CTA Case No. 3045 (Decision)

.. r� (([,l..HlLIC 0 F fH� ll''f-HUPPI~ (';OURT OF TAX A Pg>LdQL..~ QUf:."ZON Ct<'YV MARIANO P. PASCUAL AND RENATO P. DRAGON, Petitioners, - versus - C.T.A . CASE NO . 3045 THE COM1V1 ISSIONER OF I NTERNAL REVENUE , Respondent. x---� - - -- - - -X DEC I S I 0 N 'I:h is case comes up on r espondent's def ici ency ~orne tax ass es~me nt in the amount of Pl07, 101.07 for the years 1968 and 1 970 and rai ses the question of wh ether petitioners Mariano P. Pascual and Renate P. Drag on, who a r e held liabl e thereto, have formed an unregistered par tnership or a j oint venture tax- able as a corporation ~ubject to corporate income tax. The material facts are not in dispute. As alleged in the petition for r ev iew and admitted in the answer: l. Peti. t ioners. are of l ega l age , Filipinos and with postal address at c/o Royal Savings, Zapote, Las Pinas, Metro ManilaJ respondent is the duly appointed Commissioner of Internal Revenue and may be served with summons and other legal proce sses at his office in 323

DECISION -- CTA CASE NO. 3 045 - 2- BIR Building, Quezon City. 2. In a letter dated March 31 , 1979 ~h ich was rece ived by petitione rs sometime in the l as t week of May 1979 , r esponden t assessed and demanded pe ti- tioners to pay the amount of Pl07,101.07 as al leged deficiency income tax for the years 19 68 and 1970, details of which are as fo ~low s: -1 -9 -6 -8 Net income per investi9ati on - - - ~165,224.70 Tax due thereon - �- - - - �- -�� -� �- F""47 , 82~f: 00 Add : 50% surcharge - - -� - - 23,914.50 >;z% mo . int . f .r. 4-16-��69 to 4-16-7 2 - - 8,609.22 'l'Ol'AL MllOUNT DUE & COLLECTIBLE -� - - - - - 1t 80.!.;?.:,�2-::_7~~ l 970 Net income per investi9ation - �- -� - IZ 60,000.00 - - -� - P. Ts, 6o6:t16 Tax due thereon -� ��� - - - - -� Add: 50% surcharge �- �- - - �- - �- - - - 7 , 500.0U ~~s int. fr. 4�-16-71 to 12-31-72 l , 537.05 14% int. fr. l-1- 73 to 4-16-74 - 2, 711.30 ��� - ... P-26_, 7~-J~ 'IDI'AL Ar10UNT DUE & COLLEC'TIBL..S 3. On June 26, 1979, petitioners wrote respondent protesting the defici ency inc ome tax assessmen t, and in effect requesting f<?r its wi tbdr.a�ral and cancellation , pertinent portions of which read : We wish to i n form that we are protes t- ing the above-cited asse ssment notices becaus e we a vail ed of Tax Amnesti e sdetail ed hereunder: 32 4

.JEC ISION - C'.rli CASE NO. 3045 - 3 -� Tax Amnesty Nos. Renata P. Dragon -2S�-- .l--0 7 00 015��� 71 Mariano Pascual ... 3 ~.i-�1- 0 "i 000 16 �-71 By way of backgrou nd , Mr. Aquilino T . Larin, Chief, Financing Real Esta te and Transfer Taxes (audit) Division at that time, was appraised last September, 1974 of said tax amnesties we availed of, when we received his letter o f invitation dated September 6, 1974. We have n o t bea rd. fr om the Bureau of Internal Re1enue from 197 4 un til your pre- sent letter wa s received and presumed tha t the info rmation forwarded regarding the tax amnesties we availed of was suff i cient. XX X XXX 4. In a letter dated August 22, 19 79 which was received by petitioners on October 29 , 1979, respondent denied petit i oner s 1 request for cancellation and with- drawal of s a id disputed assessmen t, and at the same time r eiterated his demand for the paymen t of the same . To quote said le tter which constitutes r espondent ' s final decision in th is case: .1\ugust 22, 1979 Mes srs. Mariano P. Pascual & Renata P. Dragon c/o Renata P e Dr~CLa_,c>n Metro Bank Building Ayala ' Avenue , Makati Metro .tvlanila Gen tlemen : This refer s to your letter da~ed June 26, 1979 requesting in effect withdr awal and 32 G

DECISION - CTA CASE NO. 3045 - 4- cancellation of the defici ency income tax assessment issued against you on Mar ch 31, 1979 in the .total amount of Pl0 7,101.0 7 for the years 1968 and 1970 on t he ground that you have availed of the tax amnesty u nder Presidential Decree No. 23 , as a mended. In rep l y, I regret to inform you that after a restudy of the facts of the casa and the law pertirent ther eto, this Office cannot grant your request. Our records s how ~hat in the y e ars 19 68 and 1970~ as co-owners, you sold several parcels o f land in Quezon City. As co-owne rs in the r e al estate transact ions , you formed an unregistered partnership or a joint venture t axable as a corpora tion under Section 20(b) and i t s income s ubj ect to the tax as pres- cribed by Section 24, bo t h o f the National Internal Reyenue Code. (Evangelista vs . Col- le c t o r G.R . No. L-99 9 6, Oct. 15, 195 7 ) In other words, the a bove assessment re pr ~senting corporate income tax was issued ag ainst you for having formed an unregi stered partnership. While the income of the unregis t e r ed partnership is subj ect to corporate i ncome tax, the profits de rived by the partne1:s out of sa id income are s t ill subject to individu al income tax and must therefore, be declared in their respective i ndividual inc ome tax returns. Such being the case , the availmen t of the tax amnesty under P . D. No. 23, as amende d, by the par tners relieve them of their ind i vidual income tax liab- ilities based qn the profits derived by t hem from t he unregiste r ed p a rtnership and did not relieve from tax liab i lity the unregis- tered partnership , unles s t he latter also availed of the amnesty , which fact does not appear to be so in the instant case. In view thereof , it is requested that you pay the said deficiency income tax 32 G

