Cases For PAT
of Internal Revenue.
CIR vs. CA: Kind of Partnership that
can be organized between husband
and wife
FACTS: A limited partnership, named
"William J. Suter 'Morcoin' Co., Ltd.," was
formed on 30 September 1947 by herein
respondent William J. Suter as the
general partner, and Julia Spirig and
Gustav Carlson, as the limited partners.
The partners contributed, respectively,
P20,000.00, P18,000.00 and P2,000.00 to
the partnership.
The firm engaged, among other activities,
in the importation, marketing,
distribution and operation of automatic
phonographs, radios, television sets and
amusement machines, their parts and
accessories.
In 1948, however, general partner Suter
and limited partner Spirig got married
and, thereafter, on 18 December 1948,
limited partner Carlson sold his share in
the partnership to Suter and his wife.  The petitioner-appellant has evidently
The limited partnership had been filing its
income tax returns as a corporation,
without objection by the herein petitioner,
Commissioner of Internal Revenue, until
in 1959 when the latter, in an assessment,
consolidated the income of the firm and
the individual incomes of the partners-
spouses Suter and Spirig resulting in a
determination of a deficiency income tax
against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for
1955.
Respondent Suter protested the
assessment, and requested its
cancellation and withdrawal, as not in
accordance with law, but his request was
denied. Unable to secure a
reconsideration, he appealed to the Court
of Tax Appeals, which court, after trial,
rendered a decision, on 11 November
1965, reversing that of the Commissioner
ISSUE: Whether the limited
partnership was dissolved by virtue of
the marriage and the subsequent sale
of the share of the limited partner
RULING: NO, it was not dissolved
Suter maintains, as the Court of Tax
Appeals held, that his marriage with
limited partner Spirig and their
acquisition of Carlson's interests in the
partnership in 1948 is not a ground for
dissolution of the partnership, either in
the Code of Commerce or in the New Civil
Code, and that since its juridical
personality had not been affected and
since, as a limited partnership, as contra
distinguished from a duly registered
general partnership, it is taxable on its
income similarly with corporations, Suter
was not bound to include in his individual
return the income of the limited
partnership.
failed to observe the fact that William J.
Suter "Morcoin" Co., Ltd. was not a
universal partnership, but a particular
one. As appears from Articles 1674 and
1675 of the Spanish Civil Code, of 1889
(which was the law in force when the
subject firm was organized in 1947), a
universal partnership requires either that
the object of the association be all the
present property of the partners, as
contributed by them to the common fund,
or else "all that the partners may acquire
by their industry or work during the
existence of the partnership". William J.
Suter "Morcoin" Co., Ltd. was not such a
universal partnership, since the
contributions of the partners were fixed
sums of money, P20,000.00 by William
Suter and P18,000.00 by Julia Spirig and
neither one of them was an industrial
partner. It follows that William J. Suter
"Morcoin" Co., Ltd. was not a partnership
that spouses were forbidden to enter by
Article 1677 of the Civil Code of 1889.
Nor could the subsequent marriage of the
partners operate to dissolve it, such
marriage not being one of the causes
provided for that purpose either by the
Spanish Civil Code or the Code of
Commerce.
In the cited cases, the corporations were
already subject to tax when the fiction of
their corporate personality was pierced;
in the present case, to do so would
exempt the limited partnership from
income taxation but would throw the tax
burden upon the partners-spouses in their
individual capacities. The corporations, in
the cases cited, merely served as business
conduits or alter egos of the stockholders,
a factor that justified a disregard of their
corporate personalities for tax purposes.
This is not true in the present case. Here,
the limited partnership is not a mere
business conduit of the partner-spouses;
it was organized for legitimate business
purposes; it conducted its own dealings
with its customers prior to appellee's
marriage, and had been filing its own
income tax returns as such independent
entity. The change in its membership,
brought about by the marriage of the
partners and their subsequent acquisition
of all interest therein, is no ground for
withdrawing the partnership from the
coverage of Section 24 of the tax code,
requiring it to pay income tax. As far as
the records show, the partners did not
enter into matrimony and thereafter buy
the interests of the remaining partner
with the premeditated scheme or design
to use the partnership as a business
conduit to dodge the tax laws. Regularity,
not otherwise, is presumed.
As the limited partnership under
consideration is taxable on its income, to
require that income to be included in the
individual tax return of respondent Suter
is to overstretch the letter and intent of
the law. In fact, it would even conflict
with what it specifically provides in its
Section 24: for the appellant
Commissioner's stand results in equal
treatment, tax wise, of a general
copartnership (compañia colectiva) and a
limited partnership, when the code plainly
differentiates the two.
Lim Tong Lim vs. Philippine Fishing
Gear: Contribution to the Common
Fund; Estoppel Doctrine
FACTS: On behalf of "Ocean Quest
Fishing Corporation," Antonio Chua and
Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of
fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that
they were engaged in a business venture
with Petitioner Lim Tong Lim, who
however was not a signatory to the
agreement. The total price of the nets
amounted to P532,045. Four hundred
pieces of floats worth P68,000 were also
sold to the Corporation.
The buyers, however, failed to pay for the
fishing nets and the floats; hence, private
respondents filed a collection suit against
Chua, Yao and Petitioner Lim Tong Lim
with a prayer for a writ of preliminary
attachment. The suit was brought against
the three in their capacities as general
partners, on the allegation that "Ocean
Quest Fishing Corporation" was a
nonexistent corporation as shown by a
Certification from the Securities and
Exchange Commission.
Chua filed a Manifestation admitting his
liability and requesting a reasonable time
within which to pay. He also turned over
to respondent some of the nets which
were in his possession. Peter Yao filed an
Answer, after which he was deemed to
have waived his right to cross-examine
witnesses and to present evidence on his
behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on
the other hand, filed an Answer with
Counterclaim and Crossclaim and moved
for the lifting of the Writ of Attachment.
The trial court ruled that a partnership
among Lim, Chua and Yao existed based
(1) on the testimonies of the witnesses
presented and (2) on a Compromise
Agreement executed by the three
The compromise agreement;
a) That the parties plaintiffs &
Lim Tong Lim agree to have the
four (4) vessels sold in the amount
of P5,750,000.00 including the
fishing net. This P5,750,000.00
shall be applied as full payment for
P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim
Tong Lim;
b) If the four (4) vessel[s] and
the fishing net will be sold at a
higher price than P5,750,000.00
whatever will be the excess will be
divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale
the vessels will be less than
P5,750,000.00 whatever the
deficiency shall be shouldered and
paid to JL Holding Corporation by
1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.
CA held that petitioner was a partner of
Chua and Yao in a fishing business and
may thus be held liable as a such for the
fishing nets and floats purchased by and
for the use of the partnership.
ISSUE: Whether petitioner can be
considered a partner in the alleged
partnership
RULING: YES, he is considered as a
partner hence liable
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 who was
petitioner's brother. 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.
Moreover, it is clear that the partnership
extended not only to the purchase of the
boat, but also to that of the nets and the
floats. The fishing nets and the floats,
both essential to fishing, were obviously
acquired in furtherance of their business.
It would have been inconceivable for Lim
to involve himself so much in buying the
boat but not in the acquisition of the
aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that
there was, among petitioner, Chua and
Yao, a partnership engaged in the fishing
business. They purchased the boats,
which constituted the main assets of the
partnership, and they agreed that the
proceeds from the sales and operations
thereof would be divided among them.
We are not convinced by petitioner's
argument that he was merely the lessor of
the boats to Chua and Yao, not a partner
in the fishing venture. His allegation
defies logic. In effect, he would like this
Court to believe that he consented to the
sale of his own boats to pay a debt of
Chua and Yao, with the excess of the
proceeds to be divided among the three of
them. No lessor would do what petitioner
did. Indeed, his consent to the sale proved
that there was a preexisting partnership
among all three.
Verily, as found by the lower courts,
petitioner entered into a business
agreement with Chua and Yao, in which
debts were undertaken in order to finance
the acquisition and the upgrading of the
vessels which would be used in their
fishing business. The sale of the boats, as
well as the division among the three of
the balance remaining after the payment
of their loans, proves beyond cavil
that F/B Lourdes, though registered in his
name, was not his own property but an
asset of the partnership. It is not
uncommon to register the properties
acquired from a loan in the name of the
person the lender trusts, who in this case
is the petitioner himself. After all, he is
the brother of the creditor, Jesus Lim.
Sec. 21. Corporation by estoppel. —
All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners for all debts, liabilities
and damages incurred or arising as a
result thereof: Provided however, That
when any such ostensible corporation is
sued on any transaction entered by it as a
corporation or on any tort committed by it
as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an
ostensible corporation as such, cannot
resist performance thereof on the ground
that there was in fact no corporation.
Thus, even if the ostensible corporate
entity is proven to be legally nonexistent,
a party may be estopped from denying its
corporate existence. "The reason behind
this doctrine is obvious — an
unincorporated association has no
personality and would be incompetent to
act and appropriate for itself the power
and attributes of a corporation as
provided by law; it cannot create agents
or confer authority on another to act in its
behalf; thus, those who act or purport to
act as its representatives or agents do so
without authority and at their own risk.
And as it is an elementary principle of law
that a person who acts as an agent
without authority or without a principal is
himself regarded as the principal,
possessed of all the right and subject to
all the liabilities of a principal, a person
acting or purporting to act on behalf of a
corporation which has no valid existence
assumes such privileges and obligations
and becomes personally liable for
contracts entered into or for other acts
performed as such agent. 17
The doctrine of corporation by estoppel
may apply to the alleged corporation and
to a third party. In the first instance, an
unincorporated association, which
represented itself to be a corporation, will
be estopped from denying its corporate
capacity in a suit against it by a third
person who relied in good faith on such
representation. It cannot allege lack of
personality to be sued to evade its
responsibility for a contract it entered
into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who,
knowing an association to be
unincorporated, nonetheless treated it as
a corporation and received benefits from
it, may be barred from denying its
corporate existence in a suit brought
against the alleged corporation. In such
case, all those who benefited from the
transaction made by the ostensible
corporation, despite knowledge of its
legal defects, may be held liable for
contracts they impliedly assented to or
took advantage of.
There is no dispute that the respondent,
Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The
only question here is whether petitioner
should be held jointly 18 liable with Chua
and Yao. Petitioner contests such liability,
insisting that only those who dealt in the
name of the ostensible corporation should
be held liable. Since his name does not
appear on any of the contracts and since
he never directly transacted with the
respondent corporation, ergo, he cannot
be held liable.
Ortega vs. CA: Partnership at Will
FACTS: The law firm of ROSS,
LAWRENCE, SELPH and CARRASCOSO
was duly registered in the Mercantile
Registry on 4 January 1937 and
reconstituted with the Securities and
Exchange Commission on 4 August 1948.
The SEC records show that there were
several subsequent amendments to the
articles of partnership on 18 September
1958, to change the firm [name]
Misa (Petitioner-appellant) wrote a letter
signifying his intent to sever himself from
the partnership due to: The partnership
has ceased to be mutually satisfactory
because of the working conditions of our
employees including the assistant
attorneys.
On 30 June 1988, petitioner filed with this
Commission's Securities Investigation and
Clearing Department (SICD) a petition for
dissolution and liquidation of partnership,
docketed as SEC Case No. 3384 praying
that the Commission:
"1. Decree the formal
dissolution and order the
immediate liquidation of (the
partnership of) Bito, Misa &
Lozada;
"2. Order the respondents to
deliver or pay for petitioner's
share in the partnership assets
plus the profits, rent or interest
attributable to the use of his right
in the assets of the dissolved
partnership
"[P]etitioner's withdrawal from the law
firm Bito, Misa & Lozada did not dissolve
the said law partnership. Accordingly, the
petitioner and respondents are hereby
enjoined to abide by the provisions of the
Agreement relative to the matter
governing the liquidation of the shares of
any retiring or withdrawing partner in the
partnership interest."
On appeal, the SEC en banc reversed the
decision of the Hearing Officer and held
that the withdrawal of Attorney Joaquin L.
Misa had dissolved the partnership of
"Bito, Misa & Lozada." The Commission
ruled that, being a partnership at will, the
law firm could be dissolved by any
partner at anytime, such as by his
withdrawal therefrom, regardless of good
faith or bad faith, since no partner can be
forced to continue in the partnership
against his will.
The Court of Appeals, finding no
reversible error on the part of respondent
Commission, AFFIRMED in toto the SEC
decision and order appealed from. In fine,
the appellate court held, per its decision
of 26 February 1993, (a) that Atty. Misa's
withdrawal from the partnership had
changed the relation of the parties and
inevitably caused the dissolution of the
partnership; (b) that such withdrawal was
not in bad faith
ISSUE: Whether the partnership
subsisted despite the severance of
Atty. Misa
RULING: NO, the partnership was
dissolved
A partnership that does not fix its term is
a partnership at will. That the law firm
"Bito, Misa & Lozada," and now "Bito,
Lozada, Ortega and Castillo," is indeed
such a partnership need not be unduly
belabored. We quote, with approval, like
did the appellate court, the findings and
disquisition of respondent SEC on this
matter; viz:
The partnership agreement (amended
articles of 19 August 1948) does not
provide for a specified period or
undertaking. The "DURATION" clause
simply states:
"5. DURATION. The
partnership shall continue so long
as mutually satisfactory and upon
the death or legal incapacity of one
of the partners, shall be continued
by the surviving partners."
The hearing officer however opined that
the partnership is one for a specific
undertaking and hence not a partnership
at will. The "purpose" of the partnership
is not the specific undertaking referred to
in the law. Otherwise, all partnerships,
which necessarily must have a purpose,
would all be considered as partnerships
for a definite undertaking. There would
therefore be no need to provide for
articles on partnership at will as none
would so exist. Apparently what the law
contemplates, is a specific undertaking or
"project" which has a definite or definable
period of completion.3
The birth and life of a partnership at will
is predicated on the mutual desire and
consent of the partners. The right to
choose with whom a person wishes to
associate himself is the very foundation
and essence of that partnership. Its
continued existence is, in turn, dependent
on the constancy of that mutual resolve,
along with each partner's capability to
give it, and the absence of a cause for
dissolution provided by the law itself.
Verily, any one of the partners may, at his
sole pleasure, dictate a dissolution of the
partnership at will. He must, however, act
in good faith, not that the attendance of
bad faith can prevent the dissolution of
the partnership4 but that it can result in a
liability for damages.5
In passing, neither would the presence of
a period for its specific duration or the
statement of a particular purpose for its
creation prevent the dissolution of any
partnership by an act or will of a
partner.6 Among partners,7 mutual
agency arises and the doctrine of delectus
personae allows them to have the power,
although not necessarily the right, to
dissolve the partnership. An unjustified
dissolution by the partner can subject him
to a possible action for damages.
The dissolution of a partnership is the
change in the relation of the parties
caused by any partner ceasing to be
associated in the carrying on, as might be
distinguished from the winding up of, the
business.8 Upon its dissolution, the
partnership continues and its legal
personality is retained until the complete
winding up of its business culminating in
its termination
Woodhouse vs. Halili: Existence of
Fraud in Partnership
FACTS: On November 29, 1947, the
plaintiff entered on a written agreement,
Exhibit A, with the defendant, the most
important provisions of which are (1) that
they shall organize a partnership for the
bottling and distribution of Mision soft
drinks, plaintiff to act as industrial
partner or manager, and the defendant as
a capitalist, furnishing the capital
necessary therefor; (2) that the defendant
was to decide matters of general policy
regarding the business, while the plaintiff
was to attend to the operation and
development of the bottling plant; (3) that
the plaintiff was to secure the Mission
Soft Drinks franchise for and in behalf of
the proposed partnership; and (4) that the
plaintiff was to receive 30 per cent of the
net profits of the business.
Prior to entering into this agreement,
plaintiff had informed the Mission Dry
Corporation of Los Angeles, California,
U.S.A., manufacturers of the bases and
ingridients of the beverages bearing its
name, that he had interested a prominent
financier (defendant herein) in the
business, who was willing to invest half a
million dollars in the bottling and
distribution of the said beverages, and
requested, in order that he may close the
deal with him, that the right to bottle and
distribute be granted him for a limited
time under the condition that it will finally
be transferred to the corporation (Exhibit
H).
Formal negotiations between plaintiff and
defendant began at a meeting on
November 27, 1947, at the Manila Hotel,
with their lawyers attending. Before this
meeting plaintiff's lawyer had prepared
the draft of the agreement, Exhibit II or
OO, but this was not satisfactory because
a partnership, instead of a corporation,
was desired.
December 10, 1947, a franchise
agreement (Exhibit V) was entered into
the Mission Dry Corporation and
Fortunato F. Halili and/or Charles F.
Woodhouse, granted defendant the
exclusive right, license, and authority to
produce, bottle, distribute, and sell
Mision beverages in the Philippines.
In his complaint plaintiff asks for the
execution of the contract of partnership,
an accounting of the profits, and a share
thereof of 30 per cent, as well as damages
in the amount of P200,000.
In his answer defendant alleges by way of
defense (1) that defendant's consent to
the agreement, Exhibit A, was secured by
the representation of plaintiff that he was
the owner, or was about to become owner
of an exclusive bottling franchise, which
representation was false, and plaintiff did
not secure the franchise, but was given to
defendant himself; (2) that defendant did
not fail to carry out his undertakings, but
that it was plaintiff who failed; (3) that
plaintiff agreed to contribute the
exclusive franchise to the partnership, but
plaintiff failed to do so.
Court of First Instance rendered
judgment ordering defendant to render an
accounting of the profits of the bottling
and distribution business, subject of the
action, and to pay plaintiff 15 percent
thereof. it held that the execution of the
contract of partnership could not be
enforced upon the parties, but it also held
that the defense of fraud was not proved.
Against this judgment both parties have
appealed.
ISSUE: Whether defendant was
defrauded which can be considered as
a ground to void the contract of
partnership
RULING: NO, the fraud is merely
incidental and not causal
Plaintiff's attorney, Mr. Laurea, testified
that Woodhouse presented himself as
being the exclusive grantee of a franchise.
As a matter of fact, the first draft that Mr.
Laurea prepared, which was made before
the Manila Hotel conference on
November 27th, expressly states that
plaintiff had the exclusive franchise. Thus,
the first paragraph states:
Whereas, the manager is the
exclusive grantee of a franchise
from the Mission Dry Corporation
San Francisco, California, for the
bottling of Mission products and
their sale to the public throughout
the Philippines
Plaintiff's own version of the preliminary
conversation he had with defendant is to
the effect that when plaintiff called on the
latter, the latter answered, "Well, come
back to me when you have the authority
to operate. I am definitely interested in
the bottling business." (t. s. n., pp. 60-61.)
When after the elections of 1949 plaintiff
went to see the defendant (and at that
time he had already the option), he must
have exultantly told defendant that he had
the authority already. It is improbable and
incredible for him to have disclosed the
fact that he had only an option to the
exclusive franchise, which was to last
thirty days only, and still more
improbable for him to have disclosed that,
at the time of the signing of the formal
agreement, his option had already
expired. Had he done so, he would have
destroyed all his bargaining power and
authority, and in all probability lost the
deal itself.
The trial court reasoned, and the plaintiff
on this appeal argues, that plaintiff only
undertook in the agreement "to secure
the Mission Dry franchise for and in
behalf of the proposed partnership." The
existence of this provision in the final
agreement does not militate against
plaintiff having represented that he had
the exclusive franchise; it rather
strengthens belief that he did actually
make the representation. How could
plaintiff assure defendant that he would
get the franchise for the latter if he had
not actually obtained it for himself?
Defendant would not have gone into the
business unless the franchise was raised
in his name, or at least in the name of the
partnership. Plaintiff assured defendant
he could get the franchise. Thus, in the
draft prepared by defendant's attorney,
Exhibit HH, the above provision is
inserted, with the difference that instead
of securing the franchise for the
defendant, plaintiff was to secure it for
the partnership. To show that the
insertion of the above provision does not
eliminate the probability of plaintiff
representing himself as the exclusive
grantee of the franchise
Plaintiff had already represented to
defendant, and the latter had already
believed in, the existence of plaintiff's
exclusive franchise before the formal
negotiations, and they were assisted by
their lawyers only when said formal
negotiations actually took place.
Furthermore, plaintiff's attorney testified
that plaintiff had said that he had the
exclusive franchise; and defendant's
lawyer testified that plaintiff explained to
him, upon being asked for the franchise,
that he had left the papers evidencing it.
We conclude from all the foregoing that
plaintiff did actually represent to
defendant that he was the holder of the
exclusive franchise. The defendant was
made to believe, and he actually believed,
that plaintiff had the exclusive franchise.
The defendant was made to believe, and
he actually believed, that plaintiff had the
exclusive franchise. Defendant would not
perhaps have gone to California and
incurred expenses for the trip, unless he
believed that plaintiff did have that
exclusive privilege, and that the latter
would be able to get the same from the
Mission Dry Corporation itself. Plaintiff
knew what defendant believed about his
(plaintiff's) exclusive franchise, as he
induced him to that belief, and he may not
be allowed to deny that defendant was
induced by that belief.
The record abounds with circumstances
indicative that the fact that the principal
consideration, the main cause that
induced defendant to enter into the
partnership agreement with plaintiff, was
the ability of plaintiff to get the exclusive
franchise to bottle and distribute for the
defendant or for the partnership. The
original draft prepared by defendant's
counsel was to the effect that plaintiff
obligated himself to secure a franchise for
the defendant. Correction appears in this
same original draft, but the change is
made not as to the said obligation but as
to the grantee.
The defendant was, therefore, led to the
belief that plaintiff had the exclusive
franchise, but that the same was to be
secured for or transferred to the
partnership. The plaintiff no longer had
the exclusive franchise, or the option
thereto, at the time the contract was
perfected. But while he had already lost
his option thereto (when the contract was
entered into), the principal obligation that
he assumed or undertook was to secure
said franchise for the partnership, as the
bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if
he was guilty of a false representation,
this was not the causal consideration, or
the principal inducement, that led plaintiff
to enter into the partnership agreement.
But, on the other hand, this supposed
ownership of an exclusive franchise was
actually the consideration or price
plaintiff gave in exchange for the share of
30 percent granted him in the net profits
of the partnership business. Defendant
agreed to give plaintiff 30 per cent share
in the net profits because he was
transferring his exclusive franchise to the
partnership.
We conclude from the above that while
the representation that plaintiff had the
exclusive franchise did not vitiate
defendant's consent to the contract, it
was used by plaintiff to get from
defendant a share of 30 per cent of the
net profits; in other words, by pretending
that he had the exclusive franchise and
promising to transfer it to defendant, he
obtained the consent of the latter to give
him (plaintiff) a big slice in the net profits.
This is the dolo incidente defined in
article 1270 of the Spanish Civil Code,
because it was used to get the other
party's consent to a big share in the
profits, an incidental matter in the
agreement.
When defendant learned in Los Angeles
that plaintiff did not have the exclusive
franchise which he pretended he had and
which he had agreed to transfer to the
partnership, his spontaneous reaction was
to reduce plaintiff's share form 30 per
cent to 15 per cent only, to which
reduction defendant appears to have
readily given his assent. It was under this
understanding, which amounts to a virtual
modification of the contract, that the
bottling plant was established and
plaintiff worked as Manager for the first
three months. If the contract may not be
considered modified as to plaintiff's share
in the profits, by the decision of defendant
to reduce the same to one-half and the
assent thereto of plaintiff, then we may
consider the said amount as a fair
estimate of the damages plaintiff is
entitled to under the principle enunciated
in the case of Varadero de Manila vs.
Insular Lumber Co., 46 Phil. 176.
Defendant's decision to reduce plaintiff's
share and plaintiff's consent thereto
amount to an admission on the part of
each of the reasonableness of this amount
as plaintiff's share. This same amount was
fixed by the trial court. The agreement
contains the stipulation that upon the
termination of the partnership, defendant
was to convey the franchise back to
plaintiff (Par. 11, Exhibit A). The
judgment of the trial court does not fix
the period within which these damages
shall be paid to plaintiff. In view of
paragraph 11 of Exhibit A, we declare
that plaintiff's share of 15 per cent of the
net profits shall continue to be paid while
defendant uses the franchise from the
Mission Dry Corporation.
Aguila vs. CA: Separate and Distinct
Personality of the Partnership
FACTS: Petitioner is the manager of A.C.
Aguila & Sons, Co., a partnership
engaged in lending activities. Private
respondent and her late husband, Ruben
M. Abrogar, were the registered owners
of a house and lot, covered by Transfer
Certificate of Title No. 195101, in
Marikina, Metro Manila. On April 18,
1991, private respondent, with the
consent of her late husband, and A.C.
Aguila & Sons, Co., represented by
petitioner, entered into a Memorandum of
Agreement, which provided:
(1) That the SECOND PARTY
[A.C. Aguila & Sons, Co.] shall buy
the above-described property from
the FIRST PARTY [Felicidad S.
Vda. de Abrogar], and pursuant to
this agreement, a Deed of Absolute
Sale shall be executed by the
FIRST PARTY conveying the
property to the SECOND PARTY
for and in consideration of the sum
of Two Hundred Thousand Pesos
(P200,000.00), Philippine
Currency;
(2) The FIRST PARTY is hereby
given by the SECOND PARTY the
option to repurchase the said
property within a period of ninety
(90) days from the execution of
this memorandum of agreement
effective April 18, 1991, for the
amount of TWO HUNDRED
THIRTY THOUSAND PESOS
(P230,000.00);
(3) In the event that the FIRST
PARTY fail to exercise her option
to repurchase the said property
within a period of ninety (90) days,
the FIRST PARTY is obliged to
deliver peacefully the possession
of the property to the SECOND
PARTY within fifteen (15) days
after the expiration of the said 90
day grace period;
Private respondent failed to redeem the
property within the 90-day period as
provided in the Memorandum of
Agreement. Hence, pursuant to the
special power of attorney mentioned
above, petitioner caused the cancellation
of TCT No. 195101 and the issuance of a
new certificate of title in the name of A.C.
Aguila and Sons, Co. 5
Private respondent then received a letter
dated August 10, 1991 from Atty.
Lamberto C. Nanquil, counsel for A.C.
Aguila & Sons, Co., demanding that she
vacate the premises within 15 days after
receipt of the letter and surrender its
possession peacefully to A.C. Aguila &
Sons, Co. Otherwise, the latter would
bring the appropriate action in court. 6
Upon the refusal of private respondent to
vacate the subject premises, A.C. Aguila
& Sons, Co. filed an ejectment case
against her in the Metropolitan Trial
Court, Branch 76, Marikina, Metro
Manila. In a decision, dated April 3, 1992,
the Metropolitan Trial Court ruled in
favor of A.C. Aguila & Sons, Co. on the
ground that private respondent did not
redeem the subject property before the
expiration of the 90-day period provided
in the Memorandum of Agreement.
Private respondent then filed a petition
for declaration of nullity of a deed of sale
with the Regional Trial Court, Branch
273, Marikina, Metro Manila on
December 4, 1993. She alleged that the
signature of her husband on the deed of
sale was a forgery because he was
already dead when the deed was
supposed to have been executed on June
11, 1991.
RTC dismissed the case: The Court is
convinced that the three required
documents, to wit: the Memorandum of
Agreement, the Special Power of
Attorney, and the Deed of Absolute Sale
were all signed by the parties on the same
date on April 18, 1991. It is a common
and accepted business practice of those
engaged in money lending to prepare an
undated absolute deed of sale in loans of
money secured by real estate for various
reasons, foremost of which is the evasion
of taxes and surcharges. The plaintiff
never questioned receiving the sum of
P200,000.00 representing her loan from
the defendant. Common sense dictates
that an established lending and realty
firm like the Aguila & Sons, Co. would not
part with P200,000.00 to the Abrogar
spouses, who are virtual strangers to it,
without the simultaneous accomplishment
and signing of all the required documents,
more particularly the Deed of Absolute
Sale, to protect its interest.
However, CA reversed the decision with
the reason that the true transaction is not
a pacto de retro sale but an equitable
mortgage with pacto commisorium
Petitioner now contends that: (1) he is not
the real party in interest but A.C. Aguila
& Co., against which this case should
have been brought
ISSUE: Whether the case should be
prosecuted against A.C. Aguila
instead of Alfredo
RULING: YES, it should be against
A.C. Aguila
Rule 3, §2 of the Rules of Court of 1964,
under which the complaint in this case
was filed, provided 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. 7
This ruling is now embodied in Rule 3, §2
of the 1997 Revised Rules of Civil
Procedure. Any decision rendered against
a person who is not a real party in
interest in the case cannot be executed. 8
Hence, a complaint filed against such a
person should be dismissed for failure to
state a cause of action. 9
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. 10 In this case,
private respondent 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.
and the Memorandum of Agreement was
executed between private respondent,
with the consent of her late husband, and
A.C. Aguila & Sons, Co., represented by
petitioner. Hence, 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. 11 We cannot
understand why both the Regional Trial
Court and the Court of Appeals
sidestepped this issue when it was
squarely raised before them by petitioner.
Ang Pue vs. Sec. of Commerce:
Establishing a Partnership is Not a
Right but a Franchise
FACTS: Action for declaratory relief filed
in the Court of First Instance of Iloilo by
Ang Pue & Company, Ang Pue and Tan
Siong against the Secretary of Commerce
and Industry to secure judgment
"declaring that plaintiffs could extend for
five years the term of the partnership
pursuant to the provisions of plaintiffs'
Amendment to the Article of Co-
partnership."
The answer filed by the defendant
alleged, in substance, that the extension
for another five years of the term of the
plaintiffs' partnership would be in
violation of the provisions of Republic Act
No. 1180.
It appears that on May 1, 1953, Ang Pue
and Tan Siong, both Chinese citizens,
organized the partnership Ang Pue &
Company for a term of five years from
May 1, 1953, extendible by their mutual
consent. The purpose of the partnership
was "to maintain the business of general
merchandising, buying and selling at
wholesale and retail, particularly of
lumber, hardware and other construction
materials for commerce, either native or
foreign."
On June 19, 1954 Republic Act No. 1180
was enacted to regulate the retail
business. It provided, among other things,
that, after its enactment, a partnership
not wholly formed by Filipinos could
continue to engage in the retail business
until the expiration of its term.
On April 15, 1958 — prior to the
expiration of the five-year term of the
partnership Ang Pue & Company, but
after the enactment of the Republic Act
1180, the partners already mentioned
amended the original articles of part
ownership (Exhibit B) so as to extend the
term of life of the partnership to another
five years. When the amended articles
were presented for registration in the
Office of the Securities & Exchange
Commission on April 16, 1958,
registration was refused upon the ground
that the extension was in violation of the
aforesaid Act.
RTC ruled in favour of Sec. of Commerce
ISSUE: Whether Petitioner can extend
the existence of their partnership
despite the prohibition of the law
RULINGL: NO, they cannot extend its
existence
To organize a corporation or a
partnership that could claim a juridical
personality of its own and transact
business as such, is not a matter of
absolute right but a privilege which may
be enjoyed only under such terms as the
State may deem necessary to impose.
That the State, through Congress, and in
the manner provided by law, had the right
to enact Republic Act No. 1180 and to
provide therein that only Filipinos and
concerns wholly owned by Filipinos may
engage in the retail business can not be
seriously disputed. That this provision
was clearly intended to apply to
partnership already existing at the time of
the enactment of the law is clearly
showing by its provision giving them the
right to continue engaging in their retail
business until the expiration of their term
or life.
To argue that because the original
articles of partnership provided that the
partners could extend the term of the
partnership, the provisions of Republic
Act 1180 cannot be adversely affect
appellants herein, is to erroneously
assume that the aforesaid provision
constitute a property right of which the
partners can not be deprived without due
process or without their consent. The
agreement contain therein must be
deemed subject to the law existing at the
time when the partners came to agree
regarding the extension. In the present
case, as already stated, when the partners
amended the articles of partnership, the
provisions of Republic Act 1180 were
already in force, and there can be not the
slightest doubt that the right claimed by
appellants to extend the original term of
their partnership to another five years
would be in violation of the clear intent
and purpose of the law aforesaid.
Afisco vs. CA: Kind of Partnership
Taxable as a Corporation under Sec.
24 of the NIRC
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 [p]ool.
Accordingly, a pool composed of the
petitioners was formed on the same day.
On 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, on the basis
of which it was assessed by the
Commissioner of Internal Revenue
deficiency corporate taxes in the amount
of P1,843,273.60, and withholding taxes
in the amount of P1,768,799.39 and
P89,438.68 on dividends paid to Munich
and to the petitioners, respectively. These
assessments were protested by the
petitioners through its auditors Sycip,
Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of
Internal Revenue denied the protest and
ordered the petitioners, assessed as "Pool
of Machinery Insurers," to pay deficiency
income tax, interest, and with [h]olding
tax
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.
ISSUE: Whether they are considered
as partnership hence taxable under
the law
RULING: YES, they are considered as
a partnership, hence taxable
This Court rules that the Court of
Appeals, in affirming the CTA which had
previously sustained the internal revenue
commissioner, committed no reversible
error. Section 24 of the NIRC, as worded
in the year ending 1975, provides:
Sec. 24. Rate of tax on
corporations. — (a) Tax on
domestic corporations. — A tax is
hereby imposed upon the taxable
net income received during each
taxable year from all sources by
every corporation organized in, or
existing under the laws of the
Philippines, no matter how created
or organized, but not including
duly registered general co-
partnership (compañias
colectivas), general professional
partnerships, private educational
institutions, and building and loan
associations
Ineludibly, the Philippine legislature
included in the concept of corporations
those entities that resembled them such
as unregistered partnerships and
associations. Parenthetically, the NIRC's
inclusion of such entities in the tax on
corporations was made even clearer by
the tax Reform Act of 1997, 21 which
amended the Tax Code. Pertinent
provisions of the new law read as follows:
Sec. 27. Rates of Income Tax
on Domestic Corporations. —
(A) In General. — Except as
otherwise provided in this Code,
an income tax of thirty-five percent
(35%) is hereby imposed upon the
taxable income derived during
each taxable year from all sources
within and without the Philippines
by every corporation, as defined in
Section 22 (B) of this Code, and
taxable under this Title as a
corporation . . . .
Sec. 22. — Definition. — When
used in this Title:
(B) The term "corporation" shall
include partnerships, no matter
how created or organized, joint-
stock companies, joint accounts
(cuentas en participacion),
associations, or insurance
companies, but does not include
general professional partnerships
[or] a joint venture or consortium
formed for the purpose of
undertaking construction projects
or engaging in petroleum, coal,
geothermal and other energy
operations pursuant to an
operating or consortium
agreement under a service
contract without the Government.
"General professional
partnerships" are partnerships
formed by persons for the sole
purpose of exercising their
common profession, no part of the
income of which is derived from
engaging in any trade or business.
Art. 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."
25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a
joint interest in the profits." 26 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." 27 Meanwhile, an
association implies associates who enter
into a "joint enterprise for the transaction
of business."
In the case before us, the ceding
companies entered into a Pool Agreement
29 or an association 30 that would handle
all the insurance businesses covered
under their quota-share reinsurance
treaty 31 and surplus reinsurance
treaty32 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.
33 This common fund pays for the
administration and operation
expenses of the pool. 24
(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. 35
 (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" annexed to the Pool
Agreement. 36 Profit motive or
business is, therefore, the
primordial reason for the pool's
formation. As aptly found by the
CTA:
The fact that the pool does
not retain any profit or
income does not obliterate
an antecedent fact, that of
the pool being used in the
transaction of business for
profit. It is apparent, and
petitioners admit, that their
association or coaction was
indispensable [to] the
transaction of the
business, . . . If together
they have conducted
business, profit must have
been the object as, indeed,
profit was earned. Though
the profit was apportioned
among the members, this is
only a matter of
consequence, as it implies
that profit actually resulted.
Heirs of Tang Eng Kee vs. CA:
Establishing the Existence of
Partnership thru Circumstantial
Evidence; Joint Venture v.
Partnership
FACTS: Following the death of Tan Eng
Kee on September 13, 1984, Matilde
Abubo, the common-law spouse of the
decedent, joined by their children
Teresita, Nena, Clarita, Carlos, Corazon
and Elpidio, collectively known as herein
petitioners HEIRS OF TAN ENG KEE,
filed suit against the decedent's brother
TAN ENG LAY on February 19, 1990. The
complaint,3 docketed as Civil Case No.
1983-R in the Regional Trial Court of
Baguio City was for accounting,
liquidation and winding up of the alleged
partnership formed after World War II
between Tan Eng Kee and Tan Eng Lay.
On March 18, 1991, the petitioners filed
an amended complaint4 impleading
private respondent herein BENGUET
LUMBER COMPANY, as represented by
Tan Eng Lay.
The amended complaint principally
alleged that after the second World War,
Tan Eng Kee and Tan Eng Lay, pooling
their resources and industry together,
entered into a partnership engaged in the
business of selling lumber and hardware
and construction supplies. They named
their enterprise "Benguet Lumber" which
they jointly managed until Tan Eng Kee's
death. Petitioners herein averred that the
business prospered due to the hard work
and thrift of the alleged partners.
However, they claimed that in 1981, Tan
Eng Lay and his children caused the
conversion of the partnership "Benguet
Lumber" into a corporation called
"Benguet Lumber Company." The
incorporation was purportedly a ruse to
deprive Tan Eng Kee and his heirs of their
rightful participation in the profits of the
business.
RTC declared that the contractual
relationship is a joint venture, akin to a
partnership, and ordering Tang Lay to
pay the heirs the share of the decedent.
CA reversed the decision of the lower
court based on the following reasons;
It is obvious that there was no real property or where the capital
partnership whatsoever. Except for is P3,000.00 or more, the
a firm name, there was no firm execution of a contract is
account, no firm letterheads necessary; 2) the capacity of the
submitted as evidence, no parties to execute the contract; 3)
certificate of partnership, no money property or industry
agreement as to profits and losses, contribution; 4) community of
and no time fixed for the duration funds and interest, mentioning
of the partnership. There was even equality of the partners or one
no attempt to submit an having a proportionate share in
accounting corresponding to the the benefits; and 5) intention to
period after the war until Kee's divide the profits, being the true
death in 1984. It had no business test of the partnership. The
book, no written account nor any intention to join in the business
memorandum for that matter and venture for the purpose of
no license mentioning the obtaining profits thereafter to be
existence of a partnership [citation divided, must be established. We
omitted]. cannot see these elements from
the testimonial evidence of the
We would like to refer to Arts. 771 appellees.
and 772, NCC, that a partner [sic]
may be constituted in any form, As can be seen, the appellate court
but when an immovable is disputed and differed from the trial court
constituted, the execution of a which had adjudged that TAN ENG KEE
public instrument becomes and TAN ENG LAY had allegedly entered
necessary. This is equally true if into a joint venture. In this connection, we
the capitalization exceeds have held that whether a partnership
P3,000.00, in which case a public exists is a factual matter; consequently,
instrument is also necessary, and since the appeal is brought to us under
which is to be recorded with the Rule 45, we cannot entertain inquiries
Securities and Exchange relative to the correctness of the
Commission. In this case at bar, assessment of the evidence by the court a
we can easily assume that the quo.13 Inasmuch as the Court of Appeals
business establishment, which and the trial court had reached conflicting
from the language of the conclusions, perforce we must examine
appellees, prospered (pars. 5 & 9, the record to determine if the reversal
Complaint), definitely exceeded was justified.
P3,000.00, in addition to the
accumulation of real properties ISSUE: Whether a partnership existed
and to the fact that it is now a based on the evidence presented
compound. The execution of a
RULING: NO, a partnership did not
public instrument, on the other
exist
hand, was never established by the
appellees. The trial court determined that Tan Eng
Kee and Tan Eng Lay had entered into a
Partnership presupposes the
joint venture, which it said is akin to a
following elements [citation
particular partnership.20 A particular
omitted]: 1) a contract, either oral
or written. However, if it involves
partnership is distinguished from a joint
adventure, to wit:
(a) A joint adventure (an American
concept similar to our joint
accounts) is a sort of informal
partnership, with no firm name
and no legal personality. In a joint
account, the participating
merchants can transact business
under their own name, and can be
individually liable therefor.
(b) Usually, but not necessarily a
joint adventure is limited to a
SINGLE TRANSACTION, although
the business of pursuing to a
successful termination may
continue for a number of years; a
partnership generally relates to a
continuing business of various
transactions of a certain kind.21
A joint venture "presupposes generally a
parity of standing between the joint co-
ventures or partners, in which each party
has an equal proprietary interest in the
capital or property contributed, and
where each party exercises equal rights
in the conduct of the business.
Unfortunately for petitioners, Tan Eng
Kee has passed away. Only he, aside from
Tan Eng Lay, could have expounded on
the precise nature of the business
relationship between them. In the
absence of evidence, we cannot accept as
an established fact that Tan Eng Kee
allegedly contributed his resources to a
common fund for the purpose of
establishing a partnership. The
testimonies to that effect of petitioners'
witnesses is directly controverted by Tan
Eng Lay.
None of petitioners' witnesses could
suitably account for the beginnings of
Benguet Lumber Company, except
perhaps for Dionisio Peralta whose
deceased wife was related to Matilde
Abubo.25 He stated that when he met Tan
Eng Kee after the liberation, the latter
asked the former to accompany him to get
80 pieces of G.I. sheets supposedly owned
by both brothers.26 Tan Eng Lay,
however, denied knowledge of this
meeting or of the conversation between
Peralta and his brother.27 Tan Eng Lay
consistently testified that he had his
business and his brother had his, that it
was only later on that his said brother,
Tan Eng Kee, came to work for him. Be
that as it may, co-ownership or co-
possession (specifically here, of the G.I.
sheets) is not an indicium of the existence
of a partnership.
Besides, it is indeed odd, if not unnatural,
that despite the forty years the
partnership was allegedly in existence,
Tan Eng Kee never asked for an
accounting. The essence of a partnership
is that the partners share in the profits
and losses.29 Each has the right to
demand an accounting as long as the
partnership exists.30 We have allowed a
scenario wherein "[i]f excellent relations
exist among the partners at the start of
the business and all the partners are
more interested in seeing the firm grow
rather than get immediate returns, a
deferment of sharing in the profits is
perfectly plausible."31 But in the situation
in the case at bar, the deferment, if any,
had gone on too long to be plausible. A
person is presumed to take ordinary care
of his concerns.
This brings us to the matter of Exhibits
"4" to "4-U" for private respondents,
consisting of payrolls purporting to show
that Tan Eng Kee was an ordinary
employee of Benguet Lumber, as it was
then called. The authenticity of these
documents was questioned by petitioners,
to the extent that they filed criminal
charges against Tan Eng Lay and his wife
and children. As aforesaid, the criminal
cases were dismissed for insufficiency of
evidence.
In connection therewith, Article 1769 of
the Civil Code provides:
In determining whether a provision, we conclude that Tan Eng Kee
partnership exists, these rules
shall apply:
(1) Except as provided by Article
1825, persons who are not
partners as to each other are not
partners as to third persons;
(2) 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;
(3) 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 which the returns are
derived;
(4) The receipt by a person of a
share of the profits of a business is
a prima facie evidence that he is a
partner in the business, but no
such inference shall be drawn if
such profits were received in
payment:
(a) As a debt by installment or
otherwise;
(b) As wages of an employee or
rent to a landlord;
(c) As an annuity to a widow or
representative of a deceased
partner;
(d) As interest on a loan, though
the amount of payment vary with
the profits of the business;
(e) As the consideration for the
sale of a goodwill of a business or
other property by installments or
otherwise.
In the light of the aforequoted legal
was only an employee, not a partner.
Even if the payrolls as evidence were
discarded, petitioners would still be back
to square one, so to speak, since they did
not present and offer evidence that would
show that Tan Eng Kee received amounts
of money allegedly representing his share
in the profits of the enterprise. Petitioners
failed to show how much their father, Tan
Eng Kee, received, if any, as his share in
the profits of Benguet Lumber Company
for any particular period. Hence, they
failed to prove that Tan Eng Kee and Tan
Eng Lay intended to divide the profits of
the business between themselves, which
is one of the essential features of a
partnership.
Nevertheless, petitioners would still want
us to infer or believe the alleged
existence of a partnership from this set of
circumstances: that Tan Eng Lay and Tan
Eng Kee were commanding the
employees; that both were supervising
the employees; that both were the ones
who determined the price at which the
stocks were to be sold; and that both
placed orders to the suppliers of the
Benguet Lumber Company. They also
point out that the families of the brothers
Tan Eng Kee and Tan Eng Lay lived at the
Benguet Lumber Company compound, a
privilege not extended to its ordinary
employees.
In the instant case, we find private
respondent's arguments to be well-taken.
Where circumstances taken singly may be
inadequate to prove the intent to form a
partnership, nevertheless, the collective
effect of these circumstances may be such
as to support a finding of the existence of
the parties' intent.36 Yet, in the case at
bench, even the aforesaid circumstances
when taken together are not persuasive
indicia of a partnership. They only tend to
show that Tan Eng Kee was involved in
the operations of Benguet Lumber, but in
what capacity is unclear. We cannot
discount the likelihood that as a member
of the family, he occupied a niche above
the rank-and-file employees. He would
have enjoyed liberties otherwise
unavailable were he not kin, such as his
residence in the Benguet Lumber
Company compound. He would have
moral, if not actual, superiority over his
fellow employees, thereby entitling him to
exercise powers of supervision. It may
even be that among his duties is to place
orders with suppliers. Again, the
circumstances proffered by petitioners do
not provide a logical nexus to the
conclusion desired; these are not
inconsistent with the powers and duties of
a manager, even in a business organized
and run as informally as Benguet Lumber
Company.
Pascual vs. CIR: All Elements of a
Partnership Must be Present to
Constitute One.
FACTS: On June 22, 1965, petitioners
bought two (2) parcels of land from
Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3)
parcels of land from Juan Roque. The first
two parcels of land were sold by
petitioners in 1968 toMarenir
Development Corporation, while the three
parcels of land were sold by petitioners to
Erlinda Reyes and Maria Samson on
March 19,1970. Petitioners realized a net
profit in the sale made in 1968 in the
amount of P165,224.70, while they
realized a net profit of P60,000.00 in the
sale made in 1970. 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, in a letter dated March 31,
1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners 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.
Petitioners protested the said assessment
in a letter of June 26, 1979 asserting that
they had availed of tax amnesties way
back in 1974.
In a reply of August 22, 1979, 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 1 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.
Petitioners filed a petition for review with
the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due
course, the respondent court by a
majority decision of March 30, 1987, 2
affirmed the decision and action taken by
respondent commissioner with costs
against petitioners.
ISSUE: Whether a partnership existed
instead of co-ownership
RULING: NO, a partnership did not
exist. What existed is a co-ownership
hence not taxable
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. Respondent commissioner
and/ or his representative just assumed
these conditions to be present on the
basis of the fact that petitioners
purchased certain parcels of land and
became co-owners thereof.
In Evangelists, there was a series of
transactions where petitioners purchased
twenty-four (24) lots showing that the
purpose was not limited to the
conservation or preservation of the
common fund or even the properties
acquired by them. The character of
habituality peculiar to business
transactions engaged in for the purpose
of gain was present.
In the instant case, petitioners bought
two (2) parcels of land in 1965. They did
not sell the same nor make any
improvements thereon. In 1966, they
bought another three (3) parcels of land
from one seller. It was only 1968 when
they sold the two (2) parcels of land after
which they did not make any additional or
new purchase. The remaining three (3)
parcels were sold by them in 1970. The
transactions were isolated. The character
of habituality peculiar to business
transactions for the purpose of gain was
not present.
In Evangelista, the properties were leased
out to tenants for several years. The
business was under the management of
one of the partners. Such condition
existed for over fifteen (15) years. None of
the circumstances are present in the case
at bar. The co-ownership started only in
1965 and ended in 1970.
Article 1769 of the new Civil Code lays
down the rule for determining when a
transaction should be deemed a
partnership or a co-ownership. Said
article paragraphs 2 and 3, provides;
(2) Co-ownership or co-
possession does not 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;
(3) 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;
From the above it appears that the fact
that those who agree to form a co-
ownership share or do not share any
profits made by the use of the property
held in common does not convert their
venture into a partnership. Or 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.
This only means that, aside from the
circumstance of profit, the presence of
other elements constituting partnership is
necessary, 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
In order to constitute a partnership inter
sese there must be: (a) An intent to form
the same; (b) generally participating in
both profits and losses; (c) and such a
community of interest, as far as third
persons are concerned as enables each
party to make contract, manage the
business, and dispose of the whole
property
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.
In the present case, there is clear
evidence of co-ownership between the
petitioners. 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.
Sardane vs. CA: Prima Facie
Presumption of Partnership upon
Receipt of Shares
FACTS: Petitioner brought an action in
the City Court of Dipolog for collection of
a sum of P5,217.25 based on promissory
notes executed by the herein private
respondent Nobio Sardane in favor of the
herein petitioner. Petitioner bases his
right to collect on Exhibits B, C, D, E, F,
and G executed on different dates and
signed by private respondent Nobio
Sardane.
It has been established in the trial court
that on many occasions, the petitioner
demanded the payment of the total
amount of P5,217.25. The failure of the
private respondent to pay the said amount
prompted the petitioner to seek the
services of lawyer who made a letter
(Exhibit 1) formally demanding the return
of the sum loaned. Because of the failure
of the private respondent to heed the
demands extrajudicially made by the
petitioner, the latter was constrained to
bring an action for collection of sum of
money.
