Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.
OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
This case is about the income tax liability of four brothers and sisters who sold two parcels of
land which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with
areas of 1,124 and 963 square meters 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 (Exh.
A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they
were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to
the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050
(Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each
of them. They treated the profit as a capital gain and paid an income tax on one-half thereof
or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the
Commissioner of Internal Revenue required the four petitioners to pay corporate income
tax on the total profit of P134,336 in addition to individual income tax on their shares thereof
He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and
P15,547.56 as 42% accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584
as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay
deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the
accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid
by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture 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).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under
article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy
the two lots, resold the same and divided the profit among themselves.
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 coownership 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. Castan Tobeas
says:
Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del
origen, en que la sociedad presupone necesariamente la convencion, mentras
que la comunidad puede existir y existe ordinariamente sin ela; y por razon
del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que
el de la indivision es solo mantener en su integridad la cosa comun y
favorecer su conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se
dice que si en nuestro Derecho positive se ofrecen a veces dificultades al
tratar de fijar la linea divisoria entre comunidad de bienes y contrato de
sociedad, la moderna orientacion de la doctrina cientifica seala como nota
fundamental de diferenciacion aparte del origen de fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro comun
partible en la sociedad, y mera conservacion y aprovechamiento en la
comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
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.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where
15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the
agreement that they would divide the prize The ticket won the third prize of P50,000. The 15
persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint
ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case at bar is
fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the
Longa heirs inherited the 'hacienda' in questionpro-indiviso from their
deceased parents; they did not contribute or invest additional ' capital to
increase or expand the inherited properties; they merely continued dedicating
the property to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding shares in the
income and expenses of the 'hacienda', and they continued for many years
the status of co-ownership in order, as conceded by respondent, 'to preserve
its (the 'hacienda') value and to continue the existing contractual relations
with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA
Case No. 653, July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.Co-Ownership
who own properties which produce income should not automatically be
considered partners of an unregistered partnership, or a corporation, within
the purview of the income tax law. To hold otherwise, would be to subject the
income of all
co-ownerships of inherited properties to the tax on corporations, inasmuch as
if a property does not produce an income at all, it is not subject to any kind of
income tax, whether the income tax on individuals or the income tax on
corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited
in Araas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom
as a common fund to produce profits for themselves, it was held that they were taxable as
an unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to
an administrator and divided equally the net income, and from Evangelista vs. Collector of
Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of
real property which they leased to various tenants and derived rentals therefrom. Clearly,
the petitioners in these two cases had formed an unregistered partnership.

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.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES
CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO,
ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and the COURT OF
APPEALS, respondents.
These consolidated petitions seek the review of the amended decision of the Court of
Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision dated June
5, 1986, of the then Intermediate Appellate Court and directed that in all subsequent
elections for directors of Sanitary Wares Manufacturing Corporation (Saniwares), American
Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino
stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other
hand, the Filipino stockholders can nominate only six (6) candidates and in the event they
cannot agree on the six (6) nominees, they shall vote only among themselves to determine
who the six (6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.
The antecedent facts can be summarized as follows:

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of
manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin Young
went abroad to look for foreign partners, European or American who could help in its
expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled in Delaware,
United States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of an
enterprise which would engage primarily in the business of manufacturing in the Philippines
and selling here and abroad vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an incorporated enterprise and
that the name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the
nomination and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be substantially in the
form annexed hereto as Exhibit A and, insofar as permitted under Philippine
law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of
Directors, which shall consist of nine individuals. As long as AmericanStandard shall own at least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by American-Standard, and the
other six shall be designated by the other stockholders of the Corporation.
(pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a
minority group, including the grant of veto powers over a number of corporate acts and the
right to designate certain officers, such as a member of the Executive Committee whose
vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition that
at least 60% of the capital stock of the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the
initially harmonious relations between the two groups. According to the Filipino group, a
basic disagreement was due to their desire to expand the export operations of the company
to which ASI objected as it apparently had other subsidiaries of joint joint venture groups in

