BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY.

ROMERO

DEFINITION: ARTICLE 1767

LITONJUA VS LITONJUA
Business Organization Partnership, Agency, Trust Partnership, how formed
Aurelio and Eduardo are brothers. In 1973, Aurelio alleged that Eduardo entered into
a contract of partnership with him. Aurelio showed as evidence a letter sent to him by
Eduardo that the latter is allowing Aurelio to manage their family business (if
Eduardos away) and in exchange thereof he will be giving Aurelio P1 million or 10%
equity, whichever is higher. A memorandum was subsequently made for the said
partnership agreement. The memorandum this time stated that in exchange of
Aurelio, who just got married, retaining his share in the family business (movie
theatres, shipping and land development) and some other immovable properties, he
will be given P1 Million or 10% equity in all these businesses and those to be
subsequently acquired by them whichever is greater.

HEIRS OF TAN ENG KEE V. COURT OF APPEALS

Business Organization Partnership, Agency, Trust Periodic Accounting Profit
Sharing
Benguet Lumber has been around even before World War II but during the war, its
stocks were confiscated by the Japanese. After the war, the brothers Tan Eng Lay
and Tan Eng Kee pooled their resources in order to revive the business. In 1981, Tan
Eng Lay caused the conversion of Benguet Lumber into a corporation called Benguet
Lumber and Hardware Company, with him and his family as the incorporators. In
1983, Tan Eng Kee died. Thereafter, the heirs of Tan Eng Kee demanded for an
accounting and the liquidation of the partnership.

In 1992 however, the relationship between the brothers went sour. And so Aurelio
demanded an accounting and the liquidation of his share in the partnership. Eduardo
did not heed and so Aurelio sued Eduardo.

Tan Eng Lay denied that there was a partnership between him and his brother. He
said that Tan Eng Kee was merely an employee of Benguet Lumber. He showed
evidence consisting of Tan Eng Kees payroll; his SSS as an employee and Benguet
Lumber being the employee. As a result of the presentation of said evidence, the
heirs of Tan Eng Kee filed a criminal case against Tan Eng Lay for allegedly
fabricating those evidence. Said criminal case was however dismissed for lack of
evidence.

ISSUE: Whether or not there exists a partnership.

ISSUE: Whether or not Tan Eng Kee is a partner.

HELD: No. The partnership is void and legally nonexistent. The documentary
evidence presented by Aurelio, i.e. the letter from Eduardo and the Memorandum,
did not prove partnership.

HELD: No. There was no certificate of partnership between the brothers. The heirs
were not able to show what was the agreement between the brothers as to the
sharing of profits. All they presented were circumstantial evidence which in no way
proved partnership.

The 1973 letter from Eduardo on its face, contains typewritten entries, personal in
tone, but is unsigned and undated. As an unsigned document, there can be no
quibbling that said letter does not meet the public instrumentation requirements
exacted under Article 1771 (how partnership is constituted) of the Civil Code.
Moreover, being unsigned and doubtless referring to a partnership involving more
than P3,000.00 in money or property, said letter cannot be presented for notarization,
let alone registered with the Securities and Exchange Commission (SEC), as called
for under the Article 1772 (capitalization of a partnership) 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 Aurelios contribution, if any, to the supposed
partnership.
The Memorandum is also not a proof of the partnership for the same is not a public
instrument and again, no inventory was made of the immovable property and no
inventory was attached to the Memorandum. Article 1773 of the Civil Code requires
that if immovable property is contributed to the partnership an inventory shall be had
and attached to the contract.

It is obvious that there was no partnership whatsoever. Except for a firm name, there
was no firm account, no firm letterheads submitted as evidence, no certificate of
partnership, no agreement as to profits and losses, and no time fixed for the duration
of the partnership. There was even no attempt to submit an accounting
corresponding to the period after the war until Kees death in 1984. It had no
business book, no written account nor any memorandum for that matter and no
license mentioning the existence of a partnership.
In fact, Tan Eng Lay was able to show evidence that Benguet Lumber is a sole
proprietorship. He registered the same as such in 1954; that Kee was just an
employee based on the latters payroll and SSS coverage, and other records
indicating Tan Eng Lay as the proprietor.
Also, the business definitely amounted to more P3,000.00 hence if there was a
partnership, it should have been made in a public instrument.
But the business was started after the war (1945) prior to the publication of the New
Civil Code in 1950?
Even so, nothing prevented the parties from complying with this requirement.

