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Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS
and REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
This case is about the income tax liability of four brothers and
sisters 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. on two lots with areas of 1,124 and 963 square 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 petitioners
for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they
were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the
petitioners resold them to the Walled City Securities Corporation
and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D).
They derived from the sale a total profit of P134,341.88 or P33,584
for each of them. They treated the profit as a capital gain and paid
an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year
prescriptive period, the Commissioner of Internal Revenue required
the four petitioners to pay corporate income tax on the total profit
of 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,


or a total of P71,074.56.
Not only that. He considered the share of the profits of each
petitioner in the sum of P33,584 as a " taxable in full (not a mere
capital gain of which is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50%
fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income
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
meaning of sections 24(a) and 84(b) of the Tax Code (Collector of
Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax
Court sustained the same. Judge Roaquin dissented. Hence, the
instant appeal.
We hold that it is error to consider the petitioners as having formed
a partnership under article 1767 of the Civil Code simply because
they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered
partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They
were co-owners pure and simple. To consider them as partners
would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture
by reason of that isolated transaction.

Their original purpose was to divide the lots for residential


purposes. If later on they found it not feasible to build 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-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later. Castan
Tobeas says:
Como establecer el deslinde entre la comunidad
ordinaria o copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas
generalizada-esta: por razon del origen, en que la
sociedad presupone necesariamente la convencion,
mentras que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del fin objecto, en
que el objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo mantener en
su integridad la cosa comun y favorecer su
conservacion.
Reflejo de este criterio es la sentencia de 15 de
Octubre de 1940, en la que se dice que si en nuestro
Derecho positive se ofrecen a veces dificultades al
tratar de fijar la linea divisoria entre comunidad de
bienes y contrato de sociedad, la moderna
orientacion de la doctrina cientifica seala como nota
fundamental de diferenciacion aparte del origen de
fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro
comun partible en la sociedad, y mera
conservacion y aprovechamiento en la comunidad.
(Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971,
328- 329).
Article 1769(3) of the Civil Code provides that "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". There must be an
unmistakable intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal
Revenue, 67 Phil. 666, where 15 persons contributed small
amounts to purchase a two-peso 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 unregistered partnership.
The instant case is distinguishable from the cases where the parties
engaged in joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent
Commissioner:
Co-owership distinguished from partnership.We
find that the case at bar is fundamentally similar to
the De Leon case. Thus, like the De Leon heirs, the
Longa heirs inherited the 'hacienda' in questionproindiviso from their deceased parents; they did not
contribute or invest additional ' capital to increase or
expand the inherited properties; they merely
continued dedicating 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 income and expenses of
the 'hacienda', and they continued for many years
the status of co-ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda') value
and to continue the existing contractual relations
with the Central Azucarera de Bais for milling
purposes. Longa vs. Aranas, CTA Case No. 653, July
31, 1963).
All co-ownerships are not deemed unregistered
pratnership.Co-Ownership 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
co-ownerships of inherited properties to the tax on
corporations, inasmuch as if a property does not
produce an income at all, it is not subject to any kind
of income tax, whether the income tax on individuals
or the income tax on corporation. (De Leon vs. CI R,
CTA Case No. 738, September 11, 1961, cited in
Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed.,
pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45
SCRA 74, where after an extrajudicial settlement the co-heirs used
the inheritance or the incomes derived therefrom as a common
fund to produce profits for themselves, it was held that they were
taxable as an unregistered partnership.
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
Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where
the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom.
Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448,
Civil Code). We are not prejudging this matter. It might have
already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set
aside. The assessments are cancelled. No costs.
SO ORDERED.
G.R. No. 75875 December 15, 1989

WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P.


WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN,
ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION,
ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE
FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V.
CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN
GRIFFIN, DAVID P. WHITTINGHAM, CHARLES CHAMSAY and
LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION,
ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO, JR.,
ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF
APPEALS, respondents.
These consolidated petitions seek the review of the amended
decision of the Court of Appeals in CA-G.R. SP Nos. 05604 and
05617 which set aside the earlier decision dated June 5, 1986, of
the then Intermediate Appellate Court and directed that in all
subsequent elections for directors of Sanitary Wares Manufacturing
Corporation (Saniwares), American Standard Inc. (ASI) cannot
nominate more than three (3) directors; that the Filipino
stockholders shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can
nominate only six (6) candidates and in the event they cannot
agree on the six (6) nominees, they shall vote only among

themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for
the primary purpose of manufacturing and marketing sanitary
wares. One of the incorporators, Mr. Baldwin Young went abroad to
look for foreign partners, European or American who could help in
its expansion plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an Agreement
with Saniwares and some Filipino investors whereby ASI and the
Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall
initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues
in these cases on the nomination and election of the directors of
the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation
shall be substantially in the form annexed hereto as
Exhibit A and, insofar as permitted under Philippine
law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be
vested in a Board of Directors, which shall consist of
nine individuals. As long as American-Standard shall

own at least 30% of the outstanding stock of the


Corporation, three of the nine directors shall be
designated by American-Standard, and the other six
shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed
to protect it as a minority group, including the grant of veto powers
over a number of corporate acts and the right to designate certain
officers, such as a member of the Executive Committee whose vote
was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The
corporation was also registered with the Board of Investments for
availment of incentives with the condition that at least 60% of the
capital stock of the corporation shall be owned by Philippine
nationals.
The joint enterprise thus entered into by the Filipino investors and
the American corporation prospered. Unfortunately, with the
business successes, there came a deterioration of the initially
harmonious relations between the two groups. According to the
Filipino group, a basic disagreement was due to their desire to
expand the export operations of the company to which ASI objected
as it apparently had other subsidiaries of joint joint venture groups
in the countries where Philippine exports were contemplated. On
March 8, 1983, the annual stockholders' meeting was held. The
meeting was presided by Baldwin Young. The minutes were taken
by the Secretary, Avelino Cruz. After disposing of the preliminary
items in the agenda, the stockholders then proceeded to the
election of the members of the board of directors. The ASI group
nominated three persons namely; Wolfgang Aurbach, John Griffin
and David P. Whittingham. The Philippine investors nominated six,
namely; Ernesto Lagdameo, Sr., Raul A. Boncan, Ernesto R.
Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R,
Ceniza then nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman, Baldwin Young
ruled the last two nominations out of order on the basis of section 5
(a) of the Agreement, the consistent practice of the parties during
the past annual stockholders' meetings to nominate only nine

