Tan vs Del Rosario G.R. No. 109289, October 03, 1994 Facts: In G.R. No.

109289, it is asserted that the enactment of Republic Act No. 7 9! "iolates the follo#in$ pro"isions of the %onstitution&

to maintain, b. and lar$e, the present $lobal treatment on ta0able corporations. 1he court does not "ie# this classification to be arbitrar. and inappropriate.

/N 01N2 'Article (I, )ection 2!*1+ , -"er. bill passed b. the %on$ress shall embrace onl. one sub/ect #hich shall be e0pressed in the title thereof.' 'Article (I, )ection 28*1+ , 1he rule of ta0ation shall be uniform and e2uitable. 1he %on$ress shall e"ol"e a pro$ressi"e s.stem of ta0ation.' 'Article III, )ection 1 , No person shall be depri"ed of 0 0 0 propert. #ithout due process of la#, nor shall an. person be denied the e2ual protection of the la#s.' Iss e: 3hether or not RA 7 9! "iolates Article III )ection 1 *e2ual protection of the la#s+ !el": No. 4etitioner intimates that Republic Act No. 7 9! desecrates the constitutional re2uirement that ta0ation 'shall be uniform and e2uitable' in that the la# #ould no# attempt to ta0 sin$le proprietorships and professionals differentl. from the manner it imposes the ta0 on corporations and partnerships. 1he contention clearl. for$ets, ho#e"er, that such a s.stem of income ta0ation has lon$ been the pre"ailin$ rule e"en prior to Republic Act No. 7 9!. 5niformit. of ta0ation, li6e the 6indred concept of e2ual protection, merel. re2uires that all sub/ects or ob/ects of ta0ation, similarl. situated, are to be treated ali6e both in pri"ile$es and liabilities *7uan 8una )ubdi"ision "s. )armiento, 91 4hil. 971+. #ni$or%it& "oes not $or$en" classi$ication as lon' as: (1) t*e stan"ar"s t*at are se" t*ere$or are s bstantial an" not arbitrar&, (2) t*e cate'ori+ation is 'er%ane to ac*ieve t*e le'islative , r,ose, (3) t*e la- a,,lies, all t*in's bein' e. al, to bot* ,resent an" $ t re con"itions, an" (4) t*e classi$ication a,,lies e. all& -ell to all t*ose belon'in' to t*e sa%e class *4epsi %ola "s. %it. of :utuan, 2 )%RA 9; :asco "s. 4AG%<R, 197 )%RA 771+. 3hat ma. instead be percei"ed to be apparent from the amendator. la# is the le$islati"e intent to increasin$l. shift the income ta0 s.stem to#ards the schedular approach in the income ta0ation of indi"idual ta0pa.ers and 3 G.R. No. 109289, October 03, 1994 4 R#FINO R. T1N, 5/TITION/R, 67. R18ON R. D/9 RO71RIO, :R., 17 7/2R/T1R; OF FIN1N2/ < :O7/ #. ONG, 17 2O88I77ION/R OF INT/RN19 R/6/N#/, R/75OND/NT7. 3G.R. NO. 10944=. O2TO0/R 3, 19944 21R1G, 210199/7, :18OR1 1ND 7O8/R1 91> OFFI2/7, 21R9O 1. 21R1G, 81N#/9ITO O. 210199/7, /95IDIO 2. :18OR1, :R. 1ND 0/N:18IN 1. 7O8/R1, :R., 5/TITION/R7, 67. R18ON R. D/9 RO71RIO, IN !I7 21512IT; 17 7/2R/T1R; OF FIN1N2/ 1ND :O7/ #. ONG, IN !I7 21512IT; 17 2O88I77ION/R OF INT/RN19 R/6/N#/, R/75OND/NT7. D/2I7ION 6IT#G, :.: 1hese t#o consolidated special ci"il actions for prohibition challen$e, in G.R. No. 109289, the constitutionalit. of Republic Act No. 7 9!, also commonl. 6no#n as the )implified Net Income 1a0ation )cheme *')NI1'+, amendin$ certain pro"isions of the National Internal Re"enue %ode and, in G.R. No. 109 !, the "alidit. of )ection !, Re"enue Re$ulations No. 299, promul$ated b. public respondents pursuant to said la#. 4etitioners claim to be ta0pa.ers ad"ersel. affected b. the continued implementation of the amendator. le$islation. In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7 9! "iolates the follo#in$ pro"isions of the %onstitution& 'Article (I, )ection 2!*1+ , -"er. bill passed b. the %on$ress shall embrace onl. one sub/ect #hich shall be e0pressed in the title thereof.' 'Article (I, )ection 28*1+ , 1he rule of ta0ation shall be uniform and e2uitable. 1he %on$ress shall e"ol"e a pro$ressi"e s.stem of ta0ation.'

