COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CARLOS LEDESMA, JULIETA LEDESMA, VICENTE GUSTILO, JR., & AMPARO LEDESMA DE GUSTILO, RESPONDENTS.

Appeal by petitioner Commissioner of Internal Revenue —
hereinafter referred to as Commissioner — from the decision of the Court of
Tax Appeals, in its CTA Case No. 226, declaring as not in accordance with law
the assessment of corporate income tax made by said Commissioner in the sum of
P15,777.26 on the income of the co-partnership named “Hacienda
Fortuna” during the period from January 1 to July 13, 1949, of which
co-partnership herein respondents Carlos Ledesma, Julieta Ledesma, Amparo Ledesma de Gustilo and Vicente Gustilo, Jr.
are its members.^[1]

The undisputed facts, as shown in the record, are as follows:

On July 9, 1949 herein respondents, 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, with an area of approximately 1,202 hectares and with a sugar quota
of 79,211.17 piculs, which sugar quota was included
in the sale.  By virtue of the purchase,
Carlos Ledesma acquired the one-third undivided
portion of the plantation for the price of P144,043.00, Julieta
Ledesma acquired another one-third undivided portion
of the plantation for the same price; and respondents Amparo
Ledesma de Gustilo and
Vicente Gustilo, Jr. acquired the remaining one-third
undivided portion also for the same price. 
Prior to the purchase, the sugar quota of 79,211.17 piculs
was registered in the names of the vendors, Julio Ledesma
and Florentina de Ledesma,
under Plantation Audit No. 38-101 of the milling district of San Carlos Milling
Co., Ltd. By virtue of the purchase Plantation Audit No. 58-101 was cancelled,
and during the sugar crop year 1948-1949 the said sugar quota of 79,211.17 piculs was transferred to, apportioned among, and separately
registered in the names of the respondents, as follows: one-third to Vicente Gustilo, Jr. and Amparo Ledesma de Gustilo, under
Plantation Audit No. 38-246; one-third to Carlos Ledesma,
under Plantation Audit No. 38-247; and one-third to Julieta
Ledesma under Plantation Audit No. 38-248.

After their purchase of the plantation, herein res­pondents took
over the sugar cane farming on the plantation beginning with the crop year
1948-1949.  For the crop year 1948-1949
the San Carlos Milling Co. Ltd. credited the respondents with their shares in
the gross sugar production, as follows:

Gross
Production:

Planter’s
Share:

The respondents shared equally the expenses of pro­duction, on
the basis of their respective one-third undivided portion of the
plantation.  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
income tax returns for the year 1949 the respondents included as part of their
income their respective net profit derived from their individual sugar
production from the “Hacienda Fortuna”, as herein-above stated.

On July 11, 1949, the respondents organized themselves into a
general co-partnership, under the firm name “Hacienda Fortuna”, for
the “production of sugar cane for Conversion into sugar, palay and corn and such other products as may profitably be
produced on said hacienda, which products shall be sold or otherwise disposed
of for the purpose of realizing profit for the partnership”^[2].  The articles of general co-partnership were
registered in the commercial register of the office of the Register of Deeds in
Bacolod City,
Negros Occidental, on July 14, 1949. 
Paragraph 14 of the articles of general co-partnership provides that the
agreement shall have retroactive effect as of January 1, 1949.

