PARTNERSHIP
WEEK 1
I. Nature; Creation
A. Definition; essential features
Article 1767. By the contract of partnership two or more persons bind
themselves to contribute money, property, or industry to a common fund, with
the intention of dividing the profits among themselves.
B. Creation –
Article 1770. A partnership must have a lawful object or purpose, and must be
established for the common benefit or interest of the partners. When an
unlawful partnership is dissolved by a judicial decree, the profits shall be
confiscated in favor of the State, without prejudice to the provisions of the
Penal Code governing the confiscation of the instruments and effects of a
crime. (1666a)
Article 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. (1667a)
Article 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 requirements of the preceding
paragraph shall not affect the liability of the partnership and the members
thereof to third persons. (n)
Article 1784. A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated.
Article 1815. Every partnership shall operate under a firm name, which may or
may not include the name of one or more of the partners.
Rule 3.02 - In the choice of a firm name, no false, misleading or assumed
name shall be used. The continued use of the name of a deceased partner is
permissible provided that the firm indicates in all its communications that said
partner is deceased.
Article 1141. Real actions over immovables prescribe after thirty years.
1. MAURICIO AGAD, vs. MABATO
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of
the Court of First Instance of Davao, we are called upon to determine the
applicability of Article 1773 of our Civil Code to the contract of partnership on
which the complaint herein is based.
Alleging that he and defendant Severino Mabato are — pursuant to a public
instrument dated August 29, 1952, copy of which is attached to the complaint
as Annex "A" — partners in a fishpond business, to the capital of which Agad
contributed P1,000, with the right to receive 50% of the profits; that from 1952
up to and including 1956, Mabato who handled the partnership funds, had
yearly rendered accounts of the operations of the partnership; and that, despite
repeated demands, Mabato had failed and refused to render accounts for the
years 1957 to 1963, Agad prayed in his complaint against Mabato and Mabato
& Agad Company, filed on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the
partnership for the period from 1957 to 1963, in addition to P1,000 as
attorney's fees, and ordering the dissolution of the partnership, as well as the
winding up of its affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and
denied the existence of said partnership, upon the ground that the contract
therefor had not been perfected, despite the execution of Annex "A", because
Agad had allegedly failed to give his P1,000 contribution to the partnership
capital. Mabato prayed, therefore, that the complaint be dismissed; that Annex
"A" be declared void ab initio; and that Agad be sentenced to pay actual, moral
and exemplary damages, as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the
complaint states no cause of action and that the lower court had no jurisdiction
over the subject matter of the case, because it involves principally the
determination of rights over public lands. After due hearing, the court issued
the order appealed from, granting the motion to dismiss the complaint for
failure to state a cause of action. This conclusion was predicated upon the
theory that the contract of partnership, Annex "A", is null and void, pursuant to
Art. 1773 of our Civil Code, because an inventory of the fishpond referred in
said instrument had not been attached thereto. A reconsideration of this order
having been denied, Agad brought the matter to us for review by record on
appeal.
Articles 1771 and 1773 of said Code provide:
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. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if inventory of said property is not
made, signed by the parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable property or real
rights" have been contributed to the partnership under consideration. Mabato
alleged and the lower court held that the answer should be in the affirmative,
because "it is really inconceivable how a partnership engaged in the fishpond
business could exist without said fishpond property (being) contributed to the
partnership." It should be noted, however, that, as stated in Annex "A" the
partnership was established "to operate a fishpond", not to "engage in a
fishpond business". Moreover, none of the partners contributed either a
fishpond or a real right to any fishpond. Their contributions were limited to the
sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00)
Pesos Philippine Currency, of which One Thousand (P1,000.00) pesos
has been contributed by Severino Mabato and One Thousand
(P1,000.00) Pesos has been contributed by Mauricio Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the purpose of the
partnership. Neither said fishpond nor a real right thereto was contributed to
the partnership or became part of the capital thereof, even if a fishpond or a
real right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point
and that, the order appealed from should be, as it is hereby set aside and the
case remanded to the lower court for further proceedings, with the costs of this
instance against defendant-appellee, Severino Mabato. It is so ordered.
2. TORRES V CA
Facts:
Petitioners Torres and Baring entered into a “joint venture agreement” with
Respondent Torres for the development of a parcel of land into a subdivision.
They executed a Deed of Sale covering the said parcel of land in favor of
respondent Manual Torres, who then had it registered in his name. By
mortgaging the property, respondent Manuel Torres obtained from Equitable
Bank a loan of P40,000, which was supposed to be used for the development
of subdivision as per the JVA. However, the project did not push through and
the land was subsequently foreclosed by the bank.
Petitioners Antonia Torres alleged that it was due to respondent’s lack of
funds/skills that caused the project to fail, and that respondent use the loan in
the furtherance of his own company. On the otherhand, respondent Manuel
Torres alleged that he used the loan to implement the JVA – surveying and
subdivision of lots, approval of the project, advertisement, and construction of
roads and the likes, and that he did all of these for a total of P85,000.
Petitioners filed a case for estafa against respondent but failed. They then
instituted a civil case. CA held that the two parties formed a partnership for the
development of subdivision and as such, they must bear the loss suffered by
the partnership in the same proportion as their share in profits. Hence, the
petition.
Issue #1:
Whether or not the transaction between petitioner and respondent was that of
joint venture/partnership.
Held:
Yes. There formed a partnership between the two on the basis of joint-venture
agreement and deed of sale. A reading of the terms of agreement shows the
existence of partnership pursuant to Art 1767 of Civil Code, which states “By
the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.” In the agreement, petitioners would contribute
property to the partnership in the form of land which was to be developed into
a subdivision; while respondent would give, in addition to his industry, the
amount needed for general expenses and other costs. Furthermore, the income
from the said project would be divided according to the stipulated percentage.
Clearly, the contract manifested the intention of the parties to form a
partnership.
Issue #2:
Whether or not the deed of sale between the two was valid.
Held:
No. Petitioners were wrong in contending that the JVA is void under Article
1422[14] of the Civil Code, because it is the direct result of an earlier illegal
contract, which was for the sale of the land without valid consideration.
The Joint Venture Agreement clearly states that the consideration for the sale
was the expectation of profits from the subdivision project. Its first stipulation
states that petitioners did not actually receive payment for the parcel of land
sold to respondent. Consideration, more properly denominated as cause, can
take different forms, such as the prestation or promise of a thing or service by
another.
In this case, the cause of the contract of sale consisted not in the stated peso
value of the land, but in the expectation of profits from the subdivision project,
for which the land was intended to be used. As explained by the trial court, the
land was in effect given to the partnership as petitioners participation therein.
There was therefore a consideration for the sale, the petitioners acting in the
expectation that, should the venture come into fruition, they would get sixty
percent of the net profits.
3. ARBES V 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 sanctionThis is
an action to bring about liquidation of the funds and property of the association
called "Turnuhan Polistico & Co." The plaintiffs were members or
shareholders, and the defendants were designated as president-treasurer,
directors and secretary of said association.
FULL CASE
It is well to remember that this case is now brought before the consideration of
this court for the second time. The first one was when the same plaintiffs
appeared from the order of the court below sustaining the defendant's
demurrer, and requiring the former to amend their complaint within a period,
so as to include all the members of "Turnuhan Polistico & Co.," either as
plaintiffs or as a defendants. This court held then that in an action against the
officers of a voluntary association to wind up its affairs and enforce an
accounting for money and property in their possessions, it is not necessary that
all members of the association be made parties to the action. (Borlasa vs.
Polistico, 47 Phil., 345.) The case having been remanded to the court of origin,
both parties amend, respectively, their complaint and their answer, and by
agreement of the parties, the court appointed Amadeo R. Quintos, of the
Insular Auditor's Office, commissioner to examine all the books, documents,
and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence
the parties might desire to present.
The commissioner rendered his report, which is attached to the record, with the
following resume:
Income:
 Member's shares............................ 97,263.70
Credits paid................................ 6,196.55
Interest received........................... 4,569.45
Miscellaneous............................... 1,891.00
P109,620.70
Expenses:
Premiums to members....................... 68,146.25
Loans on real-estate....................... 9,827.00
Loans on promissory notes.............. 4,258.55
Salaries.................................... 1,095.00
Miscellaneous............................... 1,686.10
Cash on hand........................................
The defendants objected to the commissioner's report, but the trial court,
having examined the reasons for the objection, found the same sufficiently
explained in the report and the evidence, and accepting it, rendered judgment,
holding that the association "Turnuhan Polistico & Co." is unlawful, and
sentencing the defendants jointly and severally to return the amount of
P24,607.80, as well as the documents showing the uncollected credits of the
association, to the plaintiffs in this case, and to the rest of the members of the
said association represented by said plaintiffs, with costs against the
defendants.
The defendants assigned several errors as grounds for their appeal, but we
believe they can all be reduced to two points, to wit: (1) That not all persons
having an interest in this association are included as plaintiffs or defendants;
(2) that the objection to the commissioner's report should have been admitted
by the court below.
As to the first point, the decision on the case of Borlasa vs.
Polistico, supra, must be followed.
With regard to the second point, despite the praiseworthy efforts of the
attorney of the defendants, we are of opinion that, the trial court having
examined all the evidence touching the grounds for the objection and having
found that they had been explained away in the commissioner's report, the
conclusion reached by the court below, accepting and adopting the findings of
fact contained in said report, and especially those referring to the disposition of
the association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held
that the findings of facts made by a referee appointed under the provisions of
section 135 of the Code of Civil Procedure stand upon the same basis, when
approved by the Court, as findings made by the judge himself. And in Kriedt
vs. E. C. McCullogh & Co.(37 Phil., 474), the court held: "Under section 140
of the Code of Civil Procedure it is made the duty of the court to render
judgment in accordance with the report of the referee unless the court shall
unless for cause shown set aside the report or recommit it to the referee. This
provision places upon the litigant parties of the duty of discovering and
exhibiting to the court any error that may be contained therein." The appellants
stated the grounds for their objection. The trial examined the evidence and the
commissioner's report, and accepted the findings of fact made in the report. We
find no convincing arguments on the appellant's brief to justify a reversal of the
85,012.90
trial court's conclusion admitting the commissioner's findings.
24,607.80
There is no question that "Turnuhan Polistico & Co." is an unlawful
partnership (U.S. vs. Baguio, 39 Phil., 962), but the appellants allege that
because it is so, some charitable institution to whom the partnership funds may
be ordered to be turned over, should be included, as a party defendant. The
appellants refer to article 1666 of the Civil Code, 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.
Appellant's contention on this point is untenable. According to said article, no
charitable institution is a necessary party in the present case of determination
of the rights of the parties. The action which may arise from said article, in the
case of unlawful partnership, is that for the recovery of the amounts paid by the
member from those in charge of the administration of said partnership, and it is
not necessary for the said parties to base their action to the existence of the
partnership, but on the fact that of having contributed some money to the
partnership capital. And hence, the charitable institution of the domicile of the
partnership, and in the default thereof, those of the province are not necessary
parties in this case. The article cited above permits no action for the purpose of
obtaining the earnings made by the unlawful partnership, during its existence
as result of the business in which it was engaged, because for the purpose, as
Manresa remarks, the partner will have to base his action upon the partnership
contract, which is to annul and without legal existence by reason of its
unlawful object; and it is self evident that what does not exist cannot be a cause
of action. Hence, paragraph 2 of the same article provides that when the
dissolution of the unlawful partnership is decreed, the profits cannot inure to
the benefit of the partners, but must be given to some charitable institution.
We deem in pertinent to quote Manresa's commentaries on article 1666 at
length, as a clear explanation of the scope and spirit of the provision of the
Civil Code which we are concerned. Commenting on said article Manresa,
among other things says:
When the subscriptions of the members have been paid to the
management of the partnership, and employed by the latter in
transactions consistent with the purposes of the partnership may the
former demand the return of the reimbursement thereof from the
manager or administrator withholding them?
Apropos of this, it is asserted: If the partnership has no valid existence,
if it is considered juridically non-existent, the contract entered into can
have no legal effect; and in that case, how can it give rise to an action
in favor of the partners to judicially demand from the manager or the
administrator of the partnership capital, each one's contribution?
The authors discuss this point at great length, but Ricci decides the
matter quite clearly, dispelling all doubts thereon. He holds that the
partner who limits himself to demanding only the amount contributed
by him need not resort to the partnership contract on which to base his
action. And he adds in explanation that the partner makes his
contribution, which passes to the managing partner for the purpose of
carrying on the business or industry which is the object of the
partnership; or in other words, to breathe the breath of life into a
partnership contract with an objection forbidden by law. And as said
contrast does not exist in the eyes of the law, the purpose from which
the contribution was made has not come into existence, and the
administrator of the partnership holding said contribution retains what
belongs to others, without any consideration; for which reason he is
not bound to return it and he who has paid in his share is entitled to
recover it.
But this is not the case with regard to profits earned in the course of
the partnership, because they do not constitute or represent the
partner's contribution but are the result of the industry, business or
speculation which is the object of the partnership, and therefor, in
order to demand the proportional part of the said profits, the partner
would have to base his action on the contract which is null and void,
since this partition or distribution of the profits is one of the juridical
effects thereof. Wherefore considering this contract as non-existent, by
reason of its illicit object, it cannot give rise to the necessary action,
which must be the basis of the judicial complaint. Furthermore, it
would be immoral and unjust for the law to permit a profit from an
industry prohibited by it.
Hence the distinction made in the second paragraph of this article of
this Code, providing that the profits obtained by unlawful means shall
not enrich the partners, but shall upon the dissolution of the
partnership, be given to the charitable institutions of the domicile of
the partnership, or, in default of such, to those of the province.
This is a new rule, unprecedented by our law, introduced to supply an
obvious deficiency of the former law, which did not describe the
purpose to which those profits denied the partners were to be applied,
nor state what to be done with them.
The profits are so applied, and not the contributions, because this
would be an excessive and unjust sanction for, as we have seen, there
is no reason, in such a case, for depriving the partner of the portion of
the capital that he contributed, the circumstances of the two cases
being entirely different.
Our Code does not state whether, upon the dissolution of the unlawful
partnership, the amounts contributed are to be returned by the partners,
because it only deals with the disposition of the profits; but the fact
that said contributions are not included in the disposal prescribed
profits, shows that in consequences of said exclusion, the general law
must be followed, and hence the partners should reimburse the amount
of their respective contributions. Any other solution is immoral, and
the law will not consent to the latter remaining in the possession of the
manager or administrator who has refused to return them, by denying
 to the partners the action to demand them. (Manresa, Commentaries on (4) two percent (2%) for her demonstration services. The agreement was not
the Spanish Civil Code, vol. XI, pp. 262-264) reduced to writing on the strength of Belo's assurances that he was sincere,
dependable and honest when it came to financial commitments.
The judgment appealed from, being in accordance with law, should be, as it is
hereby, affirmed with costs against the appellants; provided, however, the
defendants shall pay the legal interest on the sum of P24,607.80 from the date
On October 9, 1987, Anay learned that Marjorie Tocao had signed a letter
of the decision of the court, and provided, further, that the defendants shall
addressed to the Cubao sales office to the effect that she was no longer the
deposit this sum of money and other documents evidencing uncollected credits
in the office of the clerk of the trial court, in order that said court may vice-president of Geminesse Enterprise.
distribute them among the members of said association, upon being duly
identified in the manner that it may deem proper. So ordered.
Anay attempted to contact Belo. She wrote him twice to demand her overriding
4. TOCAO V CA commission for the period of January 8, 1988 to February 5, 1988 and the audit
of the company to determine her share in the net profits.
FACTS:
Private respondent Nenita A. Anay met petitioner William T. Belo, then the
vice-president for operations of Ultra Clean Water Purifier, through her former Anay still received her five percent (5%) overriding commission up to
employer in Bangkok. Belo introduced Anay to petitioner Marjorie Tocao, December 1987. The following year, 1988, she did not receive the same
who conveyed her desire to enter into a joint venture with her for the commission although the company netted a gross sales of P 13,300,360.00.
importation and local distribution of kitchen cookwares
Under the joint venture, Belo acted as capitalist, Tocao as president and
general manager, and Anay as head of the marketing department and later, On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for
vice-President for sales sum of money with damages against Marjorie D. Tocao and William Belo
before the Regional Trial Court of Makati, Branch 140
The parties agreed that Belo's name should not appear in any documents
relating to their transactions with West Bend Company. Anay having secured
the distributorship of cookware products from the West Bend Company and The trial court held that there was indeed an "oral partnership agreement
organized the administrative staff and the sales force, the cookware business between the plaintiff and the defendants. The Court of Appeals affirmed the
took off successfully. They operated under the name of Geminesse Enterprise, lower court’s decision.
a sole proprietorship registered in Marjorie Tocao's name.

ISSUE:
The parties agreed further that Anay would be entitled to:
Whether the parties formed a partnership
(1) ten percent (10%) of the annual net profits of the business;
HELD:
(2) overriding commission of six percent (6%) of the overall weekly
production; Yes, the parties involved in this case formed a partnership

(3) thirty percent (30%) of the sales she would make; and The Supreme Court held that to be considered a juridical personality, a
partnership must fulfill these requisites:
(1) two or more persons bind themselves to contribute money, property or
industry to a common fund; and
(2) intention on the part of the partners to divide the profits among themselves.
It may be constituted in any form; a public instrument is necessary only where
immovable property or real rights are contributed thereto.
This implies that since a contract of partnership is consensual, an oral contract
of partnership is as good as a written one.
In the case at hand, Belo acted as capitalist while Tocao as president and
general manager, and Anay as head of the marketing department and later,
vice-president for sales. Furthermore, Anay was entitled to a percentage of the
net profits of the business.
Therefore, the parties formed a partnership.
C. Separate juridical personality
Article 1768. The partnership has a juridical personality separate and distinct
from that of each of the partners, even in case of failure to comply with the
requirements of article 1772, first paragraph.
Article 1775. Associations and societies, whose articles are kept secret among
the members, and wherein any one of the members may contract in his own
name with third persons, shall have no juridical personality, and shall be
governed by the provisions relating to co-ownership.
Article 1811. A partner is co-owner with his partners of specific partnership
property.
SEC. 22. Definitions - When used in this Title:
(B) The term "corporation" shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general professional
partnerships and 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 consortium agreement
under a service contract with 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.
SEC. 26. Tax Liability of Members of General Professional Partnerships. - A
general professional partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income tax only in their
separate and individual capacities.
For purposes of computing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as a
corporation.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
5. AGUILA V CA
In April 1991, the spouses Ruben and Felicidad Abrogar entered into a loan
agreement with a lending firm called A.C. Aguila & Sons, Co., a partnership.