'Article III, )ection 1 , No person shall be depri"ed of 0 0 0 propert. #ithout due process of la#, nor shall an. person be denied the e2ual protection of the la#s.' In G.R. No. 109 !, petitioners, assailin$ )ection ! of Re"enue Re$ulations No. 2,99, ar$ue that public respondents ha"e e0ceeded their rule,ma6in$ authorit. in appl.in$ )NI1 to $eneral professional partnerships. 1he )olicitor General espouses the position ta6en b. public respondents. 1he %ourt has $i"en due course to both petitions. 1he parties, in compliance #ith the %ourt=s directi"e, ha"e filed their respecti"e memoranda. G.R. No. 109289 4etitioner contends that the title of >ouse :ill No. 9 91 , pro$enitor of Republic Act No. 7 9!, is a misnomer or, at least, deficient for bein$ merel. entitled, ')implified Net Income 1a0ation )cheme for the )elf, -mplo.ed and 4rofessionals -n$a$ed in the 4ractice of their 4rofession' *4etition in G.R. No. 109289+. 1he full te0t of the title actuall. reads& 'An Act Adoptin$ the )implified Net Income 1a0ation )cheme ?or 1he )elf, -mplo.ed and 4rofessionals -n$a$ed In 1he 4ractice of 1heir 4rofession, Amendin$ )ections 21 and 29 of the National Internal Re"enue %ode, as Amended.' 1he pertinent pro"isions of )ections 21 and 29, so referred to, of the National Internal Re"enue %ode, as no# amended, pro"ide& ')ection 21. 1a0 on citi@ens or residents. , '0 0 0 000

'Not 410,000 9B <"er 4 10,000 but not o"er 4 90,000 900 C 9B of e0cess o"er 4 10,000 <"er 4 90,000 but not o"er 4120,000 2,100 C 1DB of e0cess o"er 4 90,000 <"er 49D0,000 o"er 4120,000 4120,000 but

o"er

4 4 not o"er 41D,!00 C 20B of e0cess

<"er 49D0,000 0 C 90B of e0cess o"er 49D0,000'

4!1,!0

')-%1I<N 29. Eeductions from $ross income., In co%, tin' ta?able inco%e s bBect to ta? n"er 7ections 21(a), 24(a), (b) an" (c)C an" 2D (a)(1), t*ere s*all be allo-e" as "e" ctions t*e ite%s s,eci$ie" in ,ara'ra,*s (a) to (i) o$ t*is section: 5rovi"e", *o-ever, T*at in co%, tin' ta?able inco%e s bBect to ta? n"er 7ection 21 ($) in t*e case o$ in"ivi" als en'a'e" in b siness or ,ractice o$ ,ro$ession, onl& t*e $ollo-in' "irect costs s*all be allo-e" as "e" ctions: E(a) Ra- %aterials, s ,,lies an" "irect laborC

E(b) 7alaries o$ e%,lo&ees "irectl& en'a'e" in activities in t*e co rse o$ or , rs ant to t*e b siness or ,ractice o$ t*eir ,ro$essionC E(c) E(") E(e) Teleco%% nications, electricit&, $ el, li'*t an" -aterC 0 siness rentalsC De,reciationC

