CTA Case No. 677 (Decision)

"!II' YHB PHlLD'P!N~. OF TAX �AP~~ JuAi~ YS.d '1 cf:. CO., VlC o, G. J. . A . ~J.SB 1~0 . 67'7 doing business under the name and style of iSl:lfiliL iJ T~.DL L...:'\J.'!U F.t'-CTUR IN G C0 � , .J?etitioner, - versus - 1�~ �' COl.J.' lt::)dlvN~rl JF IN1'..::tU\IAL .rl~V.ca~ uE , Respondent . X- - - - - - - - - - - - - X D B C 1 S I 0 1~ This is an appeal from a decision of the respon- dent Commissioner of Internal H.evenue holding that pe- titioner Juan Ysmael GC Co ., Inc o, formed an unregis- tered partnership vri th l'-'1aximilian Zalevs ky , Sr . and his son , Naximilian Zalevsky , Jr ., uto put up a manufactur - ing enterpriser\ which is lmown under the name of Ysmael Steel Nanufacturinb Co ., (Exh . 1, pp . 13 - 17, CTA rec . ) and therefore , liable to corporate income t ax, pursuant to Sections 24 and 84(b)' of the Tax Code . The disputed income tax assessment under review is in the amount of P13 , 117 . 00 for the year 1951 . (Exh. 3 , p . 103 , Birl rec . ; See also Exh. 4 , p. 194, Blli rec . ) It appears that sometime in Nay , 1951, petitioner Juan Ysmael & Co ., Inc ., represented by its President and General lvianager , Ko il . Hemady , as party of the first par t, and J:vlaximilian Zalevsky , Sr . and Haximilian Zale- vsky, Jr ., as party of the second part , entered into an agreement (E.xh . 1 , pp . 13 - 17 , CTA rec . ) to put up a manu- facturing enterprise knovln as the Ys mae1 Steel Hanufac-

DECISION - C. T. A. CA3~ NO . 677 - 2- turing Co . (See Exh . B, pp . 49- 50 , CTA re c.) Accord- in~ to their a~re ement, Juan Ysmael & Co ., Inc ., ashall furnish the necessary capital'11 while the Zalevskys 1'shall furnish the necessary te cl'illi cal knovrled~e and supervision , and shall devote their full and entire time to the said enterprise . tr They also agreed that the net profits to be derived from the manufacturing enterprise shall be distributed as follows: (1) 60/b of the net profits to Juan Ysmael & Co ., Inc . ; and (2) 4~ to the Zalevskys. In case of loss , the same shall also be divided in the same proportion as the net profits , i . e ., Juan Ysmael & Co., Inc ., shall bear 6o% thereof and the Zalevskys shall shoulder 40;& of the same . On April 15 , 1952 , Ysmael Steel Manufacturing Co . filed its income tax return for the year 1951 . It described itself as an unregistered partnership in the return which was signed , sworn to and subscribed before a Notary Public , by Ko H. Hemady as president, and :H. D. Zalevsky as general manager . (t:.iee pp . 3 - 6 , Blli rec.) The said return reported a net income of ?66 , 618 . 83 , and on the basis of which , the respondent assessed the amount of Pl3 , 324. oo as corporate income tax for 1951 . (Seep . 10, BIR re c.) Ysmael Steel I'-Janufacturing Co. protested against tha assessment on the ground that it is not liable for the payment of income ta.."'C pursuant to the letter of the Secr etary of Finance , dated June 27 , 1951 (see p. 17, BIR rec . ), and on September 30 , 1953 , it filed the re-

DECISION - c . ~ . A . CAS~ NO . 677 - 3- quired bond pending the final determination of its income tax liability . (See pp . 15- 16 , BIR re c.) On April 12 , 1954- , Ysmael Steel l�1anufacturing Co . protested against the same assessment of � 13 ,324. 00 based on the follm.vin~ reasons: 'That Ysmael Steel Hanufacturing Co . is an affiliate of Juan Ysmael & Co ., Inc . ; that the profits derived by Ysmael Steel l�fanufacturing Co . in the year 1951 were shared by Juan Ysmael & Co " , Inc . and hr . haxirnilian Zalevsky , Sr . in the ratio of 60% and 4o~, respe c- tively; that the net income of Ysmael Steel I�Ianufac- turing Co . should have been assessed not as a separate entity but in consolidation \v�i th the income tax return of Juan Ysrnael & Co ., Inc . for the same period; and that Juan Ysmael & Co ., Inco reported the net income it derived from Ysmael Steel Hanufacturing Co . for the year in question . " In vie\v of these alleced facts, Ysmael Steel l'la.nufacturing Co . reiterated its plea that the protested assessment be reconsidered and set aside . (Ppo 31- 32, BIH rec . ) On r~Iay 3 , 1954, the respondent caused the rein- vestigation of the income t �ax liability for the year 1951 of Ysmael Steel r,lanufacturing Co . (See p . 33 , BIR rec . ) As a result of the investigation , (See pp . 104- 105 , BDl rec . ) the respondent , on Januaryl5 , 1957, reduced the assessment to Pl3 , 117 . 00 and demanded pay- ment of the said amount . (p . 111 , BIH rec . ) The cor- responding income tax assessment notice was also issued

