GENERAL PRINCIPLES

Aurelio Litonjua Jr vs Eduardo Litonjua Sr. et al

Business Organization – Partnership, Agency, Trust – Partnership, how formed

Aurelio and Eduardo are brothers. In 1973, Aurelio alleged that Eduardo entered into a
contract of partnership with him. Aurelio showed as evidence a letter sent to him by
Eduardo that the latter is allowing Aurelio to manage their family business (if Eduardo’s
away) and in exchange thereof he will be giving Aurelio P1 million or 10% equity,
whichever is higher. A memorandum was subsequently made for the said partnership
agreement. The memorandum this time stated that in exchange of Aurelio, who just got
married, retaining his share in the family business (movie theatres, shipping and land
development) and some other immovable properties, he will be given P1 Million or 10%
equity in all these businesses and those to be subsequently acquired by them whichever
is greater.

In 1992 however, the relationship between the brothers went sour. And so Aurelio
demanded an accounting and the liquidation of his share in the partnership. Eduardo did
not heed and so Aurelio sued Eduardo.

ISSUE: Whether or not there exists a partnership.

HELD: No. The partnership is void and legally nonexistent. The documentary evidence
presented by Aurelio, i.e. the letter from Eduardo and the Memorandum, did not prove
partnership.

The 1973 letter from Eduardo on its face, contains typewritten entries, personal in tone,
but is unsigned and undated. As an unsigned document, there can be no quibbling that
said letter does not meet the public instrumentation requirements exacted under Article
1771 (how partnership is constituted) of the Civil Code. Moreover, being unsigned and
doubtless referring to a partnership involving more than P3,000.00 in money or property,
said letter cannot be presented for notarization, let alone registered with the Securities
and Exchange Commission (SEC), as called for under the Article 1772 (capitalization of
a partnership) of the Code. And inasmuch as the inventory requirement under the
succeeding Article 1773 goes into the matter of validity when immovable property is
contributed to the partnership, the next logical point of inquiry turns on the nature of
Aurelio’s contribution, if any, to the supposed partnership.

The Memorandum is also not a proof of the partnership for the same is not a public
instrument and again, no inventory was made of the immovable property and no inventory
was attached to the Memorandum. Article 1773 of the Civil Code requires that if
immovable property is contributed to the partnership an inventory shall be had and
attached to the contract.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA

EVANGELISTA, petitioners, 
vs.
THE COLLECTOR OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, respondents. G.R. No. L-9996, October 15, 1957

Facts: Petitioners borrowed sum of money from their father and together with their own
personal funds they used said money to buy several real properties. They then appointed
their brother (Simeon) as manager of the said real properties with powers and authority
to sell, lease or rent out said properties to third persons. They realized rental income from
the said properties for the period 1945-1949.

On September 24, 1954 respondent Collector of Internal Revenue demanded the

payment of income tax on corporations, real estate dealer's fixed tax and corporation
residence tax for the years 1945-1949. The letter of demand and corresponding
assessments were delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of
the respondent contained in his letter of demand dated September 24, 1954" be reversed,
and that they be absolved from the payment of the taxes in question. CTA denied their
petition and subsequent MR and New Trials were denied. Hence this petition.

Issue: Whether or not petitioners have formed a partnership and consequently, are
subject to the tax on corporations provided for in section 24 of Commonwealth Act. No.
466, otherwise known as the National Internal Revenue Code, as well as to the residence
tax for corporations and the real estate dealers fixed tax.
Held: YES. 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 parties. The first element is undoubtedly present in
the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, because of
the following observations, among others: (1) Said common fund was not something they
found already in existence; (2) They invested the same, not merely in one transaction,
but in a series of transactions; (3) The aforesaid lots were not devoted to residential
purposes, or to other personal uses, of petitioners herein.

Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to leave
no room for doubt on the existence of said intent in petitioners herein.

For purposes of the tax on corporations, our National Internal Revenue Code, includes
these partnerships — with the exception only of duly registered general copartnerships
— within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned and are
subject to the income tax for corporations.

Lim Tong Lim vs Philippine Fishing Gear Industries, Inc.

Business Organization – Partnership, Agency, Trust – Corporation by Estoppel

It was established that Lim Tong Lim requested Peter Yao to engage in commercial
fishing with him and one Antonio Chua. The three agreed to purchase two fishing boats
but since they do not have the money they borrowed from one Jesus Lim (brother of Lim
Tong Lim). They again borrowed money and they agreed to purchase fishing nets and
other fishing equipments. Now, Yao and Chua represented themselves as acting in behalf
of “Ocean Quest Fishing Corporation” (OQFC) they contracted with Philippine Fishing
Gear Industries (PFGI) for the purchase of fishing nets amounting to more than P500k.
They were however unable to pay PFGI and so they were sued in their own names
because apparently OQFC is a non-existent corporation. Chua admitted liability and
asked for some time to pay. Yao waived his rights. Lim Tong Lim however argued that
he’s not liable because he was not aware that Chua and Yao represented themselves as
a corporation; that the two acted without his knowledge and consent.