E($) 2ontrib tions %a"e to t*e Govern%ent an" accre"ite" relie$ or'ani+ations $or t*e re*abilitation o$ cala%it& stricFen areas "eclare" b& t*e 5resi"entC an" E(') Interest ,ai" or accr e" -it*in a ta?able &ear on loans contracte" $ro% accre"ite" $inancial instit tions -*ic* % st be ,roven to *ave been inc rre" in connection -it* t*e con" ct o$ a ta?,a&erGs ,ro$ession, tra"e or b siness. HFor in"ivi" als -*ose cost o$ 'oo"s sol" an" "irect costs are "i$$ic lt to "eter%ine, a %a?i% % o$ $ort& ,er cent (40I) o$ t*eir 'ross recei,ts s*all be allo-e" as "e" ctions to ans-er $or b siness or ,ro$essional e?,enses as t*e case %a& be.H

'*f+ )implified Net Income 1a0 for the )elf,-mplo.ed andAor 4rofessionals -n$a$ed in the 4ractice of 4rofession. , 1 ta? is *ereb& i%,ose" ,on t*e ta?able net inco%e as "eter%ine" in 7ection 2@ receive" " rin' eac* ta?able &ear $ro% all so rces, ot*er t*an inco%e covere" b& ,ara'ra,*s (b), (c), (") an" (e) o$ t*is section b& ever& in"ivi" al -*et*er a citi+en o$ t*e 5*ili,,ines or an alien resi"in' in t*e 5*ili,,ines -*o is sel$Ae%,lo&e" or ,ractices *is ,ro$ession *erein, "eter%ine" in accor"ance -it* t*e $ollo-in' sc*e" le:

<n the basis of the abo"e lan$ua$e of the la#, it #ould be difficult to accept petitioner=s "ie# that the amendator. la# should be considered as ha"in$ no# adopted a $rossincome, instead of as ha"in$ still retained the net income, ta0ation scheme. 1he allo#ance for deductible items, it is true, ma. ha"e si$nificantl. been reduced b. the 2uestioned la# in comparison #ith that #hich has pre"ailed prior to the amendment; limitin$, ho#e"er, allo#able deductions from $ross income is neither discordant #ith, nor opposed to, the net income ta0 concept. 1he fact of the matter is still that "arious deductions, #hich are b. no means inconse2uential, continue to be #ell pro"ided under the ne# la#. Article (I, )ection 2!*1+, of the %onstitution has been en"isioned so as *a+ to pre"ent lo$,rollin$ le$islation intended to unite the members of the le$islature #ho fa"or an. one of unrelated sub/ects in support of the #hole act, *b+ to a"oid surprises or e"en fraud upon the le$islature, and *c+ to fairl. apprise the people, throu$h such publications of its proceedin$s as are usuall. made, of the sub/ects of le$islation. F1G 1he abo"e ob/ecti"es of the fundamental la# appear to us to ha"e been sufficientl. met. An.thin$ else #ould be to re2uire a "irtual compendium of the la# #hich could not ha"e been the intendment of the constitutional mandate. 4etitioner intimates that Republic Act No. 7 9! desecrates the constitutional re2uirement that ta0ation 'shall be uniform and e2uitable' in that the la# #ould no# attempt to ta0 sin$le proprietorships and professionals differentl. from the manner it imposes the ta0 on corporations and partnerships. 1he contention clearl. for$ets, ho#e"er, that such a s.stem of income ta0ation has lon$ been the pre"ailin$ rule e"en prior to Republic Act No. 7 9!. 5niformit. of ta0ation, li6e the 6indred concept of e2ual protection, merel. re2uires that all sub/ects or ob/ects of ta0ation, similarl. situated, are to be treated ali6e both in pri"ile$es and liabilities *7uan 8una )ubdi"ision "s. )armiento, 91 4hil. 971+. 5niformit. does not forfend classification as lon$ as& *1+ the standards that are used therefor are substantial and not arbitrar., *2+ the cate$ori@ation is $ermane to achie"e the le$islati"e purpose, *9+ the la# applies, all thin$s bein$ e2ual, to both present and future conditions, and * + the classification applies e2uall. #ell to all those belon$in$ to the same class *4epsi %ola "s. %it. of :utuan, 2 )%RA 9; :asco "s. 4AG%<R, 197 )%RA 771+. 3hat ma. instead be percei"ed to be apparent from the amendator. la# is the le$islati"e intent to increasin$l. shift the income ta0 s.stem to#ards the schedular approach F2G in the income ta0ation of indi"idual ta0pa.ers and to maintain, b. and lar$e, the present $lobal treatment F9G on ta0able corporations. 3e certainl. do not "ie# this classification to be arbitrar. and inappropriate.