RTC ruled in favour Acojedo based on
judgment by default
Therein defendant Sardane appealed to
the Court of First Instance of Zamboanga
del Norte which reversed the decision of
the lower court by dismissing the
complaint and ordered the plaintiff-
appellee Acojedo to pay said defendant-
appellant P500.00 each for actual
damages, moral damages, exemplary
damages and attorney's fees, as well as
the costs of suit. Plaintiff-appellee then
sought the review of said decision by
petition to the respondent Court.
ISSUE: Whether a partnership existed
between Sardane and Acojedo
RULING: NO, there exist no
partnership
Court of First Instance held that "the
pleadings of the parties herein put in
issue the imperfection or ambiguity of the
documents in question", hence "the
appellant can avail of the parol evidence
rule to prove his side of the case, that is,
the said amount taken by him from
appellee is or was not his personal debt to
appellee, but expenses of the partnership
between him and appellee."
Consequently, said trial court concluded
that the promissory notes involved were
merely receipts for the contributions to
said partnership and, therefore, upheld
the claim that there was ambiguity in the
promissory notes, hence parol evidence
was allowable to vary or contradict the
terms of the represented loan contract.
However, in the case at bar, Exhibits B, C,
and D are printed promissory notes
containing a promise to pay a sum certain
in money, payable on demand and the
promise to bear the costs of litigation in
the event of the private respondent's
failure to pay the amount loaned when
demanded extrajudicially. Likewise, the
vales denote that the private respondent
is obliged to return the sum loaned to him
by the petitioner. On their face, nothing
appears to be vague or ambigous, for the
terms of the promissory notes clearly
show that it was incumbent upon the
private respondent to pay the amount
involved in the promissory notes if and
when the petitioner demands the same. It
was clearly the intent of the parties to
enter into a contract of loan
As manager of the basnig Sarcado
naturally some degree of control over the
operations and maintenance thereof had
to be exercised by herein petitioner. The
fact that he had received 50% of the net
profits does not conclusively establish
that he was a partner of the private
respondent herein. Article 1769(4) of the
Civil Code is explicit that while the
receipt by a person of a share of the
profits of a business is prima facie
evidence that he is a partner in the
business, no such inference shall be
drawn if such profits were received in
payment as wages of an employee.
Furthermore, herein petitioner had no
voice in the management of the affairs of
the basnig.
Court in the early case of Fortis vs.
Gutierrez Hermanos: This
contention cannot be sustained. It
was a mere contract of
employment. The plaintiff had no
voice nor vote in the management
of the affairs of the company. The
fact that the compensation
received by him was to be
determined with reference to the
profits made by the defendant in
their business did not in any sense
make him a partner therein.
There are other considerations noted by
respondent Court which negate herein
petitioner's pretension that he was a
partner and not a mere employee
indebted to the present private
respondent. Thus, in an action for
damages filed by herein private
respondent against the North Zamboanga
Timber Co., Inc. arising from the
operations of the business, herein
petitioner did not ask to be joined as a
party plaintiff. Also, although he contends
that herein private respondent is the
treasurer of the alleged partnership, yet it
is the latter who is demanding an
accounting. The advertence of the Court
of First Instance to the fact that the casco
bears the name of herein petitioner
disregards the finding of the respondent
Court that it was just a concession since it
was he who obtained the engine used in
the Sardaco from the Department of Local
Government and Community
Development. Further, the use by the
parties of the pronoun "our" in referring
to "our basnig, our catch", "our deposit",
or "our boseros" was merely indicative of
the camaraderie and not evidentiary of a
partnership, between them.
Deluao vs. Cateel: Illegal Object of
Partnership
FACTS: The appellees initially argue that
because the Fisheries Act (Act 4003) does
not contain any prohibition against the
transfer or sub-letting of fishponds
covered by permits or lease agreements,
Fisheries Administrative Order 14, sec. 7,
which embodies said prohibition, is
therefore a nullity because it is
inconsistent with the Fisheries Act.
Permits or leases entitling the holders
thereof, for a certain stated period of time
not to exceed twenty years, to enter upon
definite tracts of a public forest land to be
devoted exclusively for fishponds
purposes, or to take certain fishery
products or to construct fishponds within
tidal, mangrove and other swamps, ponds
and streams within public forest lands or
proclaimed timber lands or established
forest reserves, may be issued or
executed by the Secretary of Agriculture
and Natural Resources, subject to the
restrictions and limitations imposed by
the forest laws and regulations, to such
persons, associations or corporations as
are qualified to utilize or take forest
products under Act Number Thirty-six
hundred and seventy-four.
It is clear from the above-quoted section
of the Fisheries Act that only holders of
permits or leases issued or executed by
the Secretary of Agriculture and Natural
Resources (hereinafter referred to as
DANR Secretary) can "enter upon definite
tracts of public forest land to be devoted
exclusively for fishpond purposes, ... or to
construct fishponds within tidal,
mangrove and other swamps, ponds and
streams within public forest lands or
established forest reserves ... ."
Inferentially, persons who do not have
permits or leases properly issued or
executed by the DANR Secretary cannot
do any of the acts mentioned in sec. 63.
Certainly, a transferee or sub-lessee of a
fishpond is not a holder of a permit or
lease. He cannot, therefore, lawfully
"enter upon definite tracts of a public
forest land to be devoted exclusively for
fishpond purposes
Casteel was the original occupant and
applicant since before the last World War.
He wanted to preclude subsequent
applicants from entering and spreading
themselves within the area applied for by
him, by expanding his occupation thereof
by the construction of dikes and the
cultivation of marketable fishes. Thus, he
borrowed money from the Deluaos to
finance needed improvements for the
fishpond, and was compelled by force of
this circumstance to enter into the
contract of partnership to divide the
fishpond after the award
Appellees next argue that the contract of
service, ex. A, is not by itself a transfer or
sublease but merely an agreement to
divide or transfer, and that pursuant to its
intended "ultimate undertaking" of
dividing the fishpond into two equal parts
the appellant is under obligation,
conformably with the law on obligations
and contracts, to execute a formal
transfer and to secure official approval of
the same.
ISSUE: Whether a partnership existed
despite the object being prohibited
RULING: NO, their partnership is void
for having a void object
We discussed at length — in the said
decision and in the resolution of their first
proposition above — that the contract of
partnership to divide the fishpond
between them after such award became
illegal because it is at war with several
prohibitory laws. As such, it cannot be
made subject to any suspensive condition
the fulfillment of which could allegedly
make the ultimate undertaking therein a
demandable obligation. It is an
elementary rule in law that a partnership
cannot be formed for an illegal purpose or
one contrary to public policy and that
where the object of a partnership is the
prosecution of an illegal business or one
which is contrary to public policy, the
partnership is void. And since the
contract is null and void, the appellant is
not bound to execute a formal transfer of
one-half of the fishpond and to secure
official approval of the same.
The appellant single-handedly opposed
rival applicants who occupied portions of
the fishpond area, and relentlessly
pursued his claim to the said area up to
the Office of the DANR Secretary, until it
was finally awarded to him. There is here
neither allegation nor proof that, without
the financial aid given by the Deluaos in
the amount of P27,000, the area would
not have been awarded nor adjudicated to
Casteel. This explains, perhaps, why the
DANR Secretary did not find it equitable
to award one-half of the fishpond to the
appellee spouses despite their many
appeals and motions for reconsideration.
The appellees insist that the parties'
intention "to divide" the fishpond
remained unchanged; that the change in
intention referred solely to joint
administration before the actual division
of the fishpond; and that what can be held
as having been dissolved by the "will" of
the parties is merely the partnership to
exploit the fishpond pending the award
but not the partnership to divide the
fishpond after such award. In support of
their argument, they cite Casteel's letters
of December 27, 1950 and January 4,
1951 which allegedly merely signified the
latter's desire to put an end to the joint
administration, but to which the Deluaos
demurred.
Even admitting arguendo that Casteel's
desire to terminate the contract of
partnership — as allegedly expressed in
his aforecited letters — is equivocal in
that it contemplated the termination
merely of the joint administration over the
fishpond, the resolution of the Deluaos to
terminate the same partnership is
unequivocal. Thus, in his letter of
December 29, 1950 to Casteel, Felipe
Deluao expressed his disagreement to the
division (not joint administration) of the
fishpond, because he stated inter alia
that:
As regards your proposition to
divide the fishpond into two among
ourselves, I believe it does not find
any appropriate grounds by
now. ... .
Be informed that the conflicts over
the fishpond at Balasinon which
you proposed to divide, has not as
yet been finally extinguished by
the competent agency of the
government which shall have the
last say on the matter. Pending the
final resolution of the case over
said area, your proposition is out
of order. (Emphasis supplied)
It must be observed that, despite the
decisions of the DANR Secretary in DANR
cases 353 and 353-B awarding the area to
Casteel, and despite the latter's proposal
that they divide the fishpond between
them, the Deluaos unequivocally
expressed in their aforequoted letter their
decision not to share the fishpond with
Casteel. This produced the dissolution of
the entire contract of partnership (to
jointly administer and to divide the
fishpond after the award) between the
parties, not to mention its automatic
dissolution for being contrary to law.
Since we have shown in the immediate
preceding discussion that — even if we
consider Casteel's decision to terminate
the contract of partnership to divide the
fishpond as equivocal — the
determination of the Deluaos to terminate
said partnership is unequivocal, then the
appellees' sixth proposition that Casteel is
liable to the Deluaos for one-half of the
fishpond or the actual value thereof does
not merit any consideration. The
appellees, after all, also caused the
dissolution of the partnership.
Agad vs. Mabato: Requisite when an
Immovable Property is contributed in
a Partnership
FACTS: Alleging that he and defendant
Severino Mabato are — pursuant to a
public instrument dated August 29, 1952,
copy of which is attached to the complaint
as Annex "A" — partners in a fishpond
business, to the capital of which Agad
contributed P1,000, with the right to
receive 50% of the profits; that from 1952
up to and including 1956, Mabato who
handled the partnership funds, had yearly
rendered accounts of the operations of
the partnership
Despite repeated demands, Mabato had
failed and refused to render accounts for
the years 1957 to 1963, Agad prayed in
his complaint against Mabato and Mabato
& Agad Company, filed on June 9, 1964,
that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of
P14,000, as his share in the profits of the
partnership for the period from 1957 to
1963, in addition to P1,000 as attorney's
fees, and ordering the dissolution of the
partnership, as well as the winding up of
its affairs by a receiver to be appointed
therefor.