DECISION - CTA CASE NO. 3045 - 5- assessment �in the total amount ofP107,101.07 for the year 1968 and 1970 within thirty (30) days from your receipt of this letter , other- wise, this Office will be constrained to enforce collection of the tax by me ans of the remedies provided by law. This constitutes our final decision in this case. If you are not agreeable, you may appeal to the Court of Tax Appeals within thirty (30) days from your receipt of this l etter . � Very truly yours , EFREN I. PLANA Acting Commissioner 5. The deficiency income tax which is the s ubj e ct of this appeal was assessed in view of petitioner s ' sale of parcels of land in 1968 and 1970 on account thereof , petitioners, being co-owners o f the propert i es sold~ were, according to respondent, deemed to have formed a partnership or a joint venture taxa ble as a corporation under Section 20(b) and its income subject to tax as prescribed by Section 24, both of th e Na t i onal Internal Revenue Code . Hence, the present petition for r e vie w filed on November 23, 1979 . The issues are: 1. Whether petitioners have formed anunregistered 32 7 .v

DECISION - CTA CASE NO. 3045 - 6- partnership taxable as a corporation under the Revenue Code; 2 . Whether the assessment under consideration has prescribed ; 3. Whether petitioners are liable to the fift y perce n t (50%) .surcharge ; 4. Whether the availm~nt by petitioners indi- vidually of the tax amnesty under Presidential Decree No. 23 for 1970 and prior years relieved them from being assessed as an unregistered partnership. From our vi~w of the question of whether peti - tion~rs have formed an unregistered partnership taxable as a corporation, analogous to the case at bar on this point, by reason of the close similarity of the factual settings , iden t ity o f the laws involved and the issue litigated , is Evangelista , et al. vs. Collector of Internal Revenue, et al . , L-9996, October 15, 1957, 102 Phil . 140. Because of its decisive effects on the present case, we wi~l therefore resolve this issue in the light of, and alongside with the features and essential ingredients of ~vangelista. With respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation'' 32 8

DECISION - CTA CASE NO. 3045 - 7- and "partnership", as used in Sections 24 and 84 of the applicable National Internal RevenGe Code, thepertinent parts of which read: 11 SEC . 24. Rate of tax on corporations . - There shall be levied , assessed, collected , and pa id annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter . how created or organ- ized but not including duly registered general co-partnerships (companiascolectivas), a tax upon such income equal to the sum of the following: x x x. 11 "SEC. 84 (b). The term 'corpora tion' includes partnerships, no matter how created or qrganized, joint-stock companies, joint accounts (cuentas en participacion) , associations or insurance companies , but does not include duly r eg istered general copartnerships (compa~ias colectivas) ." Article 1767 of t he Civil Code of the Philippines p rovides: "By the contract of partn ersh ip two or mor e persons bind themselves to contribu te mon ey, proper ty , or industry to a common fund, with the intention of di viding the profi ts among themselves." Pursuant to this article, the essential elements of a partnership are two, namely: (a) a n agreement to contribute money, property or industry to a common fund~ and (b) intent to divide the profits among th e contracting part i es. These elements are undoubtedly 323

DECISION - CTA CASE NO. 3045 - 8- present in the case at bar, for, undisputedly , peti- tioners have agreed to, and did contribute money to a common fund, and intended to, as in fact did divide, the profits among themselves. This can be gleaned from the financial statement which petitioner Renate P. Dragon attached to his 1970 Income Tax Return , to wit: (p. 5, BIR records.) RENATO�P. DRAGON 26 Rizal St ., Gen. Trias, Cavite S'rA'IEMENT OF COST OF Wr SOLD Sales . . . .. . . . . . . . . li360, 000. 00 Less: Cost of.Lot Sold 300,000 .00 Total Gross Profit on sale of Lot .. p 60,000.00 Less: Expenses: Registration & L~. Stamps � . P2,633.00 Representation & Entertainment. 896.40 ~ Interest & Other bank charges � 9, OO.Q. 00 __j..2, 529 =-.40 Total Net Profit before Income Tax ..� ~ 47,470.60 Multiply by 50% (sold after one (1) year) . 50 . T o t a l . .. . ~23,735.30 : 2 = Pll,867.65 ~11,867.65 -For Mr. Renate P. Dragon 11,867. 65 - For Dra . Concordia r~I. Pascual Hence, the issue narrows down to the inten t of petitioners in acting as they did. Upon consideration 330

