Shobe_CEO » BIR Ruling No. 102-87 (April 8, 1987)

BIR Ruling No. 102-87 (April 8, 1987)

June 5th, 2009

21-n 000-00 102-87

S i r :

This refers to your letter dated February 17, 1987 requesting a ruling as to the nature of the rental income received by the heirs of the late Jose Lim and Petra Ramos from the properties they acquired by inheritance which has been the subject of adjudication and extra judicial partition.

It is represented that the late spouses Jose Lim and Petra Ramos are the owners of two parcels of land located within the commercial district of Laoag City; that the spouses derived rental income from the properties during their life time; that the properties were the subject of adjudication and extrajudicial partition by the heirs; and that the heirs are receiving rental income from the properties.

In reply, please be informed that since the properties left by the deceased spouses have been the subject of an extrajudicial settlement among the heirs who continued the business of their parents by receiving the rental income of the properties from the moment of such extrajudicial settlement, an unregistered partnership has been formed. Hence, the rental income derived from said properties constitute partnership income subject to corporate income tax imposed under Section 24(n) of the Tax Code. Thus, the Supreme Court, in the case of Ona vs. Commissioner, G.R. No. L-19342, May 25, 1972, ruled as follows:

“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 income thereof, for each of them to manage and dispose of an 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.” cda

Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.

Commissioner

Entry Filed under: Taxation