1_ANTERO M. SISON, JR.
, petitioner, extensions were granted the Office of the Solicitor General, was filed on
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue;
ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue;
TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue;
MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman,
Commissioner on Audit, and CESAR E. A. VIRATA, Minister of
Finance, respondents.
G.R. No. L-59431 July 25, 1984
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or
prohibition proceeding 1 on the validity of Section I of Batas Pambansa
Blg. 135 depends upon a showing of its constitutional infirmity. The
assailed provision further amends Section 21 of the National Internal
Revenue Code of 1977, which provides for rates of tax on citizens or
residents on (a) taxable compensation income, (b) taxable net income, (c)
royalties, prizes, and other winnings, (d) interest from bank deposits and
yield or any other monetary benefit from deposit substitutes and from trust
fund and similar arrangements, (e) dividends and share of individual
partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would
be unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-visthose
which are imposed upon fixed income or salaried individual taxpayers. 4 He
characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a
transgression of both the equal protection and due process clauses 6 of the
Constitution as well as of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file
an answer within 10 days from notice. Such an answer, after two
May 28, 1982. 8The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the
part of the petitioner, the truth [for them] being those stated [in their]
Special and Affirmative Defenses." 9 The answer then affirmed: "Batas
Pambansa Big. 135 is a valid exercise of the State's power to tax. The
authorities and cases cited while correctly quoted or paraghraph do not
support petitioner's stand." 10 The prayer is for the dismissal of the
petition for lack of merit.
This Court finds such a plea more than justified. The petition must be
dismissed.
1. It is manifest that the field of state activity has assumed a much wider
scope, The reason was so clearly set forth by retired Chief Justice
Makalintal thus: "The areas which used to be left to private enterprise and
initiative and which the government was called upon to enter optionally,
and only 'because it was better equipped to administer for the public
welfare than is any private individual or group of individuals,' continue to
lose their well-defined boundaries and to be absorbed within activities that
the government must undertake in its sovereign capacity if it is to meet the
increasing social challenges of the times." 11 Hence the need for more
revenues. The power to tax, an inherent prerogative, has to be availed of to
assure the performance of vital state functions. It is the source of the bulk
of public funds. To praphrase a recent decision, taxes being the lifeblood
of the government, their prompt and certain availability is of the
essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an
attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the
power to tax is not unconfined. There are restrictions. The Constitution
sets forth such limits . Adversely affecting as it does properly rights, both
the due process and equal protection clauses inay properly be invoked, all
petitioner does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a
separate opinion in Graves v. New York, 15 Justice Frankfurter, after
Page 1 of 14
referring to it as an 1, unfortunate remark characterized it as "a flourish of
rhetoric [attributable to] the intellectual fashion of the times following] a
free use of absolutes." 16 This is merely to emphasize that it is riot and
there cannot be such a constitutional mandate. Justice Frankfurter could
rightfully conclude: "The web of unreality spun from Marshall's famous
dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in
the Philippines.
3. This Court then is left with no choice. The Constitution as the
fundamental law overrides any legislative or executive, act that runs
counter to it. In any case therefore where it can be demonstrated that the
challenged statutory provision — as petitioner here alleges — fails to abide
by its command, then this Court must so declare and adjudge it null. The
injury thus is centered on the question of whether the imposition of a
higher tax rate on taxable net income derived from business or profession
than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here. does not suffice. There must be a
factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void or its face, he has
not made out a case. This is merely to adhere to the authoritative doctrine
that were the due process and equal protection clauses are invoked,
considering that they arc not fixed rules but rather broad standards, there
is a need for of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must
prevail. 18
5. It is undoubted that the due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty
of this Court to say that such an arbitrary act amounted to the exercise of
an authority not conferred. That properly calls for the application of the
Holmes dictum. It has also been held that where the assailed tax measure
is beyond the jurisdiction of the state, or is not for a public purpose, or, in
case of a retroactive statute is so harsh and unreasonable, it is subject to
attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge
that there is a denial of this constitutional mandate whether the assailed
act is in the exercise of the lice power or the power of eminent domain is to
demonstrated that the governmental act assailed, far from being inspired
by the attainment of the common weal was prompted by the spirit of
hostility, or at the very least, discrimination that finds no support in reason.