ISSUE: Whether or not Lim Tong Lim is liable.

HELD: Yes. From the factual findings of both lower courts, it is clear that Chua, Yao and
Lim had decided to engage in a fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from Jesus Lim. In their Compromise
Agreement, they subsequently revealed their intention to pay the loan with the proceeds
of the sale of the boats, and to divide equally among them the excess or loss. These
boats, the purchase and the repair of which were financed with borrowed money, fell
under the term “common fund” under Article 1767. The contribution to such fund need not
be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided
equally among them also shows that they had indeed formed a partnership.

Lim Tong Lim cannot argue that the principle of corporation by estoppels can only be
imputed to Yao and Chua. Unquestionably, Lim Tong Lim benefited from the use of the
nets found in his boats, the boat which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a corporation. Although it was never
legally formed for unknown reasons, this fact alone does not preclude the liabilities of the
three as contracting parties in representation of it. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.

AFISCO Insurance Corp vs CA G.R. No. 112675. January 25, 1999

FACTS: The petitioners are 41 non-life insurance corporations, organized and existing
under the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors‟ All Risk insurance policies, the petitioners
on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus
Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter
called Munich), a non-resident foreign insurance corporation. The reinsurance treaties
required petitioners to form a pool. Accordingly, a pool composed of the petitioners was
formed on the same day. April 14, 1976, the pool of machinery insurers submitted a
financial statement and filed an “Information Return of Organization Exempt from Income
Tax” for the year ending in 1975, which was assessed by the Commissioner of Internal
Revenue for tax deficiency and was protested by the petitioners through its auditors
Sycip, Gorres, Velayo and Co. Protest was denied by the CIR and ordered the Pool
Machinery Insurers to pay the deficiency. The CA ruled in the main that the pool of
machinery insurers was a partnership taxable as a corporation, and that the latter‟s
collection of premiums on behalf of its members, the ceding companies, was taxable
income.Hence, this petition.

ISSUE: “1.Whether or not the Clearing House, acting as a mere agent and performing
strictly administrative functions, and which did not insure or assume any risk in its own
name, was a partnership or association subject to tax as a corporation; “2.Whether or not
the remittances to petitioners and MUNICHRE of their respective shares of reinsurance
premiums, pertaining to their individual and separate contracts of reinsurance, were
“dividends” subject to tax; and

HELD: 1. Yes. “SEC. 22. Of Tax Reform Atc of 1997,define the term - ‘corporation’ shall
include partnerships, no matter how created or organized, x x x associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium x x x. Accordingly, the Supreme Court said: „The term „partnership‟ includes
a syndicate, group, pool, joint venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is carried on. Article 1767
of the Civil Code recognizes the creation of a contract of partnership when “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.” Its requisites are: “(1) mutual
contribution to a common stock, and (2) a joint interest in the profits.” In other words, a
partnership is formed when persons contract “to devote to a common purpose either
money, property, or labor with the intention of dividing the profits between
themselves.”Meanwhile, an association implies associates who enter into a “joint
enterprise x x x for the transaction of business.” In the case before us, the ceding
companies entered into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty and surplus
reinsurance treaty with Munich. The following unmistakably indicates a partnership or an
association covered by Section 24 of the NIRC: (1) The pool has a common fund,
consisting of money and other valuables that are deposited in the name and credit of the
pool. This common fund pays for the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors
of a corporation, composed of one representative for each of the ceding companies. (3)
True, the pool itself is not a reinsurer and does not issue any insurance policy; however,
its work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums.
The ceding companies share “in the business ceded to the pool” and in the “expenses”
according to a “Rules of Distribution” of the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pool‟s formation. 2. In the instant case, the pool
is a taxable entity distinct from the individual corporate entities of the ceding companies.
The tax on its income is obviously different from the tax on the dividends received by the
said companies.

Gatchalian vs. Collector of Internal Revenue [G.R. No. L-45425, April 29, 1939]

Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly
authorized agents of the National Charity Sweepstakes Office one ticket for the sum of
two pesos (P2), saidticket was registered in the name of Jose Gatchalian and Company.
The ticket won one of the third-prizes in the amount of P50,000.

Jose Gatchalian was required to file the corresponding income tax return covering the
prize won. Defendant-Collector made an assessment against Jose Gatchalian and Co.
requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of
Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It
was denied.
Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued.
Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the
warrant. A request that the balance be paid by plaintiffs in installments was made. This
was granted on the condition that a bond be filed.

