Litonjua Jr vs Litonjua Sr

Aurelio and Eduardo are brothers. In 1973, Aurelio alleged that  Eduardo entered into a
contract of partnership with him. Aurelio showed as evidence a letter sent to him by
Eduardo that the latter is allowing Aurelio to manage their family business (if Eduardo’s
away) and in exchange thereof he will be giving Aurelio P1 million or 10% equity,
whichever is higher. A memorandum was subsequently made for the said partnership
agreement. The memorandum this time stated that in exchange of Aurelio, who just got
married, retaining his share in the family business (movie theatres, shipping and land
development) and some other immovable properties, he will be given P1 Million or 10%
equity in all these businesses and those to be subsequently acquired by them
whichever is greater.
In 1992 however, the relationship between the brothers went sour. And so Aurelio
demanded an accounting and the liquidation of his share in the partnership. Eduardo
did not heed and so Aurelio sued Eduardo.
ISSUE: Whether or not there exists a partnership.
HELD: No. The partnership is void and legally nonexistent. The documentary evidence
presented by Aurelio, i.e. the letter from Eduardo and the Memorandum, did not prove
partnership.
The 1973 letter from Eduardo on its face, contains typewritten entries, personal in tone,
but is unsigned and undated. As an unsigned document, there can be no quibbling that
said letter does not meet the public instrumentation requirements exacted under Article
1771 (how partnership is constituted) of the Civil Code. Moreover, being unsigned and
doubtless referring to a partnership involving more than P3,000.00 in money or
property, said letter cannot be presented for notarization, let alone registered with the
Securities and Exchange Commission (SEC), as called for under the Article 1772
(capitalization of a partnership) of the Code. And inasmuch as the inventory requirement
under the succeeding Article 1773 goes into the matter of validity when immovable
property is contributed to the partnership, the next logical point of inquiry turns on the
nature of Aurelio’s contribution, if any, to the supposed partnership.
The Memorandum is also not a proof of the partnership for the same is not a public
instrument and again, no inventory was made of the immovable property and no
inventory was attached to the Memorandum. Article 1773 of the Civil Code requires that
if immovable property is contributed to the partnership an inventory shall be had and
attached to the contract.

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

FACTS:

The petitioners are 41 non-life domestic insurance corporations. They issued risk
insurance policies for machines. The petitioners in 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign
insurance corporation.  The reinsurance treaties required petitioners to form a pool,
which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for 1975. On the basis of
this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the
petitioners, respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals
dismissed their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter’s collection of premiums on behalf of its members, the
ceding companies, was taxable income. 
ISSUE/S:
1. Whether or not the pool is taxable as a corporation.
2.
HELD:
3.
4. 1) Yes: Pool taxable as a corporation
5.
6. Argument of Petitioner: The reinsurance policies were written by them
“individually and separately,” and that their liability was limited to the extent of
their allocated share in the original risks thus reinsured. Hence, the pool did not
act or earn income as a reinsurer. Its role was limited to its principal function of
“allocating and distributing the risk(s) arising from the original insurance among
the signatories to the treaty or the members of the pool based on their ability to
absorb the risk(s) ceded[;] as well as the performance of incidental functions,
such as records, maintenance, collection and custody of funds, etc.”
7.
8. Argument of SC: According to Section 24 of the NIRC of 1975:
9.
10. “SEC. 24.  Rate of tax on corporations.  --  (a)  Tax on domestic
corporations.  --  A tax is hereby imposed upon the taxable net income received
during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized,
but not including duly registered general co-partnership (compañias colectivas),
general professional partnerships, private educational institutions, and building
and loan associations xxx.”
 11.
12. Ineludibly, the Philippine legislature included in the concept of corporations those
entities that resembled them such as unregistered partnerships and associations.
Interestingly, the NIRC’s inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with
Sec. 22 reads:
13.
14. “SEC. 27.  Rates of Income Tax on Domestic Corporations.  -- 
15. (A)  In General.  --  Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22 (B) of this Code, and taxable under
this Title as a corporation xxx.”
16. “SEC. 22.  --  Definition.  --  When used in this Title:
17. xxx  xxx                                    xxx
18. (B)  The term ‘corporation’ shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under
a service contract without the Government.  ‘General professional
partnerships’ are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
19. Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section
24 covered these unregistered partnerships and even associations or joint
accounts, which had no legal personalities apart from their individual members.
20. Furthermore, Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich may be considered a partnership because
it contains the following elements: (1) The pool has a common fund, consisting of
money and other valuables that are deposited in the name and credit of the pool.
This common fund pays for the administration and operation expenses of the
pool. (2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for each of
the ceding companies. (3) While, the pool itself is not a reinsurer and does not
issue any policies; 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 pursuant to the agreement with Munich.
Profit motive or business is, therefore, the primordial reason for the pool’s
formation.

DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax
purposes – Under the old internal revenue code, “A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter
how created or organized, xxx.” Ineludibly, the Philippine legislature included in the
concept of corporations those entities that resembled them such as unregistered
partnerships and associations.

Lim vs. Philippine Fishing Gear Industries Inc. [GR 136448, 3 November 1999]

FACTS: Lim Tong Lim requested Peter Yao and Antonio Chuato engage in commercial
fishing with him. The three agreed to purchase two fishing boats but since they do not
have the money they borrowed from one Jesus Lim the brother of Lim Tong Lim.
Subsequently, they again borrowed money for the purchase of fishing nets and other
fishing equipments. Yao and Chua represented themselves as acting in behalf of
“Ocean Quest Fishing Corporation” (OQFC) and they contracted with Philippine Fishing
Gear Industries (PFGI) for the purchase of fishing nets amounting to more than P500k.
However, they were unable to pay PFGI and hence were sued in their own names as
Ocean Quest Fishing Corporation is a non-existent corporation. Chua admitted his
liability while Lim Tong Lim refused such liability alleging that Chua and Yao acted
without his knowledge and consent in representing themselves as a corporation.
 
 
ISSUE: Whether Lim Tong Lim is liable as a partner
 
 
HELD: Yes. It is apparent from the factual milieu that the three decided to engage in a
fishing business. Moreover, their Compromise Agreement had revealed their intention to
pay the loan with the proceeds of the sale and to divide equally among them the excess
or loss. The boats and equipment used for their business entails their common fund.
The contribution to such fund need not be cash or fixed assets; it could be an intangible
like credit or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership. The principle of corporation by estoppel cannot apply in
the case as Lim Tong Lim also benefited from the use of the nets in the boat, which was
an asset of the partnership. Under the law on estoppel, those acting in behalf of a
corporation and those benefited by it, knowing it to be without valid existence are held
liable as general partners. Hence, the question as to whether such was legally formed
for unknown reasons is immaterial to the case.
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.

ARBES V POLISTICO

FACTS: This is an action to bring about liquidation of the funds and property of the
association called Turnuhan Polistico & Co. The plaintiffs were members or
shareholders, and the defendants were designated as president-treasurer, directors and
secretary of said association. By agreement of the parties, the court appointed a
commissioner to examine all the books, documents, and accounts of Turnuhan Polistico
& Co. The commissioner rendered his report, showing a balance of the cash on hand
inthe amount of P24,607.80. The trial court in accepting the report, rendered judgment,
holding that the association Turnuhan Polistico & Co. is unlawful, and sentencing the
defendants jointly and severally to return the amount of P24,607.80,as well as the
documents showing the uncollected credits of the association, to the plaintiffs in this
case, and to the rest of the members of the said association represented by said
plaintiffs. There is no question that Turnuhan Polistico & Co. is an unlawful partnership,
but the appellants allege that because it is so, some charitable institution to whom the
partnership funds may be ordered to be turned over, should be included, as a party
defendant. The appellants refer to article 1666 of the CivilCode, particularly the second
paragraph, which provides:“When the dissolution of an unlawful partnership is decreed,
the profits shall begiven to charitable institutions of the domicile of the partnership, or, in
default of such, to those of the province.”

