9. GFF and BGP are partners in a big law office.

Whenever an opportunity arose, they would

pool their resources on an equal basis (50-50) and buy land on execution sale. Thereafter
they would sell the land. There were times when the transactions earned them profits and
there are times when they lost money.

a) What set up or arrangement will you suggest to them so that they will not be assessed
corporate tax?

I will suggest to GFF and BGP that they allege there merely exists a co-ownership between
them since they may only be subject to corporate income tax if both partners, as co-owners, have
formed an unregistered partnership or joint venture.

Article 1769 of the Civil Code lays down the rules whether a partnership or a co-ownership
exists. As provided under paragraph 2 of the said provision, although it is an essential element of
a partnership, co-ownership of property does not alone prove the existence of a partnership. The
law does not imply a partnership between co-owners only for the reason that they operate a
common property. There must be clear intent to form a partnership. The sharing of gross returns
under paragraph 3 does not indicate a partnership since it is the net profit that should be shared.
Although, the sharing of profits under paragraph 4 is only presumptive evidence of a partnership.
It may still be rebutted by a stronger piece of evidence.

Further, in the case of Pascual vs. CIR, 166 SCRA 560, [1988], petitioners bought three parcels
of land and subsequently sold the same realizing a net profit of P165,224.70 and P60,000.00. The
court held that the sharing of returns does not in itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in the property. There must be a
clear intent to form a partnership, the existence of a juridical personality different from the
individual partners, and the freedom of each party to transfer or assign the whole property.

Applying Article 1769 of the Civil Code and the doctrine in the case above, GFF and BGP
may argue that there is no evidence that they entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among
themselves. There was no intention to form a partnership between themselves. Their relationship
is merely that of a co-ownership. Hence, they cannot be subject to corporate tax.

b) What proofs can you think to show that they are partners? And to prove they are
not?

GFF and BGP may be shown to have established a partnership when all the essential features
under Article 1767 of the Civil Code are present which are as follows:

1. There must be a valid contract;

2. The parties must have legal capacity to enter into a contract;
3. There must be mutual contribution of money, property, or industry to a common fund;
4. The object must be lawful; and
 5. The primary purpose must be to obtain profits and to divide the same among the parties.

However, when there is difficulty in determining the existence of a partnership under the
aforementioned article, Article 1769 shall be applied. Furthermore, GFF and BGP may be proved
to be partners if there is an unmistakable intention to form a partnership, that as co-owners in the
real estate transactions, they have formed an unregistered partnership or joint venture taxable as a
corporation. An unregistered partnership was formed by GFF and BGP which like a corporation,
was subject to corporate income tax distinct from that imposed on the partners.

On the other hand, a proof that GFF and BGP are not partners may be shown if the one of the
essential features under Article 1767 is lacking and by the fact that they agreed to form a co-
ownership and the sharing of the gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the property. Aside from
the circumstance of profit, the presence of other elements constituting partnership are not present,
such as the clear intent to form a partnership, the existence of a juridical personality different from
that of the individual partners, and the freedom to transfer or assign any interest in the property by
one with the consent of the others.

As the court explained in the case of Clark vs. Sideway, 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.