Meaning of the Term "Corporation" and "Partnership" Used in Secs. 24 and 84 of the NIRC

March 20, 1959 BIR RULING NO. 136-59 Messrs. Araneta & Araneta Counselors-at-Law Insular Life Building Manila Gentlemen : This is in connection with your letter dated February 25, 1959, requesting that BIR Ruling No. 50, Series of 1959, dated January 26, 1959 be set aside and the proposed assessment against Antonio Tuason, Jr., Angela I. Tuason and Gregorio Araneta, Inc. be restrained. LibLex The principal argument against the abovementioned ruling is that the parties to the memorandum of Agreement could not have formed a partnership under the facts of this case. The essential elements of a partnership as defined in Article 1767 of the Civil Code were extensively discussed in your letter. The resolution of the question involved in this case hinges on the meaning of the term "corporation" and "partnership" as used in Section 24 and 84 of the National Internal Revenue Code, the pertinent portion of which reads as follows: "SEC. 24. Rate of tax on corporations . There shall be levied, assessed, collected, and paid annually upon total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines no matter how created or organized but not including duly registered general co-partnership ( companies collectivas ,) a tax upon such income equal to the sum of the following: "SEC. 84(b) The term 'corporation' includes partnerships, no matter how created or organized, joint sock companies, joint accounts ( cuentas en participacion ), association or insurance companies, but does not include duly registered general copartnerships ( companies colectivas )." It will be noted that the tax in question is imposed upon "Corporation" which strictly speaking are distinct and different from "partnerships". When Section 84(b) of the Tax Code includes "partnership" among the entities subject to the tax on "corporations", Congress must have in mind organizations which are not necessarily "partnerships" in the technical sense of the term, Moreover, the qualifying phrase "no matter how created or organized" indicates that a joint venture need not be undertaken in conformity with the requirements of the law on partnerships in order that one could be deemed created for purposes of the tax on corporations. cdt "The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation or venture is carried on . . . . (8 Mertens Law of Federal Income Taxation p. 562, Note 63; Emphasis ours). For purposes of the tax on corporations, our Tax Code includes not only partnerships but also joint stock companies, joint accounts, insurance companies and even mere associations. Let us now examine the facts of this case to determine if it falls under any of the entities mentioned in Section 184(b) of the Tax Code. In 1941, Angela I. Tuazon, Nieves Tuason de Barreto and their brother Antonio Tuazon, Jr. owned in common a parcel of land with an area of 64,928.6 sq. m. covered by Certificate of Title No. 60911 in Sampaloc, Manila, each owning an individual 1/3 portion. Subsequently, the share of Nieves was sold to Gregorio Araneta, Inc., a domestic corporation, and a new Certificate of Title No. 61721 was issued in lieu of the old title covering the same property. The three co-owners agreed to have the whole parcel subdivided into small lots and then sold, the proceeds of the sale to be later divided among them. This agreement is embodied in a "Memorandum of Agreement." The three co-owners agreed to improve the property by filling it and constructing roads and curbs on the same and then subdividing them into lots for sale. Araneta Inc. was to finance the whole development and subdivision; it was to prepare a schedule of prices and conditions of sale, subject to the approval of the other co-owners; it was invested with authority to sell the lots into which the property was to be subdivided, and execute the corresponding contracts and deeds of sale; it was also to pay the real estate taxes due on the property or of any portion thereof that remained unsold, the expenses of surveying, improvements, all advertising expenses salaries of personnel, commissions, office and legal expenses including expenses in instituting all actions to eject all tenants or occupants in the property; and it undertook the duty to furnish each of the co-owners Angela and Antonio Tuason, copies of the subdivision plans and the monthly sales and rents and collections made thereon. In return for all these undertaking and obligation assumed by Araneta, Inc., it was to receive 50% of the gross selling price of the lots, and any rent that may be received from the property, the remaining 50% to be divided in equal portions among the three co-owners so that each will receive 16.33% of the gross receipts. The sale of lots by a subdivision is an undertaking that requires big capital investment, employment of several men, laborers as well as office personnel. It is a venture that has to be pursued and undertaken for years especially when the lots are sold on the installment basis. Big capital investment is necessary because of the improvements that have to be made, such as the construction of roads, concrete curbs and gutters and the laying of pipes. The co-owners although they retain title to their proportionate shares, have agreed to engage in a joint venture, that of improving the property by filing it, constructing roads and curbs on the same and then subdividing them into lots for sale. It will be noted that pursuant to the Memorandum of Agreement of the parties, the co-owners do not undertake to pay the amount actually advanced and spend by Araneta Inc. for financing the whole development and subdivision of the property. Instead it was to receive a definite percentage of the gross selling price of the lots which is 50% plus whatever rents that may be received from the property. The Supreme Court after studying carefully the Memorandum of Agreement entered into by the herein taxpayer which is the same contract involved in this case, in its decision in the case entitled "Angela I. Tuason, vs. Antonio Tuason, Jr. and Gregorio Araneta, Inc." said: "By virtue of the document Exhibit 6, the parties thereto practically and substantially entered into a contract of partnership as the best and most expedient means of eventually dissolving the co-ownership, the life of said partnership to and when the object of its creation shall have been attained." But even granting for the sake of argument that no partnership in the technical sense of the term was created by the parties to the Memorandum of Agreement, yet it cannot be denied that by virtue to the said contract there was a joint venture or joint account taxable under Section 24 of the Tax Code. "Co-owners of oil and gas leases whether they be individuals or corporations or both, are considered members of a 'joint venture' and a special partnership return filed by the operating co-owner in his name immediately following initial production and for each taxable year thereafter is sufficient."(Mertens Law of Federal Income Taxation, Vol. 8, p. 562) "'Joint adventure' may exist where persons embark in undertaking without entering on prosecution of business as partners strictly, but engage in common enterprise for their mutual benefit, and have a right to demand and expect from their associates good faith in all that relates to their common interest." (Sanders vs. Newman, 181 N.W. 822, 824, 174 Wis. 321). "Where one co-owner makes advances for benefit of the other, to be repaid from earnings of property before division of profits but without personal obligation on part of the other to repay advances, co-owners are joint-adventurers" (Words and Phrases, Vol. 23, p. 59). In view of all the foregoing, this Office finds no reason to reverse its ruling issued on January 26, 1959. Accordingly, your request that the said ruling be set aside and the proposed assessment based thereon be restrained, is hereby denied. LLphil Very truly yours, (SGD.) JOSE ARAAS Commissioner of Internal Revenue