The loan was for P200k. To secure the loan, the spouses mortgaged their house
and lot located in a subdivision. The terms of the loan further stipulates that in
case of non-payment, the property shall be automatically appropriated to the
partnership and a deed of sale be readily executed in favor of the partnership.
She does have a 90 day redemption period.
Ruben died, and Felicidad failed to make payment. She refused to turn over the
property and so the firm filed an ejectment case against her (wherein she lost).
She also failed to redeem the property within the period stipulated. She then
filed a civil case against Alfredo Aguila, manager of the firm, seeking for the
declaration of nullity of the deed of sale. The RTC retained the validity of the
deed of sale. The Court of Appeals reversed the RTC. The CA ruled that the
sale is void for it is a pactum commissorium sale which is prohibited under
Art. 2088 of the Civil Code (note the disparity of the purchase price, which is
the loan amount, with the actual value of the property which is after all located
in a subdivision).
ISSUE: Whether or not the case filed by Felicidad shall prosper.
HELD: No. Unfortunately, the civil case was filed not against the real party in
interest. As pointed out by Aguila, he is not the real party in interest but rather
it was the partnership A.C. Aguila & Sons, Co. The Rules of Court provide
that “every action must be prosecuted and defended in the name of the real
party in interest.” A real party in interest is one who would be benefited or
injured by the judgment, or who is entitled to the avails of the suit. Any
decision rendered against a person who is not a real party in interest in the case
cannot be executed. Hence, a complaint filed against such a person should be
dismissed for failure to state a cause of action, as in the case at bar.
Under Art. 1768 of the Civil Code, a partnership “has a juridical personality
separate and distinct from that of each of the partners.” The partners cannot be
held liable for the obligations of the partnership unless it is shown that the
legal fiction of a different juridical personality is being used for fraudulent,
unfair, or illegal purposes. In this case, Felicidad has not shown that A.C.
Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent,
unfair, or illegal purposes. Moreover, the title to the subject property is in the
name of A.C. Aguila & Sons, Co. It is the partnership, not its officers or
agents, which should be impleaded in any litigation involving property
registered in its name. A violation of this rule will result in the dismissal of the
complaint.
6. TAN V DEL ROSARIO
FACTS:
The consolidated cases questions the constitutionality of RA 7496 or the
Simplified Net Income Taxation Scheme. Petitioners claim to be taxpayers
adversely affected by the continued implementation of the amendatory
legislation. Petitioners also assailed Section 6 of Revenue Regulations No. 2-
93: that public respondents have exceeded their rule-making authority in
applying SNIT to general professional partnerships.
The Solicitor General agrees with the public respondents.
ISSUE: Whether RA 7496 and RR Nos. 2-93 are unconstitutional.
RULING:
No. RA 7496 does not impose tax on single proprietorships and professionals
differently from the manner it imposes the tax on corporations and
partnerships. Such system of income taxation has long been the prevailing rule
even prior to RA 7496. Uniformity of taxation merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities.
Also, the Court clarifies that a general professional partnership is not itself an
income taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in their
individual capacity computed on their distributive shares of partnership profits
as provided in Section 23 of the Tax Code.
There is no distinction in income tax liability between a person who practices
his profession alone or individually and one who does it through partnership
with others in the exercise of a common profession. Under the present income
tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.
The phrase "income taxpayers" is an all embracing term used in the Tax Code,
and it practically covers all persons who derive taxable income. Partnerships
no matter how created or organized, are subject to income tax which, for
purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed,
the above standing rule as now so modified by Republic Act No. 7496 on
basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of
the law, either before or after the amendatory legislation, to place in an unequal
footing or in significant variance the income tax treatment of professionals
who practice their respective professions individually and of those who do it
through a general professional partnership.
7. MENDIOLA V CA
FACTS: Petitioner Mendiola (ATM) entered into a Side Agreement with
Pacfor (USA) who will set up a representative office in the Philippines. They
named said office as Pacfor Phils in which petitioner is president. In the
agreement, petitioner’s base salary and the company’s overhead expenditures
shall be borne by the representative office and shall be funded by Pacfor/ATM
being equally owned on 50-50 equity by ATM and Pacfor-USA. The Side
Agreement was later amended through a Revised Operating and Profit
Sharing Agreement where petitioner’s salary was increased. However, both
agreements show that the operational expenses will be borne by the
representative office and funded by all parties “as equal partners,” while the
profits and commissions will be shared among them.
Years later, petitioner wrote Pacfor’s VP for Asia seeking confirmation of his
50% equity of Pacfor Phils to which Pacfor’s President replied that petitioner
is not a part
- owner, his office being just a representative office, a “theoretical
company with the purpose of dividing the income 50-50.” He even
stressed that the petitioner knew of this arrangement from beginning,
having been the one to propose to them the setting up of a
representative office, instead of a branch office, to save on taxes.
