Afisco Insurance Corp. v. Commissioner of Internal Revenue

SECOND DIVISION [CA-G.R. SP No. 29502. October 11, 1993.] AFISCO INSURANCE CORP., ET AL. (Assessed as "Pool of Machinery Insurers") , petitioners , vs . THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS , respondents . D E C I S I O N MENDOZA , J p : This is a petition for review of the decision of the Court of Tax Appeals dated October 19, 1992, affirming the decision of the Commissioner of Internal Revenue which held petitioners liable for deficiency income tax, interest, and withholding tax. The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a Pool. Accordingly a pool composed of the petitioners was formed on the same day. On April 14, 1976, the Pool of machinery insurers submitted a financial statement and filed an "Information Return of Organization Exempt from Income Tax" for the year ending in 1975, on the basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co. On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency income tax, interest, and withholding tax, itemized as follows: Net income per information return P3,737,370.00 =========== Income tax due thereon P1,298,080.00 Add: 14% Int. fr. 4/15/76 to 4/15/79 545,193.60 TOTAL AMOUNT DUE & COLLECTIBLE P1,843,273.60 =========== Dividend paid to Munich Reinsurance Company P3,728,412.00 =========== 35% withholding tax at source due thereon P1,304,944.20 Add: 25% surcharge 326,236.05 14% interest from 1/25/76 to 1/25/79 137,019.14 Compromise penalty- non-filing of return 300.00 late payment 300.00 TOTAL AMOUNT DUE & COLLECTIBLE P1,768,799.39 =========== Dividend paid to Pool Members P655,636.00 =========== 10% withholding tax at source due thereon P65,563.60 Add: 25% surcharge 16,390.90 14% interest from 1/25/76 to 1/25/79 6,884.18 Compromise penalty- non filing of return 300.00 late payment 300.00 TOTAL AMOUNT DUE & COLLECTIBLE P89,438.68 =========== On appeal, the Court of Tax Appeals affirmed the ruling of the Commissioner of Internal Revenue in a decision dated October 19, 1992, now the subject of this appeal. Hence this petition, to which private respondents have replied in the form of a comment. The petitioners contend that I THE POOL/CLEARING HOUSE IS NOT A PARTNERSHIP SUBJECT TO INCOME TAX AS A CORPORATION II THE POOL/CLEARING HOUSE ITSELF IS NOT ENGAGED IN THE BUSINESS OF INSURANCE OR IN THE SOLICITATION OF INSURANCE BUSINESS OR IN ANY BUSINESS ACTIVITY, HENCE, IT DOES NOT DERIVE ANY TAXABLE RECEIPT OR INCOME III THE POOL/CLEARING HOUSE DOES NOT EARN INCOME AS A RESULT OF ITS "CLEARING HOUSE" FUNCTION IV A. THE AMOUNT OF P3,728,412.00 REMITTED TO MUNICH IS NOT DIVIDEND BUT REINSURANCE PREMIUM B. THE AMOUNT OF P655,636.00 REMITTED TO MEMBERS OF THE POOL/CLEARING HOUSE, LIKEWISE, DOES NOT CONSTITUTE DIVIDEND V THE COMMISSIONER'S RIGHT TO ASSESS THE POOL/CLEARING HOUSE HAD ALREADY PRESCRIBED AT THE TIME THE POOL/CLEARING HOUSE WAS NOTIFIED OF THE ASSESSMENT We shall deal with these contentions in their order. First . Petitioners allege that the CTA erred in considering their Pool a partnership subject to tax as a corporation under the National Internal Revenue Code. They claim that the Pool does not have a separate juridical or quasi juridical personality and that it is only a clearing house for members and a mere extension of their corporate personalities. We do not agree with petitioners that because their Pool does not fit the definition of a partnership they cannot be held liable for the corporate tax in sec. 24 of the Tax Code. Sec. 20(b) of the National Internal Revenue Code defines a "corporation" as including "partnerships, no matter how created or organized." On the other hand, art. 1767 of the Civil Code provides: Art. 1767 . 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 . . . Thus, however it may be organized, the partnership is included in the term "corporation." The phrase "no matter how created or organized" indicates that the joint venture need not be undertaken in any of the standard forms, or in accordance with the usual requirements of the law on partnerships in order that it could be deemed constituted for the purpose of the tax on corporations. Indeed, the tax is imposed on corporations which, strictly speaking, are distinct from partnerships. Nor is it necessary that the association has a legal personality of its own, for the term "corporation" also includes "joint accounts ( cuentas en participacion ), association or insurance companies no matter how created or organized." (Evangelista v. Collector of Internal Revenue, 102 Phil. 140 1957) Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation for purposes of the tax in sec. 24 of the Tax Code in Evangelista v . Collector of Internal Revenue, supra . The Supreme Court said: 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 Merten's Law of Federal Income Taxation, p. 562 Note 63) ( Id ., at 148) Second . The CTA also held that the ceding to Munich of only a part of the insurance previously underwritten by the petitioners as "ceding companies" implies a proportionate sharing of risks between them, as the following provisions of the Pool Agreement indicate: 1. In the case of a loss where the members are requested to advance their share of the loss immediately, the Executive Board shall advise the members of the amount of contribution of each for the loss and, if the free funds to the credit of a member in the Pool are insufficient to cover the loss, the Executive Board shall request the member to forward immediately to it the necessary amount for payment to the Ceding Company of the share of the Pool members in the loss (Article V, Sec. IV of the Pool Agreement). a. The parties to this Agreement have agreed to create a reserve fund, in an amount to be decided from time to time by the Executive Board, to guarantee the prompt settlement of losses. The pool shall deposit the funds in a Savings Account bearing interest at the prevailing rate, and any interest earned shall be credited to the account of each member company in proportion to its contribution to the reserve fund. It is understood and agreed, however, that any member-company withdrawing from the Pool shall have the right to withdraw its share of the reserve fund including earned interest, if any, after meeting all its obligation (Addendum No. 1 to the Pool Agreement). The reserve fund shall be used exclusively for the settlement of the share of a loss due from the member company who has failed to respond to a cash call within the prescribed period and only to the extent of the respective contributions to the fund of said members, in such a way that the contribution of one member shall not answer for the loss settlement liability of another or other members. Finally, it is understood and agreed that any loss payment made out of the reserve fund for the account of any member company shall be replenished by each member concerned within thirty (30) days from cash call ( Id .). 2. The liability of the 'Munich' for the reinsurances ceded to it under this Agreement shall commence and cease simultaneously with that of the 'Ceding Companies' (Article 6 of the Quota Reinsurance Treaty). It is understood and agreed that the "Munich" shall follow the fortunes of the "Ceding Companies" in treaty matters in the proportion of its share ( Id ., See similar provision in the Surplus Reinsurance Treaty). In reply petitioners argue that the reserve fund is not a common fund as in partnerships because there is allegedly no commingling of the individual deposits made by each of the members but, on the contrary, the deposits are accounted for and credited separately to the members of the Pool concerned. Petitioners argue that the test to be applied in determining whether a Pool should be treated as an association taxable as a corporation is whether it exercises control and management over the business enterprises of its members. In this regard, they claim that their Pool exercises no control over the reserve fund but that it merely renders administrative services to the members and does not insure any risk and so is not liable for losses. More specifically, it is alleged that all income entered by the members of the Pool is distributed to the member company and to the foreign insurer based on the rules of distribution after deducting premium tax and commission. The contention has no merit. As the CTA pointed out, the Pool, through its Executive Board, does exercise control and management over the fund: This fund is managed by an Executive Board . . . It does not turn out that the shares of the Pool members are distributed to them equally or proportionately immediately, Petitioners, as it appears, composed themselves into a Central Body acting through the Executive Board "to put into effect the requirements of the Quota and Surplus Share Treaties", The "partnership" element of joint control or management stresses the character of the Pool as corporation here. The Executive Board possess these powers and functions: 1. To carry on to the best advantage and interest of the Pool the duties of distributing the business received between the members and "Munich" and to make, execute, sign, seal and deliver for each of us all instruments or documents in writing of whatever kind or nature which shall be necessary to the proper conduct of said businesses; 2. To deposit funds of the Pool and to withdraw the same by check, receipt, draft or otherwise and to transact any and all business