Case Summary (G.R. No. 78133)
Key Dates and Transactional Facts
Petitioners purchased two parcels on June 22, 1965 and three parcels on May 28, 1966. They sold the first two parcels in 1968 (realizing a net profit of P165,224.70) and the other three parcels on March 19, 1970 (realizing a net profit of P60,000.00). Petitioners paid corresponding capital gains taxes in 1973 and 1974 by availing themselves of the tax amnesties granted those years. On March 31, 1979 the Acting BIR Commissioner assessed petitioners for alleged deficiency corporate income taxes totaling P107,101.07 for the years 1968 and 1970. Petitioners protested; the Commissioner replied on August 22, 1979 treating the petitioners’ co-ownership as an unregistered partnership/joint venture taxable as a corporation distinct from individual tax liabilities. The petitioners filed a CTA petition (CTA Case No. 3045). The CTA, by majority decision on March 30, 1987, affirmed the Commissioner; one judge dissented. The Supreme Court rendered the decision under review on October 18, 1988.
Procedural Posture
After administrative assessment and petitioners’ protest, the CTA reviewed the matter and upheld the Commissioner’s determination that the co-ownership constituted an unregistered partnership taxable as a corporation, distinct from the partners’ individual tax liabilities. Petitioners appealed to the Supreme Court, raising errors concerning (a) the presumption of correctness and burden of proof shifted to petitioners that an unregistered partnership existed; (b) the CTA’s finding of partnership based on isolated sale transactions without satisfying statutory partnership requirements; (c) reliance on Evangelista as controlling precedent; and (d) the CTA’s conclusion that tax amnesty did not relieve petitioners of tax liabilities of an alleged unregistered partnership.
Legal Issue Presented
Whether the co-ownership of the parcels by petitioners constituted an unregistered partnership or joint venture taxable as a corporation under Sections 20(b) and 24 of the Tax Code (thus giving rise to corporate-level tax liabilities distinct from partners’ individual liabilities), and whether petitioners’ prior availment of tax amnesty relieved them of any tax liability arising from the transactions.
Governing Legal Principles and Precedent
Article 1767 of the Civil Code defines partnership as two or more persons binding themselves to contribute money, property, or industry to a common fund with the intention of dividing profits. The essential elements are (1) contribution to a common fund and (2) intention to divide profits among the contributors. The Court’s Evangelista decision construed these elements in determining whether arrangements among multiple co-owners amounted to a partnership subject to corporate taxation under Section 24 and concluded that habitual, businesslike activity (multiple acquisitions, active management, leasing for profit over many years, centralized management) and intent to operate a business enterprise supported a finding of partnership (or equivalent entity) taxable as a corporation. The law also recognizes that mere co-ownership and sharing of gross returns do not, in themselves, establish a partnership; additional indicia of a distinct business purpose, continuity/habituality, a common capital or stock, and a community of interest vis-à-vis third parties are required.
Comparative Factual Analysis Against Evangelista
The Court compared the present facts with Evangelista: in Evangelista the petitioners engaged in a series of acquisitions (24 lots), operated the properties as a business for many years, leased them out to multiple tenants, centralized management in a designated manager with broad powers, and demonstrated continuity and a businesslike pattern indicating an intent to form an enterprise for profit. By contrast, petitioners here engaged in limited, isolated transactions: two parcels bought in 1965 (not improved or sold until 1968) and three parcels bought in 1966 and later sold in 1970, with no evidence of a pattern of repeated acquisition or long-term management for profit, no centralized management or agent exercising extensive powers, and no showing of a common stock or sustained habitual business operations. The Court emphasized that isolated joint purchases and subsequent sharing of gross returns are consistent with co-ownership (tenancy in common) and do not conclusively establish partnership inter se.
Court’s Reasoning and Holding
The Supreme Court concluded that the Commissioner
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Facts of the Case
- Petitioners Mariano P. Pascual and Renato P. Dragon purchased two parcels of land from Santiago Bernardino, et al. on June 22, 1965, and three additional parcels from Juan Roque on May 28, 1966.
- The two parcels acquired in 1965 were sold in 1968 to Marenir Development Corporation, producing a net profit of P165,224.70.
- The three parcels acquired in 1966 were sold on March 19, 1970, to Erlinda Reyes and Maria Samson, producing a net profit of P60,000.00.
- Petitioners paid the corresponding capital gains taxes in 1973 and 1974 by availing themselves of the tax amnesties granted in those years.