persons as nominees for the nine-member board of directors, and


the legal advice of Saniwares' legal counsel. The following events
then, transpired:
... There were protests against the action of the
Chairman and heated arguments ensued. An appeal
was made by the ASI representative to the body of
stockholders present that a vote be taken on the
ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote
on the ruling was taken. The Chairman then
instructed the Corporate Secretary to cast all the
votes present and represented by proxy equally for
the 6 nominees of the Philippine Investors and the 3
nominees of ASI, thus effectively excluding the 2
additional persons nominated, namely, Luciano E.
Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of
the Chairman and announced that all votes accruing
to ASI shares, a total of 1,329,695 (p. 27, Rollo, ACG.R. SP No. 05617) were being cumulatively voted for
the three ASI nominees and Charles Chamsay, and
instructed the Secretary to so vote. Luciano E.
Salazar and other proxy holders announced that all
the votes owned by and or represented by them
467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E.
Salazar. The Chairman, Baldwin Young, nevertheless
instructed the Secretary to cast all votes equally in
favor of the three ASI nominees, namely, Wolfgang
Aurbach, John Griffin and David Whittingham and the
six originally nominated by Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul Boncan, Ernesto
Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and
Baldwin Young. The Secretary then certified for the
election of the following Wolfgang Aurbach, John
Griffin, David Whittingham Ernesto Lagdameo, Sr.,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the

meeting which was duly seconded. There was also a


motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the
Chairman, Baldwin Young, who announced that the
motion was carried and declared the meeting
adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the
ASI representative, stated that the meeting was not
adjourned but only recessed and that the meeting
would be reconvened in the next room. The
Chairman then threatened to have the stockholders
who did not agree to the decision of the Chairman on
the casting of votes bodily thrown out. The ASI
Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of
Saniwares, decided to continue the meeting at the
elevator lobby of the American Standard Building.
The continued meeting was presided by Luciano E.
Salazar, while Andres Gatmaitan acted as Secretary.
On the basis of the cumulative votes cast earlier in
the meeting, the ASI Group nominated its four
nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E.
Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting
Secretary, Andres Gatmaitan, with the explanation
that there was a tie among the other six (6)
nominees for the four (4) remaining positions of
directors and that the body decided not to break the
tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the
parties with the Securities and Exchange Commission (SEC). The
first petition filed was for preliminary injunction by Saniwares,
Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R.
Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated
as SEC Case No. 2417. The second petition was for quo warranto
and application for receivership by Wolfgang Aurbach, John Griffin,
David Whittingham, Luciano E. Salazar and Charles Chamsay

against the group of Young and Lagdameo (petitioners in SEC Case


No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case
No. 2718. Both sets of parties except for Avelino Cruz claimed to be
the legitimate directors of the corporation.
The two petitions were consolidated and tried jointly by a hearing
officer who rendered a decision upholding the election of the
Lagdameo Group and dismissing the quo warranto petition of
Salazar and Chamsay. The ASI Group and Salazar appealed the
decision to the SEC en banc which affirmed the hearing officer's
decision.
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin,
David Whittingham and Charles Chamsay (docketed as AC-G.R. SP
No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No.
05617). The petitions were consolidated and the appellate court in
its decision ordered the remand of the case to the Securities and
Exchange Commission with the directive that a new stockholders'
meeting of Saniwares be ordered convoked as soon as possible,
under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo
Group) the appellate court (Court of Appeals) rendered the
questioned amended decision. Petitioners Wolfgang Aurbach, John
Griffin, David P. Whittingham and Charles Chamsay in G.R. No.
75875 assign the following errors:

REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT


DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS
AND READS PROVISIONS INTO THE AGREEMENT OF
THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the
amended decision on the following grounds:
11.1.
ThatAmendedDecisionwouldsanctiontheCA'sdisregar
d of binding contractual agreements entered into by
stockholders and the replacement of the conditions
of such agreements with terms never contemplated
by the stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction
the deprivation of the property rights of stockholders
without due process of law in order that a favored
group of stockholders may be illegally benefitted and
guaranteed a continuing monopoly of the control of a
corporation. (pp. 14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I

I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE


ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION
AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE
STOCKHOLDERS FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY THE NUMBER OF
SHARES IN SANIWARES, THUS DEPRIVING
PETITIONERS AND THE CORPORATION THEY

THE AMENDED DECISION OF THE RESPONDENT


COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO
TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY
RULE THAT PRIVATE PETITIONERS HEREIN WERE THE
DULY ELECTED DIRECTORS DURING THE 8 MARCH

1983 ANNUAL STOCKHOLDERS MEETING OF


SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are
discussed jointly.
The main issue hinges on who were the duly elected directors of
Saniwares for the year 1983 during its annual stockholders'
meeting held on March 8, 1983. To answer this question the
following factors should be determined: (1) the nature of the
business established by the parties whether it was a joint venture
or a corporation and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of Saniwares' board of
directors.
The rule is that whether the parties to a particular contract have
thereby established among themselves a joint venture or some
other relation depends upon their actual intention which is
determined in accordance with the rules governing the
interpretation and construction of contracts. (Terminal Shares, Inc.
v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales
Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend
that the actual intention of the parties should be viewed strictly on
the "Agreement" dated August 15,1962 wherein it is clearly stated
that the parties' intention was to form a corporation and not a joint
venture.
They specifically mention number 16 under Miscellaneous
Provisions which states:

They object to the admission of other evidence which tends to show


that the parties' agreement was to establish a joint venture
presented by the Lagdameo and Young Group on the ground that it
contravenes the parol evidence rule under section 7, Rule 130 of
the Revised Rules of Court. According to them, the Lagdameo and
Young Group never pleaded in their pleading that the "Agreement"
failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of
an agreement have been reduced to writing, it is to
be considered as containing all such terms, and
therefore, there can be, between the parties and
their successors in interest, no evidence of the terms
of the agreement other than the contents of the
writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or
its failure to express the true intent and agreement
of the parties or the validity of the agreement is put
in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the
writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group
pleaded in their Reply and Answer to Counterclaim in SEC Case No.
2417 that the Agreement failed to express the true intent of the
parties, to wit:
xxx xxx xxx

xxx xxx xxx


c) nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint
venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)

4. While certain provisions of the Agreement would


make it appear that the parties thereto disclaim
being partners or joint venturers such disclaimer is
directed at third parties and is not inconsistent with,
and does not preclude, the existence of two distinct
groups of stockholders in Saniwares one of which
(the Philippine Investors) shall constitute the

majority, and the other ASI shall constitute the


minority stockholder. In any event, the evident
intention of the Philippine Investors and ASI in
entering into the Agreement is to enter into ajoint
venture enterprise, and if some words in the
Agreement appear to be contrary to the evident
intention of the parties, the latter shall prevail over
the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted
together attributing to the doubtful ones that sense
which may result from all of them taken jointly (Art.
1374, New Civil Code). Moreover, in order to judge
the intention of the contracting parties, their
contemporaneous and subsequent acts shall be
principally considered. (Art. 1371, New Civil Code).
(Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending
to prove that the parties joined their efforts in
furtherance of an enterprise for their joint profit, the
question whether they intended by their agreement
to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v.
Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v.
Brownfield (Tex. Civ. A.) 238 SW 725; Hoge v. George,
27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the
Lagdameo and Young Group shows that the parties agreed to
establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which
govern its policy making body are all consistent with a joint venture
and not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin
Young, he negotiated the Agreement with ASI in
behalf of the Philippine nationals. He testified that

ASI agreed to accept the role of minority vis-a-vis the


Philippine National group of investors, on the
condition that the Agreement should contain
provisions to protect ASI as the minority.
An examination of the Agreement shows that certain
provisions were included to protect the interests of
ASI as the minority. For example, the vote of 7 out of
9 directors is required in certain enumerated
corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].
ASI is contractually entitled to designate a member
of the Executive Committee and the vote of this
member is required for certain transactions [Sec. 3
(b) (i)].
The Agreement also requires a 75% super-majority
vote for the amendment of the articles and by-laws
of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also
given the right to designate the president and plant
manager [Sec. 5 (6)]. The Agreement further
provides that the sales policy of Saniwares shall be
that which is normally followed by ASI [Sec. 13 (a)]
and that Saniwares should not export "Standard"
products otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under the
Agreement, ASI agreed to provide technology and
know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the
Agreement requiring a 7 out of 9 votes of the board
of directors for certain actions, in effect gave ASI
(which designates 3 directors under the Agreement)
an effective veto power. Furthermore, the grant to
ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements
for amendments of the articles and by-laws; and
most significantly to the issues of tms case, the

provision that ASI shall designate 3 out of the 9


directors and the other stockholders shall designate
the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns
40% of the capital stock and the Philippine National
stockholders who own the balance of 60%, and that
2) ASI is given certain protections as the minority
stockholder.

enlarges its operations and becomes profitable, the foreign group


undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be
lawfully prevented, the courts should extend protection especially
in industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens.

Premises considered, we believe that under the


Agreement there are two groups of stockholders who
established a corporation with provisions for a special
contractual relationship between the parties, i.e., ASI
and the other stockholders. (pp. 4-5)

The Lagdameo Group stated in their appellees' brief in the Court of


Appeal

Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a
six to three ratio. Each group is assured of a fixed number of
directors in the board.

In fact, the Philippine Corporation Code itself


recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting
rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx

Moreover, ASI in its communications referred to the enterprise as


joint venture. Baldwin Young also testified that Section 16(c) of the
Agreement that "Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint venturers in
respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax
purposes and liabilities to third parties.

2. An agreement between two or more stockholders,


if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the
shares held by them shall be voted as therein
provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.

Quite often, Filipino entrepreneurs in their desire to develop the


industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance.
However, there is always a danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole
or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to
speak. Or the covetousness may come later. As the Philippine firm

Appellants contend that the above provision is


included in the Corporation Code's chapter on close
corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly,
although Saniwares had 95 stockholders at the time
of the disputed stockholders meeting, these 95
stockholders are not separate from each other but
are divisible into groups representing a single
Identifiable interest. For example, ASI, its nominees
and lawyers count for 13 of the 95 stockholders. The
YoungYutivo family count for another 13
stockholders, the Chamsay family for 8 stockholders,

the Santos family for 9 stockholders, the Dy family


for 7 stockholders, etc. If the members of one family
and/or business or interest group are considered as
one (which, it is respectfully submitted, they should
be for purposes of determining how closely held
Saniwares is there were as of 8 March 1983,
practically only 17 stockholders of Saniwares. (Please
refer to discussion in pp. 5 to 6 of appellees'
Rejoinder Memorandum dated 11 December 1984
and Annex "A" thereof).
Secondly, even assuming that Saniwares is
technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is
that it is a close-held corporation. Surely, appellants
cannot honestly claim that Saniwares is a public
issue or a widely held corporation.
In the United States, many courts have taken a
realistic approach to joint venture corporations and
have not rigidly applied principles of corporation law
designed primarily for public issue corporations.
These courts have indicated that express
arrangements between corporate joint ventures
should be construed with less emphasis on the
ordinary rules of law usually applied to corporate
entities and with more consideration given to the
nature of the agreement between the joint venturers
(Please see Wabash Ry v. American Refrigerator
Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des
Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard
Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82
S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d
903; Hathway v. Porter Royalty Pool, Inc., 296 Mich.
90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138
U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These
American cases dealt with legal questions as to the
extent to which the requirements arising from the
corporate form of joint venture corporations should

control, and the courts ruled that substantial justice


lay with those litigants who relied on the joint
venture agreement rather than the litigants who
relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in
organizing the joint venture deviate from the
traditional pattern of corporation management. A
noted authority has pointed out that just as in close
corporations, shareholders' agreements in joint
venture corporations often contain provisions which
do one or more of the following: (1) require greater
than majority vote for shareholder and director
action; (2) give certain shareholders or groups of
shareholders power to select a specified number of
directors; (3) give to the shareholders control over
the selection and retention of employees; and (4) set
up a procedure for the settlement of disputes by
arbitration (See I O' Neal, Close Corporations, 1971
ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation
Code does not necessarily imply that agreements
regarding the exercise of voting rights are allowed
only in close corporations. As Campos and LopezCampos explain:
Paragraph 2 refers to pooling and voting agreements
in particular. Does this provision necessarily imply
that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a
corporation has twenty five stockholders, and
therefore cannot qualify as a close corporation under
section 96, can some of them enter into an
agreement to vote as a unit in the election of
directors? It is submitted that there is no reason for
denying stockholders of corporations other than

