CTA Case No. 3211 (Decision)

REPUBLIC 0 P THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY JOSE P. OBILLOS, Jr., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, Petitieriers, - versus - .. C.T.A. CASE NO. 3211 COMMISSIONER OF INTERNAL REVENUE, Respondent. X - .. .. - ... - - ... - X �, DE C I S I 0 N The action is one of deficiency assessment for income tax in the amount of ~71,074 0 5i for the �un- registered ce-partnership and an aggregate of ~5i,707 0 20 for the partners' individual share of the gain realized fr~m the sales of t wo parcels of res!- dential lets which petitioners alleged as illegally imposed by the respondent. :, As set forth: 1) petitioners are brothers and sisters owners of t wo re sidential lots located in Greenhills , S. an Ju.an, Rizal, purchased from Ortigas � & C0., Ltd., under a Deed of Absolute Sale dated March 13, 197 3; 2} the same property was the subject � of earlier Installment Sales Contract Nos. 11423-A and 11501 dated June 25, 1970 and April 2, 1971, respectively, made and entered between Jese J. Obillos (petitioners' father) with the Ortigaa & co �� Ltd., whose rights after full payment thereof were

DECISION - CTA CASE NO. 3211 transferred to the petitioners to locate their own residences; 3) petitioners after over slightly a year from acquisition sold the parcels separately: � the lot of 1,124 square meters to the Walled City Securities en March 15~ 1974 for Pl68,600.00 and the let of 9i3 square meters t~ Olga Cruz Candu ~n May 10~ 1974 for Pl44~45o.oo, 1ith a realized profit computed as follows: 1,124 sq, m, 963 sq. m-L Selling price Pl68,iOO.OO Pl44, �~so.oo Acquisition cost . 89,899.73 es,eo9~39 54,550.27 79,790.il Total capital gain Pl34,340.88 Divided by 4 33,584.00 SO% there~f lp,792.00 4) petitioners returned 50% ef their individual share ef P33 584.00 for income tax purposes for the year 1974� having held the property for more than 12 months; 5) upen examination and investigation en the basis cf the available data of the returns respondent Com- missioner of Internal Revenue considered the under- . taking as one of an un-registered co-partnership sub- ject to c~rpcrate income tax under Section 24 ef the Tax Code, as amended, thus, the deficiency assessment inclusive ef surcharge and interest, to wit: T.otal gain derived Pl34,33i,OO Csrp~rate income tax due 37, OH3,00 Add: 50% surcharge 181 509 0 00 15,547,5i 14% interest per annum (max. 42%) p 71,074,5i Amount due and cGllectible ��� J

DECISION - CTA CASE NO. 3211 - 3- Likewise a deficiency inc~me tax assessment on peti- tioners~ respective shares of the profits cGnsidered as distributive dividends to individual partners, and taxable in full inclusive of surcharge and interests. as follows : a ) J~se P. Obill9s 1 Jr 1 ~axable net income per P67 1 i68o 81 investigation - - - - - 22,114 .,00 l4,14i,30 Income tax due thereon Less : Amount assess ed/ P 7p 9i7c70 3,983 .. 85 paid - - - - - - Pl5,297,98 Deficiency Income Tax - Add: 50% Surcharge - - 14% interest per annum (Max. 42%) TOTAL AMOUNT STILL DUE & COLLECTIBLE ---- b) Romeo P, Obillas Taxable net income per ~58,079_ill investigation - - - - - - Pl7.438,00 Income tax due there0n - lO a lO O,O O Less: Amcunt assessed/ p 7.338,00 paid - - - - - - - 3pii9,00 Deficiency Income Tax Add: 50% Surcharge - - - 3,081,9~ 14% Interest per Pl4,088,9i annum (max. 42%) - TOTAL AMOUNT STILL DUE & COLLECTIBLE - - - - - ~ � e) Remedios P, Obilles Taxable net income per ~57,779,57 investigation - - - - - Pl7.,298,00 Income tax .due thereon - ness: Ameunt assessed/ 9,968,70 ~ 7.329,30 Defieiepnacidy In- co-m-e T" a-x.-- - Add: 50% Surcharge - - - 3,ii ,85 14% Interest per 3,078,31 annum (max, 42%) - Pl4,072,2i TOTAL AMOUNT STILL DUE & COLLECTIBLE - - - - - -

