G.R. NOS. 166299-300 December 13, 2005 relatives.
relatives. Copy of this memorandum is attached hereto and made an integral part
LITONJUA, JR. v. LITONJUA, SR.
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner Aurelio K.
Litonjua, Jr. seeks to nullify and set aside the Decision of the Court of Appeals (CA)
dated March 31, 20041 in consolidated cases C.A. G.R. Sp. No. 76987 and C.A. G.R.
SP. No 78774 and its Resolution dated December 07, 2004,2 denying petitioner’s
motion for reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K.
Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started when,
on December 4, 2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio filed a
suit against his brother Eduardo and herein respondent Robert T. Yang (Yang) and
several corporations for specific performance and accounting. In his
complaint,3 docketed as Civil Case No. 69235 and eventually raffled to Branch 68 of
the court,4 Aurelio alleged that, since June 1973, he and Eduardo are into a joint
venture/partnership arrangement in the Odeon Theater business which had
expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon
Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner
of lands and buildings, among other corporations. Yang is described in the complaint
as petitioner’s and Eduardo’s partner in their Odeon Theater investment.5 The same
complaint also contained the following material averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered into a joint
venture/partnership for the continuation of their family business and common
family funds ….
3.01.1 This joint venture/[partnership] agreement was contained in a
memorandum addressed by Eduardo to his siblings, parents and other
as Annex "A" and the portion referring to [Aurelio] submarked as Annex "A-1".
3.02 It was then agreed upon between [Aurelio] and Eduardo that in consideration
of [Aurelio’s] retaining his share in the remaining family businesses (mostly, movie
theaters, shipping and land development) and contributing his industry to the
continued operation of these businesses, [Aurelio] will be given P1 Million or 10%
equity in all these businesses and those to be subsequently acquired by them
whichever is greater. . . .
4.01 … from 22 June 1973 to about August 2001, or [in] a span of 28 years, [Aurelio]
and Eduardo had accumulated in their joint venture/partnership various assets
including but not limited to the corporate defendants and [their] respective assets.
4.02 In addition . . . the joint venture/partnership … had also acquired [various other
assets], but Eduardo caused to be registered in the names of other parties….
xxx xxx xxx
4.04 The substantial assets of most of the corporate defendants consist of real
properties …. A list of some of these real properties is attached hereto and made an
integral part as Annex "B".
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and Eduardo became sour
so that [Aurelio] requested for an accounting and liquidation of his share in the joint
venture/partnership [but these demands for complete accounting and liquidation
were not heeded].
xxx xxx xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or
the corporate defendants as well as Bobby [Yang], are transferring . . . various real
properties of the corporations belonging to the joint venture/partnership to other
parties in fraud of [Aurelio]. In consequence, [Aurelio] is therefore causing at this
time the annotation on the titles of these real properties… a notice of lis
pendens …. (Emphasis in the original; underscoring and words in bracket added.)
For ease of reference, Annex "A-1" of the complaint, which petitioner asserts to
have been meant for him by his brother Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married. ….
I am trying my best to mold you the way I work so you can follow the pattern …. You
will be the only one left with the company, among us brothers and I will ask you to
stay as I want you to run this office every time I am away. I want you to run it the
way I am trying to run it because I will be all alone and I will depend entirely to you
(sic). My sons will not be ready to help me yet until about maybe 15/20 years from
now. Whatever is left in the corporation, I will make sure that you get ONE MILLION
PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater. We two
will gamble the whole thing of what I have and what you are entitled to. …. It will be
you and me alone on this. If ever I pass away, I want you to take care of all of this.
You keep my share for my two sons are ready take over but give them the chance to
run the company which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give you first ONE HUNDRED
THOUSANDS PESOS: (P100, 000.00) in cash or asset, like Lt. Artiaga so you can live
better there. The rest I will give you in form of stocks which you can keep. This stock
I assure you is good and saleable. I will also gladly give you the share of Wack-Wack
…and Valley Golf … because you have been good. The rest will be in stocks from all
the corporations which I repeat, ten percent (10%) equity. 6
On December 20, 2002, Eduardo and the corporate respondents, as defendants a
quo, filed a joint ANSWER With Compulsory Counterclaim denying under oath the
material allegations of the complaint, more particularly that portion thereof
depicting petitioner and Eduardo as having entered into a contract of partnership.
As affirmative defenses, Eduardo, et al., apart from raising a jurisdictional matter,
alleged that the complaint states no cause of action, since no cause of action may
be derived from the actionable document, i.e., Annex "A-1", being void under the
terms of Article 1767 in relation to Article 1773 of the Civil Code, infra. It is further
alleged that whatever undertaking Eduardo agreed to do, if any, under Annex "A-
1", are unenforceable under the provisions of the Statute of Frauds.7
For his part, Yang - who was served with summons long after the other defendants
submitted their answer – moved to dismiss on the ground, inter alia, that, as to him,
petitioner has no cause of action and the complaint does not state any.8 Petitioner
opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve Affirmative
Defenses.9 To this motion, petitioner interposed an Opposition with ex-Parte Motion
to Set the Case for Pre-trial.10
Acting on the separate motions immediately adverted to above, the trial court, in an
Omnibus Order dated March 5, 2003, denied the affirmative defenses and, except
for Yang, set the case for pre-trial on April 10, 2003.11
In another Omnibus Order of April 2, 2003, the same court denied the motion of
Eduardo, et al., for reconsideration12 and Yang’s motion to dismiss. The following
then transpired insofar as Yang is concerned:
1. On April 14, 2003, Yang filed his ANSWER, but expressly reserved the right to seek
reconsideration of the April 2, 2003 Omnibus Order and to pursue his failed motion
to dismiss13 to its full resolution.
2. On April 24, 2003, he moved for reconsideration of the Omnibus Order of April 2,
2003, but his motion was denied in an Order of July 4, 2003.14
3. On August 26, 2003, Yang went to the Court of Appeals (CA) in a petition
for certiorari under Rule 65 of the Rules of Court, docketed as CA-G.R. SP No.
78774,15 to nullify the separate orders of the trial court, the first denying his motion
to dismiss the basic complaint and, the second, denying his motion for
reconsideration.
Earlier, Eduardo and the corporate defendants, on the contention that grave abuse
of discretion and injudicious haste attended the issuance of the trial court’s
aforementioned Omnibus Orders dated March 5, and April 2, 2003, sought relief
from the CA via similar recourse. Their petition for certiorari was docketed as CA
G.R. SP No. 76987.
Per its resolution dated October 2, 2003,16 the CA’s 14th Division ordered the
consolidation of CA G.R. SP No. 78774 with CA G.R. SP No. 76987.
Following the submission by the parties of their respective Memoranda of
Authorities, the appellate court came out with the herein assailed Decision dated
March 31, 2004, finding for Eduardo and Yang, as lead petitioners therein, disposing
as follows:
WHEREFORE, judgment is hereby rendered granting the issuance of the writ of
certiorari in these consolidated cases annulling, reversing and setting aside the
assailed orders of the court a quo dated March 5, 2003, April 2, 2003 and July 4,
2003 and the complaint filed by private respondent [now petitioner Aurelio] against
all the petitioners [now herein respondents Eduardo, et al.] with the court a quo is
hereby dismissed.
SO ORDERED.17 (Emphasis in the original; words in bracket added.)
Explaining its case disposition, the appellate court stated, inter alia, that the alleged
partnership, as evidenced by the actionable documents, Annex "A" and "A-
1" attached to the complaint, and upon which petitioner solely predicates his right/s
allegedly violated by Eduardo, Yang and the corporate defendants a quo is "void or
legally inexistent".
In time, petitioner moved for reconsideration but his motion was denied by the CA
in its equally assailed Resolution of December 7, 2004.18 .
Hence, petitioner’s present recourse, on the contention that the CA erred:
A. When it ruled that there was no partnership created by the actionable document
because this was not a public instrument and immovable properties were
contributed to the partnership.
B. When it ruled that the actionable document did not create a demandable right in
favor of petitioner.
C. When it ruled that the complaint stated no cause of action against [respondent]
Robert Yang; and
D. When it ruled that petitioner has changed his theory on appeal when all that
Petitioner had done was to support his pleaded cause of action by another legal
perspective/argument.
The petition lacks merit.
Petitioner’s demand, as defined in the petitory portion of his complaint in the trial
court, is for delivery or payment to him, as Eduardo’s and Yang’s partner, of his
partnership/joint venture share, after an accounting has been duly conducted of
what he deems to be partnership/joint venture property.19
A partnership exists when two or more persons agree to place their money, effects,
labor, and skill in lawful commerce or business, with the understanding that there
shall be a proportionate sharing of the profits and losses between them.20 A contract
of partnership is defined by the Civil Code as one where two or more persons bound
themselves to contribute money, property, or industry to a common fund with the
intention of dividing the profits among themselves.21 A joint venture, on the other
hand, is hardly distinguishable from, and may be likened to, a partnership since their
elements are similar, i.e., community of interests in the business and sharing of
profits and losses. Being a form of partnership, a joint venture is generally governed
by the law on partnership.22
The underlying issue that necessarily comes to mind in this proceedings is whether
or not petitioner and respondent Eduardo are partners in the theatre, shipping and
realty business, as one claims but which the other denies. And the issue bearing on
the first assigned error relates to the question of what legal provision is applicable
under the premises, petitioner seeking, as it were, to enforce the actionable
document - Annex "A-1" - which he depicts in his complaint to be the contract of
partnership/joint venture between himself and Eduardo. Clearly, then, a look at the
legal provisions determinative of the existence, or defining the formal requisites, of
a partnership is indicated. Foremost of these are the following provisions of the Civil
Code:
Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument
shall be necessary.
Art. 1772. Every contract of partnership having a capital of three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be
recorded in the Office of the Securities and Exchange Commission.
Failure to comply with the requirement of the preceding paragraph shall not affect
the liability of the partnership and the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the
parties, and attached to the public instrument.
Annex "A-1", on its face, contains typewritten entries, personal in tone, but is
unsigned and undated. As an unsigned document, there can be no quibbling that
Annex "A-1" does not meet the public instrumentation requirements exacted under
Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to
a partnership involving more than P3,000.00 in money or property, Annex "A-
1" cannot be presented for notarization, let alone registered with the Securities and
Exchange Commission (SEC), as called for under the Article 1772 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 petitioner’s contribution, if
any, to the supposed partnership.
The CA, addressing the foregoing query, correctly stated that petitioner’s
contribution consisted of immovables and real rights. Wrote that court:
A further examination of the allegations in the complaint would show that
[petitioner’s] contribution to the so-called "partnership/joint venture" was his
supposed share in the family business that is consisting of movie theaters, shipping
and land development under paragraph 3.02 of the complaint. In other words, his
contribution as a partner in the alleged partnership/joint venture consisted of
immovable properties and real rights. ….23
Significantly enough, petitioner matter-of-factly concurred with the appellate
court’s observation that, prescinding from what he himself alleged in his basic
complaint, his contribution to the partnership consisted of his share in the Litonjua
family businesses which owned variable immovable properties. Petitioner’s
assertion in his motion for reconsideration24 of the CA’s decision, that "what was to
be contributed to the business [of the partnership] was [petitioner’s] industry and his
share in the family [theatre and land development] business" leaves no room for
speculation as to what petitioner contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory requirement under Article
1773 of the Civil Code applies as long real property or real rights are initially brought
into the partnership. In short, it is really of no moment which of the partners, or, in
this case, who between petitioner and his brother Eduardo, contributed
immovables. In context, the more important consideration is that real property was
contributed, in which case an inventory of the contributed property duly signed by
the parties should be attached to the public instrument, else there is legally no
partnership to speak of.
Petitioner, in an obvious bid to evade the application of Article 1773, argues that the
immovables in question were not contributed, but were acquired after the
formation of the supposed partnership. Needless to stress, the Court cannot accord
cogency to this specious argument. For, as earlier stated, petitioner himself
admitted contributing his share in the supposed shipping, movie theatres and realty
development family businesses which already owned immovables even before
Annex "A-1" was allegedly executed.
Considering thus the value and nature of petitioner’s alleged contribution to the
purported partnership, the Court, even if so disposed, cannot plausibly extend
Annex "A-1" the legal effects that petitioner so desires and pleads to be given.
Annex "A-1", in fine, cannot support the existence of the partnership sued upon and
sought to be enforced. The legal and factual milieu of the case calls for this
disposition. A partnership may be constituted in any form, save when immovable
property or real rights are contributed thereto or when the partnership has a capital
of at least ₱3,000.00, in which case a public instrument shall be necessary.25 And if
only to stress what has repeatedly been articulated, an inventory to be signed by
the parties and attached to the public instrument is also indispensable to the
validity of the partnership whenever immovable property is contributed to it.
Given the foregoing perspective, what the appellate court wrote in its assailed
Decision26 about the probative value and legal effect of Annex "A-1" commends
itself for concurrence:
Considering that the allegations in the complaint showed that [petitioner]
contributed immovable properties to the alleged partnership, the "Memorandum"
(Annex "A" of the complaint) which purports to establish the said "partnership/joint
venture" is NOT a public instrument and there was NO inventory of the immovable
property duly signed by the parties. As such, the said "Memorandum" … is null and
void for purposes of establishing the existence of a valid contract of partnership.
Indeed, because of the failure to comply with the essential formalities of a valid
contract, the purported "partnership/joint venture" is legally inexistent and it
produces no effect whatsoever. Necessarily, a void or legally inexistent contract
cannot be the source of any contractual or legal right. Accordingly, the allegations in
the complaint, including the actionable document attached thereto, clearly
demonstrates that [petitioner] has NO valid contractual or legal right which could be
violated by the [individual respondents] herein. As a consequence, [petitioner’s]
complaint does NOT state a valid cause of action because NOT all the essential
elements of a cause of action are present. (Underscoring and words in bracket
added.)
Likewise well-taken are the following complementary excerpts from the CA’s equally
assailed Resolution of December 7, 200427 denying petitioner’s motion for