DECISION - CTA CASE NO. 3045 - 9- of all the facts and circumstances surrounding the case, we are fully sati~fied that the ir purpose was toengage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. Said common fund was not something they found already in existence. There is nothing in the records which indicates that it was.a property inherited by them .!?..E.~ i.nd~viso. 'l'hey created it purposely . 2. They invested the same, not merely in one tran saction, but in a series of transactions. The details of the b~y-and-sell transac tions as shown in Exhibit 9, page 1 of the Bureau of Internal Revenue records, are: PUHCHl-\SES Date Name of Seller Narre of -�---�---- Buyer Transfer : Area .AJnt. of Cert. of & Lo- Consi- Title No . cation deration 6/22/65 Santiago Renata P. 124209 9,634 ?39,884.76 Bernardino et Dragon & sq.m. Mariano P. al. Pascual - do - - do - -- do - 125373 9,011 P37,305.54 sq.m. Q.C. --------------�----------------�-------�------- 5/20/66 Juan Roque - do - 105648 10,000 ?300,000.00 105649 sq.rn. 105651 -do- �-do- Q.C. 33 1

DECISION - CTA CASE NO. 3045 - 10 - SALES Date Name of Name of Tr&~sfer : .~t. of Rea lized Seller Buyer Cert. of Consi- Profit Title No. deration 3/23/68 Renato P. Marenir 124209 f!J.25,242.00 �185,357.24 Dragon & Dev. Corp. Hariano P. Pascual 7/8/68 - do - - do - 125373 Pll7,173.00 �179,867.46 3/19/70 - do - Erlinda M. 105643 �--- Reyes & 105649 r.-�Iaria M. 105651 �1360,000.00 P60,000 . 00 Samson 3. While it is true that there were only two (2) purchases made, one in 1965 and the other 1n 1966, and three (3) sales transactions entered into by petitioners, two in 1968 and one in 1970, from the size or area of the parcels of land purchased, ranging from a minimum of 9,011 square meter s to a maximum of 10,000 square meters , which are located in Quezon City, one cannot but perceive, as aptly observed by respondent, the intent to create a partn ership. And since the disposal of the large parcels of land was done through a series of sales transactions, after petitioners have held them for a period of time as can be seen above, t he

DECISION - CTA CASE NO. 3045 - ll - element of profits, and bigger profits for that matter, is readily perceptible because real properties appre- ciate in value with the passing of time, which is peculiar to the real estate business. 4 . The aforesaid parcels of land were not devoted to residential purposes, or to other personal uses, of petitioners. As has been discussed above, peti- tioners acquired them for sale for monetary gain and then divide the same, as they in fact did, among them- selves. And to obtain bigger profits, petitioners held the properties for some time, and sold them in a series of transactions. 5 . Petitioners have not testified or introduced any evidence on their purpose as partners in acquiring by purchase from different sellers parcels of land located in Quezon City, and subsequently selling them to various sellers and sharing the profits derived therefrom by them. They did not even try to offer an explanation therefo~. The Court recognizes that in consonance with well-established principles, the deter- ruination of the Commissioner of Internal Revenue is presumptively correct and casts upon petitioners the burden of offering evidence in opposition the reto. 33 3

DECISION - CTA CASE NO. 3045 - 12 - The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Co mmissioner is wrong but that he (taxpaye~ is right. (Lino Gutierrez vs. Collector of Internal Revenue, CTA Case No. 504, January 28, 1962~ Tan Guan vs. Court of Tax Appe als, L-23676, April 27, 1967, 19 SCRA 903; Wilfreda. L. Caresosa vs. Bureau of Internal Revenue, CTA Case No. 3173, January 25, 1985 , certiorari denied in G.R. No. L-70758, August 21, 1985 . } All of these facts and circumstances, taken together, tend to establish the intent on the part of petitioners to contribute money and industry to a common fund with the purpose of dividing the profits among themselves . Peti t ioners contend, however, that they are mere co-owners, not copartners, for , under Article 1769(3) of the Civil Code sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing the~ hav e a joint or common right or in t ent in any property from which the returns are derived. As amplified by the Supreme Court in Jose P. Obillos, Jr . et al vs. Commissioner of Internal Revenue , G.R. No. 68118, October 31, 1985, cited by petitioner, 33 4

DECISION - CTA CASE NO. 3045 - 13 - there must be an unmistakable intention to form a partnership or joint venture. In attempting to draw support from Jose P. Obillos, petitioners have patently misapplied the said case to the case at bar. In Jose P. Obillos, the father of the petitioners therein, after having completed pay- ment on two lots located at Greenhills, San Juan, Rizal, transferred his rights to his four children to enable them to build their residences. Later on, they found it not feasible to build their residences on the lots because of the h;gh cost of construction. So they had no choice but to resell the same to dissolve the co- ownership. The Supreme Court thus stated that the division of the profit was merely incidental to the dissolution of the co-ownership. They had no intention to form a partnership. They were not engaged in any joint venture by reason of that isolated transaction. In the instant case, however, as already discussed above, petitioners contributed to a common fund for the purpose of buying from different sellers and selling to various buyers parcels of land located in Quezon City with the intent to divide, as they did divide, the profits among themselves. As a result of the buying 335

