding taxable year
from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how
created or organized but not including duly registered
general co-partnerships (compañias colectivas), a tax
upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes
partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion), associations or insurance companies, but
does not include duly registered general copartnerships.
(compañias colectivas).
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
themselves.
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.)
2. D UTERTE V R ALLOS, 2 P HIL 509
Facts: The plaintiff demanded by letter of the defendant a
settlement of their accounts. Defendant wrote another
letter, which in part provides that “you designate me as a
little less than embezzler. I have in my possession the
money of no one but myself … I have done you a favor in
admitting you into the cockpit partnership, as the only
manner in which I might collect what you owe me … You
are indebted to me nearly one thousand pesos, advanced
for your former market contract”. The plaintiff appellant
claimed that he, the defendant, and one Castro were
partners in the management of a cockpit. The defendant
denied this. That the plaintiff rendered services in the
management of the cockpit, and that the defendant paid
him money on account of the cockpit, is undisputed.
However, defendant testified that a portion of the profits
were given to two friends, Duterte and Castro, but not as
partners but paid them for his pleasure, as friends. Castro,
the other supposed partner, and a witness for the
defendant, denied that he was such partner. Castro further
testified that he received money from Rallos but not on a
monthly basis,that he is not a servant or employee of the
cockpit nor had any conversation with Rallos with
reference to the business and that he only went to the
cockpit to do Rallos a favor and helped its president.
The court found that no such partnership existed and
ordered judgment for the defendant. The plaintiff moved
for a new trial, which was denied.
Issue: WON there was partnership between them.
Ruling: YES. The finding of fact by the court below, that
there was no partnership, at least to September 1, 1901,
was plainly and manifestly against the evidence, and for
that reason a new trial of this case must be had. In this
new trial, if the evidence is the same as upon the first trial,
the plaintiff will be entitled to an accounting, at least to
September 1, 1901, and for such further term as the proof
upon the new trial shows, in the opinion of the court below,
that the partnership existed
Ratio: We see no way of explaining the accounts
submitted by the defendant to plaintiff on any theory other
than that there was a partnership between them up to
September 1, 1901, at least. The letter of the defendant, in
which he says that he admitted the plaintiff into the
partnership, can be explained on no other theory. That
there was an agreement to share the profits is clearly
proved by the accounts submitted. The plaintiff testified
that the profits and losses were to be shared equally. It is
undisputed that the cockpit was owned by the defendant
and that the partnership paid him ten dollars a day for the
use of it.
3. O NA VS COM 45 SCRA 74
FACTS: Julia Buñales died leaving as heirs her surviving
spouse, Lorenzo Oña and her five children. A civil case
was instituted for the settlement of her state, in which Oña
was appointed administrator and later on the guardian of
the three heirs who were still minors when the project for
partition was approved. This shows that the heirs have
undivided ½ interest in 10 parcels of land, 6 houses and
money from the War Damage Commission.
Although the project of partition was approved by the
Court, no attempt was made to divide the properties and
they remained under the management of Oña who used
said properties in business by leasing or selling them and
investing the income derived therefrom and the proceeds
from the sales thereof in real properties and securities. As
a result, petitioners’ properties and investments gradually
increased. Petitioners returned for income tax purposes
their shares in the net income but they did not actually
receive their shares because this left with Oña who
invested them.
Based on these facts, CIR decided that petitioners formed
an unregistered partnership and therefore, subject to the
corporate income tax, particularly for years 1955 and
1956. Petitioners asked for reconsideration, which was
denied hence this petition for review from CTA’s decision.
ISSUES:
1. WON there was a co-ownership or an
unregistered partnership
2. WON the petitioners are liable for the deficiency
corporate income tax
RULING:
1. Yes. 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
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.
2. Yes. For purposes of the tax on corporations, our
National Internal Revenue Code includes these
partnerships —
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.)
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.
4. PASCUAL AND DRAGON VS COM 166
SCRA 560
FACTS: Petitioners bought two parcels of land. The first
two parcels of land were sold by petitioners to Marenir
development corporation. The three parcels of land were
sold by petitioners to other persons. Petitioners realized a
net profit on the sale. The corresponding capital gains
taxes were paid by petitioners in 1973 and 1974 By
availing of the tax amnesties. However, in a letter by BIR
Commissioner, petitioners were assessed and required to
pay a total amount of P107,101.70. The Commissioner
averred 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. CTA
affirmed.
ISSUE: Whether or not petitioners formed an unregistered
partnership subject to corporate income tax. (NO)
RULING: NO. 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.
RATIO: 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. The transactions were isolated.
The character of habituality peculiar to business
transactions for the purpose of gain was not present. 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. There is no adequate basis to support the
proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years
thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they
cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income
tax, as the respondent commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership
with a distinct personality nor with assets that can be held
liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for
this unpaid obligation of the partnership. However, as
petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising
therefrom.
5. OBILLOS SR VS COM 139 SCRA 436
FACTS: This case is about the income tax liability of four
brothers and sisters who sold two parcels of land which
they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to
Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The
next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The
company sold the two lots to petitioners for P178,708.12
on March 13. Presumably, the Torrens titles issued to
them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a
year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total
sum of P313,050. They derived from the sale a total profit
of P134,341.88 or P33,584 for each of them. They treated
the profit as a capital gain and paid an income tax on one-
half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-
year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate
income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest,
or a total of P71,074.56.
Thus, the petitioners are being held liable for deficiency
income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains
already paid by them.
The Commissioner acted on the theory that the four
petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of
the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
ISSUE: WON the petitioners formed a partnership.
RULING: No, it is error to consider the petitioners as
having formed a partnership under article 1767 of the Civil
Code simply because they allegedly contributed
P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves.
WHEREFORE, the judgment of the Tax Court is reversed
and set aside. The assessments are cancelled. No costs.

RATIO: To regard the petitioners as having formed a
taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power
to tax involves the power to destroy. That eventuality
should be obviated.
As testified by Jose Obillos, Jr., they had no such
intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction
between a co-ownership and a partnership. The
petitioners were not engaged in any joint venture by
reason of that isolated transaction.
Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of
construction, then they had no choice but to resell the
same to dissolve the co-ownership. The division of the
profit was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary
state.
Article 1769(3) of the Civil Code provides that "the sharing
of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or
common right or interest in any property from which the
returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
** This view is supported by the following rulings of
respondent Commissioner:
Co-ownership distinguished from partnership.—We find
that the case at bar is fundamentally similar to the De
Leon case. Thus, like the De Leon heirs, the Longa heirs
inherited the 'hacienda' in question pro-indiviso from their
deceased parents; they did not contribute or invest
additional ' capital to increase or expand the inherited
properties; they merely continued dedicating the property
to the use to which it had been put by their forebears; they
individually reported in their tax returns their
corresponding shares in the income and expenses of the
'hacienda', and they continued for many years the status
of co-ownership in order, as conceded by respondent, 'to
preserve its (the 'hacienda') value and to continue the
existing contractual relations with the Central Azucarera
de Bais for milling purposes. Longa vs. Aranas, CTA Case
No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered
partnership.—Co-Ownership who own properties which
produce income should not automatically be considered
partners of an unregistered partnership, or a corporation,
within the purview of the income tax law. To hold
otherwise, would be to subject the income of all co-
ownerships of inherited properties to the tax on
corporations, inasmuch as if a property does not produce
an income at all, it is not subject to any kind of income tax,
whether the income tax on individuals or the income tax
on corporation. (De Leon vs. CI R, CTA Case No. 738,
September 11, 1961, cited in Arañas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
It is likewise different from Reyes vs. Commissioner of
Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration
of the building to an administrator and divided equally the
net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista
sisters bought four pieces of real property which they
leased to various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots
to the petitioners and whether he paid the donor's tax (See
Art. 1448, Civil Code).
6. COLLECTOR VS BATANGAS CO 54 OG
6274
FACTS: This case is an appeal of the CTA decision which
reversed the assessment and decision of the Collector of
Internal Revenue (CIR) assessing and demanding from
respondents Batangas Transportation and Laguna Bus in
the amount of Php54,143.54 which represent deficiency
income tax and compromise for the year 1946-1949.
Pending then appeal to the CTA, the assessment was
increased to P148,890.14.
Respondent bus companies are 2 distinct and separate
corporations, engaged in the business of land
transportation by means of motor busses and operating
distinct and separate lines.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 two companies lost their respective
businesses. Post-war, they were able to acquire 56 auto
busses from the US Army which they divided equally. Two
years later, Martin Olsen resigned as manager and
Joseph Benedict was appointed as Manager of both
companies by their respective Board of Directors.