Plaintiffs failed in their installment payments. Hence a request for execution of the warrant
of distraint and levy was made. Plaintiffs paid under protest to avoid the execution.

A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal.

Issue: Whether the plaintiffs formed a partnership hence liable for income tax.

Held: Yes. According to the stipulation facts the plaintiffs 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.

Alfredo Aguila Jr vs Court of Appeals et al

Business Organization – Partnership, Agency, Trust – Identity Separate and Distinct

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.

ADRIANO ARBES, ET AL vs. VICENTE POLISTICO, ET AL., G.R. No. 31057

September 7, 1929
VILLAMOR, J.:

FACTS: This 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. This case is brought for 2nd time. In the 1 st one, the court
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. The court
appointed commissioner of Insular Auditor's Office, to examine all the books, documents,
and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence.
Commissioner's report show a balance of P24, 607.80 cash on hand. Despite defendant’s
objection to the report, the trial court rendered judgment holding said association is
unlawful. And sentenced defendants jointly and severally to return the amount and
documents to the plaintiffs and members of the association. The Appellant alleged that
the association being unlawful, some charitable institution to whom the partnership funds
may be ordered to be turned over, should be included, as a party defendant. Referring 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.”

ISSUE: Whether or not charitable institution is a necessary party to this case. HELD: No.
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.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. Art. 1807. Every partner must account to the
partnership for any benefit, and hold as trustee for it any profits derived by him without
the consent of the other partners from any transaction connected with the formation,
conduct, or liquidation of the partnership or from any use by him of its property.

LORENZO OÑA V CIR

GR No. L -19342 | May 25, 1972 | J. Barredo

Facts:

Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five
children. A civil case was instituted for the settlement of her state, in which Oña was
appointed administrator and later on the guardian of the three heirs who were still minors
when the project for partition was approved. This shows that the heirs have undivided ½
interest in 10 parcels of land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to
divide the properties and they remained under the management of Oña who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceeds from the sales thereof in real properties and securities. As a
result, petitioners’ properties and investments gradually increased. Petitioners returned
for income tax purposes their shares in the net income but they did not actually receive
their shares because this left with Oña who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership
and therefore, subject to the corporate income tax, particularly for years 1955 and 1956.
Petitioners asked for reconsideration, which was denied hence this petition for review
from CTA’s decision.

Issue:

W/N there was a co-ownership or an unregistered partnership

W/N the petitioners are liable for the deficiency corporate income tax

Held:

Unregistered partnership. The Tax Court found that instead of actually distributing the
estate of the deceased among themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of Oña and let him use their
shares as part of the common fund for their ventures, even as they paid corresponding
income taxes on their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically

converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding. The reason
is simple. From the moment of such partition, the heirs are entitled already to their
respective definite shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the intervention of the other heirs,
and, accordingly, he becomes liable individually for all taxes in connection therewith. If
after such partition, he allows his share to be held in common with his co-heirs under a
single management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed, for
the purpose, for tax purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships —

The term “partnership” includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on… (8 Merten’s Law of Federal Income Taxation, p. 562
Note 63; emphasis ours.)

with the exception only of duly registered general copartnerships — within the purview of
the term “corporation.” It is, therefore, clear to our mind that petitioners herein constitute
a partnership, insofar as said Code is concerned, and are subject to the income tax for
corporations. Judgment affirmed.

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS

P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.

AQUINO, J.:

Facts:

On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square
meters of located at Greenhills, San Juan, Rizal. The next day he transferred his rights to
his four children, the petitioners, to enable them to build their residences. The Torrens
titles issued to them showed that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them
to the Walled City Securities Corporation and Olga Cruz Canada for the total sum of
P313,050. They derived from the sale a total profit of P134, 341.88 or P33,584 for each
of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.
In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income
tax on their shares thereof. The petitioners are being held liable for deficiency income
taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the
tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture The petitioners contested the assessments. Two
Judges of the Tax Court sustained the same. Hence, the instant appeal.

Issue:

Whether or not the petitioners had indeed formed a partnership or joint venture and thus
liable for corporate tax.

Held:

The Supreme Court held that the petitioners should not be considered to have formed a
partnership just because they allegedly contributed P178,708.12 to buy the two lots,
resold the same and divided the profit among themselves. To regard so would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to
destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure
and simple. To consider them as partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.

*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.*

Their original purpose was to divide the lots for residential purposes. If later on they 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 co-ownership. 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 sooner or later.

They did not contribute or invest additional ' capital to increase or expand the properties,
nor was there an unmistakable intention to form partnership or joint venture.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.