DECISION - CTA CASE NO. 3045 -� 14 - and selling transactions of pet i tioners , and the sharing of profits derived by them during the years 1968 and 1970, it is clear to our mind that petitioners herein constituted a partnership or joint venture taxable as a corporation under Section 24 of the Tax Code. Coming to the question of whether the assessment in the instant case has pre~cribed, the period within which the Commissioner of Intern al Revenue may assess internal revenue taxes is provided for in Se ctions 318 and 319 of the applicable National Internal Revenue Code, the pertin~nt portions oE which read: "S E.:S:.=_ll&!.......JL~i.�.2....2 f ...J i. mi t~_t ion -~C?n assessment a nd collection. - Except as pro- vided in the5u-cceecl ir)g section, j_nternal revenue taxes shall be assessed within five years after the retu rn was fi l ed, and .no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. x x "x" "? e c ~-~..2!~.S:�2 ~-~9..!2�_�..�...-~9.-J2.~EJ od. c) f-a of limitation of assessment and collection of taxes. - --(af-fi11:rH~Ca5e false�--or fraudulent return with intent to evade tax or of a failure to f i,il-pe70a"Cr:eeetculinrng , the tax rnav� be assessed o , r 1 i 1 ' c o u r t.: �for the collec�tion of such tax 1nay be began wi. thou t ass e s s men t , .�:...~2!lY_.!=i~!~_1.:-!L~ h i r~__,!:_~!]. years after __ th e d i scov~.E..'L..<?.f_!~_\�.i ty , fraud, o .r: omission: Provided, x x x " (Under- scoring Sllppiied)- Where a return was filed, which is not fraudulent, the tax may be assessed within five (5) years from the 33G

DEC IS ION -- CTA CASE NO. 3045 - 15 -~ date the return was due or was filed. The records of the case show however that no corporate income tax return was filed by petitioners. Where no return was filed, the tax may be assessed within ten (10) years from the date of discovery of the omission to file the return. LSec:. 319 (a), �.~?E~.i Hepublic vs. Lucia Tan, L-25483, Hay 23, 1969, .28 SCPA 325_:_7 Respondent's examiner discovered petitioners' failure/omission to file corporate income tax returns for the years 1968 and 1970 only in 1971. Hence, from 1971, respondent bad ten (10) yearsr or up to 1981, within which to assess the tax in the instant case. Since the assessment in question was issued on March 31, 1979, which is clearly within the ten-year period from 1971, respondent's right to assess has not prescriled. At any rate, no competent evidence was presented by petitioners to the effect that the right of respondent to assess and to collect the tax involved herein has prescribed. The defe nse of prescription is an affirm- ative allegation and the burden of proof is upon the party laying claim to it. (Bollozos vs. Court of Tax Appeals, L-16441, rvlarch 31, 1965, 13 SCHA 469.) Pres- ~ription being a matter of defense, the burden is on 33 7

DECISION - CTA CASE NO. 3045 - 16 - petitioners to prove that the full period of limitation has expired, so that they should positively establish the date when the period started to run and when it ended. (Querol vs. Collector of Internal Revenue, L-16705, October 20, 1962, 6 SCRA' 304.) This �brings us to the question of whether peti- tioners are liable to the fjfty percent (50%) surcharge penalty under Section 72 of the then in force National Internal revenue Code~ and this in turn dependson whether there was willful neglect on the part of petitioners to file corporat~ income tax returns for the years 1968 and 1970. // To o ur mind, there was willful neglect to file the corporate income tax returns required by law on the part of petitioners because, as borne out by the records, both petitioners Mariano P. Pasc ual and Renate P. Dragon did not file separate individual income t a x returns for 1968 reporting their respective share 0 .{: .\.. the profits realize~ by them in said year from their real estate transactions. (p. 28, Bureau of Internal Revenue records.) If petitioners did not even bother to report their share of the profits derived by the m from their buying and selling transactions, why shou ld 33 8

DECISION - CTA CASE NO. 3045 - 17 - they take the trouble of filing corporate income tax return for their partnership? But assuming that for the year 1968 petitioners were not yet awar e that they are taxable as an unregistered partnership subj e ct to corporate income tax, they could at least have filed their separate individual income tax returns for this year. It seems clear therefore that there was intentional wrongdoing with the object of avoiding the tax on the part of petitioners. Then for the years 1970, it wa s only petition e r Renato P . Dragon who filed an individual income tax return. No corporate income tax return wa s fil e d by petitioners for 1970 . Petitioners have not testified or introduced any evidence that their failure to file a re~urn either individually or as an unregistered part- nership was due to a reasonable cause, as their belief in good faith that a return is not required. Error or mistake of law may not constitute fraud but willful neglect, which is the basis of the imposition of the 50% surcharge in this case, is not equivalent to fraud. /. ., (( And on whether availment by petitioners indi- vidually of tax amnesty for 1970 and prior years relieved them from being ' assesse d as an unregistered 33 9

DECISION - CTA CASE NO. 3045 - 18 - partnership, we agree with the observation of respondent, ! quoted above, that the availment of the tax amnesty under Presidential Decree No. 23, as amended, by peti- tioners might have relieved them of their individual \.~ income tax liabilities based on the profits derived by them from the unregistered partnership but did not relieve them from the tax liability of the unregistered partner- ship. The income of the unregistered partnership is subject to corporate income tax, while the profits derived by the partners out of said income are still subject to individual income tax. Such income must there- fore be declared in their respective individual income tax returns. Since the availment of the tax amnesty under Presidential Decree No. 23, as amended, by petitioners was done'in their individual capacities and not as partners in the real estate business, such availment did not relieve the unregistered partnership as such from tax liability. Accordingly, petitioners Mariano P. Pascual and Renate P. Dragon are ordered to pay to respondent Corn- missionei of Internal Revenue the amounts of P80,352.72 and P26,748.35 as their 1968 and 1970 deficiency income tax liabilities respectively, plus surcharges and in- terest incident to delinquency pursuant to the provisions 34 0

DECISION - CTA CASE NO. 3045 - 19 -- of Section Sl(e} of the applicable National Internal Revenue Code, as .amended . WHEREFORE , the decision appealed from is hereby affirmed at petitioners' costs. SO ORDERED. Quezon City, Metro Manila, December 29, 1986. I CONCUR: dissents in a separate opinion CONSTANTE C. ROAQUIN Associate Judge 34

Cl!J'Of.IUC 0 F ; HE rBlL!PPIN1'� ~OURT OF TAX A.PP�Al-ct Q\JEZON CJ rr MARIANO P. PASCUAL AND RENATD P. DRAGON, Petitioners, - . versus- C.T.A. CASE NO. 3045 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - X DISSENTING OPINION I can not agree with the conclusion reached by the majority m~mbers of this Court holding to the effect that petit~oners Mariano P. Pascual and Renata P. Dragon are partners and they have formed an unregistered ~artnership ~r a joint venture the income from which during the years 1968 and 1970 is subject to corporate income tax under Section 24, in relation to Section 84, of the National Internal Revenue Code. As far as rna~ be pertinent, the facts in this case show that petitioners have purchased three (3) parcels of land, one (1) lot in 1962 (p. 28, tsn, Sept. 18, 1985); another lot in 1965 (p. 30, tsn, ibid.); and the third lot in 1966 (p. 30, tsn, ibid.). 34 2

DISSENTING OPINION - CTA CASE NO. 3045 - 2- Petitioners sdld the first two (2) lots in 1968 and the third lot i�n 1970 ( p. 30, tsn, ibid.). Peti- tioners realized profit in the sale made in 1968 in the amount of 885,357.24 and 879,867 . 46 , respect- ively, for the first.two (2) lots, and in 1970, the profit therefrom which amounted to 860,000.00. Based on these transactions, on� the issue of whether or no t petitioners have formed an unregistered partner- ship, the majority members of this Court held in the affirmative; that an unregistered partnership was here formed between petitioners for the reason that the instant case has a close similarity with the factual settings in Evangelista et al. vs. Collector of Internal Revenue, 102 Phil. 140, wherein the three (3) Evangelista sisters bought four pieces of real property and who leased the same to various tenants from whom they derived rental income; and wherein it was held that because of these circum- stances they have�formed an unregistered partnership, and which case was applied herein as their precedent. It is their view that "petitioners have agreed to, and did contribute money to a common fund, and intended to, as in fact did divide, the profits among 34 3

DISSENTING OPINION - CTA CASE NO. 3045 - 3- themselves." '(p. 8, Majority Decision, Dec. 29, 1986) The said � majority came to the conclusion that, on the basis of the 1970 income tax return's financial statement of petitioner Renata P. Dragon, attached thereto, and in the "series of transactions" (buy- and-sell transactions) of petitioners Pascual and Dragon, these facts and circumstances show that the latter9' "purpose was to engage in real estate trans- actions for .monetary gain and then divide the same among themselves.'�' (p. 9, lv1ajority decision, ibic!.) Except for the fact that the lots in question were purchased in three separate years (1962, 1965 and 1966), two of which were sold by them in 1968 and the third in 1970 by petitioners aforesaid, nothing in the evidence however indicates directly that peti- tioners had contributed money, property and industry into a common fund out of which the acquisitions or purchases of the said lots in those years were made. Exam in? r 0 c a y a s t a�t e d i n o pe n c o u r t t h a t t h e o n1 y basis on which conclusion was reached by him that petitioners were considered partners in the under- taking from which profits were derived and which were subject to corporate income tax are the deeds 34 4

DISSENTING OPINION - CTA CASE NO. 3045 - 4- of sale of petitioners in selling and conveying these properties (pp.� 23, 24, 25, tsn, Sept. 18, 1985) to the purchasers in 1968 and 1970. When Examiner Ocaya was asked however what money or proceeds were used by petitioners in buying the properties, he matter of factl y and non-chalantly said: ''A. Well, they contributed to buy this (these) property (ies) ." (p. 20, tsn, Nov. 18, 1985.) And when asked further whether he ~new where petitioners got the fund with which petitioners bought the properties, as evidenced by the deeds of sale (Exhs. 6, 7, and B), he stated repeatedly that he does not know (pp. 20, 21, 22, 28, tsn, Nov. 18, 1985). Examiner Ocaya, in explaining how the common fund was created, which is one vital element of the existence of the alleged partnership of petitioners and which was the principal basis of the assessment in question said: "A. \t~hen they (peti- tioners) acquired the proeerties (represented by Exhs. ~' 7 and B)j they contributed the fund to buy the prop~tties ~nd that was my (his) basis of assess- ment." (p. 25, tsn, ibid.) When petitioners acquired the properties aforesaid, Examiner Ocaya just concluded that the petitioners contributed money to a common 34 5

DISSENTING OPINION - CTA CASE NO. 3045 - 5- fund. (p. 28, � tsn, ibid.) And when asked whether petitioners hav~ each given money to a common fund to buy the properties, he stated that from the fact of the acquisition of the properties, he presumed that they have made contributions to a common fund. However, he said he did not find out in reality of whether there was a common fund (p. 30, tsn, ibid.); and had only presumed that they contributed the funds out of whic~ of the properties they acquired. (pp. 30-31, tsn, ibid.) I quote herein pertinent portions of the court pioceedings of November 18, 1985 (pp. 29-31, tsn) "JUDGE ROAQUIN. When you say that they contributed, meaning, the petitioner. contri- buted money to a common fund, how did you come to that con- clusion? A. When they acquired the property, Your Honor. In the deed of sale it appears that the two of them acq~ired the property. JUDGE ROAQUIN. Do you know whether or not the funds came from both petitioner? A. Yes , Your Honor. 34b

DISSENTING OPINION - CTA CASE NO. 3045 - 6- JUDGE ROAQUIN. Did ~au ever see the bank account at least? No? A. No, Your Honor. JUDGE ROAQUIN. Do you know whether actually x x x they have physically given money each to a common fund to buy that prop e�r t y? A. The fact that they acquired property, the two of them, it is ��� JUDGE ROAQUIN. In other words, you are now presuming -that these are common contribution by common fund. You only presumed. You did not actually found out the reality whether there was a common fund formed from out of money com- monly contributed by the two peti- tioners. A. Well, I presumed 1that they contributed the funds out of the property they acquired. JUDGE ROAQUIN. Is that the way you examiners conduct examinations for tax deficiency? A~ It is no way of ��� They will not say that they contributed the fund out of that. JUDGE ROAQUIN. You just presumed. You just come out of situations presented to you without 34 7

DISSENTING OPINION - CTA CASE NO. 3045 - 7- ' actually finding out the truth whether there was really a contri- �bution to a common fund? Do you know what I am asking? A. Your Honor, I got your point. JUDGE ROAQUIN. You just take it � .� e A. No, Your Honor. JUDGE ROAQUIN. ... that because they have bought the property, the money used by them constitute a common fund, and that is all. A. Yes,- Your Honor, that is all. JUDGE ROAQUIN. How about the se~ond time when they bought again, that is the same way? You just presumed that the money used in buying those pro- perties in 1970 came from � a com- mon fund? A. Yes, Your Honor. JUDGE ROAQUIN. That is all." I' n the trial of this case, the testimonial evi- dence bears out the fact that there was no knowledge on the part of respondent's examiner of the existence of a common fund created by petitioners. When asked whether the proceeds of the sales of the lots evidenced 34 8

DISSENTING OPINION - CTA CASE NO. 3045 - 8- by Exhs. 6, 7'and 8, were contributed again to a common fund, Examiner Ocaya, admittedly said that he does not know. (pp. 20, 22, 28, tsn, i�i�.) His conclusion that there was a common fund between them was only based on assumption or presumption. So much so that the assessment and finding of liab- ility for corporate incomB tax of petitioners and their ~xistence as a partnership by respondent Com- missioner of Internal Revenue was based on mere presumption, which violates the fundamental rule that an assessment should be based on actual facts and not on mere presumptions. On this basis alone, the assessment of respondent against petitioners must necessarily fall. There was no partnership as there was no common fund created between petitioners which is an essential element thereof. There being no partnership intended for business purposes as in the case of real estate the presumption of correctness of the. assessment �cannot stand, and the Court of Tax Appeals can never presume a taxpayer's liability without more, as an assessment must be based on actual facts established by evidence presented by respondent or likewise it cannot stand the test of judicial 34 ~

D[SSENTING OPINION - CTA CASE NO. 3045 - 9- scrutiny. Presumption of the corre~tness of an assessment bein~ a mere presumption cannot be made to rest on another presumption. (Benipayo vs. Call. of Int. Rev., G.R. L-13656, Jan. 31, 1962; Holland Milk Products vs. Comm. of Int. Rev., CTA 3756, Aug. 29, 1986; Liberty Insurance Corp. vs. Comm. of Int. Rev., CTA 3551 & 3599, Del. 15, 1986.) Moreover, where petitioners had specifically denied the assess- ment of the Bureau of Internal Revenue and in their pleadings (3rd par., Letter of counsel for petitioners to the Comm. of Int. Rev., Nov. 27, 1979, p. 110, BIR rec.; par. 6, Petition for Review, p. 2, CTA rec.) saying that what was formed was a co-ownership, as had happened in this case, this denial destroys the presumption of a prima facie correctness of the assess- ment (Knowles v. Govt., 60 Phil. 461) and therefore it was incumbent for respondent to show that the assessment was based on hard actual facts and not upon presumptions. It is imperative that the deci- sions of this Court, since the facts it may find therein may not anymore reviewable by appeal to the Supreme Court, should be supported by substantial evidence, which implies compet ent and adequate 350

DISSENTING OPINION - CTA CASE NO. 3045 - 10 - evidence. (Phil. Explosives Corp. vs. BIR, CTA 3185, Sept. 26i 1986). In this instance, the evi- dence to prove the existence between petitioners as partners were not competent and adequate. Exam- iner Dcaya was not competent as he did not know of his own knowledge that petitioners have joined together and have contri~uted money, property and indust.ry to a common fund. It is not our office either to presume the existence of such common fund in a partnership. It must be established by real evidence. We should bear in mind that in finding a true partnership relation, it principally depends upon contract, express or implied, and the underlying accepted test is the intention of the parties to become partners. (40 Am. Jur. Sec. 71, p. 178.) Situat ions or circumstance s at times may indicate this intention, but when properly examined and analyzed, it will show that partnership was not in reali~y created. � Some circums tances do not intend the establishment thereof. Article 1769 of the Civil Code points out that some circumstances on their face may lead to the belief that a partnership has been created, when in truth and in fact they are not 35 1

DISSENTING OPINION - CTA CASE NO. 3045 - 11 - indicative of the existence thereof but to another thing . (Ambrosio Padilla, Civil __s=o ~ie~!l!~.Otat e~ , 1956 Ed . , Vol. IV, pp. 252-253.) For in s t a nce, pars. 2 and 3, of Article 1769, manda tes t he rules which negates the existence of pArtn e r s hip. Art. 1769. XXX XXX XXX ( 1 ) XXX XXX XXX (2) Co-ownership (Art. 484) or co-pos s ession (Art. 538) doe s not of itself - establish a p a rtnership, whe ther such co-owners or co-po ss es s ors do or do not share any profits mad e by the use of the property; (3) The sharing of gros s returns does not of itself establi s h a partner- ship, whether or not the per s on s sharing them have a joint or common right or intere s t i n any property from which the returns are derived; XXX XXX XXX Under paragraph 2 of Art. 1769, Ambrosio Pa dilla, ~� cit., commented that "Although every partn e rship appears to be founded on a community of interest, every community of interest does not nec es sarily constitute a partnership (ibid, p . 253); and unde r said paragraph 3, Padilla said that the "H e re sharing of gross returns does not est abli s h a partner s hip, since in a partnership, the partne r s sh ar e net _profits. 352 . it

DISSENTING OPINION - CTA CASE NO. 3045 - 12 - after satisfyinq all partnership liabilities. (See Art. 1839, Civil Code , ibiE_, p. 253.) This is the precise situation of petitioners in the case at bar and the circumstances around which they were entwined. On t h e basis of the just cited provisions of Art. 1769, enforced against the backdrop of the facts as shown by the undersigned minority member, they have cl~arly intended to establish themselves more in the natu~e of a co-ownership or co-possession an d not as an unregistered partne rship and, hence, they are not liable� for corporate income tax on the profits derived from them. To my mind, when petitioners purchased the three lots in 1962, 1965 and 1966, it was manifestly with the intention to partition or subdivide the properties among themselves. (See Letter of counsel for petitioners dated Nov. 27, 1979, pp. 108-110, BIR rec.) Upon the purchase of said pro perties, they had since been governed only by a commun.i ty or undivided interests over the said lots . And as shown by the deeds of sale , the petitioners were only co-owners or in possession over the undivided portions of the properties. Each therefore is co- owner over the properties, and each owns a portion 35 3

DISSENTING OPINION - CTA CASE NO. 3045 - 13 - of the properties which are not concretely determined or physically divided. (See my Dissenting Opinion , Obillos et al. vs . Comm. of Int. Rev., CTA Case No. 3211, p. 24, which was sustained on appeal by the Supreme Court in G.R. No. 68118, Oct. 31, 1985.) When petitioners bought the said lots in 1962, 1965 and 1966, which are years� prior to the sale of sa id proper~ies in 1968 and 1970, and they did not pur- chase any other properties thereafter, they have not expanded their gain by using the proceeds of such sale in a partnership enterprise. They have not thereafter, or even during those trans actions in question engaged themselves in a business in what may be considered as a continuou s and repetitious enterprise. Otherwise, they could have embarked in an expanded business venture like in the Jose de Leon et al. vs. Com., CTA No. 738, Sept. 11, 1961 for which they could have under the circumstance formed themselves into a�partnership; or had othe rwise invested their gross returns for the purchase of other lots for resell at a profit; or an undoubted~y series of transactions had been made by them, since partnership as a rule and principle relates to a 35 4

DISSENTING OPINION - CTA CASE NO. 3045 - l!.J. - general bu s ine~s of a particular kind (40 Am. Jur. Sec. 3, p p. 127- 128; Ambrosio Padilla, E.P.. � cit:.�, p. 24 7. ) and placed under the management of one person as in Reyes vs. Comm. of Int. Rev., 24 SCHA 198, 203), then the relation of petit i oners could h ave been validly considered a partnership subject to corporate income tax. �Finally, I would like to repeat.at length portion of my dissenting opinion in the case.of Obillos v s. Cornm . of Int . He v. , CH\ Case No. 3211, af o resaid, which I believe is very pertinent herein, wherein I cited a s aut hority Supreme Court Ju st ic e Angelo Ba uti sta, in his con- curring opinion in the c ase of Evangelista vs. Call. of Int. Rev., 102 Phil. 140, 145 , thus - Finally, I wo uld like to quote at le ngth a similar ob se r vation and admon i- tion made by, or the words of ca ut ion of Justice An ge lo Bautista in the ca s e of Evangelista, et . al. vs. Collector of Int. Rev., ��.� cit ., on pa ~~e 1~)0, where he pointed out that the sharing o f the gross return does not, by itse l f, create a partnership, wheth er or not the persons sha ring them have a joint or common right or int er~st in the property; that aside from the circumstance of profit, the pre- se nc e of othe r elements is necessary to arrive at a conclusion that a partnership ex is ted , such as the clear intent to f orm ~ pa rtn e:rs h iE l to C}~a te ~uri dii::....a]:.--2.~ r.- r e sona lity different from that of the indi- y"'TCiliaTP a t n r s ,_31rid-- t () t r a!:)_~~J~:.E_ 0-r -a-s s :(:.g.!2, 35 5

