COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. WILLIAM J. SUTTER AND THE COURT OF TAX APPEALS, RESPONDENTS.

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 contradistinguished 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 Castan, 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 8
podran constituir sociedad particular? 
Aunque el punto ha sido muy debetido, 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 ester a la norma general
segun la que toda persona es capaz pare 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 resolucion
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, taxwise,
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, pages 88-89).

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 partnerships 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., did not take part.

^[1]
V. Evangelista vs. Collector of Internal Revenue, 102 Phil. 140;
Collector vs. Batangas Transportation Co., 102 Phil. 822.