All co-ownerships are not deemed unregistered partnership.—Co-Ownership who

own properties which produce income should not automatically be considered partners
of an unregistered partnership, or a corporation, within the purview of the income tax law.
To hold otherwise, would be to subject the income of all

Co-ownerships of inherited properties to the tax on corporations, inasmuch as if a

property does not produce an income at all, it is not subject to any kind of income tax,
whether the income tax on individuals or the income tax on corporation.

As compared to other cases:

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived
therefrom as a common fund to produce profits for themselves, it was held that they were
taxable as an unregistered partnership.

This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198,
where father and son purchased a lot and building, entrusted the administration of the
building to an administrator and divided equally the net income, and from Evangelista vs.
Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought
four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered
partnership.

Pascual and Dragon v. CIR, G.R. No. 78133, October 18, 1988

25MAR

[GANCAYCO, J.]

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3)
parcels of land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized
net profits. The corresponding capital gains taxes were paid by petitioners in 1973 and
1974 by availing of the tax amnesties granted in the said years. However, the Acting BIR
Commissioner assessed and required Petitioners to pay a total amount of P107,101.70
as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners
protested the said assessment asserting that they had availed of tax amnesties way back
in 1974. In a reply, respondent Commissioner informed petitioners that in the years 1968
and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income
was subject to the taxes prescribed under Section 24, both of the National Internal
Revenue Code that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities but
did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-

ownership for the purposes of income tax.

RULING:
The Petitioners are simply under the regime of co-ownership and not under
unregistered partnership.

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 (Art. 1767, Civil Code of the Philippines). In the present case, there is no
evidence that petitioners entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the profits among themselves.
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.
Hence, there is no adequate basis to support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions whereby they purchased
properties and sold the same a few years thereafter did not thereby make them partners.
They shared in the gross profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot
be considered to have formed an unregistered partnership which is thereby liable for
corporate income tax, as the respondent commissioner proposes.

Heirs of Jose Lim vs Juliet Villa Lim

Business Organization – Partnership, Agency, Trust – Partner – Periodic Accounting –

Profit Sharing

In 1980, the heirs of Jose Lim alleged that Jose Lim entered into a partnership agreement
with Jimmy Yu and Norberto Uy. The three contributed P50,000.00 each and used the
funds to purchase a truck to start their trucking business. A year later however, Jose Lim
died. The eldest son of Jose Lim, Elfledo Lim, took over the trucking business and under
his management, the trucking business prospered. Elfledo was able to but real properties
in his name. From one truck, he increased it to 9 trucks, all trucks were in his name
however. He also acquired other motor vehicles in his name.
In 1993, Norberto Uy was killed. In 1995, Elfledo Lim died of a heart attack. Elfledo’s wife,
Juliet Lim, took over the properties but she intimated to Jimmy and the heirs of Norberto
that she could not go on with the business. So the properties in the partnership were
divided among them.

Now the other heirs of Jose Lim, represented by Elenito Lim, required Juliet to do an
accounting of all income, profits, and properties from the estate of Elfledo Lim as they
claimed that they are co-owners thereof. Juliet refused hence they sued her.

The heirs of Jose Lim argued that Elfledo Lim acquired his properties from the partnership
that Jose Lim formed with Norberto and Jimmy. In court, Jimmy Yu testified that Jose Lim
was the partner and not Elfledo Lim. The heirs testified that Elfledo was merely the driver
of Jose Lim.

ISSUE: Who is the “partner” between Jose Lim and Elfledo Lim?

HELD: It is Elfledo Lim based on the evidence presented regardless of Jimmy Yu’s
testimony in court that Jose Lim was the partner. If Jose Lim was the partner, then the
partnership would have been dissolved upon his death (in fact, though the SC did not say
so, I believe it should have been dissolved upon Norberto’s death in 1993). A partnership
is dissolved upon the death of the partner. Further, no evidence was presented as to the
articles of partnership or contract of partnership between Jose, Norberto and Jimmy.
Unfortunately, there is none in this case, because the alleged partnership was never
formally organized.

But at any rate, the Supreme Court noted that based on the functions performed by
Elfledo, he is the actual partner.

The following circumstances tend to prove that Elfledo was himself the partner of Jimmy
and Norberto:

1.) Cresencia testified that Jose gave Elfledo P50,000.00, as share in the partnership, on
a date that coincided with the payment of the initial capital in the partnership;
2.) Elfledo ran the affairs of the partnership, wielding absolute control, power and
authority, without any intervention or opposition whatsoever from any of petitioners
herein;

3.) all of the properties, particularly the nine trucks of the partnership, were registered in
the name of Elfledo;

4.) Jimmy testified that Elfledo did not receive wages or salaries from the partnership,
indicating that what he actually received were shares of the profits of the business; and

5.) none of the heirs of Jose, the alleged partner, demanded periodic accounting from
Elfledo during his lifetime. As repeatedly stressed in the case of Heirs of Tan Eng Kee, a
demand for periodic accounting is evidence of a partnership.