ISSUE: Whether or not a partnership or co-ownership exists between the
parties.
HELD: Petitioner is an employee of Pacfor and no partnership or co-
ownership exists between the parties. In a partnership, the members become
co-owners of what is contributed to the firm capital and of all property that
may be acquired thereby and through the efforts of the members. The property
or stock of the partnership forms a community of goods, a common fund, in
which each party has a proprietary interest. In fact, the New Civil Code regards
a partner as a co-owner of specific partnership property. Each partner
possesses a joint interest in the whole of partnership property. If the relation
does not have this feature, it is not one of partnership. This essential element,
the community of interest, or co-ownership of, or joint interest in partnership
property is absent in the relations between petitioner and private respondent
Pacfor. Petitioner is not a part-owner of Pacfor Phils. Pacfor's President
established this fact when he said that Pacfor Phils. Is simply a "theoretical
company" for the purpose of dividing the income50-50.
He stressed that petitioner knew of this arrangement from the very start, having
been the one to propose to private respondent Pacfor the setting up of a
representative office, and "not a branch office" in the Philippines to save on
taxes. Thus, the parties in this case, merely shared profits. This alone does not
make a partnership. Besides, a corporation cannot become a member of a
partnership in the absence of express authorization by statute or charter. This
doctrine is based on the following considerations: (1)that the mutual agency
between the partners, whereby the corporation would be bound by the acts of
persons who are not its duly appointed and authorized agents and officers,
would be inconsistent with the policy of the law that the corporation shall
manage its own affairs separately and exclusively; and, (2) that such an
arrangement would improperly allow corporate property to become subject to
risks not contemplated by the stockholders when they originally invested in the
corporation. No such authorization has been proved in the case at baR.
8. ANGELES V SECRETARY OF JUSTICE
DOCTRINE: The purpose of registration of the contract of partnership with
the SEC is to give notice to third parties. Failure to register the contract of
partnership does not affect the liability of the partnership and of the partners to
third persons, nor does it affect the partnership’s juridical personality. A
partnership may exist even if the partners do not use the words “partner” or
“partnership.”
FACTS:
 Angeles spouses filed a criminal complaint for estafa against Mercado, their
brother-in-law
o Claimed that Mercado convinced them to enter into a contract of
antichresis, to last for 5 years, covering 8 parcels of land planted with
fruit-bearing lanzones trees in Nagcarlan, Laguna and owned by Juan
Sanzo
o The parties agreed that Mercado would administer the ands and
complete the necessary paperwork
o After 3 years, the Angeles spouses asked for an accounting from
Mercado, and they claim that only after this demand for an accounting
did thy discover that Mercado had put the contract of antichresis over
the subject land under Mercado and his spouse’s names
 Mercado denied the Angeles spouses’ allegations
o Claimed that there exists an industrial partnership, colloquially known
as sosyo industrial, between him and his spouse as industrial partners
and the Angeles spouses as financiers, and that this had existed since
1991, before the contract of antichresis over the subject land
o Mercado used his and his spouse’s earnings as part of the capital in the
business transactions which he entered into in behalf of the Angeles
spouses. It was their practice to enter into business transactions with
other people under the name of Mercado because the Angeles spouses
did not want to be identified as the financiers
o Attached bank receipts showing deposits in behalf of Emerita Angeles
and contracts under his name for the Angeles spouses
 During the barangay conciliation proceedings, Oscar Angeles stated that
there was a written sosyo industrial agreement: capital would come from
the Angeles spouses while the profit would be divided evenly between
Mercado and the Angeles spouses
 Provincial Prosecution Office: first recommended the filing of a criminal
information for estafa, but after Mercado filed his counter-affidavit and
 moved for reconsideration, issued an amended resolution dismissing the
complaint
 Angeles spouses appealed to Sec. of Justice, saying that the document
evidencing the contract of antichresis executed in the name of the Mercado
spouses, instead of the Angeles spouses, and that such document alone
proves Mercado’s misappropriation of their P210, 000
 Sec. of Justice: dismissed the appeal
o Angeles spouses failed to show sufficient proof that Mercado
deliberately deceived them in the transaction
o Mercado satisfactorily explained that the Angeles spouses do not want to
be revealed as the financiers
o Under the circumstances, it was more likely that the Angeles spouses
knew from the very start that the questioned document was not really in
their names
o A partnership truly existed between the Angeles spouses and Mercado,
which was clear from the fact that they contributed money to a common
fund and divided the profits among themselves.
o Angeles spouses acknowledged their joint business venture in the
barangay conciliation proceedings although they assailed the manner the
business was conducted
o Although the legal formalities for the formation were not adhered to, the
partnership relationship was evident.
o There is no estafa where money is delivered by a partner to his co-
partner on the latter’s representation that the amount shall be applied to
the business of their partnership. In case of the money received, the co-
partner’s liability is civil in nature
ISSUES/HELD:
1. W/N the Sec. of Justice committed grave abuse of discretion in
dismissing the appeal - No
2. W/N a partnership existed between Mercado and the Angeles spouses -
Yes
3. W/N there was misappropriation by Mercado – No
RATIO/RULING:
1. Angeles spouses fail to convince that the Secretary of Justice committed
grave abuse of discretion when he dismissed their appeal. Moreover, they
committed a procedural error when they failed to file a motion for
reconsideration of the Sec. of Justice’s resolution, which is already enough
reason to dismiss the case.
