Transfer of Heirs' Hereditary Shares in Favor of Their Own Partnership Not Subject to Income Tax

June 29, 1998 BIR RULING NO. 107-98 000-00-107-98 Atty. Manuel Y. Macias 1-A Sobriedad St., Balic-Balic Sampaloc, Manila S i r : This refers to your letter dated November 15, 1997 requesting, on behalf of the heirs of the late Carmelo S. Cristi, for a ruling that the transfer of the heirs' hereditary shares in favor of their own partnership is not subject to income tax. It is represented that the late Carmelo S. Cristi died intestate on May 26, 1977 at No. 100 Felix Manalo St., Cubao, Quezon City; that the estate left several real and personal properties consisting of seven (7) parcels of land, an undivided 1/14th share in another parcel of land, together with the improvements thereon, and covered by TCT Nos. 383419, 383420, 193116, 113854, 113850, 139035, 44424 and 44099 and shares of stock in Manila Electric Company, Meralco Securities Corporation and Marikina Electric Company with a combined value of P13,330.00 as reported in the inventory and appraisal filed on February 2, 1978; that the decedent was survived by his wife, Irene Eustaquio and six (6) children namely: Trinidad E. Cristi, Carolina E. Cristi, Angelina E. Cristi, Marcelo E. Cristi, Mariano E. Cristi and Miguel E. Cristi; that the estate/inheritance tax, together with the penalties due thereon, has allegedly been fully paid by the administratrix per Certificate of Full Payment dated February 20, 1978 in the amount of P13,545.99 issued by the Regional Director of Quezon City, Mr. Isabelo R. Claros, that on August 28, 1980, a Project of Partition was agreed upon by the heirs stipulating, among other things, that "xxx xxx xxx "d. All the other real properties consisting of seven (7) whole parcels of land and one-fourteenth (1/14th) undivided part of the eighth (8th) parcel of land and their improvements are by unanimous consent and agreement of all the heirs hereby assigned, transferred and conveyed to the heirs' partnership known as "Cristi Bros.," with principal office and place of business at no. 100 F. Manalo St., Cubao, Quezon City. . . ." and that the said Project of Partition had been approved in an Order dated September 5, 1980 entitled "In the Matter of the Intestate Estate of Carmelo S. Cristi" docketed as Special Proceedings No. Q-23320 issued by the Honorable Judge Rodolfo Ortiz of the Court of First Instance of Rizal, Seventh Judicial District, Branch 31 of Quezon City, where it was ruled: "The Project of Partition submitted on August 28, 1980 by: Irene Eustaquio vda. De Cristi, Trinidad E. Cristi, Carolina E. Cristi, Mariano E. Cristi, Marcelo E. Cristi, Angelina E. Cristi and Miguel E. Cristi, who are hereby declared as the only heirs of the deceased Carmelo S. Cristi, is hereby APPROVED; and this case is considered closed. "SO ORDERED." In reply, please be informed that Section 56 of Revenue Regulations No. 2 provides: prcd "Sec. 56. Contributions by Shareholders . Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus accounts or to a special capital accounts, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as part of the operating capital of the company." Although the above-cited provision refers to a corporation, nevertheless, not only a corporation but a partnership can require additional funds for conducting its business and obtain such needed money through voluntary prorata payments from its partners, since the term "corporation" as defined in the then Section 20(b) of the Tax Code of 1977 [now Section 22(B) of the Tax Code of 1997] includes inter alia partnerships, no matter how created or organized. dctai Consequently, the transfer by the heirs of their hereditary shares, consisting of the above-mentioned real properties in favor of the heirs' own partnership, known as Cristi Bros., Company, represents their additional capital contributions to Cristi Bros. It is considered as capital investment which is not included within the purview of the term "taxable income" as defined in Section 31, relation to Section 32 of the Tax Code of 1997. Accordingly, the heirs' contributions consisting of seven (7) parcels of land and undivided 1/14 th share in another parcel of land, together with the improvements thereon, are not subject to income tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cdlex Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue