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Don’t tax: We’re Only Co-owners, Not Partners | Pascual and Dragon vs. CIR and CTA (1988)

PARTIES:
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

GR No. 78133. October 18, 1988

MY TITLE:
Don’t tax: We’re just co-owners, not partners

MAIN ISSUE IN THIS CASE:
The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

In 1968 and 1970, respectively, petitioners Pascual and Dragon sold 2 sets of lands. In 1979, Acting BIR Commissioner Plana required them to pay an alleged deficiency corporate income taxes for the years 1968 and 1970.

Petitioners Pascual and DragonCIR
“we availed the tax amnesties way back 1974”“In 1968 and 1970, you formed an unregistered an unregistered partnership or joint venture that is taxable as a corporation”
NIRC:
Unregistered partnership –> subject to corporate income tax.
Profits —> individual income tax
P.D.23 only relieved you of individual tax liabilities and not partnership liabilities.

Petitioners filed with CTA. CTA affirmed CIR.

  • CTA ruled on the basis of Evangelista ruling (Evangelista v. CIR 1957): “An unregistered partnership is subject to corporate income tax distinct from that imposed on the partners.”
  • Dissenting opinion of Justice Roaquin: “There was no adequate basis that an unregistered partnership was formed.”

ISSUES RAISED by PETITIONERS:

  1. Did petitioners form an unregistered partnership? Is it subject to corporate income tax? Who has the burden to oppose its existence?
  2. Does an unregistered partnership exist based on isolated transactions only?
  3. Is this case similar to Evangelist v. CIR?
  4. Didn’t the tax amnesty relieve the petitioners from payment of individual taxes?

Overall: Petitioner is meritorious.

What is the Evangelista v. CIR case?
Petitioners borrowed money from their father, combined with their personal funds, used them to buy real properties. They appointed their brother to manage. They lleased to tenants for several years and gained profits from rent. CIR demanded corporate income tax among others.

Are the petitioner brothers subject to corporate income tax provided by CA 466 or NIRC Section 24? Residence tax for corporations? Real estate dealers’ fixed tax?

  • Issue hinges on the meaning of ‘corporation’ and ‘partnership’ under Sections 24 and 84 of NIRC.
    • Sec. 24. Rate of the tax on corporations. — There shall be levied, assessed, collected…from all sources by every corporation organized in…. the Philippines…”
    • Sec. 84(b). The term ‘corporation’ includes partnerships,… but does not include co-partnerships…”
    • 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.’ Essential elements:
      • agreement to contribute money, property, or industry to a common fund. <— clearly present among Evangelista brothers.
      • intent to divide profits among parties <— issue hinges herein. Upon consideration of the facts, we are fully satisfied that their purpose is for monetary gain.
    Analysis: Evangelista and Pascual-Dragon
ElementEvangelistaPresent Case
Character of habituality peculiar to business transactions for purpose of gain.PresentNot Present
PropertyWere leased out. Under management. Existed for over 15 years.Merely bought and sold.
Capital/FundPurposely created. Borrowed.No purposeful creation.
ManagementAffairs had a manager (here there is freedom to transfer interest of brothers to their brother-manager)No manager
Analysis of Evangelista vs. Pascual and Dragon as to existence of unregistered partnership or joint venture for purposes of taxation

Besides profit, what makes a partnership?

Justice Bautista: Article 1769 of NCC: (2) “Co-ownership … does not itself establish a partnership,… whether co-owners do or do not share any profits from the property…” (3) sharing of gross returns does not of itself establish a partnership, whether or not there is a common fund.” This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as:

  1. clear intent to form a partnership,
  2. existence of a juridical personality different from that of the individual partners,
  3. freedom to transfer or assign any interest in the property by one with the consent of the others

Merely tenants and co-owners. Not partners.

This is an isolated transaction. Pascual and dragon are merely tenants in common or co-owners. There is no partnership when:

  1. There is absence of clear intention to create a partnership…
  2. They severally retain their title to their respective contribution…
  3. No common stock or capital…
  4. No community of interest in the business… – Floyd Mechem, Elements of Law of Partnership, page 74
  5. They are merely tenants in common – Clark vs. Sideway
  6. Co-ownership, profit motive, co-management by themselves do not create partnership. – Spurlock v. Wilson
  7. SC: Profit sharing with common interest do not form a partnership.

Present and absent elements of partnership

Essential requisites not present in this casePresent but does not form a partnership
Purchasing and selling properties
Sharing in the gross profits
Clear intent to form partnership (even there is intent, the distinct asset formed is liable. Since none, individual assets shall be liable, but not again because of amnesty)
Distinct juridical personality;
or distinct assets that can be held liable for income tax
Freedom of each party to transfer or assign whole property
Elements present but does not form partnership

DECISION: Petition granted. CTA decision reversed.

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