2. Angeles spouses allege that they had no partnership with Mercado, relying
on Arts. 1771 to 1773 of the Civil Code.
 The Angeles spouses’ position that there is no partnership because of the
lack of a public instrument indicating the same and a lack of registration
with the SEC holds no water
o The Angeles spouses contributed money to the partnership and not
immovable property
o Mere failure to register the contract of partnership with the SEC does not
invalidate a contract that has the essential requisites of a partnership.
The purpose of registration is to give notice to third parties.
 Failure to register does not affect the liability of the partnership and of the
partners to third persons, nor does it affect the partnership’s juridical
personality
 The Angeles spouses admit to facts that prove the existence of a partnership
o A contract showing a sosyo industrial or industrial partnership
o Contribution of money & industry to a common fund
o Division of profits between the Angeles spouses and Mercado
3. Mercado satisfactorily explained that the Angeles spouses do not want to be
revealed as the financiers, thus the document which was in the name of
Mercado and his spouse fail to convince that there was deceit or false
representation that induced the Angeles spouses to part with their money
 Even the RTC of Sta. Cruz, Laguna, which handled the civil case filed by
the Angeles spouses against Mercado and Leo Cerayban stated that it was
the practice to have the contracts secured in Mercado’s name as the Angeles
spouses fear being kidnapped by the NPA or being questioned by the BIR
as Oscar Angeles was working with the government.
 Accounting of the proceeds is not a proper subject for the present case.
DISPOSITION: Petition for certiorari dismissed. Decision of Sec. of Justice
affirmed.
D. Mutual agency
Article 1803. When the manner of management has not been agreed upon, the
following rules shall be observed:
(1) All the partners shall be considered agents and whatever any one of them
may do alone shall bind the partnership,
without prejudice to the provisions of article 1801.
(2) None of the partners may, without the consent of the others, make any
important alteration in the immovable property of the partnership, even if it
may be useful to the partnership. But if the refusal of consent by the other
partners is manifestly prejudicial to the interest of the partnership, the court's
intervention may be sought.
Article 1818. Every partner is an agent of the partnership for the purpose of its
business, and the act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual
way the business of the partnership of which he is a member binds the
partnership, unless the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on of business of
the partnership in the usual way does not bind the partnership unless
authorized by the other partners.
Except when authorized by the other partners or unless they have abandoned
the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on the assignee's
promise to pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the ordinary
business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall bind the
partnership to persons having knowledge of the restriction. (n)
Article 1819. Where title to real property is in the partnership name, any
partner may convey title to such property by a conveyance executed in the
partnership name; but the partnership may recover such property unless the
partner's act binds the partnership under the provisions of the first paragraph of
article 1818, or unless such property has been conveyed by the grantee or a
person claiming through such grantee to a holder for value without knowledge
that the partner, in making the conveyance, has exceeded his authority.
Where title to real property is in the name of the partnership, a conveyance
executed by a partner, in his own name, passes the equitable interest of the
partnership, provided the act is one within the authority of the partner under
the provisions of the first paragraph of article 1818.
Where title to real property is in the name of one or more but not all the
partners, and the record does not disclose the right of the partnership, the
partners in whose name the title stands may convey title to such property, but
the partnership may recover such property if the partners' act does not bind the
partnership under the provisions of the first paragraph of article 1818, unless
the purchaser or his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one or more or all the
partners, or in a third person in trust for the partnership, a conveyance executed
by a partner in the partnership name, or in his own name, passes the equitable
interest of the partnership, provided the act is one within the authority of the
partner under the provisions of the first paragraph of article 1818.
Where the title to real property is in the name of all the partners a conveyance
executed by all the partners passes all their rights in such property. (n)
Article 1820. An admission or representation made by any partner concerning
partnership affairs within the scope of his authority in accordance with this
Title is evidence against the partnership. (n)
Article 1821. Notice to any partner of any matter relating to partnership affairs,
and the knowledge of the partner acting in the particular matter, acquired while
a partner or then present to his mind, and the knowledge of any other partner
who reasonably could and should have communicated it to the acting partner,
operate as notice to or knowledge of the partnership, except in the case of fraud
on the partnership, committed by or with the consent of that partner. (n)
Article 1822. Where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority of
his co-partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to the
same extent as the partner so acting or omitting to act.
