EN BANC
G.R. No. L-25532 February 28, 1969COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J.
Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein
respondent William J. Suter as the general partner, and Julia Spirig and
Gustav Carlson, as the limited partners. The partners contributed,
respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership.
On 1 October 1947, the limited partnership was registered with the
Securities and Exchange Commission. The firm engaged, among other
activities, in the importation, marketing, distribution and operation of
automatic phonographs, radios, television sets and amusement machines,
their parts and accessories. It had an office and held itself out as a
limited partnership, handling and carrying merchandise, using invoices,
bills and letterheads bearing its trade-name, maintaining its own books
of accounts and bank accounts, and had a quota allocation with the
Central Bank.
In 1948, however, general partner Suter and
limited partner Spirig got married and, thereafter, on 18 December
1948, limited partner Carlson sold his share in the partnership to Suter
and his wife. The sale was duly recorded with the Securities and
Exchange Commission on 20 December 1948.
The limited partnership had been filing its
income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the
latter, in an assessment, consolidated the income of the firm and the
individual incomes of the partners-spouses Suter and Spirig resulting in
a determination of a deficiency income tax against respondent Suter in
the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment,
and requested its cancellation and withdrawal, as not in accordance with
law, but his request was denied. Unable to secure a reconsideration, he
appealed to the Court of Tax Appeals, which court, after trial,
rendered a decision, on 11 November 1965, reversing that of the
Commissioner of Internal Revenue.
The present case is a petition for review,
filed by the Commissioner of Internal Revenue, of the tax court's
aforesaid decision. It raises these issues:
(a) Whether or not the corporate
personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William
J. Suter and his wife, Julia Spirig Suter actually formed a single
taxable unit; and
(b) Whether or not the partnership was
dissolved after the marriage of the partners, respondent William J.
Suter and Julia Spirig Suter and the subsequent sale to them by the
remaining partner, Gustav Carlson, of his participation of P2,000.00 in
the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner
of Internal Revenue, is that the marriage of Suter and Spirig and their
subsequent acquisition of the interests of remaining partner Carlson in
the partnership dissolved the limited partnership, and if they did not,
the fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business; consequently the income tax
return of respondent Suter for the years in question should have
included his and his wife's individual incomes and that of the limited
partnership, in accordance with Section 45 (d) of the National Internal
Revenue Code, which provides as follows:
(d) Husband and wife. — In the case
of married persons, whether citizens, residents or non-residents, only
one consolidated return for the taxable year shall be filed by either
spouse to cover the income of both spouses; ....
In refutation of the foregoing, respondent
Suter maintains, as the Court of Tax Appeals held, that his marriage
with limited partner Spirig and their acquisition of Carlson's interests
in the partnership in 1948 is not a ground for dissolution of the
partnership, either in the Code of Commerce or in the New Civil Code,
and that since its juridical personality had not been affected and
since, as a limited partnership, as contra distinguished from a duly
registered general partnership, it is taxable on its income similarly
with corporations, Suter was not bound to include in his individual
return the income of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership,
William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of
law because of the marriage of the only general partner, William J.
Suter to the originally limited partner, Julia Spirig one year after the
partnership was organized is rested by the appellant upon the opinion
of now Senator Tolentino in Commentaries and Jurisprudence on Commercial
Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as
follows:
A husband and a wife may not enter into a contract of general
copartnership, because under the Civil Code, which applies in the
absence of express provision in the Code of Commerce, persons prohibited
from making donations to each other are prohibited from entering into universal
partnerships. (2 Echaverri 196) It follows that the marriage of
partners necessarily brings about the dissolution of a pre-existing
partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a universal partnership, but a particular one.
As appears from Articles 1674 and 1675 of the Spanish Civil Code, of
1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else "all that the partners may acquire by their industry or work during
the existence of the partnership". William J. Suter "Morcoin" Co., Ltd.
was not such a universal partnership, since the contributions of the
partners were fixed sums of money, P20,000.00 by William Suter and
P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter by Article 1677 of the
Civil Code of 1889.
