JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners vs.

COMMISSIONER OF INTERNAL RE EN!E and CO!RT OF TA" APPEALS, respondents. Demosthenes B. Gadioma for petitioners.

A#!INO, J.: 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, 19 ! "ose Obillos, #r. completed payment to Orti$as % &o., 'td. on two lots with areas of 1,12( and 9)! square meters located at *reenhills, #an "uan, +i,al. The next day he transferred his ri$hts to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for -1 ., /..12 on March 1! 01xh. 2 and 3, p. ((, +ollo4. -resumably, the Torrens titles issued to them would show that they were co5owners of the two lots. 6n 19 (, or after havin$ held the two lots for more than a year, the petitioners resold them to the 7alled &ity #ecurities &orporation and Ol$a &ru, &anda for the total sum of -!1!,/8/ 01xh. & and 94. They derived from the sale a total profit of -1!(,!(1... or -!!,8.( for each of them. They treated the profit as a capital $ain and paid an income tax on one5half thereof or of -1), 92. 6n 2pril, 19./, or one day before the expiration of the five5year prescriptive period, the &ommissioner of 6nternal +evenue required the four petitioners to pay corporate income tax on the total profit of -1!(,!!) in addition to individual income tax on their shares thereof :e assessed -! ,/1. as corporate income tax, -1.,8/9 as 8/; fraud surchar$e and -18,8( .8) as (2; accumulated interest, or a total of P71,074.56. <ot only that. :e considered the share of the profits of each petitioner in the sum of -!!,8.( as a = taxable in full 0not a mere capital $ain of which > is taxable4 and required them to pay deficiency income taxes a$$re$atin$ -8), / .2/ includin$ the 8/; fraud surchar$e and the accumulated interest. Thus, the petitioners are bein$ held liable for deficiency income taxes and penalties totallin$ -12 , .1. ) on their profit of -1!(,!!), in addition to the tax on capital $ains already paid by them. The &ommissioner acted on the theory that the four petitioners had formed an unre$istered partnership or ?oint venture within the meanin$ of sections 2(0a4 and .(0b4 of the Tax &ode 0&ollector of 6nternal +evenue vs. 3atan$as Trans. &o., 1/2 -hil. .224. The petitioners contested the assessments. Two "ud$es of the Tax &ourt sustained the same. "ud$e +oaquin dissented. :ence, the instant appeal. 7e hold that it is error to consider the petitioners as havin$ formed a partnership under article 1 ) of the &ivil &ode simply because they alle$edly contributed -1 ., /..12 to buy the two lots, resold the same and divided the profit amon$ themselves.

To re$ard the petitioners as havin$ formed a taxable unre$istered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated. 2s testified by "ose Obillos, "r., they had no such intention. They were co5owners pure and simple. To consider them as partners would obliterate the distinction between a co5ownership and a partnership. The petitioners were not en$a$ed in any ?oint venture by reason of that isolated transaction. Their ori$inal purpose was to divide the lots for residential purposes. 6f later on they found it not feasible to build their residences on the lots because of the hi$h cost of construction, then they had no choice but to resell the same to dissolve the co5ownership. The division of the profit was merely incidental to the dissolution of the co5ownership which was in the nature of thin$s a temporary state. 6t had to be terminated sooner or later. &astan Tobe@as saysA &omo establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedadB 1l criterio diferencial5se$un la doctrina mas $enerali,ada5estaA por ra,on del ori$en, en que la sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin elaC y por ra,on del fin ob?ecto, en que el ob?eto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su inte$ridad la cosa comun y favorecer su conservacion. +efle?o de este criterio es la sentencia de 18 de Octubre de 19(/, en la que se dice que si en nuestro 9erecho positive se ofrecen a veces dificultades al tratar de fi?ar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica se@ala como nota fundamental de diferenciacion aparte del ori$en de fuente de que sur$en, no siempre uniforme, la finalidad perse$uida por los interesadosA lucro comun partible en la sociedad, y mera conser acion y aprovechamiento en la comunidad. 09erecho &ivil 1spanol, Dol. 2, -art 1, 1/ 1d., 19 1, !2.5 !294. 2rticle 1 )90!4 of the &ivil &ode provides that =the sharin$ of $ross returns does not of itself establish a partnership, whether or not the persons sharin$ them have a ?oint or common ri$ht or interest in any property from which the returns are derived=. There must be an unmistaEable intention to form a partnership or ?oint venture. $ #uch intent was present in *atchalian vs. &ollector of 6nternal +evenue, ) -hil. ))), where 18 persons contributed small amounts to purchase a two5peso sweepstaEes ticEet with the a$reement that they would divide the pri,e The ticEet won the third pri,e of -8/,///. The 18 persons were held liable for income tax as an unre$istered partnership. The instant case is distin$uishable from the cases where the parties en$a$ed in ?oint ventures for profit. Thus, in O@a vs. FF This view is supported by the followin$ rulin$s of respondent &ommissionerA !o"o#ership distin$uished from partnership.G7e find that the case at bar is fundamentally similar to the 9e 'eon case. Thus, liEe the 9e 'eon heirs, the 'on$a heirs inherited the HhaciendaH in questionpro"indi iso from their deceased parentsC

they did not contribute or invest additional H capital to increase or expand the inherited propertiesC they merely continued dedicatin$ the property to the use to which it had been put by their forebearsC they individually reported in their tax returns their correspondin$ shares in the income and expenses of the HhaciendaH, and they continued for many years the status of co5ownership in order, as conceded by respondent, Hto preserve its 0the HhaciendaH4 value and to continue the existin$ contractual relations with the &entral 2,ucarera de 3ais for millin$ purposes. 'on$a vs. 2ranas, &T2 &ase <o. )8!, "uly !1, 19)!4. %ll co"o#nerships are not deemed unre$istered pratnership.& &o5Ownership who own properties which produce income should not automatically be considered partners of an unre$istered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to sub?ect the income of all co"o#nerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not sub?ect to any Eind of income tax, whether the income tax on individuals or the income tax on corporation. 09e 'eon vs. &6 +, &T2 &ase <o. !., #eptember 11, 19)1, cited in 2ra@as, 19 Tax &ode 2nnotated, Dol. 1, 19 9 1d., pp. 5 .4. &ommissioner of 6nternal +evenue, '519!(2, May 28, 19 2, (8 #&+2 (, where after an extra?udicial settlement the co5heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unre$istered partnership. 6t is liEewise different from +eyes vs. &ommissioner of 6nternal +evenue, 2( #&+2 19., where father and son purchased a lot and buildin$, entrusted the administration of the buildin$ to an administrator and divided equally the net income, and from 1van$elista vs. &ollector of 6nternal +evenue, 1/2 -hil. 1(/, where the three 1van$elista sisters bou$ht four pieces of real property which they leased to various tenants and derived rentals therefrom. &learly, the petitioners in these two cases had formed an unre$istered partnership. 6n the instant case, what the &ommissioner should have investi$ated was whether the father donated the two lots to the petitioners and whether he paid the donorHs tax 0#ee 2rt. 1((., &ivil &ode4. 7e are not pre?ud$in$ this matter. 6t mi$ht have already prescribed. 7:1+1IO+1, the ?ud$ment of the Tax &ourt is reversed and set aside. The assessments are cancelled. <o costs. #O O+91+19.