G.R. No.

L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA BUALES,
namely: RODOLFO B. OA, MARIANO B. OA, LUZ
B. OA, VIRGINIA B. OA and LORENZO B. OA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUEs:
FACTS: Julia Buales died leaving as heirs her surviving
spouse, Lorenzo Oa and her five children. A civil case was
instituted for the settlement of her state, in which Oa was
appointed administrator and later on the guardian of the three
heirs who were still minors when the project for partition was
approved. This shows that the heirs have undivided interest
in 10 parcels of land, 6 houses and money from the War
Damage Commission.
Although the project of partition was approved by the Court,
no attempt was made to divide the properties and they
remained under the management of Oa who used said
properties in business by leasing or selling them and investing
the income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result,
petitioners properties and investments gradually increased.
Petitioners returned for income tax purposes their shares in the
net income but they did not actually receive their shares
because this left with Oa who invested them.
Based on these facts, CIR decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate
income tax, particularly for years 1955 and 1956. Petitioners
asked for reconsideration, which was denied hence this
petition for review from CTAs decision.
Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate
income tax
Held:
Unregistered partnership. The Tax Court found that instead
of actually distributing the estate of the deceased among
themselves pursuant to the project of partition, the heirs
allowed their properties to remain under the management of
Oa and let him use their shares as part of the common fund
for their ventures, even as they paid corresponding income
taxes on their respective shares.
Yes. 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 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.
For purposes of the tax on corporations, our National Internal
Revenue Code includes these partnerships
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 Mertens Law of
Federal Income Taxation, p. 562 Note 63; emphasis ours.)
with the exception only of duly registered general co
partnerships 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. Judgment affirmed.

Tai Tong Chuache & Co. v. Insurance Commission Facts:

Complainants acquired a parcel of land and a building they
assumed the mortgage of the latter in favor
of S S S , w h i c h w a s i n s u r e d w i t h r e s p
o n d e n t S S S A c c r e d i t e d G r o u p o f I n s u r e r
s . O n A p r i l 1 9 , 1 9 7 5 , Azucena Palomo
obtained a loan from petitioner TaiTong Chuache
Inc. securing it with a mortgage was executed over
the land and the building in favor
of p e t i t i o n e r . O n A p r i l 2
5 , 1 9 7 5 , A r s e n i o Chua, petitioner
s representative insured the latter' sinterest with Tra
vellers Multi -
Indemnity Corporation. O n J u n e 1 1 , 1 9 7 5 , P
e d r o P a l o m o s e c u r e d f i r e insurance covering
the building with respondent Zenith Insurance Corporation
and on July 16, 1975, another fire insurance was procured
from respondent Philippine
B r i t i s h A s s u r a n c e C o mp a n y , c o v e r i n g t h
e s a me building and the contents thereof.
However, on July31, 1975, the building and the
contents were totally razed by fire. Respondents,
Zenith Insurance, Phil.
British Assurancea n d SSS Ac c r e di t e d Gr o up o f I n s
u r e r s , p a i d t h e i r correspon ding shares of the loss.
Demand was made
f r o m r e s p o n d e n t Tr a ve l l e r s Mul t i -
I n d e mn i t y f o r i t s share in the loss but the same
was refused. Hence,
c o m p l a i n a n t s d e m a n d e d f r o m t h e o t h
e r t h r e e respondents the balance of each share in the
loss but
t h e s a me wa s a l s o r e f us e d. Pe t i t i o ne r t he n f i l
e d a complaint in intervention claiming the proceeds of the
fire insurance policy issued by respondent
TravellersMu l t i -
I n d e mn i t y b u t t h e l a t t e r a l l e ge d t ha t i t i s n o t e
n t i t l e d t o i nd e mn i t y f or l a c k o f i ns ur a bl e i nt e
r e s t before the loss of the insured premises.

Issue:

Whether or not petitioner has an insurable interest.

