Gatchalian vs.

Collector of Internal Revenue

[G.R. No. L-45425, April 29, 1939]

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

Facts:
Plaintiffs purchased, in the ordinary course of business, from one of
the duly authorized agents of the National Charity Sweepstakes
Office one ticket for the sum of two pesos (P2), said ticket was
registered in the name of Jose Gatchalian and Company. The ticket
won one of the third-prizes in the amount of P50,000.
Jose Gatchalian was required to file the corresponding income tax
return covering the prize won. Defendant-Collector made an
assessment against Jose Gatchalian and Co. requesting the
payment of the sum of P1,499.94 to the deputy provincial treasurer
of Pulilan, Bulacan. Plaintiffs, however through counsel made a
request for exemption. It was denied.
Plaintiffs failed to pay the amount due, hence a warrant of distraint
and levy was issued. Plaintiffs paid under protest a part of the tax
and penalties to avoid the effects of the warrant. A request that the
balance be paid by plaintiffs in installments was made. This was
granted on the condition that a bond be filed.
Plaintiffs failed in their installment payments. Hence a request for
execution of the warrant of distraint and levy was made. Plaintiffs
paid under protest to avoid the execution.
A claim for refund was made by the plaintiffs, which was dismissed,
hence the appeal.

Held:
Yes. According to the stipulation facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to
buy a sweepstakes ticket for the sole purpose of dividing equally the
prize which they may win, as they did in fact in the amount of
P50,000. The partnership was not only formed, but upon the
organization thereof and the winning of the prize, Jose Gatchalian
personally appeared in the office of the Philippines Charity
Sweepstakes, in his capacity as co-partner, as such collection the
prize, the office issued the check for P50,000 in favor of Jose
Gatchalian and company, and the said partner, in the same capacity,
collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.

Ona vs. Commissioner of Internal Revenue

Facts:
In 1944 Lorenzo Ona was appointed administrator of the estate of
his late wife Julia Bunales. The administrator submitted the project
of partition, which was approved by the court. However, there was
no attempt was made to divide the properties among his5 children.
Instead, the properties remained under the management of Lorenzo
who used the said properties in business by leasing or selling them
and investing the income derived therefrom. In the years 1944 to
1954, respondent CIR did treat petitioners as co-owners, not liable
to corporate tax, and it was only from 1955that CIR considered them
as having formed an unregistered partnership.
Issue:
W/N an unregistered partnership was formed.
Held:
Yes. It is admitted that all profits from these ventures were divided
among petitioners proportionately in accordance with their
respective shares in the inheritance.
From the moment petitioners allowed not only the incomes from their
respective shares but even the properties themselves to be used by
Lorenzo as a common fund in undertaking several transactions or
business, with the intention of deriving profit to be shared by them
proportionately, such act was tantamount to actually contributing
such incomes to a common fund and, in effect they thereby formed
an unregistered partnership taxable by law.

Obillos vs. Commissioner of Internal Revenue

Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of
1,124 and 963 square meters of located at Greenhills, San Juan,
Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The Torrens
titles issued to them showed that they were co-owners of the two
lots. In 1974, or after having held the two lots for more than a year,
the petitioners resold them to the Walled City Securities Corporation
and Olga Cruz Canada for the total sum of P313,050. They derived
from the sale a total profit of P134, 341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an income
tax on one-half thereof or of P16,792. In April, 1980, the
Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition
to individual income tax on their shares thereof. The petitioners are
being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on
capital gains already paid by them. The Commissioner acted on the
theory that the four petitioners had formed an unregistered
partnership or joint venture. The petitioners contested the
assessments. Two Judges of the Tax Court sustained the same.
Hence, the instant appeal.

oppressive taxation and confirm the dictum that the power to tax
involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They
were co-owners pure and simple. To consider them as partners
would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture
by reason of that isolated transaction.
Article 1769(3) of the Civil Code provides that "the sharing of gross
returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any
property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.*
Their original purpose was to divide the lots for residential purposes.
If later on they found it not feasible to build their residences on the
lots because of the high cost of construction, then they had no
choice but to resell the same to dissolve the co-ownership. The
division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It
had to be terminated sooner or later. They did not contribute or
invest additional capital to increase or expand the properties, nor
was there an unmistakable intention to form partnership or joint
venture.

Issue:

WHEREFORE, the judgment of the Tax Court is reversed and set

aside. The assessments are cancelled. No costs.

Whether or not the petitioners had indeed formed a partnership or

joint venture and thus liable for corporate tax.

All co-ownerships are not deemed unregistered partnership.

Held:
The Supreme Court held that the petitioners should not be
considered to have formed a partnership just because they allegedly
contributed P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves. To regard so would result in

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 Coownerships 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.
Lim vs. Philippine Fishing Gear Industries Inc.

FACTS:
Lim Tong Lim requested Peter Yao and Antonio Chuato engage in
commercial fishing with him. The three agreed to purchase two
fishing boats but since they do not have the money they borrowed
from one Jesus Lim the brother of Lim Tong Lim. Subsequently, they
again borrowed money for the purchase of fishing nets and other
fishing equipment. Yao and Chua represented themselves as acting
in behalf of Ocean Quest Fishing Corporation (OQFC) and they
contracted with Philippine Fishing Gear Industries (PFGI) for the
purchase of fishing nets amounting to more than P500k. However,
they were unable to pay PFGI and hence were sued in their own
names as Ocean Quest Fishing Corporation is a non-existent
corporation. Chua admitted his liability while Lim Tong Lim refused
such liability alleging that Chua and Yao acted without his
knowledge and consent in representing themselves as a
corporation.

ISSUE:
Whether Lim Tong Lim is liable as a partner

HELD:
Yes. It is apparent from the factual milieu that the three decided to
engage in a fishing business. Moreover, their Compromise
Agreement had revealed their intention to pay the loan with the

proceeds of the sale and to divide equally among them the excess
or loss. The boats and equipment used for their business entails
their common fund. The contribution to such fund need not be cash
or fixed assets; it could be an intangible like credit or industry. That
the parties agreed that any loss or profit from the sale and operation
of the boats would be divided equally among them also shows that
they had indeed formed a partnership. The principle of corporation
by estoppel cannot apply in the case as Lim Tong Lim also benefited
from the use of the nets in the boat, which was an asset of the
partnership. Under the law on estoppel, those acting in behalf of a
corporation and those benefited by it, knowing it to be without valid
existence are held liable as general partners. Hence, the question as
to whether such was legally formed for unknown reasons is
immaterial to the case.

HELD:

Aurelio Litonjua Jr vs Eduardo Litonjua Sr. et al

No. The partnership is void and legally nonexistent. The

documentary evidence presented by Aurelio, i.e. the letter from
Eduardo and the Memorandum, did not prove partnership.

Aurelio and Eduardo are brothers. In 1973, Aurelio alleged that

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

The 1973 letter from Eduardo on its face, contains typewritten

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

FACTS:

In 1992 however, the relationship between the brothers went sour.

And so Aurelio demanded an accounting and the liquidation of his
share in the partnership. Eduardo did not heed and so Aurelio sued
Eduardo.

ISSUE:
Whether or not there exists a partnership.

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