Reyes vs. Commissioner of Internal Revenue

A partnership is subject to income tax as a corporation under the National Internal Revenue Code when the parties contribute money or property to a common fund with the intent to divide the profits, even if the arrangement does not conform to the technical requirements of a partnership under the Civil Code. The qualifying phrase "no matter how created or organized" in Section 84(b) of the Code indicates that a joint venture need not be undertaken in any of the standard forms to be deemed a partnership for purposes of the tax on corporations.

Petitioners Florencio Reyes and Angel Reyes are father and son who, on October 31, 1950, purchased a lot and building known as the Gibbs Building situated at 671 Dasmariñas Street, Manila, for P835,000.00. The building was leased to various tenants at the time of purchase, and the purchasers agreed to respect the tenants' rights under the existing lease contracts with the original owners. The administration of the building was entrusted to an administrator who collected rents, kept books and records, rendered statements of accounts, negotiated leases, made necessary repairs, and disbursed payments after approval by the owners. The applicable statutory framework is the National Internal Revenue Code (Commonwealth Act No. 466), which imposes income tax on corporations and defines "corporation" to include partnerships, with the exception of duly registered general co-partnerships.

On October 31, 1950, petitioners Florencio Reyes and Angel Reyes, father and son, purchased a lot and building known as the Gibbs Building, situated at 671 Dasmariñas Street, Manila, for P835,000.00. They paid P375,000.00 initially, leaving a balance of P460,000.00, which represented the mortgage obligation of the vendors with the China Banking Corporation; this mortgage obligation was assumed by the vendees. The initial payment of P375,000.00 was shared equally by the petitioners. At the time of purchase, the building was leased to various tenants, whose rights under the lease contracts with the original owners the purchasers agreed to respect.

The administration of the building was entrusted to an administrator who collected the rents, kept its books and records, rendered statements of accounts to the owners, negotiated leases, made necessary repairs, disbursed payments whenever necessary after approval by the owners, and performed 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.

The Commissioner of Internal Revenue assessed petitioners 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. Another assessment was made against petitioners for back income taxes plus surcharge and compromise in the total sum of P25,973.75, covering the years 1955 and 1956. The Court of Tax Appeals heard the two cases jointly, reducing the tax liability for 1951-1954 to P37,128.00 and for 1955-1956 to P20,619.00 as income tax due from the partnership formed by petitioners. 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.

Petitioners maintained that the Evangelista ruling did not apply to their situation, arguing that they were co-owners and not partners. They pointed to the fact that this was only one transaction, and that an affidavit of one of them found in the Bureau of Internal Revenue records indicated 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. However, while the purchase was made on October 31, 1950, and their brief as petitioners was filed on October 20, 1965, almost 15 years later, there was no allegation that such division as between them was in fact made. The facts as found showed that the building continued to be leased by other parties with petitioners dividing equally the income after deducting the expenses of operation and maintenance.

• Inapplicability of Evangelista Doctrine: Petitioners maintained that the Evangelista ruling does not apply to their situation, alleging that the circumstances are dissimilar and that the reliance by the Court of Tax Appeals on that case was unwarranted, warranting the decision to be set aside.
• Co-Ownership, Not Partnership: Petitioners argued that they were co-owners and not partners, stressing that the acquisition of the Gibbs Building was only one transaction, and that an affidavit of one of them in the Bureau of Internal Revenue records indicated their intention was to house their respective enterprises in the building, with a plan of effecting a division in 10 years.

N/A — The decision does not separately recount the arguments of the respondents beyond the general position that the assessment was proper and that the Evangelista doctrine applied.

• Existence of a Partnership: Whether petitioners, in acquiring the Gibbs Building and dividing the rental income equally, established a partnership subject to income tax as a corporation under the National Internal Revenue Code.
• Applicability of Evangelista Doctrine: Whether the Court of Tax Appeals erred in applying the ruling in Evangelista vs. Collector of Internal Revenue to the petitioners' situation.

• Existence of a Partnership: Yes. Petitioners constituted a partnership subject to income tax as a corporation under the National Internal Revenue Code, the essential elements of partnership — agreement to contribute money or property to a common fund and intent to divide the profits — being present.
• Applicability of Evangelista Doctrine: No. The Evangelista ruling is controlling; the differences between the circumstances in that case and the present case are of slight significance and do not call for a different ruling.

• Existence of a Partnership: The Court applied the essential elements of a partnership as defined in Article 1767 of the Civil Code: (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 was undoubtedly present, as petitioners admittedly agreed to and did contribute money and property to a common fund. The issue narrowed down to their intent in acting as they did. The Court, following Evangelista, considered the collective effect of the circumstances: the common fund was created purposely, the building was not devoted to residential purposes or personal uses, the property was under the management of an administrator with power to lease, collect rents, and disburse payments, and petitioners divided the income equally after deducting expenses. The Court noted that while petitioners claimed an intention to divide the property in 10 years, no such division was alleged to have been made even almost 15 years after the purchase. The building continued to be leased by other parties with petitioners dividing the income equally.

• Applicability of Evangelista Doctrine: The Court found that the petitioners' effort to avoid the controlling force of the Evangelista ruling was unsuccessful. The Court quoted extensively from Evangelista, which held that the National Internal Revenue Code includes partnerships within the term "corporation" — with the exception only of duly registered general co-partnerships. The qualifying expression "no matter how created or organized" in Section 84(b) 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 to be deemed constituted for purposes of the tax on corporations. The Court also noted that the term "corporation" includes "joint accounts (cuentas en participacion)" and "associations," none of which has a legal personality of its own, independent of that of its members, showing that the lawmaker could not have regarded personality as a condition essential to the existence of the partnerships referred to. The Court further recalled the observation in Alhambra Cigar & Cigarette Manufacturing Co. vs. Commissioner of Internal Revenue that it is not advisable for the Court to set aside the conclusion reached by an agency such as the Court of Tax Appeals, which is dedicated exclusively to the study and consideration of tax problems and has developed expertise on the subject, unless there has been an abuse or improvident exercise of its authority.

• Definition of "Corporation" for Tax Purposes — Under Section 84(b) of the National Internal Revenue Code, the term "corporation" includes partnerships "no matter how created or organized," as well as joint accounts (cuentas en participacion) and associations, none of which has a legal personality of its own. The qualifying phrase 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, to be deemed constituted for purposes of the tax on corporations. The Court applied this doctrine to hold that petitioners, despite being technically co-owners, constituted a partnership subject to income tax as a corporation.

• Essential Elements of a Partnership — The essential elements of a partnership are two: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. While the first element may be present, the issue often narrows down to the intent of the parties. The Court applied this test, following Evangelista, to determine that petitioners' purpose was to engage in real estate transactions for monetary gain and divide the same among themselves.

• Deference to the Court of Tax Appeals — The Supreme Court should not set aside the conclusion reached by 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 there has been an abuse or improvident exercise of its authority. The Court applied this principle in affirming the CTA's decision.

• "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." — This passage, quoted from Evangelista, defines the controlling test for determining the existence of a partnership for tax purposes and was the analytical framework applied to the petitioners' situation.

• "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.'" — This quotation from Evangelista states the canonical rule that partnerships, however created or organized, are treated as corporations for income tax purposes, subject only to the statutory exception for duly registered general co-partnerships.

• "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." — This passage from Alhambra Cigar & Cigarette Manufacturing Co. articulates the principle of judicial deference to the specialized expertise of the Court of Tax Appeals, which the Court invoked in affirming the CTA's decision.

• Evangelista vs. Collector of Internal Revenue, 102 Phil. 140 (1957) — Controlling precedent. The Court applied this case to hold that petitioners constituted a partnership subject to income tax as a corporation under the National Internal Revenue Code, finding the circumstances sufficiently similar to warrant the same conclusion.

• Alhambra Cigar & Cigarette Manufacturing Co. vs. Commissioner of Internal Revenue, L-23226, November 28, 1967 — Followed. The Court cited this case for the principle of deference to the expertise of the Court of Tax Appeals in tax matters.

• Section 24, National Internal Revenue Code (Commonwealth Act No. 466) — Imposes 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)." The Court applied this provision to hold petitioners liable for income tax as a corporation.

• Section 84(b), National Internal Revenue Code (Commonwealth Act No. 466) — Defines the term "corporation" to include partnerships "no matter how created or organized," as well as joint accounts (cuentas en participacion) and associations. The Court applied this definitional provision to include petitioners' arrangement within the scope of taxable corporations.

• Article 1767, Civil Code of the Philippines — Defines the contract of partnership. The Court referred to this provision in identifying the essential elements of a partnership: agreement to contribute money, property or industry to a common fund, and intent to divide the profits.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Angeles, JJ., concurred.

N/A — No dissenting opinions are noted in the case text.