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G.R. No. 78133 October 18, 1988MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,vs.THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.De la Cuesta, De las Alas and Callanta Law Offices for petitioners.The Solicitor General for respondents

GANCAYCO, J .:The distinction between co-ownership and an unregistered partnership or joint venture for income taxpurposes is the issue in this petition.On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and onMay 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels ofland were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels ofland were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitionersrealized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a netprofit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid bypetitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitionerswere assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporateincome taxes for the years 1968 and 1970.Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed oftax amnesties way back in 1974.In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnershipor joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxesprescribed under Section 24, both of the National Internal Revenue Code

1that the unregistered

partnership was subject to corporate income tax as distinguished from profits derived from thepartnership by them which is subject to individual income tax; and that the availment of tax amnestyunder P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income taxliabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, thepetitioners were required to pay the deficiency income tax assessed.Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA CaseNo. 3045. In due course, the respondent court by a majority decision of March 30, 1987,

2affirmed the

decision and action taken by respondent commissioner with costs against petitioners.It ruled that on the basis of the principle enunciated in Evangelista

3an unregistered partnership was in

fact formed by petitioners which like a corporation was subject to corporate income tax distinct from thatimposed on the partners.In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering thecircumstances of this case, although there might in fact be a co-ownership between the petitioners,there was no adequate basis for the conclusion that they thereby formed an unregistered partnershipwhich made "hem liable for corporate income tax under the Tax Code.Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of therespondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF

THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERSFORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATEINCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE INOPPOSITION THERETO RESTS UPON THE PETITIONERS.B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALETRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUSIGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULDWARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIPEXISTS.C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTACASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THEEVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THEPETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIODCOVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista.

4

In the said case, petitioners borrowed a sum of money from their father which together with their ownpersonal funds they used in buying several real properties. They appointed their brother to managetheir properties with full power to lease, collect, rent, issue receipts, etc. They had the real propertiesrented or leased to various tenants for several years and they gained net profits from the rental income.Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, amongothers, from them.In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporationsprovided for in section 24 of Commonwealth Act No. 466, otherwise known as theNational Internal Revenue Code, as well as to the residence tax for corporationsand the real estate dealers' fixed tax. With respect to the tax on corporations, theissue hinges on the meaning of the terms corporation and partnership as used insections 24 and 84 of said Code, the pertinent parts of which read:Sec. 24. Rate of the tax on corporations.There shall be levied, assessed,collected, and paid annually upon the total net income received in the precedingtaxable year from all sources by every corporation organized in, or existing underthe laws of the Philippines, no matter how created or organized but not includingduly registered general co-partnerships (companies collectives), a tax upon suchincome equal to the sum of the following: ...Sec. 84(b). The term "corporation" includes partnerships, no matter how created ororganized, joint-stock companies, joint accounts (cuentas en participation),associations or insurance companies, but does not include duly registered generalco-partnerships (companies colectivas).Article 1767 of the Civil Code of the Philippines provides:By the contract of partnership two or more persons bind themselves to contributemoney, property, or industry to a common fund, with the intention of dividing theprofits among themselves.Pursuant to this article, the essential elements of a partnership are two, namely: (a)an agreement to contribute money, property or industry to a common fund; and (b)intent to divide the profits among the contracting parties. The first element isundoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,and did, contribute money and property to a common fund. Hence, the issuenarrows down to their intent in acting as they did. Upon consideration of all thefacts and circumstances surrounding the case, we are fully satisfied that theirpurpose was to engage in real estate transactions for monetary gain and thendivide the same among themselves, because:1. Said common fund was not something they found already in existence . It wasnot a property inherited by them pro indiviso. They created it purposely. What ismore they jointly borrowed a substantial portion thereof in order to establish said

common fund.2. They invested the same, not merely in one transaction, but in a series oftransactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,1944, by the acquisition of another real estate for P108,825.00. Five (5) days later(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)acquired and transcations undertaken, as well as the brief interregnum betweeneach, particularly the last three purchases, is strongly indicative of a pattern orcommon design that was not limited to the conservation and preservation of theaforementioned common fund or even of the property acquired by petitioners inFebruary, 1943. In other words, one cannot but perceive a character of habitualitypeculiar to business transactions engaged in for purposes of gain.

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3. The aforesaid lots were not devoted to residential purposes or to other personaluses, of petitioners herein. The properties were leased separately to severalpersons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 byway of rentals. Seemingly, the lots are still being so let, for petitioners do not evensuggest that there has been any change in the utilization thereof.4. Since August, 1945, the properties have been under the management of oneperson, namely, Simeon Evangelists, with full power to lease, to collect rents, toissue receipts, to bring suits, to sign letters and contracts, and to indorse anddeposit notes and checks. Thus, the affairs relative to said properties have beenhandled as if the same belonged to a corporation or business enterprise operatedfor profit.5. The foregoing conditions have existed for more than ten (10) years , or, to beexact, over fifteen (15) years, since the first property was acquired, and over twelve(12) years, since Simeon Evangelists became the manager.6. Petitioners have not testified or introduced any evidence, either on their purposein creating the set up already adverted to, or on the causes for its continuedexistence. They did not even try to offer an explanation therefor.Although, taken singly, they might not suffice to establish the intent necessary toconstitute a partnership, the collective effect of these circumstances is such as toleave no room for doubt on the existence of said intent in petitioners herein. Onlyone or two of the aforementioned circumstances were present in the cases cited bypetitioners herein, and, hence, those cases are not in point.

5

In the present case, there is no evidence that petitioners entered into an agreement to contributemoney, property or industry to a common fund, and that they intended to divide the profits amongthemselves. Respondent commissioner and/ or his representative just assumed these conditions to bepresent on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)

lots showing that the purpose was not limited to the conservation or preservation of the common fund oreven the properties acquired by them. The character of habituality peculiar to business transactionsengaged in for the purpose of gain was present.In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same normake any improvements thereon. In 1966, they bought another three (3) parcels of land from oneseller. It was only 1968 when they sold the two (2) parcels of land after which they did not make anyadditional or new purchase. The remaining three (3) parcels were sold by them in 1970. Thetransactions were isolated. The character of habituality peculiar to business transactions for thepurpose of gain was not present.In Evangelista, the properties were leased out t o tenants for several years. The business was under themanagement of one of the partners. Such condition existed for over fifteen (15) years. None of thecircumstances are present in the case at bar. The co-ownership started only in 1965 and ended in1970.Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new CivilCode lays down the rule for determining when a transaction should be deemed a

partnership or a co-ownership. Said article paragraphs 2 and 3, provides;(2) Co-ownership or co-possession does not itself establish a partnership, whethersuch co-owners or co-possessors do or do not share any profits made by the useof the property;(3) The sharing of gross returns does not of itself establish a partnership, whetheror not the persons sharing them have a joint or common right or interest in anyproperty from which the returns are derived;From the above it appears that the fact that those who agree to form a co-ownership share or do not share any profits made by t he use of the property held incommon does not convert their venture into a partnership. Or the sharing of thegross returns does not of itself establish a partnership whether or not the personssharing therein have a joint or common right or interest in the property. This only

means that, aside from the circumstance of profit, the presence of other elementsconstituting partnership is necessary, such as the clear intent to form a partnership,the existence of a juridical personality different from that of the individual partners,and the freedom to transfer or assign any interest in the property by one with theconsent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953ed., pp. 635-636)It is evident that an isolated transaction whereby two or more persons contributefunds to buy certain real estate for profit in the absence of other circumstancesshowing a contrary intention cannot be considered a partnership.Persons who contribute property or funds for a common enterprise and agree toshare the gross returns of that enterprise in proportion to their contribution, but whoseverally retain the title to their respective contribution, are not thereby renderedpartners. They have no common stock or capital, and no community of interest asprincipal proprietors in the business itself which the proceeds derived. (Elements ofthe Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)A joint purchase of land, by two, does not constitute a co-partnership in respectthereto; nor does an agreement to share the profits and losses on the sale of landcreate a partnership; the parties are only tenants in common. (Clark vs. Sideway,142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)Where plaintiff, his brother, and another agreed to become owners of a single tractof realty, holding as tenants in common, and to divide the profits of disposing of it,the brother and the other not being entitled to share in plaintiffs commission, nopartnership existed as between the three parties, whatever their relation may havebeen as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)In order to constitute a partnership inter sese there must be: (a) An intent to formthe same; (b) generally participating in both profits and losses; (c) and such acommunity of interest, as far as third persons are concerned as enables each partyto make contract, manage the business, and dispose of the whole property.-

Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)The common ownership of property does not itself create a partnership betweenthe owners, though they may use it for the purpose of making gains; and t hey may,without becoming partners, agree among themselves as to the management, anduse of such property and the application of the proceeds therefrom. (Spurlock vs.Wilson, 142 S.W. 363,160 No. App. 14.)

6

The sharing of returns does not in itself establish a partnership whether or not the persons sharingtherein have a joint or common right or interest in the property. There must be a clear intent to form apartnership, the existence of a juridical personality different from the individual partners, and thefreedom of each party to transfer or assign the whole property.In the present case, there is clear evidence of co-ownership between the petitioners. There is noadequate basis to support the proposition that they thereby formed an unregistered partnership. Thetwo isolated transactions whereby they purchased properties and sold t he same a few years thereafterdid not thereby make them partners. They shared in the gross profits as co- owners and paid theircapital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances,they cannot be considered to have formed an unregistered partnership which is thereby liable for

corporate income tax, as t he respondent commissioner proposes.And even assuming for the sake of argument that such unregistered partnership appears to have beenformed, since there is no such existing unregistered partnership with a distinct personality nor withassets that can be held liable for said deficiency corporate income tax, then petitioners can be heldindividually liable as partners for this unpaid obligation of the partnership p.

7However, as petitioners

have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they arethereby relieved of any further tax liability arising therefrom.WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of TaxAppeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is herebyrendered relieving petitioners of the corporate income tax liability in this case, without pronouncementas to costs.SO ORDERED.

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G.R. No. L-9996 October 15, 1957EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,vs.THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali andSolicitor Felicisimo R. Rosete for Respondents.CONCEPCION, J.:This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, forreview of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, realestate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordancewith the respondent's assessment for the same in the total amount of P6,878.34, which ishereby affirmed and the petition for review filed by petitioner is hereby dismissed with costsagainst petitioners.

It appears from the stipulation submitted by the parties:1. That the petitioners borrowed from their father the sum of P59,1400.00 which amounttogether with their personal monies was used by them for the purpose of buying realproperties,.2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this propertyhas 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 anaggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; thisproperty has an assessed value of P82,255.00 as of 1948;4. That on April 28, 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 ofP4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.including improvements thereon for P237,234.34. This property has an assessed value ofP59,140.00 as of 1948;6. That in a document dated August 16, 1945, they appointed their brother SimeonEvangelista 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 defaultingtenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and depositall notes and checks for them;7. That after having bought the above-mentioned real properties the petitioners had the samerented or leases to various tenants;8. That from the month of March, 1945 up to an including December, 1945, the total amountcollected as rents on their real properties was P9,599.00 while the expenses amounted toP3,650.00 thereby leaving them a net rental income of P5,948.33;9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out ofwhich amount was deducted in the sum of P16,288.27 for expenses thereby leaving them anet rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amountwas deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental incomeof P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded thepayment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax forthe years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and compromise P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3,1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "thedecision of the respondent contained in his letter of demand dated September 24, 1954" be reversed,and that they be absolved from the payment of the taxes in question, with costs against the respondent.After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for therespondent, and a petition for reconsideration and new trial having been subsequently denied, the caseis now before Us for review at the instance of the petitioners.

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The issue in this case whether petitioners are subject to the tax on corporations provided for in section24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well asto the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax oncorporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used insection 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paidannually upon the total net income received in the preceding taxable year from all sources byevery corporation organized in, or existing under the laws of the Philippines, no matter howcreated or organized but not including duly registered general co-partnerships (compaiascolectivas), a tax upon such income equal to the sum of the following: . . .SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created ororganized, joint-stock companies, joint accounts (cuentas en participacion), associations orinsurance companies, but does not include duly registered general copartnerships.(compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:By the contract of partnership two or more persons bind themselves to contribute money,properly, or industry to a common fund, with the intention of dividing the profits amongthemselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement tocontribute money, property or industry to a common fund; and (b) intent to divide the profits among thecontracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issuenarrows down to their intent in acting as they did. Upon consideration of all the facts and circumstancessurrounding the case, we are fully satisfied that their purpose was to engage in real estate transactionsfor monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not propertyinherited by thempro indiviso. They created it purposely. What is more they jointlyborroweda substantial portion thereof in orderto establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series oftransactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, theypurchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by theacquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), theygot a fourth lot for P237,234.14. The number of lots (24) acquired and transactionsundertaken, as well as the brief interregnum between each, particularly the last threepurchases, is strongly indicative of a pattern or common design that was not limited to theconservation and preservation of the aforementioned common fund or even of the propertyacquired by the petitioners in February, 1943. In other words, one cannot but perceive acharacter of habitually peculiar to business transactions engaged in the purpose of gain.3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, ofpetitioners herein. The properties were leased separately to several persons, who, from 1945to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots arestill being so let, for petitioners do not even suggest that there has been any change in theutilization thereof.4. Since August, 1945, the properties have been under the management of one person,

namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, tobring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus,the affairs relative to said properties have been handled as if the same belonged to acorporation or business and enterprise operated for profit.5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, overfifteen (15) years, since the first property was acquired, and over twelve (12) years, sinceSimeon Evangelista became the manager.6. Petitioners have not testified or introduced any evidence, either on their purpose increating the set up already adverted to, or on the causes for its continued existence. They didnot even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute apartnership, the collective effect of these circumstances is such as to leave no room for doubt on the

existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances werepresent in the cases cited by petitioners herein, and, hence, those cases are not in point.Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of theacts performed by them, a legal entity, with a personality independent of that of its members, did notcome into existence, and some of the characteristics of partnerships are lacking in the case at bar. Thispretense was correctly rejected by the Court of Tax Appeals.To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, aredistinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"among the entities subject to the tax on "corporations", said Code must allude, therefore, toorganizations which are not necessarily "partnerships", in the technical sense of the term. Thus, forinstance, section 24 of said Code exempts from the aforementioned tax "duly registered generalpartnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction.Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, nomatter how created or organized." This qualifying expression clearly indicates that a joint venture neednot be undertaken in any of the standard forms, or in conformity with the usual requirements of the lawon partnerships, in order that one could be deemed constituted for purposes of the tax on corporations.Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts,(cuentas en participation)" and "associations," none of which has a legal personality of its own,independent of that of its members. Accordingly, the lawmaker could not have regarded that personalityas a condition essential to the existence of the partnerships therein referred to. In fact, as above stated,"duly registered general copartnerships" which are possessed of the aforementioned personalityhave been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term"corporation" It may not be amiss to add that petitioners' allegation to the effect that their liability inconnection with the leasing of the lots above referred to, under the management of one person evenif true, on which we express no opinion tends to increase the similarity between the nature of theirventure and that corporations, and is, therefore, an additional argument in favorof the imposition of saidtax on corporations.Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from

"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-stockcompanies and insurance companies." However, the term "association" is not used in theaforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transactionof designed affairs, or the attainment of some object, which like a corporation, continuesnotwithstanding that its members or participants change, and the affairs of which, likecorporate affairs, are conducted by a single individual, a committee, a board, or some othergroup, acting in a representative capacity. It is immaterial whether such organization iscreated by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntaryassociation, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust,a 'common law' trust, and 'investment' trust (whether of the fixed or the management type),an interinsuarance exchange operating through an attorney in fact, a partnership association,and any other type of organization (by whatever name known) which is not, within themeaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of FederalIncome Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own conceptof a partnership, under the term 'partnership 'it includes not onlya partnership as known at common law but, as well, a syndicate, group, pool,joint venture orother unincorporated organizations which carries on any business financial operation, orventure, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)The term 'partnership' includes a syndicate, group, pool,joint venture or other unincorporatedorganization, through or by means of which any business, financial operation, or venture iscarried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasissupplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes thesepartnerships with the exception only of duly registered general copartnerships within the purview

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of the term "corporation."It is, therefore, clear to our mind that petitioners herein constitute apartnership, insofar as said Code is concerned and are subject to the income tax for corporations.As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides inpart:

Entities liable to residence tax.-Every corporation, no matter how created or organized,whether domestic or resident foreign, engaged in or doing business in the Philippines shallpay an annual residence tax of five pesos and an annual additional tax which in no case,shall exceed one thousand pesos, in accordance with the following schedule: . . .The term 'corporation' as used in this Act includes joint-stock company,partnership, jointaccount (cuentas en participacion), association or insurance company, no matter howcreated or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our

National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved onJune 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14,1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes withsubstantially the same meaning. Consequently, petitioners are subject, also, to the residence tax forcorporations.Lastly, the records show that petitioners have habitually engaged in leasing the properties abovementioned for a period of over twelve years, and that the yearly gross rentals of said properties fromJune 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided insection 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuantto section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling,exchanging, leasing, or renting property or his own account as principal and holding himselfout as a full or part time dealer in real estate or as an owner of rental property or propertiesrented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .(emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the

petitioners herein. It is so ordered.Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:I agree with the opinion that petitioners have actually contributed money to a common fund withexpress purpose of engaging in real estate business for profit. The series of transactions which theyhad undertaken attest to this. This appears in the following portion of the decision:

2. They invested the same, not merely in one transaction, but in a series of transactions. OnFebruary 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots forP18,000. This was soon followed on April 23, 1944, by t he acquisition of another real state forP108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. Thenumber of lots (24) acquired and transactions undertaken, as well as the brief interregnumbetween each, particularly the last three purchases, is strongly indicative of a pattern orcommon design that was not limited to the conservation and preservation of theaforementioned common fund or even of the property acquired by the petitioner in February,

1943, In other words, we cannot but perceive a character ofhabituallypeculiarto business transactions engaged in for purposes of gain.

I wish however to make to make the following observation:Article 1769 of the new Civil Code lays down the rule for determining when a transaction should bedeemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:

(2) Co-ownership or co-possession does not of itself establish a partnership, whether suchco-owners or co-possessors do or do not share any profits made by the use of the property;(3) The sharing of gross returns does not of itself establish partnership, whether or not theperson sharing them have a joint or common right or interest in any property from which thereturns are derived;

From the above it appears that the fact that those who agree to form a co-ownership shared or do notshare any profits made by the use of property held in common does not convert their venture into a

partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or notthe persons sharing therein have a joint or common right or interest in the property. This only meansthat, aside from the circumstance of profit, the presence of other elements constituting partnership isnecessary, such as the clear intent to form a partnership, the existence of a judicial personality differentfrom that of the individual partners, and the freedom to transfer or assign any interest in the property byone with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp.635- 636).It is evident that an isolated transaction whereby two or more persons contribute funds to buy certainreal estate for profit in the absence of other circumstances showing a contrary intention cannot beconsidered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share thegross returns of that enterprise in proportion to their contribution, but who severally retain the

title to their respective contribution, are not thereby rendered partners. They have nocommon stock or capital, and no community of interest as principal proprietors in thebusiness itself which the proceeds derived. (Elements of the law of Partnership by Floyd R.Mechem, 2n Ed., section 83, p. 74.)A joint venture purchase of land, by two, does not constitute a copartnership in respectthereto; nor does not agreement to share the profits and loses on the sale of land create apartnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 SCt. 327, 35 L. Ed., 1157.)Where plaintiff, his brother, and another agreed to become owners of a single tract of reality,holding as tenants in common, and to divide the profits of disposing of it, the brother and theother not being entitled to share in plaintiff's commissions, no partnership existed as betweenthe parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N.E. 6763, 233 Mass. 341.)In order to constitute a partnership inter sese there must be: (a) An intent to form the same;(b) generally a participating in both profits and losses; (c) and such a community of interest,as far as third persons are concerned as enables each party to make contract, manage the

business, and dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067,50 Ill. 470.)The common ownership of property does not itself create a partnership between the owners,though they may use it for purpose of making gains; and they may, without becomingpartners, agree among themselves as to the management and use of such property and theapplication of the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App.14.)

This is impliedly recognized in the following portion of the decision: "Although, taken singly, they mightnot suffice to establish the intent necessary to constitute a partnership, the collective effect of thesecircumstances (referring to the series of transactions) such as to leave no room for doubt on theexistence of said intent in petitioners herein."

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G.R. No. 168118 August 28, 2006THE MANILA BANKING CORPORATION, Petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.D E C I S I O NSANDOVAL-GUTIERREZ, J .:Before us is a Petition for Review on Certiorari

1assailing the Decision

2of the Court of

Appeals dated May 11, 2005 in CA-G.R. SP No. 77177, entitled "The Manila BankingCorporation,petitioner, versus Commissioner of Internal Revenue, respondent."The Manila Banking Corporation, petitioner, was incorporated in 1961 and since then had

engaged in the commercial banking industry until 1987. On May 22, 1987, the MonetaryBoard of the Bangko Sentral ng Pilipinas(BSP) issued Resolution No. 505, pursuant toSection 29 of Republic Act (R.A.) No. 265 (the Central Bank Act),

3prohibiting petitioner from

engaging in business by reason of insolvency. Thus, petitioner ceased operations that yearand its assets and liabilities were placed under the charge of a government-appointedreceiver.Meanwhile, R.A. No. 8424,

4otherwise known as the Comprehensive Tax Reform Act of

1997, became effective on January 1, 1998. One of the changes introduced by this law isthe imposition of the minimum corporate income tax on domestic and resident foreigncorporations. Implementing this law is Revenue Regulations No. 9-98 stating that the lawallows a four (4) year period from the time the corporations were registered with the Bureauof Internal Revenue (BIR) during which the minimum corporate income tax should not beimposed.On June 23, 1999, after 12 years since petitioner stopped its business operations, the BSPauthorized it to operate as a thrift bank. The following year, specifically on April 7, 2000, itfiled with the BIR its annual corporate income tax return and paid P33,816,164.00 for

taxable year 1999.

Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent a letterto the BIR requesting a ruling on whether it is entitled to the four (4)-year grace periodreckoned from 1999. In otherwords, petitioners position is that since it resumed operationsin 1999, it will pay its minimum corporate income tax only after four (4) years thereafter.On February 22, 2001, the BIR issued BIR Ruling No. 007-2001

5stating that petitioner is

entitled to the four (4)-year grace period. Since it reopened in 1999, the minimum corporateincome tax may be imposed "not earlier than 2002, i.e. the fourth taxable year beginning1999." The relevant portions of the BIR Ruling state:In reply, we hereby confirm that the law and regulations allow new corporations as well asexisting corporations a leeway or adjustment period of four years counted from the year ofcommencement of business operations (reckoned at the time of registration by thecorporation with the BIR) during which the MCIT (minimum corporate income tax) does not

apply. If new corporations, as well as existing corporations such as those registered with theBIR in 1994 or earlier, are granted a 4-year grace period, we see no reason why TMBC, acorporation that has ceased business activities due to involuntary closure for more than adecade and is now only starting again to place its business back in order, may not be giventhe same opportunity. It should be stressed that although TMBC had been registered withthe BIR before 1994, yet it did not have any business from 1987 to June 1999 due to itsinvoluntary closure. This Office is therefore of an opinion, that for purposes of justice, equityand consistent with the intent of the law, TMBC's reopening last July 1999 is akin to thecommencement of business operations of a new corporation, in consideration of which thelaw allows a 4-year period during which MCIT is not to be applied. Hence, MCIT may be

imposed upon TMBC not earlier than 2002, i.e., the fourth taxable year beginning 1999which is the year when TMBC reopened.Likewise, we find merit in your position that for having just come out of receivershipproceedings, which not only resulted in substantial losses but actually brought about acomplete cessation of all businesses, TMBC may be qualified to ask for suspension of theMCIT. The law provides that the Secretary of Finance, upon the recommendation of theCommissioner, may suspend the imposition of the MCIT on any corporation which sufferslosses on account of prolonged labor dispute, or because offorce majeure, or becauseof legitimate business reverses. [NIRC, Sec. 27(E)(3)] Revenue Regulations 9-98 defines

the term "legitimate business reverses" to include substantial losses sustained due to fire,

robbery, theft or embezzlement, or for other economic reasons as determined by theSecretary of Finance. Cessation of business activities as a result of being placed underinvoluntary receivership may be one such economic reason. But to be a basis for therecognition of the suspension of MCIT, such a situation should be properly defined andincluded in the regulations, which this Office intends to do. Pending such inclusion, thesame cannot yet be invoked. Nevertheless, it is the position of this Office that the countingof the fourth taxable year, insofar as TMBC is concerned, begins in the year 1999 whenTMBC reopened such that it will be only subject to MCIT beginning the year 2002.Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sumof P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year

1999.Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax Appeals(CTA) a petition for review.On April 21, 2003, the CTA denied the petition, finding that petitioners payment of theamount of P33,816,164.00 corresponding to its minimum corporate income tax for taxable

year 1999 is in order. The CTA held that petitioner is not entitled to the four (4)-year graceperiod because it is not a new corporation. It has continued to be the same corporation,registered with the Securities and Exchange Commission (SEC) and the BIR, despite beingplaced under receivership, thus:Moreover, it must be emphasized that when herein petitioner was placed underreceivership, there was merely an interruption of its business operations. However, itscorporate existence was never affected. The general rule is that the appointment of thereceiver does not terminate the charter or work a dissolution of the corporation, even thoughthe receivership is a permanent one. In other words, the corporation continues to exist as alegal entity, clothed with its franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner, for allintents and purposes, remained to be the same corporation, registered with the SEC andwith the BIR. While it may continue to perform its corporate functions, all its properties andassets were under the control and custody of a receiver, and its dealings with the public issomehow limited, if not momentarily suspended. x x x

On June 11, 2003, petitioner filed with the Court of Appeals a petition for review. On May11, 2005, the appellate court rendered a Decision affirming the assailed judgment of theCTA.Thus, this petition for review on certiorari.The main issue for our resolution is whether petitioner is entitled to a refund of its minimumcorporate income tax paid to the BIR for taxable year 1999.Petitioner contends that the Court of Tax Appeals erred in holding that it is not entitled to thefour (4)-year grace period provided by law suspending the payment of its minimumcorporate income tax since it is not a newly created corporation, having been registered asearly as 1961.

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For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains thatpursuant to R.A. No. 8424, petitioner should pay its minimum corporate income taxbeginning January 1, 1998 as it did not close its business operations in 1987 but merelysuspended the same. Even if placed under receivership, its corporate existence was neveraffected. Thus, it falls under the category of an existing corporation recommencing itsbanking business operations.Section 27(E) of the Tax Code provides:Sec. 27. Rates of Income Tax on Domestic Corporations. x x x(E) Minimum Corporate Income Tax on Domestic Corporations. -(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross

income as of the end of the taxable year, as defined herein, is hereby imposed on acorporation taxable under this Title, beginning on the fourth taxable year immediatelyfollowing the year in which such corporation commenced its business operations, when theminimum corporate income tax is greater than the tax computed under Subsection (A) ofthis Section for the taxable year.(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate incometax over the normal income tax as computed under Subsection (A) of this Section shall becarried forward and credited against the normal income tax for the three (3) immediatelysucceeding taxable years.x x xUpon the other hand, Revenue Regulation No. 9-98 specifies the period when a corporationbecomes subject to the minimum corporate income tax, thus:(5) Specific Rules for Determining the Period When a Corporation Becomes Subject to theMCIT (minimum corporate income tax) -For purposes of the MCIT, the taxable year in which business operations commenced shallbe the year in which the domestic corporation registered with the Bureau of InternalRevenue (BIR).Firms which were registered with BIR in 1994 and earlier years shall be covered by theMCIT beginning January 1, 1998.x x xThe intent of Congress relative to the minimum corporate income tax is to grant a four (4)-year suspension of tax payment to newly formed corporations. Corporations still startingtheir business operations have to stabilize their venture in order to obtain a stronghold in theindustry. It does not come as a surprise then when many companies reported losses in theirinitial years of operations. The following are excerpts from the Senate deliberations:Senator Romulo: x x x Let me go now to the minimum corporate income tax, which is onpage 45 of the Journal, which is to minimize tax evasion on those corporations which havebeen declaring losses year in and year out. Here, the tax rate is three-fourths, three quarterof a percent or .75% applied to corporations that do not report any taxable income on the

fourth year of their business operation. Therefore, those that do not report income on thefirst, second and third year are not included here.Senator Enrile: We assume that this is the period of stabilization of new company that isstarting in business.Senator Romulo: That is right.Thus, in order to allow new corporations to grow and develop at the initial stages of theiroperations, the lawmaking body saw the need to provide a grace period of four years fromtheir registration before they pay their minimum corporate income tax.Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known asthe "Thrift Banks Act of 1995." It took effect on March 18, 1995. This law provides for theregulation of the organization and operations of thrift banks. Under Section 3, thrift banks

include savings and mortgage banks, private development banks, and stock savings andloans associations organized under existing laws.On June 15, 1999, the BIR issued Revenue Regulation No. 4-95 implementing certainprovisions of the said R.A. No. 7906. Section 6 provides:Sec. 6. Period of exemption. All thrift banks created and organized under the provisions ofthe Act shall be exempt from the payment of all taxes, fees, and charges of whatever natureand description, except the corporate income tax imposed under Title II of the NIRC and

as specified in Section 2(A) of these regulations, for a period of five (5) years from the dateof commencement of operations; while for thrift banks which are already existing andoperating as of the date of effectivity of the Act (March 18, 1995), the tax exemption shall

be for a period of five (5) years reckoned from the date of such effectivity.For purposes of these regulations, "date of commencement of operations" shall beunderstood to mean the date when the thrift bank was registered with the Securities andExchange Commission or the date when the Certificate of Authority to Operate was issuedby the Monetary Board of the Bangko Sentral ng Pilipinas, whichever comes later.x x x

As mentioned earlier, petitioner bank was registered with the BIR in 1961. However, in1987, it was found insolvent by the Monetary Board of the BSP and was placed underreceivership. After twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificateof Authority to Operate as a thrift bank. Earlier, or on January 21, 1999, it registered withthe BIR. Then it filed with the SEC its Articles of Incorporation which was approved on June22, 1999.It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the dateof commencement of operations of a thrift bank is the date it was registered with theSEC or the date when the Certificate of Authority to Operate was issued to it by theMonetary Board of the BSP, whichever comes later.Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424imposing the minimum corporate income tax on corporations, provides that for purposes ofthis tax, the date when business operations commence is the year in which the domesticcorporation registered with the BIR. However, under Revenue Regulations No. 4-95, thedate of commencement of operations ofthrift banks, such as herein petitioner, is the datethe particular thrift bank was registered with the SEC or the date when the Certificate of

Authority to Operate was issued to it by the Monetary Board of the BSP, whichever comeslater.Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies topetitioner, being athrift bank. It is, therefore, entitled to a grace period of four (4) yearscounted from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank.Consequently, it should only pay its minimum corporate income tax after four (4) years from1999.

WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals inCA-G.R. SP No. 77177 is hereby REVERSED. Respondent Commissioner of InternalRevenue is directed to refund to petitioner bank the sum of P33,816,164.00 prematurely

paid as minimum corporate income tax.SO ORDERED.

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G.R. No. 180066COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.PHILIPPINE AIRLINES, INC., Respondent.D E C I S I O NCHICO-NAZARIO, J .:Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules ofCourt, seeking the reversal and setting aside of the Decision 1dated 9 August 2007 andResolution2dated 11 October 2007 of the Court of Tax Appeals (CTA) en banc in CTA E.B. No.246. The CTA en banc affirmed the Decision3dated 31 July 2006 of the CTA Second Division inC.T.A. Case No. 7010, ordering the cancellation and withdrawal of Preliminary Assessment

Notice (PAN) No. INC FY-3-31-01-000094 dated 3 September 2003 and Formal Letter ofDemand dated 12 January 2004, issued by the Bureau of Internal Revenue (BIR) againstrespondent Philippine Airlines, Inc. (PAL), for the payment of Minimum Corporate Income Tax(MCIT) in the amount of P272,421,886.58.There is no dispute as to the antecedent facts of this case.PAL is a domestic corporation organized under the corporate laws of the Republic of thePhilippines; declared the national flag carrier of the country; and the grantee under PresidentialDecree No. 15904of a franchise to establish, operate, and maintain transport services for thecarriage of passengers, mail, and property by air, in and between any and all points and placesthroughout the Philippines, and between the Philippines and other countries.5For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxableincome,6which left it with unapplied creditable withholding tax7in the amount of P2,334,377.95.PAL did not pay any MCIT for the period.In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR),PAL requested for the refund of its unapplied creditable withholding tax for FY 2000-2001. PAL

attached to its letter the following: (1) Schedule of Creditable Tax Withheld at Source for FY2000-2001; (2) Certificates of Creditable Taxes Withheld; and (3) Audited FinancialStatements.1avvphi1

Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation Division1 (LTAID 1) of the BIR Large Taxpayers Service (LTS), issued on 16 August 2002, TaxVerification Notice No. 00201448, authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to verifythe supporting documents and pertinent records relative to the claim of PAL for refund of itsunapplied creditable withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID1 Chief Armit S. Linsangan invited PAL to an informal conference at the BIR National Office inDiliman, Quezon City, on 27 August 2003, at 10:00 a.m., to discuss the results of theinvestigation conducted by Revenue Officer Cueto, supervised by Revenue Officer Madelyn T.Sacluti.BIR officers and PAL representatives attended the scheduled informal conference, during whichthe former relayed to the latter that the BIR was denying the claim for refund of PAL and, instead,was assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives argued that

PAL was not liable for MCIT under its franchise. The BIR officers then informed the PALrepresentatives that the matter would be referred to the BIR Legal Service for opinion.The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which wasreceived by PAL on 23 October 2003. LTAID 1 assessed PAL for P262,474,732.54, representingdeficiency MCIT for FY 2000-2001, plus interest and compromise penalty, computed as follows:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services 30,316,679,013.00

Gross Income from Operation 8,482,042,672.00

Add: Non-operating income 465,111,368.00

Total Gross Income for MCIT purposes 9,947,154,040.008

Rate of Tax 2%

Tax Due 178,943,080.80

Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74

Compromise Penalty 25,000.00

Total Amount Due P 262,474,732.549

PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated 4 November 2003 to theBIR LTS.On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand for deficiency MCIT forFY 2000-2001 in the amount of P271,421,88658, based on the following calculation:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services

Direct Costs - P 30,749,761,017.00

Less: Non-deductible

interest expense 433,082,004.00 30,316,679,013.00

Gross Income from Operation P 8,482,042,672.00

Add: Non-operating Income 465,111,368.00

Total Gross Income for MCIT purposes P 9,947,154,040.00

MCIT tax due P 178,943,080.80

Interest 20% per annum 7/16/01 to 02/15/04 92,453,805.78

Compromise Penalty 25,000.00

Total MCIT due and demandable P 271,421,886.5810

PAL received the foregoing Formal Letter of Demand on 12 February 2004, prompting it to filewith the BIR LTS a formal written protest dated 13 February 2004.The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed Assessment, which wasreceived by PAL on 26 May 2004. Invoking Revenue Memorandum Circular (RMC) No. 66-2003,the BIR LTS denied with finality the protest of PAL and reiterated the request that PALimmediately pay its deficiency MCIT for FY 2000-2001, inclusive of penalties incident todelinquency.1avvphi1PAL filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No. 7010 andraffled to the CTA Second Division. The CTA Second Division promulgated its Decision on 31July 2006, ruling in favor of PAL. The dispositive portion of the judgment of the CTA SecondDivision reads:

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WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED.Accordingly, Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand forthe payment of deficiency Minimum Corporate Income Tax in the amount of P272,421,886.58 arehereby CANCELLED and WITHDRAWN.11In a Resolution dated 2 January 2007, the CTA Second Division denied the Motion forReconsideration of the CIR.It was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed asC.T.A. E.B. No. 246. The CTA en banc found that "the cited legal provisions and jurisprudenceare teeming with life with respect to the grant of tax exemption too vivid to pass unnoticed," andthat "the Court in Division correctly ruled in favor of the respondent [PAL] granting its petition forthe cancellation of Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand

for the deficiency MCIT in the amount of P272,421,886.58."12

Consequently, the CTA en bancdenied the Petition of the CIR for lack of merit. The CTA en banc likewise denied the Motion forReconsideration of the CIR in a Resolution dated 11 October 2007.Hence, the CIR comes before this Court via the instant Petition for Review on Certiorari, basedon the grounds stated hereunder:THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILEDDECISION BECAUSE:

(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OFTHE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS

AMENDED; HENCE, IT IS COVERED BY THE MCIT PROVISION OF THE SAMECODE.(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF "OTHER TAXES"WHICH WOULD ENABLE RESPONDENT TO AVAIL ITSELF OF THE "IN LIEU" (sic)OF ALL OTHER TAXES" CLAUSE UNDER SECTION 13 OF P.D. NO. 1590("CHARTER").

(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF[PALS] CHARTER.(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILLGIVE IT THE BENEFIT OF A LOWER TAX, BUT ALSO THE RESPONSIBILITY OFPAYING ITS SHARE OF THE TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RANO. 9337.(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] ISLIABLE FOR THE DEFICIENCY MCIT.13

There is only one vital issue that the Court must resolve in the Petition at bar, i.e., whether PAL isliable for deficiency MCIT for FY 2000-2001.The Court answers in the negative.Presidential Decree No. 1590, the franchise of PAL, contains provisions specifically governing thetaxation of said corporation, to wit:Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay tothe Philippine Government during the life of this franchise whichever of subsections (a) and (b)

hereunder will result in a lower tax:(a) The basic corporate income tax based on the grantee's annual net taxableincome computed in accordance with the provisions of the National Internal RevenueCode; or(b) A franchise tax of two per cent (2%) of the gross revenues derived by the granteefrom all sources, without distinction as to transport or nontransport operations; provided,that with respect to international air-transport service, only the gross passenger, mail,and freight revenues from its outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shal l be in lieu of allother taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature,or description, imposed, levied, established, assessed, or collected by any municipal, city,

provincial, or national authority or government agency, now or in the future, including but notlimited to the following:

1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee ofaviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes,duties, charges, royalties, or fees are directly due from or imposable upon thepurchaser or the seller, producer, manufacturer, or importer of said petroleum productsbut are billed or passed on to the grantee either as part of the price or cost thereof or bymutual agreement or other arrangement; provided, that all such purchases by, sales ordeliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in itstransport and nontransport operations and other activities incidental thereto;2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all

importations by the grantee of aircraft, engines, equipment, machinery, spare parts,accessories, commissary and catering supplies, aviation gas, fuel, and oil, whetherrefined or in crude form and other articles, supplies, or materials; provided, that sucharticles or supplies or materials are imported for the use of the grantee in its transportand nontransport operations and other activities incidental thereto and are not locallyavailable in reasonable quantity, quality, or price;3. All taxes on lease rentals, interest, fees, and other charges payable to lessors,whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts,and other property rented, leased, or chartered by the grantee where the payment ofsuch taxes is assumed by the grantee;4. All taxes on interest, fees, and other charges on foreign loans obtained and otherobligations incurred by the grantee where the payment of such taxes is assumed by thegrantee;5. All taxes, fees, and other charges on the registration, licensing, acquisition, andtransfer of aircraft, equipment, motor vehicles, and all other personal and real property

of the grantee; and6. The corporate development tax under Presidential Decree No. 1158-A.

The grantee, shall, however, pay the tax on its real property in conformity with existing law.For purposes of computing the basic corporate income tax as provided herein, the grantee isauthorized:

(a) To depreciate its assets to the extent of not more than twice as fast the normal rateof depreciation; and(b) To carry over as a deduction from taxable income any net loss incurred in any yearup to five years following the year of such loss.

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax onquarterly basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end ofeach of the first three quarters of the taxable calendar or fiscal year, the quarterly franchise orincome-tax return shall be filed and payment of either the franchise or income tax shall be madeby the grantee.

A final or an adjustment return covering the operation of the grantee for the preceding calendar or

fiscal year shall be filed on or before the fifteenth day of the fourth month following the close ofthe calendar or fiscal year. The amount of the final franchise or income tax to be paid by thegrantee shall be the balance of the total franchise or income tax shown in the final or adjustmentreturn after deducting therefrom the total quarterly franchise or income taxes already paid duringthe preceding first three quarters of the same taxable year.

Any excess of the total quarterly payments over the actual annual franchise of income tax due asshown in the final or adjustment franchise or income-tax return shall either be refunded to thegrantee or credited against the grantee's quarterly franchise or income-tax liability for thesucceeding taxable year or years at the option of the grantee.The term "gross revenues" is herein defined as the total gross income earned by the granteefrom; (a) transport, nontransport, and other services; (b) earnings realized from investments inmoney-market placements, bank deposits, investments in shares of stock and other securities,

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and other investments; (c) total gains net of total losses realized from the disposition of assetsand foreign-exchange transactions; and (d) gross income from other sources. (Emphases ours.)

According to the afore-quoted provisions, the taxation of PAL, during the lifetime of its franchise,shall be governed by two fundamental rules, particularly: (1) PAL shall pay the Government eitherbasic corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by PAL,under either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration,license, and other fees and charges, except only real property tax.The basic corporate income tax of PAL shall be based on its annual net taxable income,computed in accordance with the National Internal Revenue Code (NIRC). Presidential DecreeNo. 1590 also explicitly authorizes PAL, in the computation of its basic corporate income tax, to(1) depreciate its assets twice as fast the normal rate of depreciation;14and (2) carry over as a

deduction from taxable income any net loss incurred in any year up to five years following theyear of such loss.15Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived byPAL from all sources, whether transport or nontransport operations. However, with respect tointernational air-transport service, the franchise tax shall only be imposed on the grosspassenger, mail, and freight revenues of PAL from its outgoing flights.In its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net taxable incomefor the period, resulting in zero basic corporate income tax, which would necessarily be lowerthan any franchise tax due from PAL for the same period.The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that theMCIT is income tax for which PAL is liable. The CIR reasons that Section 13(a) of PresidentialDecree No. 1590 provides that the corporate income tax of PAL shall be computed in accordancewith the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL has not applied for relieffrom the said tax, then PAL is subject to the same.The Court is not persuaded. The arguments of the CIR are contrary to the plain meaning and

obvious intent of Presidential Decree No. 1590, the franchise of PAL.Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997,16pertinentprovisions of which are reproduced below for easy reference:SEC. 27. Rates of Income Tax on Domestic Corporations. (A) In General Except as otherwise provided in this Code, an income tax of thirty-five percent(35%) is hereby imposed upon the taxable income derived during each taxable year from allsources within and without the Philippines by every corporation, as defined in Section 22(B) ofthis Code and taxable under this Title as a corporation, organized in, or existing under the laws ofthe Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); andeffective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).x x x x(E) Minimum Corporate Income Tax on Domestic Corporations.(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the gross incomeas of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable

under this Title, beginning on the fourth taxable year immediately following the year in which suchcorporation commenced its business operations, when the minimum income tax is greater thanthe tax computed under Subsection (A) of this Section for the taxable year.Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under Section27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of thecorporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% ofthe gross income of the corporation. Although this may be the general rule in determining theincome tax due from a domestic corporation under the NIRC of 1997, it can only be applied toPAL to the extent allowed by the provisions in the franchise of PAL specifically governing itstaxation.

After a conscientious study of Section 13 of Presidential Decree No. 1590, in relation to Sections27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en banc and Second Division,concludes that PAL cannot be subjected to MCIT for FY 2000-2001.First, Section 13(a) of Presidential Decree No. 1590 refers to "basic corporate income tax." InCommissioner of Internal Revenue v. Philippine Airlines, Inc.,17the Court already settled that the"basic corporate income tax," under Section 13(a) of Presidential Decree No. 1590, relates to thegeneral rate of 35% (reduced to 32% by the year 2000) as stipulated in Section 27(A) of theNIRC of 1997.Section 13(a) of Presidential Decree No. 1590 requires that the basic corporate income tax becomputed in accordance with the NIRC. This means that PAL shall compute its basic corporateincome tax using the rate and basis prescribed by the NIRC of 1997 for the said tax. There is

nothing in Section 13(a) of Presidential Decree No. 1590 to support the contention of the CIR thatPAL is subject to the entire Title II of the NIRC of 1997, entitled "Tax on Income."Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporateincome tax of PAL shall be based on its annual net taxable income. This is consistent withSection 27(A) of the NIRC of 1997, which provides that the rate of basic corporate income tax,which is 32% beginning 1 January 2000, shall be imposed on the taxable income of the domesticcorporation.Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of grossincome specified in the said Code, less the deductions and/or personal and additionalexemptions, if any, authorized for such types of income by the same Code or other special laws.The gross income, referred to in Section 31, is described in Section 32 of the NIRC of 1997 asincome from whatever source, including compensation for services; the conduct of trade orbusiness or the exercise of profession; dealings in property; interests; rents; royalties; dividends;annuities; prizes and winnings; pensions; and a partners distributive share in the net income of ageneral professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at bysubtracting from gross income deductions authorized, not just by the NIRC of 1997,18but also byspecial laws. Presidential Decree No. 1590 may be considered as one of such special lawsauthorizing PAL, in computing its annual net taxable income, on which its basic corporate incometax shall be based, to deduct from its gross income the following: (1) depreciation of assets attwice the normal rate; and (2) net loss carry-over up to five years following the year of such loss.In comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based on thegross income of the domestic corporation. The Court notes that gross income, as the basis forMCIT, is given a special definition under Section 27(E)(4) of the NIRC of 1997, different from thegeneral one under Section 34 of the same Code.

According to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of adomestic corporation engaged in the sale of service means gross receipts, less sales returns,allowances, discounts and cost of services. "Cost of services" refers to all direct costs andexpenses necessarily incurred to provide the services required by the customers and clientsincluding (a) salaries and employee benefits of personnel, consultants, and specialists directly

rendering the service; and (b) cost of facilities directly utilized in providing the service, such asdepreciation or rental of equipment used and cost of supplies.19Noticeably, inclusions in andexclusions/deductions from gross income for MCIT purposes are limited to those directly arisingfrom the conduct of the taxpayers business. It is, thus, more limited than the gross income usedin the computation of basic corporate income tax.In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxableincome, which is the basis for basic corporate income tax under Section 27(A); and grossincome, which is the basis for the MCIT under Section 27(E). The two terms have their respectivetechnical meanings, and cannot be used interchangeably. The same reasons prevent this Courtfrom declaring that the basic corporate income tax, for which PAL is liable under Section 13(a) ofPresidential Decree No. 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since

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the basis for the first is the annual net taxable income, while the basis for the second is grossincome.Third, even if the basic corporate income tax and the MCIT are both income taxes under Section27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separatetaxes.The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,20wherein itheld that income tax on the passive income21of a domestic corporation, under Section 27(D) ofthe NIRC of 1997, is different from the basic corporate income tax on the taxable income of adomestic corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 ofPresidential Decree No. 1590 gives PAL the option to pay basic corporate income tax orfranchise tax, whichever is lower; and the tax so paid shall be in lieu of all other taxes, except real

property tax. The income tax on the passive income of PAL falls within the category of "all othertaxes" from which PAL is exempted, and which, if already collected, should be refunded to PAL.The Court herein treats MCIT in much the same way. Although both are income taxes, the MCITis different from the basic corporate income tax, not just in the rates, but also in the bases fortheir computation. Not being covered by Section 13(a) of Presidential Decree No. 1590, whichmakes PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes"from which PAL is exempted.That, under general circumstances, the MCIT is paid in place of the basic corporate income tax,when the former is higher than the latter, does not mean that these two income taxes are one andthe same. The said taxes are merely paid in the alternative, giving the Government theopportunity to collect the higher amount between the two. The situation is not much different fromSection 13 of Presidential Decree No. 1590, which reversely allows PAL to pay, whichever islower of the basic corporate income tax or the franchise tax. It does not make the basic corporateincome tax indistinguishable from the franchise tax.Given the fundamental differences between the basic corporate income tax and the MCIT,

presented in the preceding discussion, it is not baseless for this Court to rule that, pursuant to thefranchise of PAL, said corporation is subject to the first tax, yet exempted from the second.Fourth, the evident intent of Section 13 of Presidential Decree No. 1520 is to extend to PAL taxconcessions not ordinarily available to other domestic corporations. Section 13 of PresidentialDecree No. 1520 permits PAL to pay whichever is lower of the basic corporate income tax or thefranchise tax; and the tax so paid shall be in lieu of all other taxes, except only real property tax.Hence, under its franchise, PAL is to pay the least amount of tax possible.Section 13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special taxtreatment (including tax exceptions/exemptions) under its franchise, as an inducement for theacceptance of the franchise and the rendition of public service by the said public utility .22In thiscase, in addition to being a public utility providing air-transport service, PAL is also the official flagcarrier of the country.The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenesthe objective of Section 13 of Presidential Decree No. 1590. In effect, PAL would not just havetwo, but three tax alternatives, namely, the basic corporate income tax, MCIT, or franchise tax.

More troublesome is the fact that, as between the basic corporate income tax and the MCIT, PALshall be made to pay whichever is higher, irrefragably, in violation of the avowed intention ofSection 13 of Presidential Decree No. 1590 to make PAL pay for the lower amount of tax.Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all other taxes"clause in Section 13 of Presidential Decree No. 1520, if it did not pay anything at all as basiccorporate income tax or franchise tax. As a result, PAL should be made liable for "other taxes"such as MCIT. This line of reasoning has been dubbed as the Substitution Theory, and this is notthe first time the CIR raised the same. The Court already rejected the Substitution Theory inCommissioner of Internal Revenue v. Philippine Airlines, Inc.,23to wit:"Substitution Theory"of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the "in lie u of all other taxes"proviso is a mere incentive that applies only when PAL actually pays something. It is clear thatPD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) asconsideration for its franchise. Either option excludes the payment of other taxes and duesimposed or collected by the national or the local government. PAL has the option to choose thealternative that results in lower taxes. It is not the fact of tax payment that exempts it, but theexercise of its option.Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which(as earlier discussed) is computed by subtracting allowable deductions and exemptions fromgross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarilyrecognized the situation in which taxable income may result in a negative amount and thus

translate into a zero tax liability.Notably, PAL was owned and operated by the government at the time the franchise was lastamended. It can reasonably be contemplated that PD 1590 sought to assist the finances of thegovernment corporation in the form of lower taxes. When respondent operates at a loss (as in theinstant case), no taxes are due; in this instances, it has a lower tax liability than that provided bySubsection (b).The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum ofone peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from itslosses would not. There is no substantial distinction between a zero tax and a one-peso taxliability. (Emphasis ours.)Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in thepresent Petition.The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind theSubstitution Theory. Section 22 of Republic Act No. 9337, more popularly known as theExpanded Value Added Tax (E-VAT) Law, abolished the franchise tax imposed by the charters of

particularly identified public utilities, including Presidential Decree No. 1590 of PAL. PAL may nolonger exercise its options or alternatives under Section 13 of Presidential Decree No. 1590, andis now liable for both corporate income tax and the 12% VAT on its sale of services. The CIRalleges that Republic Act No. 9