ISSUE: WHETHER OR NOT A CHARITABLE INSTITUTION IS A NECESSARY

PARTY IN THISCASE.

RULING: NO, no charitable institution is a necessary party in the present case of

determination of the rights of the parties. The action which may arise from said article, in
the case of unlawful partnership, is that for the recovery of the amounts paid by the
member from those in charge of the administration of said partnership, and it is not
necessary for the said parties to base their action to the existence of the partnership,
but on the fact that of having contributed some money to the partnership capital. Hence,
the charitable institution of the domicile of the partnership, and in the default thereof,
those of the province are not necessary parties in this case. In so ruling, the court had
the occasion of explaining the scope and spirit of the provision of Article 1666 of the
Civil Code (now Article 1770 of the New CivilCode). With regard to Contributions of an
Illegal Partnership: the court holds that –(1) The partner who limits himself to
demanding only the amount contributed by him need not resort to the partnership
contract on which to base his action since said contract does not exist in the eyes of
the law, the purpose from which the contribution was made has not come into
existence, and the administrator of the partnership holding said contribution retains what
belongs to others, without any consideration ; for which reason he is not bound to return
it and he who has paid in his share is entitled to recover it.(2) Our Code does not state
whether, upon the dissolution of the unlawful partnership, the amounts contributed are
to be returned by the partners, because it only deals with the disposition of the profits;
but the fact that said contributions are not included in the disposal prescribed profits,
shows that in consequences of said exclusion, the general law must be followed, and
hence the partners should reimburse the amount of their respective contributions.(3)
Any other solution is immoral, and the law will not consent to the latter remaining in the
possession of the manager or administrator who has refused to return them, by denying
to the partners the action to demand them. With regard to Profits of an Illegal
Partnership: the court holds that –(1) The article cited above permits no action for the
purpose of obtaining the earnings made by the unlawful partnership, during its existence
as result of the business in which it was engaged, because for the purpose, the partner
will have to base his action upon the partnership contract, which is to annul and without
legal existence by reason of its unlawful object; and it is self evident that what does not
exist cannot be a cause of action.(2) Profits earned in the course of the partnership,
because they do not constitute or represent the partner's contribution but are the result
of the industry, business or speculation which is the object of the partnership, and
therefore, in order to demand the proportional part of the said profits, the partner would
have to base his action on the contract which is null and void, since this partition or
distribution of the profits is one of the juridical effects thereof.(3) Furthermore, it would
be immoral and unjust for the law to permit a profit from an industry prohibited by it.

EUFEMIA EVANGELISTA v. COLLECTOR OF INTERNAL REVENUE, GR No. L-9996,

1957-10-15
Facts:
This is a petition, filed by Eufemia Evangelista
, Manuela Evangelista and Francisca Evangelista,... for review of a decision of the Court
of Tax Appeals,... hold that the petitioners are liable for the income tax, real estate
dealer's tax and the residence tax for the years 1945 to 1949... in the total amount of  
P6,878.34,... It apears from the stipulation submitted by the parties:... petitioners
borrowed from their father the sum of P59,140.00 which amount together with their
personal monies  was used by them for the purpose of buying real properties,... they
appointed their brother Simeon Evangelista to 'manage their properties with full power
to lease; to collect and receive rents; to issue receipts therefor; in default of such
payment, to bring' suits against the defaulting... tenant; to sign all letters, contracts, etc.,
for and in their behalf, and to endorse and deposit all notes and checks for them;... after
having bought the above-mentioned real properties, the petitioners had the same rented
or leased to various tenants... respondent Collector of Internal Revenue demanded the
payment, of income tax... letter of demand and the corresponding assessments were
delivered to petitioners
, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer
that "the decision of the respondent contained in. his letter of demand... be reversed,
and that they be absolved from the payment of the taxes in question
Court of Tax Appeals rendered... decision for the respondent
, and, a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.
Petitioners insist, however, that they are mere co-owners
, not copartners, for, in consequence of the acts performed by them, a legal entity, with
a personality independent of that of its members, did not come into existence, and some
of the characteristics of partnerships... are lacking in the case at bar.
Issues:
whether petitioners are subject to the tax on corporations provided for in section 24 of
National Internal Revenue Code
Ruling:
Article 1767 of the Civil Code of the Philippines provides :
 
