1. Garrison v.

CA (1990)

Doctrine: An alien actually present in the Philippines who is not a mere transient or sojourner is
a resident of the Philippines for purposes of income tax.

Facts:
Petitioners, John Garrison, Frank Robertson, Robert Cathey, James Robertson, Felicitas de
Guzman and Edward McGurk (PETITIONERS) are US Citizens who entered the country
through the Philippine Immigration Act of 1940 and are employed in the US Naval Base in
Olongapo City. They earn no Philippine source income and it is also their intention to return to
the US as soon as their employment has ended.

The BIR sent notices to Petitioners stating that they did not file their Income Tax Returns (ITR)
for 1969. The BIR claimed that they were resident aliens and required them to file their returns.

Under then then Internal Revenue Code resident aliens may be taxed regardless of whether the
gross income was derived from Philippine sources.

Petitioners refused stating that they were not resident aliens but only special temporary visitors.
Hence, they were not required to file ITRs. They also claimed exemption by virtue of the RP-US
Military Bases Agreement.

Under Military Bases Agreement, a “national of the United States serving in or employed in the
Philippines in connection with construction, maintenance, operation or defense of the bases and
reside in the Philippines by reason only of such employment” is only liable for tax on Philippine
sources of income.

The Court of Appeals held that the Bases Agreement “speaks of exemption from the payment of
income tax, not from the filing of the income tax returns . . .”

Issue:
1. Whether or not Petitioners can be considered resident aliens.

2. Whether or not Petitioners are exempt from income tax under the RP-US Military Bases
Agreement.

3. Whether or not Petitioners must still file ITR notwithstanding the exemption.

Held:
1. Yes.

Revenue Regulations No. 2 Section 5 provides: “An alien actually present in the Philippines
who is not a mere transient or sojourner is a resident of the Philippines for purposes of
income tax.”Whether or not an alian is a transient or not is further determined by his: “intentions
with regards to the length and nature of his stay. A mere floating intention indefinite as to time,
to return to another country is not sufficient to constitute him as transient. If he lives in the
Philippines and has no definite intention as to his stay, he is a resident.” The Section 5 further
provides that if the alien is in the Philippines for a definite purpose which by its nature
may be promptly accomplished, he is considered a transient.However, if an extended stay
is necessary for him to accomplsh his purpose, he is considered a resident, “though it
may be his intention at all times to return to his domicile abroad when the purpose for which he
came has been consummated or abandoned.”

2. Yes.

Notwithstanding the fact that the Petitioners are resident aliens who are generally taxable, their
class is nonetheless exempt from paying taxes on income derived from their employment
in the naval base by virtue of the RP-US Military bases agreement.The Bases Agreement
identifies the persons NOT “liable to pay income tax in the Philippines except in regard to
income derived from Philippine sources or sources other than the US sources.” They are the
persons in whom concur the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction,maintenance, operation or
defense of the bases;
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from “U.S. Sources.”

3. Yes

Even though the petitioners are exempt from paying taxes from their employment in the Naval
Base, they must nevertheless file an ITR. The Supreme Court held that the filing of an ITR and
the payment of taxes are two distinct obligations. While income derived from employment
connected with the Naval Base is exempt, income from Philippine Sources is not. The
requirement of filing an ITR is so that the BIR can determine whether or not the US
National should be taxed. “The duty rests on the U.S. nationals concerned to invoke
and prima facie establish their tax-exempt status. It cannot simply be presumed that they
earned no income from any other sources than their employment in the American bases and are
therefore totally exempt from income tax.”
2. AFISCO Insurance Corporation vs CA
GR NO. 112675 January 25, 1999

Facts: The petitioners are 41 local non-life insurance corporations. Upon their issuance of Erection,
Machinery Breakdown, Boiler Explosion and Contractors All Risk insurance policies, the petitioners entered
into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the foreign insurance
corporation, Munchener Ruckversicherungs-Gesselschaft (Munich). The reinsurance treaties required
petitioners to form a pool which was created on the same day. Subsequently, the pool of insurers
submitted a financial statement and filed an “Information Return of Organization Exempt from Income Tax”
for the year ending in 1975, on the basis of which, it was assessed by the Commissioner of Internal
Revenue a deficiency in corporate taxes in the amount of P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.

The petitioners filed a protest which the Commissioner of Internal Revenue denied. The Court of Tax
Appeals affirmed this decision. Concurrently, the CA ruled that the pool of insurers was considered as a
partnership taxable as a corporation, and that the latter’s collection of premiums on behalf of its members
was taxable income.

Issue: Whether or not the pool is a partnership whose dividends are subject to tax.

Held: The SC sustained the ruling of the Court of Appeals that the pool is taxable as a corporation.

Section 24 of the NIRC, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon
the taxable net income received during each 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-partnership (compaias colectivas), general professional partnerships, private
educational institutions, and building and loan associations xxx.

In Evangelista v. Collector of Internal Revenue the Court held that Section 24 covered in its definition these
unregistered partnerships and even associations or joint accounts, which had no legal personalities apart
from their individual members. The Court said that the term partnership includes a syndicate, group, pool,
joint venture or other unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on.

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more
persons bind themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves. Its requisites are: (1) mutual contribution to a common stock, and (2)
a joint interest in the profits. Meanwhile, an association implies associates who enter into a joint enterprise
for the transaction of a business.