reconsideration:
Further, We conclude that despite glaring defects in the allegations in the complaint
as well as the actionable document attached thereto (Rollo, p. 191), the [trial] court
did not appreciate and apply the legal provisions which were brought to its
attention by herein [respondents] in the their pleadings. In our evaluation of
[petitioner’s] complaint, the latter alleged inter alia to have contributed immovable
properties to the alleged partnership but the actionable document is not a public
document and there was no inventory of immovable properties signed by the
parties. Both the allegations in the complaint and the actionable documents
considered, it is crystal clear that [petitioner] has no valid or legal right which could
be violated by [respondents]. (Words in bracket added.)
Under the second assigned error, it is petitioner’s posture that Annex "A-1",
assuming its inefficacy or nullity as a partnership document, nevertheless created
demandable rights in his favor. As petitioner succinctly puts it in this petition:
43. Contrariwise, this actionable document, especially its above-quoted provisions,
established an actionable contract even though it may not be a partnership. This
actionable contract is what is known as an innominate contract (Civil Code, Article
1307).
44. It may not be a contract of loan, or a mortgage or whatever, but surely the
contract does create rights and obligations of the parties and which rights and
obligations may be enforceable and demandable. Just because the relationship
created by the agreement cannot be specifically labeled or pigeonholed into a
category of nominate contract does not mean it is void or unenforceable.
Petitioner has thus thrusted the notion of an innominate contract on this Court -
and earlier on the CA after he experienced a reversal of fortune thereat - as an
afterthought. The appellate court, however, cannot really be faulted for not yielding
to petitioner’s dubious stratagem of altering his theory of joint venture/partnership
to an innominate contract. For, at bottom, the appellate court’s certiorari
jurisdiction was circumscribed by what was alleged to have been the order/s issued
by the trial court in grave abuse of discretion. As respondent Yang pointedly
observed,28since the parties’ basic position had been well-defined, that of petitioner
being that the actionable document established a partnership/joint venture, it is on
those positions that the appellate court exercised its certiorari jurisdiction.
Petitioner’s act of changing his original theory is an impermissible practice and
constitutes, as the CA aptly declared, an admission of the untenability of such
theory in the first place.
[Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has
now contended that the actionable instrument may be considered an innominate
contract. xxx Verily, this now changes [petitioner’s] theory of the case which is not
only prohibited by the Rules but also is an implied admission that the very theory he
himself … has adopted, filed and prosecuted before the respondent court is
erroneous.
Be that as it may . …. We hold that this new theory contravenes [petitioner’s] theory
of the actionable document being a partnership document. If anything, it is so
obvious we do have to test the sufficiency of the cause of action on the basis of
partnership law xxx.29 (Emphasis in the original; Words in bracket added).
But even assuming in gratia argumenti that Annex "A-1" partakes of a perfected
innominate contract, petitioner’s complaint would still be dismissible as against
Eduardo and, more so, against Yang. It cannot be over-emphasized that petitioner
points to Eduardo as the author of Annex "A-1". Withal, even on this consideration
alone, petitioner’s claim against Yang is doomed from the very start.
As it were, the only portion of Annex "A-1" which could perhaps be remotely
regarded as vesting petitioner with a right to demand from respondent Eduardo the
observance of a determinate conduct, reads:
xxx You will be the only one left with the company, among us brothers and I will ask
you to stay as I want you to run this office everytime I am away. I want you to run it
the way I am trying to run it because I will be alone and I will depend entirely to you,
My sons will not be ready to help me yet until about maybe 15/20 years from
now. Whatever is left in the corporation, I will make sure that you get ONE MILLION
PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater.
(Underscoring added)
It is at once apparent that what respondent Eduardo imposed upon himself under
the above passage, if he indeed wrote Annex "A-1", is a promise which is not to be
performed within one year from "contract" execution on June 22, 1973.
Accordingly, the agreement embodied in Annex "A-1" is covered by the Statute of
Frauds and ergounenforceable for non-compliance therewith.30 By force of the
statute of frauds, an agreement that by its terms is not to be performed within a
year from the making thereof shall be unenforceable by action, unless the same, or
some note or memorandum thereof, be in writing and subscribed by the party
charged. Corollarily, no action can be proved unless the requirement exacted by the
statute of frauds is complied with.31
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10%
equity of the family businesses supposedly promised by Eduardo to give in the near
future. Any suggestion that the stated amount or the equity component of the
promise was intended to go to a common fund would be to read something not
written in Annex"A-1". Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more contracting minds mutually
agreeing to contribute money, property or industry to a common fund with the
intention of dividing the profits between or among themselves.32
In sum then, the Court rules, as did the CA, that petitioner’s complaint for specific
performance anchored on an actionable document of partnership which is legally
inexistent or void or, at best, unenforceable does not state a cause of action as
against respondent Eduardo and the corporate defendants. And if no of action can
successfully be maintained against respondent Eduardo because no valid
partnership existed between him and petitioner, the Court cannot see its way clear
on how the same action could plausibly prosper against Yang. Surely, Yang could not
have become a partner in, or could not have had any form of business relationship
with, an inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide the logical nexus that
would tie Yang to him as his partner. In fact, attendant circumstances would
indicate the contrary. Consider:
1. Petitioner asserted in his complaint that his so-called joint venture/partnership
with Eduardo was "for the continuation of their family business and common family
funds which were theretofore being mainly managed by Eduardo." 33 But Yang
denies kinship with the Litonjua family and petitioner has not disputed the
disclaimer.
2. In some detail, petitioner mentioned what he had contributed to the joint
venture/partnership with Eduardo and what his share in the businesses will be. No
allegation is made whatsoever about what Yang contributed, if any, let alone his
proportional share in the profits. But such allegation cannot, however, be made
because, as aptly observed by the CA, the actionable document did not contain such
provision, let alone mention the name of Yang. How, indeed, could a person be
considered a partner when the document purporting to establish the partnership
contract did not even mention his name.
3. Petitioner states in par. 2.01 of the complaint that "[he] and Eduardo are business
partners in the [respondent] corporations," while "Bobby is his and Eduardo’s
partner in their Odeon Theater investment’ (par. 2.03). This means that the
partnership between petitioner and Eduardo came first; Yang became their partner
in their Odeon Theater investment thereafter. Several paragraphs later, however,
petitioner would contradict himself by alleging that his "investment and that of
Eduardo and Yang in the Odeon theater business has expanded through a
reinvestment of profit income and direct investments in several corporation
including but not limited to [six] corporate respondents" This simply means that the
"Odeon Theatre business" came before the corporate respondents. Significantly
enough, petitioner refers to the corporate respondents as "progeny" of the Odeon
Theatre business.34
Needless to stress, petitioner has not sufficiently established in his complaint the
legal vinculum whence he sourced his right to drag Yang into the fray. The Court of
Appeals, in its assailed decision, captured and formulated the legal situation in the
following wise:
[Respondent] Yang, … is impleaded because, as alleged in the complaint, he is a
"partner" of [Eduardo] and the [petitioner] in the Odeon Theater Investment which
expanded through reinvestments of profits and direct investments in several
corporations, thus:
xxx xxx xxx
Clearly, [petitioner’s] claim against … Yang arose from his alleged partnership with
petitioner and the …respondent. However, there was NO allegation in the complaint
which directly alleged how the supposed contractual relation was created between
[petitioner] and …Yang. More importantly, however, the foregoing ruling of this
Court that the purported partnership between [Eduardo] is void and legally
inexistent directly affects said claim against …Yang. Since [petitioner] is trying to
establish his claim against … Yang by linking him to the legally inexistent partnership
. . . such attempt had become futile because there was NOTHING that would
contractually connect [petitioner] and … Yang. To establish a valid cause of action,
the complaint should have a statement of fact upon which to connect [respondent]
Yang to the alleged partnership between [petitioner] and respondent [Eduardo],
including their alleged investment in the Odeon Theater. A statement of facts on
those matters is pivotal to the complaint as they would constitute the ultimate facts
necessary to establish the elements of a cause of action against … Yang. 35
Pressing its point, the CA later stated in its resolution denying petitioner’s motion
for reconsideration the following:
xxx Whatever the complaint calls it, it is the actionable document attached to the
complaint that is controlling. Suffice it to state, We have not ignored the actionable
document … As a matter of fact, We emphasized in our decision … that insofar as
[Yang] is concerned, he is not even mentioned in the said actionable document. We
are therefore puzzled how a person not mentioned in a document purporting to
establish a partnership could be considered a partner.36 (Words in bracket ours).
The last issue raised by petitioner, referring to whether or not he changed his theory
of the case, as peremptorily determined by the CA, has been discussed at length
earlier and need not detain us long. Suffice it to say that after the CA has ruled that
the alleged partnership is inexistent, petitioner took a different tack. Thus, from a
joint venture/partnership theory which he adopted and consistently pursued in his
complaint, petitioner embraced the innominate contract theory. Illustrative of this
shift is petitioner’s statement in par. #8 of his motion for reconsideration of the CA’s
decision combined with what he said in par. # 43 of this petition, as follows:
8. Whether or not the actionable document creates a partnership, joint venture, or
whatever, is a legal matter. What is determinative for purposes of sufficiency of the
complainant’s allegations, is whether the actionable document bears out an
actionable contract – be it a partnership, a joint venture or whatever or some
innominate contract … It may be noted that one kind of innominate contract is what
is known as du ut facias (I give that you may do).37
43. Contrariwise, this actionable document, especially its above-quoted provisions,
established an actionable contract even though it may not be a partnership. This
actionable contract is what is known as an innominate contract (Civil Code, Article
1307).38
Springing surprises on the opposing party is offensive to the sporting idea of fair
play, justice and due process; hence, the proscription against a party shifting from
one theory at the trial court to a new and different theory in the appellate
court.39 On the same rationale, an issue which was neither averred in the complaint dismissible for failure to state of action. So, in gist, said the Court of Appeals. The
cannot be raised for the first time on appeal.40 It is not difficult, therefore, to agree Court agrees.
with the CA when it made short shrift of petitioner’s innominate contract theory on WHEREFORE, the instant petition is DENIED and the impugned Decision and
the basis of the foregoing basic reasons. Resolution of the Court of Appeals AFFIRMED.
Petitioner’s protestation that his act of introducing the concept of innominate Cost against the petitioner.
contract was not a case of changing theories but of supporting his pleaded cause of SO ORDERED.
action – that of the existence of a partnership - by another legal
perspective/argument, strikes the Court as a strained attempt to rationalize an
untenable position. Paragraph 12 of his motion for reconsideration of the CA’s
decision virtually relegates partnership as a fall-back theory. Two paragraphs later,
in the same notion, petitioner faults the appellate court for reading, with myopic
eyes, the actionable document solely as establishing a partnership/joint venture.
Verily, the cited paragraphs are a study of a party hedging on whether or not to
pursue the original cause of action or altogether abandoning the same, thus:
12. Incidentally, assuming that the actionable document created a partnership
between [respondent] Eduardo, Sr. and [petitioner], no immovables were
contributed to this partnership. xxx
14. All told, the Decision takes off from a false premise that the actionable
document attached to the complaint does not establish a contractual relationship
between [petitioner] and … Eduardo, Sr. and Roberto T Yang simply because his
document does not create a partnership or a joint venture. This is … a myopic
reading of the actionable document.
Per the Court’s own count, petitioner used in his complaint the mixed words "joint
venture/partnership" nineteen (19) times and the term "partner" four (4) times. He
made reference to the "law of joint venture/partnership [being applicable] to the
business relationship … between [him], Eduardo and Bobby [Yang]" and to his "rights
in all specific properties of their joint venture/partnership". Given this consideration,
petitioner’s right of action against respondents Eduardo and Yang doubtless pivots
on the existence of the partnership between the three of them, as purportedly
evidenced by the undated and unsigned Annex "A-1". A void Annex "A-1", as an
actionable document of partnership, would strip petitioner of a cause of action
under the premises. A complaint for delivery and accounting of partnership
property based on such void or legally non-existent actionable document is
G.R. No. L-9996 October 15, 1957
EVANGELISTA
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS
Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.
Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General
Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca
Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part
of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax,
real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive,
in accordance with the respondent's assessment for the same in the total amount of
P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is
hereby dismissed with costs against petitioners.
It appears from the stipulation submitted by the parties:
1. That the petitioners borrowed from their father the sum of P59,1400.00 which
amount together with their personal monies was used by them for the purpose of
buying real properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an
area of 3,713.40 sq. m. including improvements thereon from the sum of
P100,000.00; this property has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land
with an aggregate area of 3,718.40 sq. m. including improvements thereon for
P130,000.00; this property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. This property has an assessed
value of P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and
receive rents; to issue receipts therefor; in default of such payment, to bring suits
against the defaulting tenants; to sign all letters, contracts, etc., for and in their
behalf, and to endorse and deposit all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had
the same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total
amount collected as rents on their real properties was P9,599.00 while the expenses
amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out
of which amount was deducted in the sum of P16,288.27 for expenses thereby
leaving them a net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which
amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a
net rental income of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal
Revenue demanded the payment of income tax on corporations, real estate dealer's
fixed tax and corporation residence tax for the years 1945-1949, computed,
according to assessment made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
1948 1,912.30
1949 1,575.90 Total including surcharge P193.75

Total including surcharge and compromise P6,157.09 TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners

REAL ESTATE DEALER'S FIXED TAX
on December 3, 1954, whereupon they instituted the present case in the Court of
Tax Appeals, with a prayer that "the decision of the respondent contained in his
1946 P37.50 letter of demand dated September 24, 1954" be reversed, and that they be
absolved from the payment of the taxes in question, with costs against the
1947 150.00 respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned
decision for the respondent, and a petition for reconsideration and new trial having
1948 150.00
been subsequently denied, the case is now before Us for review at the instance of
the petitioners.
1949 150.00 The issue in this case whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the
Total including penalty P527.00 National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers fixed tax. With respect to the tax on corporations, the issue
RESIDENCE TAXES OF CORPORATION hinges on the meaning of the terms "corporation" and "partnership," as used in
section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and
1945 P38.75 paid annually upon the total net income received in the preceding taxable year from
all sources by every corporation organized in, or existing under the laws of the
1946 38.75 Philippines, no matter how created or organized but not including duly registered
general co-partnerships (compañias colectivas), a tax upon such income equal to the
1947 38.75 sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
1948 38.75 associations or insurance companies, but does not include duly registered general
copartnerships. (compañias colectivas).
1949 38.75 Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute
money, properly, or industry to a common fund, with the intention of dividing the
profits among themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide
the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not
property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely not merely in one transaction, but in
a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On
April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on
April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5)
days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots
(24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation and
preservation of the aforementioned common fund or even of the property acquired
by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of
gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal
uses, of petitioners herein. The properties were leased separately to several
persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way
of rentals. Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely Simeon Evangelista, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise
operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose
in creating the set up already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in
consequence of the acts performed by them, a legal entity, with a personality
independent of that of its members, did not come into existence, and some of the
characteristics of partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.
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 conformity with the usual
requirements of the law on partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations. Again, pursuant to said section
84(b), the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" 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
copartnerships" — 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" It may not be amiss to add that petitioners' allegation to the
effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no
opinion — tends to increase the similarity between the nature of their venture and
that corporations, and is, therefore, an additional argument in favor of the
imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed
differently from "partnerships". By specific provisions of said laws, such
"corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the aforementioned
laws.
. . . in any narrow or technical sense. It includes any organization, created for the
transaction of designed affairs, or the attainment of some object, which like a
corporation, continues notwithstanding that its members or participants change,
and the affairs of which, like corporate affairs, are conducted by a single individual,
a committee, a board, or some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an agreement, a declaration of
trust, a statute, or otherwise. It includes a voluntary association, a joint-stock
corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law'
trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership
association, and any other type of organization (by whatever name known) which is
not, within the meaning of the Code, a trust or an estate, or a partnership. (7A
Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
Similarly, the American Law.
. . . provides its own concept of a partnership, under the term 'partnership 'it
includes not only a partnership as known at common law but, as well, a syndicate,
group, pool, joint venture or other unincorporated organizations 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 supplied.)
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 supplied.) .
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.
As regards the residence of tax for corporations, section 2 of Commonwealth Act
No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing business in
the Philippines shall pay an annual residence tax of five pesos and an annual
additional tax which in no case, shall exceed one thousand pesos, in accordance
with the following schedule: . . .
The term 'corporation' as used in this Act includes joint-stock company, partnership,
joint account (cuentas en participacion), association or insurance company, no
matter how created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section
24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466),
and that the latter was approved on June 15, 1939, the day immediately after the
approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the
terms "corporation" and "partnership" are used in both statutes with substantially
the same meaning. Consequently, petitioners are subject, also, to the residence tax
for corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the
properties above mentioned for a period of over twelve years, and that the yearly
gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to
P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National
Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section
194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding
himself out as a full or part time dealer in real estate or as an owner of rental
property or properties rented or offered to rent for an aggregate amount of three
thousand pesos or more a year. . . (emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed
with costs against the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually contributed money to a
common fund with express purpose of engaging in real estate business for profit.
The series of transactions which they had undertaken attest to this. This appears in
the following portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000. On April 3, 1944,
they purchase 21 lots for P18,000. This was soon followed on April 23, 1944, by the
acquisition of another real state for P108,825. Five (5) days later (April 28, 1944),
they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner in
February, 1943, In other words, we cannot but perceive a character
of habitually peculiar to business transactions engaged in for purposes of gain.
I wish however to make to make the following observation:
Article 1769 of the new Civil Code lays down the rule for determining when a
transaction should be deemed a partnership or a co-ownership. Said article
paragraphs 2 and 3, provides:
(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by
the use of the property;
(3) The sharing of gross returns does not of itself establish partnership, whether or
not the person sharing them have a joint or common right or interest in any
property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership shared or do not share any profits made by the use of property held in
common does not convert their venture into a partnership. Or the sharing of the
gross returns does not of itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent to form a partnership,
the existence of a judicial personality different from that of the individual partners,
and the freedom to transfer or assign any interest in the property by one with the
consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953
ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but
who severally retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital, and no community of
interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in
respect thereto; nor does not agreement to share the profits and loses on the sale
of land create a partnership; the parties are only tenants in common. (Clark vs.
Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract
of reality, holding as tenants in common, and to divide the profits of disposing of it,
the brother and the other not being entitled to share in plaintiff's commissions, no
partnership existed as between the parties, whatever relation may have been as to
third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form
the same; (b) generally a 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.
(Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)
The common ownership of property does not itself create a partnership between
the owners, though they may use it for purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S. W. 363, 160 No. App. 14.)
This is impliedly recognized in the following portion of the decision: "Although,
taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances (referring to the series of
transactions) such as to leave no room for doubt on the existence of said intent in
petitioners herein."
G.R. No. 112675 January 25, 1999
AFISCO v. CA
PANGANIBAN, J.:
Pursuant to "reinsurance treaties," a number of local insurance firms formed
themselves into a "pool" in order to facilitate the handling of business contracted
with a nonresident foreign insurance company. May the "clearing house" or
"insurance pool" so formed be deemed a partnership or an association that is
taxable as a corporation under the National Internal Revenue Code (NIRC)? Should
the pool's remittances to the member companies and to the said foreign firm be
taxable as dividends? Under the facts of this case, has the goverment's right to
assess and collect said tax prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari before
us, assailing the October 11, 1993 Decision 1 of the Court of Appeals 2 in CA-GR SP
25902, which dismissed petitioners' appeal of the October 19, 1992 Decision 3 of the
Court of Tax Appeals 4 (CTA) which had previously sustained petitioners' liability for
deficiency income tax, interest and withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against
petitioner 5
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution 6denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery
Breakdown, Boiler Explosion and Contractors' All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a
Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft
(hereafter called Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool
composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement
and filed an "Information Return of Organization Exempt from Income Tax" for the
year ending in 1975, on the basis of which it was assessed by the Commissioner of
Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and source due thereon P1,304,944.20
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid
to Munich and to the petitioners, respectively. These assessments were protested Add: 25% surcharge 326,236.05
by the petitioners through its auditors Sycip, Gorres, Velayo and Co.
14% interest from
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as "Pool of Machinery Insurers," to pay deficiency 1/25/76 to 1/25/79 137,019.14
income tax, interest, and with [h]olding tax, itemized as follows:
Compromise penalty-
Net income per information return P3,737,370.00
non-filing of return 300.00
===========
late payment 300.00
Income tax due thereon P1,298,080.00
——————
Add: 14% Int. fr. 4/15/76
TOTAL AMOUNT DUE & P1,768,799.39
to 4/15/79 545,193.60
COLLECTIBLE ===========
——————
Dividend paid to Pool Members P655,636.00
TOTAL AMOUNT DUE & P1,843,273.60
===========
COLLECTIBLE
10% withholding tax at
Dividend paid to Munich
source due thereon P65,563.60
Reinsurance Company P3,728,412.00
Add: 25% surcharge 16,390.90
——————
14% interest from
35% withholding tax at
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
——————
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a partnership
taxable as a corporation, and that the latter's collection of premiums on behalf of its
members, the ceding companies, was taxable income. It added that prescription did
not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because
"the taxpayer cannot be located at the address given in the information return
filed." Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing
strictly administrative functions, and which did not insure or assume any risk in its
own name, was a partnership or association subject to tax as a corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their respective
shares of reinsurance premiums, pertaining to their individual and separate
contracts of reinsurance, were "dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the Clearing
House had already prescribed. 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals that
the pool is taxable as a corporation, and that the government's right to assess and
collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool of
clearing house was an informal partnership, which was taxable as a corporation
under the NIRC. They point out that the reinsurance policies were written by them
"individually and separately," and that their liability was limited to the extent of
their allocated share in the original risk thus reinsured. 11 Hence, the pool did not act
or earn income as a reinsurer. 12Its role was limited to its principal function of
"allocating and distributing the risk(s) arising from the original insurance among the
signatories to the treaty or the members of the pool based on their ability to absorb
the risk(s) ceded[;] as well as the performance of incidental functions, such as
records, maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they, the
reinsurers, did not share the same risk or solidary liability, 14 (2) there was no
common fund; 15 (3) the executive board of the pool did not exercise control and
management of its funds, unlike the board of directors of a corporation; 16 and (4)
the pool or clearing house "was not and could not possibly have engaged in the
business of reinsurance from which it could have derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of Internal
Revenue, the agency tasked with the enforcement of tax law, is accorded much
weight and even finality, when there is no showing. that it is patently
wrong, 18 particularly in this case where the findings and conclusions of the internal
revenue commissioner were subsequently affirmed by the CTA, a specialized body
created for the exclusive purpose of reviewing tax cases, and the Court of
Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which,
by the nature of its functions, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of its
authority. 20
This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error.
Section 24 of the NIRC, as worded in the year ending 1975, provides:
Sec. 24. Rate of tax on corporations. — (a) Tax on domestic
corporations. — A tax is hereby imposed upon the taxable net income received
during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized,
but not including duly registered general co-partnership (compañias colectivas),
general professional partnerships, private educational institutions, and building
and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations those
entities that resembled them such as unregistered partnerships and associations.
Parenthetically, the NIRC's inclusion of such entities in the tax on corporations was
made even clearer by the tax Reform Act of 1997, 21 which amended the Tax Code.
Pertinent provisions of the new law read as follows:
Sec. 27. Rates of Income Tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived during each taxable year from all sources within and without
the Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation . . . .
Sec. 22. — Definition. — When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating or consortium agreement
under a service contract without the Government. "General professional
partnerships" are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived
from engaging in any trade or business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that Section 24
covered these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from their individual members. 23 The Court
of Appeals astutely applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in
real estate business was considered a corporation for purposes of the tax in sec.
 24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The
Supreme Court said:
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)
Art. 1767 of the Civil Code recognizes the creation of a contract of partnership when
"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." 25 Its requisites are: "(1) mutual contribution to a common stock, and
(2) a joint interest in the profits." 26 In other words, a partnership is formed when
persons contract "to devote to a common purpose either money, property, or labor
with the intention of dividing the profits between
27
themselves." Meanwhile, an association implies associates who enter into a "joint
enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association 30 that would handle all the insurance businesses covered under their
quota-share reinsurance treaty 31 and surplus reinsurance treaty32 with Munich. The
following unmistakably indicates a partnership or an association covered by Section
24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are
deposited in the name and credit of the pool. 33 This common fund pays for the
administration and operation expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the board of
directors of a corporation, composed of one representative for each of the ceding
companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the
business of the ceding companies and Munich, because without it they would not
have received their premiums. The ceding companies share "in the business ceded
to the pool" and in the "expenses" according to a "Rules of Distribution" annexed to
the Pool Agreement. 36 Profit motive or business is, therefore, the primordial reason
for the pool's formation. As aptly found by the CTA:
. . . The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction of
business for profit. It is apparent, and petitioners admit, that their association
or coaction was indispensable [to] the transaction of the business, . . . If
together they have conducted business, profit must have been the object as,
indeed, profit was earned. Though the profit was apportioned among the
members, this is only a matter of consequence, as it implies that profit actually
resulted. 37
The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced, because the
facts obtaining therein are not on all fours with the present case. In Pascual, there
was no unregistered partnership, but merely a co-ownership which took up only
two isolated transactions. 39 The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of
transactions spanning more than ten years, as in the case before us.
Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding
companies and Munich are not dividends subject to tax. They insist that such
remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and "would be
tantamount to an illegal double taxation as it would result in taxing the same
taxpayer" 40 Moreover, petitioners argue that since Munich was not a signatory to
the Pool Agreement, the remittances it received from the pool cannot be deemed
dividends. 41 They add that even if such remittances were treated as dividends, they
would have been exempt under the previously mentioned sections of the 1977
NIRC, 42 as well as Article 7 of paragraph 1 43 and Article 5 of paragraph 5 44 of the
RP-West German Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same property
twice when it should be taxed only once. That is, ". . . taxing the same person twice
by the same jurisdiction for the same thing" 46 In the instant case, the pool is a
taxable entity distinct from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from the tax on
the dividends received by the said companies. Clearly, there is no double taxation
here.
The tax exemptions claimed by petitioners cannot be granted, since their
entitlement thereto remains unproven and unsubstantiated. It is axiomatic in the
law of taxation that taxes are the lifeblood of the nation. Hence, "exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be
able to justify his claim or right." 47 Petitioners have failed to discharge this burden
of proof. The sections of the 1977 NIRC which they cite are inapplicable, because
these were not yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the Court still
cannot justify the exemptions claimed. Section 255 provides that no tax shall ". . . be
paid upon reinsurance by any company that has already paid the tax . . ." This
cannot be applied to the present case because, as previously discussed, the pool is a
taxable entity distinct from the ceding companies; therefore, the latter cannot
individually claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign corporations;
hence, it cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted exemption based
solely on this provision of the Tax Code, because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool. Although not a
signatory to the Pool Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance treaties which
required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in their
income and loss. This is manifest from a reading of Article 3 49 and 10 50 of the
Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 of the Surplus
Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with
the doctrine that a tax exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language too plain to be
mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP- West
German Tax Treaty is likewise unpersuasive, because the internal revenue
commissioner assessed the pool for corporate taxes on the basis of the information
return it had submitted for the year ending 1975, a taxable year when said treaty
was not yet in effect.54 Although petitioners omitted in their pleadings the date of
effectivity of the treaty, the Court takes judicial notice that it took effect only later,
on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the subject
tax had prescribed. They claim that the subject information return was filed by the
pool on April 14, 1976. On the basis of this return, the BIR telephoned petitioners on
November 11, 1981, to give them notice of its letter of assessment dated March 27,
1981. Thus, the petitioners contend that the five-year statute of limitations then
provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found that the
prescriptive period was tolled under then Section 333 of the NIRC, 57 because "the
taxpayer cannot be located at the address given in the information return filed and
for which reason there was delay in sending the assessment." 58 Indeed, whether
the government's right to collect and assess the tax has prescribed involves facts
which have been ruled upon by the lower courts. It is axiomatic that in the absence
of a clear showing of palpable error or grave abuse of discretion, as in this case, this
Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the
Court of Appeals that the pool changed its address, for they stated that the pool's
information return filed in 1980 indicated therein its "present address." The Court
finds that this falls short of the requirement of Section 333 of the NIRC for the
suspension of the prescriptive period. The law clearly states that the said period will
be suspended only "if the taxpayer informs the Commissioner of Internal Revenue
of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals dated
October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Cost against
petitioners.1âwphi1.nêt
SO ORDERED.
G.R. No. 136448 November 3, 1999
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money
to pursue a business and to divide the profits or losses that may arise therefrom,
even if it is shown that they have not contributed any capital of their own to a
"common fund." Their contribution may be in the form of credit or industry, not
necessarily cash or fixed assets. Being partner, they are all liable for debts incurred
by or on behalf of the partnership. The liability for a contract entered into on behalf
of an unincorporated association or ostensible corporation may lie in a person who
may not have directly transacted on its behalf, but reaped benefits from that
contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same
is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this
Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modifications as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings that transpired during the
trial of this case;
 a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price of
the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the
nets counted from September 20, 1990 (date of attachment) to September 12, 1991
(date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties, and, to avoid further deterioration of
the nets during the pendency of this case, it was ordered sold at public auction for
not less than P900,000.00 for which the plaintiff was the sole and winning bidder.
The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the
amount of P900,000.00 replaced the attached property as a guaranty for any
judgment that plaintiff may be able to secure in this case with the ownership and
possession of the nets and floats awarded and delivered by the sheriff to plaintiff as
the highest bidder in the public auction sale. It has also been noted that ownership
of the nets [was] retained by the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the plaintiff attached its own properties.
It [was] for this reason also that this Court earlier ordered the attachment bond filed
by plaintiff to guaranty damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of
defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess to
the defendants who are not entitled to damages and who did not put up a single
centavo to raise the amount of P900,000.00 aside from the fact that they are not
the owners of the nets and floats. For this reason, the defendants are hereby
relieved from any and all liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession and ownership of the nets
and floats and for the reimbursement of the P900,000.00 deposited by it with the
Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent).
They claimed that they were engaged in a business venture with Petitioner Lim Tong
Lim, who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold
to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim
with a prayer for a writ of preliminary attachment. The suit was brought against the
three in their capacities as general partners, on the allegation that "Ocean Quest
Fishing Corporation" was a nonexistent corporation as shown by a Certification from
the Securities and Exchange Commission. 5 On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the
fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability
and requesting a reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his possession. Peter Yao filed an
Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear in
subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of
Attachment. 6 The trial court maintained the Writ, and upon motion of private
respondent, ordered the sale of the fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and deposited with the said court the sales
proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao
and Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1)
on the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and (e) damages. 10 The Compromise
Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in
the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or
Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever
the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature of
their obligations, but that joint liability could be presumed from the equal
distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the
RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and
Yao in a fishing business and may thus be held liable as a such for the fishing nets
and floats purchased by and for the use of the partnership. The appellate court
ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial
fishing . . . . Oviously, the ultimate undertaking of the defendants was to divide the
profits among themselves which is what a partnership essentially is . . . . By a
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 (Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed
Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE
CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN
QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
from respondent, the Court must resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding
on the Compromise Agreement alone. Furthermore, he disclaims any direct
participation in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the representatives
of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease " dated February 1, 1990,
showed that he had merely leased to the two the main asset of the purported
partnership — the fishing boat F/B Lourdes. The lease was for six months, with a
monthly rental of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two
lower courts clearly showed that there existed a partnership among Chua, Yao and
him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 — 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.
Specifically, both lower courts ruled that a partnership among the three existed
based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to
the partnership in the amount of P1 million secured by a check, because of which,
Yao and Chua entrusted the ownership papers of two other boats, Chua's FB Lady
Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch
72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity
of commercial documents; (b) reformation of contracts; (c) declaration of ownership
of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's
brother. In their Compromise Agreement, they subsequently revealed their
intention to pay the loan with the proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term "common fund"
under Article 1767. 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.
Moreover, it is clear that the partnership extended not only to the purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats, both
essential to fishing, were obviously acquired in furtherance of their business. It
would have been inconceivable for Lim to involve himself so much in buying the
boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and
Yao, a partnership engaged in the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they agreed that the proceeds
from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should
involve only questions of law. Thus, the foregoing factual findings of the RTC and the
CA are binding on this Court, absent any cogent proof that the present action is
embraced by one of the exceptions to the rule. 16 In assailing the factual findings of
the two lower courts, petitioner effectively goes beyond the bounds of a petition for
review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence of
a partnership was the Compromise Agreement. He also claims that the settlement
was entered into only to end the dispute among them, but not to adjudicate their
preexisting rights and obligations. His arguments are baseless. The Agreement was
but an embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that the
lower courts have decided on the basis of one piece of document alone, petitioner
fails to appreciate that the CA and the RTC delved into the history of the document
and explored all the possible consequential combinations in harmony with law, logic
and fairness. Verily, the two lower courts' factual findings mentioned above nullified
petitioner's argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly
finds support in the Contract of Lease and the registration papers showing that he
was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided among the three of them. No lessor would do
what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement
with Chua and Yao, in which debts were undertaken in order to finance the
acquisition and the upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the three of the
balance remaining after the payment of their loans, proves beyond cavil that F/B
Lourdes, though registered in his name, was not his own property but an asset of
the partnership. It is not uncommon to register the properties acquired from a loan
in the name of the person the lender trusts, who in this case is the petitioner
himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his
property to pay a debt he did not incur, if the relationship among the three of them
was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a
party may be estopped from denying its corporate existence. "The reason behind
this doctrine is obvious — an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or confer authority on
another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is
an elementary principle of law that a person who acts as an agent without authority
or without a principal is himself regarded as the principal, possessed of all the right
and subject to all the liabilities of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other
acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and to
a third party. In the first instance, an unincorporated association, which represented
itself to be a corporation, will be estopped from denying its corporate capacity in a
suit against it by a third person who relied in good faith on such representation. It
cannot allege lack of personality to be sued to evade its responsibility for a contract
it entered into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether petitioner
should be held jointly 18 liable with Chua and Yao. Petitioner contests such liability,
insisting that only those who dealt in the name of the ostensible corporation should
be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held
liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes, the boat which has earlier been proven to be an asset of the partnership.
He in fact questions the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to
form a corporation. Although it was never legally formed for unknown reasons, this
fact alone does not preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are
held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said
association and is covered by the scope of the doctrine of corporation by estoppel.
We reiterate the ruling of the Court in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other.
It is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done
upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against
the nets. We agree with the Court of Appeals that this issue is now moot and
academic. As previously discussed, F/B Lourdes was an asset of the partnership and
that it was placed in the name of petitioner, only to assure payment of the debt he
and his partners owed. The nets and the floats were specifically manufactured and
tailor-made according to their own design, and were bought and used in the fishing
venture they agreed upon. Hence, the issuance of the Writ to assure the payment of
the price stipulated in the invoices is proper. Besides, by specific agreement,
ownership of the nets remained with Respondent Philippine Fishing Gear, until full
payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice
Artemio V. Panganiban, particularly the finding that Antonio Chua, Peter Yao and
petitioner Lim Tong Lim have incurred the liabilities of general partners. I merely
would wish to elucidate a bit, albeit briefly, the liability of partners in a general
partnership.
When a person by his act or deed represents himself as a partner in an existing
partnership or with one or more persons not actual partners, he is deemed an agent
of such persons consenting to such representation and in the same manner, if he
were a partner, with respect to persons who rely upon the representation. 1 The
association formed by Chua, Yao and Lim, should be, as it has been deemed, a de
facto partnership with all the consequent obligations for the purpose of enforcing
the rights of third persons. The liability of general partners (in a general partnership
as so opposed to a limited partnership) is laid down in Article 1816 2 which posits
that all partners shall be liable pro rata beyond the partnership assets for all the
contracts which may have been entered into in its name, under its signature, and by
a person authorized to act for the partnership. This rule is to be construed along
with other provisions of the Civil Code which postulate that the partners can be
held solidarily liable with the partnership specifically in these instances — (1) where,
by any wrongful act or omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same extent as the partner so
acting or omitting to act; (2) where one partner acting within the scope of his
apparent authority receives money or property of a third person and misapplies it;
and (3) where the partnership in the course of its business receives money or
property of a third person and the money or property so received is misapplied by
any partner while it is in the custody of the partnership 3 — consistently with the
rules on the nature of civil liability in delicts and quasi-delicts.
G.R. No. L-45425 April 29, 1939
2. Gregoria Cristobal
.18
...............................................................................................
JOSE GATCHALIAN, ET AL., plaintiffs-appellants,
vs. 3. Saturnina Silva
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee. .08
....................................................................................................