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

Also, the Supreme Court emphasized that for 40 years, Tan Eng Kee never asked for
an accounting. The essence of a partnership is that the partners share in the profits
and losses. Each has the right to demand an accounting as long as the partnership
exists. Even if it can be speculated that a scenario wherein if excellent relations exist
among the partners at the start of the business and all the partners are more
interested in seeing the firm grow rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible. But in the situation in the case at bar, the
deferment, if any, had gone on too long to be plausible. A person is presumed to
take ordinary care of his concerns. A demand for periodic accounting is evidence of a
partnership which Kee never did.
The Supreme Court also noted:
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
which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is 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 installment or otherwise;
(b) As wages of an employee or rent to a landlord;

FACTS: The spouses Andres Jarantilla and Felisa Jaleco were survived by eight
children: Federico Sr., Delfin, Benjamin, Conchita, Rosita, Pacita, Rafael and
Antonieta. Petitioner Federico Jarantilla, Jr. is the grandchild of the late Jarantilla
spouses by their son Federico Jarantilla, Sr. and his wife Leda Jamili. Petitioner also
has two other brothers: Doroteo and Tomas Jarantilla.
The Jarantilla heirs extrajudicially partitioned amongst themselves the real properties
of their deceased parents. With the exception of the real property adjudicated to
Pacita Jarantilla, the heirs also agreed to allot the produce of the said real properties
for the years 1947-1949 for the studies of Rafael and Antonieta Jarantilla.
Sps. Rosita Jarantilla and Vivencio Deocampo entered into an agreement with the
spouses Buenaventura Remotigue and Conchita Jarantilla to provide mutual
assistance to each other by way of financial support to any commercial and
agricultural activity on a joint business arrangement. This proved to be successful as
they were able to establish a manufacturing and trading business, acquire real
properties, and construct buildings, among other things. The same ended in 1973
upon their voluntary dissolution.
The spouses Buenaventura and Conchita Remotigue executed a document
Acknowledgement of Participating Capital stating the participating capital of of their
co-owners as of the year 1952, with Antonieta Jarantillas stated as eight thousand
pesos (P8,000.00) and Federico Jarantilla, Jrs as five thousand pesos (P5,000.00).
The controversy started when Antonieta filed a complaint against Buenaventura,
Cynthia, Doroteo and Tomas, for the accounting of the assets and income of the coownership, for its partition and the delivery of her share corresponding to eight
percent (8%), and for damages. She alleged that the initial contribution of property
and money came from the heirs inheritance, and her subsequent annual investment
of seven thousand five hundred pesos (P7,500.00) as additional capital came from
the proceeds of her farm.
Respondents denied having formed a partnership. They did not deny the existence
and validity of the "Acknowledgement of Participating Capital" and in fact used this
as evidence to support their claim that Antonietas 8% share was limited to the
businesses enumerated therein. Petitioner Federico Jr joined his aunt Antonieta and
likewise asserted his share in the supposed partnership.

(c) As an annuity to a widow or representative of a deceased partner;

The RTC rendered judgment in favor of Antonieta and Federico. On appeal, the CA
set the RTC Decision. Petitioner filed a petition for review to the SC.

(d) As interest on a loan, though the amount of payment vary with the profits of the
business;

ISSUE: Whether or not the CA erred in ruling that petitioners are not entitled to
profits over the businesses not listed in the Acknowledgement

(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.

JARANTILLA, JR. V. JARANTILLA

HELD: No. CA Decision Affirmed

CIVIL LAW - There is a co-ownership when an undivided thing or right belongs to
different persons. It is a 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.
CIVIL LAW - 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

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

they may, without becoming partners, agree among themselves as to the

management, and use of such property and the application of the proceeds
therefrom.
Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership: (a) an agreement to contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the contracting parties.
It is not denied that all the parties in this case have agreed to contribute capital to a
common fund to be able to later on share its profits. They have admitted this fact,
agreed to its veracity, and even submitted one common documentary evidence to
prove such partnership - the Acknowledgement of Participating Capital.
The Acknowledgement of Participating Capital is a duly notarized document
voluntarily executed by Conchita Jarantilla-Remotigue and Buenaventura Remotigue
in 1957. Petitioner does not dispute its contents and is actually relying on it to prove
his participation in the partnership. Article 1797 of the Civil Code provides:

should not be made to rest on loose, equivocal or indefinite declarations. Trustworthy

evidence is required because oral evidence can easily be fabricated.
The petitioner has failed to prove that there exists a trust over the subject real
properties. Aside from his bare allegations, he has failed to show that the
respondents used the partnerships money to purchase the said properties. Even
assuming arguendo that some partnership income was used to acquire these
properties, the petitioner should have successfully shown that these funds came from
his share in the partnership profits. After all, by his own admission, and as stated in
the Acknowledgement of Participating Capital, he owned a mere 6% equity in the
partnership. DENIED.
SY VS COURT OF APPEALS

In Villareal v. Ramirez, the Court held that since a partnership is a separate juridical
entity, the shares to be paid out to the partners is necessarily limited only to its total
resources.

FACTS: Sometime in 1958, private respondent Jaime Sahot[5] started working as a

truck helper for petitioners family-owned trucking business named Vicente Sy
Trucking. In 1965, he became a truck driver of the same family business, renamed T.
Paulino Trucking Service, later 6Bs Trucking Corporation in 1985, and thereafter
known as SBT Trucking Corporation since 1994. Throughout all these changes in
names and for 36 years, private respondent continuously served the trucking
business of petitioners. When Sahot was 59 years old, he incurred several absences
due to various ailments. Particularly causing him pain was his left thigh, which greatly
affected the performance of his task as a driver. He inquired about his medical and
retirement benefits with the Social Security System (SSS) on April 25, 1994, but
discovered that his premium payments had not been remitted by his employer. Sahot
filed a week-long leave to get medical attention. He was treated for EOR,
presleyopia, hypertensive retinopathy G II and heart enlargement. Because of such,
Belen Paulino of the SBT Trucking Service management told him to file a formal
request for extension of his leave. When Sahot applied for an extended leave, he
was threatened of termination of employment should he refuse to go back to work.
Eventually, Sahot was dismissed from employment which prompted the latter to file
an illegal dismissal case with the NLRC. For their part, petitioners admitted they had
a trucking business in the 1950s but denied employing helpers and drivers. They
contend that private respondent was not illegally dismissed as a driver because he
was in fact petitioners industrial partner. They add that it was not until the year 1994,
when SBT Trucking Corporation was established, and only then did respondent
Sahot become an employee of the company, with a monthly salary that reached
P4,160.00 at the time of his separation. The NLRC and the CA ruled that Sahot was
an employee of the petitioner.

CIVIL LAW - express and implied trust

ISSUE: Whether Sahot is an industrial partner

Art. 1797. The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall
be in proportion to what he may have contributed, but the industrial partner shall not
be liable for the losses.
The petitioner himself claims his share to be 6%, as stated in the Acknowledgement
of Participating Capital. However, petitioner fails to realize that this document
specifically enumerated the businesses covered by the partnership: Manila Athletic
Supply, Remotigue Trading in Iloilo City and Remotigue Trading in Cotabato City.
Since there was a clear agreement that the capital the partners contributed went to
the three businesses, then there is no reason to deviate from such agreement and go
beyond the stipulations in the document. Therefore, the Court of Appeals did not err
in limiting petitioners share to the assets of the businesses enumerated in the
Acknowledgement of Participating Capital.