Ruling:
Re s p o nd e n t i n s ur a nc e c o mp a ny d i d no t a s s a i l
t h e validity of the insurance policy taken out by petitioner
over the mortgaged property. Neither did it deny that the said
property was totally razed by fire within the period
covered by the insurance. Respondent advanced an affirmative defense
of lack of insurable interest on the part of the petitioner that
before the occurrence of the peril insured against the Palomos
had already paid
t h e i r c r e d i t d ue t he pe t i t i o ne r . Re s po nde n t ha
v i n g admitted the material allegations in the complaint has
t h e
b ur de n o f p r o o f t o s how t ha t pe t i t i o ne r h a s
n o insurable interest over the insured property at the time the
contingency took place. Upon that point, there is
fa i l ur e o f p r o o f . Re s po nde nt e xe r t e d n o e f f o r t
t o present any evidence to substantiate its claim,
while
p e t i t i o n e r d i d . F o r s a i d r e s p o n d e n t ' s f a i
l u r e , t h e decision must be adverse to it. However,
respondent Insurance Commission absolved
respondent insurance company from liability on the
basis of the certification issued by the then Court
of First Instance of Davao, Branch II, that in a
certain civil action against the Palomos, Arsenio
Lopez Chua stands as the complainant and not Tai Tong
Chuache.
From said evidence respondent commission inferred
that the credit extended by herein petitioner to the
Palomos secured by the insured property must have
b e e n p a i d . Su c h i s a gl a r i ng e r r or wh i c h
c a n no t b e
sanctioned. Respondent Commission' s findings arebas
ed upon a mere inference.The record of the case shows that
the petitioner to support its claim for the insurance
proceeds offered as evidence the contract of mortgage which
has not been cancelled nor released. It has been held in a long
lineof cases that when the creditor is in possession of the
document of credit, he need not prove non-
paymentfor it is presumed. The validity of the insurance
policy
t a k e n b y p e t i t i o n e r w a s n o t a s s a i l e d b y
p r i v a t e respondent. Moreover, petitioner's claim that the
loan extended to the Palomos has not yet been paid
was
corroborated by Azucena Palomo who testified that t
h e y a r e s t i l l i n d e b t e d t o h e r e i n p e t i t i o n e r . Pu
b l i c respondent argues however, that if the civil case really
stemmed from the loan granted to Azucena Palomo by
petitioner the same should have been brought by TaiTo ng
Ch u a c h e o r b y i t s r e p r e s e n t a t i v e i n i t s o wn
behalf. From the above premise respondent concluded that
the obligation secured by the insured property must
have been paid. The premise i s correct but the conclusion
is wrong. Citing Rule 3, Sec. 2 respondent pointed out that
the action must be brought in the name of the real party in
interest. Correct! However, it should be borne in mind that
petitioner being a partnership may sue and be
s u e d i n i t s n a m e o r b y i t s
d u l y a u t h o r i z e d representative. The fact
that Arsenio Lopez Chua is the
r e p r e s e n t a t i v e o f p e t i t i o n e r i s n o t q u e s t
i o n e d . Petitioners declaration that Arsenio Lopez Chua
acts as
t h e m a n a g i n g p a r t n e r o f t h e p a r t n e r
s h i p w a s corroborated by respondent insurance
company. Thus Chua as the managing partner of the
partnership may execute all acts of administration including
the right to sue debtors of the partnership in case of their
failure
top a y t h e i r o b l i g a t i o n s w h e n i t b e c a
m e d u e a n d d e ma n d a b l e . O r a t t h e v e r y
l e a s t , C h u a b e i n g a partner of petitioner Tai Tong
Chuache & Company is a n a g e nt o f t h e
p a r t ne r s h i p . Be i n g a n a g e n t , i t i s
u n d e r s t o o d t h a t h e a c t e d f o r a n d i n b e h a l f
o f t h e firm.

