MENDIOLA, ROSSEANNE GAYLE THERESE

Pascual v. Comm. of Internal Revenue

166 SCRA 560 (1988)

Area of Law on Agency Covered: Rules on Determining Perfected Partnership—

Co-ownership or Co-possession does not itself establish a Partnership even when
Profits are shared

SALIENT FACTS:

1. Pascual and Dragon bought five parcels of land together.

2. They sold two parcels in 1968 to Marenir Development Corporation and sold
the other three parcels of land to Reyes and Samson in 1970.

3. The capital gains taxes were paid by Pascual and Dragon in 1973 and 1974 by
availing of tax amnesties granted in the said years.

4. In 1979, the Acting BIR Commissioner Plana sent a letter to Pascual and
Dragon, informing them that they were assessed and required to pay a total
amount of P107,101.70 as alleged deficiency corporate income taxes for the
years 1968 and 1970.

5. Pascual and Dragon protested the assessment, asserting that they had availed
of tax amnesties but the Commissioner informed Pascual and Dragon that in
the years 1968 and 1970, Pascual and Dragon as co-owners in the real estate
transactions formed an unregistered partnership taxable as a corporation and
subject to corporate income tax; and that the tax amnesties only relieved
Pascual and Dragon from individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership and must pay the tax
deficiency.

ISSUES: Was a partnership established when Pascual and Dragon bought and sold
the parcels of land together and shared in the profit?

SUPREME COURT HELD:

Resolution of the Issue: No partnership was established from the joint

purchase and sale of the parcels of land.
Law Applicable to the ISSUE and FACTS: Article 1769 of the Civil Code
provides for the rules in determining whether a partnership exists. Paragraph (2)
provides that co-ownership or co-possession does not of itself establish a
partnership, whether such co-owners or co-possessors do or do not share any profits
made by the use of the property and paragraph (3) says 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.

Application of the Law Cited to the Facts of the Problem: Pascual and
Dragon are mere co-owners of the lands bought together and shared the profits
when they sold the lots. These were isolated transactions whose character of
habituality peculiar to business transactions for the purpose of gain was not present.
The sharing of profits does not establish a partnership because there must be a clear
intent to form such partnership which will have a separate juridical personality
different from the individual partners.

Doctrine of the Case: Merely sharing in the profits of jointly purchased and
sold lands is not sufficient to establish a partnership because intent to establish such
is material; this intent may be seen through the character of habituality peculiar to
business transactions for the purpose of gain.

MY CRITIQUE AND ANALYSIS:

This case also discussed the case of Evangelista which was used by the
Commissioner as precedent to determine as a partnership the relationship between
Pascual and Dragon. A pertinent quote from the Evangelista decision is, “Pursuant to
Article 1767, 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 properties.”

In Evangelista, the intent of the parties was clear as the purchased properties
were leased out, under the management of one of the purchasers, for fifteen years.
This is the habituality peculiar to business transactions for the purpose of gain that
constituted the partnership. Such was not the case in the relationship of Pascual and
Dragon. Their co-ownership of the subject lots began when they purchased the lands
together in 1965 and ended when they sold the last parcels in 1970. They did not
lease the lands, nor did they manage it for profit. There was no partnership because
only one element was present: the agreement to contribute money, property, or
industry to a common fund. Clearly, no intent to establish the partnership with a
separate juridical personality was present.

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