Pascual and Dragon v CIR and CTA Gancayco, J. | 1988 Facts: 1.

In 1965, petitioners bought 2 parcels of land from one Bernardino and in 1966, they bout 3 parcels of land from one Roque; Later in 1968, they sold the 1st 2 parcels of land to Marenir Development Corporation; While the 3 parcels of land to Reyes and Samson in 1970; 2. Petitioners obtained net profit of 165k in the 1968 sale and a net profit of 60k in the 1970 sale; They paid the corresponding capital gain taxes 1973 and 1974 by availing of tax amnesties in said years; 3. The problem arose when the Acting BIR Commissioner (Plana) assessed petitioners in 1979 and required them to pay 107k as alleged deficiency corporate income taxes for 1968 and 1970; Petitioners protested this saying they availed of tax amnesties above said; 4. The Commissioner replied to the protest and said that in 1968 and 1970, petitioners (as co-owners in the real estate transactions) formed an unregistered partnership or joint venture which is taxable as a corporation under Section 20(b) and its income also taxable under Section 24, both of the National Internal Revenue Code; Further, 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; Also, their availment of tax amnesties only relieved them of their individual income tax liabilities (and not of their unregistered partnership); 5. Petitioner petitioned for review with CTA which sadly affirmed the Commissioner; CTA relied on the principle in Evangelista v Collector (1957): an unregistered partnership was in fact formed by petitioner which like a corporation was subject to corporate income tax distinct from that imposed on the partners; 6. Petitioners went to SC. Issue: W/N petitioner formed an unregistered partnership which is taxable of corporate income tax. No. Ratio: The Evangelista case: Short facts: Petitioners here borrowed money from their father; together with their own funds, they used it to buy several real properties; They appointed their brother to manage the properties with full power to lease, collect, rent, issue receipts, etc;

They had the real properties rented or leased for several years and gained net profits from the rental income; so the Collector of Internal Revenue demanded income tax on a corporation from them; Court there ruled (issue on tax on corporations: meaning of corporation and partnership as used in Sections 241 and 842 of the NIRC): 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. Elements of a partnership: 1. An agreement to contribute money, property or industry to a common fund; and Present at case because petitioners agreed to and did contribute money and property to a common fund; 2. Intent to divide the profits among the contracting parties; As for this element, Court went to find intent of petitioners and considered facts and circumstances; SC satisfied that the 2nd element was present: 1. Said common fund not found already in existence; it was not inherited by them; they created it purposely; they jointly borrowed a substantial portion to establish the fund; 2. They invested the same in a series of transactions; they acquired 24 lots and the transactions strongly indicate a pattern or common design that was not limited to the conservation and preservation of the common fund or even the property acquired; there existed a character of habituality peculiar to business transactions engaged in for purposes of gain; 3. Lots not devoted to residential purposes or to other personal uses; 4. Properties under management of one person (Simeon Evangelista) with full power to lease, collect rents, etc.; thus the affairs related to the property have been handled as if the same belonged to a corporation or business enterprise operated for profit; 5. The foregoing conditions existed for more than 10 years (or 15 since the property was 1

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: ...
2

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companies colectivas)

acquired or 12 when Simeon became manager); 6. Petitioners have not testified or introduced evidence on their purpose creating the set up; Although taken singly, they might not 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;

At case: 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; The Commissioner just assumed these conditions to be present based on the fact that petitioners purchase parcels of land and became co-owners thereof; In Evangelista: a. there was a series of transactions showing that the purpose was not limited to conservation or preservation of the common fund or even the properties; b. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present; At case: Both not present at case; transactions were isolate; they did not make improvements on the 1st 2 parcels of land bought in 1965; they bought the later 3 in 1966; It was only 1968 when they sold the 2 parcels of land after which they did not make any additional or new purchase; the 3 were sold in 1970; In Evangelista, the properties were leased to tenants for several years and the business was under management of one of the partners; None of the circumstances are present at case; the co-ownership started only in 1965 and ended in 1970; Court then cites concurring of Justice Angelo Bautista in Evangelista: Article 1679 of CC lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership: He cited paragraphs 23 and 34 of said article; Aside from the instance of profit, the presence of other elements constituting partnership is necessary: o Clear intent to form a partnership;

Existence of a juridical personality different from that of the individual partners; and o Freedom to transfer or assign any interest in the property by one with consent of the others; 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 In order to constitute a partnership inter sese there must be: o An intent to form the same; o Generally participating in both profits and losses; and o 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; 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) o

At case: Clear there is evidence of co-ownership between the petitioners; No adequate basis that they formed an unregistered partnership; The two isolated transactions did not make them partners; Assuming arguendo that an unregistered partnership have been formed, since it does not have a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held liable individually as partners; HOWEVER, as they availed of benefits of tax amnesty as individual taxpayers, they are thereby relieved of any further tax liability. PETITIONER GRANTED.

(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; 4 (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;