In his answer, Mabato admitted the
formal allegations of the complaint and
denied the existence of said partnership,
upon the ground that the contract
therefor had not been perfected, despite
the execution of Annex "A", because Agad
had allegedly failed to give his P1,000
contribution to the partnership capital.
Mabato prayed, therefore, that the
complaint be dismissed; that Annex "A" be
declared void ab initio
This conclusion was predicated upon the
theory that the contract of partnership,
Annex "A", is null and void, pursuant to
Art. 1773 of our Civil Code, because an
inventory of the fishpond referred in said
instrument had not been attached
thereto.
ISSUE: Whether the partnership is
void for failure to conform to the
formality required by law when an
immovable property is contributed to
the common fund
RULING: NO, there was no fishpond
contributed in the common fund
Mabato alleged and the lower court held
that the answer should be in the
affirmative, because "it is really
inconceivable how a partnership engaged
in the fishpond business could exist
without said fishpond property (being)
contributed to the partnership." It should
be noted, however, that, as stated in
Annex "A" the partnership was
established "to operate a fishpond", not to
"engage in a fishpond business".
Moreover, none of the partners
contributed either a fishpond or a real
right to any fishpond. Their contributions
were limited to the sum of P1,000 each.
Indeed, Paragraph 4 of Annex "A"
provides:
That the capital of the said
partnership is Two Thousand
(P2,000.00) Pesos Philippine
Currency, of which One Thousand
(P1,000.00) pesos has been
contributed by Severino Mabato
and One Thousand (P1,000.00)
Pesos has been contributed by
Mauricio Agad.
The operation of the fishpond mentioned
in Annex "A" was the purpose of the
partnership. Neither said fishpond nor a
real right thereto was contributed to the
partnership or became part of the capital
thereof, even if a fishpond or a real right
thereto could become part of its assets.
CIR vs. Ledesma: Taxability of a articles of general co-partnership were
Partnership upon Registration
FACTS: On July 9, 1949 herein
respondents, Carlos Ledesma, Julieta
Ledesma and the spouses Amparo
Ledesma and Vicente Gustilo, Jr.,
purchased from their parents, Julio
Ledesma and Florentina de Ledesma, the
sugar plantation known as "Hacienda
Fortuna," consisting of 36 parcels of land,
situated in the municipality of San Carlos,
province of Negros Occidental
By virtue of the purchase, Carlos
Ledesma acquired the one-third undivided
portion of the plantation for the price of
P144,043.00; Julieta Ledesma acquired
another one-third undivided portion of the
plantation for the same price; and
respondents Amparo Ledesma de Gustilo
and Vicente Gustilo, Jr. acquired the
remaining one-third undivided portion
also for the same price.
By virtue of the purchase Plantation Audit
No. 58-101 was cancelled, and during the
sugar crop year 1948-1949 the said sugar
quota of 79,211.17 piculs was transferred
to, apportioned among, and separately
registered in the names of, the
respondents, as follows: one-third to
Vicente Gustilo, Jr. and Amparo Ledesma
de Gustilo, under Plantation Audit No. 38-
246; one-third to Carlos Ledesma, under
Plantation Audit No. 38-247; and one-
third to Julieta Ledesma under Plantation
Audit No. 38248.
On July 11, 1949, the respondents
organized themselves into a general co-
partnership under the firm name
"Hacienda Fortuna", for the "production
of sugar cane for conversion into sugar,
palay and corn and such other products
as may profitably be produced on said
hacienda, which products shall be sold or
otherwise disposed of for the purpose of
realizing profit for the partnership."2 The
registered in the commercial register of
the office of the Register of Deeds in
Bacolod City, Negros Occidental, on July
14, 1949. Paragraph 14 of the articles of
general partnership provides that the
agreement shall have retroactive effect as
of January 1, 1949
The provincial revenue agent reported
that during the period from January 1,
1959 to July 13, 1949 the "Hacienda
Fortuna" had a net profit amounting to
P131,477.20, and that the income tax due
on said net profit, at the rate of 12%, was
P15,777.26. It thus resulted that the
original assessment of P23,704.22, as
corporate income tax on the income for
the entire calendar year 1949, was
reduced to P15,777.26 after deducting
the corporate income tax due on the net
profits derived by the "Hacienda Fortuna"
for the period from July 14 to December
31, 1949, based on the theory that the co-
partnership "Hacienda Fortuna" was
exempt from the payment of corporate
income tax on its income from the day its
articles of general co-partnership were
registered in the mercantile registry.
Herein respondents accepted the
correctness of the figures contained in the
report of the provincial revenue agent,
but denied their liability to pay the
corporate income tax of P15,777.26
assessed against the "Hacienda Fortuna"
as a general co-partnership.
On April 2, 1955 the respondents,
through counsel, wrote a letter to the
Commissioner asking for the
reconsideration of his ruling of March 12,
1955, upon the ground that during the
period from January 1 to July 13, 1949 the
respondents were operating merely as co-
owners of the plantation known as
"Hacienda Fortuna", so that the case of
the "Hacienda Fortuna" was really one of
co-ownership and not that of an
unregistered co-partnership which was
subject to corporate tax. That request for
reconsideration was denied by the
Commissioner on October 25, 1955. The
respondents filed a second request for
reconsideration, dated November 4, 1955,
but the Commissioner in a letter dated
December 6, 1955, which was received by
respondents on December 20, 1955,
denied said second request for
reconsideration.
CTA ruled that prior to the execution of
the articles of general co-partnership on
July 11, 1949 the respondents had
operated the "Hacienda Fortuna" as a
general partnership.
Respondents alleged that the partnership
known as "Hacienda Fortuna" which was
organized by on July 11, 1949, whose
articles of general partnership provided
that the partnership agreement should
retroact as of January 1, 1949, and which
articles of general co-partnership were
registered on July 14, 1949.
ISSUE: Whether the partnership
should be exempt from tax for the
year 1949, despite being registered
only on July 1949
RULING: YES, the partnership should
be exempt from corporate income tax
Sec. 24. Rate of tax on corporation.
— (a) Tax on domestic corporations. — In
general, there shall be levied, collected,
and paid annually upon the total net
income received in the preceding taxable
year from all sources by every corporation
organized in, or existing under the laws
of, the Philippines, no matter how created
or organized, but not including duly
registered general co-partnerships
(compañias colectivas), domestic life
insurance companies and foreign life
insurance companies doing business in
the Philippines
The Court of Tax Appeals made a finding
that the respondents had actually
operated the "Hacienda Fortuna" as a
general partnership from January 1, 1949,
and that when its articles of general
partnership were registered on July 14,
1949 that registration had the effect of
giving the partnership the status of a
registered co-partnership which places it
under the purview of Section 24 of the
Tax Code as exempt from the payment of
corporate income tax during the entire
taxable year of 1949.
Although petitioners acquired undivided
shares in the Hacienda Fortuna, from the
evidence of record it appears to us that
the intention of the parties was to form,
and that they did operate the hacienda as,
a general partnership. That this was their
intention is confirmed by the fact that
they actually organized a general co-
partnership on July 11, 1949. And the
Articles of General Co-partnership which
was registered on July 14, 1949 provides
that the agreement shall be retroactive as
of January 1, 1949
There is no specific provision of law or
regulations as to the date of
commencement of the exemption of a
registered general co-partnership. We
find, however, that the Bureau of Internal
Revenue as far back as 1924, issued a
ruling which was published in the Official
Gazette to the effect that 'the status or
form of organization of a partnership at
the end of the taxable year will determine
its income tax liability for that year.
The rule enunciated above that the status
of a general partnership as a registered
or unregistered general co-partnership at
the end of the taxable year determines its
liability or exemption from income tax for
the entire taxable year is a sound rule. It
does not run counter to any specific
provision of law or regulation. On the
other hand, it appears to us to be in
harmony with the intent and purpose of
the law to grant exemption to registered
general co-partnership and to tax the
partners only in their individual capacity.
The Court of Tax Appeals, in its decision,
has pointed out that as early as 1924 the
Bureau of Internal Revenue had applied
the "status-at-the-end-of-the-taxable-year"
rule in determining the income tax
liability of a partnership, such that a
partnership is considered a registered
partnership for the entire taxable year
even if its articles of co-partnership are
registered only at the middle of the
taxable year, or in the last month of the
taxable year. We agree with the Court of
Tax Appeals that the ruling is a sound
one, and it is in consonance with the
purpose of the law in requiring the
registration of partnerships. The policy of
the law is to encourage persons doing
business under a partnership agreement
to have the partnership agreement, or the
articles of partnership, registered in the
mercantile registry, so that the public
may know who the real partners of the
partnership are, the capital stock of the
partnership, the interest or contribution
of each partner in the capital stock, the
proportionate share of each partner in the
profits, and the earnings or salaries of the
partner or partners who render service
for the partnership
It is precisely in the share of the profits
and the salaries or wages that the
partners would receive that the
government is interested in, because it is
on these incomes that the assessment of
the income tax is based. It can happen
that the profits realized by an
unregistered partnership may be
distributed to other persons in addition to
those who appear to the public as the
partners. The government may not be
able to trace exactly to whom the profits
of an unregistered partnership go, nor
can the government determine the
precise participation of the apparent
partners in the profits of the partnership.
It is for this reason that the government
imposes a corporate income tax against
an unregistered partnership as an entity,
and an individual income tax against the
apparent members thereof. But once the
partnership is duly registered, the names
of all the partners are known, the
proportional interest of the partners in
the business of the partnership is known,
and the government can very well assess
the income tax on the respective income
of the partners whose names appear in
the articles of co-partnership.
Solis vs. Barroso: Donation Propter
Nuptias (NO PAT)
FACTS: The spouses Juan Lambino and
Maria A. Barroso begot three children
named Alejo, Eugenia and Marciana
Lambino. On June 2, 1919 said spouses
made a donation of propter nuptias of the
lands described in the complaint in favor
of their son Alejo Lambino and Fortunata
Solis in a private document (Exhibit A) in
consideration of the marriage which the
latter were about to enter into.
One of the conditions of this donation is
that in case of the death of one of the
donees, one-half of these lands thus
donated would revert to the donors while
the surviving donee would retain the
other half. On the 8th of the said month of
June 1919, Alejo Lambino and Fortunata
Solis were married and immediately
thereafter the donors delivered the
possession of the donated lands to them.
On August 3, 1919 donee Alejo Lambino
died. In the same year donor Juan
Lambino also died. After the latter's
death, his wife, Maxima Barroso,
recovered possession of the donated
lands.
The surviving donee Fortunata Solis filed
the action, which is the subject matter of
this appeal, against the surviving donor
Maxima Barroso and Eugenia and
Marcelina Lambino, heirs of the deceased
donor Juan Lambino, with their respective
husbands, demanding of the defendants
the execution of the proper deed of
donation according to law, transferring
one-half of the donated property, and
moreover, to proceed to the partition of
the donated property and its fruits.
The court rendered judgment based upon
article 1279 of the Civil Code granting
plaintiff's prayer and ordering the
defendants to execute a deed of donation
in favor of the plaintiff, adequate in form
and substance to transfer to the latter the
legal title to the part of the donated lands
assigned to her in the original donation.
ISSUE: Whether Art. 1279 applies to
Donation
RULING: NO, it does not apply
We are concerned with a donation propter
nuptias, which, according to article 1328
of the Civil Code, must be governed by
the rules established in Title II, Book III of
this Code, on donations (articles 618 to
656), Article 633 provides that in order
that a donation of real property may be
valid, it must be made in a public
instrument. This is the article applicable
to donation propter nuptias in so far as its
formal validity is concerned. The only
exceptions to this rule are onerous and
remuneratory donations, in so far as they
do not exceed the value of the charge
imposed, which are then governed by the
rules on contracts (art. 622), and those
which are to take effect upon the donor's
death, which are governed by the rules
established for testamentary successions
We have, therefore, a donation propter
nuptias which is not valid and did not
create any right, since it was not made in
a public instrument, and hence, article
1279 of the Civil Code which the lower
court applied is not applicable thereto.
The last named article provides that,
should the law require the execution of an
instrument or any other special form in
order to make the obligations of a
contract effective, the contracting parties
may compel each other to comply with
such formality from the moment that
consent has been given, and the other
requirements for the validity of the
contract exist
But the lower court states in its judgment
that the present donation is onerous, and
pursuant to article 622 of the Civil Code
must be governed by the rules on
contracts. This opinion is not well
founded. Donations for valuable
consideration, as may be inferred from
article 619 of the Civil Code, are such as
compensate services which constitute
debts recoverable from the donor, or
which impose a charge equal to the
amount of the donation upon the donee,
neither of which is true of the present
donation, which was made only in
consideration of marriage. The lower
court insists that, by the fact that this is a
donation propter nuptias, it is based upon
the marriage as a consideration, and must
be considered onerous. Neither is this
opinion well founded. In donations
propter nuptias, the marriage is really a
consideration, but not in the sense of
being necessary to give birth to the
obligation. This may be clearly inferred
from article 1333, which makes the fact
that the marriage did not take place a
cause for the revocation of such
donations, thus taking it for granted that
there may be a valid donation propter
nuptias, even without marriage, since that
which has not existed cannot be revoked.
And such a valid donation would be
forever valid, even if the marriage never
took place, if the proper action for
revocation were not instituted, or if it
were instituted after the lapse of the
statutory period of prescription. This is,
so because the marriage in a donation
propter nuptias is rather a resolutory
condition which, as such, presupposes the
existence of the obligation which may be
resolved or revoked, and it is not a
condition necessary for the birth of the
obligation.
Torres vs. CA: Sharing of Loss
between Partners
FACTS: Sisters Antonia Torres and
Emeteria Baring, herein petitioners,
entered into a "joint venture agreement"
with Respondent Manuel Torres for the
development of a parcel of land into a
subdivision. Pursuant to the contract,
they executed a Deed of Sale covering the
said parcel of land in favor of respondent,
who then had it registered in his name.
By mortgaging the property, respondent
obtained from Equitable Bank a loan of
P40,000 which, under the Joint Venture
Agreement, was to be used for the
development of the subdivision. 4 All
three of them also agreed to share the
proceeds from the sale of the subdivided
lots.
According to petitioners, the project
failed because of "respondent's lack of
funds or means and skills." They add that
respondent used the loan not for the
development of the subdivision, but in
furtherance of his own company,
Universal Umbrella Company.
Respondent claimed that the subdivision
project failed, however, because
petitioners and their relatives had
separately caused the annotations of
adverse claims on the title to the land,
which eventually scared away prospective
buyers. Despite his requests, petitioners
refused to cause the clearing of the
claims, thereby forcing him to give up on
the project.
In affirming the trial court, the Court of
Appeals held that petitioners and
respondent had formed a partnership for
the development of the subdivision. Thus,
they must bear the loss suffered by the
partnership in the same proportion as
their share in the profits stipulated in the
contract. Disagreeing with the trial
court's pronouncement that losses as well
as profits in a joint venture should be
distributed equally, 7 the CA invoked
Article 1797 of the Civil Code which
provides:
Art. 1797 — The losses and profits
shall be distributed in conformity
with the agreement. If only the
share of each partner in the profits
has been agreed upon, the share of
each in the losses shall be in the
same proportion.
The CA elucidated further:
In the absence of stipulation, the
share of each partner in the profits
and losses shall be in proportion to
what he may have contributed, but
the industrial partner shall not be
liable for the losses. As for the
profits, the industrial partner shall
receive such share as may be just
and equitable under the
circumstances. If besides his
services he has contributed
capital, he shall also receive a
share in the profits in proportion
to his capital.
ISSUE: Whether a partnership existed
hence to determine the scope of their
respective liabilities
RULING: YES, a partnership existed
The pertinent provision of the JVA are the
following;
ONE: That the SECOND PARTY
signed an absolute Deed of
Sale . . . dated March 5, 1969, in
the amount of TWENTY FIVE
THOUSAND FIVE HUNDRED
THIRTEEN & FIFTY CTVS.
(P25,513.50) Philippine Currency,
for 1,700 square meters at ONE
[PESO] & FIFTY CTVS. (P1.50)
Philippine Currency, in favor of the
FIRST PARTY, but the SECOND
PARTY did not actually receive the
payment.
SECOND: That the SECOND
PARTY, had received from the
FIRST PARTY, the necessary
amount of TWENTY THOUSAND
(P20,000.00) pesos, Philippine
currency, for their personal
obligations and this particular
amount will serve as an advance
payment from the FIRST PARTY
for the property mentioned to be
sub-divided and to be deducted
from the sales.
THIRD: That the FIRST PARTY,
will not collect from the SECOND
PARTY, the interest and the
principal amount involving the
amount of TWENTY THOUSAND
(P20,000.00) Pesos, Philippine
Currency, until the sub-division
project is terminated and ready for
sale to any interested parties, and
the amount of TWENTY
THOUSAND (P20,000.00) pesos,
Philippine currency, will be
deducted accordingly.
FOURTH: That all general
expense[s] and all cost[s] involved
in the sub-division project should
be paid by the FIRST PARTY,
exclusively and all the expenses
will not be deducted from the sales
after the development of the sub-
division project.
FIFTH: That the sales of the sub-
divided lots will be divided into
SIXTY PERCENTUM 60% for the
SECOND PARTY and FORTY
PERCENTUM 40% for the FIRST
PARTY, and additional profits or
whatever income deriving from the
sales will be divided equally
according to the . . . percentage
[agreed upon] by both parties.
A reading of the terms embodied in the
Agreement indubitably shows the
existence of a partnership pursuant to
Article 1767 of the Civil Code, which
provides:
Art. 1767. 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.
Under the above-quoted Agreement,
petitioners would contribute property to
the partnership in the form of land which
was to be developed into a subdivision;
while respondent would give, in addition
to his industry, the amount needed for
general expenses and other costs.
Furthermore, the income from the said
project would be divided according to the
stipulated percentage. Clearly, the
contract manifested the intention of the
parties to form a partnership. 11
It should be stressed that the parties
implemented the contract. Thus,
petitioners transferred the title to the
land to facilitate its use in the name of the
respondent. On the other hand,
respondent caused the subject land to be
mortgaged, the proceeds of which were
used for the survey and the subdivision of
the land. As noted earlier, he developed
the roads, the curbs and the gutters of the
subdivision and entered into a contract to
construct low-cost housing units on the
property.
Respondent's actions clearly belie
petitioners' contention that he made no
contribution to the partnership. Under
Article 1767 of the Civil Code, a partner
may contribute not only money or
property, but also industry.
contract and in another recognize it,
depending on what momentarily suits
their purpose. Parties cannot adopt
inconsistent positions in regard to a
contract and courts will not tolerate,
much less approve, such practice.
In short, the alleged nullity of the
partnership will not prevent courts from
considering the Joint Venture Agreement
an ordinary contract from which the
parties' rights and obligations to each
other may be inferred and enforced.

They contend that since the parties did

not make, sign or attach to the public
instrument an inventory of the real
property contributed, the partnership is
void.

We clarify. First, Article 1773 was

intended primarily to protect third
persons. Thus, the eminent Arturo M.
Tolentino states that under the aforecited
provision which is a complement of
Article 1771, 12 "The execution of a
public instrument would be useless if
there is no inventory of the property
contributed, because without its
designation and description, they cannot
be subject to inscription in the Registry of
Property, and their contribution cannot
prejudice third persons. This will result in
fraud to those who contract with the
partnership in the belief [in] the efficacy
of the guaranty in which the immovables
may consist. Thus, the contract is
declared void by the law when no such
inventory is made." The case at bar does
not involve third parties who may be
prejudiced.

Second, petitioners themselves invoke the

allegedly void contract as basis for their
claim that respondent should pay them 60
percent of the value of the property. 13
They cannot in one breath deny the