DISSENTING OPINION - CTA CASE NO. 3045 - 1 ') - a ny i n t e r e s t i n t he !-?.!2 P..!:..:�.!.L.E..Y._2.Tl e wi t h the consent of t he others. Said Justice ~ngelo Bautista, i n his concurring opin- ion, in the Evangelista case: "I wish how ever to m<:Jke the following ob servation: Article 1769 of the New Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3 , provides: "(2) Co - ownership or co- possession does not of itself e$tablish a partnership, whether s u ch co-owners or co-possessors do or do not share any profits made by the use of the property; . '' ( 3 ) T~~:....Eh..a r in_9__.2!..._g r 2.~~~ turns does not of itself establish ~~tnershi.E_.t_!il:~;2.~he r__ or not t_:I-Je_ person s s haring them have a .ioint 52r c om m.o n r i g':2l._..�.E......L!:!...t eI~-> t .i n �-~ property from which _th_e rei:_~.:..D.�.......!!!.�� derived;" "From the above it appears that the fact that those who agree to form a co-ownership share or do not share any profits made by the use of the property held in common does not con- vert their venture into a partnership. Dr t he sharing of the gross returns does not of itself establish a part- ner sh ip � whether or not the persons sharing therein hav e a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting part- nership is necessary , such as the clear intent to form a partn ers hip , the existence of a juridical personal- ity different from that of the indi- vidual partners , and the freedom to . 35 6

DISSENTING OPINION - CTA CASE NO. 3045 - 16 - transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I , 1953 ed., pp. 635-636). "It is evident that an isolated transaction whereby two or more per- so ns contribute funds to buy certain real estate for profit in the absence of other circumstances s howing a con- trary intention cannot be considered a partnership. � "P ersons who contribute property or funds for a common enterprise and agree to share the gro ss returns of that enterprise in proportion to their contribution, but who severally retain the title "to their respective contri- bution, are not ther e by rendered part - ners . They have no co mmon stock or capital, and no community of interest as principal proprieto r s in the busi- ness itself vJhich the proceeds derived ." (Elements of the law of Partnership by Floyd R. Mechem, 2nd Ed . , section 83, p . 74.) A 11 joint purchase of land, by two, does not constitute a co-partnership in respe ct thereto; nor does an agree- ment to share the profit s and losses on the sale of land create a partner- ship; the parties are only tenants in co mmon � 11 ( CJ. ark v s � Sideway , 14 2 U � S � 682 , 12 S. Ct. 327, 35 L. Ed., 1157.) "\1here plaintiff, his brother , and another agreed to become owners of a si ngle tract of realty, holding as tenants in common, and to divide the profits of disposing of it, the bro- ther and the other not being entitled to share in plaintiff's commissions, no pa rtnership existed ns between the three parties, whatever their relation 35 '7

DISSENTING OPINION - CTA CASE NO . 3045 - 17 - may � have been ns to third pDrt-.ies." (Magee vs. Magee, 123 N.E. 673, 233 fvlass. 341.) "The common O\,/nership of pro- perty does not itself create a partnership between the owners, though they may use it for purpose of making gains; and they may, with- out becoming partners, agree among t hem se lv es as to the management and use of such property and the applic- ation of the proceeds therefrom." (Spurlock vs. ~ilson, 142 S.W . 363, 160 No . App. J4 . ) 11 This is impliedly recoqnized in the following portion of the deci- sion: "Although, taken singly , they might not suffice to establish the intent necessary to constitute a p~rtnership, the collective effect of t hese circumstances (referring to the series of transcations) such as to leave no room for doubt on the existence of said intent in peti- tioners herein ." (underlining min~.) On the basis of the above discussion, I nm of the opinion that there is in this case undoubtedly a co-ownership from which no corporate tax is impos- able . Considering, not only from the facts herein shown )n this diss enti ng opinion, but also the applic- able law in this case, that all these points to the exi stence of a co-ownership between the petitioners , there is justification in the annullment and cancell- ation of the assessment against petitioners as not 358

DISSENTING OPINION CTA CASE NO. 3045 - JB - having any ba sis in fact and in law. Even assuming, for the sake of argument only, that petitioners have validly been found to h nve created a partnership and, hence, subject to the basic corporate income ta x on their tra nsactions , they cannot be h e ld liable for 50% su rcharge on the basic tax for not filing n corporate income tax us they had no willful intention not to File n corpo- rate income tax since they had a ] 1 <J]ong !"Jtood in the position or hnd honef3tly acted in CJood fnith that they were�under co-ownership ond their llrof ils and gains from their transactions were not subject to corporate income tax. Consequently, n o 50% sur - charge s houJ.d be imposed und er Sec ti o n 72 of Ll�1e then enforced National Internal Revenue Code os that would be a blatant error on the Court to do so . T~n Vl� ew of the foregoing discussion, I rtH]ister my dissenting vote. Quezon City, +1etro Ha niln, :Jonua/3, !987. /~ ~" t:_.f7tt!-Cbt."? coV(sT/\NTE c.(- RfJAQliTN j'A s '" o c i Q t e J u d q e / 35 8