[Obillos v. CIR] (1985) III.

RATIONALE
[Justice Aquino]
TOPIC TAX ON CORPORATIONS –
Co-ownership
SUMMARY (optional for relatively long cases)
DOCTRINE Article 1769(3) of the Civil Code provides
that "the sharing of gross returns does not
of itself establish a partnership, whether or
not the persons sharing them have a joint
or common right or interest in any property
from which the returns are derived". There
must be an unmistakable intention to form
a partnership or joint venture.
I. FACTS
In 1973, Jose Obillos, Sr. bought two (2) lots for Php 179K,
and then transferred his rights on the lots to his four (4)
children, namely, Jose Jr., Sarah, Romeo, and Remedios.
The issued Torrens titles showed that the 4 siblings co-own
the 2 lots.
In 1974, the Obillos siblings resold the 2 lots at Php 313K,
thereby profiting Php 134K which they equally divided
among themselves. The siblings treated the profit as capital
gain and each paid income tax on his or her share.
In 1980, the Commissioner on Internal Revenue, on the
theory that the Obillos siblings had formed an unregistered
partnership or joint venture, required them to pay corporate
income tax on the said Php 134K profit, in addition to the
income tax on their individual shares.
The Obillos siblings had no intention to form a partnership
under Article 1767 of the Civil Code. They were co-owners
pure and simple.
To consider the siblings as partners would obliterate the
distinction between a co-ownership and a partnership. They
were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential
purposes. If the siblings later on found it not feasible to build
their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same
to dissolve the coownership. The division of the profit was
merely incidental to the dissolution of the co-ownership,
which was in the nature of things a temporary state. It had
to be terminated eventually.
Article 1769(3) of the Civil Code provides that "the sharing of
gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or
common right or interest in any property from which the
returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.
IV. DISPOSITIVE
Judgment of the Tax Court is reversed and set aside.
Assessments are cancelled.

The CIR also considered the profit shares of each sibling as

a distributive dividend taxable in full (not a mere capital gain
which is taxable in half) and required them to pay deficiency
income taxes, fraud surcharge, and accumulated interests.

As a result, the Obillos siblings were held liable for deficiency

income taxes and penalties totaling Php 128K on their profit
of Php 134K, on top of the tax on capital gains they already
paid.

The Obillos siblings contested the assessments but the Tax

Court decided in favor of the CIR. Hence, the siblings
appealed to the SC.

II. ISSUE

Whether the Obillos siblings formed an unregistered

partnership and are liable for corporate income tax – NO