Tan v. Del Rosario

FACTS:

Petitioners, in one case, are taxpayers who claim that the RA 7496, aka Simplified Net Income Taxation Scheme ("SNIT"), is violative of the Constitution, based on the following grounds:

1. Every bill shall embrace only one subject (Art. VI, Sec. 26 [1]). This is because the House Bill of SNIT is entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession"

2. The rule of taxation shall be uniform and equitable and the Congress shall evolve a progressive system of taxation. (Art. VI, Sec. 28 [1]). This is because of the imbalance between the tax liabilities covered by the amendatory law and those who are not.  

3. No person shall be deprived of property without due process of law, nor shall any person be denied the equal protection of the laws. (Art. III, Sec. 1). This is because the law attempted to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships.

In another case, the petitioners argue that the respondents exceeded in their rule-making authority in applying SNIT to general professional partnerships (GPP).

ISSUE:

Whether the SNIT Scheme is violative of the Constitution.

RULING: 

No, the SNIT Scheme does not violate the Constitution.

1. Every bill shall embrace only one subject. The purpose of this provision is to (1) prevent log-rolling legislation; (2) avoid surprises or even fraud; and (3) fairly apprise the people. In this case, the objectives are met. 

2. The rule of taxation shall be uniform and equitable. Uniformity of taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privilege and liabilities. However, it is with the discretion of the legislature to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation and the court cannot freely delve into those matters, save where the tax measure becomes unconscionable and unjust as to amount to confiscation of property. 

3. No person shall be deprived of property without due process of law. Nor shall any person be denied the equal protection of the laws. Uniformity in the classification means that (1) there is a substantial distinction; (2) the distinction is germane to the purpose of the law; (3) the law must apply to both present and future conditions; and (4) the law applies equally to all belonging to the same class. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power

Moreover, as decided in another case, the SC held that a general professional partnership is not income taxpayer (unlike in ordinary business partnership which is treated as a corporation for income tax purposes and so subject to CIT). 

The income tax is imposed not on the GPP, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares in the net profit of their GPP, whether distributed or not.

In determining the partner’s distributive share in the net income of the partnership, each partner (1) shall take into account separately his distributive share of the partnership’s income, gain, loss, deduction, or credit, and (2) shall be deemed to have elected the itemized deductions.

NOTES:

The Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

Taxable Partnerships - Ordinarily, partnerships, no matter how created or organized, are subject to income tax, for being legally contemplated as corporations. 

Exempt Partnerships – General Professional Partnerships are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. The partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits