Gatchalian vs. Collector of Internal Revenue [G.R. No.

L-45425, April 29, 1939]
Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic
Mind
Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly
authorized agents of the National Charity Sweepstakes Office one ticket for the sum of
two pesos (P2), saidticket was registered in the name of Jose Gatchalian and Company.
The ticket won one of the third-prizes in the amount of P50,000.
Jose Gatchalian was required to file the corresponding income taxreturn covering the
prize won. Defendant-Collector made an assessment against Jose Gatchalian and Co.
requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of
Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It
was denied.
Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued.
Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the
warrant. A request that the balance be paid by plaintiffs in installments was made. This
was granted on the condition that a bond be filed.
Plaintiffs failed in their installment payments. Hence a request for execution of the
warrant of distraint and levy was made. Plaintiffs paid under protest to avoid the
execution.
A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal.
Issue: Whether the plaintiffs formed a partnership hence liable forincome tax.
Held: Yes. 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. 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 co-partner, 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.
Obillos et al vs. CIR/CA GRN – L68118 October 29, 1985 Aquino, J.:
FACTS:
Petitioners sold the lots they inherited from their father and derived a total profit of
P33,584 for each of them. They treated the profit as capital gain and paid an income tax
thereof. The CIR required petitioners to pay corporate income tax on their shares, .20%
tax fraud surcharge and 42% accumulated interest. Deficiency tax was assessed on the
theory that they had formed an unregistered partnership or joint venture.
ISSUE:
Whether or not partnership was formed by the siblings thus be assessed of the corporate
tax.
RULING:
Petitioners were co-owners and to consider them partners would obliterate the

distinction between co-ownership and partnership. The petitioners were not engaged in
any joint venture by reason of that isolated transaction.
Art 1769… 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
partnership or joint venture.
PASCUAL v. Commissioner of Internal Revenue #10 BUSORG G.R. No. 78133 October 18,
1988 GANCAYCO, J.:
FACTS:
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et
al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque.
The first two parcels of land were sold by petitioners in 1968 to Marenir Development
Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and
Maria Samson on March 19,1970. Petitioner realized a net profit in the sale made in
1968 in the amount of P165, 224.70, while they realized a net profit of
P60,000 in the sale made in 1970. The corresponding capital gains taxes were
paid by petitioners in 1973 and 1974 . Respondent Commissioner informed petitioners
that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes prescribed
under Section 24, both of the National Internal Revenue Code; that the
unregistered partnership was subject to corporate income tax as distinguished
from profits derived from the partnership by them which is subject to individual
income tax.
ISSUE:
Whether petitioners formed an unregistered partnership
income tax (partnership vs. co-ownership)

subject

to

corporate

RULING:
Article 1769 of the new Civil Code lays down the rule for determining when a transaction
should be deemed a partnership or a co-ownership. Said article paragraphs 2
and
3,
provides:(2) Co-ownership or co-possession does not itself establish a
partnership, whether such co-owners or co-possessors do or do not share any profits
made by the use of the property; (3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived; The sharing of
returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole
property. In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter did
not thereby make them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot
be
considered
to
have
formed
an

unregistered partnership which is thereby liable for corporate income tax, as the
respondent commissioner proposes. And even assuming for the sake of argument that
such unregistered partnership appears to have been formed, since there is no
such existing unregistered partnership with a distinct personality nor with assets
that can be held liable for said deficiency corporate income tax, then petitioners can
be held individually liable as partners
for
this
unpaid
obligation
of
the
partnership.
AURBACH VS. SANITARY WARES
FACTS: This was the case where there were essentially two groups of shareholders in the
company: one composed of Filipinos, and the other group of foreign investors. There was
an increase in the latter’s shares in the company so they wanted a proportionate
increase in their nominees to the company’s Board of Directors.
HOLDING: Although a corporation cannot enter into a partnership, it can nevertheless
engage in a joint venture with others. In this case, taking into consideration their intent
and history, the parties formed a joint venture and not a corporation. This becomes
relevant because it implies that the argument of ASI (the foreign investors), having been
based on the Corporation Code, will not apply.
A joint venture has been generally understood to mean an organization formed for some
temporary purpose. It is distinguished mainly from a partnership in that the latter
contemplates a general business with some continuity while the former is formed for the
execution of a single transaction.
Moran, Jr. vs CA
In
February
1971,
Isabelo
Moran
and
Mariano
Pecson
entered
into
a partnershipagreement where they agreed to contribute P15k each for the purpose of
printing 95k posters of the delegates to the then 1971 Constitutional Commission. Moran
shall be in charge in managing the printing of the posters. It was further agreed that
Pecson will receive a commission of P1k a month starting from April 1971 to December
1971; that the partnership is to be liquidated on December 15, 1971.
Pecson partially fulfilled his obligation to the partnership when he issued P10k in favor of
the partnership. He gave the P10k to Moran as the managing partner. Moran however did
not add anything and, instead, he only used P4k out of the P10k in printing 2,000
posters. He only printed 2,000 posters because he felt that printing all 95k posters is a
losing venture because of the delay by the COMELEC in announcing the full delegates. All
the posters were sold for a total of P10k.
Pecson sued Moran. The trial court ordered Moran to pay Pecson damages. The Court of
Appeals affirmed the decision of the trial court but modified the same as it ordered
Moran to pay P47.5k for unrealized profit; P8k for Pecson’s monthly commissions; P7k as
return of investment because the venture never took off; plus interest.
ISSUE: Whether or not the CA judgment is correct.
HELD: No. The award of P47.5k for unrealized profit is speculative. There is no evidence
whatsoever that the partnership between the Moran and Pecson would have been a
profitable venture (because base on the circumstances then i.e. the delay of the
COMELEC in proclaiming the candidates, profit is highly unlikely). In fact, it was a failure
doomed from the start. There is therefore no basis for the award of speculative damages

in favor of Pecson. Further, there is mutual breach in this case, Pecson only gave P10k
instead of P15k while Moran gave nothing at all.
As for the P8k monthly commission, this is without basis. The agreement does not state
the basis of the commission. The payment of the commission could only have been
predicated on relatively extravagant profits. The parties could not have intended the
giving of a commission inspite of loss or failure of the venture. Since the venture was a
failure, Pecson is not entitled to the P8k commission.
As for the P7k award as return for Pecson’s investment, the CA erred in his ruling too.
Though the venture failed, it did took off the ground as evidenced by the 2,000 posters
printed. Hence, return of investment is not proper in this case. There are risks in any
business venture and the failure of the undertaking cannot entirely be blamed on the
managing partner alone, specially if the latter exercised his best business judgment,
which seems to be true in this case.
Moran must however return the unused P6k of Pecson’s contribution to
the partnership plus P3k representing Pecson’s profit share in the sale of the printed
posters. Computation of P3k profit share is as follows: (P10k profit from the sale of the
2,000 posters printed) – (P4k expense in printing the 2k posters) = (P6k profit); Profit ÷ 2
= P3k each.