Furthermore, petitioners failed to adduce any evidence to show that the real and personal
properties acquired and registered in the names of Elfledo and Juliet formed part of the
estate of Jose, having been derived from Jose’s alleged partnership with Jimmy and
Norberto.

Elfledo was not just a hired help but one of the partners in the trucking business, active
and visible in the running of its affairs from day one until this ceased operations upon his
demise. The extent of his control, administration and management of the partnership and
its business, the fact that its properties were placed in his name, and that he was not paid
salary or other compensation by the partners, are indicative of the fact that Elfledo was a
partner and a controlling one at that. It is apparent that the other partners only contributed
in the initial capital but had no say thereafter on how the business was ran. Evidently it
was through Elfredo’s efforts and hard work that the partnership was able to acquire more
trucks and otherwise prosper. Even the appellant participated in the affairs of the
partnership by acting as the bookkeeper sans salary.

Sunga – Chan v. Chua

Facts:

On June 22, 1992, respondent Lamberto T. Chua filed a complaint against petitioners,
Lilibeth Sunga Sunga Chan and Cecilia Sunga, daughter and wife, respectively of the
deceased Jacinto L. Sunga, for winding up of Partnership Affairs, accounting, appraisal
and recovery of Shares and Damages with Writ of Preliminary Attachment with the
Regional Trial Court, Branch 11, Zamboanga del Norte.

Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in
the distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila with initial capital
contribution of Php100,000.00 each, with the intention that the profits would be equally
divided between them. For business convenience, respondent and Jacinto agreed to
register the business name of their partnership SHELLITE GAS APPLIANCE CENTER
under the name of Jacinto as sole proprietorship.

Petitioners question the correctness of the finding of the Trial Court and the Court of
Appeals that a partnership existed in the absence of any written document to show
partnership between respondent and Jacinto from 1977 until Jacinto’s death.

Issue:

Whether or not respondent Lamberto Chua and Jacinto L. Sunga has entered into a
partnership?

Held:

Yes. The court ruled that 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. Also, Article 1772 of the Civil Code requires that
partnership with a capital of Php3,000.00 or more must register with the Securities and
Exchange Commission, however this registration requirement is not mandatory. Article
1768 of the Civil Code explicitly provides that the partnership retains its juridical
personality even if it fails register. The failure to register the contract of partnership does
not invalidate the same as among the partners, so long as the contract has the essential
requisites, because the main purpose of registration is to give notice to third parties, and
it can be assumed that the members themselves knew of the contents of their contract.

CIR VS. SUTER

FACTS:A limited partnership named William J. Suter 'Morcoin' Co., Ltd was formed
30September 1947 by William J. Suter as the general partner, and Julia Spirig
andGustav Carlson. They contributed, respectively, P20,000.00, P18,000.00 andP2,000
.00. it was also duly registered with the SEC. On 1948 Suter and Spirig gotmarried and
in effect Carlson sold his share to the couple, the same was alsoregistered with the
SEC. The limited partnership had been filing its income tax returns as acorporation,
without objection by the herein petitioner, Commissioner of InternalRevenue, until in 1959
when the latter, in an assessment, consolidated the incomeof the firm and the individual
incomes of the partners-spouses Suter and Spirigresulting in a determination of a
deficiency income tax against respondent Suter inthe amount of P2,678.06 for 1954
and P4,567.00 for 1955.

ISSUE:Whether or not the limited partnership has been dissolved after the marriageof
Suter and Spirig and buying the interest of limited partner Carlson.

RULING:No, the limited partnership was not dissolved

.“A husband and a wife may not enter into a contract of generalcopartnership, because
under the Civil Code, which applies in the absence of express provision in the Code of
Commerce, persons prohibited from makingdonations to each other are prohibited from
entering into universal partnerships. (2Echaverri 196) It follows that the marriage of
partners necessarily brings about thedissolution of a pre-existing partnership.
“What the law prohibits was when the spouses entered into a generalpartnership. In
the case at bar, the partnership was limited

Primelink Properties and Development Corporation vs Ma. Clarita Lazatin-Magat

Business Organization – Partnership, Agency, Trust – Dissolution and Winding Up – Joint

Venture Agreement – Rights of Innocent Party

In 1994, Primelink Properties and the Lazatin siblings entered into a joint venture
agreement whereby the Lazatins shall contribute a huge parcel of land and Primelink
shall develop the same into a subdivision. For 4 years however, Primelink failed to
develop the said land. So in 1998, the Lazatins filed a complaint to rescind the joint
venture agreement with prayer for preliminary injunction. In said case, Primelink was
declared in default or failing to file an answer and for asking multiple motions for
extension. The trial court eventually ruled in favor of the Lazatins and it ordered Primelink
to return the possession of said land to the Lazatins as well as some improvements which
Primelink had so far over the property without the Lazatins paying for said improvements.
This decision was affirmed by the Court of Appeals. Primelink is now assailing the order;
that turning over improvements to the Lazatins without reimbursement is unjust; that the
Lazatins did not ask the properties to be placed under their possession but they merely
asked for rescission.