According to Benedict, the purpose of the joint
management called “Joint Emergency Operation” was to
economize in overhead expenses. At the end of each
calendar year, all gross receipts and expenses of both
companies are determined and the net profit were divided
50-50 then transferred to the book of accounts of each
company, and each company prepares its own income
tax return from their 50% share.
The CIR theorizes that the 2 companies pooled their
resources in the establishment of the Joint
Emergency Operation thereby forming a joint venture. He
believes that a corporation exists, distinct from the 2
respondent companies. The CTA held that the Joint
Emergency Operation is not a corporation within the
contemplation of the NIRC, much less a partnership,
association or insurance company, and therefore was not
subject to income tax separately and independently of
respondent companies.
ISSUE: Whether or not the transportation companies in
the case at bar are corporations which are subject to
income tax.
RULING: YES.
RATIO: 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 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. 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.
7. NV REEDERJI AMSTERDAM V COM (L-
460229, 6/23/88)
Facts: A foreign shipping corporation, Amsterdam, which
called on Philippine ports to load cargoes for foreign
destination on two occasions in 1963 and 1964
respectively, and which was collected freight fees on these
transactions. In these two instances, petitioner Royal
Interocean Lines acted as husbanding agent for a fee or
commission on said vessels. No income tax appears to
have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through
his examiners, filed the corresponding income tax returns
for and in behalf of the Amsterdam under Section 15 of the
National Internal Revenue Code. On June 30, 1967,
respondent Commissioner assessed said petitioner in the
amounts of P193,973.20 and P262,904.94 as deficiency
income tax for 1963 and 1964, respectively, as "a non-
resident foreign corporation not engaged in trade or
business in the Philippines under Section 24 (b) (1) of the
Tax Code.
On the assumption that the said petitioner is a foreign
corporation engaged in trade or business in the
Philippines, on August 28, 1967, petitioner Royal
Interocean Lines filed an income tax return of the
aforementioned vessels 1 and paid the tax thereon in the
amount of P1,835.52 and P9,448.94, respectively,
pursuant to Section 24 (b) (2) in relation to Section 37 (B)
(e) of the National Internal Revenue Code and Section
163 of Revenue Regulations No. 2. On the same two
dates, petitioner Royal Interocean Lines as the
husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the
abovementioned assessment made by the respondent
Commissioner which protest was denied by said
respondent in a letter dated March 3, 1969: On March 31,
1969, petitioners filed a petition for review with the
respondent Court of Tax Appeals praying for the
cancellation of the subject assessment. After due hearing,
the respondent court, on December 1, 1976, rendered a
decision modifying said assessments by eliminating the
50% fraud compromise penalties imposed upon
petitioners. Petitioners filed a motion for reconsideration of
said decision but this was denied by the respondent court.
Issue: WON Amsterdam not having any office or place of
business in the Philippines should be taxed as a foreign
corporation not engaged in trade or business.
Ruling: The petition is devoid of merit. CTA ruling be final
and executory. Amsterdam lost the case.
Ratio: Petitioner N.V. Reederij "AMSTERDAM" is a foreign
corporation not authorized or licensed to do business in
the Philippines. It does not have a branch office in the
Philippines and it made only two calls in Philippine ports,
one in 1963 and the other in 1964. In order that a foreign
corporation may be considered engaged in trade or
business, its business transactions must be continuous. A
casual business activity in the Philippines by a foreign
corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income
tax purposes.
The Court reproduces with approval the following
disquisition of the respondent court —
A corporation is itself a taxpaying entity and speaking
generally, for purposes of income tax, corporations are
classified into (a) domestic corporations and (b) foreign
corporations. (Sec. 24(a) and (b), Tax Code.) Foreign
corporations are further classified into (1) resident foreign
corporations and (2) non-resident foreign corporations.
(Sec. 24(b) (1) and (2). Tax Code.) A resident foreign
corporation is a foreign corporation engaged in trade or
business within the Philippines or having an office or place
of business therein (Sec. 84(g), Tax Code) while a non-
resident foreign corporation is a foreign corporation not
engaged in trade or business within the Philippines and
not having any office or place of business therein. (Sec.
84(h), Tax Code.)
A domestic corporation is taxed on its income from
sources within and without the Philippines, but a foreign
corporation is taxed only on its income from sources within
the Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev.
