1. RUFINO TAN V. RAMON DEL ROSARIO, JR.

(237 SCRA 324)

Topic: Taxation of general professional partnerships v. ordinary business partnerships Facts: Petitioners challenge the constitutionality of RA 7496, commonly known as the Simplified Net Income Taxation Scheme (SNIT). Issue and Ruling: 1. W/N the SNIT applies to partners in general professional partnerships. YES. There is no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through a partnership (whether registered or not) with others in the exercise of a common profession. Under the present income tax system, all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. Although the general professional partnership is exempt from the payment of taxes (but it still has an obligation to file an income tax return mainly for administration and data), the partners themselves are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. Notes: Differences between general professional partnerships and ordinary business partnerships: a. A general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. b. Ordinary business partnerships, no matter how created or organized, are taxable partnerships. General professional partnerships are exempt partnerships. Under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.

2. COMMISSIONER OF INTERNAL REVENUE V. BRITISH OVERSEAS AIRWAYS CORP. (149 SCRA 395)
Topic: Test of taxability of income of resident foreign corporations Facts: British Airways, a foreign company, is protesting a deficiency income tax assessment by the Commissioner of Internal Revenue for the period covering the years 1959-1963. It contends that although it maintained a general sales agent in the Philippines which was responsible for selling British Airways tickets covering passengers and cargoes, it did not actually carry passengers and/or cargo to or from the Philippines within the stated period and thus should not have bee assessed taxes. Issues and Ruling: 1. W/N British Airways was a resident foreign corporation doing business in the Philippines during the stated period. YES. During the stated period, British Airways maintained a general sales agent in the Philippines which exercised functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, its main activity, the regular sale of tickets, is the very lifeblood of the airline business, the generation of sales being the paramount objective. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines, according to Section 24(b)(2) of the same Code. 2. W/N the revenue of British Airways from ticket sales in the Philippines for air transportation constitute income of British Airways subject to taxation in the Philippines, although they did not actually carry passengers and/or cargo to or from the Philippines within the stated period. YES. The absence of flight operations to and from the Philippines is not determinative of the source of income or the site of income taxation. The test of taxability is the source, and the source of an income is that activity which produced the inco me. Even if the British Airways tickets sold covered the transport of passengers and cargo to and from foreign cities, it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from an activity regularly pursued within the Philippines. The word source conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. Note: Although there is no specific criterion as to what co nstitutes doing or engaging in or transacting business as stated under Section 20(h) of the 1977 Tax Code, the terms imply a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some functions normally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the business organization.