DECISION - CTA CASE NO. 3211 d) Sarah P, Obillos Taxable net income per P531 (t79 9 57 investigation - ~ - - - ~1 5,412.00 Inc0me ~ax pue thereon Less: Amount assessed/ a,s12.oo ~ i,900o00 paid - - - - - - - Deficiency Income Tax - 3,450.00 Add : Surcharge of 50% 2,898 q00 14% interest per ~13,24-8,00 annum (Maxr:~ 42%) TOTAL AMOUNT STILL DUE & COLLECTIBLE - - - - - - ~) petitioners protested the deficiency assessment on April 30� 1980 but the �arne was denied by the respondent in a decision dated January 12� 19Slo Hence , this appeals By and large p etitioners would consider them- selves as ce-owners in the purchase of the parcels of land primarily intended fer their residential homes; did not form a partnership express ~r implied; did not buy the lGts to engage in business; did nQt disburse any expenditures to improve or enhance the value of the lets with the intention of selling them later as a business prop~sition nor did they intrQduce any change or imprevem~ts thereon; the subsequent sale of the lots. however, was not an act proving that they engaged in business n~r an act sufficient in form and law to constitute a partnership under the Civil Ced and Tax Code .r the sale was an isolated transactiono Hence, the treatment by each ~f the petitioners of their respective share of the profits - -D 3s-G.

DECISION CTA CASE NO. 3211 - 5- realized as capital gain returnable at 50% for haTing held the property for more than a year. Respondent poses the rub wrapped up this wise: ~at an unregisterea partnership was formed� taxable as a corporation within the purvievl cf the Seetion 24 of the Tax Cede as amended, when petitioners c0n- tributed eash to purchase the lots which were lat er sold and the profits realized therefrom divided ameng themselves1 that the respective shares in the gains in the amount rec~ived by each of petitioners r~presents distribution of prQfits realized from the sale of ordinary asset, and therefore. taxable in full against each of the recipients. ~be case revolves itself into the question of whether under the given facts there exEted a part� nership subject to the corporate tax as to warrant an assessment for deficiency income tax on the profits derived from the separate sale of the two lots. By Section 24(a) ef the Tax Code, "Atax is � hereby imp~sed upon the taxable net income received during each taxable ye~r from al~ sources by every � corperation organized in� or existing under the laws ef the .Philippines, and partnerships, no matter how created or organized but not including general pr - fessional �partnerships. xx" And~ "my a contract of partnership two cr more pe~sons bind themselves to contribute money, pr0perty or industry to a comm n

DECISION CTA CASE NOA 3211 fund, with the intention of dividing the profits among themselvesct " (Article 1767 , Civil Code of the Philippines). We think that the language of the provisions is broad enough to cover the petitioners� undertaking. The essential elements of (1) an agreement to cGn- tribute money, property or industry to a commGn fund; and (2) intent to divide the profits among themselves, are present under the situation disclosed. The first hardly presents a gripping question. There was the common fund expediently installed in the acquisition ef the two parcels of land, which, allegedly were to be devoted to the petitioners� own residences. Petitioners did not h~ld the l o ts for the purpose1 they made a sciamachy of the i ntendment. The resale of the lots after slightly over a year from acqui- sition, one after another, on March 15� 1974 and then . on May 10, 1974 , as sumed more importance than the need for building the residences. Not for naught however as the yield of a clean 75% profit over eost was more than en o~gh by any � investment standard 0 Thus the second, intention to divide the profits among the petitioners came to a fitting finale when each shared P33#584.00 from the transactions of neither accident nor error.. The petitioners bought the land for r esale as in fact the same were sold at a fat and respectable profit of Pl34,340 00 0 354 - - r:

DECISION CTA CASE NO. 3211 - 7- It is in this respect that we percei ve that invisible hand in the venture jointly acquiesced as could readily slip into that warm cubbyhole of the loosely defined partnership "no mateer hew created or organized" (Se a. 24 (a) � Tax Cede) which '"qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, . er 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." (Fl0rencio Reyes, et alo v. Commissioner ~f Internal Rev e nue and CTA, G.R . L-24020, July 1968) 0 Moreover, a "joint �dventure" and a *partnership" are closely akin and their rights, duties and liabilities are to be treated by the rules substantially the sameo (Larson Vo Robinson, D.c . Mont. 13i F o Supp. (G9-471). ~he apparent quibble on the aspect of an isolated transaction can hardly be a reassuring pr~spect that c�n easily be reconciled with the statutory intenpment. "A joint purchase with a view of a joint sale and communion of profit and loss though for a single tran- saction , will constitu t e a partnership .~ (In re : Warren, 29 Fed. Cas. 2ii, 2Q8 ) 0 aut there can be a first that well pressage the next. Likewis e 11 the absence ef any imprcvement to enhance the value of the lot s fer income generating purpGses may not all be necessary . Business thrives' on an "'as is where