"By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing1 the profits
among- themselves."
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element is undoubtedly
present in the... case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence, the issue narrows down to
their intent in acting as  they  did.  Upon consideration of all the  facts and
circumstances surrounding the... case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same among
themselves,... because:
1.  Said common fund was... created... purposely.  What is more they jointly borrowed a
substantial portion thereof in order to... establish said common fund.
They invested the  same, not merely in one transaction, but in a series of transactions.
s strongly indicative of a pattern or common design that was not limited to... the
conservation and preservation of the aforementioned common fund
.  In other words, one cannot but perceive a character of habituality peculiar to business
transactions engaged in for... purposes of gain.
The  aforesaid lots  were not  devoted to  residential purposes,... , or to other personal
uses, of petitioners herein.
The properties were leased separately to several persons... properties have been under
the management of one person, namely, Simeon Evangelista
Thus, the affairs relative to said properties have been handled as if the same belonged
to a corporation or business enterprise operated for profit.
as defined in section 84(6) of said Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying expression clearly indicates that a
joint venture... need not be undertaken in any of the standard forms, or in conformity
with the usual requirements of the law on partnerships, in order that one couid be
deemed constituted for purposes of the tax on corporations. Again, pursuant to said
section 84(6), the term "corporation"... includes, among other, "joint accounts, (cuentas
en participation)" and "associations", none of which his a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded
that personality as a condition... essential to the existence of the partnerships, therein
referred to. In fact, as above stated, "duly registered general copartnerships" which are
possessed of the aforementioned personality have been expressly excluded by law
(sections 24 and 84 [6]) from the... connotation of the term "corporation." It may not be
amiss to add that petitioners' allegation to the effect that their liability in connection with
the leasing of the lots above referred to, under the management of one person even if
true, on which we express no opinion tends... to increase the similarity between the
nature of their venture and that of corporations, and is, therefore, an additional
argument in favor of the imposition of said tax on corporations.
For purposes of the tax on corporations, our National Internal Revenue Code, includes
these partnerships with the exception only of duly registered general copartnerships
within the purview of the term "corporation."
It is, therefore, clear to our mind that... petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465
provides in part:
 
"Entities liable to residence tax. Every corporation, no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines
shall pay an annual residence tax of five pesos and an annual additional tax... which, in
no case, shall exceed one thousand pesos, in accordance with the following schedule:   
*    *    *.
 
"The term 'corporation' as used in this Act includes joint-stock company, partnership,
joint account (cuentas en participacion), association or insurance company, no matter
how created or organized." (italics ours.)
Considering that the pertinent part of this provision is analogous to that of sections 24
and 84 (b) of our National Internal Revenue Code (Commonwealth Act No. 466), and
that the latter was approved on June 15, 1939, the day immediately after the approval of
said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation"
and "partnership" are used in both statutes with substantially the same meaning.
Consequently, petitioners are subject, also, to the residence tax for corporations.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed

Alfredo Aguila Jr vs Court of Appeals et al

In April 1991, the spouses Ruben and Felicidad Abrogar entered into a loan agreement
with a lending firm called A.C. Aguila & Sons, Co., a partnership. The loan was for
P200k. To secure the loan, the spouses mortgaged their house and lot located in a
subdivision. The terms of the loan further stipulates that in case of non-payment, the
property shall be automatically appropriated to the partnership and a deed of sale be
readily executed in favor of the partnership. She does have a 90 day redemption period.
Ruben died, and Felicidad failed to make payment. She refused to turn over the
property and so the firm filed an ejectment case against her (wherein she lost). She also
failed to redeem the property within the period stipulated. She then filed a civil case
against Alfredo Aguila, manager of the firm, seeking for the declaration of nullity of the
deed of sale. The RTC retained the validity of the deed of sale. The Court of Appeals
reversed the RTC. The CA ruled that the sale is void for it is a pactum commissorium 
sale which is prohibited under Art. 2088 of the Civil Code (note the disparity of the
purchase price, which is the loan amount, with the actual value of the property which is
after all located in a subdivision).
ISSUE: Whether or not the case filed by Felicidad shall prosper.
HELD: No. Unfortunately, the civil case was filed not against the real party in interest.
As pointed out by Aguila, he is not the real party in interest but rather it was the
partnership A.C. Aguila & Sons, Co. The Rules of Court provide that “every action must
be prosecuted and defended in the name of the real party in interest.” A real party in
interest is one who would be benefited or injured by the judgment, or who is entitled to
the avails of the suit. Any decision rendered against a person who is not a real party in
interest in the case cannot be executed. Hence, a complaint filed against such a person
should be dismissed for failure to state a cause of action, as in the case at bar.
Under Art. 1768 of the Civil Code, a partnership “has a juridical personality separate
and distinct from that of each of the partners.” The partners cannot be held liable for the
obligations of the partnership unless it is shown that the legal fiction of a different
juridical personality is being used for fraudulent, unfair, or illegal purposes. In this case,
Felicidad has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is
being used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject
property is in the name of A.C. Aguila & Sons, Co. It is the partnership, not its officers or
agents, which should be impleaded in any litigation involving property registered in its
name. A violation of this rule will result in the dismissal of the complaint.

LORENZO OÑA V CIR

Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five
children. A civil case was instituted for the settlement of her state, in which Oña was
appointed administrator and later on the guardian of the three heirs who were still
minors when the project for partition was approved. This shows that the heirs have
undivided ½ interest in 10 parcels of land, 6 houses and money from the War Damage
Commission.

Although the project of partition was approved by the Court, no attempt was made to
divide the properties and they remained under the management of Oña who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a
result, petitioners’ properties and investments gradually increased. Petitioners returned
for income tax purposes their shares in the net income but they did not actually receive
their shares because this left with Oña who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership
and therefore, subject to the corporate income tax, particularly for years 1955 and 1956.
Petitioners asked for reconsideration, which was denied hence this petition for review
from CTA’s decision.

Issue:   
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax

Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Oña and let him use their
shares as part of the common fund for their ventures, even as they paid corresponding
income taxes on their respective shares.
Yes. For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding. The reason
is simple. From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or instrument
were executed, for the purpose, for tax purposes, at least, an unregistered partnership
is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships —

 The term “partnership” includes a syndicate, group, pool, joint venture or other

unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on… (8 Merten’s Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships — within the purview
of the term “corporation.” It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the
income tax for corporations. Judgment affirmed.

G.R. L-68118 Obillos v. CIR

Facts: 
In 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan.
The next day, he transferred his rights to his four children for them to build their own
residences. The Torrens title would show that they were co-owners of the two lots.
However, the petitioners resold them to Walled City Securities Corporation and Olga
Cruz Canda for P313k or P33k for each of them. They treated the profit as capital
gains and paid an income tax of P16,792.00 

The CIR requested the petitioners to pay the corporate income tax of their shares, as
this entire assessment is based on the alleged partnership under Article 1767 of the
Civil Code; simply because they contributed each to buy the lots, resold them and
divided the profits among them.

