Afisco Insurance Corporation vs.

CA
GR No. 112675 January 25, 1999

Facts: ​The petitioners are non-life insurance corporations, organized and existing under the laws of
the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and
Contractors' All Risk insurance policies, the petitioners on entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners
to form a pool. Accordingly, a pool composed of the petitioners was formed on the same day.

The pool of machinery insurers submitted a financial statement and filed an "Information Return of
Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was
assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of
P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends
paid to Munich and to the petitioners, respectively. These assessments were protested by the
petitioners, but the protest was denied by the CIR. ​The CA ruled in the main that the pool of
machinery insurers was a partnership taxable as a corporation, and that the latter's collection of
premiums on behalf of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due,
because "the taxpayer cannot be located at the address given in the information return filed."

The case was elevated to CTA, which affirmed the CIR ruling. A petition for review was filed to
the CA, which affirmed CTA’s decision.

Petitioners contend that the Court of Appeals erred in finding that the pool of clearing house was an
informal partnership, which was taxable as a corporation under the NIRC. They point out that the
reinsurance policies were written by them "individually and separately," and that their liability was
limited to the extent of their allocated share in the original risk thus reinsured. ​Its role was limited to
its principal function of "allocating and distributing the risk(s) arising from the original insurance
among the signatories to the treaty or the members of the pool based on their ability to absorb
the risk(s) ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc.

Issues:
1. Whether or not the pool of clearing houses is a taxable corporation
2. Whether or not the pool’s remittances are taxable.

Ruling:
1. Yes. The Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Section 24
covered these unregistered partnerships and even associations or joint accounts, which
had no legal personalities apart from their individual members.
 Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when
"two or more persons bind themselves to contribute money, property, or Industry to a
common fund, with the intention of dividing the profits among themselves." Its requisites
are: "(1) mutual contribution to a common stock, and (2) a joint interest in the profits." In
other words, a partnership is formed when persons contract "to devote to a common
purpose either money, property, or labor with the intention of dividing the profits between
themselves." Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business."
In the case before us, the ceding companies entered into a Pool Agreement or an
association that would handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance treaty with Munich. The
following unmistakably indicates a partnership or an association covered by Section 24
of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the business of
the ceding companies and Munich, because without it they would not have received their
premiums. The ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool Agreement. Profit
motive or business is, therefore, the primordial reason for the pool's formation.

2. Yes. ​Double taxation means taxing the same property twice when it should be taxed only
once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing" In
the instant case, the pool is a taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its ​income is obviously different from the tax on the ​dividends
received by the said companies. Clearly, there is no double taxation here. The tax exemptions
claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation.
Hence, "exemptions therefrom are highly disfavored in law and he who claims tax exemption
must be able to justify his claim or right."

Section 24 (b) (1) pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be
granted exemption based solely on this provision of the Tax Code, because the same
subsection specifically taxes dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.
Eufemia Evangelista, et al vs. Collector of Internal Revenue
G.R. No. L-9996 October 15, 1957

Facts: The petitioners borrowed from their father the sum of P59,1400.00 which amount together
with their personal monies was used by them for the purpose of buying real properties. The
petitioners bought various parcels of land and rented the same to various tenants, accumulating
income from 1945 to 1949. The Collector of Internal Revenue demanded the payment of income tax
on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949.
The petitioners brought the issue to the CTA, praying that the decision of the respondent in his letter
of demand be reversed. CTA denied the same.

Issue: Whether or not the petitioners are subject to the tax on corporations as well as to the
residence tax for corporations and the real estate dealers fixed tax.

Ruling: Yes.

No doubt that the petitioners formed a partnership. They created the common fund by jointly
borrowing money. They invested the same, not merely not merely in one transaction, but in a ​series
of transactions. The lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, thus for profit. the
properties have been under the management of one person, namely Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to
indorse and deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise operated for profit. All
of the essential elements of a partnership are present, namely: (a) an agreement to contribute
money, property or industry to a common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, ​no matter how created or organized.​ " This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (​cuentas en participation)​ " and "associations," ​none of which has a
legal personality of its own, independent of that of its members​. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" — ​which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no opinion — tends to
increase the similarity between the nature of their venture and that corporations, and is, therefore, an
additional argument ​in favor​ of the imposition of said tax on corporations.