Guillermo B. Reyes for appellants. 4. Guillermo Tapia

.13
Office of the Solicitor-General Tuason for appellee. ...................................................................................................

IMPERIAL, J.: 5. Jesus Legaspi

.15
......................................................................................................
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 6. Jose Silva
.07
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
7. Tomasa Mercado
dismissed the action with the costs against them. .08
................................................................................................
The case was submitted for decision upon the following stipulation of facts: 8. Julio Gatchalian
.13
...................................................................................................
Come now the parties to the above-mentioned case, through their respective
undersigned attorneys, and hereby agree to respectfully submit to this Honorable 9. Emiliana Santiago
Court the case upon the following statement of facts: .13
................................................................................................

1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that 10. Maria C. Legaspi
.16
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 11. Francisco Cabral
.13
one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the ...............................................................................................
amounts as follows:
12. Gonzalo Javier
.14
....................................................................................................
1. Jose Gatchalian
P0.18
.................................................................................................... 13. Maria Santiago .17

...................................................................................................
14. Buenaventura
......................................................................................
15. Mariano
.................................................................................................
Total ........................................................................................................
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
Guzman deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian &
.13 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;
Santos
.14 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
2.00 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 Amount Address
1. Mariano Santos ........................................... P0.14 Pulilan, Bulacan.
2. Buenaventura Guzman ............................... .13 - Do -
3. Maria Santiago ............................................ .17 - Do -
 And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
4. Gonzalo Javier .............................................. .14 - Do -

5. Francisco Cabral .......................................... .13 - Do - RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED
JANUARY 19, 1935 SUBMITTED TO THE COLLECTOR OF INTERNAL REVENUE.
6. Maria C. Legaspi .......................................... .16 - Do -
Exhibit Purchase
7. Emiliana Santiago ......................................... .13 - Do - Price Net
Name Expenses
Won prize
8. Julio Gatchalian ............................................ .13 - Do - No. Price

9. Jose Silva ...................................................... .07 - Do - 1. Jose Gatchalian P4,42 3,94

D-1 P0.18 P 480
.......................................... 5 5
10. Tomasa Mercado ....................................... .08 - Do -
2. Gregoria Cristobal 2,57
D-2 .18 4,575 2,000
11. Jesus Legaspi ............................................. .15 - Do - ...................................... 5

12. Guillermo Tapia ........................................... .13 - Do - 3. Saturnina Silva 1,51

D-3 .08 1,875 360
............................................. 5
13. Saturnina Silva ............................................ .08 - Do -
4. Guillermo Tapia 2,96
D-4 .13 3,325 360
14. Gregoria Cristobal ....................................... .18 - Do - .......................................... 5

15. Jose Gatchalian ............................................ .18 - Do - 5. Jesus Legaspi by Maria 3,10

D-5 .15 3,825 720
Cristobal ......... 5

2.00 Total cost of said 6. Jose Silva

1,51
.................................................. D-6 .08 1,875 360
5
..
ticket; and that, therefore, the persons named above are entitled to the parts of
whatever prize that might be won by said ticket. 7. Tomasa Mercado 1,51
D-7 .07 1,875 360
....................................... 5
Pulilan, Bulacan, P.I.
8. Julio Gatchalian by Beatriz 2,91
(Sgd.) JOSE GATCHALIAN D-8 .13 3,150 240
Guzman ....... 0
 The legal questions raised in plaintiffs-appellants' five assigned errors may properly
9. Emiliana Santiago 2,96
D-9 .13 3,325 360 be reduced to the two following: (1) Whether the plaintiffs formed a partnership, or
...................................... 5
merely a community of property without a personality of its own; in the first case it
10. Maria C. Legaspi 3,14 is admitted that the partnership thus formed is liable for the payment of income tax,
D-10 .16 4,100 960 whereas if there was merely a community of property, they are exempt from such
...................................... 0
payment; and (2) whether they should pay the tax collectively or whether the latter
11. Francisco Cabral 2,96 should be prorated among them and paid individually.
D-11 .13 3,325 360
...................................... 5
The Collector of Internal Revenue collected the tax under section 10 of Act No.
12. Gonzalo Javier 2,96 2833, as last amended by section 2 of Act No. 3761, reading as follows:
D-12 .14 3,325 360
.......................................... 5
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the
13. Maria Santiago 3,99 total net income received in the preceding calendar year from all sources by every
D-13 .17 4,350 360
.......................................... 0 corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association or insurance company, organized in the Philippine
14. Buenaventura Guzman 2,96 Islands, no matter how created or organized, but not including duly registered
D-14 .13 3,325 360
........................... 5 general copartnership (compañias colectivas), a tax of three per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid annually upon
15. Mariano Santos 2,96
D-15 .14 3,325 360 the total net income received in the preceding calendar year from all sources within
........................................ 5
the Philippine Islands by every corporation, joint-stock company, partnership, joint
<="" td="" account (cuenta en participacion), association, or insurance company organized,
style="font authorized, or existing under the laws of any foreign country, including interest on
-size: 14px; bonds, notes, or other interest-bearing obligations of residents, corporate or
text- otherwise: Provided, however, That nothing in this section shall be construed as
decoration permitting the taxation of the income derived from dividends or net profits on
: none; which the normal tax has been paid.
50,00
2.00 color:
0 The gain derived or loss sustained from the sale or other disposition by a
rgb(0, 0,
128); font- corporation, joint-stock company, partnership, joint account (cuenta en
family: participacion), association, or insurance company, or property, real,
arial, personal, or mixed, shall be ascertained in accordance with subsections (c)
verdana;"> 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.

Avanceña, C.J., Villa-Real, Diaz, Laurel, Concepcion and Moran, JJ., concur.
G.R. No. 127347 November 25, 1999
ALFREDO N. AGUILA, JR., petitioner,
vs.
HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE
ABROGAR, respondents.
MENDOZA, J.:
1
This is a petition for review on certiorari of the decision of the Court of Appeals,
dated November 29, 1990, which reversed the decision of the Regional Trial Court,
Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed
the petition for declaration of nullity of a deed of sale filed by private respondent
Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in
lending activities. Private respondent and her late husband, Ruben M. Abrogar,
were the registered owners of a house and lot, covered by Transfer Certificate of
Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent,
with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by
petitioner, entered into a Memorandum of Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described
property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this
agreement, a Deed of Absolute Sale shall be executed by the FIRST PARTY conveying
the property to the SECOND PARTY for and in consideration of the sum of Two
Hundred Thousand Pesos (P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase
the said property within a period of ninety (90) days from the execution of this
memorandum of agreement effective April 18, 1991, for the amount of TWO
HUNDRED THIRTY THOUSAND PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the
said property within a period of ninety (90) days, the FIRST PARTY is obliged to
deliver peacefully the possession of the property to the SECOND PARTY within
fifteen (15) days after the expiration of the said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis
pendens or whatever claims on the property nor shall be cause the annotation of
say claim at the back of the title to the said property;
(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her
ownership of the property and shall defend the rights of the SECOND PARTY against
any party whom may have any interests over the property;
(6) All expenses for documentation and other incidental expenses shall be for the
account of the FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the
SECOND PARTY after the expiration of the 15-day grace period given in paragraph 3
above, the FIRST PARTY shall pay an amount equivalent to Five Percent of the
principal amount of TWO HUNDRED PESOS (P200.00) or P10,000.00 per month of
delay as and for rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the property
within ninety (90) days period above-mentioned, this memorandum of agreement
shall be deemed cancelled and the Deed of Absolute Sale, executed by the parties
shall be the final contract considered as entered between the parties and the
SECOND PARTY shall proceed to transfer ownership of the property above described
to its name free from lines and encumbrances. 2
On the same day, April 18, 1991, the parties likewise executed a deed of absolute
sale, 3 dated June 11, 1991, wherein private respondent, with the consent of her
late husband, sold the subject property to A.C. Aguila & Sons, Co., represented by
petitioner, for P200,000,00. In a special power of attorney dated the same day, April
18, 1991, private respondent authorized petitioner to cause the cancellation of TCT
No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila
and Sons, Co., in the event she failed to redeem the subject property as provided in
the Memorandum of Agreement. 4
Private respondent failed to redeem the property within the 90-day period as
provided in the Memorandum of Agreement. Hence, pursuant to the special power
of attorney mentioned above, petitioner caused the cancellation of TCT No. 195101
and the issuance of a new certificate of title in the name of A.C. Aguila and Sons,
Co. 5
Private respondent then received a letter dated August 10, 1991 from Atty.
Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate
the premises within 15 days after receipt of the letter and surrender its possession
peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring the
appropriate action in court. 6
Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila &
Sons, Co. filed an ejectment case against her in the Metropolitan Trial Court, Branch
76, Marikina, Metro Manila. In a decision, dated April 3, 1992, the Metropolitan
Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that private