4etitioner $i"es a fairl. e0tensi"e discussion on the merits of the la#, illustratin$, in the process, #hat he belie"es to be an imbalance bet#een the ta0 liabilities of those co"ered b. the amendator. la# and those #ho are not. 3ith the le$islature primaril. lies the discretion to determine the nature *6ind+, ob/ect *purpose+, e0tent *rate+, co"era$e *sub/ects+ and situs *place+ of ta0ation. 1his court cannot freel. del"e into those matters #hich, b. constitutional fiat, ri$htl. rest on le$islati"e /ud$ment. <f course, #here a ta0 measure becomes so unconscionable and un/ust as to amount to confiscation of propert., courts #ill not hesitate to stri6e it do#n, for, despite all its plenitude, the po#er to ta0 cannot o"erride constitutional proscriptions. 1his sta$e, ho#e"er, has not been demonstrated to ha"e been reached #ithin an. appreciable distance in this contro"ers. before us. >a"in$ arri"ed at this conclusion, the plea of petitioner to ha"e the la# declared unconstitutional for bein$ "iolati"e of due process must perforce fail. 1he due process clause ma. correctl. be in"o6ed onl. #hen there is a clear contra"ention of inherent or constitutional limitations in the e0ercise of the ta0 po#er. No such trans$ression is so e"ident to us. G.R. No. 109 !

1he se"eral propositions ad"anced b. petitioners re"ol"e around the 2uestion of #hether or not public respondents ha"e e0ceeded their authorit. in promul$atin$ )ection !, Re"enue Re$ulations No. 2,99, to carr. out Republic Act No. 7 9!. 1he 2uestioned re$ulation reads& ')ec. ! General 4rofessional 4artnership , 1he $eneral professional partnership *G44+ and the partners comprisin$ the G44 are co"ered b. R.A. No. 7 9!. 1hus, indeterminin$ the net profit of the partnership, onl. the direct costs mentioned in said la# are to be deducted from partnership income. Also, the e0penses paid or incurred b. partners in their indi"idual capacities in the practice of their profession #hich are not reimbursed or paid b. the partnership but are not considered as direct cost, are not deductible from his $ross income.' 1he real ob/ection of petitioners is focused on the administrati"e interpretation of public respondents that #ould appl. )NI1 to partners in $eneral professional partnerships. 4etitioners cite the pertinent deliberations in %on$ress durin$ its enactment of Republic Act No. 7 9!, also 2uoted b. the >onorable >ernando :. 4ere@, minorit. floor leader of the >ouse of the Representati"es, in the latter=s pri"ile$e speech b. #a. of

commentin$ on the 2uestioned implementin$ re$ulation respondents follo#in$ the effecti"it. of the la#, thusl.&