ISSUE: Whether or not the improvements made by Primelink should also be turned over
under the possession of the Lazatins.

HELD: Yes. In the first place, even though the Lazatins did specifically pray for
possession the same (placing of improvements under their possession) is incidental in
the relief they prayed for. They are therefore entitled possession over the parcel of land
plus the improvements made thereon made by Primelink.

In this jurisdiction, joint ventures are governed by the laws of partnership. Under the laws
of partnership, when a partnership is dissolved, as in this case when the trial court
rescinded the joint venture agreement, the innocent party has the right to wind up the
partnership affairs.

With the rescission of the JVA on account of petitioners’ fraudulent acts, all authority of
any partner to act for the partnership is terminated except so far as may be necessary to
wind up the partnership affairs or to complete transactions begun but not yet finished. On
dissolution, the partnership is not terminated but continues until the winding up of
partnership affairs is completed. Winding up means the administration of the assets of
the partnership for the purpose of terminating the business and discharging the
obligations of the partnership.

It must be stressed, too, that although the Lazatins acquired possession of the lands and
the improvements thereon, the said lands and improvements remained partnership
property, subject to the rights and obligations of the parties, inter se, of the creditors and
of third parties and subject to the outcome of the settlement of the accounts between the
parties, absent any agreement of the parties in their JVA to the contrary (here no
agreement in the JVA as to winding up). Until the partnership accounts are determined,
it cannot be ascertained how much any of the parties is entitled to, if at all.

Aurbach vs. Sanitary Wares

(Partnership; Joint Venture; Foreign and Domestic Corp)

F: This consolidated petition assailed the decision of the CA directing a certain MANNER
OF ELECTION OF OFFICERS IN THE BOARD OF DIRECTORS

*There are two groups in this case, the Lagdameo group composed of Filipino investors
and the American Standard Inc. (ASI) composed of foreign investors.

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual
intention of the parties should be viewed strictly on the "Agreement" dated August
15,1962 wherein it is clearly stated that the parties' intention was to form a corporation
and not a joint venture.

I: The main issue hinges on who were the duly elected directors of Saniwares for the year
1983 during its annual stockholders' meeting held on March 8, 1983. To answer this
question the following factors should be determined:

*(1) the nature of the business established by the parties whether it was a joint venture
or a corporation and

H:

 While certain provisions of the Agreement would make it appear that the parties
thereto disclaim being partners or joint venturers such disclaimer is directed at third
parties and is not inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other ASI shall constitute the minority
stockholder. In any event, the evident intention of the Philippine Investors and
ASI in entering into the Agreement is to enter into a joint venture enterprise
 An examination of the Agreement shows that certain provisions were inccuded to
protect the interests of ASI as the minority. For example, the vote of 7 out of 9
directors is required in certain enumerated corporate acts. ASI is contractually
entitled to designate a member of the Executive Committee and the vote of this
member is required for certain transactions

 The Agreement also requires a 75% super-majority vote for the amendment of the
articles and by-laws of Saniwares. ASI is also given the right to designate the
president and plant manager .The Agreement further provides that the sales policy
of Saniwares shall be that which is normally followed by ASI and that Saniwares
should not export "Standard" products otherwise than through ASI's Export
Marketing Services. Under the Agreement, ASI agreed to provide technology and
know-how to Saniwares and the latter paid royalties for the same.

 The legal concept of a joint venture is of common law origin. It has no precise
legal definition but it has been generally understood to mean an organization
formed for some temporary purpose. It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control.

 The main distinction cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature.