It suffices then that the laws operate equally and uniformly on all persons
under similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the privileges
conferred and the liabilities imposed. Favoritism and undue preference
cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumtances which if not Identical
are analogous. If law be looked upon in terms of burden or charges, those
that fall within a class should be treated in the same fashion, whatever
restrictions cast on some in the group equally binding on the rest." 20 That
same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of
approximating the Ideal of the laws benefits being available to all and the
affairs of men being governed by that serene and impartial uniformity,
which is of the very essence of the Idea of law. There is, however, wisdom,
as well as realism in these words of Justice Frankfurter: "The equality at
which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws
are not abstract propositions. They do not relate to abstract units A, B and
C, but are expressions of policy arising out of specific difficulties, address
to the attainment of specific ends by the use of specific remedies. The
Constitution does not require things which are different in fact or opinion
to be treated in law as though they were the same." 21 Hence the constant
reiteration of the view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this
Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result
from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation.'" 23
Page 2 of 14
7. Petitioner likewise invoked the kindred concept of uniformity. According Batasang Pambansa to adopt the gross system of income taxation to
to the Constitution: "The rule of taxation shag be uniform and compensation income, while continuing the system of net income taxation
equitable." 24 This requirement is met according to Justice Laurel as regards professional and business income.
in Philippine Trust Company v. Yatco,25 decided in 1940, when the tax
"operates with the same force and effect in every place where the subject 9. Nothing can be clearer, therefore, than that the petition is without merit,
may be found. " 26 He likewise added: "The rule of uniformity does not call considering the (1) lack of factual foundation to show the arbitrary
for perfect uniformity or perfect equality, because this is hardly character of the assailed provision; 31 (2) the force of controlling doctrines
attainable." 27 The problem of classification did not present itself in that on due process, equal protection, and uniformity in taxation and (3) the
case. It did not arise until nine years later, when the Supreme Court held: reasonableness of the distinction between compensation and taxable net
"Equality and uniformity in taxation means that all taxable articles or kinds income of professionals and businessman certainly not a suspect
of property of the same class shall be taxed at the same rate. The taxing classification,
power has the authority to make reasonable and natural classifications for
purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the WHEREFORE, the petition is dismissed. Costs against petitioner.
differentiation" complained of "conforms to the practical dictates of justice
and equity" it "is not discriminatory within the meaning of this clause and Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova,
is therefore uniform." 29 There is quite a similarity then to the standard of Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur.
equal protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation."30 Teehankee, J., concurs in the result.
8. Further on this point. Apparently, what misled petitioner is his failure to Plana, J., took no part.
take into consideration the distinction between a tax rate and a tax base.
There is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the
applicable tax rate. Taxpayers may be classified into different categories.
