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PARTNERSHIP CASES

LITONJUA VS. LITONJUA

Facts:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr.
(Eduardo) are brothers. The legal dispute between them started when, on 2002, in the RTC
Aurelio filed a suit against his brother Eduardo and... respondent Robert T. Yang (Yang) and
several corporations for specific performance and accounting. In his complaint Aurelio... alleged
that, since 1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon
Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical
Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue Realty,
Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint
as petitioner's and Eduardo's partner in their Odeon Theater investment.The same complaint also
contained the following material averments: It was then agreed upon between [Aurelio] and
Eduardo that in consideration of [Aurelio's] retaining his share in the remaining family
businesses... and contributing his industry to the continued operation of... these businesses,
[Aurelio] will be given P1 Million or 10% equity in all these businesses and those to be
subsequently acquired by them whichever is greater. . . . In addition... the joint
venture/partnership... had also acquired [various other assets], but Eduardo caused to be
registered in the names of other parties.... Sometime in 1992, the relations between [Aurelio] and
Eduardo became sour so that [Aurelio] requested for an accounting and liquidation of his share
in the joint venture/partnership [but these demands for complete accounting and liquidation were
not heeded]. What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the
corporate defendants as well as Bobby [Yang], are transferring... various real properties of the
corporations belonging to the joint venture/partnership to other parties in fraud of [Aurelio]. In
consequence, [Aurelio] is therefore causing at this time the annotation on the titles of these real
properties' a notice of lis pendens Eduardo and the corporate respondents, as defendants a quo,
filed a joint ANSWER... denying under oath the material allegations of the complaint, more
particularly that portion... depicting petitioner... and Eduardo as having entered into a contract of
partnership. For his part, Yang... moved to dismiss on the ground... that... as to him, petitioner
has no cause of action and the complaint does not state any. Petitioner's demand... in the petitory
portion of his complaint... is for delivery or payment to him, as Eduardo's and Yang's partner, of
his partnership/joint venture share, after an accounting has been duly conducted of what he
deems to be... partnership/joint venture property.
Issues:
whether or not petitioner and respondent Eduardo are partners in the theatre, shipping and realty
business
Ruling:
The petition lacks merit. Petitioner's demand... in the petitory portion of his complaint... is for
delivery or payment to him, as Eduardo's and Yang's partner, of his partnership/joint venture
share, after an accounting has been duly conducted of what he deems to be... partnership/joint
venture property. A partnership exists when two or more persons agree to place their money,
effects, labor, and skill in lawful commerce or business, with the understanding that there shall
be a proportionate sharing of the profits and losses between them. A contract of... partnership is
defined by the Civil Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits among
themselves. A joint venture, on the other hand, is... hardly distinguishable from, and may be
likened to, a partnership since their elements are similar, i.e., community of interests in the
business and sharing of profits and losses. Being a form of partnership, a joint venture is
generally governed by the law on... partnership. Clearly,... a look at the legal provisions
determinative of the existence, or defining the formal requisites, of a partnership is indicated.
Foremost of these are the following provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in
money or property, shall appear in a public instrument, which must be recorded in the Office of
the Securities and Exchange Commission.
Failure to comply with the requirement of the preceding paragraph shall not affect the liability of
the partnership and the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is contributed
thereto, if an inventory of said property is not made, signed by the parties, and attached to the
public instrument.
Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and
undated. As an unsigned document, there can be no quibbling that Annex "A-1" does not meet
the public instrumentation requirements exacted under Article 1771... of the Civil Code.
Moreover, being unsigned and doubtless referring to a partnership involving more than
P3,000.00 in money or property, Annex "A-1" cannot be presented for notarization, let alone
registered with the Securities and Exchange Commission (SEC), as... called for under the Article
1772 of the Code. And inasmuch as the inventory requirement under the succeeding Article 1773
goes into the matter of validity when immovable property is contributed to the partnership, the
next logical point of inquiry turns on the nature of... petitioner's contribution, if any, to the
supposed partnership.
A partnership may be constituted in any form, save when immovable property or real rights are...
contributed thereto or when the partnership has a capital of at least P3,000.00, in which case a
public instrument shall be necessary.
And if only to stress what has repeatedly been articulated, an inventory to be signed by the
parties and attached to... the public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to it.
Considering that the allegations in the complaint showed that [petitioner] contributed immovable
properties to the alleged partnership, the "Memorandum"... which purports to establish the said
"partnership/joint venture" is NOT a public... instrument and there was NO inventory of the
immovable property duly signed by the parties. As such, the said "Memorandum" ... is null and
void for purposes of establishing the existence of a valid contract of partnership. Indeed, because
of the failure to comply with the... essential formalities of a valid contract, the purported
"partnership/joint venture" is legally inexistent and it produces no effect whatsoever. Necessarily,
a void or legally inexistent contract cannot be the source of any contractual or legal right.
Accordingly, the... allegations in the complaint, including the actionable document attached
thereto, clearly demonstrates that [petitioner] has NO valid contractual or legal right which could
be violated by the [individual respondents] herein. As a consequence, [petitioner's] complaint
does
NOT state a valid cause of action because NOT all the essential elements of a cause of action are
present.

