Facts:
This case is an appeal of the CTA decision which reversed the assessment and decision of the Collector of Internal Revenue (CIR) assessing and demanding from respondents BatangasTranspo and Laguna Busthe amount of Php54,143.54 which represent deficiency income tax and compromise for the year 1946-1949. Pending then appeal to the CTA, the assessment was increased to P148,890.14.
Respondent bus companies are 2 distinct and separate corporations, engaged in the business of land transportation by means of motor busses and operating distinct and separate lines.
During the war, the two companies lost their respective businesses. Post-war, they were able to acquire56 auto busses from the US Army which they divided equally.Two years later, Martin Olsen resigned as manager and Joseph Benedict was appointed as Manager of both companies by their respective Board of Directors. According to Benedict, the purpose of the jointmanagement called “Joint Emergency Operation” was to economize in overhead expenses. At the end of each calendar year, all gross receipts and expenses of both companies are determined and the net profitwere divided 50-50 then transferred to the book of accounts of each company, and each company prepares its own income tax return from their 50% share.The CIR theorizes that the 2 companies pooled their resources in the establishment of the JointEmergency Operation thereby forming a joint venture. He believes that a corporation exists, distinct fromthe 2 respondent companies.The CTA held that the Joint Emergency Operation is not a corporation within the contemplation of the NIRC, much less a partnership, association or insurance company, and therefore was not subject to income tax separately and independently of respondent companies.
Issue:
Whether or not the two transportation companies involved are liable to the payment of income tax as acorporation on the theory that the joint emergency operation organized and operated by them is a corporation within the meaning of Sec 84 of the Revised Internal Revenue Code
Ruling:
Yes. although no legal personality may have been created by the Joint Emergency Operation, nevertheless said joint venture or joint management operated the business affairs of the 2 companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.
The Court ruled on this issue by citing the case ofEufemia Evangelista, et. al v. CIR – agency case. This involved the 3 sisters who borrowed from their father money which they invested inland and then improved upon and later sold. The sisters also hired their brother to oversee the buy-and-sell of land. Contrary to their claim that said operation was merely a co-ownership, theCourt ruled that considering the facts and circumstances surrounding the said case, the 3 sistershad purpose to engage in real estate transactions for monetary gain and then divide the profitsamong themselves, making them co-partners. When the Tax Code included “partnerships”among the entities subject to the tax on corporations, it must refer to organizations which arenot necessarily partnerships in the technical sense of the term, and that furthermore, said lawdefined the term "corporation" as including partnerships no matter how created or organized.
Further, from the standpoint of income tax law, the procedure and practice of the 2 buscompanies in determining the net income of each was arbitrary and unwarranted. After all, the 2companies operates in 2 different lines, in different provinces or territories, with differentequipment and personnel it cannot possibly be true and correct to say that the end of each year,the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax.Thus, the Court held that the Joint Emergency Operation or sole management or joint venture inthis case falls under the provisions of section 84 (b) of the Internal Revenue Code, andconsequently, it is liable to income tax provided for in section 24 of the same code.* But they were exempted from paying 25% surcharge for failure to file a tax return, because of their honest belief (based on advice of their attorneys and accountants) that they are not required to do so.
This case is an appeal of the CTA decision which reversed the assessment and decision of the Collector of Internal Revenue (CIR) assessing and demanding from respondents BatangasTranspo and Laguna Busthe amount of Php54,143.54 which represent deficiency income tax and compromise for the year 1946-1949. Pending then appeal to the CTA, the assessment was increased to P148,890.14.
Respondent bus companies are 2 distinct and separate corporations, engaged in the business of land transportation by means of motor busses and operating distinct and separate lines.
During the war, the two companies lost their respective businesses. Post-war, they were able to acquire56 auto busses from the US Army which they divided equally.Two years later, Martin Olsen resigned as manager and Joseph Benedict was appointed as Manager of both companies by their respective Board of Directors. According to Benedict, the purpose of the jointmanagement called “Joint Emergency Operation” was to economize in overhead expenses. At the end of each calendar year, all gross receipts and expenses of both companies are determined and the net profitwere divided 50-50 then transferred to the book of accounts of each company, and each company prepares its own income tax return from their 50% share.The CIR theorizes that the 2 companies pooled their resources in the establishment of the JointEmergency Operation thereby forming a joint venture. He believes that a corporation exists, distinct fromthe 2 respondent companies.The CTA held that the Joint Emergency Operation is not a corporation within the contemplation of the NIRC, much less a partnership, association or insurance company, and therefore was not subject to income tax separately and independently of respondent companies.
Issue:
Whether or not the two transportation companies involved are liable to the payment of income tax as acorporation on the theory that the joint emergency operation organized and operated by them is a corporation within the meaning of Sec 84 of the Revised Internal Revenue Code
Ruling:
Yes. although no legal personality may have been created by the Joint Emergency Operation, nevertheless said joint venture or joint management operated the business affairs of the 2 companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.
The Court ruled on this issue by citing the case ofEufemia Evangelista, et. al v. CIR – agency case. This involved the 3 sisters who borrowed from their father money which they invested inland and then improved upon and later sold. The sisters also hired their brother to oversee the buy-and-sell of land. Contrary to their claim that said operation was merely a co-ownership, theCourt ruled that considering the facts and circumstances surrounding the said case, the 3 sistershad purpose to engage in real estate transactions for monetary gain and then divide the profitsamong themselves, making them co-partners. When the Tax Code included “partnerships”among the entities subject to the tax on corporations, it must refer to organizations which arenot necessarily partnerships in the technical sense of the term, and that furthermore, said lawdefined the term "corporation" as including partnerships no matter how created or organized.
Further, from the standpoint of income tax law, the procedure and practice of the 2 buscompanies in determining the net income of each was arbitrary and unwarranted. After all, the 2companies operates in 2 different lines, in different provinces or territories, with differentequipment and personnel it cannot possibly be true and correct to say that the end of each year,the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax.Thus, the Court held that the Joint Emergency Operation or sole management or joint venture inthis case falls under the provisions of section 84 (b) of the Internal Revenue Code, andconsequently, it is liable to income tax provided for in section 24 of the same code.* But they were exempted from paying 25% surcharge for failure to file a tax return, because of their honest belief (based on advice of their attorneys and accountants) that they are not required to do so.
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