�, DECioiON - C. T. A. CASE NO . 677 - lt - by the respondent and served on Ysrnael Steel Flanufac- turing Co . (Exh . 3 , p . 103 , BIR re c.) On February 15 , 1957, Ysmael Steel Manufa cturin~ Co . requested for the reconsideration of the assess - ment . (Pp . 125- 126 , BIR rec . ) However , this request for reconsideration \�Tas denied by the respondent in his letter dated April 2 , 1957 . (Exh . 2 , p . 129, BIR re c.) On June 16 , 1958 , Ysmael Steel 1�lanufac turing Co . rei- terated its request for reconsideration of t he assess - ment \>Jhich request ivas also denied by the respondent in his letter of July 6 , � 1959 . (Exh. lt , p . 191t, BTI=t rec. ) Hence, on July 9 , 19 59 , the petitioner f iled the present appeal with this Court . The only issue to be resolved in this case is whe - ther or not Ysmael Steel -:anufa cturin~ Co o is an unre - gistered partnership , and therefore subject to corporate income tax pursuant to Sections 2lt and 8lt(b) of the Na- tional Internal Revenue Code . The petitioner claims that Ysrnael Steel Hanufac- turin~ Co . is a subsidiary of Juan Ysmael & Co ., Inc ., and that inasmuch as Juan Ysmael & Co o, Inc . has already included in its income tax return the net income realized by Ysmael Steel 11anufacturing Co . from its 1951 manufac�- turing operations , the respondent_Commissioner of Internal Revenue erred in issuing the instant disputed assessment against Ysmael Steel I1lanufacturing Co . For clarification, we would like to state that in its amended 1951 income tax return , Juan Ysmael & Co . suffered a loss of --

DECISION - C . T . A. CASE 1~0 . 677 - 5- P229,937 . 66 . Hence , no income tax was paid on any amount received by it from the earnin~s of Ysmael Steel Ivlanufacturing Co . On the other hand , the respondent c ontends that Ysmael Steel Hanufacturing Co . is an unre - gistered partnership that came into existence by virtue of the contract , Exhibit 1 , entered into by and betv~een Juan Ysmael & Co . , Inc . and .i:Vlaximilian Zalevsky, Sr ., and his son l�iaximilian Zalevsky , Jr ., and therefore tax- able for corporate income tax purposes . We find the claim of the petitioner to be 1.>Ji thout merit and hereby sustain the contention of the respon- dent that Ysmael Steel Hanufacturing Co . is an unregis - tered partnership subject to corporate income tax under Section 24 of the National Internal Revenue Code, in re- lation with Section 84(b) of the same Code . Sections 24 and 84(b) of the National Internal Re - venue Code provide in part as follows: \'Se c. 24. Rate of tax on corporations .- There shall be levied , assessed, collected , and paid annually upon the total net income rec~ived in � the preceding taxable year from all sources by every corporation organized in , or existing under the laws of the Phil- ippines , no matter how created or organized , but not including duly registered ~eneral copartnerships ( compafiias colectivas) , a tax upon such income equal to the Sillll of the fol - lovJing : x x x ." use e. 84 . Definitions .- When used in this Title - X X X X 11 (b) The term ' corporation ' includes partnerships , no matter how created or or - ganized , joint- stock companies , joint ac- counts ( cu~ntas ~ participac1on), associa-

f ; DECiSIOi'J - C . 'I' .A. CASE liJO . 677 - 6- tions or insurance companies , but does not include duly re~istered general co- partnerships ( compafiias colectivas) .. And Article 1767 of the New Civil Code reads as follows: uArt . 1767 . By the contract of part- nership two or more persons bind themselves, to contribute money, property , or industry to a common fund , -vrith the intention of di - vidin~ the profits among themselves . u 'rhe Supreme Court, interpreting and applyin~ Arti- cle 1767 of the Civil Code of the Philippines said that upursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to con- tribute money, property or industry to a common fund; and, (b) intent to divide the profits among the con- tracting parties . 11 (Evangelista vs . Collector of In- ternal Revenue , G. R. No . L-9996, Oct . 15 , 1957; 54 OG 996.) In the case at bar, it is clear to our mind that these two elements are present . The parties to the agreement in question , Exhibit 1 , (pp . 13-17 , C'l'A rec . ) in organizing Ysmael Steel Nanufacturing Co . , as a manu- facturing enterprise , agreed to contribute to a con~on fund , petitioner Juan Ysmael & Co o, Inc. , to Ufurnish t he necessary capital , as it sees fit , for the opera- tion, maintenance, proper functioning of the said Com- pany , and for the purchase of the necessary equipment or materials , 11 and the Zalevs kys , to contribute 11 the necessary technical knowledge and supervisionu and a,reeing further nto devote their full and entire time