In the case, the companies entered into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty
with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of
the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. This common fund pays for the administration and operation expenses of the pool.

(2) The pool functions through an executive board, which resembles the board of directors of a corporation,
composed of one representative for each of the ceding companies.

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is
indispensable, beneficial and economically useful to the business of the insurance companies and Munich,
because without it they would not have received their premiums. The insurance companies share in the
business ceded to the pool and in the expenses according to a Rules of Distribution annexed to the Pool
Agreement. Profit motive or business is, therefore, the primordial reason for the pools formation. As aptly
found by the CTA: “The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact that of the pool being used in the transaction of business for profit. It is apparent, and
petitioners admit, that their association or coaction was indispensable to the transaction of the business. If
together they have conducted business, profit must have been the object as, indeed, profit was earned.
Though the profit was apportioned among the members, this is only a matter of consequence, as it implies
that profit actually resulted.”

Thus, the petition is DENIED and the Resolutions of the Court of Appeals are hereby AFFIRMED.
3. PASCUAL VS. CIR
GR NO. 78133 OCTOBER 18, 1988

FACTS:

The petitioners bought 5 parcels of land. The first 2 parcels of land were sold by the
petitioners in 1968 and the 3 parcels of land were sold in 1970. Capital gains tax was paid
by the petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said
years. In 1979, the respondent Commissioner informed petitioners that they have formed
an unregistered partnership and should be subject to corporate income tax. The CTA
affirmed the decision.

ISSUE:
Whether or not the petitioners created an unregistered partnership, and should be
liable for corporate income tax.

RULING:

NO. The court ruled that the petitioners have not created an unregistered
partnership because it is clear that there is co-ownership between the two. Under art. 1796
of the CC, a co-ownership or co possession does not itself establish a partnership whether
they do or not share any profits made by the property. Aside from the circumstance of
profit, the other elements must be present such as the clear intent to form a partnership. It
is evident that an isolated transaction whereby two or more persons contribute funds to
buy certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter did not thereby make them
partners. They shared in the gross profits as co- owners and paid their capital gains taxes
on their net profits and availed of the tax amnesty thereby. Under these circumstances,
they cannot be considered to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent commissioner proposes. In order to
constitute a partnership there must be: (a) An intent to form the same; (b) generally
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. In this case, there is no evidence that petitioners entered
into an agreement to contribute money, property or industry to a common fund, and that
they intended to divide the profits among themselves. Hence, the petitioners are relieved
from liability.
4. G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS

P. OBILLOS, brothers and sisters, petitioners 
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

AQUINO, J.:

Facts:

On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square meters of
located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children,
the petitioners, to enable them to build their residences. The Torrens titles issued to them showed
that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050. They
derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They treated the
profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income tax on
their shares thereof. The petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains
already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture The petitioners contested the assessments. Two Judges of the Tax
Court sustained the same. Hence, the instant appeal.

Issue:

Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable
for corporate tax.

Held:

The Supreme Court held that the petitioners should not be considered to have formed a
partnership just because they allegedly contributed P178,708.12 to buy the two lots, resold the
same and divided the profit among themselves. To regard so would result in oppressive taxation
and confirm the dictum that the power to tax involves the power to destroy. That eventuality
should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership
and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.

*Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right
or interest in any property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*

Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they
had no choice but to resell the same to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later.

They did not contribute or invest additional ' capital to increase or expand the properties, nor was
there an unmistakable intention to form partnership or joint venture.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.

All co-ownerships are not deemed unregistered partnership.—Co-Ownership who own

properties which produce income should not automatically be considered partners of an
unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise, would be to subject the income of all 

Co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does

not produce an income at all, it is not subject to any kind of income tax, whether the income tax
on individuals or the income tax on corporation.

As compared to other cases:

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in
these two cases had formed an unregistered partnership.
5. G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES vs. THE COMMISSIONER OF INTERNAL
REVENUE

FACTS

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T.
Oña and her five children. A case was filed for the settlement of her estate. Later, Lorenzo T.
Oña the surviving spouse was appointed administrator of the estate. Oña then submitted the
project of partition, which was approved by the Court. The Court appointed Oña to be guardian
of the persons and property of the 3 minor children. No attempt was made to divide the
properties which remained under the management of Oña who used said properties in business
by leasing or selling them and investing the income derived from them. As a result, petitioners'
properties and investments gradually increased. The children usually comes back to Oña for
payment of the taxes.

Respondent CIR decided that the petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax and was assessed. Petitioners protested against
the assessment and asked for reconsideration which was denied. They then filed a Petition for
review of the decision of the Court of Tax Appeals

ISSUE

W/N the petitioners formed an unregistered partnership and thus subject to corporate
taxes.

RULING

Yes. The petitioners formed an unregistered partnership.

The project of partition was approved in 1949 yet, the properties remained under the
management of Oña who used said properties in business by leasing or selling them and
investing the income derived from it which increased the value of the properties.

The corporate tax law states that in cases of inheritance, there should be a period when
the heirs can be considered as co-owners rather than unregistered co-partners.

For tax purposes, the co-ownership of inherited properties is automatically converted

into an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs in
proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding.
 From the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each of them to manage and dispose
of as exclusively his own without the intervention of the other heirs, therefore he becomes
liable individually for all taxes in connection with his share. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used with the
intent of making profit, even if no document or instrument were executed for that purpose, an
unregistered partnership is formed.
6.