close ones the right to enter into not voting or


pooling agreements to protect their interests, as long
as they do not intend to commit any wrong, or fraud
on the other stockholders not parties to the
agreement. Of course, voting or pooling agreements
are perhaps more useful and more often resorted to
in close corporations. But they may also be found
necessary even in widely held corporations.
Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the
requisites laid down by section 96, it is entirely
possible that a corporation which is in fact a close
corporation will not come within the definition. In
such case, its stockholders should not be precluded
from entering into contracts like voting agreements if
these are otherwise valid. (Campos & Lopez-Campos,
op cit, p. 405)
In short, even assuming that sec. 5(a) of the
Agreement relating to the designation or nomination
of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and
binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may
vote their additional equity during elections of Saniwares' board of
directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of
ASI's participation in the management of the
corporation is spelled out in the Agreement. Section
5(a) hereof says that three of the nine directors shall
be designated by ASI and the remaining six by the
other stockholders, i.e., the Filipino stockholders. This
allocation of board seats is obviously in consonance
with the minority position of ASI.

Having entered into a well-defined contractual


relationship, it is imperative that the parties should
honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend
that any allocation of board seats, even in joint
venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights
to cumulative voting as provided in Section 24 of the
Corporation Code. This Court should not be prepared
to hold that any agreement which curtails in any way
cumulative voting should be struck down, even if
such agreement has been freely entered into by
experienced businessmen and do not prejudice those
who are not parties thereto. It may well be that it
would be more cogent to hold, as the Securities and
Exchange Commission has held in the decision
appealed from, that cumulative voting rights may be
voluntarily waived by stockholders who enter into
special relationships with each other to pursue and
implement specific purposes, as in joint venture
relationships between foreign and local stockholders,
so long as such agreements do not adversely affect
third parties.
In any event, it is believed that we are not here
called upon to make a general rule on this question.
Rather, all that needs to be done is to give life and
effect to the particular contractual rights and
obligations which the parties have assumed for
themselves.
On the one hand, the clearly established minority
position of ASI and the contractual allocation of board
seats Cannot be disregarded. On the other hand, the
rights of the stockholders to cumulative voting
should also be protected.
In our decision sought to be reconsidered, we opted
to uphold the second over the first. Upon further
reflection, we feel that the proper and just solution to

give due consideration to both factors suggests itself


quite clearly. This Court should recognize and uphold
the division of the stockholders into two groups, and
at the same time uphold the right of the stockholders
within each group to cumulative voting in the process
of determining who the group's nominees would be.
In practical terms, as suggested by appellant Luciano
E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees
will be, a vote would have to be taken among the
Filipino stockholders only. During this voting, each
Filipino stockholder can cumulate his votes. ASI,
however, should not be allowed to interfere in the
voting within the Filipino group. Otherwise, ASI would
be able to designate more than the three directors it
is allowed to designate under the Agreement, and
may even be able to get a majority of the board
seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the allocation of
the board seats and the stockholder's right to
cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the
appellees on possible violation or circumvention of
the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of
the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875,
pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory
that the ASI Group has the right to vote their additional equity
pursuant to Section 24 of the Corporation Code which gives the
stockholders of a corporation the right to cumulate their votes in
electing directors. Petitioner Salazar adds that this right if granted
to the ASI Group would not necessarily mean a violation of the AntiDummy Act (Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:

And provided finally that the election of aliens as


members of the board of directors or governing body
of corporations or associations engaging in partially
nationalized activities shall be allowed in proportion
to their allowable participation or share in the capital
of such entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May
28, 1975)
The ASI Group's argument is correct within the context of Section
24 of the Corporation Code. The point of query, however, is
whether or not that provision is applicable to a joint venture with
clearly defined agreements:
The legal concept of ajoint venture is of common law
origin. It has no precise legal definition but it has
been generally understood to mean an organization
formed for some temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is in fact hardly
distinguishable from the partnership, since their
elements are similar community of interest in the
business, sharing of profits and losses, and a mutual
right of control. Blackner v. Mc Dermott, 176 F. 2d.
498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.
2d. 12 289 P. 2d. 242 [1955]). The main distinction
cited by most opinions in common law jurisdictions is
that the partnership contemplates a general business
with some degree of continuity, while the joint
venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts
v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE 2d. 74
[1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership
may be particular or universal, and a particular
partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem
therefore that under Philippine law, a joint venture is

a form of partnership and should thus be governed


by the law of partnerships. The Supreme Court has
however recognized a distinction between these two
business forms, and has held that although a
corporation cannot enter into a partnership contract,
it may however engage in a joint venture with others.
(At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and
Selected Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction and
operations of contracts generally apply to a contract of joint
venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the
resolution of the question of whether or not the ASI Group may vote
their additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the
agreement of the parties as regards the allocation of director seats
under Section 5 (a) of the "Agreement," and the right of each group
of stockholders to cumulative voting in the process of determining
who the group's nominees would be under Section 3 (a) (1) of the
"Agreement." As pointed out by SEC, Section 5 (a) of the
Agreement relates to the manner of nominating the members of
the board of directors while Section 3 (a) (1) relates to the manner
of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as
regards the election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect
even a Filipino director who would be beholden to them would
obliterate their minority status as agreed upon by the parties. As
aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in
the voting within the Filipino group. Otherwise, ASI
would be able to designate more than the three
directors it is allowed to designate under the