'. DECISION CTA CASE NO. 3211 - 8- is��� pr�p sition 0 As a very factly matter the instant undertaking had netted for petitioners a c lean 75% return on capital f~r such a brief period of a little � more than a year from acquisition. W~ therefGre view with ease respondent's righteous indignation in assessing the petitioners for deficiency income tax considereo thus: -rhe gain realized from the sale of the two lots in the amount of ~134,33io00 (per income tax return) is an ordinary gain subject to corporate income tax unde~ Section 24(a} of the Tax Code, as amended. Eence, the assessment against petitioner, Jose Po Obillos, ~r., et alo as an Unregis- tered Co-partnership, in the amount of ~7 1 1 074.5,, is in accordance with l aw, and therefore, valido "As the Obillos created a partnership among themselves# a fortiori, the gains realized from the venture and distributed equally among the partners~ are ordinary gains which are taxable in full in the hands cf the recipients, the Obillos in this case. Thus, the following deficiency income tax assessments against the Obillos are valid, viz . : a) Jose Po Obillc3, Jr. � �� ~15,297.98 b) Romeo P. Obillos 14,088~96 e) Remedios Po Obillos �� 0 d) Sarah Po Obillos 14,072.2' � 0� 13,2~8.00" ��� W�e likewise find the impssit.ion of the surcharge � and interest well taken 0 As shown, all the material facts and/�r figures i1 the Schedule 4 (Gain and Losses f rom the sales or Exchange of capital Assets) of s aid BIR Form Ne. 1701 f~r purposes of determining the correct capital g a ins were not supplied. Neither were the said informatiVe data furnished the examiner,

DECISION CTA CASE NO. 3211 - 9- in spite of repeated demands made (Ref o p. 22 and PP o 124-12,, BIR rec.). Thus, respond ent was constrained to determine and assess the taxes in question on the best data available; not merely on the basis of the return, but from other sources as well. ~he non- Compliance with t he req uirements of the BIR Form cons- titute fraud with intent to eyade the tax. "The law imposes upon the taxpayer the burden of supplying by the r eturn the infermation upon which an assessment would be based. His duty complied with, the taxpayer is not bound to do anything more than to wait.for the Commissioner to assess the tax. x x Xo Non-observance consists in filing a false or fraudulent return with intent to evade the tax or in filing no return at all ." (CIR v. Lilia Yusay Gonzales and CTA G.R. L-19595, Novo 24� l9o,). Moreover, the Obillos substantially underdeclared their inccme in 1974, which is also constitutive of fraud. Having thus f a llen sharply at cdds with the statutory pr0scriptions. the incre- mental imposition could not be sheer malarkey. FOR ALL THE FOREGOING, we hold petitioners liable for the deficien~y income tax for the year 1974 in accordance with the respondent's assessments for the same which are hereby affirmed and the petition f or review dismissed with costs against petitioners .

DECIS I ON - CTA CASE NO. 32 1 1 - 10 - SO ORDEREDo Quezon City, Metro Manila, November 30, 1983 0 WE CONCUR: AMANTE Presidi CONSTANTE C. ROAUUIN Associate Judge Dis sents in a separate opinion

ltEPURli C OF THE PHI LI PPINES COUR r OF T A./ APPEALS QUEZ ON CIT J uSE P . OBILLOS, Jr. , SARAH P . OBI LLOS, ROMEO P . OBILLOS and REMEDIOS P. OBILLOS , brothers and s i sters , � Petitioner s, - .versus - C. T. A. CASE NO. 3211 COMMISSIONER OF INTERNAL REVENUE , Respondent . X. - - - .x DISSENTING OPINION I am in ful l and complete disagreement with the finding of my majority colleagues in the ir decision tha t t here wa s i n this case a partnership that was created by and between petitioners, the Obillos, two brothe�rs , Jos e J r. and Romeo, and two s isters , Sarah an.d Remedios , and hence , the ga i ns received by them from the sale of the ir real properties, consisti ng of two ( 2 ) .lots, ar e subject t o corpo ~ate tax unde�r Sec- 'I � tion 24 (a ) ~ in relation t o Section 84 (b) of the National Internal Revenue Code , as amended . Contrar ily, and to my mind, what was formed and created between and a'mong said Obillos brothers and sisters, is in reality a co-own~rshi p or tenancy in