The former Chief Justice of the Spanish
Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition
contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden
celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido,
nos inclinamos a la tesis permisiva de los contratos de sociedad
particular entre esposos, ya que ningun precepto de nuestro Codigo los
prohibe, y hay que estar a la norma general segun la que toda persona es
capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta
misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar
de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the
partners operate to dissolve it, such marriage not being one of the
causes provided for that purpose either by the Spanish Civil Code or the
Code of Commerce.
The appellant's view, that by the marriage
of both partners the company became a single proprietorship, is equally
erroneous. The capital contributions of partners William J. Suter and
Julia Spirig were separately owned and contributed by them before their
marriage; and after they were joined in wedlock, such contributions
remained their respective separate property under the Spanish Civil Code
(Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each
consort in William J. Suter "Morcoin" Co., Ltd. did not become common
property of both after their marriage in 1948.
It being a basic tenet of the Spanish and
Philippine law that the partnership has a juridical personality of its
own, distinct and separate from that of its partners (unlike American
and English law that does not recognize such separate juridical
personality), the bypassing of the existence of the limited partnership
as a taxpayer can only be done by ignoring or disregarding clear
statutory mandates and basic principles of our law. The limited
partnership's separate individuality makes it impossible to equate its
income with that of the component members. True, section 24 of the
Internal Revenue Code merges registered general co-partnerships (compañias colectivas)
with the personality of the individual partners for income tax
purposes. But this rule is exceptional in its disregard of a cardinal
tenet of our partnership laws, and can not be extended by mere
implication to limited partnerships.
The rulings cited by the petitioner
(Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77
Phil. 504) as authority for disregarding the fiction of legal
personality of the corporations involved therein are not applicable to
the present case. In the cited cases, the corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so would exempt the
limited partnership from income taxation but would throw the tax burden
upon the partners-spouses in their individual capacities. The
corporations, in the cases cited, merely served as business conduits or alter egos
of the stockholders, a factor that justified a disregard of their
corporate personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a mere business
conduit of the partner-spouses; it was organized for legitimate business
purposes; it conducted its own dealings with its customers prior to
appellee's marriage, and had been filing its own income tax returns as
such independent entity. The change in its membership, brought about by
the marriage of the partners and their subsequent acquisition of all
interest therein, is no ground for withdrawing the partnership from the
coverage of Section 24 of the tax code, requiring it to pay income tax.
As far as the records show, the partners did not enter into matrimony
and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business
conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
As the limited partnership under
consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to
overstretch the letter and intent of the law. In fact, it would even
conflict with what it specifically provides in its Section 24: for the
appellant Commissioner's stand results in equal treatment, tax wise, of a
general copartnership (compañia colectiva) and a limited
partnership, when the code plainly differentiates the two. Thus, the
code taxes the latter on its income, but not the former, because it is
in the case of compañias colectivas that the members, and not the
firm, are taxable in their individual capacities for any dividend or
share of the profit derived from the duly registered general partnership
(Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As
Amended, Vol. 1, pp. 88-89).lawphi1.nêt
But it is argued that the income of the
limited partnership is actually or constructively the income of the
spouses and forms part of the conjugal partnership of gains. This is not
wholly correct. As pointed out in Agapito vs. Molo 50 Phil. 779, and
People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits
of the wife's parapherna become conjugal only when no longer needed to
defray the expenses for the administration and preservation of the
paraphernal capital of the wife. Then again, the appellant's argument
erroneously confines itself to the question of the legal personality of
the limited partnership, which is not essential to the income taxability
of the partnership since the law taxes the income of even joint
accounts that have no personality of their own. 1 Appellant
is, likewise, mistaken in that it assumes that the conjugal partnership
of gains is a taxable unit, which it is not. What is taxable is the
"income of both spouses" (Section 45 [d] in their individual capacities.
Though the amount of income (income of the conjugal partnership vis-a-vis the
joint income of husband and wife) may be the same for a given taxable
year, their consequences would be different, as their contributions in
the business partnership are not the same.
The difference in tax rates between the
income of the limited partnership being consolidated with, and when
split from the income of the spouses, is not a justification for
requiring consolidation; the revenue code, as it presently stands, does
not authorize it, and even bars it by requiring the limited partnership
to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and Teehankee, JJ., concur.
Barredo, J., took no part.
FootnotesBarredo, J., took no part.
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