 ARSENIO T. MENDIOLA, Petitioner, v. COURT OF APPEALS, NATIONAL

LABOR RELATIONS COMMISSION, PACIFIC FOREST RESOURCES,
PHILS., INC. and/or CELLMARK AB, Respondents.
 RESOLUTION
 PUNO, C.J.:
 For resolution is the Motion for Reconsideration1 dated September 23, 2006 filed
by respondent Pacific Forest Resources, Inc. (Pacfor), of the Decision 2 of this
Court dated July 31, 2006, where we held:
 IN VIEW THEREOF, the petition is GRANTED. The Court of Appeals' January
30, 2003 Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution,
affirming the December 20, 2001 Decision of the National Labor Relations
Commission, are ANNULED and SET ASIDE. The July 30, 2001 Decision of the
Labor Arbiter is REINSTATED with the MODIFICATION that the amount
of P250,000.00 representing an alleged increase in petitioner's salary shall be
deducted from the grant of separation pay for lack of evidence.
 SO ORDERED.
 The dispositive portion of the July 30, 2001 Decision of the Labor Arbiter reads
as follows:
 WHEREFORE, premises considered, judgment is hereby rendered ordering
herein respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and
severally to compensate complainant Arsenio T. Mendiola separation pay
equivalent to at least one month for every year of service, whichever is
higher (sic), as reinstatement is no longer feasible by reason of the strained
relations of the parties equivalent to five (5) months in the amount of $32,000.00
plus the sum of P250,000.00; pay complainant the sum of P500,000.00 as moral
and exemplary damages and ten percent (10%) of the amounts awarded as and
for attorney's fees.
 All other claims are dismissed for lack of
basis.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
 SO ORDERED.
 The Labor Arbiter's decision held Cellmark solidarily liable with respondent
Pacfor.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
 However, as respondent Pacfor pointed out in its Motion for Reconsideration, the
courts never acquired jurisdiction over the person of Cellmark. Respondent
Cellmark is the parent corporation of respondent Pacfor. It is a corporation duly
organized under the laws of Sweden, with principal office in Gothenburg,
Sweden. It did not receive any summons from any court or quasi-judicial body
with regard to the instant case, nor did it voluntarily submit itself to the jurisdiction
of the Labor Arbiter.
 With regard to the other issues, no substantial arguments have been raised by
respondent Pacfor. These issues have been thoroughly discussed by this Court
in its July 31, 2006 decision.
 IN VIEW WHEREOF, the petitioner's Motion for Reconsideration is PARTIALLY
GRANTED. The judgment rendered by the Labor Arbiter dated July 30, 2001,
shall be without effect only as to respondent Cellmark AB.
 SO ORDERED.

J. Tiosejo Investment Corp. v. Spouses Benjamin and Eleanor Ang

G.R. No. 174149, September 8, 2010

Facts:

In this case, the petitioners seek the reversal of the CA’s Resolution declaring J.
Tiosejo Investment Corp. solidarily liable with Primetown Property Group, Inc.
(PPGI) to pay Spouses Benjamin and Eleanor Ang their refund for their payments
plus legal interest until fully paid and damages.

J. Tiosejo entered into a Joint Venture Agreement with PPGI for the development
of a residential condominium project known as Meditel in Mandaluyong City.
Petitioner contributed the lot while PPGI undertook to develop the condominium.
The parties further agreed to a 17%-83% sharing as to developed units.

PPGI further undertook to use all proceeds from pre-selling of its saleable units for
the completion of the Condominium Project. Sometime in 1996, PPGI executed a
Contract to Sell with Spouses Ang on a certain condominium unit and parking slot
for P2,077,334.25 and P313,500.00, respectively. On July 1999, respondent
Spouses filed before the Housing and Land Use Regulatory Board(HLURB) a
complaint for the rescission of the Contract to Sell, against J. Tiosejo and PPGI.
They claim that they were promised that the condo unit would be available for turn-
over and occupancy by December 1998, however the project was not completed
as of the said date. Spouses Ang instructed petitioner and PPGI to stop depositing
the post-dated checks they issued and to cancel said Contracts to Sell. Despite
several demands, petitioner and PPGI have failed and refused to refund the
P611,519.52 they already paid under the circumstances.

As defense, PPGI claim that the delay was attributable to the economic crisis and
to force majeure (unexpected and unforeseen inflation and increase rates and cost
of building materials). They also state that it offered several alternatives to
Spouses Ang to transfer their investment to its other feasible projects and for the
amounts they already paid to be considered as partial payment for the replacement
unit/s.

On a separate answer, petitioner claims that its prestation under the JVA consisted
of contributing the property on which the condominium was to be constructed. Not
being privy to the Contracts to Sell executed by PPGI and respondents, it did not
receive any portion of the payments made by the latter; and, that without any
contributory fault and negligence on its part, PPGI (and not the petitioner)
breached its undertakings under the JVA by failing to complete the condominium
project. The Housing and Land Use (HLU) arbiter ruled in favor of respondents,
rescinding the contract and ordering petitioner and PPGI to pay refund, interest,
damages, attorney’s fees and administrative fines. The HLURB Board of
Commissioners affirmed the HLU’s order. Motion for Reconsideration (MR) was
denied. The case was subsequently raised to the Office of the President (OP)
which rendered a decision dismissing petitioner’s appeal on the ground that the
latter’s appeal memorandum was filed out of time and that the HLURB Board
committed no grave abuse of discretion in rendering the appealed decision.MR
was also denied. Petitioner filed before the CA a motion for extension within which
to file its petition for review, claiming heavy workload of its counsel. This was
denied by the CA. MR was denied for lack of merit. Hence, the present petition
before the Supreme Court.

Issue:

Whether or not J. Tiosejo Investment Corp. is exempt from liability by

claiming it was not privy to the Contract to Sell executed by its JV partner, PPGI
and the Spouses Ang

Held:

The Supreme Court held that J. Tiosejo Investment Corp. “cannot avoid
liability by claiming that it was not in any way privy to the Contracts to Sell executed
by PPGI and respondents.” It was stated in its ruling that a “joint venture” is
considered as a form of partnership, and as such, it should be governed by the law
of partnerships.

Under Article 1824 of the Civil Code of the Philippines, all partners are solidarily
liable with the partnership for everything chargeable to the partnership, including
loss or injury caused to a third person or penalties incurred due to 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. Whether innocent or guilty, all
the partners are solidarily liable with the partnership itself.

G.R. No. L-39780 November 11, 1985 ELMO MUÑASQUE, petitioner, vs.
COURT OF APPEALS,CELESTINO GALAN TROPICAL COMMERCIAL
COMPANY and RAMON PONS, respondents. GUTTIERREZ, JR., J.:

Facts: Munasque (petitioner) entered into a partnership with Galan under the
registered name “Galan and Associates” as Contractor. They entered into a written
contract with respondent Tropical for remodeling the latter’s Cebu branch building.
Under the contract, the project totaled 25,000 to be paid in installments; 7, 000
upon signing and 6, 000 every 15 working days. Tropical made the first payment
by check in the name of Munasque. Munasque indorsed the check in favor of
Galan to enable Galan to deposit it in the bank and pay for the materials and labor
used in the project. However, Galan allegedly spent P6, 183.37 for his personal
use. When the second check came, Munasque refused to indorse it again to
Galan. Galan informed Tropical of the misunderstanding between him and
Munasque as partners. Hence upon second payment, Tropical changed the name
of the payee on the second check from Munasque to “Galan and Associates” which
enabled Galan to encash the second check. Meanwhile, the construction was
continued through Munasque’s sole efforts by incurring debts from various
suppliers. The construction work was finished ahead of schedule with the total
expenditure reaching P 34, 000 (note yung contract nila 25k lang). Munasque filed
a complaint for payment of sum of money and damages against Galan, Tropical,
and Tropical’s Cebu branch manager Pons. Cebu Southern Hardware Company
and Blue Diamond Glass Palace intervened in the case for the credit which they
extended to the partnership of Munasque and Galan for the construction project.
Both trial court and Court of Appeals absolved respondents Tropical and its Cebu
manager, Pons, from any liability. TC held Galvan and Munasque “jointly and
severally” liable to its creditors which decision was modified by CA and held them
“jointly” liable. Issues: Whether the obligation of Munasque and Galan is joint or
solidary? Held: Solidary. While it is true that under Article 1816 of CC, “All partners,
including industrial ones, shall be liable pro rate with all their property and after all
the partnership assets have been exhausted, for the contracts which may be
entered into the name and for account of the partnership, under its signature and
by a person authorized to act for the partnership. xxx”, this provision should be
construed together with Article 1824 which provides that: “All partners are liable
solidarily with the partnership for everything chargeable to the partnership under
Articles 1822 and 1823.” While the liability of the partners are merely joint in
transactions entered into by the partnership, a third person who transacted with
said partnership can hold the partners solidarily liable for the whole obligation if the
case of the third person falls under Articles 1822 and 1823. The obligation is
solidary because the law protects him, who in good faith relied upon the authority
of a partner, whether such authority is real or apparent. Tropical had every reason
to believe that a partnership existed between Munasque and Galan and no fault or
error can be imputed against it for making payments to “Galan and Associates”
because as far as it was concerned, Galan was a true partner with real authority
to transact in behalf of the partnership it was dealing with (because in the first place
they entered into a duly registered partnership name and secondly, Munasque
endorsed the first check payment to Galan). This is even more true in the cases of
the intervenors who supplied materials on credit to the partnership. Thus, it is but
fair that the consequences of any wrongful act committed by any of the partners
therein should be answered solidarily by all the partners and the partnership as a
whole. However, as between Munasque and Galan, Galan must reimburse
Munasque for the payments made to the intervenors as it was satisfactorily
established that Galan acted in bad faith in his dealings with Munasque as a
partner.