Petra M. Vd&? De Fernandez and Concepcion Martinez, et al. vs. Commissioner of Internal Revenue

DECISION

On July 20, 1960, respondent assessed petitioners in the amounts of P45,726.37, P41,990.70 and P41,918.13 as corporate income tax, inclusive of administrative ~ penalties and interests for failure to file income tax returns for the years 1951 to 1953, the subject matter in C.T.A. No. 935. Subsequently, on December 20, 1961, another assessment was made against petitioners in the amounts of P24,849.65, 733,590.08, 729,898.70, P50,466.69, P43,162.80 and P46,412.99 as income tax for the years 1954 to 1959, the subject matter in C.T.A. No. 1262. Having failed to secure a reconsideration of the said assessments, petitioners appealed to this Court. These 438

935 and L262"

2 Cases have veen jointly tears af they involve the sans iseues. ‘ __ 1% appears Wiest Gonsepoten Leybs y Yunzon dled in- tes tate in the olty of Manils ob February 16, 1930, __ ees the petitioners fetta i, Vans te, na by petitioners oa loa Pabruary Li, 1931, the estate whieh ‘consis 32 parcels of land located bn the City of Hania ond tae ‘improvements therven were adjudiceted pPo=indiviso ia oqugl Shares to toe said two sisters, instead of perti~ tioning said parceis, the sisters, eight years leter, transferred tue titles o/ suid properties to their nenes | hed in undivided equal shares and he properties resein un- | Giviced pp te the pretent, earning intose from rentals. ie CS Ppa ties wpe, eteialstemss ty Me lerdines “Leybs Ines, a COrperation organized anc engaged ia r estate business Since before the second worl’ war. tioners are tie principal stockholders of thls ce tion. From 1991 te 1959 alone, petitioners ear’ following iacone from the seid properties:

a 1951 rhe me “d ’ . 268 ip ——— Mitac 1956 mn omme \.

439

_ EE ——— =

Dasision -

OTa CASES NOG, 935 end 1262 :

P230,631.00 #161 636.67 ee oo Tetal <«-<<<.

In 1950, petitioners received war damage payments in the sun of ee ee Constructions and recon- ‘structions were andertaken on sone of ‘the aforesaid lots. in 1950, 1991 and 1995. Yor thebe purpose, petitioners spent §68,986.50 in 1950, €10,000.0 io 1992 sat - #136, 000,00 in 1955. To ewimuce the value of one of the lots, petitioners bought an adjoining parcel for . #200,0@0,00 fo 1997. Later ta the year, thay sels tc the Martinez Loyoa inc. a lot for $260,000.00.

Petitioners’ stare in the Lacowe of tae propertics sudject of. this case are reported is their intividcad lacoue tan return ani, io thelr Claanclal statements, the set up is eslled “joint account” by whica petitioners mean thet “the lncouwes resdize as reperted in these atete- aesnts cone frow thea properties Jointly owned ty the sis- ters."

The Sein istuse involved in these cases ares

1. whether petitioners Boreiaz ire liakie te tne paysent ef cor- porate income tary — "2, Whotser the right of the respond- ant to assese t .« income tax for ~- ee Tee to ish hee slrendy

OMCISIGN ~

GTA Casi ACS.

935 & 1262 q

3. whether petitioners are liadle for administrative penalties end interest for failure to' file returns.

Unregistered partnerships are subject to the in- come tax on corporations undep Section 24 of the Seationsl internal Aevenue Cece in relstion to jection S4(b) of the same Code which reads as follows:

gee, 8. Definitions. - when used ic this Title - (bo) the ters “eerporation” ineludes partnerships, no metter how ereated or Organized, jointestock companies int accounts leuantes en partielpscién), as- sdciations or insurance eres but dees not duly regis genere) Copertuerships (compafiias colectivas).

Petitioners now urge thot they ieve notformed an un =~ registered partnershio ant they are mere ca-owners of properties, hence ere not subjeet to the Lacome tax on corporations.

‘ article 1767 of the Civil Code of the Philippines provides:

wy tne contract of partnership two or.more persons Llnd themselves to con- tribute money, property, or industry to a common func, with the intention of Gividing the profits among themselves.

pursuant to thie article, the essentinl elements ~ of a partnership are two, aemely: (a) an agreement to contribute money, preperty or industry to a common fund; and (b) intent to divide the profits among the contrast- 44d GTa Cais 808, 93> 4 126, ing porties. if these two eiements concur it iz im- tio Corlal that the parties termed thelr reletionship as mere Co-owagership for it is not whet the partics cali their agreement cut tie true ature thereof that con- trols the legal effects of tuclr sets, ‘Thus, in Flo- renelo Reyes, et al., Ws. Comm, of Int. Revy., et al., (G.As No. Le2aG~ 21, duly 29, 1968) petitioners there in bought a lot aad building regis tering the preperty ia their names 98 owners pro indivise and letting ‘or reat the building te different lessees. The Supreme Court considered petitioners therein es partners aud aot mere co-owners since the property was bought to be were ated for profits. ) .