the countries where Philippine exports were contemplated. On March 8, 1983, the annual
stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes
were taken by the Secretary, Avelino Cruz. After disposing of the preliminary items in the
agenda, the stockholders then proceeded to the election of the members of the board of
directors. The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin
and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young.
Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr.
Charles Chamsay. The chairman, Baldwin Young ruled the last two nominations out of order
on the basis of section 5 (a) of the Agreement, the consistent practice of the parties during
the past annual stockholders' meetings to nominate only nine persons as nominees for the
nine-member board of directors, and the legal advice of Saniwares' legal counsel. The
following events then, transpired:
... There were protests against the action of the Chairman and heated
arguments ensued. An appeal was made by the ASI representative to the body
of stockholders present that a vote be taken on the ruling of the Chairman.
The Chairman, Baldwin Young, declared the appeal out of order and no vote on
the ruling was taken. The Chairman then instructed the Corporate Secretary to
cast all the votes present and represented by proxy equally for the 6
nominees of the Philippine Investors and the 3 nominees of ASI, thus
effectively excluding the 2 additional persons nominated, namely, Luciano E.
Salazar and Charles Chamsay. The ASI representative, Mr. Jaqua protested the
decision of the Chairman and announced that all votes accruing to ASI shares,
a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and
instructed the Secretary to so vote. Luciano E. Salazar and other proxy holders
announced that all the votes owned by and or represented by them 467,197
shares (p. 27, Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in
favor of Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless
instructed the Secretary to cast all votes equally in favor of the three ASI
nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and
the six originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo,
Sr., Raul Boncan, Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee,
and Baldwin Young. The Secretary then certified for the election of the
following Wolfgang Aurbach, John Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, Raul
A. Boncan, Baldwin Young. The representative of ASI then moved to recess the
meeting which was duly seconded. There was also a motion to adjourn (p. 28,
Rollo, AC-G.R. SP No. 05617). This motion to adjourn was accepted by the
Chairman, Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment were
registered and having been ignored, Mr. Jaqua the ASI representative, stated
that the meeting was not adjourned but only recessed and that the meeting
would be reconvened in the next room. The Chairman then threatened to have
the stockholders who did not agree to the decision of the Chairman on the
casting of votes bodily thrown out. The ASI Group, Luciano E. Salazar and
other stockholders, allegedly representing 53 or 54% of the shares of

Saniwares, decided to continue the meeting at the elevator lobby of the

American Standard Building. The continued meeting was presided by Luciano
E. Salazar, while Andres Gatmaitan acted as Secretary. On the basis of the
cumulative votes cast earlier in the meeting, the ASI Group nominated its four
nominees; Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Chamsay. Luciano E. Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting Secretary, Andres Gatmaitan,
with the explanation that there was a tie among the other six (6) nominees for
the four (4) remaining positions of directors and that the body decided not to
break the tie. (pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities
and Exchange Commission (SEC). The first petition filed was for preliminary injunction by
Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo and George F. Lee against Luciano Salazar and Charles Chamsay. The
case was denominated as SEC Case No. 2417. The second petition was for quo warranto and
application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano
E. Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in
SEC Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both
sets of parties except for Avelino Cruz claimed to be the legitimate directors of the
corporation.
The two petitions were consolidated and tried jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo Group and dismissing the quo warranto
petition of Salazar and Chamsay. The ASI Group and Salazar appealed the decision to the
SEC en banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate
Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles Chamsay
(docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed as AC-G.R. SP No.
05617). The petitions were consolidated and the appellate court in its decision ordered the
remand of the case to the Securities and Exchange Commission with the directive that a new
stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the
supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate
court (Court of Appeals) rendered the questioned amended decision. Petitioners Wolfgang
Aurbach, John Griffin, David P. Whittingham and Charles Chamsay in G.R. No. 75875 assign
the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF
PRIVATE RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.

III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS

INTO THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH
ACTION IT CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the
following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding
contractual agreements entered into by stockholders and the replacement of
the conditions of such agreements with terms never contemplated by the
stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the
property rights of stockholders without due process of law in order that a
favored group of stockholders may be illegally benefitted and guaranteed a
continuing monopoly of the control of a corporation. (pp. 14-15, Rollo-7597576)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING
THAT THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS,
FAILS TO FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE
LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year
1983 during its annual stockholders' meeting held on March 8, 1983. To answer this question
the following factors should be determined: (1) the nature of the business established by the
parties whether it was a joint venture or a corporation and (2) whether or not the ASI Group
may vote their additional 10% equity during elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established among
themselves a joint venture or some other relation depends upon their actual intention which
is determined in accordance with the rules governing the interpretation and construction of
contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp 678;
Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)

The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention
of the parties should be viewed strictly on the "Agreement" dated August 15,1962 wherein it
is clearly stated that the parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder. (At
P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo and Young Group on
the ground that it contravenes the parol evidence rule under section 7, Rule 130 of the
Revised Rules of Court. According to them, the Lagdameo and Young Group never pleaded in
their pleading that the "Agreement" failed to express the true intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been
reduced to writing, it is to be considered as containing all such terms, and
therefore, there can be, between the parties and their successors in interest,
no evidence of the terms of the agreement other than the contents of the
writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the
true intent and agreement of the parties or the validity of the agreement is
put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and
Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true
intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the
parties thereto disclaim being partners or joint venturers such disclaimer is
directed at third parties and is not inconsistent with, and does not preclude,
the existence of two distinct groups of stockholders in Saniwares one of which
(the Philippine Investors) shall constitute the majority, and the other ASI shall
constitute the minority stockholder. In any event, the evident intention of the
Philippine Investors and ASI in entering into the Agreement is to enter into
ajoint venture enterprise, and if some words in the Agreement appear to be
contrary to the evident intention of the parties, the latter shall prevail over the
former (Art. 1370, New Civil Code). The various stipulations of a contract shall

