Evangelista v. Collector of Internal Revenue

[C.T.A. CASE NO. 53. August 29, 1955.] EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA , petitioner , vs . THE COLLECTOR OF INTERNAL REVENUE , respondent . D E C I S I O N This is a case involving an assessment against the petitioners by the respondent Collector of Internal Revenue in the total amount of P6,878.34 allegedly representing income tax from an unregistered partnership composed of petitioners, together with the real estate dealers' fixed tax, and the corporation residence tax, all for the years 1945 to 1949, inclusive, computed as follows: INCOME TAXES 1945 P614.84 1946 1,144.71 1947 910.34 1948 1,912.30 1949 1,575.90 Total including surcharge and compromise P6,157.09 REAL ESTATE DEALERS ' FIXED TAX 1946 P37.50 1947 150.00 1948 150.00 1949 150.00 Total including penalty 527.50 RESIDENCE TAXES OF CORPORATION 1945 P38.75 1946 38.75 1947 38.75 1948 38.75 1949 38.75 Total including surcharge 193.75 TOTAL TAXES DUE P6,878.34 ======= The case was submitted for decision by this Court upon an agreed statement of facts involving as it does purely questions of law. The pertinent portions of the stipulation read as follows: "1. That the petitioner borrowed from their father the sum of P59,140.00 which amount together with their personal monies was used by them for the purpose of buying real properties; 2. That on February 2, 1943 they bought from Mrs. Josefina Florentino a lot with an area of 3,718.40 sq. m. including improvements thereon for the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948; 3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of 3,718.40 sq. m. including improvements thereon for P18,000.00; this property has an assessed value of P8,255.00 as of 1948; 4. That on April 23, 1944 they purchased from the Insular Investments, Inc., a lot of 4,353 sq. m. including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948; 5. That on April 28, 1944 they bought from Mrs. Valentin Afable a lot of 8,371 sq. m. including improvements thereon for P237,234.14. This property has an assessed value of P59,140.00 as of 1948; 6. That in a document dated August 16, 1945 they appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring suits against the defaulting tenant; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them'; 7. That after having bought the above-mentioned real properties, the petitioners had the same rented or leased to various tenants; 8. That from the month of March, 1945 up to and including December, 1945, the total amount collected as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 (P3,650.67) thereby leaving them a net rental income of P5,948.33; 9. That in the 1946, they realized a gross rental income in the sum of P24,786.30, out of which amount was deducted the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13; 10. That in 1948 they realized a gross rental income of P17,453.00, out of which amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35. xxx xxx xxx "C. That in the deed of sale executed by Josefina Florentino dated February 2, 1953, one of the petitioners are named as vendee of 1/4 only of the properties therein described; that in the three subsequent deeds of sale in favor of the petitioners, they were not named as individual vendees of 1/4 only but collective vendees of the whole properties described therein." The only legal question we are called upon to resolve based on the facts as stated above is whether or not the petitioners have formed an unregistered partnership for purpose of applying section 84 (b) of the National Internal Revenue Code, and thus subject to income tax under section 24 of the same Code, and as a consequential but corollary issue therefor, whether or not the petitioners could likewise be subject to the real estate dealer's and residence taxes assessable on the authority of sections 193 (q) and 194 (s) of the National Internal Revenue Code and Commonwealth Act No. 465. Under the Income Tax Law (Title II, National Internal Revenue Code), a "corporation" is subject to the 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 (companies colectivas)." (Sec. 84 (b), National Internal Revenue Code; emphasis supplied) Likewise under the Residence Tax Law (Commonwealth Act 465) the term "corporation" ". . . includes joint-stock company, partnership, joint account (cuenta en participacion) association, or insurance company, no matter how created or organized ." (section 2, Com. Act 465; emphasis supplied). From the aforecited provisions of the National Internal Revenue Code and Commonwealth Act No. 465, the "partnership . . . no matter how created or organized", is deemed included in the term corporation" and taxable as such. In the case at bar, therefore, it will be necessary to determine whether the petitioners had formed a partnership as to be liable for the taxes imposed on corporations. Considering that the facts and circumstances in this case occurred prior to 1950, or more particularly from 1943 to 1949, the determination of the question will be made by applying the pertinent provisions of the Civil Code of 1889 and other previous laws enforced at the time (Art. 2253, Civil Code of the Philippines). The concepts of partnership are set forth in the following applicable provisions: "By the contract of 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 contract of association, by which two or more persons bind themselves to place in a common fund property, industry, or any of these things, in order to obtain profit, shall be commercial whatever its class may be, provided it has been constituted in accordance with the provisions of this Code". (Art. 116, Spanish Code of Commerce). The foregoing definitions indicate the distinguishing characteristics of partnerships, which are: (1) mutual contribution to a common stock or fund and (2) a joint interest in the profits (Fernandez vs. De la Rosa, 1 Phil. 676). The respondent contends that the petitioners herein have formed a partnership, and although the same is not registered, it comes within the purview of section 84 (b) of the National Internal Revenue Code and Section 2, Commonwealth Act No. 465. The petitioners on the other hand maintain that they have not formed a partnership , but merely a community of property and the latter is not embraced within the definition of corporation" as prescribed by the aforecited provisions of the Tax Code and Commonwealth Act No. 465. In order to determine the existence of a partnership, where the parties have not expressly called themselves as partners, es nomine , their intention must be ascertained. This real intention refers to their legal intention and must be determined from their representations, acts and conduct, and if they have agreed to everything or perform such acts as are necessary to constitute or form a partnership, they are partners whether their purpose was to create or avoid the relation. "The controlling intention is the legal intention deductible from the acts of the parties, and if they intend to do a thing which in law constitutes a partnership, they are partners , whether their purpose was to create or avoid the relation." (Go Chung v. Pacific Commercial Co., 45 Phil. 142). "Where the question of partnership vol non is to be determined, between the parties to the contract, the main inquiry is to be directed to the ascertainment of their real intention. If it be found that they have agreed upon those matters which, in law, constitute a contract of partnership, it must be presumed that they intended that contract . If, on the other hand, some essential element of that contract is omitted, it is not a contract of partnership, no matter what it may be called." (Amacker v. Kent, (1919) 144 La. 545, 553, 80 So. 717, 720) ". . . if the contract by its terms establishes a partnership between the parties, even the expressed intent that it should not be so classed would be of no avail. It is the intent to do the things which constitute a partnership that usually determines whether or not that relation exists between the parties." (Associated Piping & Engineering Co. v. Jones, (1936), 17 Cal App. 2d 107, 61 P 2d 536). (all emphasis supplied) In this particular instance, we note the following salient facts: (1) the petitioners in 1943 and 1944, pooled their resources together to purchase lands with a total acquisition value of P464,059.14 and an assessed value of 1948 of P129,895.00; (2) that they administered the properties jointly until August 16, 1945, when they constituted their brother, Simeon Evangelista, as their attorney-in-fact to manage their properties; (3) that after the aforesaid properties were acquired, the same were rented or leased to various tenants; (4) that the petitioners have not divided the properties from the time of acquisition up to the present, or approximately eleven (11) years; and (5) that during the years 1945 to 1949 inclusive, the petitioners realized the following rentals, and after deducting the expenses, the net rental income was divided among the petitioners. Gross Net Rental Rental Expenses Income 1945 P9,599.00 P3,650.67 P5,948.33 1946 24,786.30 16,288.27 7,498.13 1947 18,230.00 