To repeat, it. is enough that the classification must rest upon substantial
distinctions that make real differences. In the case of the gross income
taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are e
not entitled to make deductions for income tax purposes because they are
in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It
would not be just then to disregard the disparities by giving all of them
zero deduction and indiscriminately impose on all alike the same tax rates
on the basis of gross income. There is ample justification then for the
Page 3 of 14
2_MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
G.R. No. 78133 October 18, 1988
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 tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3)
parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970. Petitioners realized a net profit in the sale made
in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes
were paid by petitioners 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, petitioners were assessed and required to pay a total
amount of P107,101.70 as alleged deficiency corporate income taxes for
the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979
asserting that they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed
petitioners that in the years 1968 and 1970, petitioners as co-owners in the
real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its income was
subject to the taxes prescribed under Section 24, both of the National
Internal Revenue Code 1 that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the
availment of tax amnesty under P.D. No. 23, as amended, by petitioners
relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership. Hence,
the petitioners 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 Case No. 3045. In due course, the respondent
court by a majority decision of March 30, 1987, 2 affirmed the decision and
action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an
unregistered partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that
imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin
stated that considering the circumstances 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 partnership which 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 the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP SUBJECT
TO CORPORATE INCOME TAX, AND THAT THE BURDEN
OF OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
Page 4 of 14
 B. IN MAKING A FINDING, SOLELY ON THE BASIS OF
ISOLATED SALE TRANSACTIONS, THAT AN
UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW
THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP
EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO
THE EVANGELISTA CASE AND THEREFORE SHOULD BE
DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT
RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER
TAXES FOR THE PERIOD COVERED 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 own personal funds they used in buying several
real properties. They appointed their brother to manage their properties
with full power to lease, collect, rent, issue receipts, etc. They had the real
properties rented 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, among
others, 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 corporations provided for in section 24 of
Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers'
fixed tax. With respect to the tax on corporations, the
issue hinges on the meaning of the terms corporation and
partnership as used in sections 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 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 (companies collectives), a tax
upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships,
no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not
include duly registered general co-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 contribute money, property, or industry to a
common fund, with the intention of dividing the profits
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 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 issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied
Page 5 of 14
that their purpose was to engage in real estate
transactions for 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 a property inherited by
them pro indiviso. They created it purposely. What is more
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 of transactions. 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 between each, particularly the last three
purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and
preservation of the aforementioned common fund or even
of the property acquired by petitioners in February, 1943.
In other words, one cannot but perceive a character of
habituality peculiar to business transactions engaged in
for purposes of gain.
3. The aforesaid lots were not devoted to residential
purposes or to other personal uses, of petitioners herein.
The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there
has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the
management of one person, namely, Simeon Evangelists,
with full power to lease, to collect rents, to issue receipts,
to bring 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 a corporation or business enterprise operated
for profit.
5. The foregoing conditions have existed for more than ten
(10) years, or, to be exact, 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 purpose in creating the set up
already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation
therefor.
Although, taken singly, they might not suffice to establish
the intent necessary to constitute a partnership, 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 were present in the cases cited by
petitioners 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 contribute money, property or industry to a common fund,
and that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to
be present 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 or even the
properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present.
Page 6 of 14
In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make
any additional or new purchase. The remaining three (3) parcels were sold
by them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of gain was
not present.
In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and
ended in 1970.
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 Civil Code 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, whether such co-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 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;
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 the use of the 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 not the persons sharing 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 elements constituting
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 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 certain real estate
for profit in the absence of other circumstances showing a
contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common
enterprise and agree to share the gross 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 no common
stock or capital, and no community of interest as principal
proprietors in the business itself which the proceeds
derived. (Elements of the 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 respect thereto; nor does an agreement to
share the profits and losses on the sale of land create 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 tract of 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
Page 7 of 14
 plaintiffs commission, no partnership existed as between
the three parties, whatever their relation may have been 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 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.-
Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create
a partnership between the owners, though they may use it
for the purpose of making gains; and they may, without
becoming partners, agree among themselves as to the
management, and use of such property and the
application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that
can be held liable for said deficiency corporate income tax, then petitioners
can be held individually liable as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the
respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED
and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.
Cruz, Griño-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.

The sharing of returns does not in itself establish a partnership whether or

not the persons sharing therein have a joint or common right or interest in
the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners,
and the freedom 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 no adequate basis to support the proposition that they
thereby formed an unregistered 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 the circumstances, they
cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner
proposes.

Page 8 of 14
3_RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U.
ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109289 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A.
CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and
BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE
and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 109446 October 3, 1994
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R.
109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in
G.R. No. 109289, the constitutionality of Republic Act No. 7496, also
commonly known as the Simplified Net Income Taxation Scheme ("SNIT"),
amending certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93,
promulgated by public respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued
implementation of the amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) — Every bill passed by the
Congress shall embrace only one subject which shall be
expressed in the title thereof.