Agreement, and may even be able to get a majority


of the board seats, a result which is clearly contrary
to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of
the board seats and the stockholder's right to
cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the
appellees on possible violation or circumvention of
the Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements of
the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo,
75875)
Equally important as the consideration of the contractual intent of
the parties is the consideration as regards the possible domination
by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act. In this regard, petitioner
Salazar's position is that the Anti-Dummy Act allows the ASI group
to elect board directors in proportion to their share in the capital of
the entity. It is to be noted, however, that the same law also limits
the election of aliens as members of the board of directors
in proportion to their allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to designate three
directors. This is the allowable participation of the ASI Group.
Hence, in future dealings, this limitation of six to three board seats
should always be maintained as long as the joint venture
agreement exists considering that in limiting 3 board seats in the 9man board of directors there are provisions already agreed upon
and embodied in the parties' Agreement to protect the interests
arising from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer
and SEC which were impliedly affirmed by the appellate court
declaring Messrs. Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan,
Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as

the duly elected directors of Saniwares at the March 8,1983 annual


stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in
G.R. No. 75951) object to a cumulative voting during the election of
the board of directors of the enterprise as ruled by the appellate
court and submits that the six (6) directors allotted the Filipino
stockholders should be selected by consensus pursuant to section 5
(a) of the Agreement which uses the word "designate" meaning
"nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take
control of the enterprise if the Filipino stockholders are allowed to
select their nominees separately and not as a common slot
determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in
the allocation of board directors should not be interpreted in
isolation. This should be construed in relation to section 3 (a) (1) of
the Agreement. As we stated earlier, section 3(a) (1) relates to
the manner of voting for these nominees which is cumulative
voting while section 5(a) relates to the manner of nominating the
members of the board of directors. The petitioners in G.R. No.
75951 agreed to this procedure, hence, they cannot now impugn its
legality.
The insinuation that the ASI Group may be able to control the
enterprise under the cumulative voting procedure cannot, however,
be ignored. The validity of the cumulative voting procedure is
dependent on the directors thus elected being genuine members of
the Filipino group, not voters whose interest is to increase the ASI
share in the management of Saniwares. The joint venture character
of the enterprise must always be taken into account, so long as the
company exists under its original agreement. Cumulative voting
may not be used as a device to enable ASI to achieve stealthily or
indirectly what they cannot accomplish openly. There are
substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to
maintain the minority status of the foreign investors group as
earlier discussed. They should be maintained.

WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No.


75875 are DISMISSED and the petition in G.R. No. 75951 is partly
GRANTED. The amended decision of the Court of Appeals is
MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David
Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are
declared as the duly elected directors of Saniwares at the March
8,1983 annual stockholders' meeting. In all other respects, the
questioned decision is AFFIRMED. Costs against the petitioners in
G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,


vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
The plaintiff brought this action to recover from the defendant
Collector of Internal Revenue the sum of P1,863.44, with legal
interest thereon, which they paid under protest by way of income
tax. They appealed from the decision rendered in the case on
October 23, 1936 by the Court of First Instance of the City of
Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation
of facts:
Come now the parties to the above-mentioned case,
through their respective undersigned attorneys, and hereby
agree to respectfully submit to this Honorable Court the
case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of
Pulilan, Bulacan, and that defendant is the Collector of
Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to
enable them to purchase one sweepstakes ticket valued at
two pesos (P2), subscribed and paid therefor the amounts as
follows:

1. Jose
Gatchalian ............................................................................ P0.18
........................

2. Gregoria
Cristobal ...............................................................................
................

.18

3. Saturnina
Silva .....................................................................................
...............

.08

4. Guillermo
Tapia ....................................................................................
...............

.13

5. Jesus
Legaspi ................................................................................
......................

.15

6. Jose
Silva .....................................................................................
........................

.07

7. Tomasa
Mercado ...............................................................................
.................

.08

8. Julio
Gatchalian ............................................................................
.......................

.13

9. Emiliana
Santiago ...............................................................................
.................

.13

10. Maria C.
Legaspi ................................................................................
...............

.16

11. Francisco
Cabral ..................................................................................
.............

.13

12. Gonzalo
Javier ....................................................................................
................

.14

13. Maria
Santiago ...............................................................................
....................

.17

14. Buenaventura
Guzman ...............................................................................
.......

.13

15. Mariano
Santos ..................................................................................
...............

.14

Total .....................................................................................
...................

2.00

3. That immediately thereafter but prior to December 15,


1934, plaintiffs purchased, in the ordinary course of

business, from one of the duly authorized agents of the


National Charity Sweepstakes Office one ticket bearing No.
178637 for the sum of two pesos (P2) and that the said
ticket was registered in the name of Jose Gatchalian and
Company;
4. That as a result of the drawing of the sweepstakes on
December 15, 1934, the above-mentioned ticket bearing No.
178637 won one of the third prizes in the amount of
P50,000 and that the corresponding check covering the
above-mentioned prize of P50,000 was drawn by the
National Charity Sweepstakes Office in favor of Jose
Gatchalian & Company against the Philippine National Bank,
which check was cashed during the latter part of December,
1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose 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 on December 29,
1934, the said return was signed by Jose Gatchalian, a copy
of which return is enclosed as Exhibit A and made a part
hereof;
6. That on January 8, 1935, the defendant made an
assessment against Jose Gatchalian & Company requesting
the payment of the sum of P1,499.94 to the deputy
provincial treasurer of Pulilan, Bulacan, giving to said Jose
Gatchalian & Company until January 20, 1935 within which
to pay the said amount of P1,499.94, a copy of which letter
marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their
attorney, sent to defendant a reply, a copy of which marked
Exhibit C is attached and made a part hereof, requesting
exemption from 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,
copies of which returns are attached and marked Exhibit D-1
to D-15, respectively, in order of their names listed in the
caption of this case and made parts hereof; a statement of
sale signed by Jose Gatchalian showing the amount put up
by each of the plaintiffs to cover up the attached and
marked as Exhibit E and made a part hereof; and a copy of
the affidavit signed by Jose Gatchalian dated December 29,

1934 is attached and marked Exhibit F and made part


thereof;
8. That the defendant in his letter dated January 28, 1935, a
copy of which marked Exhibit G is enclosed, denied
plaintiffs' request of January 20, 1935, for exemption from
the payment of tax and reiterated his demand for the
payment of the sum of P1,499.94 as income tax and gave
plaintiffs until February 10, 1935 within which to pay the
said tax;
9. That in view of the failure of the plaintiffs to pay the
amount of tax demanded by the defendant, notwithstanding
subsequent demand made by defendant upon the plaintiffs
through their attorney on March 23, 1935, a copy of which
marked Exhibit H is enclosed, defendant on May 13, 1935
issued a warrant of distraint and levy against the property of
the plaintiffs, a copy of which warrant marked Exhibit I is
enclosed and made a part hereof;
10. That to avoid embarrassment arising from the embargo
of the property of the plaintiffs, the said plaintiffs on June
15, 1935, through Gregoria Cristobal, Maria C. Legaspi and
Jesus Legaspi, paid under protest the sum of P601.51 as part
of the tax and penalties to the municipal treasurer of Pulilan,
Bulacan, as evidenced by official receipt No. 7454879 which
is attached and marked Exhibit J and made a part hereof,
and requested defendant that plaintiffs be allowed to pay
under protest the balance of the tax and penalties by
monthly installments;
11. That plaintiff's request to pay the balance of the tax and
penalties was granted by defendant subject to the condition
that plaintiffs file the usual bond secured by two solvent
persons to guarantee prompt payment of each installments
as it becomes due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of
which marked Exhibit K is enclosed and made a part hereof,
to guarantee the payment of the balance of the alleged tax
liability by monthly installments at the rate of P118.70 a
month, the first payment under protest to be effected on or
before July 31, 1935;

13. That on July 16, 1935 the said plaintiffs formally


protested against the payment of the sum of P602.51, a
copy of which protest is attached and marked Exhibit L, but
that defendant in his letter dated August 1, 1935 overruled
the protest and denied the request for refund of the
plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the
monthly installments in accordance with the terms and
conditions of bond filed by them, the defendant in his letter
dated July 23, 1935, copy of which is attached and marked
Exhibit M, ordered the municipal treasurer of Pulilan,
Bulacan to execute within five days the warrant of distraint
and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment
arising from the levy of their property, the plaintiffs on
August 28, 1936, through Jose Gatchalian, Guillermo Tapia,
Maria Santiago and Emiliano Santiago, paid under protest to
the municipal treasurer of Pulilan, Bulacan the sum of
P1,260.93 representing the unpaid balance of the income
tax and penalties demanded by defendant as evidenced by
income tax receipt No. 35811 which is attached and marked
Exhibit N and made a part hereof; and that on September 3,
1936, the plaintiffs formally protested to the defendant
against the payment of said amount and requested the
refund thereof, copy of which is attached and marked
Exhibit O and made part hereof; but that on September 4,
1936, the defendant overruled the protest and denied the
refund thereof; copy of which is attached and marked
Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of
the total sum of one thousand eight hundred and sixty three
pesos and forty-four centavos (P1,863.44) paid under
protest by them but that defendant refused and still refuses
to refund the said amount notwithstanding the plaintiffs'
demands.
17. The parties hereto reserve the right to present other and
additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of


age, hereby certify, that on the 11th day of August, 1934, I
sold parts of my shares on ticket No. 178637 to the persons
and for the amount indicated below and the part of may
share remaining is also shown to wit:
Purchaser
1. Mariano
Santos ...........................................

Amoun
t

Address

P0.14

Pulilan,
Bulacan.

2. Buenaventura
Guzman ...............................

.13

- Do -

3. Maria
Santiago ............................................

.17

- Do -

4. Gonzalo
Javier ..............................................

.14

- Do -

5. Francisco
Cabral ..........................................

.13

- Do -

6. Maria C.
Legaspi ..........................................

.16

- Do -

7. Emiliana
Santiago .........................................

.13

8. Julio
Gatchalian ............................................

.13

- Do -

9. Jose
Silva ......................................................

.07

- Do -

10. Tomasa
Mercado .......................................

.08

- Do -

11. Jesus
Legaspi .............................................

.15

12. Guillermo
Tapia ...........................................

.13

13. Saturnina
Silva ............................................
14. Gregoria
Cristobal .......................................

15. Jose
Gatchalian ............................................

.18

- Do -

Total cost of
2.00 said
ticket; and that, therefore, the persons named above are
entitled to the parts of whatever prize that might be won by
said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of
exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS
FOR 1934 ALL DATED JANUARY 19, 1935 SUBMITTED TO THE
COLLECTOR OF INTERNAL REVENUE.

Name
- Do -

Exhibi
t
No.

1. Jose
Gatchalian ....................
......................

D-1

2. Gregoria
Cristobal .......................
...............

Purcha
se
Price

Price
Won

Expenses

Net
priz
e

P4,42
5

P 480

3,94
5

D-2

.18 4,575

2,000

2,57
5

3. Saturnina
Silva .............................. D-3
...............

.08 1,875

360

1,51
5

- Do -

4. Guillermo
Tapia .............................
.............

D-4

.13 3,325

360

2,96
5

.08

- Do -

5. Jesus Legaspi by
Maria Cristobal .........

D-5

.15 3,825

720

3,10
5

.18

- Do -

6. Jose
D-6
Silva ..............................

.08 1,875

360 1,51
5

- Do -

P0.18

......................
7. Tomasa
Mercado ........................ D-7
...............

.07 1,875

360

1,51
5

8. Julio Gatchalian by
Beatriz Guzman .......

D-8

.13 3,150

240

2,91
0

9. Emiliana
Santiago .......................
...............

D-9

.13 3,325

360

2,96
5

10. Maria C.
Legaspi .........................
.............

D-10

.16 4,100

960

3,14
0

11. Francisco
Cabral ........................... D-11
...........

.13 3,325

360

2,96
5

12. Gonzalo
Javier ............................. D-12
.............

.14 3,325

360

2,96
5

13. Maria
Santiago .......................
...................

D-13

.17 4,350

360

3,99
0

14. Buenaventura
Guzman ........................
...

D-14

.13 3,325

360

2,96
5

15. Mariano
Santos ........................... D-15
.............

.14 3,325

360

2,96
5

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The legal questions raised in plaintiffs-appellants' five assigned
errors may properly be reduced to the two following: (1) Whether
the plaintiffs formed a partnership, or merely a community of
property without a personality of its own; in the first case it is
admitted that the partnership thus formed is liable for the payment
of income tax, whereas if there was merely a community of
property, they are exempt from such payment; and (2) whether
they should pay the tax collectively or whether the latter should be
prorated among them and paid individually.
The Collector of Internal Revenue collected the tax under section
10 of Act No. 2833, as last amended by section 2 of Act No. 3761,
reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and
paid annually upon the total net income received in the
preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account
(cuenta en participacion), association or insurance
company, organized in the Philippine Islands, no matter how
created or organized, but not including duly registered
general copartnership (compaias colectivas), a tax of three
per centum upon such income; and a like tax shall be levied,
assessed, collected, and paid annually upon the total net
income received in the preceding calendar year from all
sources within the Philippine Islands by every corporation,
joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign
country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or
otherwise: Provided, however, That nothing in this section
shall be construed as permitting the taxation of the income
derived from dividends or net profits on which the normal
tax has been paid.
The gain derived or loss sustained from the sale or other
disposition by a corporation, joint-stock company,
partnership, joint account (cuenta en participacion),