Regs. No. 2.) However, while a foreign corporation doing
business in the Philippines is taxable on income solely
from sources within the Philippines, it is permitted to
deductions from gross income but only to the extent
connected with income earned in the Philippines. (Secs.
24(b) (2) and 37, Tax Code.) On the other hand, foreign
corporations not doing business in the Philippines are
taxable on income from all sources within the Philippines,
as interest, dividends, rents, salaries, wages, premiums,
annuities Compensations, remunerations, emoluments, or
other fixed or determinable annual or periodical or casual
gains, profits and income and capital gains" The tax is
30% (now 35%) of such gross income. (Sec. 24 (b) (1),
Tax Code.)

Now to the case at bar. Here, petitioner N.V. Reederij
"Amsterdam" is a non-resident foreign corporation,
organized and existing under the laws of The Netherlands
with principal office in Amsterdam and not licensed to do
business in the Philippines. (pp. 8-81, CTA records.) As a
non-resident foreign corporation, it is thus a foreign
corporation, not engaged in trade or business within the
Philippines and not having any office or place of business
therein. (Sec. 84(h), Tax Code.) As stated above, it is
therefore taxable on income from all sources within the
Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital
gains, and the tax is equal to thirty per centum of such
amount, under Section 24(b) (1) of the Tax Code. The
accent is on the words of--`such amount." Accordingly,
petitioner N. V. Reederij "Amsterdam" being a non-
resident foreign corporation, its taxable income for
purposes of our income tax law consists of its gross
income from all sources within the Philippines.
The law seems clear and specific. It thus calls for its
application as worded as it leaves no leeway for
interpretation. The applicable provision imposes a tax on
foreign corporations falling under the classification of non-
resident corporations without any exceptions or conditions,
unlike in the case of foreign corporations engaged in trade
or business within the Philippines which contained (at the
time material to this case) an exception with respect to
foreign life insurance companies. Adherence to the
provision of the law, which specifies and determines the
taxable income of, and the rate of income tax applicable
to, non-resident foreign corporations, without mentioning
any exceptions, would therefore lead to the conclusion
that petitioner N.V. Reederij "Amsterdam" is subject to
income tax on gross income from all sources within the
Philippines.
A foreign corporation engaged in trade or business within
the Philippines, or which has an office or place of business
therein, is taxed on its total net income received from all
sources within the Philippines at the rate of 25% upon the
amount but which taxable net income does not exceed
P100,000.00, and 35% upon the amount but which taxable
net income exceeds P100,000.00. On the other hand, a
foreign corporation not engaged in trade or business
within the Philippmes and which does not have any office
or place of business therein is taxed on income received
from all sources within the Philippines at the rate of 35% of
the gross income.
Petitioner relies on Section 24 (b) (2) and Section 37 (B)
(e) of the Tax Code and implementing Section 163 of the
Income Tax Regulations but these provisions refer to a
foreign corporation engaged in trade or business in the
Philippines and not to a foreign corporation not engaged in
trade or business in the Philippines like petitioner-ship-
owner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e)
of the Code, as implemented by Section 163 of the
Regulations, provides the rule of the determination of
the net income taxable in the Philippines of a foreign
steamship company doing business in the Philippines.
To assure that non-resident foreign steamship
companies not engaged in business in the Philippines
and not having any office or place of business herein
are not covered therein, the regulations explicitly and
clearly provide that "the net income of a foreign
steamship co company doing business in or from this
country is ascertained," under the formula contained
therein, "for the purpose of the income tax.! The
reason is easily discernible. As stated above, the
taxable income of non-resident foreign corporations
consists of its gross income from all sources within the
Philippines. Accordingly, a foreign steamship
corporation derives income partly from sources within
and partly from sources without the Philippines if it is
carrying on a business of transportation service
between points in the Philippines and points outside
the Philippines. (Vol. 3, 1965, Federal Taxes, Par.
16389.) Only then does Section 37 (e) of the Tax
Code, are implemented by Section 163 of the
Regulations, apply in computing net income subject to
tax. There is no basis therefore for an assertion "that
Section 37 (e) does not distinguish between a foreign
corporation engaged in business in the Philippines
and a foreign corporation not engaged in business in
the Philippines."" (p. 84, CTA records.) (Decision, pp.
11-12.)