12,294.45 5,935.55 1948 17,453.00 4,237.65 12,615.35 From the foregoing facts over which there is no dispute, we believe and so hold that the petitioners were holding the real properties not under a mere community of property but as partners . The distinguishing characteristics of the partnership first given above are present in the case at bar. By the acts of the petitioners they have actually contributed, money or property into a common fund, for the purpose of operating and keeping the properties for rental purposes, and actually divided the net profits among themselves. They administered, as principals the properties involved, either by themselves personally or thru their chosen attorney-in-fact or manager. ". . . it is well settled that, where the parties to a contract, by their acts, conduct or agreement show that they intended to combine their property, labor, skill and experience or some of these elements on one side and some on the other, to carry on, as principals or co-owners, a common business, trade or venture as a commercial enterprise and to share, either expressly or by implication, the profits and the losses or expenses that may be incurred, such parties are partners." (47 C.J. pp. 675-676) The contention of the petitioners that there was a mere community of property is belied by their very acts. It is a generally recognized rule that a partnership is not possible unless there is a community, and the mere existence of a community of 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 parties, there is in fact a partnership. The presence of this element of dividing profits, is the principal distinguishing characteristics between the voluntary community and the partnership. The presence of that purpose in the case at bar, and although we assume arguendo that it was merely a community of property at the beginning, however, it became and was in fact a partnership thereafter. "Por el ultimo de los motivos antes indicados o sea por su fin u objeto, distinguense aun mas el contrato de sociedad y la nocion de la comunidad, pues la idea de la ganancia o provecho comun reportable de las cosas o de la industria aportada a la sociedad que esta so propone como nota esencial, falta en la comunidad, ya sea voluntaria, ya incidental o accidental, independiente de la voluntad. Los socios, ha dicho Treplong, se asocia para obtener un beneficio, para especular, para acrecentar se fortuna, y por el contrario, los comuneros estan en comunidad sin ningun espiritu de luero, y aun cuando la comunidad no resulte de causa independiente de la voluntad, como el azar, la sucesion o por ministerio de la ley, sine que exista en virtud de una con convencion, es siempre sin ningun fin de especulacion, y per lo tanto, no puede ser aplicable a la mismo el concepto de la sociedad, ni puede estimarse existente esta. Es decir que los socios se constituyen en tal caracter por el contrato de sociedad, siempre con la mente y la aspiracion de alcanzar algun provecho o ganancia, en tanto que los comuneros, volunarios o no, no se inspiran en el proposito de lucro nacido del concurso personal de los mismos. Esa idea de lucro comun o sea esperanza de la ganancia repartible entre los socios, es lo que mas distingue la sociedad de la comunidad, como tenemos ya dicho, y, por lo tanto, no es preciso insistir mas en ello. Algunos etros motivos existen por los que pueden diferenciarse la sociedad y la comunidad; pero bastan los expuestos, que son los principales, para no incurrir en el error de confundirlas." (11 Manresa, Comentarios al Codigo Civil Espaol, 4th Ed. 1931, p. 232). "Basta, a nuestro juicio, para dislindar las dos instituciones de que venimes tratando (partnership and community of property), tenor presente que es uno de los elementos esenciales de la sociedad el intento de obtener un lucro comun y partiblo , como fin principal y director del contrato. Cuedo concurra esa voluntad de conseguir y distribuir una ganancia comun entendida la palabra ganancia en el sentido estricto que hay que darle en relacion con el articulo 1.665 de nuestro Codigo habra lugar al contrato de sociedad. Cuando falte eso requisito o alguna de las circumstancias en que so descompone, se dara una simple comunidad de bienes. "Le que hay es que este criterio, teoricazente sencillo, puede en la practica dar lugar a dificultades y controversias, que se resolveran, como cuestiones de hecho, segun las circumstancias. En la duda entiende la doctrina francesa que habra de considerarse que hay comunidad mas bien que sociedad. Especialmente, se habra de declarar la comunidad, en