LORENZO T. ONA et.

al

VS.

COMMISSIONER OF INTERNAL REVENUE

FACTS:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T.
Oña and her five children. In a Civil Case for settlement of her estate Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of said deceased. The administrator
submitted the project of partition, which was approved by the Court. Because three of the heirs,
namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the project of
partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a
petition for appointment as guardian of said minors. the Court appointed him guardian of the
persons and property of the aforenamed minors

The project partition shows that the heirs have undivided ½ interest in 10 parcels of land,
6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to
divide the properties and they remained under the management of Oña who used said properties
in business by leasing or selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As a result, petitioners’
properties and investments gradually increased. Petitioners returned for income tax purposes
their shares in the net income but they did not actually receive their shares because this left with
Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners
asked for reconsideration, which was denied hence this petition for review from CTA’s decision.

ISSUE:
Does the property constitutes unregistered partnership subject to corporate income tax?
RULING:
Yes. For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for the heirs
in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the incomes thereof,
for each of them to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs
under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed, for the
purpose, for tax purposes, at least, an unregistered partnership is formed.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as
co-owners continues until the inheritance is actually and physically distributed among the heirs,
for it is easily conceivable that after knowing their respective shares in the partition, they might
decide to continue holding said shares under the common management of the administrator or
executor or of anyone chosen by them and engage in business on that basis. Withal, if this were
to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons
for holding the appellants therein to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided,
there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-
ownership of inherited properties is automatically converted into an unregistered partnership the
moment the said common properties and/or the incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in proportion to their respective shares in the
inheritance as determined in a project partition either duly executed in an extrajudicial settlement
or approved by the court in the corresponding testate or intestate proceeding. The reason for this
is simple. From the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each of them to manage and dispose of
as exclusively his own without the intervention of the other heirs, and, accordingly he becomes
liable individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used with the
intent of making profit thereby in proportion to his share, there can be no doubt that, even if no
document or instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.