BIR Ruling

November 26, 1973 Mr. Pablo L. Fausto P. O. Box 179, Zamboanga City S i r : This refers to your letter dated July 25, 1973 requesting information on the tax consequences of the "process of phasing out" the estate left by your deceased parents based on a project of partition approved by the court. acd It is represented that a group of heirs are receiving indivisible properties consisting of lands and building; that you will administer the properties under the following set-up: "1. An administrator will be hired as a convenient means of collecting rental income and supervise up-keep and maintenance of the buildings. "2. Separate receipts will be issued in the name of each heir for his or her share on the rental collected. "3. Administrative expenses will be pro-rated among the co-owners and separate vouchers will be prepared for shares of each co-owner on the expense. "4. Separate books of accounts will be maintained for each co-owner where his share of common transactions will be recorded. "5. During the accounting period or at the end of the year, each co-owner may withdraw his net income as reflected in each co-owners books of account. "6. The income will be deposited in a joint bank account subject to proportionate withdrawal of heirs or co-owners. The purpose of the joint bank account is to make it convenient to pay administrative expense but the fund will not be allowed to accumulate more than what is necessary for operating expenses. "7. The heirs do not intend to make any additional investment on the properties inherited neither do they intend to make any capital improvements except normal and up-keep of the property." You would like to be informed whether under the foregoing set-up an unregistered partnership is formed or there is merely co-ownership among the heirs. cdta In reply thereto, I have the honor to inform you that the foregoing set-up is more co-ownership by the heirs of the estate while in the process of being phased out based on a project of partition approved by the court, pursuant to the doctrine laid in the case "Jose P. de Leon, et al. vs. The Commissioner of Internal Revenue and the Provincial Revenue Officer, Regional District No. 4, Quezon City, CTA Case No. 738, promulgated on September 11, 1961, which made a very clear distinction between "co-ownership" and "unregistered partnership". Being a more co-ownership, the corporate income tax shall not be imposed. You are, however, advised to form a registered partnership based on the afore-mentioned set-up established by the heirs on the estate to be phased out in order to obviate any doubt in the future, should the co-ownership remain for more than ten years. cd Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5