Public respondent' s allegation that the civil case
filed by Arsenio Chua was in his capacity as
personal creditor of spouses Palomo has no basis.
The respondent insurance company having issued a
policy in favor of herein petitioner which policy was of legal
force and effect at the time of the fire, it is bound by its
terms and conditions. Upon its failure to prove the
allegation of lack of insurable interest on the part of the
petitioner, respondent insurance company is and must be held
liable.

TOCAO vs. COURT OF APPEALS and NENITA
A. ANAY, G.R. No. 127405 October 4, 2000MARJORIE
TOCAO and WILLIAM T. BELO, petitioners,vs.COURT
OF APPEALS and NENITA A. ANAY, respondents.
DECISIONYNARES-SANTIAGO, J.:

FACTS: Fresh from her stint as marketing adviser of
Technolux in Bangkok, Thailand, private respondent Nenita
A. Anay met petitioner William T. Belo, then the vice-
president for operations of Ultra Clean Water Purifier, through
her former employer in Bangkok. Belo introduced Anay to
petitioner Marjorie Tocao, who conveyed her desire to enter
into a joint venture with her for the importation and
local distribution of kitchen cook wares. Belo volunteered to
finance the joint venture and assigned to Anay the job of
marketing the product considering her experience and
established relationship with West Bend Company, a
manufacturer of kitchen wares in Wisconsin, U.S.A. Under the
joint venture, Belo acted as capitalist, Tocao as president and
general manager, and Anay as head of the marketing
department and later, vice-president for sales. Anay organized
the administrative staff and sales force while Tocao hired
and fired employees, determined commissions and/or
salaries of the employees, and assigned them to different
branches. The parties agreed that Belos name should not
appear in any documents relating to their transactions with
West Bend Company. Instead, they agreed to use Anays
name in securing distributorship of cookware from that
company. The parties agreed further that Anay would be
entitled to: (1) ten percent (10%) of the annual net profits of
the business; (2) overriding commission of six percent (6%) of
the overall weekly production; (3) thirty percent (30%) of the
sales she would make; and (4) two percent (2%) for her
demonstration services. The agreement was not reduced to
writing on the strength of Belos assurances that he was
sincere ,dependable and honest when it came to financial c
ommitments . Any having secured the distributorship
of cookware products from the West Bend Company
andorganized the administrative staff and the sales force, the
cookware business took off successfully. They operated under
the name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712
Rufino Building, Ayala Avenue, MakatiCity. Belo made good
his monetary commitments to Anay. Thereafter, Roger
Muencheberg of West Bend Company invited Anay to the
distributor/dealer meeting in West Bend, Wisconsin,U.S.A.,
from July 19 to 21, 1987 and to the southwestern
regional convention in Pismo Beach, California, U.S.A., from
July 25-26, 1987. Anay accepted the invitation with the
consent of Marjorie Tocao who, as president and
general manager of Geminesse Enterprise, even wrote a letter
to the Visa Section of the U.S. Embassy in Manila on July 13,
1987. A portion of the letter reads: Ms. Nenita D. Anay (sic),
who has been patronizing and supporting West Bend Co. for
twenty(20) years now, acquired the distributorship of
Royal Queen cookware for Geminesse Enterprise ,is the Vice
President Sales Marketing and a business partner of our
company, will attend in response to the invitation.On October
9, 1987, Anay learned that Marjorie Tocao had signed a
letter[vi][6] addressed to the Cubao sales office to the effect
that she was no longer the vice-president of Geminesse
Enterprise. The following day, October 10, she received a note
from Lina T. Cruz, marketing manager, that Marjorie
Tocao had barred her from holding office and conducting
demonstrations in both Makati and Cubao offices.

ISSUE:
the issues were limited to: (a) whether or not the plaintiff was
an employee or partner of Marjorie Tocao and Belo.