But as testified by Obillos, they have no intention to form the partnership and that it was
merely incidental since they sold the said lots due to high demand of construction.
Naturally, when they sell them as co-partners, it will result to the share of profits.
Further, their intention was to divide the lots for residential purposes.

Issue: 

Was there a partnership, hence, they are subject to corporate income taxes?

Court Ruling: 

Not necessarily. As Article 1769 (3) of the Civil Code provides: the sharing of gross
returns does not in 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. There must be an unmistakeable intention to form a partnership or joint
venture. 

In this case, the Commissioner should have investigated if the father paid donor's
tax to establish the fact that there was really no partnership. 

Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988

25

MAR

[GANCAYCO, J.]

FACTS:
Petitioners bought two (2) parcels of land and a year after, they bought another three (3)
parcels of land. Petitioners subsequently sold the said lots in 1968 and 1970, and
realized net profits. The corresponding capital gains taxes were paid by petitioners in
1973 and 1974 by availing of the tax amnesties granted in the said years. However, the
Acting BIR Commissioner assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment asserting that they had availed of tax
amnesties way back in 1974. In a reply, 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; and that the availment of tax amnesty under
P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the deficiency income tax
assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-

ownership for the purposes of income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under
unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the profits
among themselves (Art. 1767, Civil Code of the Philippines). In the present case, there
is no evidence that petitioners entered into an agreement to contribute money, property
or industry to a common fund, and that they intended to divide the profits among
themselves. 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. Hence, 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.

Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988

25

MAR

[GANCAYCO, J.]

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3)
parcels of land. Petitioners subsequently sold the said lots in 1968 and 1970, and
realized net profits. The corresponding capital gains taxes were paid by petitioners in
1973 and 1974 by availing of the tax amnesties granted in the said years. However, the
Acting BIR Commissioner assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment asserting that they had availed of tax
amnesties way back in 1974. In a reply, 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; and that the availment of tax amnesty under
P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the deficiency income tax
assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-

ownership for the purposes of income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under
unregistered partnership.

By the contract of partnership two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the profits
among themselves (Art. 1767, Civil Code of the Philippines). In the present case, there
is no evidence that petitioners entered into an agreement to contribute money, property
or industry to a common fund, and that they intended to divide the profits among
themselves. 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. Hence, 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.
Lilibeth Sunga-Chan vs Lamberto Chua

In 1977, Chua and Jacinto Sunga verbally agreed to form a partnership for the sale and
distribution of Shellane LPGs. Their business was very profitable but in 1989 Jacinto
died. Upon Jacinto’s death, his daughter Lilibeth took over the business as well as the
business assets. Chua then demanded for an accounting but Lilibeth kept on evading
him. In 1992 however, Lilibeth gave Chua P200k. She said that the same represents a
partial payment; that the rest will come after she finally made an accounting. She never
made an accounting so in 1992, Chua filed a complaint for “Winding Up of Partnership
Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ of
Preliminary Attachment” against Lilibeth.
Lilibeth in her defense argued among others that Chua’s action has prescribed.
ISSUE: Whether or not Chua’s claim is barred by prescription.
HELD: No. The action for accounting filed by Chua three (3) years after Jacinto’s death
was well within the prescribed period.   The Civil Code provides that an action to
enforce an oral contract prescribes in six (6) years while the right to demand an
accounting for a partner’s interest as against the person continuing the business
accrues at the date of dissolution, in the absence of any contrary agreement.
Considering that the death of a partner results in the dissolution of the partnership, in
this case, it was after Jacinto’s death that Chua as the surviving partner had the right to
an account of his interest as against Lilibeth.  It bears stressing that while Jacinto’s
death dissolved the partnership, the dissolution did not immediately terminate the
partnership.  The Civil Code expressly provides that upon dissolution, the partnership
continues and its legal personality is retained until the complete winding up of its
business, culminating in its termination.