association, or insurance company, or property, real,


personal, or mixed, shall be ascertained in accordance with
subsections (c) and (d) of section two of Act Numbered Two
thousand eight hundred and thirty-three, as amended by Act
Numbered Twenty-nine hundred and twenty-six.
The foregoing tax rate shall apply to the net income
received by every taxable corporation, joint-stock company,
partnership, joint account (cuenta en participacion),
association, or insurance company in the calendar year
nineteen hundred and twenty and in each year thereafter.
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 stipulation 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 Philippines Charity Sweepstakes, in his capacity as copartner, as such collection 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 collected under the aforesaid section 10 (a) of Act No.
2833, as amended by section 2 of Act No. 3761. There is no merit
in plaintiff's contention that the tax should be prorated among
them and paid individually, resulting in their exemption from the
tax.
In view of the foregoing, the appealed decision is affirmed, with the
costs of this instance to the plaintiffs appellants. So ordered.
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely:
RODOLFO B. OA, MARIANO B. OA, LUZ B. OA, VIRGINIA
B. OA and LORENZO B. OA, JR., petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Petition for review of the decision of the Court of Tax Appeals in
CTA Case No. 617, similarly entitled as above, holding that
petitioners have constituted an unregistered partnership and are,
therefore, subject to the payment of the deficiency corporate
income taxes assessed against them by respondent Commissioner
of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2)
of the Internal Revenue Code, as amended by Section 8 of Republic
Act No. 2343 and the costs of the suit, 1 as well as the resolution of
said court denying petitioners' motion for reconsideration of said
decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as
heirs her surviving spouse, Lorenzo T. Oa and her
five children. In 1948, Civil Case No. 4519 was
instituted in the Court of First Instance of Manila for
the settlement of her estate. Later, Lorenzo T. Oa
the surviving spouse was appointed administrator of
the estate of said deceased (Exhibit 3, pp. 34-41, BIR
rec.). On April 14, 1949, the administrator submitted
the project of partition, which was approved by the
Court on May 16, 1949 (See Exhibit K). Because three
of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project of
partition was approved, Lorenzo T. Oa, their father
and administrator of the estate, filed a petition in
Civil Case No. 9637 of the Court of First Instance of
Manila for appointment as guardian of said minors.
On November 14, 1949, the Court appointed him
guardian of the persons and property of the
aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70,
BIR rec.) shows that the heirs have undivided onehalf (1/2) interest in ten parcels of land with a total
assessed value of P87,860.00, six houses with a total
assessed value of P17,590.00 and an undetermined
amount to be collected from the War Damage
Commission. Later, they received from said

Commission the amount of P50,000.00, more or less.


This amount was not divided among them but was
used in the rehabilitation of properties owned by
them in common (t.s.n., p. 46). Of the ten parcels of
land aforementioned, two were acquired after the
death of the decedent with money borrowed from the
Philippine Trust Company in the amount of
P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR
rec.).
The project of partition also shows that the estate
shares equally with Lorenzo T. Oa, the administrator
thereof, in the obligation of P94,973.00, consisting of
loans contracted by the latter with the approval of
the Court (see p. 3 of Exhibit K; or see p. 74, BIR
rec.).
Although the project of partition was approved by the
Court on May 16, 1949, no attempt was made to
divide the properties therein listed. Instead, the
properties remained under the management of
Lorenzo T. Oa 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 from P105,450.00 in 1949 to P480,005.20
in 1956 as can be gleaned from the following yearend balances:

Y
e
a
r

Inves
tmen
t

La
nd

Bui
ldin
g

P87,860.00

P17,590.00

P24,657.65

128,566.72

96,076.26

51,301.31

120,349.28

110,605.11

67,927.52

87,065.28

152,674.39

61,258.27

84,925.68

161,463.83

63,623.37

99,001.20

167,962.04

100,786.00

120,249.78

169,262.52

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102104)
Acco
unt

Ac
co
unt

Acc
ou
nt

From said investments and properties petitioners


derived such incomes as profits from installment
sales of subdivided lots, profits from sales of stocks,
dividends, rentals and interests (see p. 3 of Exhibit 3;
p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes
are recorded in the books of account kept by Lorenzo
T. Oa where the corresponding shares of the

petitioners in the net income for the year are also


known. Every year, petitioners returned for income
tax purposes their shares in the net income derived
from said properties and securities and/or from
transactions involving them (Exhibit 3, supra; t.s.n.,
pp. 25-26). However, petitioners did not actually
receive their shares in the yearly income. (t.s.n., pp.
25-26, 40, 98, 100). The income was always left in
the hands of Lorenzo T. Oa who, as heretofore
pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent
(Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax,
pursuant to Section 24, in relation to Section 84(b),
of the Tax Code. Accordingly, he assessed against the
petitioners the amounts of P8,092.00 and P13,899.00
as corporate income taxes for 1955 and 1956,
respectively. (See Exhibit 5, amended by Exhibit 17,
pp. 50 and 86, BIR rec.). Petitioners protested against
the assessment and asked for reconsideration of the
ruling of respondent that they have formed an
unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per
investigation ................ P40,209.89

Net income as per


investigation ................ P69,245.23
Income tax due thereon ...............................
13,849.00
25% surcharge ..............................................
3,462.25
Compromise for non-filing .......................... 50.00
Total ...............................................................
P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25%
surcharge was eliminated in line with the ruling of
the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so
that the questioned assessment refers solely to the
income tax proper for the years 1955 and 1956 and
the "Compromise for non-filing," the latter item
obviously referring to the compromise in lieu of the
criminal liability for failure of petitioners to file the
corporate income tax returns for said years. (See
Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to
Petition)
Petitioners have assigned the following as alleged errors of the Tax
Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING
THAT THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;

Income tax due thereon ............................... 8,042.00


25% surcharge ..............................................
2,010.50
Compromise for non-filing .......................... 50.00
Total ...............................................................
P10,102.50

II.

