OBILLOS v.

COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS

139 SCRA 436
October 29, 1985

By: Tristan Jan P. Bagat

PONENTE: AQUINO, J.
FACTS:

Jose Obillos Sr. bought two lots at Greenhills, San Juan, Rizal from Ortigas & Co., Ltd.
He transferred his rights to his four children for them to build their residences. The titles
issued showed the siblings as co-owners of the lots.

After more than a year, the children sold the lots to Walled City Securities
Corporation and Olga Cruz Canda. They earned a profit of P134,341.88 total, or P33,584 for
each of them. Treating the profit as a capital gain, they paid income tax on P16,792 each.

The Commissioner of Internal Revenue assessed the siblings for corporate income
tax on the total profit of P134,341.88, in addition to the individual income tax on their
shares. He assessed them corporate income tax of P37,018, P18,509 as surcharge, and
P15,547.56 as interest for a total of P71,074.56. He also held each of them liable for income
tax in the full amount of P33,584, not capital gain on the ½. The Commissioner claimed that
the siblings had formed an unregistered partnership or joint venture within the meaning of
the tax code.

ISSUE: Whether the siblings are liable for corporate income tax as an unregistered
partnership

RULING:

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
co-ownership and a partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on
they found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the co-ownership.
The division of the profit was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be terminated sooner or later