DISSENTING OPINION - CTA CASE NO . 3211 - 2- commo n; consequently, the income derived from t e sale of said lots are not subject to the aforesaid corpo rate income tax~ But l et us f irst fi nd out whether there was , in fact or in law, a partnership created as f ound by the majority judges in the instant case. At the outset , certain l aws and relevan t and apflica b 1e~ri sprudence must have to be cited and emphasized here. Under Artic le 1767 of the Civil Code of the Philippines, partnership has been defined as a contract whereby two or more persons bind them- s~lves to contribute money, property , or indu str y to a common fund, with the intention of divid ing the profits among themselves. It is also a status and a fiduciary relation between persons carrying on a business in common with a view of profit . (Paras , Civil Code of the Philippines Annotated, 9th Ed ., Vol . V, p. 405.) The object must be for profit and not merely f or common enjoyment (Ibid, p. 40G. ) There must be a desire to f ormulate an active union � with people whom there exist mutual confidence and trust. (Ibid, citing Fe rn andez v . De l a Rosa, 1 Phil . &71. ) And in Arti cle 1771 , the Civil Cod e says that a partnership may be constituted i n any form, except where immovable property or real rights are contri- buted thereto, in which case a public i nstrument shall

DISSENTING OPINION - CTA CASE NO. 3211 - 3- be necessary . However , where a contract prov ' des t hat there was a community of i nterest in the business as such, and there was ~o righ t to participate in the management of the business, there is no partnership . (Tolentino , Civil Code of the Philipp ines, 1959 Ed. , Vol. V, p . 271. ) . In the existence of a partnership , no part icular form of contract is necessar y for i ts creation . (R . A. Bartley , 4 BTA 874 .) A contract of partnership may be oral or written . (Article 1771 , Civil Code bf the Ph i lippines; Mertens , Law of Federal Income ~- . ation; Vol. 6, 1977 Ed., Chap . 351 , p . 16 .) . Whether or not , in truth and i n f act, a partnership exists is basically a question of intenti on of the parties . - - - - - . (Mertens , Law of Federal Income Taxation, I bid.) And where there is no proof of the real intent to become partners i n the operation of a business, pro- fit sharing arrangements as a rule do not constitute partnership for t ax purposes . (Ibid. , citing Edward C. James, 16 TC 930; Estate. o f Louis t. Briden, 11 TC 1095; Mamie Tindall , 14 TC 1120 , 1125 ; Tolentino, !?.� � cit ; p . 273) �. An agreement to share profits and losses on the sale of l an d purchased by two or mo re persons, does not create a par tnership but a co- I ownership . (Tolentino, ibid.) .

DISSENTING OPINION - CTA CASE NO. 3211 - 4- In the American case of Carnie-~oudie Manufac- turing Co . ( 24 BTA 679, 684) '� it cited the Supreme Court of Oklahoja ( itizens National Bank of Chickasaw , 24 Okla . 408 ; lfl P c 720) '� which said that - "A partnership exists as a result of a voluntary cont act between the parties, and neve r solely _by operation of law. Causler v. Wharton , 62 Ala . 358 ; Cowles v. Garret, 30 Ala . 341; Haycock v . Will iams , 54 Ark . 384, 16 s .w. 3; Einstein v . Gourdin , 4 Woods, 415 , 8 Fed. Ca s . No . 4, 320; 22 Am. & Eng . Ency . of Law (2d Ed ) p. 14 , footnote 3 . It i s a relation arising out of a con- tract to do certain things , and exists only where t he parties intend to enter into a contract of partnership and , un- less they have estopped themse:lve:s by holding themselves out to the world as partners, their i ntention as derived fr om the contract is decisive of the question ." Moreover, the� overriding question i s whether or not the partnership is real and the answer to that greatly depends upon whether the partners really and truly intended to join t ogether for the purpose of carrying on business of partnership and sharing in the profits and losses or both . In this respect, the ir intention to form a partnership is.a questio~ of fact , to be determined from the testimony disclosed by their agreement, considered as a whole , and by their conduct in the execution of ~ts provisions . This is what,in effect, the Supreme Court of �the United States ,. in the case of Commissioner of I Revenue v. w.o. Internal

