Assessment in the Income Tax Deficiency

July 10, 1958 BIR RULING NO. 370-58 Messrs. Castillo, Torrefranca & Enjambre Attorneys-at-Law Manalili St., Cebu City Gentlemen : With reference to your letter dated April 7, 1958, written for and in behalf of your clients, Yu Tiong and Yu Sun, requesting reconsideration of the assessment against them of the amount of P60,282.50, as deficiency income taxes for the year 1948, 1949, 1950, 1951, 1952 and 1953, I have the honor to inform you that after a careful consideration of the issues therein involved, your request is hereby denied. cdpr The only legal question to be resolved is whether or not your clients have formed an unregistered partnership for said years within the purview of Section 84(b) of the National Internal Revenue Code. Under the Income Tax Law a "corporation" is subject to income tax levied and assessed under Section 24 thereof, and for purposes of this law, the term "corporation" is defined as follows: "The term 'corporation'; includes partnerships no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion) associations or insurance companies, but does not include duly registered general co-partnerships (companias collectivas)." Sec 84(b), NIRC emphasis supplied) From the aforecited provisions of the National Internal Revenue Code, a partnership, no matter how created or organized, is deemed included in the term "corporation" and taxable as such. The concept of partnership in the old Civil Code is set forth in the following provisions: "By the contract and partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves."(Art. 1665 Spanish Civil Code; See also Art. 1767 New Civil Code). The foregoing definition indicate the distinguishing characteristics of partnerships, which are: (1) mutual contribution to a common stock or fund and (2) joint interest in the profits. (Fernandez vs. dela Rosa, 1 Phil 676). In order to determine the existence of the partnership herein, the intention of the parties must be ascertained. "The legal intention deducible from the acts of the parties controls in determining the existence of a partnership. If they intend to do a thing which in law constitutes a partnership, they are partners, although their purpose was to avoid the creation of such relation." (Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142). cdt In this case, you admitted the following facts: (1) The owners, Messrs. Yu Tiong and Yu Sun purchased before the war from Joaquin Castro & Co., Lots Nos. 2173, 2493-A, 7364-A, and 7364-B, located in Cebu, paying one-half each of the price thereof; (2) That they shared equally the expenses for the repairs and reconstruction of the buildings constructed thereon and shared in like manner the rentals therefrom. It is generally recognized rule that a partnership is not possible unless there is a community, and the mere existence of a community property does not of itself indicate a partnership. However, if the community which is created voluntarily is established with the purpose of acquiring profits which has to be divided among the partners, there is in fact a partnership. The taxpayers herein did not maintain and keep the properties in question only for its preservation, conservation and common enjoyment, on the contrary the properties were acquired for the purpose of deriving profits therefrom. "Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso . They created it purposely. . . " "They invested the same, not merely in one transaction, but in a series of transactions. . . " "The aforesaid lots were not devoted to residential purpose, or to other personal uses, of petitioners herein. The properties were leased separately to several persons. . . " "The foregoing conditions have exited for more than ten (10) years, . . ". "Although taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such to leave no room for doubt on the existence of said intent in petitioners herein. . . " (Decision S. C., Evangelista et al., vs. CIR & CTA, G.R. No. L-9996, prom. October 15, 1957). You are, therefore, requested for the last time to urge your clients, Messrs, Yu Tiong and Yu Sun to pay the sum of P60,282.50, plus the delinquency penalties that have accrued thereon, to the City Treasurer of Cebu within ten (10) days from receipt hereof; otherwise, this Office will be constrained to file judicial action against your clients, without further notice. prcd Very truly yours, (SGD.) MELECIO R. DOMINGO Acting Commissioner of Internal Revenue