Upon consideration of eli the facts snd eircume tances surrounding the ease, we sre satisfied that petitioners have formed @ pertnership: engaged ia real estate business tor profits vecnuses ; : ~

1. Wone of the properties in gulanien appears to be devoted to residential purposes or te other personal uses of peti tionars. All the lots have been leased . separately to severe) persons from thelr aequisition in 1930 to the present, "rom 1951 to 1959 alone petitioners . netted #1,438,125.86. The lots are all under the adminis- tro tion and menagenent of a third perty, the Martines Ley- be, ray @ corporation engeged in real estate business, 442

DpacIstok -

CTA Cad loss 935 & 1262 6 From these om@ Peeeives a poalir Of resources by peti- tioners not only Poy the preserVattion ani enjoyment of property which 48 the purzgsse Of @o-ownership (Padilla, Civil Code, Annotated, B Ys acs #a%tion, Vol. II, p. 139) | but also for profitable business operations. It is per- vasive in the set v> that a nuaber of real properties hes been placed tm the Raniis of Martinez Leyba, Ine, to constitute a business enterprise.

2. Gne ef the asatiaettons Letyveen co-9wnership and partnership is Lo ‘the purpose of each. While ¢co- ownership is for the prefervation end common enjoyment of property, » vrtnership is for the incresse of eapgital through prefits. In this respect it is slgnificant thst petitioners bought a parcel of lend In 1957 for #200,000 frm the resources of thelr original properties te enhance the value of a property wich bordered said purchased | preperty. This purchase is- clearly not an act of proserve~ tlon and comton enjoyuent ani is yuilte s revealing trans- action for it clearly suggests that the eo-neuitn had purposes othar than the ‘datiensit venue and common enjoyment of their inberites properties, 3- Wo plausible explanation has bean offered by petitioners as to why the properties tn question have not been partitioned by them up to the present, a lapse of 40 years, The explanation that the partition of some lots will diminish their economic value considering their 443 DBCISIGN .

GTA CASES Nos.

935 © 1262 7 fatural conformation snd that there is no way of par- titloning said lets so that petitioners may be equale ly situated from the econcnie point after partition, sounds hollow. . Under this explanation these proper- ties will never be partitioned because ideal partition ean be done but rarely. The properties sre not hard to partition. In cases involving numerous lets, 31 | iots in this case, She allocations my be made by lots with equitable adjectments if the eircumstences so re- quire. It may not be amiss te say at this juncture that tneset that in 1957 petitioners bought a parcel of land from the resourees of the inherited properties to enhance tee value of one of said properties, and the fact that they undertook constructions an reconstructions on the properties euriier show that they hed no intention ef — dissolving the ostensible co-ownerstiip of the properties between them. On the contrary, their obvious intention was to continue keeping then under os tonsible co~owner- ship and in the meantime ase them for business in that guise, | To our mind, the collective effect of the forego- ing circumstances clearly indicetes that petitioners have constituted a partnership.

[ Petitioners eontend thit since these propertics were inherited by them then it can not be said that they heve Capital sontributions to justify the existence of a part- nership. This Court held in Lorenzo T. Ofia, et al vs.

444 . Me * aS | i ee os ed te

See

DECISION - =, GTA CABES Nos.

935 & 1262 The Commissioner of Internel Revenue, C.T.4A. Case Ho. 617, July 31, 1961, that the use of properties ine herited pro indiviso for business by the heirs who are owners in comzon therecf gives rise to an un- registere? partnership among the heirs. sabject te the incense tex for corporation under Section 6% of the Revenue Code in relation to Section 24 of the same Code. It is hardly necessary to cay that if the inherited _ property and its income are used for business by the co-owners then their respective shares and their income are in effect their contribvutioas to the pertnership.) ; 4 In the case at ber, the returns of petitioners for 19 1952, 1953 and 195% were due for filing on March 1, 1952, Waren 1, 1953, March 1, 195% and Mareh 1, 1955, respectively. It is now urged that the Sovernment's - _ Pight to assess the taxes in question expired on May 15, 1957, May 15, 1958, May 15, 2959 ond Way 15, 1960, respectively. Petitioners obviously forget thet no returne for the partnership were ever nade; the returns were made ie the individusl income tex returns of the petitioners, Such returns are not valid returns for the unregistered partnership an4 their filing cannot be the start of the prescriptive pertoe for the assessment of the partnership, snd hence the ten-year period for 445 \

ORCISION ~-

CTA CAS™S Nos.