Article VI, Section 28(1) — The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Article III, Section 1 — No person shall be deprived of . . .
property without due process of law, nor shall any person
be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations
No. 2-93, argue that public respondents have exceeded their rule-making
authority in applying SNIT to general professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in
compliance with the Court's directive, have filed their respective
memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of
Republic Act No. 7496, is a misnomer or, at least, deficient for being merely
entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in
G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation
Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending
Sections 21 and 29 of the National Internal Revenue Code,
as Amended.
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The pertinent provisions of Sections 21 and 29, so referred to, of the
National Internal Revenue Code, as now amended, provide:
Sec. 21. Tax on citizens or residents. —
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or
Professionals Engaged in the Practice of Profession. — A
tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable
year from all sources, other than income covered by
paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his
profession herein, determined in accordance with the
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000
Over P350,000 P61,600 + 30%
of excess over P350,000
Sec. 29. Deductions from gross income. — In computing
taxable income subject to tax under Sections 21(a), 24(a),
(b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of
this section: Provided, however, That in computing
taxable income subject to tax under Section 21 (f) in the
case of individuals engaged in business or practice of
profession, only the following direct costs shall be
allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in
the course of or pursuant to the business or practice of
their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited
relief organizations for the rehabilitation of calamity
stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans
contracted from accredited financial institutions which
must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs
are difficult to determine, a maximum of forty per cent
(40%) of their gross receipts shall be allowed as
deductions to answer for business or professional
expenses as the case may be.
On the basis of the above language of the law, it would be difficult to
accept petitioner's view that the amendatory law should be considered as
having now adopted a gross income, instead of as having still retained
the net income, taxation scheme. The allowance for deductible items, it is
true, may have significantly been reduced by the questioned law in
comparison with that which has prevailed prior to the amendment; limiting,
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however, allowable deductions from gross income is neither discordant
with, nor opposed to, the net income tax concept. The fact of the matter is
still that various deductions, which are by no means inconsequential,
continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a)
to prevent log-rolling legislation intended to unite the members of the
legislature who favor any one of unrelated subjects in support of the whole
act, (b) to avoid surprises or even fraud upon the legislature, and (c) to
fairly apprise the people, through such publications of its proceedings as
are usually made, of the subjects of legislation.1 The above objectives of
the fundamental law appear to us to have been sufficiently met. Anything
else would be to require a virtual compendium of the law which could not
have been the intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the
constitutional requirement that taxation "shall be uniform and equitable" in
that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on
corporations and partnerships. The contention clearly forgets, however,
that such a system of income taxation has long been the prevailing rule
even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be
treated alike both in privileges and liabilities (Juan Luna Subdivision vs.
Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long
as: (1) the standards that are used therefor are substantial and not
arbitrary, (2) the categorization is germane to achieve the legislative
purpose, (3) the law applies, all things being equal, to both present and
future conditions, and (4) the classification applies equally well to all those
belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA
3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is
the legislative intent to increasingly shift the income tax system towards
the schedular approach2 in the income taxation of individual taxpayers and
to maintain, by and large, the present global treatment3 on taxable
corporations. We certainly do not view this classification to be arbitrary
and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law,
illustrating, in the process, what he believes to be an imbalance between
the tax liabilities of those covered by the amendatory law and those who
are not. With the legislature primarily lies the discretion to determine the
nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. This court cannot freely delve into those
matters which, by constitutional fiat, rightly rest on legislative judgment. Of
course, where a tax measure becomes so unconscionable and unjust as to
amount to confiscation of property, courts will not hesitate to strike it
down, for, despite all its plenitude, the power to tax cannot override
constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this
controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law
declared unconstitutional for being violative of due process must perforce
fail. The due process clause may correctly be invoked only when there is a
clear contravention of inherent or constitutional limitations in the exercise
of the tax power. No such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the
question of whether or not public respondents have exceeded their
authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership — The general
professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496. Thus,
in determining the net profit of the partnership, only the
direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred
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 by partners in their individual capacities in the practice of
their profession which are not reimbursed or paid by the
partnership but are not considered as direct cost, are not
deductible from his gross income.
