BIR Ruling No. 072-63

October 9, 1963 BIR RULING NO. 072-63 The Regional Director Regional District No. 3 Manila S i r : In reply to your letter dated July 24, 1963, I have the honor to inform you that general co-partnerships, when duly registered, are not subject to income tax but are required to file returns of their income on BIR 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) LLphil As in the case of an individual taxpayer, 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 of the partnership business are to be deducted in the partnership return, and the partners reports as an individual his distributive share of the net income of the partnership. (p. 80, Chap. 35, Vol. 6, Hertons') Although not subject to income tax, partnerships are nevertheless required to make returns at income. Since individuals carrying a 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. (Id) Partnerships have their own accounting of income separate and distinct from that of the individual partners. In the ultimate analysis, the distributive share of a partner is just his share of the earnings realized from a certain business pursuit and is, therefore, one among the taxable items of his gross income which may be the basis of the 10% optional standard deductions under Section 30(k) of the Tax Code. Moreover, a partnership has a personality distinct and separate from that of the partners. So, expensed which are personal to the partner cannot be claimed as a 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. 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 (Ct. C1. 1940); Percy G. Ligon, TC Memo. 1954-222 cited vol. 6 Mertens, Emphasis ours) Certain deductions normally allowed to individual partners in accordance with their distributive shares are disallowed to the partnerships. Among these are the deductions for charitable contributions, personal exemptions and the optional standard deduction (Id). In view of the foregoing considerations, this office is of the opinion that even if in arriving at its net income, the partnership has already availed of the itemized deductions under Section 30 of the Tax Code, the partners in filing their individual returns are not precluded from the use of the optional standard deduction pursuant to Section 30(k) thereof. It is to be understood, however, in this connection, that the rule would be different if the partnership has, aside from said ordinary income, a capital gains transaction. For in such a case each partner should report his distributive share of the capital gains and losses of the partnership including them in his individual return along with his personal capital gains and losses, if any. (Vol. 2 Prentice-Ball 1953 Federal Tax Service, par. 16, 549, 323). And if the partner offsets his capital losses against his capital gains, the itemized deduction under Section 30(d) (4) of the Tax Code is deemed to have been claimed and, therefore, he can no longer avail of the optional standard deduction under Section 30(k) of the same Code. (BIR Ruling dated May 20, 1955) LLjur Very truly yours, (SGD.) RAMON T. OBEN Acting Commissioner of Internal Revenue