respondent did not redeem the subject property before the expiration of the 90-day
period provided in the Memorandum of Agreement. Private respondent appealed
first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to the Court
of Appeals, and later to this Court, but she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of sale
with the Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4,
1993. She alleged that the signature of her husband on the deed of sale was a
forgery because he was already dead when the deed was supposed to have been
executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for
falsification against petitioner with the Office of the Prosecutor of Quezon City
which was dismissed in a resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiff's claim therefore that the Deed of Absolute Sale is a forgery because they
could not personally appear before Notary Public Lamberto C. Nanquil on June 11,
1991 because her husband, Ruben Abrogar, died on May 8, 1991 or one month and
2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still
in the Quezon City Medical Center recuperating from wounds which she suffered at
the same vehicular accident on May 8, 1991, cannot be sustained. The Court is
convinced that the three required documents, to wit: the Memorandum of
Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were all
signed by the parties on the same date on April 18, 1991. It is a common and
accepted business practice of those engaged in money lending to prepare an
undated absolute deed of sale in loans of money secured by real estate for various
reasons, foremost of which is the evasion of taxes and surcharges. The plaintiff
never questioned receiving the sum of P200,000.00 representing her loan from the
defendant. Common sense dictates that an established lending and realty firm like
the Aguila & Sons, Co. would not part with P200,000.00 to the Abrogar spouses,
who are virtual strangers to it, without the simultaneous accomplishment and
signing of all the required documents, more particularly the Deed of Absolute Sale,
to protect its interest.
xxx xxx xxx
WHEREFORE, foregoing premises considered, the case in caption is hereby
ORDERED DISMISSED, with costs against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-appellant and
defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New
Civil Code finds strong application in the case at bar in the light of the following
circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually
inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the
residential house of plaintiff-appellant stands. The property is inside a
subdivision/village. The property is situated in Marikina which is already part of
Metro Manila. The alleged sale took place in 1991 when the value of the land had
considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33
per square meter for both the land and for the house.
Second: The disputed Memorandum of Agreement specifically provides that
plaintiff-appellant is obliged to deliver peacefully the possession of the property to
the SECOND PARTY within fifteen (15) days after the expiration of the said ninety
(90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical
possession of the thing allegedly sold.
In fact, plaintiff-appellant retained possession of the property "sold" as if they were
still the absolute owners. There was no provision for maintenance or expenses,
much less for payment of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the
property "sold". It is well-known that payment of taxes accompanied by actual
possession of the land covered by the tax declaration, constitute evidence of great
weight that a person under whose name the real taxes were declared has a claim of
right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602
of the New Civil Code is sufficient to declare a contract of sale with right to
repurchase an equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually
inadequate, has retained possession of the subject property and has continued
paying the realty taxes over the subject property, (circumstances mentioned in par.
(1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is an equitable
mortgage, not a sale with right to repurchase. The factors cited are in support to the
finding that the Deed of Sale/Memorandum of Agreement with right to repurchase
is in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was
executed by reason of the loan extended by defendant-appellee to plaintiff-
appellant. The amount of loan being the same with the amount of the purchase
price.
xxx xxx xxx
Since the real intention of the party is to secure the payment of debt, now deemed
to be repurchase price: the transaction shall then be considered to be an equitable
mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of
a pactum commissorium which is clearly prohibited by Article 2088 of the New Civil
Code. Article 2088 of the New Civil Code reads:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a property is pledged
or mortgaged by way of security for the payment of principal obligation; and (2) that
there should be a stipulation for an automatic appropriation by the creditor of the
thing pledged and mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-
appellant secured by a mortgage on the property of plaintiff-appellant. The loan was
payable within ninety (90) days, the period within which plaintiff-appellant can
repurchase the property. Plaintiff-appellant will pay P230,000.00 and not
P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of
plaintiff-appellee to pay the P230,000.00 within the ninety (90) days period, the
property shall automatically belong to defendant-appellee by virtue of the deed of
sale executed.
Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so
declare to be invalid, for being violative of law.
xxx xxx xxx
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and
SET ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101
issued in favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in
favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby
declared VOID and is hereby ANNULLED. Transfer Certificate of Title No. 195101 of
the Registry of Marikina is hereby ordered REINSTATED. The loan in the amount of
P230,000.00 shall be paid within ninety (90) days from the finality of this decision. In
case of failure to pay the amount of P230,000.00 from the period therein stated, the
property shall be sold at public auction to satisfy the mortgage debt and costs and if
there is an excess, the same is to be given to the owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila
& Co., against which this case should have been brought; (2) the judgment in the
ejectment case is a bar to the filing of the complaint for declaration of nullity of a
deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and
private respondent is a pacto de retro sale and not an equitable mortgage as held by
the appellate court.
The petition is meritorious.
Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was
filed, provided that "every action must be prosecuted and defended in the name of
the real party in interest." A real party in interest is one who would be benefited or
injured by the judgment, or who is entitled to the avails of the suit. 7 This ruling is
now embodied in Rule 3, §2 of the 1997 Revised Rules of Civil Procedure. Any
decision rendered against a person who is not a real party in interest in the case
cannot be executed. 8 Hence, a complaint filed against such a person should be
dismissed for failure to state a cause of action. 9
Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate
and distinct from that of each of the partners." The partners cannot be held liable
for the obligations of the partnership unless it is shown that the legal fiction of a
different juridical personality is being used for fraudulent, unfair, or illegal
purposes. 10 In this case, private respondent has not shown that A.C. Aguila & Sons,
Co., as a separate juridical entity, is being used for fraudulent, unfair, or illegal
purposes. Moreover, the title to the subject property is in the name of A.C. Aguila &
Sons, Co. and the Memorandum of Agreement was executed between private
respondent, with the consent of her late husband, and A.C. Aguila & Sons, Co.,
represented by petitioner. Hence, it is the partnership, not its officers or agents,
which should be impleaded in any litigation involving property registered in its
name. A violation of this rule will result in the dismissal of the complaint. 11 We
cannot understand why both the Regional Trial Court and the Court of Appeals
sidestepped this issue when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this
action should be prosecuted makes it unnecessary to discuss the other issues raised
by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the
complaint against petitioner is DISMISSED.
SO ORDERED.
Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
G.R. No. L-19342 May 25, 1972
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA,
MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo
R. Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
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 Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo
T. Oña 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. Oña 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
Oña, were still minors when the project of partition was approved, Lorenzo T. Oña,
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.
Oña, 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 (See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
p. 74, BIR rec.).
From said investments and properties petitioners derived such incomes as profits
Although the project of partition was approved by the Court on May 16, 1949, no from installment sales of subdivided lots, profits from sales of stocks, dividends,
attempt was made to divide the properties therein listed. Instead, the properties rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
remained under the management of Lorenzo T. Oña who used said properties in incomes are recorded in the books of account kept by Lorenzo T. Oña where the
business by leasing or selling them and investing the income derived therefrom and corresponding shares of the petitioners in the net income for the year are also
the proceeds from the sales thereof in real properties and securities. As a result, known. Every year, petitioners returned for income tax purposes their shares in the
petitioners' properties and investments gradually increased from P105,450.00 in net income derived from said properties and securities and/or from transactions
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
balances: 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. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
Year Investment Land Building
102-104).
Account Account Account
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)
decided that petitioners formed an unregistered partnership and therefore, subject
— P87,860.00 P17,590.00 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
P24,657.65 128,566.72 96,076.26 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.).
51,301.31 120,349.28 110,605.11 Petitioners protested against the assessment and asked for reconsideration of the
ruling of respondent that they have formed an unregistered partnership. Finding no
67,927.52 87,065.28 152,674.39 merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.).
(See pp. 1-4, Memorandum for Respondent, June 12, 1961).
61,258.27 84,925.68 161,463.83
The original assessment was as follows:
63,623.37 99,001.20 167,962.04
1955
100,786.00 120,249.78 169,262.52
Net income as per investigation ................ P40,209.89
175,028.68 135,714.68 169,262.52
Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50 II.
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50 THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE
CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM
1956 TRANSACTIONS THEREFROM (sic);