8. COM VS PROCTER 204 SCRA 377
FACTS:
Procter and Gamble Philippines declared dividends
payable to its parent company and sole stockholder, P&G
USA. Such dividends amounted to Php 24.1M. P&G Phil
paid a 35% dividend withholding tax to the BIR which
amounted to Php 8.3M It subsequently filed a claim with
the Commissioner of Internal Revenue for a refund or tax
credit, claiming that pursuant to Section 24(b)(1) of the
National Internal Revenue Code, as amended by
Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only 15%.
MAIN ISSUE: Whether or not P&G Philippines is entitled
to the refund or tax credit.
HELD: YES. P&G Philippines is entitled. Sec 24 (b) (1) of
the NIRC states that an ordinary 35% tax rate will be
applied to dividend remittances to non-resident corporate
stockholders of a Philippine corporation. This rate goes
down to 15% ONLY IF he country of domicile of the
foreign stockholder corporation “shall allow” such foreign
corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation.
However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount
equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and
the reduced 15% tax rate. Thus, the test is if USA “shall
allow” P&G USA a tax credit for ”taxes deemed paid in the
Philippines” applicable against the US taxes of P&G USA,
and such tax credit must reach at least 20 percentage
points. Requirements were met.
9. CREBA VS ROMULA 614 SCRA 605
Chamber of Real Estate and Builders’ Associations,
Inc., v. The Hon. Executive Secretary Alberto Romulo,
et al
G.R. No. 160756. March 9, 2010
Facts: Petitioner Chamber of Real Estate and Builders’
Associations, Inc. (CREBA), an association of real estate
developers and builders in the Philippines, questioned the
validity of Section 27(E) of the Tax Code which imposes
the minimum corporate income tax (MCIT) on
corporations. Under the Tax Code, a corporation can
become subject to the MCIT at the rate of 2% of gross
income, beginning on the 4th taxable year immediately
following the year in which it commenced its business
operations, when such MCIT is greater than the normal
corporate income tax. If the regular income tax is higher
than the MCIT, the corporation does not pay the MCIT.
CREBA argued, among others, that the use of gross
income as MCIT base amounts to a confiscation of capital
because gross income, unlike net income, is not realized
gain.
CREBA also sought to invalidate the provisions of RR No.
2-98, as amended, otherwise known as the Consolidated
Withholding Tax Regulations, which prescribe the rules
and procedures for the collection of CWT on sales of real
properties classified as ordinary assets, on the grounds
that these regulations:
· Use gross selling price (GSP) or fair market value (FMV)
as basis for determining the income tax on the sale of real
estate classified as ordinary assets, instead of the entity’s
net taxable income as provided for under the Tax Code;
· Mandate the collection of income tax on a per transaction
basis, contrary to the Tax Code provision which imposes
income tax on net income at the end of the taxable period;
· Go against the due process clause because the
government collects income tax even when the net income
has not yet been determined; gain is never assured by
mere receipt of the selling price; and
· Contravene the equal protection clause because the
CWT is being charged upon real estate enterprises, but
not on other business enterprises, more particularly, those
in the manufacturing sector, which do business similar to
that of a real estate enterprise.
Issues:
1. Is the imposition of MCIT constitutional?
2. Is the imposition of CWT on income from sales of
real properties classified as ordinary assets
constitutional?
Held:
1. Yes.
The imposition of the MCIT is constitutional. An income
tax is arbitrary and confiscatory if it taxes capital, because
it is income, and not capital, which is subject to income
tax. However, MCIT is imposed on gross income which is
computed by deducting from gross sales the capital spent
by a corporation in the sale of its goods, i.e., the cost of
goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed.
Various safeguards were incorporated into the law
imposing MCIT. Firstly, recognizing the birth pangs of
businesses and the reality of the need to recoup initial
major capital expenditures, the MCIT is imposed only on
the 4th taxable year immediately following the year in
which the corporation commenced its operations.
Secondly, the law allows the carry-forward of any excess
of the MCIT paid over the normal income tax which shall
be credited against the normal income tax for the three
immediately succeeding years. Thirdly, since certain
businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate
business reverses.
