CTA Case No. 617 (Decision)

../ �-� IUU"UBLIC Ofl' ~ LORENZO T. ONA, and HEIRS OF JULIA BUNALES, namely: RUDOtFO B. ONA, MARIANO B. ORA, LUZ B. ONA, VIRGINIA B. ONA, AND LORENZO B. ONA, JR.' Petitionera, - versus ... c.T.A. CASE NO. 617 THE COMMISSIONER OF INTERNAL REVENUE t Respondent. X- ~ - ~ ~ � - � - - - X DECISION This is an appeal from the decision of the respond- ent finding the petitioners to have formed an unregistered partnership and, therefore, subject to the corporate in- come tax under Section 24, in relation to Section 84(b), of the National Internal Revenue Code. The facts of the case have been correctly stated in the memorandum of coun- sel for the Government from which we quotes _Julia Bunales died on March 23, !944 1 leaving as heirs her surviving spouse. Loren- zo T. Ona and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement of her estate. Later~ Lorenzo T. Ona, the su~iving spouse was appointed administrator of the estate of said deceased (Ex hibi t 3t1 h PP� 34-31, BIR r ec . ). On April 14t 194 9 , ea dminist rato r su b m i t t ed the _ project of partition, which was approved by the Court on May 161 1949 (See Exhibit K). Because three of the heirs, namely Luz, Vir- ginia and Lorenzo, Jr10 , all surnamed Ona, were still minors h~rl ; the project of parti- tion was approved, Lorenzo !.li4.. .0na, their father and administrater of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for appoint- ment as guardian of � s�aid minors. On November 14, 1949� the Court appointed him guardian

1J DECISION ... C. T.A. CASE NO. 617 iI ,I I I .. of the persons and property of the aforenamed minors (See P� 3 1 BIR rec.} The project of parti ti on (Exhibit K; sea also PP� 77"70, BIR rec.) shows that the heir$ ~ have undivided oneNhalf (~)interest in ten , parcels of land with a total assessed value of 8a7lu1 860.0 0P11 7 s ix hou ses with a total ass essed v e of . 59 0.00 and an un d etermined amount to be collected from the War Damag~ Commission. "Later, they received from said Cgmmission the amount of P50 1000.00~ more or less. This amount was not divid~d among the~ . but was used in the ~ rehabilitation of properti~~ owned by them in ~ common (t.s . n. , pe - 46). Or the ten parcels of � land aforementioned, two were acquired after the death of the decedent .witb money borrowe9 fr~n the Philippine Trust Company in the amount of 72,173. 00 (t. s.n., P� 24; Exhibit 3, PP� 34-31 1 BIR rec. ),. The project of partition also shows . that the estate shares equally with Lorenzo T. Ona , the administrator thereof, in the obligation of 194. 973. 00 con sisti ng of l9a ns contracted by the� latt er 1 with the ap pro val of the Court (see P� 3 of Exhibit K; or see P� 74~ BIR rec. ). . Although the project of partit ion was ap� proved by the Court on May 16a 1949� no attempt was made to divide the properties therein listed. Instead� the propertie~ remained under the � management of Lorenzo T. Ona who used said prop- erties in business by leasing or selling them and investing the income derived th~refrom and the proceeds from the sales thereof in real propN erties and securities. As a result, petitioo- ers' properties and investments gradually in- creased from 10b5e'1 450. 00 i n 1949 to P400 ,005 . in 1956 as can gleaned from th e following 20 year- end balances: Year Investmept Land Building Account AC'COU'nt Account 1949 P24a657.65 87 , 860~00 17,590~00 1950 .51 . 301.. 31 1951 67 , 927.52 128, 566.72 96 ,076. 26 1952 61 , 258.27 120,349.28 110,.605.11 1953 6! , 6 2 3 . 3 7 87,065.28 152, 674, 39 1954 100, 786.00 1955 84, 925.68 161~463.83 1956 175~028.6E3 99t;001., 20 120, 249.� 78 167. 962, 04 135, 714. ()8 169, 262.52 169~262.52 . (See Exhibits 3 & K; t . s.n. { .PP� 22. 25H26 1 40� 50, 102-104}� From said investments and properties pet:t:tion- ers derived such incomes as profits from install� ,