DEClSIOI~ - C. T. A. CAScl NJ . 677 - 7- to the said enterprise . " Hence , undoubtedly the first element is present in the instant case . With regard to the second element , there can be no question that the same is also present in this case: 'l'he a~ reement expressly states in clear and unmistakable words the intention of dividin0 t he profits amon the contr a cting partie s . Para~r aphs 5 and 6 of said agree- ment provide as follows: . '5. The ne t pro f lt s t J b c.t.er ~ved fr ._.,. tr .~ '"' 1t ~� pr i.'~;;; shall b t.li!:>tributed between the part~es he reto as Lollows: 1 (&) ~ lAtJ per cent (60fo) of the net profits shall accrue and belong to the FruiTY OF THE 1i'lliS ' PAJ.i'l'; and 11 (b) Forty per cent ( 40}h) shall accrue and belon~ to the PARTY uF TIJE S~COr~ D P.t :t'l' . "6 . The PAd.TY OF J.'HE S~C01W PJU:tr shall not receive any salaries . Hov1ever , they shall be allovTed a drawing account not ex- ceeding '11.�10 Thousand Nine 1fu.ndred Pesos <~~,900.00) monthly and all ~1ounts so drawn by them , which is to be approved by the PAhl'Y OF T: ~ ~IRS ~ P {T , shall be deducted from their share of the net prof its stipulated in the precedin, para: raph . For losses , if any , the PARTY OF THH! SECOND Pii.HT, shall shoulder forty per cent (40;o) of the same . 11 Horeover , we note that on April 15, 1952, Ysmael Steel 1-.fa.nufacturing Co ., thru K. H. Hemady and l�1. D. lalevsky , president and g eneral manager respectively , filed its income tax r e turn for the year 1951 , vrherein it described and stated the nature of the company as an unregistered partnership . (See pp . 3-6, BIR re c.) This statement of a relevant fact made by not only the responsible but the hi~hest offi c ials of the company ,

DECISION - C. 'l' . A. CASE NO . 677 - 8- c onstitutes an express admiss ion which may be taken as evidence against it , (Sec . 7 , Rule 123 , Rules of Court) for the simple reason that it is fair to presume that it corresponds with the truth, and it is the fault of the company itself if it does not . (U . S . vs . Ching Po, 23 Phil . 578 . ) Having arrived at the conclusion that the t\�ro essential elements of a partnership are present in the instant case , and having found that Ysmael Steel Manu- facturing Co . has expressly admitted in its income tax return that it is such an unregistered partnership , we hold that said Ysmael Steel Nanufo.cturing Co . is subject to the payment of the corporate income tax in question, pursuant to the provisions of Sections24 and 84(b) of the National Internal Revenue Code . (Collector of In- ternal Revenue vs . Batangas Transp . Co ., G . ~ . No . L- 9692 , Jan . �6 , 19 58 ; 54 OG 6724 . ) ~tlBR~FO~ , in view of the foregoing considerations , the petition for revimv is here by dismissed , and re t i - ti oner Juan Ysmae1 & Co ., Inc ., as one of the partners of the unregistered partnership known as Ysmae1 Steel Hanufacturing Co . , i s hereby ordered to pay the Commis - s.ioner of Internal Revenue the sum of Fl3 , 117 . 00 within thirt y (30) days from the date this decision becomes final, as deficiency income tax for the year 1951 , with- out prejudice to 1...rhatever action it may take at;;ainst J:v1aximi1ian Zalevsky , Sr . and his son , Maximilian Zale - vsky , Jr ., for their corresponding share of the 1951.

D 'C: IO.N- 677 C . ~ . A . CA0~ ~0 . - 9- � income tax �payable by �smael Steel 1anufacturing Co . If any amount of the tax is not paid vli thin the time prescribed above , there shall be collec t ed a sur- charge of 5% of the tax unpaid , plus interest at the rate of l /b a month from the date of delinquency to the date of pay-ment , provided that the maximun1 amount that may be collected as interest shall n~t exceed the amount corresponding to a period of three (3) years . Jith costs aoainst the petitioner . SO O.ti.U.C:rl.C.:D . Manila , December 7, 196l o We concur: h \~ Presiding Jud5e ROMAN � UHALI Associate Judge (