be interpreted together attributing to the doubtful ones that sense which may
result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in
order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered. (Art. 1371, New Civil
Code). (Part I, Original Records, SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties
joined their efforts in furtherance of an enterprise for their joint profit, the
question whether they intended by their agreement to create a joint
adventure, or to assume some other relation is a question of fact for the jury.
(Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex.
Civ. A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as
the testimonial evidence presented by the Lagdameo and Young Group shows that the
parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy making
body are all consistent with a joint venture and not with an ordinary corporation. As stated
by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated
the Agreement with ASI in behalf of the Philippine nationals. He testified that
ASI agreed to accept the role of minority vis-a-vis the Philippine National
group of investors, on the condition that the Agreement should contain
provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included
to protect the interests of ASI as the minority. For example, the vote of 7 out of
9 directors is required in certain enumerated corporate acts [Sec. 3 (b) (ii) (a)
of the Agreement]. ASI is contractually entitled to designate a member of the
Executive Committee and the vote of this member is required for certain
transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of
the articles and by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also
given the right to designate the president and plant manager [Sec. 5 (6)]. The
Agreement further provides that the sales policy of Saniwares shall be that
which is normally followed by ASI [Sec. 13 (a)] and that Saniwares should not
export "Standard" products otherwise than through ASI's Export Marketing
Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology
and know-how to Saniwares and the latter paid royalties for the same. (At p.
2).
xxx xxx xxx

It is pertinent to note that the provisions of the Agreement requiring a 7 out of

9 votes of the board of directors for certain actions, in effect gave ASI (which
designates 3 directors under the Agreement) an effective veto power.
Furthermore, the grant to ASI of the right to designate certain officers of the
corporation; the super-majority voting requirements for amendments of the
articles and by-laws; and most significantly to the issues of tms case, the
provision that ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there are two
distinct groups in Saniwares, namely ASI, which owns 40% of the capital stock
and the Philippine National stockholders who own the balance of 60%, and
that 2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two
groups of stockholders who established a corporation with provisions for a
special contractual relationship between the parties, i.e., ASI and the other
stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected"
in the selection of the nine directors on a six to three ratio. Each group is assured of a fixed
number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin
Young also testified that Section 16(c) of the Agreement that "Nothing herein contained shall
be construed to constitute any of the parties hereto partners or joint venturers in respect of
any transaction hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the technology and
marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a firm in
exchange for its manufacturing expertise, use of its brand names, and other such
assistance. However, there is always a danger from such arrangements. The foreign group
may, from the start, intend to establish its own sole or monopolistic operations and merely
uses the joint venture arrangement to gain a foothold or test the Philippine waters, so to
speak. Or the covetousness may come later. As the Philippine firm enlarges its operations
and becomes profitable, the foreign group undermines the local majority ownership and
actively tries to completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to say the least. To the
extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of their voting
rights.

Sec. 100. Agreements by stockholders.xxx xxx xxx

2. An agreement between two or more stockholders, if in writing and signed
by the parties thereto, may provide that in exercising any voting rights, the
shares held by them shall be voted as therein provided, or as they may agree,
or as determined in accordance with a procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation
Code's chapter on close corporations and Saniwares cannot be a close
corporation because it has 95 stockholders. Firstly, although Saniwares had 95
stockholders at the time of the disputed stockholders meeting, these 95
stockholders are not separate from each other but are divisible into groups
representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for
another 13 stockholders, the Chamsay family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7 stockholders, etc. If the members
of one family and/or business or interest group are considered as one (which,
it is respectfully submitted, they should be for purposes of determining how
closely held Saniwares is there were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of
appellees' Rejoinder Memorandum dated 11 December 1984 and Annex "A"
thereof).
Secondly, even assuming that Saniwares is technically not a close corporation
because it has more than 20 stockholders, the undeniable fact is that it is
a close-held corporation. Surely, appellants cannot honestly claim that
Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint
venture corporations and have not rigidly applied principles of corporation law
designed primarily for public issue corporations. These courts have indicated
that express arrangements between corporate joint ventures should be
construed with less emphasis on the ordinary rules of law usually applied to
corporate entities and with more consideration given to the nature of the
agreement between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des Moines Union
Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v. Atlantic Coast Line Ry; 240
N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md., 212,113 A 2d 903;
Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p. 680,1958). These American cases dealt
with legal questions as to the extent to which the requirements arising from
the corporate form of joint venture corporations should control, and the courts
ruled that substantial justice lay with those litigants who relied on the joint
venture agreement rather than the litigants who relied on the orthodox
principles of corporation law.