DISSENTING OPINION - CTA CASE NO . 3211 - 5- Culbertson, 337 US 733, 741-7.46 , have said : "The qu es~ion is not whether the ser- . vices or capitc;l cont ributed by a partner are of sufficient i mportance to meet some objective standard supposedly established by ~he Tower Case , but whether, consider- . ing all the facts - the agreement, the con- duct of the parties in the execu tion of its provisions , their . statements, the testimony of disinterested .persons, � the relationshie of the parties , their r espectiye abilities and capital contributions, the actual con- !Jgl of income and the purposes for which it is used , and any other facts throwi ng light QD their true inten t - the_pax ties in good faith and acting with a business pur- . pose intended to join togethet in the pte- . sent conduct of the enterprise . There is noth ing new or particularly djffjcuJt ahop t such a test e Triers of f act are constantl ca e erm1ne e 1ntent w1t wh1ch a person acted . The Tax Court , for example, must make such a determination in every e�state tax case in which it is con- . tended that a transfer was made in contem- . plation of death, for� 'T.he question, neces- . sarily , is as to the state of 'mind of the donor. ' United States v . Wells, 283 US 102, 117, 75 Led 867, 875, 51 S Ct 446 (1931) . See Allen v. Trust Co . of Ga . 326 US 630, � 90 Led 367, 66 S Ct 389 (1946). Whether the parties really i ntended to carry on business as partners ie not, we think, any more difficult of determination or the man i- festations of such i ntent any less percept- ible than is ordinarily true of inquiries into the subjective. � But the Tax Court did not view the ques- tion as one concerning the bona fide intent of the parties to join together as partners. Not once i n i ts opinion i s there even an oblique reference to any lack of intent on the part of respondent and his sons to com- bine their c apital and services 1 f _or the purpose of carrying on the business. u . Ins- tead, the court , focusing ~ntirely upon con- cepts of 'vital services 8 ~nd ' original

DISSENTING OPINION- CTA CASE NO. 3211 - .6 - capi tal' , simply decided that the alleged partners had no t satisfied those t est when t he f acts were compared with those i n t he Tower Case . Th~ cou rt's opinion i s r eplete with such statements as ' we discer n nothing constituting what we think is a requisite contribution to a real partnership ', _ ' w.e fi nd no son adding ' vital additional ser- . vice ' ~hich would take the place of capital contribution within the sense of t he Tower Case . 6 CCH TCM _698 , 699~ Unquest ionably a cou rt ' ~ determin ation t hat the services contr i buted by a partner are not ' v i ta l' ~nd ltat he has not parti- . c ipat~d in ' managemen t and control of the business ' or contributed ' original capital ' has the effect of placing a heavy burden on the t axpayer to show the bona fide intent � of the parties to join together as partners . But such determination is not concl usive, and tha t i s the vice i n the ~ests' ~dopted by the Tax Court . It assumes that there is no room f or an honest difference of opinion as to whether the services or capital fur - . n i shed by t he alleged partner are of suffi- . cient importance t o j ustify his inclusion i n the partnership . If, upon a consider- . ation of all the facts , it i s found that the partner s j oined together i n good faith to conduct a business, having agreed t hat the services or capi tal to be contributed pre- . sently by each is of such val ue to the part- nership that the contributor should parti- c ipate in the distribution of profits, that is suffici ent. The Tower Case d id not pur- . ~ort to au thor ize the Tax Court to substitute 1ts judgment for tha t of the par t ies; it sim- ply furnished some guides to the deter min- . ation of their true intent . Even though it was admitted in the Tower Case that the wife contributed no original capital , management of the business, or other vital services, this Cour t did not say as a matter of law that there was no valid partnership . We said, instead , that "~here was , thus , more than ample evidence to suppor.t t he Tax Court ' s. fi nding that no genuine unton for partnership business purposes was ever intended and that t he husband earned the i ncome.' .327 us at 29 2, 90 L ed 678L 66 S Ct 532 , 164 ALR 1135 . ( Ital ics added. )~ LUnderscoring mine.7 �

DISSENTING OPINION CTA CASE NO . 3211 - 7- Indeed , a partnership may exist without a forma l agreement and the f ormal execution of t he articles of partnership does not necessarily create a partnership in the apsence of 'a true business purpose. (Mertens , Law of Federa l Income Taxation, �.� � cit . ) . It is a fundamental postuiate i n this and in American j urisdiction that an agreement to share in the profits does not necessarily constitute a partner- ship agreement. (Art . 1769, Civil Code of the Philippines ; Evangelista vs. Coll. of Int . Rev . , 54 Off . Gaz . 996 , 1003; Jessie James Finch , 55 , 179 P-H Memo TC; Me rte ns , 9J2 � cit., Chap. 35 , p . 21 . ) At this stage, it is appropriate for me to restate some of the most popu l ar and often quoted definitions of partnership . Among the historic definitions of partnership is that one stated by Chancelloer Kent and who declared that it is "A contract of two or more competent perso ns � ~ .to place their money, e ffects, . labor and skill, or business, and ill .to divide the profit and bear the loss�in certain proportions ." (John W. Graham, 8 BTA 1081, 1083 , aff'4 44 F2d 566; Samuel J. Lidor, 16 BTA 1421; R.C. McKnight, 13 BTA 885; J oe Gilovich & Co., 6 BTA 864; In serted nos. (1) and (2) mine; Unde rlininq supplied .) . Another is that definition given by Justice Story:

DISSENTING OPINION - CTA CASE NO. 3211 - 8- "A voluntary contract between two or more persons to place their money effects , labor and skill or some ~ or all of them i n lawful commerce or business , with the understanding that there sha ll be a communion of the profits thereof between them ." (John w. Gr a ham , �� � c it .; Carnie-Goudie Mfg . Co., ��� cit., pp. 683- 684; Emphasis mine. ) And another frequently quoted definition is stated as follows: "The requi s ites of a partnership are that the parties must have join!d together to carry on a t rad e or adve nt ur e for their common benefit, eac h con- tributing property or services, and having a community of interest in the profits." (Howard Coombs, 20 BTA 1021 , 1024, quoting Meehan v . Valentine, 1 45 US 611, 36 Led. 835 , 12 S Ct 972 ; Leonard Gunderson , ��� cit. , 6 BTA 1123 1 and C.C . Cooke, TC Op. Dkt 2000 4 (1951) . a~f'd. 203 F 2d 258 ; 98 L ed 342, 74 S Ct 25; Ita li.�.2 supplied.) . Also, J udge Black, citing Comm . v . Tower , 327 US 280; Ward v. Thompson, i2 How 330 , 166 L Ed . 249, in the case of Edward c. James, 16 TC 930 , 939 , defined partnership generally "xxx as a joining together the money, goods, labo r or skill of two or more pe rsons for the purpose of car rying on a business and sharing I in the profits or losses or both ." (Unde rlining mine.)

OPIN~ ON- DISSENTING 1 CTA CASE NO. 32~1 I - .9 - The requi \. t �s of a partnership are that the parties must "Ijo.ined t ogether to carry 1 n a tr ade or adventure their c ommon benefit , e ach contri- buting proper ty or ser v ices , and having a communi ty of interest in the profits . (Meehan v . Va l entine, 145 us 611, 618 , citea in R.A . Ba rtley , 4 BTA 874, 878; underscoring supplied.) . "The basis of a partnership is a contract and a generally ac:c�epted test for determin i ng whether a partnership exists between two ind ividua ls is whether they have entered into a contract f or the sharing of profits and losses of a business enterprise." (R. A. Bartley, ibid., p. 879; Emphasis mine.) . The Tax Court of the United States has held that when t here is no proof of a real intent to become partners in the operation of a busi ness, profit sharing arrangements do not constitute partnership . (Edward C. Jame s, 16 TC 930, affd 197 F 2d 813 ; Estate of Louis Briden, 11 TC 1095 ; Mamie Tindall , 1 4 TC 1120 .) . Consequently , to me�, there is no principle in tax law which requires or permits the trier of facts to set up a special concept of partnership f or tax pur- poses, or ~therwise treat the facts in a tax case differently from the way they s hould be treated in any \ other kind of litigation. (Nei l v . Comm . , 269 F 2d 563 . )