HELD: The trial court held that there was indeed an oral
partnership agreement between the plaintiff and the
defendants, based on the following: (a) there was an intention
to create a partnership;(b) a common fund was established
through contributions consisting of money and industry,
and(c) there was a joint interest in the profits. The testimony
of Elizabeth Bantilan, Anays cousin and the administrative
officer of Geminesse Enterprise from August 21, 1986 until it
was absorbed by Royal International, Inc., buttressed the fact
that a partnership existed between the parties. The letter of
Roger Muencheberg of West Bend Company stating that he
awarded the distributorship to Anay and Marjorie Tocao
because he was convinced that with Marjories financial
contribution and Anays experience, the combination of the
two would be invaluable to the partnership, also supported that
conclusion. Belos claim that he was merely a guarantor has
no basis since there was no written evidence thereof as
required by Article 2055of the Civil Code. Moreover, his acts
of attending and/or presiding over meetings of Geminesse
Enterprise plus his issuance of a memo giving Anay 37%
commission on personal sales belied this. On the contrary, it
demonstrated his involvement as a partner in the business. The
trial court finally held that a partner who is excluded
wrongfully from a partnership is an innocent partner. Hence,
the guilty partner must give him his due upon the dissolution
of the partnership as well as damages or share in the profits
realized from the appropriation of the partnership business
and goodwill. An innocent partner thus possesses pecuniary
interest in every existing contract that was incomplete and
in the trade name of the co-partnership and assets at the time
he was wrongfully expelled. To be considered a
juridical personality, a partnership must fulfill these requisites:
(1) two or more persons bind themselves to contribute money,
property or industry to a common fund; and(2) intention on the part
of the partners to divide the profits among themselves.[xv][15] It may be
constituted in any form; a public instrument is necessary only
where immovable property or real rights are contributed
thereto.[xvi][16] This implies that since a contract of
partnership is consensual, an oral contract of partnership is as
good as a written one. Where no immovable property or real
rights are involved, what matters is that the parties
have complied with the requisites of a partnership. The fact
that there appears to be no record in the Securities and
Exchange Commission of a public instrument embodying the
partnership agreement pursuant to Article 1772 of the
Civil Code[xvii][17] did not cause the nullification of the
partnership. The pertinent provision of the Civil Code on the
matter states: Art. 1768. The partnership has a juridical
personality separate and distinct from that of each of the
partners, even in case of failure to comply with the
requirements of article 1772, first paragraph. Petitioners admit
that private respondent had the expertise to engage in the
business of distributorship of cookware. Private respondent
contributed such expertise to the partnership and hence, under
the law, she was the industrial or managing partner. It was
through her reputation with the West Bend Company that the
partnership was able to open the business of distributorship of
that companys cookware products; it was through the
same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private
respondents indispensable role in putting up the
business. Undoubtedly, petitioner Tocao unilaterally
excluded private respondent from the partnership to reap for
herself and/or for petitioner Belo financial gains
resulting from private respondents efforts to make the
business venture a success. Thus, as petitioner Tocao became
adept in the business operation, she started to assert herself to
the extent that she would even shout at private respondent in
front of other people.[xxxviii][38] Her instruction to
Lina Torda Cruz, marketing manager, not to allow private
respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private
respondent was no longer necessary in the business
operation,[xxxix][39] and resulted in a falling out between the
two. However, a mere falling out or misunderstanding
between partners does not convert the partnership into a sham
organization.[xl][40] The partnership exists until dissolved
under the law. Since the partnership created by petitioners and
private respondent has no fixed term and is therefore a
partnership at will predicated on their mutual desire and
consent ,it may be dissolved by the will of a partner. Thus:x x
x. The right to choose with whom a person wishes to associate
himself is the very foundation and essence of that partnership.
Its continued existence is, in turn, dependent on the constancy
of that mutual resolve, along with each partners capability to
give it, and the absence of cause for dissolution provided by
the law itself. Verily, any one of the partners may, at his sole
pleasure ,dictate a dissolution of the partnership at will.
He must, however, act in good faith, not that the attendance of
bad faith can prevent the dissolution of the partnership but that
it can result in a liability for damages.[xli][41] An unjustified
dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the
doctrine of delectus personae allows the partners to have the
power, although not necessarily the right to dissolve the
partnership.[xlii][42]In this case, petitioner Tocaos unilateral
exclusion of private respondent from the partnership is shown
by her memo to the Cubao office plainly stating that private
respondent was, as of October 9, 1987, no longer the vice-
president for sales of Geminesse Enterprise.[xliii][43] By that
memo, petitioner Tocao effected her own withdrawal from the
partnership and considered herself ashaving ceased to be
associated with the partnership in the carrying on of the
business. Nevertheless, the partnership was not terminated
thereby; it continues until the winding up of the
business.[xliv][44]The winding up of partnership affairs has
not yet been undertaken by the partnership. This is manifest in
petitioners claim for stocks that had been entrusted to private
respondent in the pursuit of the partnership business.