As correctly held by the SEC Hearing Officer:

It is said that participants in a joint venture, in organizing the joint venture
deviate from the traditional pattern of corporation management. A noted
authority has pointed out that just as in close corporations, shareholders'
agreements in joint venture corporations often contain provisions which do
one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3) give to the
shareholders control over the selection and retention of employees; and (4)
set up a procedure for the settlement of disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily
imply that agreements regarding the exercise of voting rights are allowed only
in close corporations. As Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this
provision necessarily imply that these agreements can be valid only in close
corporations as defined by the Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as a close corporation under
section 96, can some of them enter into an agreement to vote as a unit in the
election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not
voting or pooling agreements to protect their interests, as long as they do not
intend to commit any wrong, or fraud on the other stockholders not parties to
the agreement. Of course, voting or pooling agreements are perhaps more
useful and more often resorted to in close corporations. But they may also be
found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with the
requisites laid down by section 96, it is entirely possible that a corporation
which is in fact a close corporation will not come within the definition. In such
case, its stockholders should not be precluded from entering into contracts
like voting agreements if these are otherwise valid. (Campos & Lopez-Campos,
op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the
designation or nomination of directors restricts the right of the Agreement's
signatories to vote for directors, such contractual provision, as correctly held
by the SEC, is valid and binding upon the signatories thereto, which include
appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity
during elections of Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the
management of the corporation is spelled out in the Agreement. Section 5(a)

hereof says that three of the nine directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the Filipino stockholders. This
allocation of board seats is obviously in consonance with the minority position
of ASI.
Having entered into a well-defined contractual relationship, it is imperative
that the parties should honor and adhere to their respective rights and
obligations thereunder. Appellants seem to contend that any allocation of
board seats, even in joint venture corporations, are null and void to the extent
that such may interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should not be
prepared to hold that any agreement which curtails in any way cumulative
voting should be struck down, even if such agreement has been freely entered
into by experienced businessmen and do not prejudice those who are not
parties thereto. It may well be that it would be more cogent to hold, as the
Securities and Exchange Commission has held in the decision appealed from,
that cumulative voting rights may be voluntarily waived by stockholders who
enter into special relationships with each other to pursue and implement
specific purposes, as in joint venture relationships between foreign and local
stockholders, so long as such agreements do not adversely affect third
parties.
In any event, it is believed that we are not here called upon to make a general
rule on this question. Rather, all that needs to be done is to give life and effect
to the particular contractual rights and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established minority position of ASI and the
contractual allocation of board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to cumulative voting should also be
protected.
In our decision sought to be reconsidered, we opted to uphold the second over
the first. Upon further reflection, we feel that the proper and just solution to
give due consideration to both factors suggests itself quite clearly. This Court
should recognize and uphold the division of the stockholders into two groups,
and at the same time uphold the right of the stockholders within each group
to cumulative voting in the process of determining who the group's nominees
would be. In practical terms, as suggested by appellant Luciano E. Salazar
himself, this means that if the Filipino stockholders cannot agree who their six
nominees will be, a vote would have to be taken among the Filipino
stockholders only. During this voting, each Filipino stockholder can cumulate
his votes. ASI, however, should not be allowed to interfere in the voting within
the Filipino group. Otherwise, ASI would be able to designate more than the
three directors it is allowed to designate under the Agreement, and may even
be able to get a majority of the board seats, a result which is clearly contrary
to the contractual intent of the parties.

Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to Section 24 of the Corporation Code which
gives the stockholders of a corporation the right to cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted to the ASI Group would not necessarily mean
a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites section
2-a thereof which provides:
And provided finally that the election of aliens as members of the board of
directors or governing body of corporations or associations engaging in
partially nationalized activities shall be allowed in proportion to their allowable
participation or share in the capital of such entities. (amendments introduced
by Presidential Decree 715, section 1, promulgated May 28, 1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation
Code. The point of query, however, is whether or not that provision is applicable to a joint
venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise
legal definition but it has been generally understood to mean an organization
formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920])
It is in fact hardly distinguishable from the partnership, since their elements
are similar community of interest in the business, sharing of profits and losses,
and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal.
2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited by
most opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the
joint venture is formed for the execution of a single transaction, and is thus of
a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266
Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that under Philippine law, a joint
venture is a form of partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a distinction
between these two business forms, and has held that although a corporation
cannot enter into a partnership contract, it may however engage in a joint
venture with others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)