of

public

returned for ta0ation and the ta0 paid in accordance #ith the pro"isions of this 1itle. '*b+ In determinin$ his distributi"e share in the net income of the partnership, each partner , '*1+ )hall ta6e into account separatel. his distributi"e share of the partnership=s income, $ain, loss, deduction, or credit to the e0tent pro"ided b. the pertinent pro"isions of this %ode, and '*2+ )hall be deemed to ha"e elected the itemi@ed deductions, unless he declares his distributi"e share of the $ross income undiminished b. his share of the deductions.' 1here is, then and no#, no distinction in income ta0 liabilit. bet#een a person #ho practices his profession alone or indi"iduall. and one #ho does it throu$h partnership *#hether re$istered or not+ #ith others in the e0ercise of a common profession. Indeed, outside of the $ross compensation income ta0 and the final ta0 on passi"e in"estment income, under the present income ta0 s.stem all indi"iduals deri"in$ income from an. source #hatsoe"er are treated in almost in"ariabl. the same manner and under a common set of rules. 3e can #ell appreciate the concern ta6en b. petitioners if perhaps #e #ere to consider Republic Act No. 7 9! as an entirel. independent, not merel. as an amendator., piece of le$islation. 1he "ie# can easil. become m.opic, ho#e"er, #hen the la# is understood, as it should be, as onl. formin$ part of, and sub/ect to, the #hole income ta0 concept and precepts lon$ obtainin$ under the National Internal Re"enue %ode. 1o elaborate a little, the phrase 'income ta0pa.ers' is an all embracin$ term used in the 1a0 %ode, and it practicall. co"ers all persons #ho deri"e ta0able income. 1he la#, in le".in$ the ta0, adopts the most comprehensi"e ta0 situs of nationalit. and residence of the ta0pa.er *that renders citi@ens, re$ardless of residence, and resident aliens sub/ect to income ta0 liabilit. on their income from all sources+ and of the $enerall. accepted and internationall. reco$ni@ed income ta0able base *that can sub/ect non,resident aliens and forei$n corporations to income ta0 on their income from 4hilippine sources+. In the process, the %ode classifies ta0pa.ers into four main $roups, namel.& *1+ Indi"iduals, *2+ %orporations, *9+ -states under 7udicial )ettlement and * + Irre"ocable 1rusts *irre"ocable both as tocorpus and as to income+. 4artnerships are, under the %ode, either 'ta0able partnerships' or 'e0empt partnerships.' <rdinaril., partnerships, no matter ho# created or or$ani@ed, are sub/ect to income ta0 *and thus alluded to as 'ta0able partnerships'+ #hich, for purposes of the abo"e cate$ori@ation, are b. la# assimilated to be #ithin the conte0t of, and so le $all.contemplated as, corporations. -0cept for fe# "ariances, such as in

'HIR. A8:AN<, No# Ir. )pea6er, I #ould li6e to $et the correct impression on this bill. Eo #e spea6 here of indi"iduals #ho are earnin$, I mean, #ho earn throu$h business enterprises and therefore, should file an income ta0 returnJ KIR. 4-R-L. 1hat is correct, Ir. )pea6er. 1his does not appl. to corporations. It applies onl. to indi"iduals.= '*)ee Eeliberations on >.:. No. 9 91 , Au$ust !, 1991, !&1D 4.I.; -mphasis ours+ 'H<ther deliberations support this position, to #it& KIR. A:AMA . . . No#, Ir. )pea6er, did I hear the Gentleman from :atan$as sa. that this bill is intended to increase collections as far as indi"iduals are concerned and to ma6e collection of ta0es e2uitableJ KIR. 4-R-L. 1hat is correct, Ir. )pea6er.= '*Id. at !& 0 4.I.; -mphasis ours+ 'In fact, in the sponsorship speech of )enator Iamintal 1amano on the )enate "ersion of the )NI1), it is cate$oricall. stated, thus& 'H1his bill, Ir. 4resident, is not applicable to business corporations or to partnerships; it is onl. #ith respect to indi"iduals and professionals.= *-mphasis ours+' 1he %ourt, first of all, should li6e to correct the apparent misconception that $eneral professional partnerships are sub/ect to the pa.ment of income ta0 or that there is a difference in the ta0 treatment bet#een indi"iduals en$a$ed in business or in the practice of their respecti"e professions and partners in $eneral professional partnerships. 1he fact of the matter is that a $eneral professional partnership, unli6e an ordinar. business partnership *#hich is treated as a corporation for income ta0 purposes and so sub/ect to the corporate income ta0+, is not itself an income ta0pa.er. 1he income ta0 is imposed not on the professional partnership, #hich is ta0 e0empt, but on the partners themsel"es in their indi"idual capacit. computed on their distributi"e shares of partnership profits. )ection 29 of the 1a0 %ode, #hich has not been amended at all b. Republic Act 7 9!, is e0plicit& ')-%1I<N 29. 1a0 liabilit. of members of $eneral professional partnerships. , *a+ 4ersons e0ercisin$ a common profession in $eneral partnership shall be liable for income ta0 onl. in their indi"idual capacit., and the share in the net profits of the $eneral professional partnership to #hich an. ta0able partner #ould be entitled #hether distributed or other#ise, shall be

the application of the 'constructi"e receipt rule' in the deri"ation of income, the income ta0 approach is ali6e to both /uridical persons. <b"iousl., )NI1 is not intended or en"isioned, as so correctl. pointed out in the discussions in %on$ress durin$ its deliberations on Republic Act 7 9!, afore2uoted, to co"er corporations and partnerships #hich are independentl. sub/ect to the pa.ment of income ta0. '-0empt partnerships,' upon the other hand, are not similarl. identified as corporations nor e"en considered as independent ta0able entities for income ta0 purposes. A $eneralprofessional partnership is such an e0ample.F G >ere, the partners themsel"es, not the partnership *althou$h it is still obli$ated to file an income ta0 return Fmainl. for administration and dataG+, are liable for the pa.ment of income ta0 in their indi"idual capacit. computed on their respecti"e and distributi"e shares of profits. In the determination of the ta0 liabilit., a partner does so as an indi"idual, and there is no choice on the matter. In fine, under the 1a0 %ode on income ta0ation, the $eneral professional partnership is deemed to be no more than a mere mechanism or a flo#,throu$h entit. in the $eneration of income b., and the ultimate distribution of such income to, respecti"el., each of the indi"idual partners. )ection ! of Re"enue Re$ulation No. 2,99 did not alter, but merel. confirmed, the abo"e standin$ rule as no# so modified b. Republic Act No. 7 9! on basicall. the e0tent of allo#able deductions applicable to all indi"idual income ta0pa.ers on their non,compensation income. 1here is no e"ident intention of the la#, either before or after the amendator. le$islation, to place in an une2ual footin$ or in si$nificant "ariance the income ta0 treatment of professionals #ho practice their respecti"e professions indi"iduall. and of those #ho do it throu$h a $eneral professional partnership. >!/R/FOR/, the petitions are EI)II))-E. No special pronouncement on costs. 7O ORD/R/D. Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan, and Mendoza, JJ., concur. Padilla, and Bidin, JJ., on lea"e.

F2G

A s.stem emplo.ed #here the income ta0 treatment "aries and made to depend on the 6ind or cate$or. of ta0able income of the ta0pa.er.
F9G

A s.stem #here the ta0 treatment "ie#s indifferentl. the ta0 base and $enerall. treats in common all cate$ories of ta0able income of the ta0pa.er.
F G

A $eneral professional partnership, in this conte0t, must be formed for the sole purpose of e0ercisin$ a common profession, no part of the income of #hich is deri"ed from its en$a$in$ in an. trade business; other#ise, it is sub/ect to ta0 as an ordinar. business partnership or, #hich is to sa., as a corporation and thereb. sub/ect to the corporate income ta0. 1he onl. other e0empt partnership is a /oint "enture for underta6in$ construction pro/ects or en$a$in$ in petroleum operations pursuant to an operatin$ a$reement under a ser"ice contract #ith the $o"ernment *see )ections 20, 29 and 2 , National Internal Re"enue %ode+.

F1G

7ustice Isa$ani A. %ru@ on 4hilippine 4olitical 8a# 1999 edition, pp. 1 !, 1 7, citin$ #ith appro"al %oole. on %onstitutional 8imitations.