Patagoc vs csc
185 scra 411 1990

Facts: Patagoc was appointed City Engineer by Zamboanga City Mayor to
take the place of the deceased city engineer. The appointment was in the
nature of a reinstatement. He was previously employed by the city
government, assigned with the Bureau of Public Works Engineering District
and with the City Engineer's Office when the Ministry of Public Works was
reorganized and he was phased out. He rose from Civil Engineering Aide II
to Supervising City Engineer 11. Thereafter, for six (6) years before his
appointment as City Engineer, he was a consultant with the Department of
Public Works and Highways and then with a private construction firm. The
incumbent Assistant City Engineer, filed a protest against petitioner's
appointment with the Civil Service Regional Office on the ground that he
was next-in-rank. The Civil Service Regional Director, in a decision finds the
protest meritorious hereby revoking Patagocs appointment

Issue: what is the extent of the City Mayors authority to appoint the City
Engineer as when the appointee and the protestant are both qualified for the
position, may the Civil Service Commission disapprove the appointment of
the former and order the appointment of the protestant?

Ruling: No according to the supreme court Appointment is an essentially
dictionary power and must be performed by the officer in which it is vested
according to his best lights, the only condition being that the appointee
should the cannot be faulted on the ground that there are others better
qualified qualifications required by law. If he does, then the appointment
who should have been preferred. This is a political question involving
considerations of wisdom which only the appointing authority can decide. It
may be, as alleged by the Commission, that Civil Service Circular No. 5, s.
1983 provides as a condition for appointment by reinstatement that "the
vacancy cannot be filled by promotion of qualified officers and employees in
the agency concerned, by transfer of qualified officers or employees from
other government agencies, or there are no eligibles in the appropriate
register of the Commission available for certification to the vacancy."
However, this circular cannot be construed so as to effectively eliminate the
appointing power's discretion. At best, the circular can be considered as a
guide for the appointing power's exercise of discretion. Moreover, we note
that the condition stated in the circular is not even imposed in P.D. No. 807.
Should he choose not to fill the vacant position by promotion, the decree, as
stated earlier, gives the appointing power several alternatives:
., the vacancy may be filled by transfer, by reinstatement, by re-employment,
or by an original appointment.

Phililex Mining vs CIR

Facts: Petitioner Philex entered into an agreement with
Baguio Gold Mining Corporation for the former to manage the
latters mining claim know as the Sto. Mine. The
parties agreement was denominated as Power of Attorney.
The mine suffered continuing losses over the years, which
resulted in petitioners withdrawal as manager of the mine.
The parties executed a Compromise Dation in Payment,
wherein the debt of Baguio amounted to Php. 112,136,000.00.
Petitioner deducted said amount from its gross income in
its annual tax income return as loss on the settlement of
receivables from Baguio Gold against reserves and
allowances. BIR disallowed the amount as deduction for bad
debt. Petitioner claims that it entered a contract of agency
evidenced by the power of attorney executed by them and
the advances made by petitioners is in the nature of a loan and
thus can be deducted from its gross income. Court of Tax
Appeals (CTA) rejected the claim and held that it is a
partnership rather than an agency. CA affirmed CTA .

Issue: Whether or not it is an agency.

Held: No. The lower courts correctly held that the Power of
Attorney (PA) is the instrument material that is material in
determining the true nature of the business relationship
between petitioner and Baguio. An examination of the said PA
reveals that a partnership or joint venture was indeed intended
by the parties. While a corporation like the petitioner cannot
generally enter into a contract of partnership unless authorized
by law or its charter, it has been held that it may enter into a
joint venture, which is akin to a particular partnership. The PA
indicates that the parties had intended to create a PAT and
establish a common fund for the purpose. They also had a
joint interest in the profits of the business as shown by the 50-
50 sharing of income of the mine.

Moreover, in an agency coupled with interest, it is the
agency that cannot be revoked or withdrawn by the principal
due to an interest of a third party that depends upon it or
the mutual interest of both principal and agent. In this case the
non-revocation or non-withdrawal under the PA applies to the
advances made by the petitioner who is the agent and not the
principal under the contract. Thus, it cannot be inferred from
the stipulation that it is an agency.

G.R. No. L-68118 October 29, 1985JOSE P. OBILLOS, JR.,
SARAH P. OBILLOS, ROMEO P. OBILLOS and
REMEDIOS P.
OBILLOS,brothers and sisters, petitionersvs.COMMISSIONER
OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.AQUINO,
J .:
Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and
963 square meters of 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 Torrens titles issued to them showed that they
were co-owners of the two lots .I n 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 Canada for the total sum of P313,050. 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, 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. The petitioners are being held liable for deficiency income
taxes and penalties totaling 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 The petitioners contested the assessments. Two
Judges of the Tax Court sustained the same. Hence, the instant appeal.

Issue:
Whether or not the petitioners had indeed formed a partnership or joint
venture and thus liable for corporate tax.

Held:
The Supreme Court held that the petitioners should not be considered to
have formed a partnership just because they allegedly contributed
P178,708.12 to buy the two lots, resold the same and divided the profit
among themselves. To regard so 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.
*
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 t
hem have a joint or common right or interest in any property
from which the returns are derived". There must be an unm
istakable intention to form a partnership or joint venture.

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. They did not
contribute or invest additional ' capital to increase or expand the properties,
nor was there an unmistakable intention to form partnership or joint venture.

WHEREFORE, the judgment of the Tax Court is reversed and set aside.
The assessments are cancelled. No costs.
All co-ownerships are not deemed unregistered partnership.

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. As compared to other cases: 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 there from as a common fund to produce profits for themselves, it
was held that they were taxable as an unregistered partnership. This case is
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 rentalstherefrom. Clearly,
the petitioners in these two cases had formed an unregistered partnership.





Deluao vs. Casteel [ 26 SCRA 475]

Facts:
Nicanor Casteel filed a fishpond application for a big tract of
swampy land in the sitio of Malalagin Davao City three times.
All the applications were disapproved for a variety of reasons.
Casteel filed a motion for reconsideration and while the
motion was pending resolution, he was advised by the district
forester of Davao that no further action would be taken unless
he filed a new application for the areaconcerned. So he filed a
new fishpond application. Meanwhile, several applications
were submitted by
other persons of the area covered by Casteels application.
Leoncio Aradillos filed his fishpond
application covering 10 hectares of land and was later granted
a fishpond permit. Victor Carpio also filed
his fishpond application. Alejandro Cacams application
was given due course and a fishpond permit was also issued to
him. Felipe Deluao filed his own fishpond application for the
area covered by
Casteels application. Because of the threat poised upon his
position by the above applicants, Casteel
realized the urgent necessity of expanding his occupation by
constructing dikes and cultivating marketable fishes, in order
to prevent squatters from usurping the land. But lacking
financial resources, he sought financial aid from his uncle
Felipe Deluao who extended loans to him. Casteel also filed
corresponding protests. Despite the finding in the investigation
that Casteel had already introduced
improvements on portions applied by him, the Director of Fisheries rejected
Casteels application
requiring him to remove all the improvements which he had
introduced in the land. In 1949, Inocencia Deluao and Nicanor
Casteel executed a contract
denominated as a contract of service
Whereby Deluao hires and employees Casteel. Inocencia
Deluao also executed an SPA in favour of Jessica Donesa to
represent her in the administration of the fishponds. The
Director of Fisheries rejected the application
by Deluao but the latter reiterated his claim by filing two administrative
cases. Subsequently, Casteels
application was given due course and the latter forbade
Inocencia Deluao from further administering the fishpond and
ejected Jessica Donesa in the premises. Alleging violation of
the contract of service, spouses Deluao filed an action for
specific performance and damages against Casteel.