Moreover, the usual rules as regards the construction and operations of contracts generally
apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the
question of whether or not the ASI Group may vote their additional equity lies in the
agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties as
regards the allocation of director seats under Section 5 (a) of the "Agreement," and the right
of each group of stockholders to cumulative voting in the process of determining who the
group's nominees would be under Section 3 (a) (1) of the "Agreement." As pointed out by
SEC, Section 5 (a) of the Agreement relates to the manner of nominating the members of
the board of directors while Section 3 (a) (1) relates to the manner of voting for these
nominees.
This is the proper interpretation of the Agreement of the parties as regards the election of
members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director
who would be beholden to them would obliterate their minority status as agreed upon by the
parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may even be
able to get a majority of the board seats, a result which is clearly contrary to
the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the
stockholder's right to cumulative voting. Moreover, this ruling will also give
due consideration to the issue raised by the appellees on possible violation or
circumvention of the Anti-Dummy Law (Com. Act No. 108, as amended) and
the nationalization requirements of the Constitution and the laws if ASI is
allowed to nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the enterprise
in violation of the nationalization requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position is that the
Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in
the capital of the entity. It is to be noted, however, that the same law also limits the election
of aliens as members of the board of directors in proportion to their allowance
participation of said entity. In the instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable participation of the ASI Group. Hence, in
future dealings, this limitation of six to three board seats should always be maintained as
long as the joint venture agreement exists considering that in limiting 3 board seats in the 9man board of directors there are provisions already agreed upon and embodied in the

parties' Agreement to protect the interests arising from the minority status of the foreign
investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which were
impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach, John Griffin,
David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A. Boncan, Emesto V.
Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly elected directors of
Saniwares at the March 8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to
a cumulative voting during the election of the board of directors of the enterprise as ruled by
the appellate court and submits that the six (6) directors allotted the Filipino stockholders
should be selected by consensus pursuant to section 5 (a) of the Agreement which uses the
word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise if the
Filipino stockholders are allowed to select their nominees separately and not as a common
slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of board
directors should not be interpreted in isolation. This should be construed in relation to
section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1) relates to
the manner of voting for these nominees which is cumulative voting while section 5(a)
relates to the manner of nominating the members of the board of directors. The petitioners
in G.R. No. 75951 agreed to this procedure, hence, they cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the
cumulative voting procedure cannot, however, be ignored. The validity of the cumulative
voting procedure is dependent on the directors thus elected being genuine members of the
Filipino group, not voters whose interest is to increase the ASI share in the management of
Saniwares. The joint venture character of the enterprise must always be taken into account,
so long as the company exists under its original agreement. Cumulative voting may not be
used as a device to enable ASI to achieve stealthily or indirectly what they cannot
accomplish openly. There are substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to maintain the minority
status of the foreign investors group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED. The amended decision of the Court of Appeals
is MODIFIED in that Messrs. Wolfgang Aurbach John Griffin, David Whittingham Emesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee are declared as the duly elected directors of Saniwares at the March 8,1983
annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED.
Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue
the sum of P1,863.44, with legal interest thereon, which they paid under protest by way of
income tax. They appealed from the decision rendered in the case on October 23, 1936 by
the Court of First Instance of the City of Manila, which dismissed the action with the costs
against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable
Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the
amounts as follows:
1. Jose Gatchalian ....................................................................................................

P0.18

2. Gregoria Cristobal ...............................................................................................

.18

3. Saturnina Silva ....................................................................................................

.08

4. Guillermo Tapia ...................................................................................................

.13

5. Jesus Legaspi ......................................................................................................

.15

6. Jose Silva .............................................................................................................

.07

7. Tomasa Mercado ................................................................................................

.08

8. Julio Gatchalian ...................................................................................................

.13

9. Emiliana Santiago ................................................................................................

.13

10. Maria C. Legaspi ...............................................................................................

.16

11. Francisco Cabral ...............................................................................................

.13

12. Gonzalo Javier ....................................................................................................

.14

13. Maria Santiago ...................................................................................................

.17

14. Buenaventura Guzman ......................................................................................

.13

15. Mariano Santos .................................................................................................

.14

Total ........................................................................................................

2.00

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased,
in the ordinary course of business, from one of the duly authorized agents of the

National Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of
two pesos (P2) and that the said ticket was registered in the name of Jose Gatchalian
and Company;
4. That as a result of the drawing of the sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637 won one of the third prizes in the
amount of P50,000 and that the corresponding check covering the above-mentioned
prize of P50,000 was drawn by the National Charity Sweepstakes Office in favor of
Jose Gatchalian & Company against the Philippine National Bank, which check was
cashed during the latter part of December, 1934 by Jose Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner
Alfredo David to file the corresponding income tax return covering the prize won by
Jose Gatchalian & Company and that on December 29, 1934, the said return was
signed by Jose Gatchalian, a copy of which return is enclosed as Exhibit A and made a
part hereof;
6. That on January 8, 1935, the defendant made an assessment against Jose
Gatchalian & Company requesting the payment of the sum of P1,499.94 to the
deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian &
Company until January 20, 1935 within which to pay the said amount of P1,499.94, a
copy of which letter marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is attached and made a part hereof,
requesting exemption from payment of the income tax to which reply there were
enclosed fifteen (15) separate individual income tax returns filed separately by each
one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to
D-15, respectively, in order of their names listed in the caption of this case and made
parts hereof; a statement of sale signed by Jose Gatchalian showing the amount put
up by each of the plaintiffs to cover up the attached and marked as Exhibit E and
made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption
from the payment of tax and reiterated his demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs until February 10, 1935 within which to
pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by
the defendant, notwithstanding subsequent demand made by defendant upon the
plaintiffs through their attorney on March 23, 1935, a copy of which marked Exhibit H
is enclosed, defendant on May 13, 1935 issued a warrant of distraint and levy against
the property of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed
and made a part hereof;
10. That to avoid embarrassment arising from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C.
Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax
and penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced by official
receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof,
and requested defendant that plaintiffs be allowed to pay under protest the balance
of the tax and penalties by monthly installments;

11. That plaintiff's request to pay the balance of the tax and penalties was granted by
defendant subject to the condition that plaintiffs file the usual bond secured by two
solvent persons to guarantee prompt payment of each installments as it becomes
due;
12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to guarantee the payment of the balance of the
alleged tax liability by monthly installments at the rate of P118.70 a month, the first
payment under protest to be effected on or before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs formally protested against the payment of
the sum of P602.51, a copy of which protest is attached and marked Exhibit L, but
that defendant in his letter dated August 1, 1935 overruled the protest and denied
the request for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs to pay the monthly installments in
accordance with the terms and conditions of bond filed by them, the defendant in his
letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered
the municipal treasurer of Pulilan, Bulacan to execute within five days the warrant of
distraint and levy issued against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and embarrassment arising from the levy of
their property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo
Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal
treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance of
the income tax and penalties demanded by defendant as evidenced by income tax
receipt No. 35811 which is attached and marked Exhibit N and made a part hereof;
and that on September 3, 1936, the plaintiffs formally protested to the defendant
against the payment of said amount and requested the refund thereof, copy of which
is attached and marked Exhibit O and made part hereof; but that on September 4,
1936, the defendant overruled the protest and denied the refund thereof; copy of
which is attached and marked Exhibit P and made a part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one
thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44)
paid under protest by them but that defendant refused and still refuses to refund the
said amount notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to present other and additional evidence if
necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that
on the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to
the persons and for the amount indicated below and the part of may share remaining
is also shown to wit:
Purchaser
1. Mariano Santos ...........................................

Amount
P0.14

Address
Pulilan, Bulacan.

2. Buenaventura Guzman ...............................

.13

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose Gatchalian ............................................

.18

- Do -

2.00 Total cost of said

ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.

Name

Exhibit
No.

Purchas
e
Price

Price
Won

Net
prize

Expenses

1. Jose
Gatchalian .............................
.............

D-1

P0.18

P4,42
5

P 480

3,94
5

2. Gregoria
Cristobal ................................
......

D-2

.18

4,575

2,000

2,57
5

3. Saturnina
Silva ....................................... D-3
......

.08

1,875

360

1,51
5

4. Guillermo
Tapia ...................................... D-4
....

.13

3,325

360

2,96
5

5. Jesus Legaspi by Maria

Cristobal .........

D-5

.15

3,825

720

3,10
5

6. Jose
Silva ....................................... D-6
.............

.08

1,875

360

1,51
5

7. Tomasa
Mercado ................................. D-7
......

.07

1,875

360

1,51
5

8. Julio Gatchalian by Beatriz

Guzman .......

D-8

.13

3,150

240

2,91
0

9. Emiliana
Santiago ................................
......

D-9

.13

3,325

360

2,96
5

10. Maria C.
Legaspi ..................................
....

D-10

.16

4,100

960

3,14
0

11. Francisco
Cabral .................................... D-11
..

.13

3,325

360

2,96
5

12. Gonzalo
Javier .....................................
.....

D-12

.14

3,325

360

2,96
5

13. Maria
Santiago ................................
..........

D-13

.17

4,350

360

3,99
0

14. Buenaventura
Guzman ...........................

D-14

.13

3,325

360

2,96
5

15. Mariano
Santos .................................... D-15
....

.14

3,325

360

2,96
5

2.00

<="" td="" style="fontsize: 14px; text50,00 decoration: none; color:

0 rgb(0, 0, 128); font-family:
arial, verdana;">

The legal questions raised in plaintiffs-appellants' five assigned errors may properly be
reduced to the two following: (1) Whether the plaintiffs formed a partnership, or merely a
community of property without a personality of its own; in the first case it is admitted that
the partnership thus formed is liable for the payment of income tax, whereas if there was
merely a community of property, they are exempt from such payment; and (2) whether they
should pay the tax collectively or whether the latter should be prorated among them and
paid individually.