1956

III.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING


THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);

THE COURT OF TAX APPEALS ERRED IN HOLDING


THAT PETITIONERS WERE LIABLE FOR CORPORATE
INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING
THAT THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED
USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL
INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED
IN COMMON, FROM THE DEFICIENCY TAX OF THE
UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following
questions: (1) Under the facts found by the Court of Tax Appeals,
should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buales and the profits
derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax
under Sections 24 and 84(b) of the National Internal Revenue
Code? (2) Assuming they have formed an unregistered partnership,
should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them
in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should
be considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already
paid by them for the same years 1955 and 1956 as individual
income taxes on their respective shares of the profits accruing from

the properties they owned in common be deducted from the


deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the
Court is that whereas petitioners' predecessor in interest died way
back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably
petitioners have been holding their respective shares in their
inheritance since those dates admittedly under the administration
or management of the head of the family, the widower and father
Lorenzo T. Oa, the assessment in question refers to the later years
1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the
respondent Commissioner of Internal Revenue did treat petitioners
as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that
an earlier assessment had already been made. Such being the
case, and We see no reason how it could be otherwise, it is easily
understandable why petitioners' position that they are co-owners
and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find
comfort in the fact that they were not similarly assessed earlier by
the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate
of the deceased among themselves pursuant to the project of
partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all
these became possible because, admittedly, petitioners never
actually received any share of the income or profits from Lorenzo T.
Oa and instead, they allowed him to continue using said shares as
part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares
of the profits of their common business as reported by the said
Lorenzo T. Oa.

It is thus incontrovertible that petitioners did not, contrary to their


contention, merely limit themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
years herein involved, some of the said properties were sold at
considerable profit, and that with said profit, petitioners engaged,
thru Lorenzo T. Oa, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the moment
petitioners allowed not only the incomes from their respective
shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oa as a common fund in
undertaking several transactions or in business, with the intention
of deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions
of the Tax Code.
It is but logical that in cases of inheritance, there should be a
period when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our corporate
tax laws aforementioned. Before the partition and distribution of
the estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming
thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was
stated, among the reasons for holding the appellants therein to be
unregistered co-partners for tax purposes, that their common fund
"was not something they found already in existence" and that "it
was not a property inherited by them pro indiviso," but it is
certainly far fetched to argue therefrom, as petitioners are doing
here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already

indicated, 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 for this 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. This is
exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph
(3), of the Civil Code, providing that: "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," and, for that
matter, on any other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court clearly differentiated
the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations"
under Sections 24 and 84(b) of the National Internal Revenue Code.
Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on
this point thus:
To begin with, the tax in question is one imposed
upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships"
among the entities subject to the tax on
"corporations", said Code must allude, therefore, to
organizations which are not
necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly
registered general partnerships," which constitute

precisely one of the most typical forms of


partnerships in this jurisdiction. Likewise, as defined
in section 84(b) 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 confirmity with the
usual requirements of the law on partnerships, in
order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant
to said section 84(b),the term "corporation" includes,
among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has
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 co-partnerships" which are possessed of
the aforementioned personality have been
expressly excluded by law (sections 24 and 84[b])
from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a
partnership. Under the term
"partnership" it includes not only a
partnership as known in common law
but, as well, a syndicate, group,
pool, joint venture, or other
unincorporated organization which
carries on any business, financial
operation, or venture, and which is
not, within the meaning of the Code, a
trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income
Taxation, p. 789; emphasis ours.)
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.)
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.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29,
1968, 24 SCRA 198, wherein the Court ruled against a theory of coownership pursued by appellants therein.
As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question, of
their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of
the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged
that, if there was an unregistered partnership, the
holding should be limited to the business engaged in
apart from the properties inherited by petitioners. In
other words, the taxable income of the partnership
should be limited to the income derived from the
acquisition and sale of real properties and corporate
securities and should not include the income derived
from the inherited properties. It is admitted that the
inherited properties and the income derived
therefrom were used in the business of buying and
selling other real properties and corporate securities.
Accordingly, the partnership income must include not
only the income derived from the purchase and sale
of other properties but also the income of the
inherited properties.
Besides, as already observed earlier, the income derived from
inherited properties may be considered as individual income of the
respective heirs only so long as the inheritance or estate is not

distributed or, at least, partitioned, but the moment their


respective known shares are used as part of the common assets of
the heirs to be used in making profits, it is but proper that the
income of such shares should be considered as the part of the
taxable income of an unregistered partnership. This, We hold, is the
clear intent of the law.
Likewise, the third question of petitioners appears to have been
adequately resolved by the Tax Court in the aforementioned
resolution denying petitioners' motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners
alleges:
Even if we were to yield to the decision
of this Honorable Court that the herein
petitioners have formed an
unregistered partnership and,
therefore, have to be taxed as such, it
might be recalled that the petitioners
in their individual income tax returns
reported their shares of the profits of
the unregistered partnership. We think
it only fair and equitable that the
various amounts paid by the individual
petitioners as income tax on their
respective shares of the unregistered
partnership should be deducted from
the deficiency income tax found by
this Honorable Court against the
unregistered partnership. (page 7,
Memorandum for the Petitioner in
Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that
the taxable income of the partnership must be
reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is

not correct; rather, it should be the other way


around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by
the amounts of income tax assessed against the
partnership. Consequently, each of the petitioners in
his individual capacity overpaid his income tax for
the years in question, but the income tax due from
the partnership has been correctly assessed. Since
the individual income tax liabilities of petitioners are
not in issue in this proceeding, it is not proper for the
Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax
cannot be credited as part payment of the taxes herein in question.
It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their
individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate
action. We do not agree. As We see it, the case of petitioners as
regards the point under discussion is simply that of a taxpayer who
has paid the wrong tax, assuming that the failure to pay the
corporate taxes in question was not deliberate. Of course, such
taxpayer has the right to be reimbursed what he has erroneously
paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the
period for the recovery of the excess income taxes in the case of
herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the
reason for the delay is precisely because the taxpayers failed to
make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly
above suspicion in their conduct vis-a-vis their tax obligation to the
State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax
Appeals appealed from is affirm with costs against petitioners.