Corporate Income taxation

Commissioner of Internal Revenue vs. Carlos Ledesma, Julieta Ledesma, Vicente Gustilo. Jr. and Amparo
Ledesma de Gustilo
G.R. No. L-17509 January 30, 1970

On July 9, 1949, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma and
Vicente Gustilo, Jr., purchased from their parents, the sugar plantation known as "Hacienda
Fortuna," consisting of 36 parcels of land, which sugar quota was included in the sale. By
virtue of the purchase, respondents owned one-third each of the undivided portion of the
plantation. After the 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.

The respondents shared equally the expenses of production, on the basis of their respective
one-third undivided portions of the plantation. In their individual income tax returns for the
year 1949 the respondents included as part of their income their respective net profits 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." 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 partnership provides that the
agreement shall have retroactive effect as of January 1, 1949.
RMC 20-2013

Prescribing the Policies and Guidelines in the Issuance of
TaxExemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations Under Section 30 of the
National Internal Revenue Code of 1997, As Amended
REVENUE MEMORANDUM ORDER NO.
20-2013 issued on July 22, 2013
It prescribes the policies and guidelines in the issuance of Tax Exemption Rulings
to qualified nonstock, non-profit corporations and associations under Section
30 of the National Internal Revenue Code (NIRC) of 1997, as amended
Corporations and associations enumerated under Section 30 of the NIRC, as
amended, including those which have been issued tax exemption
rulings/certificates prior to June 30, 2012, shall file their respective Applications
for TaxExemption/Revalidation with the Revenue District Office (RDO) where
they are registered. Only corporations or associations that are duly qualified
under Section 30 of the NIRC, as amended, shall be issued Tax Exemption
Rulings.
RMC 20-2013 Section 1
a. Ensure compliance with the conditions attached to the tax exemption
b. Ascertain the existence of other income derived from non-exempt activities and
provide proper tax treatment thereon
c. Enforce the payment of other taxes for which no exemption was granted under
Philippine tax laws (e.g., withholding taxes, fringe benefits tax, and documentary stamp
tax)
d. Minimize tax leakages arising from inaccurate interpretation of relevant tax laws and
administrative issuances This Order is hereby issued to prescribe policies and guidelines
in the processing of tax exemption applications and for the revalidation of tax exemption
rulings/certificates of corporations and associations listed under Section 30 of the NIRC,
as amended.
RMC 20-2013 Section 2
Applications for Tax Exemption and Revalidation.
Corporations and associations enumerated under Section 30 of the
NIRC, as amended, including those which have been issued tax
exemption rulings/certificates prior to June 30, 2012, shall file their
respective Applications for Tax Exemption/Revalidation with the
Revenue District Office (RDO) where they are registered. Only
corporations or associations that are duly qualified under Section 30
of the NIRC, as amended, shall be issued Tax Exemption Rulings.
 Section 30(E) of the NIRC

Nonstock corporation or association organized and

operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer, officer
or any specific person;
 RMC 20-2013 Section 2 cont
Corporations or Associations under Section 30(E) of the NIRC,
as amended.— Corporations or associations which apply for tax
exemption ruling under Section 30(E) of the NIRC, as
amended, must meet all the following requirements:
a. It must be a non-stock corporation or association
organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans.
 b. It should meet the following
tests:
Organizational Test -- Operational Test -- mandates
requires that the corporation that the regular activities of the
or association’s constitutive corporation or association be
documents exclusively limit its exclusively devoted to the
purposes to one or more of accomplishment of the
those described in purposes specified in
paragraph (E) of Section 30 paragraph (E) of Section 30 of
the NIRC, as amended.
of the NIRC, as amended.

A corporation or association fails to meet this test if a substantial part of its

operations may be considered “activities conducted for profit’.
c. All the net income or assets of the corporation or association must be
devoted to its purpose/s and no part of its net income or asset accrues to
or benefits any member or specific person. Any profit must be plowed
back and must be devoted or used altogether for the furtherance of the
purpose for which the corporation or association was organized.

d. It must not be a branch of a foreign non-stock, non-profit corporation.

SECTION 9. Validity of the Tax Exemption
Ruling

A Tax Exemption Ruling issued under this Order shall be valid

for a period of three (3) years from the date of effectivity
specified in the Ruling, unless sooner revoked or cancelled.
The Tax Exemption Ruling shall be deemed revoked if there
are material changes in the character, purpose, or method of
operation of the corporation or association which are
inconsistent with the basis for its income tax exemption. The
revocation takes effect as of the date of the material change.
sECTION 10. Renewal of Tax Exemption
Rulings.
Tax Exemption Rulings may be renewed upon filing of a
subseguent. Application for Tax Exemption/Revalidation,
under same requirements and procedures provided herein.
Otherwise, the exemption shall be deemed revoked upon the
expiration of the Tax Exemption Ruling. The new Tax
Exemption Ruling shall be valid for another period of three
(3) years, unless sooner revoked or cancelled.
SECTION 11. Effect of Failure to File
Annual Information Return.