The real objection of petitioners is focused on the administrative
interpretation of public respondents that would apply SNIT to partners in
general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496,
also quoted by the Honorable Hernando B. Perez, minority floor leader of
the House of Representatives, in the latter's privilege speech by way of
commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would
like to get the correct impression of this
bill. Do we speak here of individuals who
are earning, I mean, who earn through
business enterprises and therefore,
should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker.
This does not apply to corporations. It
applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15
P.M.; Emphasis ours).
Other deliberations support this position,
to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I
hear the Gentleman from Batangas say
that this bill is intended to increase
collections as far as individuals are
concerned and to make collection of
taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal
Tamano on the Senate version of the SNITS, it is
categorically stated, thus:
This bill, Mr. President, is not applicable
to business corporations or to
partnerships; it is only with respect to
individuals and professionals. (Emphasis
ours)
The Court, first of all, should like to correct the apparent misconception
that general professional partnerships are subject to the payment of
income tax or that there is a difference in the tax treatment between
individuals engaged in business or in the practice of their respective
professions and partners in general professional partnerships. The fact of
the matter is that a general professional partnership, unlike an ordinary
business partnership (which is treated as a corporation for income tax
purposes and so subject to the corporate income tax), is not itself an
income taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares of partnership
profits. Section 23 of the Tax Code, which has not been amended at all by
Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional
partnerships. — (a) Persons exercising a common
profession in general partnership shall be liable for
income tax only in their individual capacity, and the share
in the net profits of the general professional partnership to
which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and
the tax paid in accordance with the provisions of this Title.
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 (b) In determining his distributive share in the net income
of the partnership, each partner —
(1) Shall take into account separately his
distributive share of the partnership's
income, gain, loss, deduction, or credit to
the extent provided by the pertinent
provisions of this Code, and
(2) Shall be deemed to have elected the
itemized deductions, unless he declares
his distributive share of the gross income
undiminished by his share of the
deductions.
There is, then and now, no distinction in income tax liability between a
person who practices his profession alone or individually and one who
does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive investment income,
under the present income tax system all individuals deriving income from
any source whatsoever are treated in almost invariably the same manner
and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were
to consider Republic Act No. 7496 as an entirely independent, not merely
as an amendatory, piece of legislation. The view can easily become
myopic, however, when the law is understood, as it should be, as only
forming part of, and subject to, the whole income tax concept and precepts
long obtaining under the National Internal Revenue Code. To elaborate a
little, the phrase "income taxpayers" is an all embracing term used in the
Tax Code, and it practically covers all persons who derive taxable income.
The law, in levying the tax, adopts the most comprehensive tax situs of
nationality and residence of the taxpayer (that renders citizens, regardless
of residence, and resident aliens subject to income tax liability on their
income from all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident aliens and
foreign corporations to income tax on their income from Philippine
sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as
to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt
partnerships." Ordinarily, partnerships, no matter how created or
organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law
assimilated to be within the context of, and so legally contemplated as,
corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended
or envisioned, as so correctly pointed out in the discussions in Congress
during its deliberations on Republic Act 7496, aforequoted, to cover
corporations and partnerships which are independently subject to the
payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for
income tax purposes. A general professional partnership is such an
example.4 Here, the partners themselves, not the partnership (although it is
still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity
computed on their respective and distributive shares of profits. In the
determination of the tax liability, a partner does so as an individual, and
there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more
than a mere mechanism or a flow-through entity in the generation of
income by, and the ultimate distribution of such income to, respectively,
each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely
confirmed, the above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable
to all individual income taxpayers on their non-compensation income.
There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant
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variance the income tax treatment of professionals who practice their
respective professions individually and of those who do it through a
general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on

costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo,

Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave.

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