- On March 31, 1979, then Acting BIR Commissioner Efren I. Plana issued a letter assessing petitioners and requiring payment of a total of P107,101.07 as alleged deficiency corporate income taxes for the years 1968 and 1970.
- Petitioners protested the assessment by letter dated June 26, 1979, citing their prior availment of tax amnesty in 1974.
- In a reply dated August 22, 1979, the Commissioner informed petitioners that: (a) petitioners, as co-owners in the real estate transactions, formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and subject to taxes under Section 24 of the National Internal Revenue Code; (b) the unregistered partnership was subject to corporate income tax distinct from partners’ individual income tax; and (c) tax amnesty under P.D. No. 23, as amended, relieved petitioners of their individual income tax liabilities but did not relieve the unregistered partnership’s tax liability.
- Petitioners filed a petition for review with the Court of Tax Appeals as CTA Case No. 3045.
Procedural History
- The Commissioner assessed petitioners for alleged deficiency corporate income taxes by letter of March 31, 1979, followed by a reply explaining the legal rationale on August 22, 1979.
- Petitioners protested and elevated the matter to the Court of Tax Appeals, docketed CTA Case No. 3045.
- The Court of Tax Appeals, by majority decision dated March 30, 1987 (opinion penned by Presiding Judge Amante Filler, concurred by Associate Judge Alex Z. Reyes), affirmed the Commissioner’s assessment and ordered payment with costs against petitioners.
- Associate Judge Constante Roaquin filed a separate dissenting opinion disagreeing with the majority’s conclusion that an unregistered partnership existed.
- Petitioners sought review before the Supreme Court by filing the present petition.
Issues Presented to the Supreme Court
- Whether the Court of Tax Appeals erred in presuming correct the Commissioner’s determination that petitioners formed an unregistered partnership subject to corporate income tax, and in placing the burden of proof on petitioners to rebut that presumption.
- Whether the Court of Tax Appeals erred in finding an unregistered partnership existed solely on the basis of isolated sale transactions, ignoring legal requirements to conclude a partnership’s existence.
- Whether the Court of Tax Appeals erred in treating the instant case as similar to and governed by the Evangelista precedent.
- Whether the tax amnesty availed of by petitioners relieved them of corporate income tax liability or only of individual income tax liabilities for the period covered by the amnesty.
Commissioner’s Assessment and Rationale
- The Commissioner characterized petitioners’ co-ownership of the purchased parcels as constituting an unregistered partnership or joint venture.
- He relied on provisions of the National Internal Revenue Code—specifically Section 20(b) (as cited) and Section 24—contending that an unregistered partnership is taxable as a corporation and liable for corporate income tax distinct from partners’ individual taxes.
- The Commissioner asserted that tax amnesty under P.D. No. 23 relieved individual taxpayers of income tax but did not relieve the unregistered partnership’s separate tax liabilities.
- Based on that view, the Commissioner assessed petitioners with a deficiency corporate income tax amounting to P107,101.07 for the years 1968 and 1970.
Petitioners’ Contentions and Grounds for Relief
- Petitioners challenged the CTA’s affirmation of the Commissioner’s assessment and raised four principal alleged errors of the respondent court:
- (A) The CTA erred in holding as presumptively correct the Commissioner’s determination that petitioners formed an unregistered partnership subject to corporate income tax and in placing the burden upon petitioners to offer evidence contrary to that determination.
- (B) The CTA erred in finding an unregistered partnership existed based solely on isolated sale transactions, thereby ignoring the statutory and jurisprudential requirements for concluding that a partnership exists.
- (C) The CTA erred in treating the instant case as similar to Evangelista and deciding it accordingly.
- (D) The CTA erred in ruling that the tax amnesty did not relieve petitioners from payment of other taxes for the period covered by such amnesty.
Court of Tax Appeals’ Decision (Majority)
- The CTA majority affirmed the Commissioner’s determination that an unregistered partnership existed between petitioners and, applying the principle enunciated in Evangelista, held that such an unregistered partnership was taxable as a corporation.
- The CTA thereby sustained the deficiency corporate income tax assessment against petitioners and imposed costs against them.
Dissenting Opinion at CTA
- Associate Judge Constante Roaquin dissented, stating that, given the circumstances, while co-ownership may have existed between petitioners, there was no adequate basis to conclude they formed an unregiste