— If a corporation or association which has been issued a

Tax Exemption Ruling fails to file its annual information
return, it shall automatically lose its income tax-exempt
status beginning the taxable year for which it failed to file an
annual information return, in addition to the sanctions
imposed under Section 250 of the NIRC, as amended.
SECTION 12. Transitory
Provisions.
Tax exemption rulings or certificates issued to corporations
or associations listed under Section 30 of the NIRC, as
amended, prior to June 30, 2012 shall be valid until
December 31, 2013. Tax exemption rulings or certificates
issued after June 30, 2012 shall continue to be valid for a
period of three (3) years form date of issuance, unless
sooner revoked or cancelled.
REVENUE MEMORANDUM ORDER NO. 44-2016
issued on July 26, 2016 amends Revenue

Memorandum Order No. 20-2013, as amended re:

"Prescribing the Policies and Guidelines in the Issuance of
Tax Exemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of the
National Internal Revenue Code of 1997, as Amended"
In order for the non-stock, non-profit
educational institutions to enjoy its tax
exemption conferred by the 1987 Constitution

(a) the school must be nonstock
and non-profit;

(b) the income is actually, directly
there are two and exclusively used for
requisites, namely: educational purposes. There are
no other conditions and limitations.
Non-stock, non-profit educational institutions shall file their respective applications
for Tax Exemption with the office of the Assistant Commissioner, Legal Service,
Attention: Law Division, together with the following documents:


a.Original copy of the application letter for e. Certified true copy of government
recognition/permit/accreditation to operate as an educational
issuance of Tax Exemption Ruling; institution issued by the Commission on Higher Education
(CHED), Department of Education (DepEd), or Technical

b. Certified true copy of the Certificate of Education and Skills Development Authority (TESDA);
Good Standing issued by the Securities and Provided, that if the government recognition/
Exchange Commission; permit/accreditation to operate as an educational institution was
issued five (5) years prior to the application for tax exemption,

c. Original copy of the Certification under Oath an original copy of a current Certificate of Operation/Good
Standing, or other equivalent document issued by the
of the Treasurer as to the amount of the appropriate government agency (i.e., CHED, DepEd, or
income, compensation, salaries or any TESDA) shall be submitted as proof that the non-stock and
emoluments paid to its trustees, officers and non-profit educational institution is currently operating as such;
and
other executive officers;

d.Certified true copy of the Financial 
f. Original copy of the Certificate of utilization of annual
Statements of the corporation for the last revenues and assets by theTreasurer or his equivalent of the
three (3) years; non-stock and non-profit educational institution.
REVENUE MEMORANDUM ORDER NO. 44-2016 cont

Tax Exemption Rulings or Certificates of Tax Exemption of non-stock, non-

profiteducational institutions shall remain valid and effective, unless recalled for valid
grounds. They are not required to renew or revalidate the Tax Exemption Rulings
previously issued to them, but it shall be subject to revocation if there are material
changes in the character, purpose or method of operation of the corporation which are
inconsistent with the basis for its Income Tax exemption.
Non-stock, non-profit educational institutions with Tax Exemption Rulings or Certificates
of Exemption issued prior to June 30, 2012 are required to apply for new Tax
Exemption Rulings.
KIM S. JACINTO-HENARES v. ST. PAUL COLLEGE OF
MAKATI, GR No. 215383, 2017-03-08

Facts:petitioner Kim S. Jacinto-Henares, acting in her capacity as then
Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing
the Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified
Non-Stock, Non-Profit Corporations and Associations under Section 30 of the
Held
National Internal Revenue Code of 1997, as Amended."... respondent St. Paul
College of Makati (SPCM), a non-stock, non-profit educational institution
organized and existing under Philippine laws, filed a Civil Action to Declare
Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 before the RTC.

We deny the petition on the
that "RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-stock,
non-profit educational institutions of the privilege of tax exemption under Sec. ground of mootness.
4(3) of Article XIV of the Constitution... that they submit an application for tax
exemption to the BIR subject to approval by CIR in the form of a Tax[]Exemption
Ruling (TER) which is valid for a period of [three] years and subject to
renewal.the RTC ruled in favor of SPCM and declared RMO No. 20-2013 We take judicial notice that on
25 July 2016, the present
unconstitutional.the RTC denied the CIR's motion for reconsideration