I � DECISION � C.T.A. CASE NO. 617 - 3- ment sales 9f subdivided lets, profits from . sales . of stocks, Qividends, rentals and inter- ests (see P� ~of Exhibit 3; P� 32BIR rec.J t.s.n. PP� 37-38). The said incomes are re- � corded in the books of account kept by Loren- zo T. Ona, whe:re the corresponding shares of the petitioners in the net income for the year �re also shown. Every years petitione_rs re- . turned for income tax purposes their shares . in the net income derived fr~ said p+operties � and securities and/or from transactions involv- ing them (Exhibit 3, supra; t.s.n. PP� 25!-26). However, petitioner$ did not actually receive their shares in the yearly inc?me. (t.s.n. PP� 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo To ena whot as heret9fore pointed out, invested them in real properties and securities (See Exhibit 3 1 t.s.n. PP� 50� 102-104). . . On the basis of the foregoing fa~ts, respondent decided that petition~rs form~d an unregistered partnership and therefore, sub~ ject to the corporate income tax, pursuant to Section~4 1 in relation to Section 84(Q), . of the Tax Code. (\ccordingly, he assessed � aga inst the pe titi oners the . amounts of t81 09?.0D and �13 , 899 . 00 as corpo rate income t~xes f or . P1ame9t5ei5ntdiaedonndeby1~9pE5r6xo1htierbseitstepd1e7ca1tgivPaPei�nlys5.t0t (See Exhibit 5, and 86, BIR rec�J � he a ssessment an asked for reconsideration of the ruling of res- pondent that they have formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See �Exhibit 17 1 P� 86, BIR rec. ). (See PP� 1.4, Memorandum for Respondent, June 12, 1961.) The original assessment was as followsl 1955 Net income as per investigation -------~~~---~ Income tax due t-h-e-r-e-o-n------~-----------"- C25o%mpsruormcihseargfoe r non-filing -~---~ Total ---~~-----~-~~------~~~-- �~ Net income as per � p 69~245~23 inve stigation ----- - ----------------~- � 13.849.00 Income tax due �th efeon � 3�4� 5602.0250 CT25oo%mtapslruormc-ih-sae-r-gf-oe--r-�n----o--n---~-f--i--li--n--g----------~---------- f 17.361;25 (See Exh. 131 page 50 1 BIR records) I

DECISION - C.T.A. CASE NO. 617 - 4- Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the $upreme Court in Collector v. Batangas Transportation Co., G. R. No. L"9692, Jan. 6, 1958, so that the questioned assess- ment refers solely to the income tax preper fer the year& 1955 and 1956 and the �compromise for non-filing,� the latter item obviously referring to the compromise in lieu of the criminal liability for failure of petitioners .to file the corporate income tax returns for said years. (See Exh. 17, pag& 86, BIR Rrecords,.) It is alleged on behalf of petitionGrs that they did not organize a partnership; that they are .merely co- owners of the properties left by the deceased; and that although a p'reject of partition was submitted to and duly approved by the probate court, no actual partition took place. some of the heirs being minors at the time and in view of the impra,ticability of actually dividing some of the properties. Reliance is placed upon Article 1767 of the Civil Code which provides that - �By the contract of partnership two or more persons baund themselves to con- tribute money, property or industry to a common fund 1 with the intention of dividing the profits among themselves . " and upon Article 1769 which prov1des that �co-ownership or co-possession does not of itself establish a partner- ship1 whether such co-owners or co-possessors do . or do not share yriY profit made by the use of the property.� vlrn this case, however, petitioners did not limit them- selves in holding the properties inherited by them. They bought real property for the purpose of resale, as in fact