On March 22, 1959
the Commissioner assessed against the partnership “Hacienda Fortuna”
corporate income tax for the calendar year 1949, under Section 24 of the Nation­al
Internal Revenue Code, in the sum of P23,704.22. 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, dated March 12, 1955, the Commissioner
advised respondents that inasmuch as the articles of general co-partnership of
the “Hacienda Fortuna” were registered on July 14, 1949, the income realized by the
partnership prior to the registration can not be exempt from the payment of
corporate income tax.  In a letter, also
dated March 12, 1955, the Commissioner instructed the provincial revenue agent
of Negros Occidental to investigate the income of
“Hacienda Fortuna” for the period from January 1, 1949 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”.  The
provincial revenue agent reported that during the period from January 1 to July 13, 1949 the “Hacienda
Fortuna” had a net profit amounting to P131,477.20, and that the income
tax due on said net profit, at the rate of 12%, was P15,777.26. It thus
resulted that the original assessment of P23,704.22, as corporate income tax on
the income for the entire calendar year 1949, was reduced to P15,777.26 after
deducting the corporate income tax due on the net profits derived by the
“Hacienda Fortuna” for the period from July 14 to December 31, 1949,
based on the theory that the co-partnership “Hacienda Fortuna” was
exempt from the payment of corporate income tax on its income from the day its
articles of general co-partnership were registered in the mercantile
registry.  Herein 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 of
P15,777.26 assessed against the “Hacienda Fortuna” as a general
co-partnership.

On April 2, 1955 the respondents, through counsel, wrote a letter
to the Commissioner asking for the reconsideration of his ruling of March 12,
1955, 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.  That
request for reconsideration was denied by the Commissioner on October 25, 1955. The respondents
filed a second request for, reconsideration, dated November 4, 1955, but the
Commissioner in a letter dated December 6, 1955, which was received by
respondents on December 20, 1955, denied said second request for
reconsideration.  Thereupon, respondents,
on January 3, 1956, filed a
petition for review with the Court of Tax Appeals, by way of an appeal from the
ruling of the Commissioner of March
12, 1955 and from the denial of the requests for reconsideration of
said ruling.  The case was docketed in
the Court of Tax Appeals as CTA Case No. 226.

In the meantime, on March 22, 1955, exactly 5 years from and
after the date of the assessment on March 22, 1950, and before the expiration
of the thirty-day period within which the respondents could ask for a
reconsideration of the ruling of the Commissioner of March 12, 1955, or appeal
to the Court of Tax Appeals, the Provincial Fiscal of Negros
Occidental, upon the request of the Commissioner, filed a complaint against
herein respondents for the collection of the alleged income tax assessed
against the “Hacienda Fortuna”. 
The said action, entitled “The Collector of Internal Revenue vs.
Carlos Ledesma, Julieta Ledesma, Vicente Gustilo, Jr. and
Amparo Ledesma de Gustilo” was docketed in the Court of First Instance
or Negros Occidental as Civil Case No. 3373.

It happened, therefore, that before respondents could bring the
case on appeal to the Court of Tax Appeals a complaint for the collection of
the alleged income tax due on the “Hacienda Fortuna” was filed
against them in the Court of First Instance of Negros
Occidental.  Upon motion of the
Commissioner, in CTA Case No. 226, the Court of Tax Appeals, on July 31, 1956,
dismissed the petition for review upon the ground that the Court of First
Instance of Negros Occidental had already acquired
jurisdiction over the controverted assessment prior
to the institution of the appeal, and the judgment in Civil Case No. 3373 of
the Court of First Instance of Negros Occidental
would constitute res adjudicata
between the same parties.  Herein respondents
filed in the Supreme Court a petition for man­damus to compel the Court of Tax
Appeals to annul the resolution of July
31, 1956 dismissing the petition in CTA Case No. 226 and to proceed
with the case.  The Supreme Court set
aside the resolution of the Court of Tax Appeals of July 31, 1956 and directed said court to proceed
with the determination of the appeal of herein respondents in CTA Case No. 226^[3].  This Court held that the Court of Tax Appeals
had exclusive jurisdiction over the disputed assessment, to the exclusion of
the Court of First Instance of Negros
Occidental.  Subsequently, the Court of
First Instance of Negros Occidental dismissed Civil
Case No. 3373.

After the dismissal of Civil Case No. 3373 of the Court of First
Instance of Negros Occidental, and before the hearing
of CTA Case No, 226 in the Court of Tax Appeals, herein respondents filed a
supplemental petition for review alleging, as an additional ground for appeal,
that the action of the Government to collect the tax assessed against the
“Hacienda Fortuna” had prescribed. 
During the hearing before the Court or Tax Appeals, the parties
submitted a stipulation of facts and their respective documentary evidence.

Two issues were raised before the Court of Tax Appeals, to wit:
(1) whether or not the right of the Government to collect the income tax
against the “Hacienda Fortuna” as an unregistered general
co-partnership, for the year 1949, had prescribed; and (2) whether or not the
income tax in question was validly assessed against the “Hacienda
Fortuna.”

The Court or Tax Appeals, on August 15, 1960, 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 Court of Tax Appeals, therefore, reversed
the rulings of the Commissioner of Internal Revenue, appealed from.

Herein respondents did not appeal from the decision of the Court
of Tax Appeals, but in the brief that they filed before this Court, as appellees, they claim that the Court of Tax Appeals erred
in holding that prior to the execution of the articles of general
co-partnership on July 11, 1949 the respondents had operated the “Hacienda
Fortuna” as a general partnership; and that the Court of Tax Appeals erred
in not holding that the right of the Government to collect the income tax in
question had prescribed.  In this
connection, suffice it to say that the conclusion of the Court of Tax Appeals
that the respondents operated the “Hacienda Fortuna” as a partnership
prior to the execution of the articles of general co-partnership is based on
findings of fact, and We find no reason in the record to disturb the findings
of the tax court on this matter.  On the
contrary, the intention of the respondents to operate the “Hacienda
Fortuna” as a partnership, before July
11, 1949, is clearly shown in paragraph 14 of the articles of
general co-partnership which provides that the partnership agreement
“shall be retroactive as of January
1, 1949.” We also find no merit in the contention of the
respondents that the Court of Tax Appeals erred in not holding that the right
of the Government to collect the income tax in question had prescribed.

We shall now occupy ourselves with the errors as­signed by the
Commissioner, as follows:

1. “The Court of Tax Appeals erred in holding that herein
respondents, as partners of the general co-partnership ‘Hacienda Fortuna’, are
not subject to corporate income tax prior to its registration or for the period
from January 1 to July 13, 1949.”

2. “The Court of Tax Appeals erred in holding that, the
registration of the articles or general co-partnership of the ‘Hacienda
Fortuna’ on July 14, 1949 operated to exempt said partnership from the
corporate income tax for the year 1949 and not only for the period from July
14, 1949 to December 31, 1949.”

The Solicitor General, as counsel for the Commissioner, considers
these two assigned errors as interrelated and discusses them together.

The sole question to be decided in this appeal is whether or not
the partnership known as “Hacienda Fortuna” which was organized by
respondents on July 11, 1949, whose articles of general co-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.

The provision of law that is relevant to this question is that
portion of Section 24 of the National Internal Revenue Code which reads as
follows:

“Sec. 24.  Rate of
tax on corporation.  — (a) Tax on
domestic corporations.  — In
general, there shall be levied, 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 (compañias colectivas),
domestic life insurance companies and foreign life insurance companies doing
business in the Philippines, a tax upon such income equal to the sum of the
following:” (Underlining supplied.)

x        x          x

It is the contention of the Commissioner that 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.  It is the position of the Commissioner, in
the present case, that the partnership known as “Hacienda Fortuna” 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.  In other words, from January 1 to July 13, 1949 the partnership
“Hacienda Fortuna” should be considered still an unregistered
co-partnership for the purposes of the assessment of the corporate income tax,
notwithstanding the fact that paragraph 14 of its articles of co-partnership
provides that the partnership agreement should retroact to January 1, 1949. 
Thus, as stated at the earlier part of this decision, the Commissioner
instructed the provincial revenue agent in Negros Occidental
to determine the net income of the “Hacienda Fortuna” for the period
from January 1 to July 13, 1949, said agent having reported that the net income
of the partnership during that period amounted to P131,477.20, and that the
corporate income tax due on that net income was P15,777.26. It is this amount
of P15,777.26 which the Commissioner insists in collecting from the respondents.

On the other hand, the respondents contend that prior to July 14,
1949 they were operating the sugar plantation that they bought from their
parents 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 even assuming that hey were operating
the sugar plantation as a partnership he registration of the articles of
general co-partnership on July 14, 1949 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.

The Court of Tax Appeals made a finding that the respondents had
actually operated the “Hacienda Fortuna” as a general partnership
from January 1, 1949, and that when its articles of general co-partnership were
registered on July 14, 1949 that registration had the effect of giving the partnership
the status of a registered co-partnership which places it under the purview of
Section 24 of the Tax Code as exempt from the payment of corporate income tax
during the entire taxable year of 1949. 
The pertinent portion of the decision of the Court of Tax Appeals reads
as follows:

“Although petitioners acquired undivided shares in the
Hacienda Fortuna, from the evidence of record it appears to us that the
intention of the parties was to form, and that they did operate the hacienda
as, a general partnership.  That this was
their intention is confirmed by the fact that they actually organized a general
co-partnership on July 11, 1949.  And the Articles of General Co-partnership
which was registered on July 14, 1949
provides that the agreement shall be retroactive as of January 1, 1949. 
The sole question to be decided is, therefore, whether the partnership
is entitled to exemption for the entire year of 1949, or whether it is taxable
as an unregistered partnership before its articles of partnership was actually
registered.

“Section 24 of the Revenue Code imposes an income tax on
corporations.  The term ‘corporation’
includes unregistered general co-partnerships. 
(Sec. 84 (b)).  Section 26
provides that persons carrying on business in general co-partnership duly
registered in the mercantile registry shall be liable for income tax only in
their individual capacity.  There is no
specific provision of law or regulations as to the date of commencement of the
exemption of a registered general co-partnership.  We find, however, that the Bureau of Internal
Revenue as far back as 1924, issued a ruling which was published in the
Official Gazette to the effect that ‘the status or form of organization of a
partnership at the end of the taxable year will determine its income tax
liability for that year.’ We quote:

‘A & S Co. had been paying income tax
for years as nonregistered partnership.  On July, 1922, it registered its partnership
agreement.  Should it file a return for
the period from January to July of the year of its registration?

‘HOLD:  That it need not do
so.  For purposes of the Income Tax Law,
the status or form of organization of a partnership at the end of the taxable
year will determine its income tax liability for that year.  (September
4, 1924,)’ Ruling No. 30, 22 O. G. 3451.)”^[4]

“Ruling No. 30 of the Bureau of Internal Revenue, dated September 4, 1924, does not appear to
have been revoked or even revised or amended. 
In fact, the same opin­ion was reiterated in a ruling dated November 4, 1948.  Again, we quote:

‘In answer to your letter dated October 15, 1948, requesting
opinion whether or not a commercial partnership, intended to be registered as
evidenced by the partnership agreement formally executed by the parties at the
time it commenced to do business, but which was not registered until after the
lapse of several months, should be required to file two (2) separate returns –
one corresponding to the unregistered period and another for the period after
its registration, you are informed that, if a general partnership registers its
articles of partnership within the same taxable year, which may either be
calendar or fiscal year, in which it commenced business, it is required to file
only one income tax return covering its income for the period from the date of
its business operation to the end of the taxable year.  However, where the registration takes place
after the end of the taxable year in which the partnership commenced business,
separate returns should be filed, one corresponding to the taxable year in
which the partnership did business as an unregistered partnership, and another
covering the taxable year in which it operated as a registered
partnership.  (B. I. R. ruling, dated
November 5, 1948, contained in a letter addressed to Provincial Examiner Amante Astudillo, Surigao, Surigao.)’

“The rule enunciated above that the status of a general
partnership as a registered or unregistered general co-partnership at the end
of the taxable year determines its liability or exemption from income tax for
the entire taxable year is a sound rule. 
It does not run counter to any specific provision of law or
regulation.  On the other hand, it
appears to us to be in harmony with the intent and purpose of the law to grant
exemption to registered general co-partnership and to tax the partners only in
their individual capacity.  We note that
when the attention of respondent was called to the existence of the Bufeau’s ruling of November
5, 1948, he merely stated that he was not inclined to reconsider
his decision and would prefer ‘to have a judicial pronouncement on the matter.’
(See p. 222, B. I. R. records.)

“Moreover, the old Income Tax Law (Act No. 2833, as amended)
contained the same provisions regarding the exemption from income tax of registered
general co-partnerships as the present law. 
The practice of the Bureau of Internal Revenue exempting general
co-partnerships from income tax for the entire year so long as it was
registered within that year continued to be the prevailing rule in 1939, when
the NationaI Internal Revenue Code, Commonwealth Act
No. 466, was enacted.  The law governing
general co-partnership contained in the old law was merely reenacted in the new
Code.  It is reasonable to suppose that a
long standing administrative practice, if contrary to the intention of the
legislature, would be specifically corrected by it.  (1 USTC, Par. 259; see also 1 USTC, Par.
293).  That Congress merely reenacted the
old law in the face of the long continued practice of the Bureau of Internal
Revenue which it published in the Official Gazette is a strong indication that
such practice has received congressional approval.  We find no justification to deviate from the
rule.”

We are in accord with the views expressed by the Court of Tax
Appeals in the afore-quoted portion of its decision.  The Bureau of Internal Revenue, in the exer­cise
of its powers relative to the collection of internal revenue taxes, fees and
charges, may make, and has in fact issued, administrative rules and rulings in
connection with the enforcement of the provisions of the National Internal
Revenue Code.  There are rulings of the
Bureau of Internal Revenue where the “status-at-the-end-of-the-taxable-year”
rule has been applied in determining the taxpayer’s income tax liability during
the taxable year.  In the book,
“Rules and Rulings on the Philippine Income Tax”, a compilation by
Francisco Tantuico, Sr. and Francisco Tantuico, Jr. of the rulings of the Bureau or Internal
Revenue, We read:^[5]

“A child born or adopted during the first fifteen days of
October, if wholly dependent upon the head of the family for support on
December 31 of the year, entitles the latter to an additional exemption of
P600.00 (amount amended) in accordance with subsections (c) and (d) of section
23 of the National Internal Revenue Code (Ruling of February 8, 1952).”
[p. 65]

“A child who becomes 21 years of age during the last 15 days
of June, unless incapable of support for being mentally or physically
defective, does not entitle his parents to any additional exemption (Rule of
February 8, 1952).” [pages 65-66]

“A father is entitled to P600.00 (amount amended) additional
exemption for his child born on December 31 of the taxable year, but not for a
child who became of age on September 15, unless the latter is incapable of
self-support because he is physically or mentally defective. (Ruling of July
29, 1948).” [page 66]

“A person who married during the first fifteen days of July,
if not legally separated from his spouse on December 31 of that year is granted
the full exemption of P3,000 for said year. 
(Ruling of February 8, 1952).” [page 58]

“Under Section 23 of the National Internal Revenue Code, as
amended by Re­public Act 590, a person who marries on December 31 is entitled
to the full exemption of P3,000.00 for said calendar year; and a child born or
legally adopted on December 31, wholly dependent upon the taxpayer can be
claimed as an additional exemption of P600 (amount amended) for the said
year.  (BIR Ruling of June 19, 1952, p.  58).” [page 58]

The Court of Tax Appeals, in its decision, has pointed out that
as early as 1924 the Bureau of Internal Revenue 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 is registered only at the middle of the taxable year, or in the
last month of the taxable year.  We agree
with the Court of Tax Appeals that 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 co-partnership, registered in the mercantile
registry, so that the public may know who the real partners of the partnership
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.^[6]
It is precisely 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.  It can happen that the profits realized by an
unregistered partnership may be distributed to other persons in addition to
those who appear to the public as the partners. 
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.  And so, We believe that it
is a fair and sound application of Section 24 or the tax code that once a
partnership is registered during a taxable year that partnership should be
considered a registered partnership exempt from the payment of corporate income
tax during that taxable year, and only the partners thereof should be made to
pay income tax on the profits of the partnership that were divided among
them.  Section 26 of the tax code
provides as follows:

“Sec. 26 – Tax liability of members of duly registered
co-partnership.  – Persons carrying
on business in general co-partnership (compañia colectiva) duly registered in the mercantile registry, or
those exercising a common profession in general partnership, shall be liable
for income tax only in their individual capacity, and the share in the profits
of the registered general co-partnership (compañia colectiva) or in the general professional partnership to
which any taxable partner should be entitled, whether distributed or otherwise
shall be returned for taxation and the tax paid in accordance with the provisions
of this title.”

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 under Section 24 or the tax code
should be made to cover the entire taxable year, regardless or 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 partners, 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 or
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 or 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).

Once the articles of co-partnership is registered, the collecting
agents of the government can very well trace the operations of the partnership
during the period of the taxable year prior to the date of registration – that
is, if the partnership had operated as an unregistered partnership prior to the
date of its registration, and require the partners to declare the true income
that they derived from the operations of the partnership during the period
prior to the date of re­gistration and after the date of registration.

We hold that 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. 
Considering that most of our tax laws are patterned after the tax laws
of the United States of America,
the following authority is pertinent:

“Considerable weight is given to the Treasury Department’s
administrative construction of a tax provision and to its regulations.  The Supreme Court at one time said:  ‘Treasury regulations and interpretations
long continued without substantial change, applied to unamended
or substantially re-enacted statutes are deemed to have received congressional
approval and have the effect of law’….”

“Treasury Department rules and regulations will not be
disturbed except for cogent reasons or unless contrary to the statute or
exceeding departmental authority, and they are binding on the Commissioner and
taxpayer alike.  When a particular construction
has been operative over a long period and has acquired the sanction of usage it
is entitled to ‘respectful consideration specially if rights have been adjusted
and determined by it for many years, as a change may result in inequitable
treatment of similarly situated taxpayers and may occur after many persons have
acted upon the faith of the regulation. 
The rule is also, perhaps, particularly applicable where a change in the
administrative construction would produce great administrative inconvenience or
irregularity.  Particular weight will be
given to an administrative construction where much latitude for discretion has
been given to the Treasury.  Where the
basic provision of the Code is couched in general language an interpretative
regulation is appropriate.  Where the
statutory provision is ambiguous the Supreme Court has sustained the
administrative construction particularly where the Congress did not interfere
with the interpretation claimed by the administrative agency.” (“The
Law of Federal Income Taxation” by Jacob Mertens,
Jr., Volume 1, 1962 Revision, Section 320, pages 32-35).

WHEREFORE, the decision of the Court of Tax Appeals
appealed from is affirmed.  No
pronouncement as to costs.

SO ORDERED. 

Concepcion, C.J., Reyes, J.B.L., Dizon,
Makalintal, Sanchez, Castro, Fernando, and Teehankee, JJ., concur.

Barredo and
Villamor, JJ., did
not take part.

^[1]
When the assessment was first made on March
22, 1950 the head of the Bureau of Internal Revenue was then called
the Collector of Internal Revenue, who is now called Commissioner of Internal
Revenue.

^[2]
Paragraph 2 of the articles of general copartner­ship.

^[3]
Carlos Ledesma, et al., vs. Court of Tax
Appeals, G. R. No. L-11343, January
29, 1958.

^[4]
Official Gazette, Vol. XXII, No. 149, page 3451, December 11, 1924.

^[5]
Mr. Francisco Tantuico Sr. is a former Revenue
Regional Director, Regional District No. 10, Bureau of Internal Revenue; and
Mr. Francisco Tantuico, Jr. is presently a Judge of
the Court of First Instance of Cebu.

^[6]
Tan Senguan & Co. vs. Collector or
Internal Revenue, 55 Phil. 439, 445; Collector of Internal Revenue vs. Isasi, 101 Phil. 257.