G.R. No. L-24020-21 - Reyes vs. Commissioner of Internal Revenue

Petitioners, Florencio Reyes and Angel Reyes, were assessed by the Commissioner of Internal Revenue for income tax, surcharge, and compromise for two separate periods:

For the years 1951 to 1954, an initial assessment of P46,647.00 was first imposed and then reduced to P37,528.00.
For the years 1955 and 1956, a separate assessment of P25,973.75 was made after the petitioners failed to seek reconsideration in a timely manner.

Both assessments led to proceedings before the Court of Tax Appeals, where the two cases—although involving similar issues and facts—were heard jointly, resulting in a consolidated ruling.

On October 31, 1950, petitioners, a father and son, purchased a lot and building known as the Gibbs Building located at 671 Dasmarinas Street, Manila, for a total price of P835,000.00.
The payment structure involved:

An initial equal cash payment of P375,000.00 between the petitioners.
The remaining balance of P460,000.00 represented a mortgage obligation (assumed from the vendors’ mortgage with the China Banking Corporation).

The building, leased to various tenants, was managed by an administrator entrusted with:

The gross income from the rental of the Gibbs Building was approximately P90,000.00 annually.
After deducting the expenses of operation and maintenance, the net income was equally divided between the petitioners.
The arrangement of pooling income, managing expenses, and sharing the net profits indicates the creation of a common fund for mutually beneficial real estate transactions.

The facts were evaluated in light of the National Internal Revenue Code (NIRC), which:

Imposes income tax on corporations, including entities such as duly registered general co-partnerships and other forms of partnerships.
Broadly defines “corporation” to include partnerships regardless of their formal organization.

The case was significantly influenced by the leading decision in Evangelista v. Collector of Internal Revenue, which established that:

The essential elements of a partnership are (i) an agreement to contribute money, property, or industry to a common fund and (ii) the intent to divide the profits among the contracting parties.
Petitioners’ actions in forming a common fund through joint investment and profit sharing satisfied these elements.

The continued operation and lease of the building over a long period underscored the intent to engage in real estate transactions for monetary gain.
Management of the property was centralized under an administrator with full authority to perform contracts, collect rents, and manage financial obligations—all indicative of a partnership arrangement rather than mere co-ownership.
Petitioners’ reliance on distinctions such as ownership of property versus the existence of a partnership was addressed by the court, noting that their conduct and shared management clearly pointed to a partnership.

Whether the transaction and management of the Gibbs Building amounted to the creation of a partnership under the NIRC.
If the sharing of income and expenses constitutes the essential agreement to form a common fund with intent to divide profits.

Whether the reasoning and doctrinal principles established in Evangelista apply to the present case.
If the prior decision correctly encompassed the arrangement as a partnership subject to the income tax imposed on corporations.

Whether petitioners, despite being co-owners, should be considered partners for tax purposes.
If the alleged differences (such as intentions to eventually divide the enterprise in a way different from a typical partnership) warrant a different tax treatment.

Whether the reduction of tax liability by the Court of Tax Appeals was correctly based on the elimination of surcharge and compromise penalties.
If the petitioners’ failure to seek reconsideration for subsequent assessments impacts the substance of the partnership analysis and resultant tax imposition.