Title
Ona vs. Commissioner of Internal Revenue
Case
G.R. No. L-19342
Decision Date
May 25, 1972
Heirs managed inherited properties for profit, reinvesting income; deemed an unregistered partnership, liable for corporate taxes despite individual tax payments.

Case Summary (G.R. No. L-19342)

Petition, Relief Sought and Procedural Posture

Petitioners sought review of the Court of Tax Appeals’ decision in CTA Case No. 617 holding that petitioners constituted an unregistered partnership and were liable for deficiency corporate income taxes for taxable years 1955 and 1956. The Commissioner assessed corporate income taxes (P8,092 for 1955 and P13,899 for 1956 as ultimately reflected), plus statutory penalties originally imposed but partly eliminated by the Tax Court; petitioners’ motion for reconsideration was denied. The Supreme Court review affirmed the Tax Court’s decision and assessed costs against petitioners.

Key Dates and Applicable Law

Material dates: decedent’s death March 23, 1944; project of partition approved May 16, 1949; guardian appointment November 14, 1949; tax assessments for 1955 and 1956; Supreme Court decision rendered May 25, 1972. Applicable law: National Internal Revenue Code (notably Sections 24 and 84(b)), Civil Code Article 1769(3) (quoted and discussed), and the procedural references to amendments such as Section 51(e)(2) as amended by Republic Act No. 2343. Constitutional basis: the Constitution in force at the time of decision (the 1935 Constitution).

Factual Summary

The project of partition showed the heirs had an undivided one-half interest in ten parcels of land (assessed value P87,860), six houses (P17,590), and a War Damage Commission claim later yielding roughly P50,000 used to rehabilitate commonly owned properties. Two parcels were acquired after decedent’s death with borrowed funds (Philippine Trust Company loan of P72,173). The estate was also jointly liable with Lorenzo T. Ona for loans totaling P94,973. Although the project of partition was approved in 1949, the physical division was not effected; instead, Lorenzo T. Ona continued to manage and operate the properties and used income and sale proceeds to invest in real property and securities. Year-end balances in the relevant accounts demonstrate growth of petitioners’ aggregate property and investments from a base of approximately P105,450 in 1949 to P480,005.20 in 1956. Income derived (installment sales profits, stock sales profits, dividends, rentals, and interest) was recorded in Lorenzo’s books showing each heir’s proportional share and reported annually in the heirs’ individual income tax returns, but actual distributions were not made; income was retained and reinvested by Lorenzo.

Issues Presented

(1) Whether, under the found facts, petitioners were merely co-owners of inherited property and its income or had formed an unregistered partnership subject to corporate income tax under Sections 24 and 84(b) of the Tax Code. (2) If an unregistered partnership existed, whether its scope should be limited to subsequent investments and transactions, excluding income from the inherited properties. (3) If a partnership is taxable, whether amounts the heirs paid as individual income tax on their alleged shares should be credited against the partnership’s deficiency corporate income tax.

Court’s Reasoning — Conversion of Co-Ownership into an Unregistered Partnership for Tax Purposes

The Court emphasized that while co-ownership of inherited property is distinct from partnership status, tax law (Sections 24 and 84(b)) treats certain unincorporated organizations, joint ventures, and similar arrangements as "corporations" for taxation, irrespective of technical Civil Code partnership formalities. The decisive fact was that, after partition approval, petitioners allowed both the inherited properties and the incomes attributable to their respective shares to be used by Lorenzo as a common fund for business activities with the intent of deriving profit to be shared proportionally. Petitioners consistently left their shares of income in the common management, permitted reinvestment, and accepted allocation of profits in proportion to their inherited shares. Under these circumstances, the Court held that the heirs’ conduct effectively constituted the creation of an unregistered partnership for tax purposes. The Court rejected the contention that mere sharing of gross returns or joint ownership of property pro indiviso automatically shields heirs from being treated as a partnership; instead, once partition identifies definite shares and those shares are then pooled into a common business fund to earn profits, the tax law’s concept of an unregistered partnership applies even in the absence of a formal partnership contract.

Court’s Reasoning — Scope of Taxable Partnership Income

The Court addressed the claim that income attributable to the inherited properties should be treated as individual income and excluded from partnership income. It held that because the inherited properties and their income were employed in the common business of buying and selling other real properties and securities, the income of the inherited properties necessarily formed part of the partnership’s business income. The key consideration was the actual use of the inherited assets and income as components of the common business fund rather than their legal origin; once so used, such proceeds became partnership income taxable as such.

Court’s Reasoning — Credit for Individual Income Taxes Paid by Heirs

Petitioners argued that amounts they paid as individual income tax on their reported shares of profits should be deducted from the partnership deficiency. The Court rejected this, explaining the correct legal sequencing: the partnership’s tax liability is assessed against the partnership entity (or, for an unregistered partnership, treated as a corporate tax liability), and the distributable partnership profits thereafter would be reduced

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