Issue: WON the contract of service created a contract of co-
ownership and partnership betweenDeluao and Casteel over
the fishpond.

Held: Too well-settled to require any citation of authority is
the rule that everyone is conclusively presumed to know the
law. It must be assumed, conformably to such rule, that the
parties entered into the so-called "contract of service"
cognizant of the mandatory and prohibitory laws governing
the filing of applications for fishpond permits. And since they
were aware of the said laws, it must likewise be assumed
in fairness to the parties that they did not intend to violate
them. This view must necessarily negate the appellees'
allegation that exhibit A created a contract of co-ownership
betweenthe parties over the disputed fishpond. We shall
therefore construe the contract as one of partnership, divided
into two parts - namely, a contract of partnership, to exploit
the fishpond pending its award to either Felipe Deluao or
Nicanor Casteel, and a contract of partnership to divide the
fishpond between them after such award. The first is valid, the
second illegal. It is well to note that when the appellee
Inocencia Deluao and the appellant entered into the so-called
"contract of service", there were two pending applications
over the fishpond. One was Casteel's which was appealed by
him to the Secretary of Agriculture and Natural Resources
after it was disallowed by the Director of Fisheries. The other
wasFelipe Deluao's application over the same area which was
likewise rejected by the Director of Fisheries.The evidence
preponderates in favor of the view that the initial intention of
the parties was not to form a co-ownership but to establish a
partnership.
Inocencia Deluao as capitalist partner and Casteel asindustrial
partner.
the ultimate undertaking of which was to divide into two
equal parts such portion of the fishpond as might have been
developed by the amount extended by the plaintiffs-appellees,
with the further provision that Casteel should reimburse the
expenses incurred by the appellees over one-half of the
fishpond that would pertain to him. The arrangement under the
so-called "contract of service" continued until the decisions
were issued by the Secretary of Agriculture and Natural
Resourcesin DANR Cases 353 and 353-B. This development,
by itself, brought about the dissolution of the partnership. Art.
1830(3) of the Civil Code enumerates, as one of the causes for
the dissolution of a partnership, ". . . any event which makes it
unlawful for the business of the partnership to be carried on or
for the members to carry it on in partnership." The approval
of the appellant's fishpond application by the decisions in
DANR Cases 353 and 353-B brought to the fore several
provisions of law which made the continuation of the
partnership unlawful and therefore caused its ipso facto
dissolution. Act 4003,known as the Fisheries Act, prohibits the
holder of a fishpond permit (the permittee) from transferring
or subletting the fishpond granted to him, without the previous
consent or approval of the Secretary of Agriculture and
Natural Resources. The Public Land Act also provides that
"The lessee shall not assign, encumber, or sublet his rights
without the consent of the Secretary of Agriculture and
Commerce, and the violation of this condition shall avoid the
contract. Finally, section 37 of Administrative Order No. 14of
the Secretary of Agriculture and Natural Resources issued in
August 1937, prohibits a transfer or sublease unless first
approved by the Director of Lands and under such terms and
conditions as he may prescribe. Since the partnership had for
its object the division into two equal parts of the fishpond
between the appellees and the appellant after it shall have been
awarded to the latter, and therefore it envisaged the
unauthorized transfer of one-half thereof to parties other than
the applicant Casteel, it was dissolved by the approval of his
application and the award to him of the fishpond. The
approval was an event which made it unlawful for the business
of the partnership to be carried on or for the members to carry
it on in partnership.