BIR Ruling

December 9, 1969 The Director Revenue Region No. 6 Quezon City S i r : There is returned to you herewith the entire docket bearing on the internal revenue tax case of Mr. David H. Dee Poe of No. 115 9th Street, New Manila, Quezon City, involving the sum of P876.00 as deficiency income tax for the year 1964, inclusive of the 1/2% monthly interest and compromise penalty. Investigation disclosed that Mr. David H. Dee Poe and his wife, Ivy Woo Dee, are the only partners making up the Hawkins Chemical Products, Co. (hereinafter referred to as the Partnership), a general co-partnership duly organized and registered with the Securities and Exchange Commission, and engaged in the business of manufacturing baking powder, flavoring extract and food coloring and as general merchant. As required by law, the partnership filed its 1964 return (B.I.R. Form No. 17.04), and for the purpose of determining its net income and the distributive share of the partners, itemized ordinary and necessary business expenditures were deducted from its income declared in said return. Being husband and wife, the aforementioned partners filed a joint income tax return for the year 1964 declaring a gross income of P28,892.67 inclusive of their share in the partnership. However, instead of an itemized deduction from their gross income, the couple claimed the 10% optional standard deduction in the maximum amount of P1,000.00. No discrepancy was reportedly discovered in so far as the partnership operation is concerned. The following question is posed for our resolution, viz: Are the partners, husband and wife in this case, precluded from the use of the optional standard deduction in their joint income tax return by the mere fact that in the determination of its net income and the distributive share of the partners, the partnership has already availed of the itemized deduction under Section 30 of the Tax Code? Duly registered general co-partnerships are not subject to income tax but are nevertheless required to file returns of their income on B.I.R. Form No. 17.04 for the purpose of furnishing information as to the share in the gains or profits which the partners shall include in their individual returns. The partners are required to report as an item of income their distributive shares of the net income of the partnership of which they are members. (Sec. 22, Rev. Regs. No. 2) Since individuals carrying one business in partnership are liable to tax only in their individual capacity and not as partners, the partnership return is comparable to a fiduciary return; it is informational only, in which respect it is to be distinguished from a return of income. (p. 80, Chap. 35, Vol. 6, Mertens') As in the case of individual taxpayers, the ordinary net income of a partnership consists of the excess of gross income over allowable deductions, and ordinary net loss consists of the excess of such deductions over gross income. Expenses and other deductions of the partnership business are to be deducted in the partnership return, and the partner reports as an individual his distributive share of the net income of the partnership. ( Id .) Partnerships like the Hawkins Chemical Products, Co., have their own accounting of income separate and distinct from that of the individual partners. Such being the case, the distributive shares of Mr. and Mrs. Dee Poe, as partners of the said partnership constitute their respective share of and/or in the earnings realized from a certain business pursuit, includible as any other taxable items of gross income which may be the basis of the 10% optional standard deduction under Section 30(k) of the Tax Code. Moreover, a partnership has a personality distinct and separate from that of the partners. So, expenses which are personal to the partners cannot be claimed as deduction from its gross income. On the part of the partners, it is the optional standard deduction that is supposed to take care of such non-business expenses. LexLib Certain deductions normally allowed to individual partners in accordance with their distributive shares are disallowed to the partnerships. Among these are the deduction for charitable contributions, personal exemption and the optional standard deduction. (Vol. 6 Mertens') Since a partner's distributive share of partnership income is included in his gross income in the same manner as his individual income , he may generally offset against his partnership income any individual deductions to which he is entitled unless the statute clearly provides to the contrary. (Craik vs. U.S., 31 F. supp. 132 (Cr. Cl. 1940); Percy G. Ligen, TC Memo. 1954-222 cited Vol. 6 Mertens, emphasis ours.) cdlex In view of the foregoing considerations, this Office is of the opinion that even if in arriving at its net income, the partnership, Hawkins Chemical Products, Co. has already availed of the itemized deductions under Section 30 of the Tax Code, the partners, Mr. and Mrs. Dee Poe in filing their joint income tax returns are not precluded to Section 30(k) thereof. It is to be understood, however, that the rule would be different if the partnership has, aside from said ordinary income, a capital gains transaction. For in such a case, the partners should report their distributive share of the capital gains and losses of the partnership by including them in their individual or joint return along with their personal capital gains and losses, if any. (see Vol. 2 Prentice Hall 1953 Federal Tax Service, par. 18, p. 549; 15,323) And if the partners offset their capital losses against their capital gains, the itemized deduction under Section 30(d) (4) of the Tax Code is deemed to have been claimed and, therefore, they can no longer avail of the optional standard deduction under Section 30(k) of the same Code. (see B.I.R. Ruling dated May 20, 1955) Be guided accordingly. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue