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G.R. No.

L-17509 January 30, 1970


COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO. JR. and AMPARO LEDESMA DE GUSTILO, respondents.

FACTS:
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.
Each of them acquired 1/3 undivided portion of the plantation.
Prior to the purchase, the sugar quota piculs was registered in the names of the vendors, Julio and Florentina. By virtue of the
purchase, the original plantation audit was cancelled, and during the sugar crop year 1948-1949 the said sugar quota was
transferred to, apportioned among, and separately registered in the names of, the respondents.
After their purchase of the plantation, respondents took over the sugar cane farming on the plantation beginning with the crop
year 1948-1949.
The respondents shared equally the expenses of production. 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
ITR 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."
The respondents organized themselves into a general co-partnership under the firm name "Hacienda Fortuna." The articles of
general co-partnership were registered in the commercial register of the office of the Register of Deeds on July 14, 1949.
Paragraph 14 of the articles of general partnership provides that the agreement shall have retroactive effect as of January 1,
1949.
The Commissioner assessed against the partnership "Hacienda Fortuna" corporate income tax for the calendar year 1949. 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, the Commissioner advised respondents that inasmuch as the articles of general co-partnership of the "Hacienda
Fortuna" were registered, the income realized by the partnership prior to the registration cannot be, exempt from the payment of
corporate income tax. In another letter, 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."
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.
Respondents wrote a letter to the Commissioner asking for the reconsideration of his ruling, 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.
The Provincial Fiscal, upon the request of the Commissioner, filed a complaint against respondents for the collection of the
alleged income tax assessed against the "Hacienda Fortuna" in the CFI. However, the CFI dismissed the case.
In a petition for review, the CTA 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 CTA, therefore, reversed the rulings of the CIR as to the assessment. Hence, this appeal.

Petitioner: 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. The partnership 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.

Respondents: Prior to July 14, 1949 they were operating the sugar plantation 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 the
registration of the articles of general co-partnership 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.

ISSUE: WON the partnership known as "Hacienda Fortuna" which was organized by respondents on July 11, 1949, whose
articles of general 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

RULING:
The CTA has pointed out that as early as 1924 the BIR 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.
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 partnership, registered in the mercantile registry, so that the public may know who the real partners 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.
It is 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. 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.
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 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 partner, 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).
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.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versus- FILINVEST DEVELOPMENT CORPORATION, respondent
G. R. No. 163653 July 19, 2011

FACTS:
On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of
the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate
development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and
FAI.
FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the
aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling, finding that the exchange is among those
contemplated under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC)[4] which provides that (n)o gain or loss
shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as
a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said
corporation." On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its
affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI)
FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests
and compromise penalties.
The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it
executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the
arms-length interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates
Having submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate Division,
FDC and FAI filed a letter requesting an early resolution of their request for reconsideration/protest on the ground that the 180
days prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000.
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest
within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA)
pursuant to Section 228 of the 1997 NIRC. The petition alleged, among other matters, that as previously opined in BIR Ruling, no
taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further
control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical interests on
the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of
a stipulation to the effect; that not being promissory notes or certificates of obligations, the instructional letters as well as the cash
and journal vouchers evidencing said cash advances were not subject to documentary stamp taxes; and, that no income tax may
be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC
and FAC both prayed that the subject assessments for deficiency income and documentary stamp taxes for the years 1996 and
1997 be cancelled and annulled.
The CIR filed its answer, claiming that the transfer of property in question should not be considered tax free since, with the
resultant diminution of its shares in FLI, FDC did not gain further control of said corporation. Likewise calling attention to the fact
that the cash advances FDC extended to its affiliates were interest free despite the interest bearing loans it obtained from
banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section
179 (b) and (c), gave him "the power to allocate, distribute or apportion income or deductions between or among such
organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp
taxes on the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section 180 of
the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether
or not they are evidenced by a formal agreement or by mere office memo.

ISSUES:
1. W/N the advances extended by respondent to its affiliates are subject to income tax – NO.
2. W/N the exchange of shares of stock for property among FDC, FAI and FLI met all the requirements for the non­recognition of
taxable gain under sec 34 (c) (2) of the old NIRC (now sec 40 (c) (2) (c) of the NIRC) – YES.
3. W/N the letters of instruction or cash vouchers extended by FDC to its affiliates are deemed loan agreements subject to DST
under sec 180 of the NIRC – YES.
4. W/N the gain on dilution as a result of the increase in the value of FDC’s shareholdings is taxable – NO.
RULING:
Theoretical Interest Rates (for the advances extended)
Sec 43 of the 1993 NIRC provides that, “(i)n any case of 2 or more organizations, trades or businesses (whether
or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by
the same interests, the CIR is authorized to distribute, apportion or allocate gross income or deductions between or among such
organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.”

It may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among
controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as
the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length
with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes.

Despite the broad parameters provided, the power to impute "theoretical interests" to the controlled taxpayer's transactions is not
included. There must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the
item of gross income sought to be distributed, apportioned or allocated by the CIR.
There is no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR.

Regarding the Deed of Exchange


• Sec 34 (c) (2) of the 1993 NIRC:
o Sec. 34. Determination of amount of and recognition of gain or loss.­
(c) Exception – x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange
for shares of stock in such corporation of which as a result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be considered as
issued in return of property.

Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty­one
percent of the total voting power of classes of stocks entitled to one vote" under Sec 34 (c) (6) [c] of the 1993 NIRC, the
exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax­free transaction under par 34 (c) (2) of the
same provision.

Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to
reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain
which resulted from the subject transfer.

Documentary Stamp Taxes


The instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates qualified
as loan agreements upon which DST may be imposed.
We find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency DST.

Dilution of Shares
No reversible error can, finally, be imputed against both the CTA and the CA for invalidating the deficiency income taxes FDC is
supposed to have incurred as a consequence of the dilution of its shares in FAC.
Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's
finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's
shareholdings in FAC which the CIR failed to establish.