EVANGELISTA VS. CIR

Facts:
This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca
Evangelista,... for review of a decision of the Court of Tax Appeals,... hold that the petitioners
are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to
1949... in the total amount of P6,878.34,... It apears from the stipulation submitted by the
parties:... petitioners borrowed from their father the sum of P59,140.00 which amount together
with their personal monies was used by them for the purpose of buying real properties,... they
appointed their brother Simeon Evangelista to 'manage their properties with full power to lease;
to collect and receive rents; to issue receipts therefor; in default of such payment, to bring' suits
against the defaulting... tenant; to sign all letters, contracts, etc., for and in their behalf, and to
endorse and deposit all notes and checks for them;... after having bought the above-mentioned
real properties, the petitioners had the same rented or leased to various tenants... respondent
Collector of Internal Revenue demanded the payment, of income tax... letter of demand and the
corresponding assessments were delivered to petitioners, whereupon they instituted the present
case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in.
his letter of demand... be reversed, and that they be absolved from the payment of the taxes in
question Court of Tax Appeals rendered... decision for the respondent, and, a petition for
reconsideration and new trial having been subsequently denied, the case is now before Us for
review at the instance of the petitioners. Petitioners insist, however, that they are mere co-
owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a
personality independent of that of its members, did not come into existence, and some of the
characteristics of partnerships... are lacking in the case at bar.
Issues:
whether petitioners are subject to the tax on corporations provided for in section 24 of
National Internal Revenue Code
Ruling:
Article 1767 of the Civil Code of the Philippines provides :

"By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing1 the profits among-
themselves."
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement
to contribute money, property or industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly present in the... case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and property to a common
fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of
all the facts and circumstances surrounding the... case, we are fully satisfied that their purpose
was to engage in real estate transactions for monetary gain and then divide the same among
themselves,... because:
1. Said common fund was... created... purposely. What is more they jointly borrowed a
substantial portion thereof in order to... establish said common fund.
They invested the same, not merely in one transaction, but in a series of transactions strongly
indicative of a pattern or common design that was not limited to... the conservation and
preservation of the aforementioned common fund. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for... purposes of gain. The
aforesaid lots were not devoted to residential purposes,... , or to other personal uses, of
petitioners herein. The properties were leased separately to several persons... properties have
been under the management of one person, namely, Simeon Evangelista Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit. as defined in section 84(6) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This qualifying expression clearly
indicates that a joint venture... need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in order that one couid be
deemed constituted for purposes of the tax on corporations. Again, pursuant to said section
84(6), the term "corporation"... includes, among other, "joint accounts, (cuentas en
participation)" and "associations", none of which his a legal personality of its own, independent
of that of its members. Accordingly, the lawmaker could not have regarded that personality as a
condition... essential to the existence of the partnerships, therein referred to. In fact, as above
stated, "duly registered general copartnerships" which are possessed of the aforementioned
personality have been expressly excluded by law (sections 24 and 84 [6]) from the... connotation
of the term "corporation." It may not be amiss to add that petitioners' allegation to the effect that
their liability in connection with the leasing of the lots above referred to, under the management
of one person even if true, on which we express no opinion tends... to increase the similarity
between the nature of their venture and that of corporations, and is, therefore, an additional
argument in favor of the imposition of said tax on corporations.
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general copartnerships within the purview
of the term "corporation."
It is, therefore, clear to our mind that... petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:

