Art. 1769.

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each
other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether

such-co-owners or co-possessors do or do not share any profits made by the use of
the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits
of the business;

(e) As the consideration for the sale of a goodwill of a business or other

property by installments or otherwise. (n)

Art. 1825. When a person, by words spoken or written or by conduct, represents himself,
or consents to another representing him to anyone, as a partner in an existing partnership
or with one or more persons not actual partners, he is liable to any such persons to whom
such representation has been made, who has, on the faith of such representation, given
credit to the actual or apparent partnership, and if he has made such representation or
consented to its being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so giving credit
by or with the knowledge of the apparent partner making the representation or consenting
to its being made:

(1) When a partnership liability results, he is liable as though he were an actual

member of the partnership;

(2) When no partnership liability results, he is liable pro rata with the other
persons, if any, so consenting to the contract or representation as to incur liability,
otherwise separately.
When a person has been thus represented to be a partner in an existing partnership, or
with one or more persons not actual partners, he is an agent of the persons consenting to
such representation to bind them to the same extent and in the same manner as though he
were a partner in fact, with respect to persons who rely upon the representation. When all
the members of the existing partnership consent to the representation, a partnership act or
obligation results; but in all other cases it is the joint act or obligation of the person acting
and the persons consenting to the representation. (n)

JOSE GATCHALIAN ET AL. v. COLLECTOR OF INTERNAL REVENUE, GR No. 45425,

1939-04-29

Facts:

plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that defendant is the
Collector of Internal Revenue of the Philippines;... plaintiffs, in order to enable them to purchase
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:... immediately thereafter... plaintiffs purchased... from... ne of the duly authorized
agents of the National Charity Sweepstakes Office one ticket bearing No. 178637... and that the
said ticket was registered in the name of Jose Gatchalian and Company... as a result

, the above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of
P50,000... and... which check was cashed... by Jose Gatchalian & Company

Gatchalian was required by income tax examiner Alfredo David to file the corresponding income
tax return covering the prize won by Jose Gatchalian & Company and that... the said return was
signed by

Gatchalian... efendant made an assessment against... requesting the payment of the sum of
P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan... plaintiffs, through their
attorney, sent to defendant a reply... requesting exemption from the payment of the income tax to
which reply there were enclosed fifteen (15)... separate individual income tax returns filed
separately by each one of the plaintiffs... defendant... denied plaintiffs' request... for exemption
from the payment of tax... in view of the failure of the plaintiffs to pay the amount of tax
demanded by the defendant, notwithstanding subsequent demand... issued a warrant of distraint
and levy against the property of the plaintiffs... plaintiffs,... through Gregoria Cristobal, Maria C.
Legaspi and Jesus Legaspi,... paid under protest the sum of P601.51... as part of the tax... and
requested defendant that plaintiffs be allowed to pay under protest the balance... plaintiffs
demanded upon defendant the refund of the total sum of

P1,863.44... paid under protest by them but that defendant refused and still refuses to refund the
said amount... notwithstanding the plaintiffs' demands.

Issues:

Whether the plaintiffs formed a partnership, or merely a community of property without a

personality of its own
Ruling:

There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulated facts the
plaintiffs organized a partnership of a civil nature because each of them put up money... to buy a
sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they
did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only
formed, but upon the organization thereof and the winning of... the prize, Jose Gatchalian
personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as co-
partner, as such collected the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner,... in the same capacity, collected the said check.
All these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound
to pay the income tax which the defendant collecte

There is no merit in... plaintiffs' contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.

PASCUAL v. Commissioner of Internal Revenue #10 BUSORG

G.R. No. 78133 October 18, 1988

GANCAYCO, J.:

FACTS:

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land were
sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioner realized a net profit in
the sale made in 1968 in the amount of P165, 224.70, while they realized a net profit of P60,000 in the
sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 .

Respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners
in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code; that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to individual income tax.

ISSUE:

Whether petitioners formed an unregistered partnership subject to corporate income tax (partnership vs.
co-ownership)

RULING:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed
a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:(2) Co-ownership or co-
possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property; (3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or interest
in any property from which the returns are derived;

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must be a clear intent to form a partnership,
the existence of a juridical personality different from the individual partners, and the freedom of each party
to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable for corporate income tax,
as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with assets
that can be held liable for said deficiency corporate income tax, then petitioners can be held individually
liable as partners for this unpaid obligation of the partnership.