8.

Pascual vs. CIR and CA

G.R. No. 78133, October 18, 1988

Facts:

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino,
et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The
first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on
March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years.

On March 31, 1979, Acting BIR Commissioner Efren I. Plana wrote a letter wherein
etitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency
corporate income taxes for the years 1968 and 1970. Plana informed the petitioners that they
formed and unregistered partnership and that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership.

The CA affirmed the decision of the BIR Commissioner. Hence, this petition.

Issue:

Did the petitioner formed an unregistered partnership subject to corporate income tax?

Ruling:

No, the petitioner did not form an unregistered partnership subject to corporate income
tax.

Article 1767 of the Civil Code of the Philippines states that “By the contract of partnership
two or more persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.”

In this case, In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and such a community of
interest, as far as third persons are concerned as enables each party to make contract, manage
the business, and dispose of the whole property. There is no evidence that petitioners entered
into an agreement to contribute money, property, or industry to a common fund, and that they
intended to divide the profits among themselves. Respondent commissioner and/ or his
representative just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership.
Also, for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets
that can be held liable for said deficiency corporate income tax, then petitioners can be held
individually liable as partners for this unpaid obligation of the partnership. However, as petitioners
have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are
thereby relieved of any further tax liability arising therefrom.
 9.

Philex Mining Corp. vs. CIR

G.R. No. 148187, April 16, 2008

Facts:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and
operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay,
Benguet Province. The parties’ agreement was denominated as "Power of Attorney". In the
course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered
continuing losses over the years which resulted to petitioner’s withdrawal as manager of the mine
on January 28, 1982 and in the eventual cessation of mine operations on February 20, 1982.
Petitioner deducted from its gross income the amount of P112,136,000.00 as "loss on settlement
of receivables from Baguio Gold against reserves and allowances in its 1982 annual income tax
return. However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction for
bad debt and assessed petitioner a deficiency income tax of P62,811,161.39. Petitioner protested
before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied. The BIR denied petitioner’s protest for lack of legal and factual basis.
The CTA affirmed the decision of the BIR and held that the "Power of Attorney" executed by
petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount
partook of the nature of an investment, it could not be deducted as a bad debt from petitioner’s
gross income. The Court of Appeals affirmed the decision of the CTA.

Issue:

Is there a partnership between Philex and Baguio Gold that will lead to

Ruling:

Yes, there is a partnership between Philex and Baguio Gold.

Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a
share in the profits of a business is prima facie evidence that he is a partner in the business."

In this case, it should be stressed that the main object of the "Power of Attorney" was not
to confer a power in favor of petitioner to contract with third persons on behalf of Baguio Gold but
to create a business relationship between petitioner and Baguio Gold, in which the former was to
manage and operate the latter’s mine through the parties’ mutual contribution of material
resources and industry. The totality of the circumstances and the stipulations in the parties’
agreement indubitably lead to the conclusion that a partnership was formed between petitioner
and Baguio Gold. It was unlikely for a business corporation to lend hundreds of millions of pesos
to another corporation with neither security, or collateral, nor a specific deed evidencing the terms
and conditions of such loans. The parties also did not provide a specific maturity date for the
advances to become due and demandable, and the manner of payment was unclear. All these
point to the inevitable conclusion that the advances were not loans but capital contributions to a
partnership. Petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the
deduction claimed. The petitioner failed to substantiate its assertion that the advances were
subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it
could not claim the advances as a valid bad debt deduction.
 10.

Deluao vs Casteel

G.R. No. L-21906, December 24, 1968

Facts:

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in the
then Sitio of Malalag, Municipality of Padada, Davao. No action was taken thereon by the
authorities concerned. During the Japanese occupation, he filed another fishpond application for
the same area, but because of the conditions then prevailing, it was not acted upon either. On
December 12, 1945, he filed a third fishpond application for the same area, which, after a survey,
was found to contain 178.76 hectares. Upon investigation conducted by a representative of the
Bureau of Forestry, it was discovered that the area applied for was still needed for firewood
production. Hence on May 13, 1946 this third application was disapproved. Meanwhile, several
applications were submitted by other persons for portions of the area covered by Casteel's
application. Petitioner realized the urgent necessity of expanding his occupation thereof by
constructing dikes and cultivating marketable fishes, in order to prevent old and new squatters
from usurping the land. The Director of Fisheries nevertheless rejected Casteel's application on
October 25, 1949, required him to remove all the improvements which he had introduced on the
land, and ordered that the land be leased through public auction. On September 15, 1950 the
Secretary of Agriculture and Natural Resources issued a decision that Castel should be
reinstated and given due course for the area indicated. Sometime in January 1951 Nicanor
Casteel forbade Inocencia Deluao from further administering the fishpond, and ejected the latter's
representative (encargado), Jesus Donesa, from the premises. Inocencia Deluao filed an action
in the Court of First Instance of Davao for specific performance and damages against Nicanor
Casteel and Juan Depra. Casteel filed a motion to dissolve the injunction, alleging among others,
that he was the owner, lawful applicant and occupant of the fishpond in question.

Issue:

Did the reinstatement of Castel constituted a dissolution of partnerhsip between Him and
Deluao?

Ruling:

Yes, the reinstatement of Castel constituted a dissolution of partnerhsip between Him

and Deluao.

The Supreme Court ruled that the arrangement under the so-called "contract of service"
continued until the decision both dated Sept. 15, 1950 were issued by the Secretary of Agriculture
and Natural Resources in DANR Cases 353 and 353-B. This development, by itself, brought
about the dissolution of the partnership. Since the partnership had for its object the division into
two equal parts of the fishpond between the appellees and the appellant after it shall have been
awarded to the latter, and therefore it envisaged the unauthorized transfer of one half thereof to
parties other than the applicant Casteel, it was dissolved by the approval of his application and
the award to him of the fishpond. The approval was an event which made it unlawful for the
members to carry it on in partnership. Moreover, subsequent events likewise reveal the intent of
both parties to terminate the partnership because each refused to share the fishpond with the
other.