DECISION ~ C.T.A. CASE NO. 617 .. 5 - the same was resold at a considerable profit. They also engaged in the purchase and sale of corporate securities from which they realized substan~ial � profits. The evidence shows that the bulk of the earnings and profits of peti- tioners during the years under review were derived from transactions entirely unrelated to the properties inherit- ed by them. (See statement of income and expenses for 1955 and 1956, PP� 63 and 71, C.T.A. records.) And they divid- ed the profits among themselves proportionately in . accord- ance with their shares in the inheritance. (See PP� 61 and 68, c.r.A. records.) Under the circumstances, we are of the opinion that petitioners established a partnership, and 1 as such, subject to the corporate income tax under Section 24 of the Revenue Code, in relation to Section 84 (b) of the same Code. It is also contended that there was no intention on the part of petitioners to form a partnership. For tax purposes, the intention of the parties is not essential. What is important is the nature ef the transactions and the result' thereof. It is also argued that no partnership could have been constituted by petitioners because, under Article 1771 of ~he Civil Code, it is essential that, where real property or real rights are contributed, the partnership agreement must be embodied in a public instrument. It ,is enough to state here that under Section 84(b) of the Revenue Code� the term �corporation� includes partnerships (except registered general copartnerships), no matter how 'reated q_r organized, Therefore, the fact that petit,ioners failed to comply with certain requirements for the validity of 17

DECISION ... C.T . A. CASE NO. 617 - 6- the partnership 'greement does not militate against the taxability of such partnership as a corporationo Finally ,. petitioners contend that Lorenzo T. Ona 'shared the profit& from his transactions with his chil- dren solely because of his love for them and of his desire to r ovide for their suppo:rt and not because the.y are legal- ly ent itled to such shares. It would seem from this line of reasoning that since the v~rious transactions from which pro�it~ were derfved were entered into exclusively in the name of Lorenzo T. Ona , his children by the first marriage (the other petitioners) are not entitled to share in said profits , as in fac~ ~here was �no actual cash deliv~ ery to them.� (See pages 6-7 , Memorandum . for ~etitioners.) This appears to be a very bold admission. If, as now al- leged , said profits belong _exclusively to Lorenzo T. Ona ., he alone .would be subject to income tax on the entire in- come. Consequently, it would seem that he made a gross underdeclaration of his incomes for the years .1955 and 1956 when he declared only one half thereof , in his income tax return$, the other half havingbeen cieclared by the , other petitioners herein in equal proportion for the pur- pose of evading payment of a ~igge r amount of income tax. Upon a careful review of the records of the case , we pre- fer to believe that petitioners formed an informal part- nership and that the profits earned by the partnership pertained to them proportionately in accordance with their shares under th~ject of partition duly approved by the probate court. Included in the assessment is the sum of 100.00 I?

ECISION - C.T . A. CASE NO. 617 -7- which is denominated as �compromise for non-filing� of corporate income tax returns for the years 1955 and 1956. As there appears � to be no comprqmise agreement between pe- titioners and respondent which could be made the basis for the collection of said amount, the inclusion thereof in tho asses&ment is unauthorized and illegal. FOR THE FOREOOING (X)NSIDERATIONS , the deci&ion appeal- ed from is hereby affi nmed9 except with reQpect to the com~ promise. Accordingly. petitioner& are ordered to pay the sums of 810 2. 00 and 131 849. 00 , or a total of P21 , 891~, wit hin thirty day& from the date this decision becomes fin 1 plus 5% su charge and 1% monthly interest from ec" ember 15 , 1958� subject to the provisions of Sect ion 51 (e)(2) of the Revenue Code , as amended by Section 8 of Republi c Act No. _2343. Wit h costs against petiti ners. SO OPDERE � Manila � July 31, 1961. IDMAN M. L'MALI Associate Judge WE CONCURS