Pascual and Dragon v. CIR, G.R. No.

78133, October 18, 1988

FACTS:
Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels
of land. Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits.
The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of
the tax amnesties granted in the said years. However, the Acting BIR Commissioner assessed
and required Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970. Petitioners protested the said assessment asserting
that they had availed of tax amnesties way back in 1974. In a reply, respondent Commissioner
informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the
National Internal Revenue Code that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by them which is subject
to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended,
by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them
from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay
the deficiency income tax assessed.
ISSUE:
Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for
the purposes of income tax.
RULING:
The Petitioners are simply under the regime of co-ownership and not under unregistered
partnership.
By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves (Art. 1767, Civil Code of the Philippines). In the present case, there is no evidence
that petitioners entered into an agreement to contribute money, property or industry to a
common fund, and that they intended to divide the profits among themselves. The sharing of
returns does not in itself establish a partnership whether or not the persons sharing therein have
a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property. Hence, there is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two
isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners
and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent commissioner
proposes.

YULO V. YANG CHIAO SENG

Facts:
Yang Chiao Seng proposed to form a partnership with Rosario Yulo to run and operate a theatre
on the premises occupied by Cine Oro, Plaza Sta. Cruz, Manila, the principal conditions of the
offer being (1) Yang guarantees Yulo a monthly participation of P3,000 (2) partnership shall be
for a period of 2 years and 6 months with the condition that if the land is expropriated, rendered
impracticable for business, owner constructs a permanent building, then Yulos right to lease
and partnership even if period agreed upon has not yet expired; (3) Yulo is authorized to
personally conduct business in the lobby of the building; and (4) after Dec 31, 1947, all
improvements placed by partnership shall belong to Yulo but if partnership is terminated before
lapse of 1 and years, Yang shall have right to remove improvements. Parties established,
Yang and Co. Ltd., to exist from July 1, 1945 Dec 31, 1947.
In June 1946, they executed a supplementary agreement extending the partnership for 3 years
beginning Jan 1, 1948 to Dec 31, 1950.
The land on which the theater was constructed was leased by Yulo from owners, Emilia Carrion
and Maria Carrion Santa Marina for an indefinite period but that after 1 year, such lease may be
cancelled by either party upon 90-day notice. In Apr 1949, the owners notified Yulo of their
desire to cancel the lease contract come July. Yulo and husband brought a
civil action to declare the lease for a indefinite period. Owners brought their own civil action
forejectment upon Yulo and Yang.
CFI: Two cases were heard jointly; Complaint of Yulo and Yang dismissed declaring contract of
lease terminated.
CA: Affirmed the judgment.
In 1950, Yulo demanded from Yang her share in the profits of the business. Yang answered
saying he had to suspend payment because of pending ejectment suit.
Yulo filed present action in 1954, alleging the existence of a partnership between them and that
Yang has refused to pay her shares.
Defendants Position: The real agreement between plaintiff and defendant was one of lease
and not of partnership; that the partnership was adopted as a subterfuge to get around the
prohibition contained in the contract of lease between the owners and the plaintiff against the
sublease of the property.
Trial Court: Dismissal. It is not true that a partnership was created between them because
defendant has not actually contributed the sum mentioned in the Articles of Partnership or any
other amount. The agreement is a lease because plaintiff didnt share either in the profits or in
the losses of the business as required by Art 1769 (CC) and because plaintiff was granted a
guaranteed participation in the profits belies the supposed existence of a partnership.
Issue: Was the agreement a contract a lease or a partnership?
Ruling: Dismissal. The agreement was a sublease not a partnership. The following are the
requisites of partnership: (1) two or more persons who bind themselves to contribute money,

property or industry to a common fund; (2) the intention on the part of the partners to divide the
profits among themselves (Article 1761, CC)
Plaintiff did not furnish the supposed P20,000 capital nor did she furnish any help or intervention
in the management of the theatre. Neither has she demanded from defendant any accounting of
the expenses and earnings of the business. She was absolutely silent with respect to any of the
acts that a partner should have done; all she did was to receive her share of P3,000 a month
which cannot be interpreted in any manner than a payment for the use of premises which she
had leased from the owners.

FERNANDO SANTOS, Petitioner, v. Spouses ARSENIO and NIEVES REYES,

Respondents.
Facts:
In June 1986, Fernando Santos, Nieves Reyes and Melton Zabat orally agreed to form a
partnership a lending business. Santos contributed 70% (as financier) while Reyes and Zabat
shared 30% (as industrial partners). Later, Reyes introduced Cesar Gragera whom they would
provide loans to Grageras corporation particularly its employees. In return Gragera shall have a
commission based on the loan payments. The partners decided on August 1986 to have a
written agreement but they found out that Zabat engaged in a competitor venture thus expelled
him. The two had Arsenio Reyes (husband of Nieves) replaced Zabat.
However, Santos accused the Spouses of not remitting the loans payments. He argued that the
couple were only his employees and there was a special arrangement between him and
Gragera. The trial court and the Court of Appeals ruled against Santos.
Issue:
Whether or not there was a partnership formed between Santos and the Spouses Reyes?
Held:
YES. The original partnership with Zabat continued even after the expulsion of the latter from
the partnership because there was no intent to dissolve the (partnership) relationship.
[Respondents] were industrial partners of [petitioner]. . . . Nieves herself provided the initiative
in the lending activities with Monte Maria. In consonance with the agreement between appellant,
Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common
fund with the intention of sharing in the profits of the partnership. [Respondents] provided
services without which the partnership would not have [had] the wherewithal to carry on the
purpose for which it was organized and as such [were] considered industrial partners
(Evangelista v. Abad Santos, 51 SCRA 416 [1973]).
While concededly, the partnership between [petitioner,] Nieves and Zabat was technically
dissolved by the expulsion of Zabat therefrom, the remaining partners simply continued
the business of the partnership without undergoing the procedure relative to dissolution.
Instead, they invited Arsenio to participate as a partner in their operations. There was
therefore, no intent to dissolve the earlier partnership. The partnership between [petitioner,]
Nieves and Arsenio simply took over and continued the business of the former partnership with
Zabat, one of the incidents of which was the lending operations with Monte Maria.

Obillos v CIR
G.R. No. L-68118
October 29, 1985
FACTS:
1. On March1973 Jose Obillos, Sr. completed payment on two lots located at Greenhills, San
Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable
them to build their residences. The company sold the two lots to petitioners for P178,708.12 on
March 13
2. In 1974, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz
Canda for the total sum of P313,050. They derived from the sale a total profit of P134,341.88 or
P33,584 for each of them. They treated the profit as a capital gain and paid an income
tax on one-half thereof or of P16,792.
3. In April 1980, the CIR required the four petitioners to pay corporate income tax on the total
profit of P134,336 in addition to individual income tax on their shares thereof. The petitioners
are being held liable for deficiency income taxes and penalties totaling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains already paid by them.
4. The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
ISSUE: Whether or not the petitioners had created an unregistered partnership.
HELD: NO.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy.
That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-ownership
and a partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they
had no choice but to resell the same to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.

In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.