"Entities liable to residence tax. Every corporation, no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual
residence tax of five pesos and an annual additional tax... which, in no case, shall exceed one
thousand pesos, in accordance with the following schedule: * * *.
"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how created or
organized." (italics ours.)
Considering that the pertinent part of this provision is analogous to that of sections 24 and 84 (b)
of our National Internal Revenue Code (Commonwealth Act No. 466), and that the latter was
approved on June 15, 1939, the day immediately after the approval of said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.
Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed

LIM TONG LIM VS. PH FISHING GEAR

FACTS: Lim Tong Lim requested Peter Yao and Antonio Chuato engage in commercial fishing
with him. The three agreed to purchase two fishing boats but since they do not have the money
they borrowed from one Jesus Lim the brother of Lim Tong Lim. Subsequently, they again
borrowed money for the purchase of fishing nets and other fishing equipments. Yao and Chua
represented themselves as acting in behalf of “Ocean Quest Fishing Corporation” (OQFC) and
they contracted with Philippine Fishing Gear Industries (PFGI) for the purchase of fishing nets
amounting to more than P500k. However, they were unable to pay PFGI and hence were sued in
their own names as Ocean Quest Fishing Corporation is a non-existent corporation. Chua
admitted his liability while Lim Tong Lim refused such liability alleging that Chua and Yao acted
without his knowledge and consent in representing themselves as a corporation.

ISSUE: Whether Lim Tong Lim is liable as a partner

HELD: Yes. It is apparent from the factual milieu that the three decided to engage in a fishing
business. Moreover, their Compromise Agreement had revealed their intention to pay the loan
with the proceeds of the sale and to divide equally among them the excess or loss. The boats and
equipment used for their business entails their common fund. The contribution to such fund need
not be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided equally
among them also shows that they had indeed formed a partnership. The principle of corporation
by estoppel cannot apply in the case as Lim Tong Lim also benefited from the use of the nets in
the boat, which was an asset of the partnership. Under the law on estoppel, those acting in behalf
of a corporation and those benefited by it, knowing it to be without valid existence are held liable
as general partners. Hence, the question as to whether such was legally formed for unknown
reasons is immaterial to the case.

AFISCO VS. CA

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

Insurance pool in the case at bar is deemed a partnership or association taxable as a


corporation – In the case at bar, petitioners-insurance companies formed a Pool Agreement, or
an association that would handle all the insurance businesses covered under their quota-share
reinsurance treaty and surplus reinsurance treaty with Munich is considered a partnership or
association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same
person twice by the same jurisdiction for the same thing.” In the instant case, the insurance pool
is a taxable entity distince from the individual corporate entities of the ceding companies. The
tax on its income is obviously different from the tax on the dividends received by the companies.
There is no double taxation.
FACTS:

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

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

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

The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation,
and that the latter’s collection of premiums on behalf of its members, the ceding companies, was
taxable income.
ISSUE/S:
1. Whether or not the pool is taxable as a corporation.
2. Whether or not there is double taxation.

HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of their allocated share in the original
risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was
limited to its principal function of “allocating and distributing the risk(s) arising from the original
insurance among the signatories to the treaty or the members of the pool based on their ability to
absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including duly registered general co-partnership (compañias
colectivas), general professional partnerships, private educational institutions, and building and
loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations. Interestingly, the NIRC’s
inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform
Act of 1997 Sec. 27 read together with Sec. 22 reads:

“SEC. 27. Rates of Income Tax on Domestic Corporations. --


(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year from
all sources within and without the Philippines by every corporation, as defined in Section 22 (B)
of this Code, and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract without the Government. ‘General professional
partnerships’ are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members.
Furthermore, Pool Agreement or an association that would handle all the insurance businesses
covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich
may be considered a partnership because it contains the following elements: (1) The pool has a
common fund, consisting of money and other valuables that are deposited in the name and credit
of the pool. This common fund pays for the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies. (3) While, the
pool itself is not a reinsurer and does not issue any policies; its work is indispensable, beneficial
and economically useful to the business of the ceding companies and Munich, because without it
they would not have received their premiums pursuant to the agreement with Munich. Profit
motive or business is, therefore, the primordial reason for the pool’s formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. Imposing a tax “would be tantamount to an illegal double taxation, as it
would result in taxing the same premium income twice in the hands of the same taxpayer.”
Furthermore, even if such remittances were treated as dividends, they would have been exempt
under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well as Article 7 of paragraph 1and
Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by the same
jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince
from the individual corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the companies. There is no double
taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax exemption
construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on foreign corporations;
hence, it cannot be claimed by the ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based solely on this provision of the Tax
Code because the same subsection specifically taxes dividends, the type of remittances
forwarded to it by the pool. The foregoing interpretation of Section 24 (b) (1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption
claimed must be expressed in a language too plain to be mistaken.

GATCHALIAN VS. CIR

Facts:
plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that defendant is the
Collector of Internal Revenue of the Philippines;... plaintiffs, in order to enable them to purchase
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts as
follows:... immediately thereafter... plaintiffs purchased... from... ne of the duly authorized agents
of the National Charity Sweepstakes Office one ticket bearing No. 178637... and that the said
ticket was registered in the name of Jose Gatchalian and Company... as a result, the above-
mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000...
and... which check was cashed... by Jose Gatchalian & Company Gatchalian was required by
income tax examiner Alfredo David to file the corresponding income tax return covering the
prize won by Jose Gatchalian & Company and that... the said return was signed by Gatchalian...
efendant made an assessment against... requesting the payment of the sum of P1,499.94 to the
deputy provincial treasurer of Pulilan, Bulacan... plaintiffs, through their attorney, sent to
defendant a reply... requesting exemption from the payment of the income tax to which reply
there were enclosed fifteen (15)... separate individual income tax returns filed separately by each
one of the plaintiffs... defendant... denied plaintiffs' request... for exemption from the payment of
tax... in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant,
notwithstanding subsequent demand... issued a warrant of distraint and levy against the property
of the plaintiffs... plaintiffs,... through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi,...
paid under protest the sum of P601.51... as part of the tax... and requested defendant that
plaintiffs be allowed to pay under protest the balance... plaintiffs demanded upon defendant the
refund of the total sum of
P1,863.44... paid under protest by them but that defendant refused and still refuses to refund the
said amount... notwithstanding the plaintiffs' demands.
Issues:
Whether the plaintiffs formed a partnership, or merely a community of property without a
personality of its own
Ruling:
There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulated facts the
plaintiffs organized a partnership of a civil nature because each of them put up money... to buy a
sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they
did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only
formed, but upon the organization thereof and the winning of... the prize, Jose Gatchalian
personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as co-
partner, as such collected the prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner,... in the same capacity, collected the said check.
All these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound
to pay the income tax which the defendant collecte
There is no merit in... plaintiffs' contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.