defecto de circumstancias reveladoras de la intencion de formar sociedad (tales como la indicacion de las aportaciones, la fijacion de la cuota de cada uno en los beneficios y en las perdidas, el nombramiento de administradores), cuando los coproprietarios permanezean en la indivision unicamente para evitar la disminuncion de rentas que resultaria de una particion. Por el contrario, es de presumir la existencia de la sociedad aunque el punto ha side resuelto muy contradictoriamente por la jurisprudencia extranjera cuando los herederos continuan el negocio industrial o mercantil de su causante, realizando todos los actos propios del mismo, pues basta esto para revelar la intencion de obtener y partir los beneficios de la empresa, transformando el estado pasivo, propio de la comunidad hereditaria, en el estado activo propio de la sociedad." (25 Seaevola por Castan, Codigo Civil, Vol. I, 1933 Ed. p. 516-517) (emphasis supplied) Moreover, we note that the herein petitioners did not maintain and keep the properties in question only for the purpose of their preservation, conservation and common enjoyment. On the contrary, the properties were in fact acquired and retained for the purpose of deriving rentals and income therefrom, and had in fact been retained for approximately eleven (11) years by the petitioners for such purpose. Under such circumstances, the relation was a partnership relation and the petitioners who appear as co-owners must be treated as partners. In cases involving the provisions of the Civil Code and the Code of Commerce brought before it, the Supreme Court of Spain has applied this test of more conservation and common enjoyment" as applicable to the community of property as distinguished from the test of "common partible profit" indicative of the partnership. "que si en nuestro derecho positivo, y singularmente en su aplicacion, so efrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica, seala como nota fundamental la diferenciacion, aparte del origin e fuente de que surgen, no siempre uniforme, de la finalidad porseguida por los interesados lucro comun partible en la Sociedad y mera conservacion y aprovachemiento en la comunidad lo one llevaria a estimar que la explotacion de un Cafe-Bar es negocio propio del contrato de sociedad, y mas especificamente del de sociedad mercantil, con el contenido, objeto o indole commercial de sus operaciones". (Sentencia del Tribunal Supremo de 15 de Octobre, 1940, cited in 1940 Enciclopedia Juridica Espaola p. 1187) ". . . como los co erederos litigantes al dejar en comun bienes determinados, afectosa negocios industriales, contraren la continuacion de esos negocios para obtener un lucro comun partible y no la mera conservacion de los bienes para su aprovechamiento , preciso se hace admitir que la relacion juridica creada en ese contrato es la llamada comunidad societaria , porque si bien la falta de los requisitos formales que el Codigo de comercio establece para el contrato de sociedad impide el reconomiciento de la personalidad juridica social frente a terceros, por concurrir en el caso presente los requisites de este clase de contratos, segun antes se dice, el concertada entre los coherederos litigantes deba surtir efecto come sociedad irregular e de hecho, ya que los arts, 1278 y 1667 del C.e. y los 117 y 120 del de Comercio autorizan esta conclusion. (Decision of the Supreme Court of Spain of April 16, 1942, cited and quoted in 1 Garrigues, Tratado de Derecho Mercantil (Vol. I, 1947 Ed.) p. 469.) (emphasis ours) We find no other conclusion than to hold the herein petitioners did in fact operate a partnership for the purpose of engaging in the real estate business and for which the income tax prescribed in section 24 in relation to section 84 (b) of the National Internal Revenue Code may be levied and assessed. For the same reason such partnership should be likewise subject to the residence tax imposed by Commonwealth Act No. 465, and the real estate dealer's tax imposed by sections 193 (q) and 194 (s) of the National Internal Revenue Code. The mathematical computation of the taxes in question demanded by the respondent from the petitioners in the total amount of P6,878.34, not being disputed by the petitioners, the same is deemed correct. FOR ALL THE FOREGOING, we held that the petitioners are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioners is hereby dismissed with costs against petitioner. LLpr SO ORDERED. MARIANO NABLE Presiding Judge I CONCUR: AUGUSTO M. LUCIANO Associate Judge (did not take part in the proceedings) ROMAN M. UMALI Associate Judge