Case Summary (G.R. No. L-25532)
Petitioner
Commissioner of Internal Revenue, seeking to consolidate the income of the limited partnership and the individual incomes of spouses Suter and Spirig for tax purposes.
Respondent
William J. Suter, as general partner, and the Court of Tax Appeals whose decision is under review.
Key Dates
• September 30, 1947 – Formation of the limited partnership.
• October 1, 1947 – Registration with the Securities and Exchange Commission.
• December 18–20, 1948 – Marriage of Suter and Spirig; Carlson’s sale of his P2,000 interest.
• 1954–1955 – Taxable years subject to assessment.
• 1959 – Commissioner issues deficiency assessment.
• November 11, 1965 – Court of Tax Appeals reverses assessment.
• February 28, 1969 – Supreme Court decision under review.
Applicable Law
• 1935 Philippine Constitution (in force in 1969)
• Spanish Civil Code of 1889, Arts. 1674, 1675 (universal vs. particular partnerships), Art. 1677 (universal partnership prohibition between spouses), Art. 1396 (separate property of spouses)
• Code of Commerce (dissolution causes)
• National Internal Revenue Code (N.I.R.C.):
– Sec. 24 (taxation of registered general partnerships)
– Sec. 26 (members of general partnerships taxable on profit shares)
– Sec. 45(d) (consolidated return for spouses)
Issues Presented
- Whether the limited partnership’s separate juridical personality should be disregarded for income-tax purposes, treating spouses Suter and Spirig as a single taxable unit.
- Whether the marriage of the partners and Carlson’s sale of his share dissolved the limited partnership by operation of law.
Facts
The firm was organized in 1947 with three partners contributing fixed capital (P20,000; P18,000; P2,000). It operated under its trade name, maintained books and bank accounts, and filed its own income-tax returns as a corporation without objection until 1959. After marriage and purchase of Carlson’s interest, the Commissioner assessed a deficiency by consolidating the partnership’s income with that of Suter and Spirig. The CTA reversed that assessment, prompting this appeal.
Petitioner’s Arguments
• The marriage of Suter and Spirig transformed the firm into a conjugal enterprise or dissolved the partnership under civil-commerce law, eliminating its separate personality.
• As spouses conducting business exclusively between themselves, they constitute one taxable unit under N.I.R.C. Sec. 45(d), mandating a single consolidated return.
Respondent’s Arguments
• The partnership was a particular—not universal—partnership; spouses are not barred from forming or continuing such partnerships.
• Marriage and Carlson’s sale are not statutory dissolution events.
• Limited partnerships enjoy separate juridical personality and, under Sec. 24, are taxed on their own income; consolidation with individual returns is neither required nor authorized.
Court’s Analysis
• The prohibition in Art. 1677 of the Civil Code applies only to universal partnerships; “Morcoin” Co., Ltd. was a particular partnership with fixed capital contributions.
• Marriage is not a ground for dissolution under the Civil Code or Code of Commerce, and the spouses’ contributions remain separate property (Art. 1396).
• Philippine law recognizes the distinct juridical personality of partnerships; that fiction cannot be disregarded except by clear statutory command.
Case Syllabus (G.R. No. L-25532)
Facts of the Case
- On September 30, 1947, William J. Suter (‘general partner’), Julia Spirig and Gustav Carlson (‘limited partners’) formed “William J. Suter ‘Morcoin’ Co., Ltd.” with contributions of ₱20,000, ₱18,000 and ₱2,000 respectively.
- The limited partnership was registered with the Securities and Exchange Commission on October 1, 1947.
- The firm imported, marketed, distributed and operated automatic phonographs, radios, television sets, amusement machines, their parts and accessories.
- It maintained its own office, trade-named letterheads, books of accounts, bank accounts, and held a quota allocation with the Central Bank.
- In 1948, Suter married Spirig; on December 18, 1948, Carlson sold his ₱2,000 interest to the spouses for ₱1.00, recorded with the SEC on December 20, 1948.
Procedural History
- From organization until 1959, the partnership filed income tax returns as a corporation without objection from the Commissioner of Internal Revenue.
- In 1959, the Commissioner assessed a consolidated deficiency income tax against Suter: ₱2,678.06 for 1954 and ₱4,567.00 for 1955.
- Suter protested, the Commissioner denied the protest, and Suter appealed to the Court of Tax Appeals (CTA).
- On November 11, 1965, the CTA reversed the Commissioner’s assessment.
- The Commissioner filed this petition for review before the Supreme Court.
Issues Presented
- Whether the limited partnership’s juridical personality should be disregarded for income tax purposes, treating Suter and his wife as a single taxable unit.
- Whether the marriage of Suter and Spirig, plus acquisition of Carlson’s interest, dissolved the limited partnership by operation of law.
Petitioner’s Contentions
- The marriage of general partner Suter to limited partner Spirig and their subsequent purchase of Carlson’s interest dissolved the limited partnership unde