ARBES VS. POLISTICO

FACTS:
An association called “Turnuhan Polistico & Co” was deemed by the court-appointed
commissioner, to which the court declared as well, as an unlawful partnership. The defendants
objected to the trial court’s report. Consequently, they filed a motion for a charitable institution
to be included as a party defendant applying the provisions of Art. 1666 of the NCC which
provides:

“A partnership must have a lawful object and must be established for the common benefit of the
partners. When the dissolution of an unlawful partnership is decreed, the profits shall be given to
charitable institutions of the domicile of the partnership, or, in default of such, to those of the
province.”

ISSUE:
May a charitable institution be a party defendant based on the provisions of Art. 1666?

HELD:
No. The Court held that the application for the said article is improper. An unlawful partnership
is a void contract, and as such, no right or cause of action can flow from it.

The Court made reference to Manresa which propounded that the relevant logic that members of
an unlawful partnership should not be able to recover profits since in the eyes of the law, the
partnership had not come into existence and that no judicial action may flow from the contract.
However, such members may recover what they have contributed not on the basis of the contract,
but on the basis of the mere contribution they have made on the capital and to disable them to do
so would be an unjust sanction.

ONA VS. CIR

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

Although the project of partition was approved by the Court, no attempt was made to divide the
properties and they remained under the management of Oña who used said properties in business
by leasing or selling them and investing the income derived therefrom and the proceeds from the
sales thereof in real properties and securities. As a result, petitioners’ properties and investments
gradually increased. Petitioners returned for income tax purposes their shares in the net income
but they did not actually receive their shares because this left with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners
asked for reconsideration, which was denied hence this petition for review from CTA’s decision.

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

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

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

PASCUAL VS. CIR

Facts:
The distinction between co-ownership and an unregistered partnership or joint venture for
income tax purposes is the issue in this petition.
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. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70,
while they realized a net profit of P60,000.00 in the sale made in 1970. The... corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana,
petitioners were assessed and required to pay a total amount of P107,101.07 as alleged
deficiency corporate income taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had
availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, 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...
unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to... individual income tax; and that the
availment of tax amnesty under P.D. No. 23
Petitioners filed a petition for review with the respondent Court of Tax Appeals
It ruled that on the basis of the principle enunciated in Evangelista,[3] an unregistered
partnership was in fact formed by petitioners which like a corporation was subject to corporate
income tax distinct from that imposed on the partners.
Issues:
"A.
IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE: IN OPPOSITION THERETO RESTS
UPON THE PETITIONERS.
Ruling:
The basis of the subject decision of the respondent court is the ruling of this Court in
Evangelista.
In the said case, petitioners borrowed a sum of money from their father which together with their
own personal funds they used in buying several real properties. They appointed their brother to
manage their properties with full power to lease, collect, rent, issue receipts, etc.
They had the real properties rented or leased to various tenants for several years and they gained
net profits from the rental income. Thus, the Collector of Internal Revenue demanded the
payment of income tax on a corporation, among others, from them.
In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits
among themselves. Respondent commissioner and/or his representative just assumed these...
conditions to be present on the basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same
nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from
one seller. It was only in 1968 when they sold the two (2) parcels of land after... which they did
not make any additional or new purchase. The remaining three (3) parcels were sold by them in
1970. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was
under the management of one of the partners. Such condition existed for over fifteen (15) years.
None of these circumstances are present in the case at bar. The co-ownership... started only in
1965 and ended in 1970.
'Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no... common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived.' (Elements of the Law of Partnership by Floyd D. Mechem, 2n Ed., section 83,
p. 74.)
'A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties
are only tenants in common.' (Clark vs. Sideway, 142 U.S. 682, 12 Ct.
327, 35 L. Ed., 1157.)
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.[7]
However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are thereby relieved of any... further tax liability arising therefrom.
WHEREFORE, the petition is hereby GRANTED and the decision of the respondent Court of
Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is
hereby rendered relieving petitioners of the corporate income tax liability in this case, without...
pronouncement as to costs.