Article 1825. When a person, by words spoken or written or by conduct,
represents himself, or consents to another representing him to anyone, as a
partner in an existing partnership or with one or more persons not actual
partners, he is liable to any such persons to whom such representation has been
made, who has, on the faith of such representation, given credit to the actual or
apparent partnership, and if he has made such representation or consented to its
being made in a public manner he is liable to such person, whether the
representation has or has not been made or communicated to such person so
giving credit by or with the knowledge of the apparent partner making the
representation or consenting to its being made: (1) When a partnership liability
results, he is liable as though he were an actual member of the partnership; (2)
When no partnership liability results, he is liable pro rata with the other
persons, if any, so consenting to the contract or representation as to incur
liability, otherwise separately. When a person has been thus represented to be a
partner in an existing partnership, or with one or more persons not actual
partners, he is an agent of the persons consenting to such representation to bind
them to the same extent and in the same manner as though he were a partner in
fact, with respect to persons who rely upon the representation. When all the
members of the existing partnership consent to the representation, a partnership
act or obligation results; but in all other cases it is the joint act or obligation of
the person acting and the persons consenting to the representation.
Rule 130. Sec 29
Sec. 29 . Admission by co-partner or agent. — The act or declaration of a
partner or agent of the party within the scope of his authority and during the
existence of the partnership or agency, may be given in evidence against such
party after the partnership or agency is shown by evidence other than such act
or declaration. The same rule applies to the act or declaration of a joint owner,
joint debtor, or other person jointly interested with the party.
Rule 14
Sec. 11. Service upon domestic private juridical entity.
When the defendant is a corporation, partnership or association organized
under the laws of the Philippines with a juridical personality, service may be
made on the president, managing partner, general manager, corporate
secretary, treasurer, or in-house counsel.
Article 1800. The partner who has been appointed manager in the articles of
partnership may execute all acts of administration despite the opposition of his
partners, unless he should act in bad faith; and his power is irrevocable without
just or lawful cause. The vote of the partners representing the controlling
interest shall be necessary for such revocation of power. A power granted after
the partnership has been constituted may be revoked at any time. (1692a)
Article 1801. If two or more partners have been intrusted with the management
of the partnership without specification of their respective duties, or without a
stipulation that one of them shall not act without the consent of all the others,
each one may separately execute all acts of administration, but if any of them
should oppose the acts of the others, the decision of the majority shall prevail.
In case of a tie, the matter shall be decided by the partners owning the
controlling interest. (1693a)
Article 1802. In case it should have been stipulated that none of the managing
partners shall act without the consent of the others, the concurrence of all shall
be necessary for the validity of the acts, and the absence or disability of any
one of them cannot be alleged, unless there is imminent danger of grave or
irreparable injury to the partnership.
Article 1832. Except so far as may be necessary to wind up partnership affairs
or to complete transactions begun but not then finished, dissolution terminates
all authority of any partner to act for the partnership: (1) With respect to the
partners, (a) When the dissolution is not by the act, insolvency or death of a
partner; or (b) When the dissolution is by such act, insolvency or death of a
partner, in cases where article 1833 so requires; (2) With respect to persons not
partners, as declared in article 1834. (n)
Article 1833. Where the dissolution is caused by the act, death or insolvency
of a partner, each partner is liable to his co-partners for his share of any
liability created by any partner acting for the partnership as if the partnership
had not been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for the
partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the partner
acting for the partnership had knowledge or notice of the death or insolvency.
Article 1834. After dissolution, a partner can bind the partnership, except as
provided in the third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs or completing
transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if dissolution had not No. 2 (b). Nothing in this article shall affect the liability under article 1825 of
taken place, provided the other party to the transaction: any person who after dissolution represents himself or consents to another
representing him as a partner in a partnership engaged in carrying on business.
(a) Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of the dissolution; or
(b) Though he had not so extended credit, had nevertheless known of
the partnership prior to dissolution, and, having no knowledge or
notice of dissolution, the fact of dissolution had not been advertised in
a newspaper of general circulation in the place (or in each place if
more than one) at which the partnership business was regularly carried
on.
The liability of a partner under the first paragraph, No. 2, shall be satisfied out
of partnership assets alone when such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is
made; and
(2) So far unknown and inactive in partnership affairs that the business
reputation of the partnership could not be said to have been in any
degree due to his connection with it.
The partnership is in no case bound by any act of a partner after dissolution:
(1) Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up
partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership affairs;
except by a transaction with one who –
(a) Had extended credit to the partnership prior to dissolution
and had no knowledge or notice of his want of authority; or
(b) Had not extended credit to the partnership prior to
dissolution, and, having no knowledge or notice of his want of
authority, the fact of his want of authority has not been
advertised in the manner provided for advertising the fact of
dissolution in the first paragraph,