DISSENTING OPIN ION- CTA CASE NO. 3211 - 10 - Stated in another way, t he concept of partnership . should be understood in the s ame ligh t regardless of the case, whether tax or in an ordinary c i vil case , in which t he question of the existence t hereof is involved. � It may be diffic~lt o r problematical, but not undeterminable to hold; whether or not under a given sets of fac ts , a partnership in r eality exist. This question i s either one of f act , or law, or both ; but the term parnership does not include two or more per- sons own ing real property as tenants in common . (Jerry Maiatico, 12 TC 146; Charles E. Tibbals , 58,044 P-H Memo TC. ) Under Section 24(a) ?f our Philippine Internal Revenue Code, and as defined in Section 84 (b) pf the same, a " corporatio~' for purposes of corporate i ~come tax, does not refer only to cor po rati on proper but i ncludes p artnership, no matter how it is creat~d or organ ized, as well . But under this provi sion, the determination of whethei a partnersh ip wa s created or has existed for purposes of taxabil ity as a corpor- . ation is fundamen tally based upon and governed by the general provision of ' the law of partnership in the Civil Code of the Philippines , which has , as its legal I ou tgrowth not only ou r Old Civil Code but on American

D~SSENTING OPINION- CTA CASE NO. 3211 , - 11 - Partnership Statutes as well (U n iform Partnership Act and the Uniform Limited Partnership Act) ~ which laws have been reputedly framed in keeping with modern business practices . (Report of the Code Commission , p. 67.) . Under Section 6 of the rJniform Partnership Act, "A partnership i s an association of two or mor e persons to carry on as co-own0rs a business for profit." (Underlini.!}.g mine�. ) . And in Mechem, Eleme~nts of Part- nership, 2nd Ed., p . 1, cited by Hectors . de ~eon , in his book entitled "The ~ on Partnerships and Private Corporation," 1973 Ed., p. 1, partnership is defined as "x x x a legal relation based upon the express or i mpl i ed agreement of two or more competent persons whereby they unite their property, labor or skill in carrying on some lawful business as principals for thei r j oin t profit. " Persons who did not intend to be partners as to each other are not partners to third persons or even to the Government . (Art. 1769, Civil Code of the Philippines.) ~t is now plain that � the determination of whether a partnership exist regard- less of whether it is a t ax or an ordinary case where it is being litigated , our courts shall always be guided by the facts with care in the light not only under our local law and jurisprudence, but by American

I I DISSENTING OPINION- - 12 - CTA CASE NO. 3211 I law and jurisprudence on the subject as well. I The law and ]udicial pronouncements here and � in American jurisdiction on the subject of partner- ship had consistently zeroed in, and was emphatic on the i ntention of two (2) ?r more persons to form a business enterprise, express or i mp lied, for profit purposes t hat will cause the creation and existence of a partnership . This was stressed heretofore and the authorities cited overwhelmed me . The aforesaid authorities as guideposts, therefore, had the peti- . tioners, the Obillos brothers and sisters, intended the:mselVtes to be: partners, or otherwise have i ntended to cre�ate, among themselves, a partnership for busi- nes.s purposes? I have personally heard the testimony of pe ti- . tioner Jose P. Obillos, Jr. in this case . I believe that said witness had testified positively, frankly and honestly that he and his brothers and sisters bought the two real properties in question for the purpose sole:ly of building on them their residences. But bec�ause they cannot build thereon their said residences due to the problem of rising costs , and, finally, t~mpted by the many offers to buy the said l ots, they succumbed thereto, finally decided, sold I the same at a profit which they admitted ly divided

I DISSENTING OPINION- CTA CASE NO . 3211 - 13 - among, the�ms:elves . Ard takin g advantage of their privilege under the ~aw of reporting only 50% of their share i n the: profits earned under the capital gains tax provision , each one of them reported their p~of its equal share o f the in thei r i ncome tax re- t urns and paid their c orresponding individual income tax liability ~ From the simple f acts of this case, it can be g a thered that the father: of peti- tioner, Jose Obillos , Sr. , had ~ransferred to t he petitioners the property in question . It was not, however, altogether made clear i n the trial whether the fa ther had already paid in f ull the purchase price by installments of the two ~arcels of land at the ti me of sale by Ortigas , Inc . to his children, petitioners herein . Whether petitioners br other s or sisters have paid their father f or the transfer to them of the properties is not also quite clear . At any rate, it was due to t he said transfer that the brothe rs and sisters were in fact holding , or were in actual possession ovet the said l ots prior to the sales made by them to the Walled City Sec urities and to blga Cruz Cand u in 1974. My personal impression i s t hat no partnership agreement was entered into by and between the brothers and ~isters with respect to the� acquisition of the two l ots \vhich the y held over J