The petitioner further asserts that he is entitled to respondents properties based on

the concept of trust. He claims that since the subject real properties were purchased
using funds of the partnership, wherein he has a 6% share, then "law and equity
mandates that he should be considered as a co-owner of those properties in such
proportion."
As a rule, the burden of proving the existence of a trust is on the party asserting its
existence, and such proof must be clear and satisfactorily show the existence of the
trust and its elements. While implied trusts may be proved by oral evidence, the
evidence must be trustworthy and received by the courts with extreme caution, and

RULING: No. Article 1767 of the Civil Code states that in 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. Not one of
these circumstances is present in this case. No written agreement exists to prove the
partnership between the parties. Private respondent did not contribute money,
property or industry for the purpose of engaging in the supposed business. There is
no proof that he was receiving a share in the profits as a matter of course, during the
period when the trucking business was under operation. Neither is there any proof
that he had actively participated in the management, administration and adoption of
policies of the business. Thus, the NLRC and the CA did not err in reversing the
finding of the Labor Arbiter that private respondent was an industrial partner from

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

1958 to 1994. On this point, the Court affirmed the findings of the appellate court and
the NLRC. Private respondent Jaime Sahot was not an industrial partner but an
employee of petitioners from 1958 to 1994. The existence of an employer-employee
relationship is ultimately a question of fact and the findings thereon by the NLRC, as
affirmed by the Court of Appeals, deserve not only respect but finality when
supported by substantial evidence. Substantial evidence is such amount of relevant
evidence which a reasonable mind might accept as adequate to justify a conclusion.
ELEMENTS: ARTICLE 1767
EVANGELISTA V. CIR
Facts: Herein petitioners seek a review of CTAs decision holding them liable for
income tax, real estate dealers tax and residence tax. As stipulated, petitioners
borrowed from their father a certain sum for the purpose of buying real properties.
Within February 1943 to April 1994, they have bought parcels of land from different
persons, the management of said properties was charged to their brother Simeon
evidenced by a document. These properties were then leased or rented to various
tenants. On September 1954, CIR demanded the payment of income tax on
corporations, real estate dealers fixed tax, and corporation residence tax to which
the petitioners seek to be absolved from such payment.
Issue: Whether petitioners are subject to the tax on corporations.
Ruling: The Court ruled that with respect to the tax on corporations, the issue hinges
on the meaning of the terms corporation and partnership as used in Section 24
(provides that a tax shall be levied on every corporation no matter how created or
organized except general co-partnerships) and 84 (provides that the term corporation
includes among others, partnership) of the NIRC. Pursuant to Article 1767, NCC
(provides for the concept of partnership), its essential elements are: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties.
It is of the opinion of the Court that the first element is undoubtedly present
for petitioners have agreed to, and did, contribute money and property to a common
fund. As to the second element, the Court fully satisfied that their purpose was to
engage in real estate transactions for monetary gain and then divide the same
among themselves as indicated by the following circumstances:
1. The common fund was not something they found already in existence
nor a property inherited by them pro indiviso. It was created purposely, jointly
borrowing 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. The number of lots acquired and transactions undertake 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. In
other words, one cannot but perceive a character of habitually peculiar to business
transactions engaged in the purpose of gain;
3.
Said properties were not devoted to residential purposes, or to other
personal uses, of petitioners but were leased separately to several persons;
4.
They were under the management of one person where 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.
Existed for more than ten years, or, to be exact, over fifteen years,
since the first property was acquired, and over twelve 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.
The collective effect of these circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Also, petitioners argument that their
being mere co-owners did not create a separate legal entity was rejected because,
according to the Court, the tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different from "partnerships". When the
NIRC 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. The qualifying expression found in
Section 24 and 84(b) 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. Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein referred to. For
purposes of the tax on corporations, NIRC includes these partnerships - with the
exception only of duly registered general co partnerships - within the purview of the
term "corporation." It is, therefore, clear 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 CA No. 465),
it is analogous to that of section 24 and 84 (b) of the NIRC. 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.
Finally, on the issues of being liable for real estate dealers tax, they are
also liable for the same because the records show that they have habitually engaged
in leasing said properties whose yearly gross rentals exceeds P3,000.00 a year.

COMMON FUND
LIM VS. PHILIPPINE FISHING GEAR INDUSTRIES INC.
FACTS: Lim Tong Lim requested Peter Yao and Antonio Chuato engage in
commercial fishing with him. The three agreed to purchase two fishing boats but
since they do not have the money they borrowed from one Jesus Lim the brother of
Lim Tong Lim. Subsequently, they again borrowed money for the purchase of fishing
nets and other fishing equipments. Yao and Chua represented themselves as acting
in behalf of Ocean Quest Fishing Corporation (OQFC) and they contracted with
Philippine Fishing Gear Industries (PFGI) for the purchase of fishing nets amounting
to more than P500k. However, they were unable to pay PFGI and hence were sued
in their own names as Ocean Quest Fishing Corporation is a non-existent
corporation. Chua admitted his liability while Lim Tong Lim refused such liability
alleging that Chua and Yao acted without his knowledge and consent in representing
themselves as a corporation.