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last
amended by section 2 of Act No. 3761, reading as follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
total net income received in the preceding calendar year from all sources by every
corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association or insurance company, organized in the Philippine Islands,
no matter how created or organized, but not including duly registered general
copartnership (compaias colectivas), a tax of three per centum upon such income;
and a like tax shall be levied, assessed, collected, and paid annually upon the total
net income received in the preceding calendar year from all sources within the
Philippine Islands by every corporation, joint-stock company, partnership, joint
account (cuenta en participacion), association, or insurance company organized,
authorized, or existing under the laws of any foreign country, including interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise: Provided, however, That nothing in this section shall be construed as
permitting the taxation of the income derived from dividends or net profits on which
the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation,
joint-stock company, partnership, joint account (cuenta en participacion), association,
or insurance company, or property, real, personal, or mixed, shall be ascertained in
accordance with subsections (c) and (d) of section two of Act Numbered Two
thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine
hundred and twenty-six.
The foregoing tax rate shall apply to the net income received by every taxable
corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company in the calendar year nineteen
hundred and twenty and in each year thereafter.
There is no doubt that if the plaintiffs merely formed a community of property the latter is
exempt from the payment of income tax under the law. But according to the stipulation facts
the plaintiffs organized a partnership of a civil nature because each of them put up money to
buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may
win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership
was not only formed, but upon the organization thereof and the winning of the prize, Jose
Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his
capacity as co-partner, as such collection the prize, the office issued the check for P50,000
in favor of Jose Gatchalian and company, and the said partner, in the same capacity,
collected the said check. All these circumstances repel the idea that the plaintiffs organized
and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one
bound to pay the income tax which the defendant collected under the aforesaid section 10
(a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's
contention that the tax should be prorated among them and paid individually, resulting in
their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to
the plaintiffs appellants. So ordered.
G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA,

MARIANO B. OA, LUZ B. OA, VIRGINIA B. OA and LORENZO B. OA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly
entitled as above, holding that petitioners have constituted an unregistered partnership and
are, therefore, subject to the payment of the deficiency corporate income taxes assessed
against them by respondent Commissioner of Internal Revenue for the years 1955 and 1956
in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December
15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as
amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the
resolution of said court denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oa and her five children. In 1948, Civil Case No. 4519 was
instituted in the Court of First Instance of Manila for the settlement of her
estate. Later, Lorenzo T. Oa the surviving spouse was appointed
administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.).
On April 14, 1949, the administrator submitted the project of partition, which
was approved by the Court on May 16, 1949 (See Exhibit K). Because three of
the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oa, were still
minors when the project of partition was approved, Lorenzo T. Oa, their
father and administrator of the estate, filed a petition in Civil Case No. 9637 of
the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the
persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the
heirs have undivided one-half (1/2) interest in ten parcels of land with a total
assessed value of P87,860.00, six houses with a total assessed value of
P17,590.00 and an undetermined amount to be collected from the War
Damage Commission. Later, they received from said Commission the amount
of P50,000.00, more or less. This amount was not divided among them but
was used in the rehabilitation of properties owned by them in common (t.s.n.,
p. 46). Of the ten parcels of land aforementioned, two were acquired after the
death of the decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR
rec.).
The project of partition also shows that the estate shares equally with Lorenzo
T. Oa, the administrator thereof, in the obligation of P94,973.00, consisting of
loans contracted by the latter with the approval of the Court (see p. 3 of
Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949,
no attempt was made to divide the properties therein listed. Instead, the
properties remained under the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real properties
and securities. As a result, petitioners' properties and investments gradually

increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be

gleaned from the following year-end balances:

Y
e
a
r

Inves
tmen
t

La
nd

Bui
ldin
g

Acco
unt

Ac
co
unt

Acc
ou
nt

1949

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as

profits from installment sales of subdivided lots, profits from sales of stocks,
dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp.
37-38). The said incomes are recorded in the books of account kept by
Lorenzo T. Oa where the corresponding shares of the petitioners in the net
income for the year are also known. Every year, petitioners returned for
income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit
3, supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their
shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
always left in the hands of Lorenzo T. Oa who, as heretofore pointed out,
invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal
Revenue) decided that petitioners formed an unregistered partnership and
therefore, subject to the corporate income tax, pursuant to Section 24, in
relation to Section 84(b), of the Tax Code. Accordingly, he assessed against
the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income
taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17,
pp. 50 and 86, BIR rec.). Petitioners protested against the assessment and
asked for reconsideration of the ruling of respondent that they have formed an
unregistered partnership. Finding no merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in
line with the ruling of the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned
assessment refers solely to the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the latter item obviously referring

