JOSE GATCHALIAN, et al. v.

THE COLLECTOR OF INTERNAL

REVENUE (G.R. No. L-45425)
April 29, 1939

Topic: Taxpayers - Partnership

SUMMARY:

Jose Gatchalian, together with 14 others, pooled money together in order to purchase one sweepstakes
ticket valued at P2. The said ticket was registered in the name of Jose Gatchalian and Company. As
luck would have it, the ticket won third prize in the amount of P50,000.

Subsequently, Gatchalian was required by the CIR to pay income tax covering the amount won, which
assessment Gatchalian, et al. paid under protest. Gatchalian, et al. were arguing that they should be
exempt from paying income tax because what they formed was merely a community of property and
not a partnership.

The SC affirmed the validity of the CIR assessment, ruling that what Gatchalian, et al. organized was a
partnership.

FACTS:

In 1934, Jose Gatchalian and 14 others, all hailing from Pulilan, Bulacan, chipped in various amounts of
money* to enable them to purchase a sweepstakes ticket worth two pesos. The ticket (No. 178637) was
bought from a National Charity Sweepstakes Office (NCSO) and was registered in the name of Jose
Gatchalian and Company.

During the sweepstakes draw on December 15, 1934, the same ticket won one of the third prizes in the
amount of P50,000. Thereafter, the PNB check covering the prize was issued by the NCSO in favor of
Jose Gatchalian & Company.

On December 29, 1934, Gatchalian was required by  income tax examiner Alfredo David to file the
corresponding income tax return covering the prize won by Jose Gatchalian & Company. In 1935, the
CIR issued a tax assessment of P1,499.94 against Gatchalian and Company, pursuant to the agency's
power under Sec. 10** of Act No. 2833 as amended by Section 2 of Act No. 3761.

On account of Gatchalian and Company's refusal to pay the tax assessment, the CIR issued a warrant of
distraint and levy against Gatchalian and the other 14 plaintiffs. In order to avoid embarrassment
arising from the embargo of their property, Gatchalian, et al. paid under protest the partial sum of
P601.51.

Because Gatchalian, et al. failed to pay the balance, the CIR ordered the municipal treasurer of
Pulilan, Bulacan to execute the previously issued warrant of distraint and levy.

Yet again, in order to avoid embarrassment and annoyance arising from the levy of their properties,
Gatchalian, et al. paid under protest the sum of P1,260.93, which included the balance of the
assessment plus penalties.

Gatchalian, et al. were contending that they should be exempt from paying income tax arising out of
their gains from winning in the sweepstakes because, contrary to CIR's assertion, what they instituted
was a mere community of property without a personality of its own and not a partnership.

CIR: Dismissed Gatchalian, et al.'s argument.

CFI of Manila: Affirmed the validity of CIR's tax assessment against Gatchalian, et al.

RULING:

Petition denied. Affirmed CFI's ruling on the validity of CIR's tax assessment.

Whether what Gatchalian, et al. instituted was a mere community of property. – NO, IT WAS A
PARTNERSHIP OF A CIVIL NATURE. 

According to the facts on record, Gatchalian, et al. organized a partnership of a civil nature because
each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the
prize which they may win, as they did in fact in the amount of P50,000.

The partnership was not only formed, but upon the organization thereof and the winning of the prize,
Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his
capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of
Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check.

All these circumstances repel the idea that the plaintiffs organized and formed a community of
property only.

Whether Gatchalian and Company are exempt from paying income tax. – NO. 

Having organized and constituted a partnership of a civil nature, Gatchalian and Company is the one
bound to pay the income tax which the CIR collected.
There is also no merit in their contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.

DOCTRINE:

If two or more persons merely formed a community of property, the latter is exempt from the payment
of income tax under the law. But if what is organized and constituted is a partnership of a civil nature,
the said entity is bound to pay income tax.