WHETHER THE TRIAL COURT CORRECTLY

CONCLUDED THAT RMO [NO.] 20-2013 CIR Caesar R. Dulay issued
IMPOSES A PREREQUISITE BEFORE A
NON-STOCK, NON-PROFIT
RMO No. 44-2016,... this
EDUCATIONAL INSTITUTION MAY AVAIL Order is being issued to
OF THE TAX EXEMPTION UNDER
SECTION 4(3), ARTICLE XIV OF THE exclude non-stock, non-
CONSTITUTION. profit educational institutions
SEC. 22(B)
The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement
under a service contract with the Government. 'General professional
partnerships’ are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
Sec 26 of NIRC
Tax Liability of Members of General Professional Partnerships. - A general
professional partnership as such shall not be subject to the income tax imposed
under this Chapter. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in their separate and
individual capacities.
For purposes of computing the distributive share of the partners, the net income
of the partnership shall be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
Revenue Memorandum Circular (RMC) No. 50-2
018 - BIR
ISSUE
WON the partnership known as "Hacienda Fortuna" which was organized by respondents on July 11,
1949, whose articles of general 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
RESPONSE
Petitioner: It is only from the date of the registration of the articles of 
Respondents: Prior to July 14, 1949 they were operating the sugar
general co- partnership in the mercantile register when a co-partnership is plantation under a system of co-ownership, and not as a partnership,
exempt from the payment of corporate income tax under Section 24 of the Tax so that they were not under obligation to pay the corporate income tax
Code. The partnership is exempt from the payment of corporate income tax assessed by the Commissioner on the alleged income of the
due only on income received from July 14, 1949, the date of the registration of partnership "Hacienda Fortuna" from January 1 to July 13, 1949. The
its articles of general co-partnership. respondents further contend that the registration of the articles of
general co-partnership 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.
HELD:
It is in the share of the profits and the salaries or wages that the
The CTA has pointed out that as early as 1924 the BIR had partners would receive that the government is interested in,
applied the "status-at-the-end-of-the-taxable-year" rule in because it is on these incomes that the assessment of the income
determining the income tax liability of a partnership, such tax is based. The government may not be able to trace exactly to
that a partnership is considered a registered partnership whom the profits of an unregistered partnership go, nor can the
government determine the precise participation of the apparent
for the entire taxable year even if its articles of co-
partners in the profits of the partnership. It is for this reason that
partnership are registered only at the middle of the taxable the government imposes a corporate income tax against an
year, or in the last month of the taxable year. unregistered partnership as an entity, and an individual income
tax against the apparent members thereof. But once the
The ruling is a sound one, and it is in consonance with the partnership is duly registered, the names of all the partners are
known, the proportional interest of the partners in the business of
purpose of the law in requiring the registration of
the partnership is known, and the government can very well
partnerships. The policy of the law is to encourage persons assess the income tax on the respective income of the partners
doing business under a partnership agreement to have the whose names appear in the articles of co-partnership.
partnership agreement, or the articles of partnership,
registered in the mercantile registry, so that the public may Once the partnership is registered its operation during the taxable
year may be ascertained in all matters regarding its management,
know who the real partners are, the capital stock of the its expenditures, its earnings, and the participation of the partners
partnership, the interest or contribution of each partner in in the net profits. If it can be ascertained that the profits of the
the capital stock, the proportionate share of each partner partnership have actually been given, or credited, to the partners,
in the profits, and the earnings or salaries of the partner or then there is no reason why the partnership should be made to
partners who render service for the partnership. 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.
HELD:
The exclusion of a registered partnership from the entities subject to the
It may thus be said that a premium is given to a partnership payment of corporate income tax should be made to cover the entire
that is registered by exempting it from the payment of taxable year, regardless of whether the registration takes place at the
corporate income tax, and making only the individual middle, or towards the last days, of the taxable year. This is so because,
partners pay income tax on the basis of their respective 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,
shares in the partnership profits. On the other hand, the and the income tax is collected after the end of the taxable year. Since it is
partnership that is not registered is being penalized by the policy of the government to encourage a partnership to register its
making it pay corporate income tax on the profits it 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
realizes during a taxable year and at the same time
partner, this benefit of exclusion from paying corporate income tax arising
making the partners thereof pay their individual income from registration should be liberally extended to registered, or registering,
tax based on their respective shares in the profits of the partnerships in order that the purpose of the government may be attained.
partnership. In other words, there is double assessment of The provision of Section 24 of the tax code excluding "registered general
co-partnership" from the payment of corporate income tax is not an
income tax against the partners of the unregistered exemption clause but a classification clause which must be construed
partnership, but only one assessment against the partners liberally in favor of the taxpayer.
of registered partnership.
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 of 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).

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.
SEC. 30. Exemptions from Tax on
Corporations.
The following organizations shall not be taxed under this Title in respect to income received by them as such:
 (A) Labor, agricultural or horticultural organization not organized principally for profit;
 (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
 (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge
system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;
 (D) Cemetery company owned and operated exclusively for the benefit of its members;
 (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
 (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual;
 (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare
 (H) A nonstock and nonprofit educational institution
 (I) Government educational institution
 (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
 (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning
back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;
 Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax
imposed under this Code.