to the compromise in lieu of the criminal liability for failure of petitioners to

file the corporate income tax returns for said years. (See Exh. 17, page 86, BIR
records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS
PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the
facts found by the Court of Tax Appeals, should petitioners be considered as co-owners of
the properties inherited by them from the deceased Julia Buales and the profits derived
from transactions involving the same, or, must they be deemed to have formed an
unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal
Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not
be only in the sense that they invested as a common fund the profits earned by the
properties owned by them in common and the loans granted to them upon the security of
the said properties, with the result that as far as their respective shares in the inheritance
are concerned, the total income thereof should be considered as that of co-owners and not
of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same
years 1955 and 1956 as individual income taxes on their respective shares of the profits

accruing from the properties they owned in common be deducted from the deficiency
corporate taxes, herein involved, assessed against such unregistered partnership by the
respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as May 16, 1949, and presumably
petitioners have been holding their respective shares in their inheritance since those dates
admittedly under the administration or management of the head of the family, the widower
and father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and
1956. We believe this point to be important because, apparently, at the start, or in the years
1944 to 1954, the respondent Commissioner of Internal Revenue did treat petitioners as coowners, not liable to corporate tax, and it was only from 1955 that he considered them as
having formed an unregistered partnership. At least, there is nothing in the record indicating
that an earlier assessment had already been made. Such being the case, and We see no
reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact that
they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oa who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceed from the sales
thereof in real properties and securities," as a result of which said properties and
investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in
"building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all these became possible
because, admittedly, petitioners never actually received any share of the income or profits
from Lorenzo T. Oa and instead, they allowed him to continue using said shares as part of
the common fund for their ventures, even as they paid the corresponding income taxes on
the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during
the material years herein involved, some of the said properties were sold at considerable
profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase
and sale of corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with their respective
shares in the inheritance. In these circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an
unregistered partnership within the purview of the above-mentioned provisions of the Tax
Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of
our corporate tax laws aforementioned. Before the partition and distribution of the estate of
the deceased, all the income thereof does belong commonly to all the heirs, obviously,
without them becoming thereby unregistered co-partners, but it does not necessarily follow

that such status as co-owners continues until the inheritance is actually and physically
distributed among the heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares under the common
management of the administrator or executor or of anyone chosen by them and engage in
business on that basis. Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the
National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for
holding the appellants therein to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes,
the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share to be held in common
with his co-heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing 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," and, for that matter, on any other provision of
said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of unregistered
partnerships which are considered as "corporations" under Sections 24 and 84(b) of the
National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned
tax "duly registered general partnerships," which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation includes partnerships, no
matter how created or organized." This qualifying expression clearly indicates
that a joint venture need not be undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporation.
Again, pursuant to said section 84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en participacion)" and "associations", none of
which has a legal personality of its own, independent of that of its members.

Accordingly, the lawmaker could not have regarded that personality as a

condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" which are
possessed of the aforementioned personality have been expressly excluded
by law (sections 24 and 84[b]) from the connotation of the term "corporation."
....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term
"partnership" it includes not only a partnership as known in
common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries on
any business, financial operation, or venture, and which is not,
within the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal Income Taxation, p.
789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is
carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships with the exception only of duly registered
general copartnerships within the purview of the term "corporation." It is,
therefore, clear to our mind that petitioners herein constitute a partnership,
insofar as said Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled
against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes
of the corporate taxes in question, of their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of the Tax Court in denying
their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other words,
the taxable income of the partnership should be limited to the income derived
from the acquisition and sale of real properties and corporate securities and
should not include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived therefrom were
used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the
income derived from the purchase and sale of other properties but also the
income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or
estate is not distributed or, at least, partitioned, but the moment their respective known
shares are used as part of the common assets of the heirs to be used in making profits, it is
but proper that the income of such shares should be considered as the part of the taxable
income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the
Tax Court in the aforementioned resolution denying petitioners' motion for reconsideration of
the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court
that the herein petitioners have formed an unregistered
partnership and, therefore, have to be taxed as such, it might
be recalled that the petitioners in their individual income tax
returns reported their shares of the profits of the unregistered
partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on
their respective shares of the unregistered partnership should
be deducted from the deficiency income tax found by this
Honorable Court against the unregistered partnership. (page 7,
Memorandum for the Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income tax
assessed against the partnership. Consequently, each of the petitioners in his
individual capacity overpaid his income tax for the years in question, but the
income tax due from the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they
might have paid as individual income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do not agree. As
We see it, the case of petitioners as regards the point under discussion is simply that of a
taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right to be reimbursed what
he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not
seem right to virtually disregard prescription merely upon the ground that the reason for the
delay is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their
conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.