935 & 1262 9 enacuonent shevlé be counteé from the discovery of the fatlure to file. (Republic vs, Jalandoni, d. A No. Lal83S%, Sept. 20, 1965; Coll. of Int. Rev. va. Pineda, G. R. No. L-14522, May 31, 1961.) It is aot Clear from the evidence es to when such discovery was made and the presumption of regularity of official acts 65 well a2 the role that he whe alleges preseription has the duty of proving it, militete against petitioners. )

{ we artes with petitioners thet they are not liable for the 254 surcharge because their failure to file a return af a corporstion as provided in Section “6 of the Revenue Cote was in ood faith. Petitioners 414 file re- turns for the income of the properties in question in their individual income tax returns. Considering ‘the sur- rounding eircumstances ani the mature of this case, ‘one | Gan easily belleve that the omission was in good faith tn line with the cecision of the Supreme Court in collector of Internal Revenue vy, The Satanges Transportetion Com- pany «nd Laguna Tayadas Sus Company, Gi Be HO, L-9692, Jan. 6, 1958. } ‘It appears that the appealed decision impored a compromise penalty in both cases. Needless to say, the Commissioner of Internal ,Asvenue has no power to impose a Cospromice penalty without conseat of the taxpayer.

as to the romicse penalty in the tetal amount of $250.00, it ds new 6 well-

SeCcisign «

CTA GaAs ios.

935 & 1262 1952 ne ;

settlea doctrine that compromise seer ro gt be imposed or collected wi the agreement and conformity of the tax~ perers (Collector of Internal Revenue y. versity of Santo Temas, et al., %. RR. Hoe. L112 w inli28°, Hoy. 28, 1958 958) » R. Noe, 1lm12250 & 1-12259, May 27, 1959; The Pailipoines internattonad Pair,. Inc. We. TCOll, Of Int. Rev., %. e. Nos, im12928 & L-12932, Mareh 31, 1962.)

The tax due from the partnership for the years to 1959 ls computed as follows:

225) n Ret incoue per investigation et sae pat Tex due bi ca al “ Adus > an t from 2222 fet incowe per investigation ‘Tex thereon 970.

aad monthly interest from = income me per lavas tigation ida money tateres t froe ceaecs TOTAL AMOUNT DUE wigeasenea—n eae and Het income per inves tigation , iad thly interest froa a ry 0-59 to Lee 20-6] -mememe

DacIsIQi «- -

CTs CaSES Neos.

935 & 1262 12 4273 Net income per seniaisihantian -—< Tax due thereon wwe nmanmoawacem © 4 rs adds i monthly interest from - 20-59 to 1220661 oem mme 4 43%2.38 2236 Bet inecge ak oll investigation --<= Tax OS OO A ED BED A OO: rs 2 , e tAa me monthly interest fros ;

—_ to 1a20-61 -~0---— ___ 5,960.70 4272 set income por retarn «--------< 162,605.50 adds Unaccounted t ‘ from the sale of real estates sgle per docasent registered with the wegister of Deeds, Manila, 1957 -<<-- "a.7 000.00 Deducts * seqaieision cost evidenced by tae assessed Value Fernandes _==08, 520 » he Cene i- ee adds wonthly interest from 20-59 to 12-20-61 nwewme 448

DECISIGN <

CTA CAS™S Hos, 935 & 1262 ‘lz 2238 met income = ey investigation --<

Ss

ada “td sonthay mon interest fron’ — * Poe te Lang0n6l ~=ma—swn__ 5.500580 4232 Yet income . investigation ad i tr vps monthay sntere a tuts TOTAL AMOUNT DUB wor en meen nono nog 612472 ;

37 oo #36, eK ha i an noe ewne spe is LISD wane wee nme 335 270.

19 gorass 83 DQ owen meen TOPAL mw BUD s0Gsa58 = WIRSSPORR, petitioners are hereby ordered to pay within thirty (30) days from the dete this decision becomes final tie mount of #331,064.58 as income tax — due frou the partnership for the years 1951 to 1959.

In addition to the said amount, petitioners are hereby ordered to pay 5h surcharge and 1) monthly interest on the said sum, from the date of notice and demand by respondent to the date of payment, subject to the é 449 ‘

DeCIsion -

43 Liwitetion proviced in Section $1(e) of the National Internal Revenue Code, With costs against petitioners. SC CRDSRED.

qaezon City, December 2}, 1970.

fan Lh AAMOR L..AVANCEAA

Associate Judge

“8 GONCUR: | ~ ROMAN NM, UMALT

Presiding Judge

assoclate Jud 490