AFISCO vs.

CA
Income Tax

Facts:

41 non-life insurance companies, including petitioner AFISCO entered into

a Quota Share Reinsurance Treaties with Munich, a non-resident foreign
insurance corporation, to cover for All Risk Insurance Policies over
machinery erection, breakdown and boiler explosion. The treaties
required petitioners to form a pool, to which AFISCO and the others
complied.

The pool of machinery insurers submitted a financial statement and filed

an “Information Return of Organization Exempt from Income Tax” for the
year ending 1975, on the basis of which, it was assessed by the CIR
deficiency corporate taxes. A protest was filed but denied by the CIR.

Petitioners contend that they cannot be taxed as a corporation, because

(a) the reinsurance policies were written by them individually and
separately, (b) their liability was limited to the extent of their allocated
share in the original risks insured and not solidary, (c) there was no
common fund, (d) the executive board of the pool did not exercise control
and management of its funds, unlike the board of a corporation, (e) the
pool or clearing house was not and could not possibly have engaged in
the business of reinsurance from which it could have derived income for
itself. They further contend that remittances to Munich are not dividends
and to subject it to tax would be tantamount to an illegal double taxation,
as it would result to taxing the same premium income twice in the hands
of the same taxpayer
ISSUE/S:

Whether or not the pool is taxable as a corporation.

Held: A pool is considered a corporation for taxation purposes. Citing

the case of Evangelista v. CIR, the court held that Sec. 24 of the NIRC
covered these unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from individual members.
Further, the pool is a partnership as evidence by a common fund, the
existence of executive board and the fact that while the pool is not in
itself, a reinsurer and does not issue any insurance policy, its work is
indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have
received their premiums.

As to the claim of double taxation, the pool is a taxable entity distinct

from the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received by
the said companies. Clearly, there is no double taxation.

As to the argument on prescription, the prescriptive period was totaled

under the Section 333 of the NIRC, because the taxpayer cannot be
located at the address given in the information return filed and for which
reason there was delay in sending the assessment. Further, the law
clearly states that the prescriptive period will be suspended only if the
taxpayer informs the CIR of any change in the address.