Net income as per investigation ................ P69,245.23 III.

Income tax due thereon ............................... 13,849.00 THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE
25% surcharge .............................................. 3,462.25 FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
Compromise for non-filing .......................... 50.00 PARTNERSHIP;
Total ............................................................... P17,361.25
IV.
(See Exhibit 13, page 50, BIR records)
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
Upon further consideration of the case, the 25% surcharge was eliminated in line PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co., PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to the THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND
income tax proper for the years 1955 and 1956 and the "Compromise for non- THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
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 V.
years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
Petitioners have assigned the following as alleged errors of the Tax Court: COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID
BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF
I. THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED
AN 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 Buñales
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. Oña, 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 co-owners,
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. Oña 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. Oña 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. Oña.
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. Oña, 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. Oña 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.
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.
Demosthenes B. Gadioma for petitioners.
AQUINO, 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, 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 ½ 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 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. Castan Tobeñas 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 señala 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 Oña 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 question pro-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 Arañas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
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.
Abad Santos, Escolin, Cuevas and Alampay, JJ., concur.
Concepcion, Jr., is on leave.

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.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or joint
venture for income tax purposes is the issue in this petition.
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.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I.
Plana, petitioners 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.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that
they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in
the years 1968 and 1970, petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as a corporation under
Section 20(b) and its income was subject to the taxes prescribed under Section 24,
both of the National Internal Revenue Code 1 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. Hence, the petitioners were required to
pay the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals
docketed as CTA Case No. 3045. In due course, the respondent court by a majority
decision of March 30, 1987, 2 affirmed the decision and action taken by respondent
commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners which like a corporation was subject
to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that
considering the circumstances of this case, although there might in fact be a co-
ownership between the petitioners, there was no adequate basis for the conclusion
that they thereby formed an unregistered partnership which made "hem liable for
corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT
THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS,
THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-
13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court
in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which
together with their own personal funds they used in buying several real properties.
They appointed their brother to manage their properties with full power to lease,
collect, rent, issue receipts, etc. They had the real properties rented or leased to
various tenants for several years and they gained net profits from the rental income.
Thus, the Collector of Internal Revenue demanded the payment of income tax on a
corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for corporations and
the real estate dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected,
and paid annually upon the total net income received in the preceding taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (companies collectives), a tax upon such income equal to
the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation),
associations or insurance companies, but does not include duly registered general
co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
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.
Pursuant to this article, the essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a common fund; and (b)
intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence, the issue
narrows down to their intent in acting as they did. Upon consideration of all the
facts and circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and then divide
the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not
a property inherited by them pro indiviso. They created it purposely. What is more
they jointly borrowed a substantial portion thereof in order to establish said
common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23,
1944, by the acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24)
acquired and transcations undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character of habituality
peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal
uses, of petitioners herein. The properties were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of
rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest
that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one
person, namely, Simeon Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and contracts, and to indorse and
deposit notes and checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business enterprise operated for
profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be
exact, over fifteen (15) years, since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose
in creating the set up already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to
constitute a partnership, the collective effect of these circumstances is such as to
leave no room for doubt on the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point. 5
In the present case, 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.
In Evangelists, there was a series of transactions where petitioners purchased
twenty-four (24) lots showing that the purpose was not limited to the conservation
or preservation of the common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions engaged in for the purpose
of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not
sell the same nor make any improvements thereon. In 1966, they bought another
three (3) parcels of land from one seller. It was only 1968 when they sold the two (2)
parcels of land after which they did not make any additional or new purchase. The
remaining three (3) parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business transactions for the
purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The
business was under the management of one of the partners. Such condition existed
for over fifteen (15) years. None of the circumstances are present in the case at bar.
The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code
lays down the rule for determining when a transaction should be deemed a
partnership or a co-ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) 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;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property held in
common does not convert their venture into a partnership. Or the sharing of the
gross returns does not of itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of other elements
constituting partnership is necessary, such as the clear intent to form a partnership,
the existence of a juridical personality different from that of the individual partners,
and the freedom to transfer or assign any interest in the property by one with the
consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953
ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances
showing a contrary intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but
who severally retain the title to their respective contribution, are not thereby
rendered partners. They have no common stock or capital, and no community of
interest as principal proprietors in the business itself which the proceeds derived.
(Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect
thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. (Clark vs. Sideway,
142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract
of realty, holding as tenants in common, and to divide the profits of disposing of it,
the brother and the other not being entitled to share in plaintiffs commission, no
partnership existed as between the three parties, whatever their relation may have
been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
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.-
Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between
the owners, though they may use it for the purpose of making gains; and they may,
without becoming partners, agree among themselves as to the management, and
use of such property and the application of the proceeds therefrom. (Spurlock vs.
Wilson, 142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the
persons sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the
petitioners. There is no adequate basis to support the proposition that they thereby
formed an unregistered partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their
capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate income tax, as the
respondent commissioner proposes.
And even assuming 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 p. 7 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.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent
Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and
another decision is hereby rendered relieving petitioners of the corporate income
tax liability in this case, without pronouncement as to costs.
SO ORDERED.
Cruz, Griño-Aquino and Medialdea, JJ., concur.
Narvasa, J., took no part.
G.R. No. 172690 March 3, 2010
HEIRS OF JOSE LIM, represented by ELENITO LIM, Petitioners,
vs.
JULIET VILLA LIM, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of
Civil Procedure, assailing the Court of Appeals (CA) Decision2 dated June 29, 2005,
which reversed and set aside the decision3 of the Regional Trial Court (RTC) of
Lucena City, dated April 12, 2004.
The facts of the case are as follows:
Petitioners are the heirs of the late Jose Lim (Jose), namely: Jose's widow Cresencia
Palad (Cresencia); and their children Elenito, Evelia, Imelda, Edelyna and Edison, all
surnamed Lim (petitioners), represented by Elenito Lim (Elenito). They filed a
Complaint4 for Partition, Accounting and Damages against respondent Juliet Villa
Lim (respondent), widow of the late Elfledo Lim (Elfledo), who was the eldest son of
Jose and Cresencia.
Petitioners alleged that Jose was the liaison officer of Interwood Sawmill in Cagsiay,
Mauban, Quezon. Sometime in 1980, Jose, together with his friends Jimmy Yu
(Jimmy) and Norberto Uy (Norberto), formed a partnership to engage in the trucking
business. Initially, with a contribution of ₱50,000.00 each, they purchased a truck to
be used in the hauling and transport of lumber of the sawmill. Jose managed the
operations of this trucking business until his death on August 15, 1981. Thereafter,
Jose's heirs, including Elfledo, and partners agreed to continue the business under
the management of Elfledo. The shares in the partnership profits and income that
formed part of the estate of Jose were held in trust by Elfledo, with petitioners'
authority for Elfledo to use, purchase or acquire properties using said funds.
Petitioners also alleged that, at that time, Elfledo was a fresh commerce graduate
serving as his father’s driver in the trucking business. He was never a partner or an
investor in the business and merely supervised the purchase of additional trucks
using the income from the trucking business of the partners. By the time the
