GR 17509; (January, 1970) (Digest)
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
On July 9, 1949, respondents Carlos Ledesma, Julieta Ledesma, and spouses Amparo Ledesma de Gustilo and Vicente Gustilo, Jr. purchased “Hacienda Fortuna” from their parents, acquiring equal one-third undivided portions. They took over sugar cane farming for the 1948-1949 crop year. The San Carlos Milling Co., Ltd. credited them separately with shares of the gross sugar production and issued separate quedans based on their individual quotas. They shared production expenses equally and reported their respective net profits from the hacienda in their individual income tax returns for 1949. On July 11, 1949, they organized a general co-partnership under the name “Hacienda Fortuna,” with articles of partnership registered on July 14, 1949. Paragraph 14 of the articles provided retroactive effect as of January 1, 1949. The Commissioner of Internal Revenue assessed corporate income tax against the partnership “Hacienda Fortuna” for the 1949 calendar year. The Commissioner later reduced the assessment to P15,777.26, covering the period from January 1 to July 13, 1949, on the theory that the partnership was exempt from corporate income tax only from the date of its registration (July 14, 1949). Respondents contested, arguing that from January 1 to July 13, 1949, they were merely co-owners, not an unregistered partnership subject to corporate tax. The Court of Tax Appeals held the assessment was not in accordance with law.
ISSUE
Whether the income derived by respondents from “Hacienda Fortuna” for the period January 1 to July 13, 1949, is subject to corporate income tax as income of an unregistered partnership.
RULING
No. The Supreme Court affirmed the decision of the Court of Tax Appeals. The Court held that the respondents, prior to the formal organization of their partnership on July 11, 1949, were merely co-owners of the hacienda. Their acts of sharing gross returns, having undivided shares in the property, and contributing money to pay expenses did not, by themselves, constitute a partnership. The essential element of a partnership—the intention to create a partnership—was absent before July 11, 1949. The partnership came into existence only upon the execution of the articles of co-partnership, and its registration on July 14, 1949, exempted it from corporate income tax under Section 24 of the National Internal Revenue Code. The retroactivity clause in the articles could not create a partnership retroactively for tax purposes. Therefore, the income for the period prior to the partnership’s existence was not subject to corporate income tax.