2. Yes.
Despite the imposition of CWT on GSP or FMV, the
income tax base for sales of real property classified as
ordinary assets remains as the entity’s net taxable income
as provided in the Tax Code, i.e., gross income less
allowable costs and deductions. The seller shall file its
income tax return and credit the taxes withheld by the
withholding agent-buyer against its tax due. If the tax due
is greater than the tax withheld, then the taxpayer shall
pay the difference. If, on the other hand, the tax due is
less than the tax withheld, the taxpayer will be entitled to a
refund or tax credit. The use of the GSP or FMV as basis
to determine the CWT is for purposes of practicality and
convenience. The knowledge of the withholding agent-
buyer is limited to the particular transaction in which he is
a party. Hence, his basis can only be the GSP or FMV
which figures are reasonably known to him.
Also, the collection of income tax via the CWT on a per
transaction basis, i.e., upon consummation of the sale, is
not contrary to the Tax Code which calls for the payment
of the net income at the end of the taxable period. The
taxes withheld are in the nature of advance tax payments
by a taxpayer in order to cancel its possible future tax
obligation. They are installments on the annual tax which
may be due at the end of the taxable year. The
withholding agent-buyer’s act of collecting the tax at the
time of the transaction, by withholding the tax due from the
income payable, is the very essence of the withholding tax
method of tax collection.
On the alleged violation of the equal protection clause, the
taxing power has the authority to make reasonable
classifications for purposes of taxation. Inequalities which
result from singling out a particular class for taxation, or
exemption, infringe no constitutional limitation. The real
estate industry is, by itself, a class and can be validly taxable year. In the instant case, petitioner did not
treated differently from other business enterprises. establish by clear and convincing evidence that such
accumulated was for the immediate needs of the
What distinguishes the real estate business from other business.
manufacturing enterprises, for purposes of the imposition
of the CWT, is not their production processes but the To determine the reasonable needs of the business, the
prices of their goods sold and the number of transactions United States Courts have invented the “Immediacy Test”
involved. The income from the sale of a real property is which construed the words “reasonable needs of the
bigger and its frequency of transaction limited, making it business” to mean the immediate needs of the business,
less cumbersome for the parties to comply with the and it is held that if the corporation did not prove an
withholding tax scheme. On the other hand, each immediate need for the accumulation of earnings and
manufacturing enterprise may have tens of thousands of profits such was not for reasonable needs of the business
transactions with several thousand customers every and the penalty tax would apply. (Law of Federal Income
month involving both minimal and substantial amounts. Taxation Vol 7) The working capital needs of a business
depend on the nature of the business, its credit policies,
10. C YANAMID P HILS , INC . VS CA, GR 108607, the amount of inventories, the rate of turnover, the amount
1/20/07 of accounts receivable, the collection rate, the availability
of credit and other similar factors. The Tax Court opted to
Facts: Petitioner is a corporation organized under determine the working capital sufficiency by using the
Philippine laws and is a wholly owned subsidiary of ration between the current assets to current liabilities.
American Cyanamid Co. based in Maine, USA. It is Unless, rebutted, the presumption is that the assessment
engaged in the manufacture of pharmaceutical products is correct. With the petitioner’s failure to prove the CIR
and chemicals, a wholesaler of imported finished goods incorrect, clearly and conclusively, the Tax Court’s ruling is
and an imported/indentor. In 1985 the CIR assessed on upheld.
petitioner a deficiency income tax of P119,817) for the
year 1981. Cyanamid protested the assessments
particularly the 25% surtax for undue accumulation of
earnings. It claimed that said profits were retained to
increase petitioner’s working capital and it would be used
for reasonable business needs of the company. The CIR
refused to allow the cancellation of the assessments,
petitioner appealed to the CTA. It claimed that there was
not legal basis for the assessment because 1) it
accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and
retirement of indebtedness 2) it is a wholly owned
subsidiary of American Cyanamid Company, a foreign
corporation, and its shares are listed and traded in the NY
Stock Exchange. The CTA denied the petition stating that
the law permits corporations to set aside a portion of its
retained earnings for specified purposes under Sec. 43 of
the Corporation Code but that petitioner’s purpose did not
fall within such purposes. It found that there was no need
to set aside such retained earnings as working capital as it
had considerable liquid funds. Those corporations
exempted from the accumulated earnings tax are found
under Sec. 25 of the NIRC, and that the petitioner is not
among those exempted. The CA affirmed the CTA’s
decision.

Issue: Whether or not the accumulation of income was

justified.

Held:
In order to determine whether profits are accumulated for
the reasonable needs of the business to avoid the surtax
upon the shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the
time of the accumulation, not intentions subsequently,
which are mere afterthoughts. The accumulated profits
must be used within reasonable time after the close of the