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

ISSUE: Whether Lim Tong Lim is liable as a partner

HELD: Yes. It is apparent from the factual milieu that the three decided to engage in
a fishing business. Moreover, their Compromise Agreement had revealed their
intention to pay the loan with the proceeds of the sale and to divide equally among
them the excess or loss. The boats and equipment used for their business entails
their common fund. 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. The principle of corporation
by estoppel cannot apply in the case as Lim Tong Lim also benefited from the use of
the nets in the boat, which was an asset of the partnership. Under the law on
estoppel, those acting in behalf of a corporation and those benefited by it, knowing it
to be without valid existence are held liable as general partners. Hence, the question
as to whether such was legally formed for unknown reasons is immaterial to the
case.

basis of the information return it had submitted for the year ending 1975, a taxable
year when said treaty was not yet in effect. Petitioners likewise failed to comply with
the requirement of Section 333 of the NIRC for the suspension of the prescriptive
period. The Resolutions of the Court of Appeals are affirmed.
2. CIVIL LAW; PARTNERSHIP; REQUISITES. Article 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. Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits. 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
themselves. Meanwhile, an association implies associates who enter into a joint
enterprise x x x for the transaction of business.

AFISCO v. CA G.R. No. 112675, January 25, 1999

GATCHALIAN VS CIR

This is a Petition For Review on Certiorari assailing the Decision of the Court of
Appeals dismissing petitioners appeal of the Decision of the Court of Tax Appeals
which had sustained petitioners liability for deficiency income tax, interest and
withholding tax. Petitioners contended that the Court of Appeals erred in finding that
the pool or clearing house was an informal partnership, which was taxable as a
corporation under the NIRC. Petitioners further claimed that the remittances of the
pool to the ceding companies and Munich are not dividends subject to tax. They
insisted that taxing such remittances contravene Sections 24 (b) (I) and 263 of the
1977 NIRC and would be tantamount to an illegal double taxation. Moreover,
petitioners argued that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed dividends. However, even if
such remittances were treated as dividends, they would have been exempt under the
previously mentioned sections of the 1977 NIRC, as well as Article 7 of paragraph
land Article 5 of the RP-West German Tax Treaty. Petitioners likewise contended that
the Internal Revenue Commissioner was already barred by prescription from making
an assessment.

Facts: Plaintiffs purchased, in the ordinary course of business, from one of the
duly authorized agents of the National CharitySweepstakes Office one ticket for the
sum of two pesos (P2), saidticket was registered in the name of Jose Gatchalian and
Company. The ticket won one of the third-prizes in the amount of P50,000.

In the present case, the ceding companies entered into a Pool Agreement or
association that would handle all the insurance businesses covered under their
quota-share reinsurance treaty and surplus reinsurance treaty with Munich.

Issue: Whether the plaintiffs formed a partnership hence liable forincome tax.

Petitioners allegation of double taxation is untenable. The pool is a taxable

entity distinct from the individual corporate entities of the ceding companies. The tax
on its income is different from the tax on the dividends received by the said
companies. The tax exemptions claimed by petitioners cannot be granted. The
sections of the 1977 NIRC which petitioners cited 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. Petitioners claim that Munich is taxexempt based on the RP-West German Tax Treaty is likewise unpersuasive, because
the Internal Revenue Commissioner assessed the pool for corporate taxes on the

Jose Gatchalian was required to file the corresponding income taxreturn covering the
prize won. Defendant-Collector made an assessment against Jose Gatchalian and
Co. requesting the payment of the sum of P1,499.94 to the deputy provincial
treasurer of Pulilan, Bulacan. Plaintiffs, however through counsel made a request for
exemption. It was denied.
Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was
issued. Plaintiffs paid under protest a part of the tax and penalties to avoid the effects
of the warrant. A request that the balance be paid by plaintiffs in installments was
made. This was granted on the condition that a bond be filed. Plaintiffs failed in their
installment payments. Hence a request for execution of the warrant of distraint and
levy was made. Plaintiffs paid under protest to avoid the execution. A claim for
refund was made by the plaintiffs, which was dismissed, hence the appeal.

Held: Yes. 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. 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 copartner, 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.
SANTOS vs. SPOUSES ARSENIO and NIEVES REYES

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

FACTS: In June 1986, Fernando Santos (70%), Nieves Reyes (15%), and Melton
Zabat (15%) orally instituted a partnership with them as partners. Their venture is to
set up a lending business where it was agreed that Santos shall be financier and that
Nieves and Zabat shall contribute their industry. **The percentages after their names
denote their share in the profit. Later, Nieves introduced Cesar Gragera to Santos.
Gragera was the chairman of a corporation. It was agreed that the partnership shall
provide loans to the employees of Grageras corporation and Gragera shall earn
commission from loan payments. In August 1986, the three partners put into writing
their verbal agreement to form the partnership. As earlier agreed, Santos shall
finance and Nieves shall do the daily cash flow more particularly from their dealings
with Gragera, Zabat on the other hand shall be a loan investigator. But then later,
Nieves and Santos found out that Zabat was engaged in another lending business
which competes with their partnership hence Zabat was expelled. The two continued
with the partnership and they took with them Nieves husband, Arsenio, who became
their loan investigator. Later, Santos accused the spouses of not remitting Grageras
commissions to the latter. He sued them for collection of sum of money. The spouses
countered that Santos merely filed the complaint because he did not want the
spouses to get their shares in the profits. Santos argued that the spouses, insofar as
the dealing with Gragera is concerned, are merely his employees. Santos alleged
that there is a distinct partnership between him and Gragera which is separate from
the partnership formed between him, Zabat and Nieves. The trial court as well as the
Court of Appeals ruled against Santos and ordered the latter to pay the shares of the
spouses.
ISSUE: Whether or not the spouses are partners.
HELD: Yes. Though it is true that the original partnership between Zabat, Santos and
Nieves was terminated when Zabat was expelled, the said partnership was however
considered continued when Nieves and Santos continued engaging as usual in the
lending business even getting Nieves husband, who resigned from the Asian
Development Bank, to be their loan investigator who, in effect, substituted Zabat.
There is no separate partnership between Santos and Gragera. The latter being
merely a commission agent of the partnership. This is even though the partnership
was formalized shortly after Gragera met with Santos (Note that Nieves was even the
one who introduced Gragera to Santos exactly for the purpose of setting up a lending
agreement between the corporation and the partnership). HOWEVER, the order of
the Court of Appeals directing Santos to give the spouses their shares in the profit is
premature. The accounting made by the trial court is based on the total income of
the partnership. Such total income calculated by the trial court did not consider the
expenses sustained by the partnership. All expenses incurred by the money-lending
enterprise of the parties must first be deducted from the total income in order to
arrive at the net profit of the partnership. The share of each one of them should be
based on this net profit and not from the gross income or total income.

the court court held then that in an action against the officers of a voluntary
association to wind up its affairs and enforce an accounting for money and property
in their possessions, it is not necessary that all members of the association be made
parties to the action. The court appointed commissioner of Insular Auditor's Office, to
examine all the books, documents, and accounts of "Turnuhan Polistico & Co.," and
to receive whatever evidence. Commissioner's report show a balance of P24, 607.80
cash on hand. Despite defendants objection to the report, the trial court rendered
judgment holding said association is unlawful. And sentenced defendants jointly and
severally to return the amount and documents to the plaintiffs and members of the
association. The Appellant alleged that the association being unlawful, some
charitable institution to whom the partnership funds may be ordered to be turned
over, should be included, as a party defendant. Referring to article 1666 of the Civil
Code, which provides: A partnership must have a lawful object, and must be
established for the common benefit of the partners. When the dissolution of an
unlawful partnership is decreed, the profits shall be given to charitable institutions of
the domicile of the partnership, or, in default of such, to those of the province.
ISSUE: Whether or not charitable institution is a necessary party to this case.
HELD: No. No charitable institution is a necessary party in the present case of
determination of the rights of the parties. The action which may arise from said
article, in the case of unlawful partnership, is that for the recovery of the amounts
paid by the member from those in charge of the administration of said partnership,
and it is not necessary for the said parties to base their action to the existence of the
partnership, but on the fact that of having contributed some money to the partnership
capital. And hence, the charitable institution of the domicile of the partnership, and in
the default thereof, those of the province are not necessary parties in this case. The
article cited above permits no action for the purpose of obtaining the earnings made
by the unlawful partnership, during its existence as result of the business in which it
was engaged, because for the purpose, as Manresa remarks, the partner will have to
base his action upon the partnership contract, which is to annul and without legal
existence by reason of its unlawful object; and it is self evident that what does not
exist cannot be a cause of action. Hence, paragraph 2 of the same article provides
that when the dissolution of the unlawful partnership is decreed, the profits cannot
inure to the benefit of the partners, but must be given to some charitable
institution.The profits are so applied, and not the contributions, because this would
be an excessive and unjust sanction for, as we have seen, there is no reason, in
such a case, for depriving the partner of the portion of the capital that he contributed,
the circumstances of the two cases being entirely different. Art. 1807. Every partner
must account to the partnership for any benefit, and hold as trustee for it any profits
derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or from any
use by him of its property.

LAWFUL PURPOSE AND COMMON BENEFIT

ARBES VS POLISTICO
FACTS: This is an action to bring about liquidation of the funds and property of the
association called "Turnuhan Polistico & Co." The plaintiffs were members or
shareholders, and the defendants were designated as president-treasurer, directors
and secretary of said association. This case is brought for 2nd time. In the 1st one,

AGUILA VS CA
Business Organization Partnership, Agency, Trust Identity Separate and Distinct

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

In April 1991, the spouses Ruben and Felicidad Abrogar entered into a loan
agreement with a lending firm called A.C. Aguila & Sons, Co., a partnership. The loan
was for P200k. To secure the loan, the spouses mortgaged their house and lot
located in a subdivision. The terms of the loan further stipulates that in case of nonpayment, the property shall be automatically appropriated to the partnership and a
deed of sale be readily executed in favor of the partnership. She does have a 90 day
redemption period.

RULES TO DETERMINE EXISTENCE

ARTICLE 1769

Ruben died, and Felicidad failed to make payment. She refused to turn over the
property and so the firm filed an ejectment case against her (wherein she lost). She
also failed to redeem the property within the period stipulated. She then filed a civil
case against Alfredo Aguila, manager of the firm, seeking for the declaration of nullity
of the deed of sale. The RTC retained the validity of the deed of sale. The Court of
Appeals reversed the RTC. The CA ruled that the sale is void for it is a pactum
commissorium sale which is prohibited under Art. 2088 of the Civil Code (note the
disparity of the purchase price, which is the loan amount, with the actual value of the
property which is after all located in a subdivision).
ISSUE: Whether or not the case filed by Felicidad shall prosper.
HELD: No. Unfortunately, the civil case was filed not against the real party in interest.
As pointed out by Aguila, he is not the real party in interest but rather it was the
partnership A.C. Aguila & Sons, Co. The Rules of Court provide 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. Any decision rendered against a person who is not a
real party in interest in the case cannot be executed. Hence, a complaint filed against
such a person should be dismissed for failure to state a cause of action, as in the
case at bar.
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. In this
case, Felicidad 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. 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.

ONA VS CIR
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

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

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 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. Judgment affirmed.

persons sharing them have a joint or common right or interest in any property from
which the returns are derived. There must be an unmistakeable intention to form
a partnership or joint venture.
In this case, the Commissioner should have investigated if the father paid
donor's tax to establish the fact that there was really no partnership.
PASCUAL VS CIR
FACTS: Petitioners bought two (2) parcels of land and a year after, they bought
another three (3) parcels of land. Petitioners subsequently sold the said lots in 1968
and 1970, and realized net profits. 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, the Acting BIR Commissioner assessed and required Petitioners 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 asserting that
they had availed of tax amnesties way back in 1974. In a reply, 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
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.
ISSUE: Whether the Petitioners should be treated as an unregistered partnership or
a co-ownership for the purposes of income tax.

OBILLOS VS CIR
Facts: In 1973, Jose Obillos completed payment on two lots located in Greenhills,
San Juan. The next day, he transferred his rights to his four children for them to build
their own residences. The Torrens title would show that they were co-owners of the
two lots. However, the petitioners resold them to Walled City Securities Corporation
and Olga Cruz Canda for P313k or P33k for each of them. They treated the profit
as capital gains and paid an income tax of P16,792.00
The CIR requested the petitioners to pay the corporate income tax of their shares, as
this entire assessment is based on the alleged partnership under Article 1767 of the
Civil Code; simply because they contributed each to buy the lots, resold them and
divided the profits among them.
But as testified by Obillos, they have no intention to form the partnership and that it
was merely incidental since they sold the said lots due to high demand of
construction. Naturally, when they sell them as co-partners, it will result to the share
of profits. Further, their intention was to divide the lots for residential purposes.
Issue: Was there a partnership, hence, they are subject to corporate income taxes?
Court Ruling: Not necessarily. As Article 1769 (3) of the Civil Code provides: the
sharing of gross returns does not in itself establish a partnership, whether or not the

RULING: The Petitioners are simply under the regime of co-ownership and not under
unregistered partnership.
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 (Art. 1767, Civil Code of the Philippines). 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. 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. Hence, 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.

BUSINESS ORGANIZATION CASE DIGESTS 1 ATTY. ROMERO

HEIRS OF JOSE LIM AND JULIET LIM

FACTS: In 1980, the heirs of Jose Lim alleged that Jose Lim entered into a
partnership agreement with Jimmy Yu and Norberto Uy. The three contributed
P50,000.00 each and used the funds to purchase a truck to start their trucking
business. A year later however, Jose Lim died. The eldest son of Jose Lim, Elfledo
Lim, took over the trucking business and under his management, the trucking
business prospered. Elfledo was able to but real properties in his name. From one
truck, he increased it to 9 trucks, all trucks were in his name however. He also
acquired other motor vehicles in his name. In 1993, Norberto Uy was killed. In 1995,
Elfledo Lim died of a heart attack. Elfledos wife, Juliet Lim, took over the properties
but she intimated to Jimmy and the heirs of Norberto that she could not go on with
the business. So the properties in the partnership were divided among them. Now
the other heirs of Jose Lim, represented by Elenito Lim, required Juliet to do an
accounting of all income, profits, and properties from the estate of Elfledo Lim as
they claimed that they are co-owners thereof. Juliet refused hence they sued her.
The heirs of Jose Lim argued that Elfledo Lim acquired his properties from the
partnership that Jose Lim formed with Norberto and Jimmy. In court, Jimmy Yu
testified that Jose Lim was the partner and not Elfledo Lim. The heirs testified that
Elfledo was merely the driver of Jose Lim.
ISSUE: Who is the partner between Jose Lim and Elfledo Lim?
HELD: It is Elfledo Lim based on the evidence presented regardless of Jimmy Yus
testimony in court that Jose Lim was the partner. If Jose Lim was the partner, then
the partnership would have been dissolved upon his death (in fact, though the SC did
not say so, I believe it should have been dissolved upon Norbertos death in 1993). A

partnership is dissolved upon the death of the partner. Further, no evidence was
presented as to the articles of partnership or contract of partnership between Jose,
Norberto and Jimmy. Unfortunately, there is none in this case, because the alleged
partnership was never formally organized. But at any rate, the Supreme Court noted
that based on the functions performed by Elfledo, he is the actual partner. The
following circumstances tend to prove that Elfledo was himself the partner of Jimmy
and Norberto: 1.) Cresencia testified that Jose gave Elfledo P50,000.00, as share in
the partnership, on a date that coincided with the payment of the initial capital in the
partnership; 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; 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; and 5.) none of the heirs
of Jose, the alleged partner, demanded periodic accounting from Elfledo during his
lifetime. As repeatedly stressed in the case of Heirs of Tan Eng Kee, 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 Juliet formed part of the estate of Jose, having
been derived from Joses alleged partnership with Jimmy and Norberto. 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 Elfredos efforts and hard work that the
partnership was able to acquire more trucks and otherwise prosper.