Topic: TAX LAWS AND IMPLEMENTING RULES AND REGULATIONS

34. [G.R. No. L-17509. January 30, 1970.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CARLOS LEDESMA,

JULIETA LEDESMA, VICENTE GUSTILO, JR. & AMPARO LEDESMA DE
GUSTILO, Respondents.

Assistant Solicitor General Jose P. Alejandro and Special Attorneys Priscilla R.

Gonzales and Librada del Rosario-Natividad for Petitioner.

Angel S. Gamboa for Respondents.

SYLLABUS

1. COMMERCIAL LAW; PARTNERSHIPS; MERCANTILE REGISTRY; REGISTRATION OF

PARTNERSHIP, ENCOURAGED. — The policy of the law is to encourage persons doing
business under a partnership agreement to have the partnership agreement, or the
articles of co-partnership, registered in the mercantile registry, so that the public may
know who the real partners of the partnership are, the capital stock of the partnership,
the interest or contribution of each partner in the capital stock, the proportionate share
of each partner in the profits, and the earnings or salaries of the partner or partners
who render service for the partnership.

2. TAXATION; PARTNERSHIPS; DOUBLE ASSESSMENT ON UNREGISTERD

PARTNERSHIP. — The government imposes a corporate income tax against an
unregistered partnership as an entity, and an individual income tax against the
apparent members thereof for the reason that the government may not be able to trace
exactly to whom the profits of an unregistered partnership go, nor can the government
determine the precise participation of the apparent partners in the profits of the
partnership.

3. ID.; REGISTERED PARTNERSHIPS; EXEMPT FROM PAYMENT OF CORPORATE INCOME

TAX. — Once a partnership is registered during a taxable year that partnership should
be considered as registered partnership exempt from the payment of corporate income
tax during that taxable year, regardless of whether the registration takes place at the
middle, or towards the last days, of the taxable year. This is so because the payment of
income tax, is determined as of the end of the taxable year, and the income tax is
collected after the end of the taxable year. Only the partners thereof should be made to
pay income tax on the profits of the partnership that were divided among them.

4. ID.; ID.; ADMINISTRATIVE CONSTRUCTION ENTITLED TO WEIGHT AND RESPECT. —

When a particular construction has been operative over a long period and has acquired
the sanction of usage, as when the Bureau of Internal Revenue as early as 1924 applied
the "status-at-the-end-of-the-taxable-year" rule in determining the income tax liability
of a partnership, it is entitled to "respectful consideration" specially if rights have been
adjusted and determined by it for many years, as a change may result in inequitable
treatment of similarly situated taxpayers and may occur after many persons have acted
upon the faith of the regulation.

DECISION

ZALDIVAR, J.:

Appeal by petitioner Commissioner of Internal Revenue — hereinafter referred to as

Commissioner — from the decision of the Court of Tax Appeals, in its CTA Case No.
226, declaring as not in accordance with law the assessment of corporate income tax
made by said Commissioner in the sum of P15,777.26 on the income of the co-
partnership named "Hacienda Fortuna" during the period from January 1 to July 13,
1949, of which co-partnership herein respondents Carlos Ledesma, Julieta Ledesma,
Amparo Ledesma de Gustilo and Vicente Gustilo, Jr. are its members. 1

The undisputed facts, as shown in the record, are as follows: chanrob1es virtual 1aw library

On July 9, 1949 herein respondents, Carlos Ledesma, Julieta Ledesma and the spouses
Amparo Ledesma and Vicente Gustilo, Jr., purchased from their parents, Julio Ledesma
and Florentina de Ledesma, the sugar plantation known as "Hacienda Fortuna,"
consisting of 36 parcels of land, situated in the municipality of San Carlos, province of
Negros Occidental, with an area of approximately 1,202 hectares and with a sugar
quota of 79,211.17 piculs, which sugar quota was included in the sale. By virtue of the
purchase, Carlos Ledesma acquired the one-third undivided portion of the plantation for
the price of P144,043.00; Julieta Ledesma acquired another one-third undivided portion
of the plantation for the same price; and respondents Amparo Ledesma de Gustilo and
Vicente Gustilo, Jr. acquired the remaining one-third undivided portion also for the
same price. Prior to the purchase, the sugar quota of 79,211.17 piculs was registered in
the names of the vendors, Julio Ledesma and Florentina de Ledesma, under Plantation
Audit No. 38-101 of the milling district of San Carlos Milling Co., Ltd. By virtue of the
purchase Plantation Audit No. 58-101 was cancelled, and during the sugar crop year
1948-1949 the said sugar quota of 79,211.17 piculs was transferred to, apportioned
among, and separately registered in the names of, the respondents, as follows: one-
third to Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo, under Plantation Audit No.
38-246; one-third to Carlos Ledesma, under Plantation Audit No. 38-247; and one-third
to Julieta Ledesma under Plantation Audit No. 38-248.

After their purchase of the plantation, herein respondents took over the sugar cane
farming on the plantation beginning with the crop year 1948-1949. For the crop year
1948-1949 the San Carlos Milling Co, Ltd. credited the respondents with their shares in
the gross sugar production, as follows: chanrob1es virtual 1aw library

Gross Production: chanrob1es virtual 1aw library

Amparo Ledesma and

Vicente Gustilo, Jr 21,308.30 piculs

Carlos Ledesma 21,308.30"

Julieta Ledesma 21,308.30"

—————————

TOTAL 63,924.90 piculs.

Planters’ Share: chanrob1es virtual 1aw library

Amparo Ledesma and

Vicente Gustilo, Jr. 13,317.70 piculs

Carlos Ledesma 13,317.70"

Julieta Ledesma 13,317.70"

—————————

TOTAL 39,953.10 piculs

The respondents shared equally the expenses of production, on the basis of their
respective one-third undivided portions of the plantation. The San Carlos Milling Co.,
Ltd. issued to respondents separate quedans for the sugar produced, based on the
quota under the plantation audits respectively issued to them. In their individual
income tax returns for the year 1949 the respondents included as part of their income
their respective net profits derived from their individual sugar production from the
"Hacienda Fortuna," as herein-above stated.

On July 11, 1949, the respondents organized themselves into a general co-partnership,
under the firm name "Hacienda Fortuna", for the "production of sugar cane for
conversion into sugar, palay and corn and such other products as may profitably be
produced on said hacienda, which products shall be sold or otherwise disposed of for
the purpose of realizing profit for the partnership." 2 The articles of general co-
partnership were registered in the commercial register of the office of the Register of
Deeds in Bacolod City, Negros Occidental, on July 14, 1949. Paragraph 14 of the
articles of general co-partnership provides that the agreement shall have retroactive
effect as of January 1, 1949.

On March 22, 1959 the Commissioner assessed against the partnership "Hacienda
Fortuna" corporate income tax for the calendar year 1949, under Section 24 of the
National Internal Revenue Code, in the sum of P23,704.22. The respondents contested
the assessment upon the ground that the "Hacienda Fortuna" was a registered general
co-partnership, and requested for the cancellation of the assessment. In a letter, dated
March 12, 1955, the Commissioner advised respondents that inasmuch as the articles
of general co-partnership of the "Hacienda Fortuna" were registered on July 14, 1949,
the income realized by the partnership prior to the registration cannot be exempt from
the payment of corporate income tax. In a letter, also dated March 12, 1955, the
Commissioner instructed the provincial revenue agent of Negros Occidental to
investigate the income of "Hacienda Fortuna" for the period from January 1, 1959 to
July 13, 1949, being the portion of the year 1949 which was prior to July 14, 1949, the
date of the registration of the articles of general co-partnership of "Hacienda Fortuna."
The provincial revenue agent reported that during the period from January 1 to July 13,
1949 the "Hacienda Fortuna" had a net profit amounting to P131,477.20, and that the
income tax due on said net profit, at the rate of 12%, was P15,777.26. It thus resulted
that the original assessment of P23,704.22, as corporate income tax on the income for
the entire calendar year 1949, was reduced to P15,777.26 after deducting the
corporate income tax due on the net profits derived by the "Hacienda Fortuna" for the
period from July 14 to December 31, 1949, based on the theory that the co-partnership
"Hacienda Fortuna" was exempt from the payment of corporate income tax on its
income from the day its articles of general co-partnership were registered in the
mercantile registry. Herein respondents accepted the correctness of the figures
contained in the report of the provincial revenue agent, but denied their liability to pay
the corporate income tax of P15,777.26 assessed against the "Hacienda Fortuna" as a
general co-partnership.

On April 2, 1955 the respondents, through counsel, wrote a letter to the Commissioner
asking for the reconsideration of his ruling of March 12, 1955, upon the ground that
during the period from January 1 to July 13, 1949 the respondents were operating
merely as co-owners of the plantation known as "Hacienda Fortuna", so that the case of
the "Hacienda Fortuna" was really one of co-ownership and not that of an unregistered
co-partnership which was subject to corporate tax. That request for reconsideration was
denied by the Commissioner on October 25, 1955. The respondents filed a second
request for reconsideration, dated November 4, 1955, but the Commissioner in a letter
dated December 6, 1955, which was received by respondents on December 20, 1955,
denied said second request for reconsideration. Thereupon, Respondents, on January 3,
1956, filed a petition for review with the Court of Tax Appeals, by way of an appeal
from the ruling of the Commissioner of March 12, 1955 and from the denial of the
requests for reconsideration of said ruling. The case was docketed in the Court of Tax
Appeals as CTA Case No. 226.

In the meantime, on March 22, 1955, exactly 5 years from and after the date of the
assessment on March 22, 1950, and before the expiration of the thirty-day period
within which the respondents could ask for a reconsideration of the ruling of the
Commissioner of March 12, 1955, or appeal to the Court of Tax Appeals, the Provincial
Fiscal of Negros Occidental, upon the request of the Commissioner, filed a complaint
against herein respondents for the collection of the alleged income tax assessed against
the "Hacienda Fortuna." The said action, entitled "The Collector of Internal Revenue v.
Carlos Ledesma, Julieta Ledesma, Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo"
was docketed in the Court of First Instance of Negros Occidental as Civil Case No. 3373.

It happened, therefore,, that before respondents could bring the case on appeal to the
Court of Tax Appeals a complaint for the collection of the alleged income tax due on the
"Hacienda Fortuna" was filed against them in the Court of First Instance of Negros
Occidental. Upon motion of the Commissioner, in CTA Case No. 226, the Court of Tax
Appeals, on July 31, 1956, dismissed the petition for review upon the ground that the
Court of First Instance of Negros Occidental had already acquired jurisdiction over the
controverted assessment prior to the institution of the appeal, and the judgment in Civil
Case No. 3373 of the Court of First Instance of Negros Occidental would constitute res
adjudicata between the same parties. Herein respondents filed in the Supreme Court a
petition for mandamus to compel the Court of Tax Appeals to annul the resolution of
July 31, 1956 dismissing the petition in CTA Case No. 226 and to proceed with the case.
The Supreme Court set aside the resolution of the Court of Tax Appeals of July 31,
1956 and directed said court to proceed with the determination of the appeal of herein
respondents in CTA Case No. 226 3 This Court held that the Court of Tax Appeals had
exclusive jurisdiction over the disputed assessment, to the exclusion of the Court of
First Instance of Negros Occidental. Subsequently, the Court of First Instance of Negros
Occidental dismissed Civil Case No. 3373.

After the dismissal of Civil Case No. 3373 of the Court of First Instance of Negros
Occidental, and before the hearing of CTA Case No. 226 in the Court of Tax Appeals,
herein respondents filed a supplemental petition for review alleging, as an additional
ground for appeal, that the action of the Government to collect the tax assessed against
the "Hacienda Fortuna" had prescribed. During the hearing before the Court of Tax
Appeals, the parties submitted a stipulation of facts and their respective documentary
evidence.

Two issues were raised before the Court of Tax Appeals, to wit: (1) whether or not the
right of the Government to collect the income tax against the "Hacienda Fortuna" as an
unregistered general co-partnership, for the year 1949, had prescribed; and (2)
whether or not the income tax in question was validly assessed against the "Hacienda
Fortuna."cralaw virtua1aw library

The Court of Tax Appeals, on August 15, 1960, rendered a decision, declaring that the
right of the Government to collect the income tax in question had not prescribed, but
holding that the assessment of the corporate income tax against the "Hacienda
Fortuna" is not in accordance with law. The Court of Tax Appeals, therefore, reversed
the rulings of the Commissioner of Internal Revenue, appealed from.

Herein respondents did not appeal from the decision of the Court of Tax Appeals, but in
the brief that they filed before this Court, as appellees, they claim that the Court of Tax
Appeals erred in holding that prior to the execution of the articles of general co-
partnership on July 11, 1949 the respondents had operated the "Hacienda Fortuna" as a
general partnership; and that the Court of Tax Appeals erred in not holding that the
right of the Government to collect the income tax in question had prescribed. In this
connection, suffice it to say that the conclusion of the Court of Tax Appeals that the
respondents operated the "Hacienda Fortuna" as a partnership prior to the execution of
the articles of general co-partnership is based on findings of fact, and We find no
reason in the record to disturb the findings of the tax court on this matter. On the
contrary, the intention of the respondents to operate the "Hacienda Fortuna" as a
partnership, before July 11, 1949, is clearly shown in paragraph 14 of the articles of
general co-partnership which provides that the partnership agreement "shall be
retroactive as of January 1, 1949." We also find no merit in the contention of the
respondents that the Court of Tax Appeals erred in not holding that the right of the
Government to collect the income tax in question had prescribed.

We shall now occupy ourselves with the errors assigned by the Commissioner, as
follows: chanrob1es virtual 1aw library

(1) "The Court of Tax Appeals erred in holding that herein respondents, as partners of
the general co-partnership `Hacienda Fortuna’, are not subject to corporate income tax
prior to its registration or for the period from January 1 to July 13, 1949." cralaw virtua1aw library

(2) "The Court of Tax Appeals erred in holding that the registration of the articles or
general co-partnership of the `Hacienda Fortuna’ on July 14, 1949 operated to exempt
said partnership from the corporate income tax for the year 1949 and not only for the
period from July 14, 1949 to December 31, 1949." cralaw virtua1aw library

The Solicitor General, as counsel for the Commissioner, considers these two assigned
errors as interrelated and discusses them together.

The sole question to be decided in this appeal is whether or not the partnership known
as "Hacienda Fortuna" which was organized by respondents on July 11, 1949, whose
articles of general co-partnership provided that the partnership agreement should
retroact as of January 1, 1949, and which articles of general co-partnership were
registered on July 14, 1949, should pay corporate income tax as an unregistered
partnership on its net income received during the period from January 1, 1949 to July
13, 1949, the period in the year 1949 prior to the date of said registration.

The provision of law that is relevant to this question is that portion of Section 24 of the
National Internal Revenue Code which reads as follows: jgc:chanrobles.com.ph

"Sec. 24. Rate of tax on corporation. — (a) Tax on domestic corporations. — In general,
there shall be levied, collected, and paid annually upon the total net income received in
the preceding taxable year from all sources by every corporation organized in, or
existing under the laws of, the Philippines, no matter how created or organized, but not
including duly registered general co-partnerships (compañias colectivas), domestic life
insurance companies and foreign life insurance companies doing business in the
Philippines, a tax upon such income equal to the sum of the following:" (Emphasis
supplied.)

x          x           x

It is the contention of the Commissioner that it is only from the date of the registration
of the articles of general co-partnership in the mercantile register when a co-
partnership is exempt from the payment of corporate income tax under Section 24 of
the Tax Code. It is the position of the Commissioner, in the present case, that the
partnership known as "Hacienda Fortuna" is exempt from the payment of corporate
income tax due only on income received from July 14, 1949, the date of the registration
of its articles of general co-partnership. In other words, from January 1 to July 13, 1949
the partnership "Hacienda Fortuna" should be considered still an unregistered co-
partnership-for the purposes of the assessment of the corporate income tax,
notwithstanding the fact that paragraph 14 of its articles of co-partnership provides that
the partnership agreement should retroact to January 1, 1949. Thus, as stated at the
earlier part of this decision, the Commissioner instructed the provincial revenue agent
in Negros Occidental to determine the net income of the "Hacienda Fortuna" for the
period from January 1 to July 13, 1949, said agent having reported that the net income
of the partnership during that period amounted to P131,477.20, and that the corporate
income tax due on that net income was P15,777.26. It is this amount of P15,777.26
which the Commissioner insists in collecting from the respondents.

On the other hand, the respondents contend that prior to July 14, 1949 they were
operating the sugar plantation that they bought from their parents under a system of
co-ownership, and not as a partnership, so that they were not under obligation to pay
the corporate income tax assessed by the Commissioner on the alleged income of the
partnership "Hacienda Fortuna" from January 1 to July 13, 1949. The respondents
further contend that even assuming that they were operating the sugar plantation as a
partnership the registration of the articles of general co-partnership on July 14, 1949
had operated to exempt said partnership from corporate income tax on its net income
during the entire taxable year, from January 1 to December 31, 1949.

The Court of Tax Appeals made a finding that the respondents had actually operated
the "Hacienda Fortuna" as a general partnership from January 1, 1949, and that when
its articles of general co-partnership were registered on July 14, 1949 that registration
had the effect of giving the partnership the status of a registered co-partnership which
places it under the purview of Section 24 of the Tax Code as exempt from the payment
of corporate income tax during the entire taxable year of 1949. The pertinent portion of
the decision of the Court of Tax Appeals reads as follows: jgc:chanrobles.com.ph

"Although petitioners acquired undivided shares in the Hacienda Fortuna, from the
evidence of record it appears to us that the intention of the parties was to form, and
that they did operate the hacienda as, a general partnership. That this was their
intention is confirmed by the fact that they actually organized a general co-partnership
on July 11, 1949. And the Articles of General Co-partnership which was registered on
July 14, 1949 provides that the agreement shall be retroactive as of January 1, 1949.
The sole question to be decided is, therefore, whether the partnership is entitled to
exemption for the entire year of 1949, or whether it is taxable as an unregistered
partnership before its articles of partnership was actually registered.

"Section 24 of the Revenue Code imposes an income tax on corporations. The term
`corporation’ includes unregistered general co-partnerships. (Sec. 84 [b]). Section 26
provides that persons carrying on business in general co-partnership duly registered in
the mercantile registry shall be liable for income tax only in their individual capacity.
There is no specific provision of law or regulations as to the date of commencement of
the exemption of a registered general co-partnership. We find, however, that the
Bureau of Internal Revenue as far back as 1924, issued a ruling which was published in
the Official Gazette to the effect that `the status or form of organization of a
partnership at the end of the taxable year will determine its income tax liability for that
year.’ We quote: jgc:chanrobles.com.ph

"A & S Co. had been paying income tax for years as nonregistered partnership. On July,
1922, it registered its partnership agreement. Should it file a return for the period from
January to July of the year of its registration?

`HELD: That it need not do co. For purposes of the Income Tax Law, the status or form
of organization of a partnership at the end of the taxable year will determine its income
tax liability for that year. (September 4, 1924.)’ (Ruling No. 30, 22 O.G. 3451) "4

"Ruling No. 30 of the Bureau of Internal Revenue, dated September 4, 1924, does not
appear to have been revoked or even revised or amended. In fact, the same opinion
was reiterated in a ruling dated November 4, 1948. Again, we quote: chanrob1es virtual 1aw library

‘In answer to your letter dated October 15, 1948, requesting opinion whether or not a
commercial partnership, intended to be registered as evidenced by the partnership
agreement formally executed by the parties at the time it commenced to do business,
but which was not registered until after the lapse of several months, should be required
to file two (2) separate returns — one corresponding to the unregistered period and
another for the period after its registration, you are informed that, if a general
partnership registers its articles of partnership within the same taxable year, which may
either be calendar or fiscal year, in which it commenced business, it is required to file
only one income tax return covering its income for the period from the date of its
business operation to the end of the taxable year. However, where the registration
takes place after the end of the taxable year in which the partnership commenced
business, separate returns should be filed, one corresponding to the taxable year in
which the partnership did business as an unregistered partnership, and another
covering the taxable year in which it operated as a registered partnership.’ (B. I. R.
ruling, dated November 5, 1948, contained in a letter addressed to Provincial Examiner
Amante Astudillo, Surigao, Surigao.)’

"The rule enunciated above that the status of a general partnership as a registered or
unregistered general co-partnership at the end of the taxable year determines its
liability or exemption from income tax for the entire taxable year is a sound rule. It
does not run counter to any specific provision of law or regulation. On the other hand, it
appears to us to be in harmony with the intent and purpose of the law to grant
exemption to registered general co-partnership and to tax the partners only in their
individual capacity. We note that when the attention of respondent was called to the
existence of the Bureau’s ruling of November 5, 1948, he merely stated that he was not
inclined to reconsider his decision and would prefer `to have a judicial pronouncement
on the matter.’ (See p. 222, B.I.R. records.)

"Moreover, the old Income Tax Law (Act No. 2833, as amended) contained the same
provisions regarding the exemption from income tax of registered general co-
partnerships as the Prevent law. The practice of the Bureau of Internal Revenue
exempting general co-partnerships from income tax for the entire year so long as it was
registered within that year continued to be the prevailing rule in 1939, when the
National Internal Revenue Code, Commonwealth Act No. 466, was enacted. The law
governing general co-partnership contained in the old law was merely reenacted in the
new Code. It is reasonable to suppose that a long standing administrative practice, if
contrary to the intention of the legislature, would be specifically corrected by it. (1
USTC, Par. 259; see also 1 USTC, Par. 293). That Congress merely reenacted the old
law in the face of the long continued practice of the Bureau of Internal Revenue which it
published in the Official Gazette is a strong indication that such practice has received
congressional approval. We find no justification to deviate from the rule." cralaw virtua1aw library

We are in accord with the views expressed by the Court of Tax Appeals in the afore-
quoted portion of its decision. The Bureau of Internal Revenue, in the exercise of its
powers relative to the collection of internal revenue taxes, fees and charges, may
make, and has in fact issued, administrative rules and rulings in connection with the
enforcement of the provisions of the National Internal Revenue Code. There are rulings
of the Bureau of Internal Revenue where the "status-at-the-end-of-the-taxable-year"
rule has been applied in determining the taxpayer’s income tax liability during the
taxable year. In the book, "Rules and Rulings on the Philippine Income Tax", a
compilation by Francisco Tantuico, Sr. and Francisco Tantuico, Jr. of the rulings of the
Bureau of Internal Revenue, We read: 5

"A child born or adopted during the first fifteen days of October, if wholly dependent
upon the head of the family for support on December 31 of the year, entitles the latter
to an additional exemption of P600.00 (amount amended) in accordance with
subsections (c) and (d) of section 23 of the National Internal Revenue Code (Ruling of
February 8, 1952)." [p. 65]

"A child who becomes 21 years of age during the last 16 days of June, unless incapable
of support for being mentally or physically defective, does not entitle his parents to any
additional exemption (Rule of February 8, 1952)." [pages 65-66]

"A father is entitled to P600.00 (amount amended) additional exemption for his child
born on December 81 of the taxable year, but not for a child who became of age on
September 15, unless the latter is incapable of self-support because he is physically or
mentally defective. (Ruling of July 29, 1948)." [page 66]

"A person who married during the first fifteen days of July, if not legally separated from
his spouse on December 31 of that year is granted the full exemption of P3,000 for said
year. (Ruling of February 8, 1952)." [page 58]

"Under Section 23 of the National Internal Revenue Code, as amended by Republic Act
590, a person who marries on December 31 is entitled to the full exemption of
P3,000.00 for said calendar year; and a child born or legally adopted on December 31,
wholly dependent upon the taxpayer can be claimed as an additional exemption of P600
(amount amended) for the said year. (BIR Ruling of June 19, 1952, p. 58). [page 58]

The Court of Tax Appeals, in its decision, has pointed out that as early as 1924 the
Bureau of Internal Revenue had applied the "status-at-the-end-of-the-taxable-year"
rule in determining the income tax liability of a partnership, such that a partnership is
considered a registered partnership for the entire taxable year even if its articles of co-
partnership are registered only at the middle of the taxable year, or in the last month of
the taxable year.

We agree with the Court of Tax Appeals that the ruling is a sound one, and it is in
consonance with the purpose of the law in requiring the registration of partnerships.
The policy of the law is to encourage persons doing business under a partnership
agreement to have the partnership agreement, or the articles of co-partnership,
registered in the mercantile registry, so that the public may know who the real partners
of the partnership are, the capital stock of the partnership, the interest or contribution
of each partner in the capital stock, the proportionate share of each partner in the
profits, and the earnings or salaries of the partner or partners who render service for
the partnership. 6 It is precisely in the share of the profits and the salaries or wages
that the partners would receive that the government is interested in, because it is on
these incomes that the assessment of the income tax is based. It can happen that the
profits realized by an unregistered partnership may be distributed to other persons in
addition to those who appear to the public as the partners. The government may not be
able to trace exactly to whom the profits of an unregistered partnership go, nor can the
government determine the precise participation of the apparent partners in the profits
of the partnership. It is for this reason that the government imposes a corporate
income tax against an unregistered partnership as an entity, and an individual income
tax against the apparent members thereof. But once the partnership is duly registered,
the names of all the partners are known, the proportional interest of the partners in the
business of the partnership is known, and the government can very well assess the
income tax on the respective income of the partners whose names appear in the
articles of co-partnership. Once the partnership is registered its operation during the
taxable year may be ascertained in all matters regarding its management, its
expenditures, its earnings, and the participation of the partners in the net profits. If it
can be ascertained that the profits of the partnership have actually been given, or
credited, to the partners, then there is no reason why the partnership should be made
to pay a corporate income tax on the profits realized by the partnership, and at the
same time assess an income tax on the income that the partners had received from the
partnership. And so, We believe that it is a fair and sound application of Section 24 of
the tax code that once a partnership is registered during a taxable year that partnership
should be considered as registered partnership exempt from the payment of corporate
income tax during that taxable year, and only the partners thereof should be made to
pay income tax on the profits of the partnership that were divided among them. Section
26 of the tax code provides as follows:jgc:chanrobles.com.ph

"SEC. 26. Tax liability of members of duly registered co-partnership. — Persons

carrying on business in general co-partnership (compañia colectiva) duly registered in
the mercantile registry, or those exercising a common profession in general
partnership, shall be liable for income tan only in their individual capacity, and the
share in the profits of the registered general co-partnership (compañia colectiva) or in
the general professional partnership to which any taxable partner should be entitled,
whether distributed or otherwise shall be returned for taxation and the tax paid in
accordance with the provisions of this title." cralaw virtua1aw library

It may thus be said that a premium is given to a partnership that is registered by

exempting it from the payment of corporate income tax, and making only the individual
partners pay income tax on the basis of their respective shares in the partnership
profits. On the other hand, the partnership that is not registered is being penalized by
making it pay corporate income tax on the profits it realizes during a taxable year and
at the same time making the partners thereof pay their individual income tax based on
their respective shares in the profits of the partnership. In other words, there is double
assessment of income tax against the partners of the unregistered partnership, but only
one assessment against the partners of registered partnership.

The exclusion of a registered partnership from the entities subject to the payment of
corporate income tax under Section 24 of the tax code should be made to cover the
entire taxable year, regardless of whether the registration takes place at the middle, or
towards the last days, of the taxable year. This is so because, after all, the taxable
status of the taxpayer, for the purposes of the payment of income tax, is determined as
of the end of the taxable year, and the income tax is collected after the end of the
taxable year. Since it is the policy of the government to encourage a partnership to
register its articles of co-partnership in order that the government can better ascertain
the profits of the partnership and the distribution of said profits among the partners,
this benefit of exclusion from paying corporate income tax arising from registration
should be liberally extended to registered, or registering, partnerships in order that the
purpose of the government may be attained. The provision of Section 24 of the tax
code excluding "registered general co-partnership" from the payment of corporate
income tax is not an exemption clause but a classification clause which must be
construed liberally in favor of the taxpayer.

"A classification statute, or one which specifies the persons or property subject and not
subject to a tax, is not an exemption statute and the general rule . . . that a tax statute
will be construed in favor of the taxpayer applies (84 C.J S., Section 277, page 443)

"Any doubt as to the person or property intended to be included in a tax statute will be
resolved in favor of the taxpayer. (51 Am, Jur., Section 409, page 433)

Once the articles of co-partnership are registered, the collecting agents of the
government can very well trace the operations of the partnership during the period of
the taxable year prior to the date of registration — that is, if the partnership had
operated as an unregistered partnership prior to the date of its registration, and require
the partners to declare the true income that they derived from the operations of the
partnership during the period prior to the date of registration and after the date of
registration.

We hold that the administrative construction of Section 24 of the tax code made by the
Bureau of Internal Revenue as early as 1924, reiterated in 1948, as pointed out by the
Court of Tax Appeals, being of long standing, not shown to be contrary to law, and not
having been modified up to the time when the case at bar came up, should be upheld.
Considering that most of our tax laws are patterned after the tax laws of the United
States of America, the following authority is pertinent:jgc:chanrobles.com.ph

"Considerable weight is given to the Treasury Department’s administrative construction

of a tax provision and to its regulations. The Supreme Court at one time said:
`Treasury regulations and interpretations long continued without substantial change,
applied to unamended or substantially re-enacted statutes are deemed to have received
congressional approval and have the effect of law’ . . ." cralaw virtua1aw library

"Treasury Department rules and regulations will not be disturbed except for cogent
reasons or unless contrary to the statute or exceeding departmental authority, and they
are binding on the Commissioner and taxpayer alike. When a particular construction
has been operative over a long period and has acquired the sanction of usage it is
entitled to `respectful consideration’ specially if rights have been adjusted and
determined by it for many years, as a change may result in inequitable treatment of
similarly situated taxpayers and may occur after many persons have acted upon the
faith of the regulation. The rule is also, perhaps, particularly applicable where a change
in the administrative construction would produce great administrative inconvenience or
irregularity. Particular weight will be given to an administrative construction where
much latitude for discretion has been given to the Treasury. Where the basic provision
of the Code is couched in general language an interpretative regulation is appropriate.
Where the statutory provision is ambiguous the Supreme Court has sustained the
administrative construction particularly where the Congress did not interfere with the
interpretation claimed by the administrative agency." ("The Law of Federal Income
Taxation" by Jacob Mertens, Jr., Volume 1, 1962 Revision, Section 820, pages 32-35).

WHEREFORE, the decision of the Court of Tax Appeals appealed from is affirmed. No
pronouncement as to costs. It is so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Fernando and

Teehankee, JJ., concur.

Barredo and Villamor, JJ., did not take part