January 30, 1970
Ponente: Zaldivar, J.
FACTS
Herein respondents bought from their parents a parcel of land in Negros Occidental known as Hacienda Fortuna, along with its sugar quota. The parcel of land was divided into three equal portions.
Following their purchase, the respondents took over the sugar cane farming and shared equally the expenses of production, but got separate quedans and Plantation Audits.Subsequently, they organized themselves into a general co-partnership under the firm name “Hacienda Fortuna” for the production of sugar on the whole parcel of land, which partnership was registered well into the middle of the taxable year 1949.
CIR assessed the partnership with corporate income tax for the year 1949, contending that the tax law provision exempting partnerships from corporate income tax can only be made applicable to respondents after their registration of the articles of general co-partnership.
The CTA, drawing from an administrative interpretation of the BIR to the effect 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, ruled in favor of respondents.
RULING
The SC ruled in favor of the partnership.
Once a partnership is registered during a taxable year that partnership should be considered as 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.
This is called the “status-at-the-end-of-the-taxable-year” rule. 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.