operations and affairs with any and all banking institutions may be deemed necessary, proper and convenient by our said attorney-in-fact; 3. To demand, collect and receive from "Munich" any and all sums of money which are now or may hereafter become due as by reason of the above reinsurance treaties between the members of the Pool and the "Munich"; with full power and authority to execute and deliver in our behalf full acquittances and receipts for all payments made to them in our behalf; 4. To settle all questions of payment or premiums or losses between the members of the Pool and the "Munich" in accordance with the terms and conditions of the Treaties; 5. In the event of loss, to pay off our share of said loss in our behalf from whatever funds we may have with the Pool. (CTA Decision, pp. 13-15) Furthermore, since there is assumption of risk by all the Pool Members, a reserve fund was created "to guarantee the prompt settlement of losses" (Exh. K-2), "The reserve fund shall be used exclusively for the settlement of the share of a loss due from the member-company who has failed to respond to a cash call within the prescribed period." The profits are distributed only after the business of insurance has been transacted and after all losses and expenses of management have been paid from the common fund. xxx xxx xxx The fact that the Pool does not retain any profit or income does not obliterate an antecedent fact, that of the Pool being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or coaction was indispensable in the transaction of the business. In their words, the establishment of a pool "is dictated by the need for said insurance companies to pool their resources together if they expect to capture some insurance business". If together they have conducted business, profit must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this is only a matter of consequence, as it implies that profit actually resulted. ( Id ., pp. 15-17) Third . Having shown that the Pool is a partnership taxable as a corporation and that the premiums collected by it on behalf of it members constitute income of the Pool, the subsequent distribution of the premiums to the members constitutes dividend payment. Petitioner's contention that the amounts remitted were reinsurance premiums and as such were exempt from taxation under sec. 24 (b) (i) is thus without merit. Petitioners should have withheld the amounts corresponding to tax on the dividends paid to the Pool members and to Munich as required by secs. 53 and 54 of the Code. Hence the assessments for withholding taxes at the source in the amounts of P1,768,799.39 and P89,438.68 are proper. Fourth . Petitioners argue that from April 14, 1976, when they filed their Information Return, to March 27, 1981, when the Commissioner of Internal Revenue issued a notice of assessment and notice, more than five years had elapsed and that it is erroneous to hold that because what was filed was not an Income Tax Return, the period of prescription is not five years as provided in sec. 318 of the NIRC but ten years from the date of discovery of the failure to file the Income Tax Return as provided in sec. 319. Petitioners contend that the "discovery rule" in sec. 319 refers to the "failure to file a return," without distinction whether it is an Information Return or Income Tax Return which has not been filed. Petitioners are barking at the wrong tree. The "discovery rule" that they say is not applicable to this case is not the basis for holding the government's action in this case timely. In rejecting petitioners' contention that prescription had set in, the CTA based its ruling on sec. 333 of the NIRC which suspends the running of the statute of limitations on the collection of taxes if the taxpayer cannot be located. The CTA said: We find this argument unavailing to petitioners because the taxpayer cannot be located at the address given in the information return filed and for which reason there was delay in sending the assessment. It must be stressed that this is one of the instances which suspends the running of the prescriptive period set forth by then Section 333 of the National Internal Revenue Code as amended by P.D. No. 69, which in part pertinent reads: "Sec. 333. Suspension of running of statute . The running of the statute of limitations provided in Section 331 or 332 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty days thereafter; . . .; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected ; . . . (Emphasis supplied) On this basis, respondent is not barred from assessing and collecting the taxes due from the Pool. WHEREFORE, the petition is DISMISSED, with costs against petitioners. SO ORDERED. Elbinias and Tayao-Jaguros, JJ., concur.