For purposes of the tax on corporations, ​our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — ​within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax which in no case, shall exceed one
thousand pesos, in accordance with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, ​partnership​, joint account
(​cuentas en participacion​), association or insurance company, ​no matter how created or organized​.
(emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.

Mariano Pascual and Renato Dragon vs. CIR

G.R. No. 78133 October 18, 1988

Facts: Petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land
were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized
a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners
in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in a letter of
the CIR, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested the said
assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in
1974. Commissioner informed petitioners that in the years 1968 and 1970, 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 its income was subject to the taxes prescribed under Section
24, both of the National Internal Revenue Code that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership. Hence, the petitioners were required to
pay the deficiency income tax assessed. Petitioners filed a petition for review with the respondent
Court of Tax Appeals, which affirmed the decision of the Commissioner.

Issues:
1. Whether or not the petitioners can be considered to have formed a partnership, thus required
to pay corporate income tax

Ruling:
1. No. In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner and/ or his representative just
assumed these conditions to be present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.

In Evangelista, ​there was a series of transactions where petitioners purchased twenty-four

(24) lots showing that the purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. ​The character of habituality peculiar
to business transactions engaged in for the purpose of gain was present​.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the
same nor make any improvements thereon. In 1966, they bought another three (3) parcels of
land from one seller. It was only 1968 when they sold the two (2) parcels of land after which
they did not make any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.

In ​Evangelista,​ the properties were leased out to tenants for several years. The business
was under the management of one of the partners. Such condition existed for over fifteen
(15) years. None of the circumstances are present in the case at bar. The co-ownership
started only in 1965 and ended in 1970. The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have a joint or common right or
interest in the property. There must be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There
is no adequate basis to support the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they purchased properties and sold the
same a few years thereafter did not thereby make them partners. They shared in the gross
 profits as co- owners and paid their capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they cannot be considered to have formed
an unregistered partnership which is thereby liable for corporate income tax, as the
respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as partners for this unpaid obligation of the
partnership. However, as petitioners have availed of the benefits of tax amnesty as individual
taxpayers in these transactions, they are thereby relieved of any further tax liability arising
therefrom.

Jose P. Obillos, et. al. vs. CIR

G.R. No. L-68118 October 29, 1985

Facts: ​On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots
with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he
transferred his rights to his four children, the petitioners, to enable them to build their residences.
The company sold the two lots to petitioners for P178,708.12 on March 13. Presumably, the Torrens
titles issued to them would show that they were co-owners of the two lots. In 1974, or after having
held the two lots for more than a year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P313,050. They derived from the sale a total
profit of P134,341.88 and treated it as a capital gain and paid an income tax on one-half thereof or of
P16,792. One day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay ​corporate income tax​ on the profit sales of the
property, to individual income tax on their shares thereof. He also considered the share of the profits
of each petitioner as " taxable in full (not a mere capital gain of which ½ is taxable) and required
them to pay deficiency income taxes. Thus, the petitioners are being held liable for deficiency
income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on
capital gains already paid by them. The Commissioner acted on the theory that the four petitioners
had formed an unregistered partnership or joint venture. The petitioners contested the assessments
to the Tax Court but it upheld the decision of the Commissioner by a vote of 2-1.

Issue: Whether or not the petitioners should be held liable for corporate income tax and the
additional individual income taxes on their share of the sale of the property.

Ruling: No. it is error to consider the petitioners as having formed a partnership under article 1767 of
the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the
same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction. Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit
was merely incidental to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later. ​Article 1769(3) of the Civil Code provides
that "the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived". There must be an unmistakable intention to form a partnership or joint venture.

In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax.