436

SUPREMECOURTREPORTSANNOTATED
Obillos,Jr.vs.CommissionerofInternalRevenue
*

No.L68118.October29,1985.

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P.

OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters,
petitioners,vs.COMMISSIONEROFINTERNALREVENUEand
COURTOFTAXAPPEALS,respondents.
Taxation The dictum that the power to tax involves the power to
destroy should be obviated.To regard the petitioners as having formed a
taxableunregisteredpartnershipwouldresultinoppressive
________________
*SECONDDIVISION.

437

VOL.139,OCTOBER29,1985

437

Obillos,Jr.vs.CommissionerofInternalRevenue

taxationandconfirmthedictumthatthepowertotaxinvolvesthepowerto
destroy.Thateventualityshouldbeobviated.
Same Partnership Coownership Where the father sold his rights
over two parcels of land to his four children so they can build their
residence, but the latter after one (1) year sold them and paid the capital
gains,theyshouldnotbetreatedtohaveformedanunregisteredpartnership
andtaxedcorporateincometaxonthesaleanddividendincometaxontheir
shares of the profit's from the sale.Their original purpose was to divide
thelotsforresidentialpurposes.Iflaterontheyfounditnotfeasibletobuild
their residences on the lots because of the high cost of construction, then
they had no choice but to resell the same to dissolve the coownership. The

division of the profit was merely incidental to the dissolution of the co

ownershipwhichwasinthenatureofthingsatemporarystate.Ithadtobe
terminatedsoonerorlater.
Same Same Same Mere sharing of gross income from an isolated
transactiondoesnotestablishapartnership.Article1769(3)of'theCivil
Codeprovidesthat''thesharingofgrossreturnsdoesnotofitselfestablisha
partnership, whether or not the persons sharing them have a j oint or
common right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a partnership or
jointventure.

PETITIONtoreviewthejudgmentoftheCourtofTaxAppeals.
ThefactsarestatedintheopinionoftheCourt.
DemosthenesB.Gadiomaforpetitioners.
AQUINO,J..
Thiscaseisabouttheincometaxliabilityoffourbrothersandsisters
who sold two parcels of land which they had acquired from their
father.
On March 2. 1973 Jose Obillos, Sr. completed payment to
Ortigas&Co.,Ltd.ontwolotswithareasof1,124and963square
meters located at Greenhills, San Juan, Rizal. The next day he
transferred his rights to his four children, the petitioners, to enable
them to build their residences. The company sold the two lots to
petitionersforP178,708.12onMarch13
438

438

SUPREMECOURTREPORTSANNOTATED
Obillos,Jr.vs.CommissionerofInternalRevenue

(Exh.AandB,p.44,Rollo).Presumably,theTorrenstitlesissuedto
themwouldshowthattheywerecoownersofthetwolots.
In 1974, or after having held the two lots for more than a year,
thepetitionersresoldthemtotheWalledCitySecuritiesCorporation
andOlgaCruzCandaforthetotalsumofP313,050(Exh.CandD).
TheyderivedfromthesaleatotalprofitofP134,341.88orP33,584
foreachofthem.Theytreatedtheprofitasacapitalgainandpaidan
incometaxononehalfthereoforonP16,792.
In April, 1980, or one day before the expiration of the fiveyear
prescriptiveperiod,theCommissionerofInternalRevenuerequired
thefourpetitionerstopaycorporateincometaxonthetotalprofitof
P134,336 in addition to individual income tax on their shares
thereof. He assessed P37,018 as corporate income tax, P18,509 as

50% fraud surcharge and P15,547.56 as 42% accumulated interest,

oratotalofP71,074.56.
Not only that. He considered the share of the profits of each
petitionerinthesumofP33,584asa"distributivedividend"taxable
infull(notamerecapitalgainofwhich is taxable) and required
them to pay deficiency income taxes aggregating P56,707.20
includingthe50%fraudsurchargeandtheaccumulatedinterest.
Thus,thepetitionersarebeingheldliablefordeficiencyincome
taxes and penalties totalling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by
them.
The Commissioner acted on the theory that the four petitioners
had formed an unregistered partnership or joint venture within the
meaningofsections24(a)and84(b)oftheTaxCode(Collectorof
InternalRevenuevs.BatangasTrans.Co.,102Phil.822).
Thepetitionerscontestedtheassessments,TwoJudgesoftheTax
Court sustained the same. Judge Roaquin dissented. Hence, the
instantappeal.
We hold that it is error to consider the petitioners as having
formedapartnershipunderarticle1767oftheCivilCode
439

VOL.139,OCTOBER29,1985

439

Obillos,Jr.vs.CommissionerofInternalRevenue

simply because they allegedly contributed P178,708.12 to buy the

twolots,resoldthesameanddividedtheprofitamongthemselves.
Toregardthepetitionersashavingformedataxableunregistered
partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That
eventualityshouldbeobviated.
AstestifiedbyJoseObillos,Jr.,theyhadnosuchintention.They
were coowners pure and simple. To consider them as partners
would obliterate the distinction between a coownership and a
partnership. The petitioners were not engaged in any joint venture
byreasonofthatisolatedtransaction.
Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residencesonthelotsbecauseofthehighcostofconstruction,then
they had no choice but to resell the same to dissolve the co
ownership. The division of the profit was merely incidental to the
dissolutionofthecoownershipwhichwasinthenatureofthingsa
temporary state. It had to be terminated sooner or later. Castan
Tobeassays:

"Cmoestablecereldeslindeentrelacomunidadordinariaocopropiedadyla
sociedad?
"El criterio diferencialsegn la doctrina ms generalizadaest: por
razn del origen, en que la sociedad presupone necesariamente la
convencin,mientrasquelacomunidadpuedeexistiryexisteordinariamente
sin ella y por razn del fin u objecto, en que el objeto de la sociedad es
obtener lucro, mientras que el de la indivisin es slo mantener en su
integridadlacosacomnyfavorecersuconservacin.
"Reflejo de este criterio es la sentencia de 15 de octubre de 1940, en la
quesedicequesiennuestroDerechopositivoseofrecenavecesdificultades
al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de
sociedad, la moderna orientacin de la doctrina cientifca seala como nota
fundamental de diferenciacin, aparte del origen o fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comn
partible en la sociedad, y mera conservacin y aprovechamiento en la
comunidad."(DerechoCivilEspaol,Vol.2,Part1,10Ed,1971,328329).
440

440

SUPREMECOURTREPORTSANNOTATED
Obillos,Jr.vs.CommissioneroflnternalRevenue

Article1769(3)oftheCivilCodeprovidesthat"thesharingofgross
returnsdoesnotofitselfestablishapartnership,whetherornotthe
personssharingthemhaveajointorcommonrightorinterestinany
property from which the returns are derived". There must be an
unmistakableintentiontoformapartnershiporjointventure.**
Such intent was present in Gatchalian vs. Collector of Internal
Revenue,67Phil.666where15personscontributedsmallamounts
to purchase a twopeso sweepstakes ticket with the agreement that
they would divide the prize. The ticket won the third prize of
P50,000. The 15 persons were held liable for income tax as an
unregisteredpartnership.
The instant case is distinguishable from the cases where the
partiesengagedinjointventuresforprofit.Thus,inOavs.
** This view is supported by the following rulings of respondent
Commissioner:
"Coownershipdistinguishedfrompartnership.Wefindthatthecaseat
bar is fundamentally similar to the De Leon case. Thus, like the De Leon
heirs,theLongaheirsinheritedthe'hacienda'inquestionproindivisofrom
theirdeceasedparentstheydidnotcontributeorinvestadditionalcapitalto
increaseorexpandtheinheritedpropertiestheymerelycontinueddedicating
the property to the use to which it had been put by their forebears they
individually reported in their tax returns their corresponding shares in the
incomeandexpensesofthe'hacienda',andtheycontinuedformanyyearsthe

statusofcoownershipinorder,asconcededbyrespondent,'topreserveits
(the 'hacienda') value and to continue the existing contractual relations with
the Central Azucarera de Bais for milling purposes/ " (Longa vs. Aranas,
CTACaseNo.653,July31,1963).
"Allcoownershipsarenotdeemedunregisteredpartnership.Coheirs
who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within
the purview of the income tax law. To hold otherwise, would be to subject
the income of all coownerships of inherited properties to the tax on
corporations,inasmuchasifapropertydoesnotproduceanincomeatall,it
is not subject to any kind of income tax, whether the income tax on
individualsortheincometaxoncorporation."(DeLeonvs.CIR,CTACase
No. 738, September 11, 1961, cited in Araas, 1977 Tax Code Annotated,
Vol.1,1979Ed.,pp.7778),
441

VOL.139,OCTOBER29,1985

441

Obillos,Jr.vs.CommissioneroflnternalRevenue
CommissionerofInternalRevenue,L19342,May25,1972,45SCRA74,
whereafteranextrajudicialsettlementthecoheirsusedtheinheritanceorthe
incomes derived therefrom as a common fund to produce profits for
themselves,itwasheldthattheyweretaxableasanunregisteredpartnership.

It is likewise different from Reyes vs. Commissioner of Internal

Revenue, 24 SCRA 198 where father and son purchased a lot and
building, entrusted the administration of the building to an
administrator and divided equally the net income, and from
Evangelistavs.CollectorofInternalRevenue,102Phil.140 where
the three Evangelista sisters bought four pieces of real property
whichtheyleasedtovarioustenantsandderivedrentalstherefrom.
Clearly, the petitioners in these two cases had formed an
unregisteredpartnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to the
petitionersandwhetherhepaidthedonor'stax(Seeart.1448,Civil
Code), We are not prejudging this matter. It might have already
prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and
setaside.Theassessmentsarecancelled.Nocosts.
SOORDERED.
AbadSantos,Escolin,CuevasandAlampay,JJ.,concur.
Concepcion,Jr.,onleave.

Judgmentreversedandsetaside.
Notes.Taxes being the chief source of revenue for the
Government to keep it running must be paid immediately and
without delay. (Collector of Internal Revenue vs. Yuseco, 3 SCRA
313.)
Asthesaleofthebakeryinquestionwasnotasingleassetbutof
individualassetsthatmadeupthebusiness,itwasincumbentupon
theownertopointoutwhatpartofthepricehehadreceivedcould
be fairly attributed to each asset so that the capital and/or ordinary
gainstaxesproperlypayableuponthesaleofthebusinesscouldbe
ascertained,Hisfailuretodosois
442

442

SUPREMECOURTREPORTSANNOTATED
Obillos,Jr.vs.CommissioneroflnternalRevenue

sufficientreasonfordenyinghispetitionforrefundofthetaxeshe
paid.(Ferrervs.CommissionerofInternalRevenue,5SCRA1022.)
Mere sharing of gross returns does not establish a partnership,
sinceinapartnership,thepartnerssharenetprofitsaftersatisfying
allthepartnership'sliabilities(SeeArticle1839,CivilCode.)
The receipt, however, of a share in the net profits establishes a
prima facie evidence to partnership which, however, may be
rebuttedbyproofthatwhathasbeenreceivedwerenotprofits.Thus,
the receipt of share in the profits as (a) payment of a debt by
installment or otherwise, as (b) wages of an employee or rent to a
landlord,as(c)annuitytoawidoworrepresentativeofthedeceased
partner,as(d)interestonaloan,oras(e)aconsiderationforthesale
ofgoodwill,cannotbeconsideredasindicativeofestablishmentofa
partnership.
By the weight of authority, an agreement to share both profits
and the losses tends strongly to establish the existence of a
partnership, and conversely, lack of such agreement tends strongly
tonegativetheexistenceofapartnership.(40Am.Jur.,Sec.39.)
The participation in profits is undoubtedly prima facie evidence
of a partnership, as well as generally as under the Uniform
PartnershipAct,and,intheabsenceofcontradictoryevidence,will
control. But the presumption of partnership arising from a
participation in profits may be rebutted, and outweighed by other
circumstances,suchasevidencethattheparticipationwasreferable
tosomeotherreason,suchascompensationforservicesrenderedas
agent,broker,salesmanorotherwise.(40Am.Jur.,Sec.38,pp.151
152.)