partnership ceased, it had nine trucks, which were all registered in Elfledo's name.
Petitioners asseverated that it was also through Elfledo’s management of the
partnership that he was able to purchase numerous real properties by using the
profits derived therefrom, all of which were registered in his name and that of
respondent. In addition to the nine trucks, Elfledo also acquired five other motor
vehicles.
On May 18, 1995, Elfledo died, leaving respondent as his sole surviving heir.
Petitioners claimed that respondent took over the administration of the
aforementioned properties, which belonged to the estate of Jose, without their
consent and approval. Claiming that they are co-owners of the properties,
petitioners required respondent to submit an accounting of all income, profits and
rentals received from the estate of Elfledo, and to surrender the administration
thereof. Respondent refused; thus, the filing of this case.
Respondent traversed petitioners' allegations and claimed that Elfledo was himself a
partner of Norberto and Jimmy. Respondent also claimed that per testimony of
Cresencia, sometime in 1980, Jose gave Elfledo ₱50,000.00 as the latter's capital in
an informal partnership with Jimmy and Norberto. When Elfledo and respondent
got married in 1981, the partnership only had one truck; but through the efforts of
Elfledo, the business flourished. Other than this trucking business, Elfledo, together
with respondent, engaged in other business ventures. Thus, they were able to buy
real properties and to put up their own car assembly and repair business. When
Norberto was ambushed and killed on July 16, 1993, the trucking business started to
falter. When Elfledo died on May 18, 1995 due to a heart attack, respondent talked
to Jimmy and to the heirs of Norberto, as she could no longer run the business.
Jimmy suggested that three out of the nine trucks be given to him as his share, while
the other three trucks be given to the heirs of Norberto. However, Norberto's wife,
Paquita Uy, was not interested in the vehicles. Thus, she sold the same to
respondent, who paid for them in installments.
Respondent also alleged that when Jose died in 1981, he left no known assets, and
the partnership with Jimmy and Norberto ceased upon his demise. Respondent also
stressed that Jose left no properties that Elfledo could have held in trust.
Respondent maintained that all the properties involved in this case were purchased
and acquired through her and her husband’s joint efforts and hard work, and
without any participation or contribution from petitioners or from Jose. Respondent
submitted that these are conjugal partnership properties; and thus, she had the
right to refuse to render an accounting for the income or profits of their own
business.
Trial on the merits ensued. On April 12, 2004, the RTC rendered its decision in favor
of petitioners, thus:
WHEREFORE, premises considered, judgment is hereby rendered:
1) Ordering the partition of the above-mentioned properties equally between the
plaintiffs and heirs of Jose Lim and the defendant Juliet Villa-Lim; and
2) Ordering the defendant to submit an accounting of all incomes, profits and
rentals received by her from said properties.
SO ORDERED.
Aggrieved, respondent appealed to the CA.
On June 29, 2005, the CA reversed and set aside the RTC's decision, dismissing
petitioners' complaint for lack of merit. Undaunted, petitioners filed their Motion
for Reconsideration,5 which the CA, however, denied in its Resolution6 dated May 8,
2006.
Hence, this Petition, raising the sole question, viz.:
IN THE APPRECIATION BY THE COURT OF THE EVIDENCE SUBMITTED BY THE
PARTIES, CAN THE TESTIMONY OF ONE OF THE PETITIONERS BE GIVEN GREATER
WEIGHT THAN THAT BY A FORMER PARTNER ON THE ISSUE OF THE IDENTITY OF
THE OTHER PARTNERS IN THE PARTNERSHIP?7
In essence, petitioners argue that according to the testimony of Jimmy, the sole
surviving partner, Elfledo was not a partner; and that he and Norberto entered into
a partnership with Jose. Thus, the CA erred in not giving that testimony greater
weight than that of Cresencia, who was merely the spouse of Jose and not a party to
the partnership.8
Respondent counters that the issue raised by petitioners is not proper in a petition
for review on certiorari under Rule 45 of the Rules of Civil Procedure, as it would
entail the review, evaluation, calibration, and re-weighing of the factual findings of
the CA. Moreover, respondent invokes the rationale of the CA decision that, in light
of the admissions of Cresencia and Edison and the testimony of respondent, the
testimony of Jimmy was effectively refuted; accordingly, the CA's reversal of the
RTC's findings was fully justified.9
We resolve first the procedural matter regarding the propriety of the instant
Petition.
Verily, the evaluation and calibration of the evidence necessarily involves
consideration of factual issues — an exercise that is not appropriate for a petition
for review on certiorari under Rule 45. This rule provides that the parties may raise
only questions of law, because the Supreme Court is not a trier of facts. Generally,
we are not duty-bound to analyze again and weigh the evidence introduced in and
considered by the tribunals below.10 When supported by substantial evidence, the
findings of fact of the CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the following recognized
exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and
conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the issues of the
case and the same is contrary to the admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on
which they are based;
(9) When the facts set forth in the petition as well as in the petitioners' main and
reply briefs are not disputed by the respondents; and
(10) When the findings of fact of the Court of Appeals are premised on the supposed
absence of evidence and contradicted by the evidence on record.11
We note, however, that the findings of fact of the RTC are contrary to those of the
CA. Thus, our review of such findings is warranted.
On the merits of the case, we find that the instant Petition is bereft of merit.
A partnership exists when two or more persons agree to place their money, effects,
labor, and skill in lawful commerce or business, with the understanding that there
shall be a proportionate sharing of the profits and losses among them. A contract of
partnership is defined by the Civil Code as one where 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.12
Undoubtedly, the best evidence would have been the contract of partnership or the
articles of partnership. Unfortunately, there is none in this case, because the alleged
partnership was never formally organized. Nonetheless, we are asked to determine
who between Jose and Elfledo was the "partner" in the trucking business.
A careful review of the records persuades us to affirm the CA decision. The evidence
presented by petitioners falls short of the quantum of proof required to establish
that: (1) Jose was the partner and not Elfledo; and (2) all the properties acquired by
Elfledo and respondent form part of the estate of Jose, having been derived from
the alleged partnership.
Petitioners heavily rely on Jimmy's testimony. But that testimony is just one piece of
evidence against respondent. It must be considered and weighed along with
petitioners' other evidence vis-à-vis respondent's contrary evidence. In civil cases,
the party having the burden of proof must establish his case by a preponderance of
evidence. "Preponderance of evidence" is the weight, credit, and value of the
aggregate evidence on either side and is usually considered synonymous with the
term "greater weight of the evidence" or "greater weight of the credible evidence."
"Preponderance of evidence" is a phrase that, in the last analysis, means probability
of the truth. It is evidence that is more convincing to the court as worthy of belief
than that which is offered in opposition thereto.13 Rule 133, Section 1 of the Rules of
Court provides the guidelines in determining preponderance of evidence, thus:
SECTION I. Preponderance of evidence, how determined. In civil cases, the party
having burden of proof must establish his case by a preponderance of evidence. In
determining where the preponderance or superior weight of evidence on the issues
involved lies, the court may consider all the facts and circumstances of the case, the
witnesses' manner of testifying, their intelligence, their means and opportunity of
knowing the facts to which they are testifying, the nature of the facts to which they
testify, the probability or improbability of their testimony, their interest or want of
interest, and also their personal credibility so far as the same may legitimately
appear upon the trial. The court may also consider the number of witnesses, though
the preponderance is not necessarily with the greater number.
At this juncture, our ruling in Heirs of Tan Eng Kee v. Court of Appeals14 is
enlightening. Therein, we cited Article 1769 of the Civil Code, which provides:
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each
other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by
the use of the property;
(3) 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;
(4) The receipt by a person of a share of the profits of a business is a prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
Applying the legal provision to the facts of this case, the following circumstances
tend to prove that Elfledo was himself the partner of Jimmy and Norberto: 1)
Cresencia testified that Jose gave Elfledo ₱50,000.00, as share in the partnership, on
a date that coincided with the payment of the initial capital in the partnership;15 (2)
Elfledo ran the affairs of the partnership, wielding absolute control, power and
authority, without any intervention or opposition whatsoever from any of
petitioners herein;16 (3) all of the properties, particularly the nine trucks of the
partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo
did not receive wages or salaries from the partnership, indicating that what he
actually received were shares of the profits of the business;17 and (5) none of the
petitioners, as heirs of Jose, the alleged partner, demanded periodic accounting
from Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng Kee,18 a
demand for periodic accounting is evidence of a partnership.
Furthermore, petitioners failed to adduce any evidence to show that the real and
personal properties acquired and registered in the names of Elfledo and respondent
formed part of the estate of Jose, having been derived from Jose's alleged
partnership with Jimmy and Norberto. They failed to refute respondent's claim that
Elfledo and respondent engaged in other businesses. Edison even admitted that
Elfledo also sold Interwood lumber as a sideline.19 Petitioners could not offer any
credible evidence other than their bare assertions. Thus, we apply the basic rule of
evidence that between documentary and oral evidence, the former carries more
weight.20
Finally, we agree with the judicious findings of the CA, to wit:
The above testimonies prove that Elfledo was not just a hired help but one of the
partners in the trucking business, active and visible in the running of its affairs from
day one until this ceased operations upon his demise. The extent of his control,
administration and management of the partnership and its business, the fact that its
properties were placed in his name, and that he was not paid salary or other
compensation by the partners, are indicative of the fact that Elfledo was a partner
and a controlling one at that. It is apparent that the other partners only contributed
in the initial capital but had no say thereafter on how the business was ran.
Evidently it was through Elfredo’s efforts and hard work that the partnership was
able to acquire more trucks and otherwise prosper. Even the appellant participated
in the affairs of the partnership by acting as the bookkeeper sans salary.1avvphi1
It is notable too that Jose Lim died when the partnership was barely a year old, and
the partnership and its business not only continued but also flourished. If it were
true that it was Jose Lim and not Elfledo who was the partner, then upon his death
the partnership should have
been dissolved and its assets liquidated. On the contrary, these were not done but
instead its operation continued under the helm of Elfledo and without any
participation from the heirs of Jose Lim.
Whatever properties appellant and her husband had acquired, this was through
their own concerted efforts and hard work. Elfledo did not limit himself to the
business of their partnership but engaged in other lines of businesses as well.
In sum, we find no cogent reason to disturb the findings and the ruling of the CA as
they are amply supported by the law and by the evidence on record.
WHEREFORE, the instant Petition is DENIED. The assailed Court of Appeals Decision
dated June 29, 2005 is AFFIRMED. Costs against petitioners.
SO ORDERED.