FIRST DIVISION

[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.

SYLLABUS

1. CIVIL LAW; PARTNERSHIP; HOW ESTABLISHED. — 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.
2. COMMERCIAL LAW; CORPORATE INCOME TAX; PARTIES IN CASE AT BAR
NOT LIABLE FOR THE PAYMENT THEREOF. — 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 pro ts
as co-owners and paid their capital gains taxes on their net pro ts 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. As petitioners have availed of the bene ts of
tax amnesty as individual taxpayers in these transactions, they are thereby relieved of
any further tax liability arising therefrom.

DECISION

GANCAYCO , J : p

The distinction between co-ownership and an unregistered partnership or joint

venture for income tax purposes is the issue in this petition. prLL

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 rst two parcels of land were sold by petitioners in 1968 to
Marenir 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 pro t in the sale made in 1968 in the amount of P165,224.70, while they realized a
net pro t 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. LLphil

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 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 de ciency 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 pro ts 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. Cdpr

Petitioners led 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 a rmed 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 them 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.)
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 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 pro ts 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' xed 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 (companias colectivas), 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 (companias 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 pro ts among the contracting parties . The rst
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 satis ed 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

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 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 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 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 enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years,
or, to be exact, over fteen (15) years since the rst property was acquired, and
over twelve (12) years, since Simeon Evangelista became the manager.
6. Petitioners have not testi ed 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 su ce to establish the intent

necessary to constitute a partnership, the collective effect of these circumstance
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 pro ts 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 Evangelista, 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
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 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 fteen (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 pro ts 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 pro t, 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 pro t 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 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 pro ts 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 pro ts of
disposing of it, the brother and the other not being entitled to share in plaintiff's
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 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 pro ts 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 pro ts as co-owners and paid their capital
gains taxes on their net pro ts 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 de ciency
corporate income tax, then petitioners can be held individually liable as partners for this
unpaid obligation of the partnership. 7 However, as petitioners have availed of the
bene ts of tax amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.
WHEREFORE, 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.

Footnotes
1. Annex "C" of the Petition, citing Evangelista v. Collector, G.R. No. 9996, Oct. 15, 1957, 102
Phil. 140.
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 2. Penned by Presiding Judge Amante Filler, concurred in by Associate Judge Alex Z.
Reyes, Associate Judge Roaquin dissented in a separate opinion.
3. Supra.

4. Supra.
5. Supra, pp. 144-146; emphasis supplied.
6. Supra, pp. 150-151; emphasis supplied.
7. Article 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partnership contract. (Civil Code of the
Philippines).
See also Articles 1817 and 1818, Supra.

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