DISSENTING OPIN ION - CTA CASE NO. 3211 - 14 - a year. There was not any proof which will show the intent to form a partne~ r ship among themselves, either prior to , or at the time of the purchase of the t wo properties from the Ortigas , Co . Petitione rs have never held the�mse�lves as such to the Ortigas , Co . or to the buyers of the ~wo lots .� They were merely hold- i ng the said properties as co-owners. The mere pur- chase of a real property fo r the purpose of using i t does not show the intent to enter i nto a business for profit . The fact that their father transferred the r ight to own the same by purchase negatives thei r intention, the�refo re�, to form and create a partne r ship . It is i mportant to so state here that there is no proof that they have retained the proceeds of sale in a common fu nd for the purpose of secur i ng by subse- quent purchase other lots , again t o be sold for profit . This i s negated by the testimony of petitioners ' witness, Obillos , .J r . , who s:aid that the money r ec~ived by the~m as purchase price shall be used to purchase anothe r l ot with which t~ey wil l finally locate their residences. In order that there can be a partnership betwee n and among them, there must be pro� of that they were engaged in a bona fide business of real estate . A relation to engage in business is never evident; ther e was no evidence to show t hat they reinvested

DISSENTING OPINI ON - CTA CASE NO. l211 - 15- their money in the similar activity of purchasing and acquiring lots to be re ~0ld for the purpose of gain or profit. The only ' presumption from which one� can deduce the existence , of a partnership, which is lack- i ng, is the inte~nt to create a partnership. The fact that petitioners, brothers and sisters, have equal ly shared in the profits realized by the sale of their two lots is insufficient to pr esume their partnership existence. As was said heretofore, the mere shar ing in the gross profits or returns does not make up a partnership . There is need to show t hat petitioners have� contributed the money with which to purchase the lots for business purposes, or otherwise for profit, and not for their use as residence which is not a busi- ness enterprise. Here, there is: absent a contract of partnership, express: or implied, between them. . To my mind, petitioners have held the properties more in the� nature� as co-owner.s owning an undivided interest in said properties, and sharing i n the pro- fits from the sales made1 and which finally termina ted the co-ownership relation among them. The respondent has not, by hi s evidence, sh own that the petitioners were in fact joined ~s partners , or presented proof of the intention of petitioners to be partners among themselves. Furthermore, the s~les made by petitioners

DISSENTING OPINION - CTA CASE NO . 3211 - 16- were mer.e�ly isolated and not habitual and t h is fact does no t transform, or otherwise contitute , petitione�rs i mp liedly as partner~ in a business enterprise . In a particular Ame�ric:an case , it was held that a holding of an undivided one half interest in a second mortgage would not constitute earrying on a business, venture, or a financial operation.but would constitute mer ely the holding of proper t y, and not a valid partner - ship . {Hallbrett Realty Corpo r ation v . Comm. of In t. Fev ., 15 TC 157 , 159.) In this c ase of Hallbrett Realty Corporation, the question wa s whether o r not Sam Rosen and Jacob Brickman we�re engaged i n a j o int venture or partnershi p by means of whic h some business, f i nancial operation or venture was carried on by them. These t wo persons had paid a lump sum for the stock of Ha l lbrett Realty Corporation and the securities of the� same . Each of the~se two paid one - h,alf of the� stock . The me:re owne:rship. of the stock under such circumstances did not make them joint venturers o r partners . Ro sen became President of Ha l lb�re t t Realby and operated it s hotel . Brickman never became off ice�r of the Hal l brett Rea l t y and had nothing to do wi th the operation of t he hotel . There was no j oint venture there. They had I the sec ond mor t gage assigned ~o a nominee . Such hold- ing of an undivided one half interest in a second

DISSENTING OPINION - CTA CASE NO. 3211 - 17 - mortgage would not constitute a carrying on a business , a venture, or a financial operation but would consti- tute merely the holdlng of property. The f undame ntal c:riterion, citing Hallbrett Realty Corporation case above, ibid., in determining the ex.istence of a va~id partrre rship is an ex.istence of an intent to join together in the conduct of a business . Towards this end, each of the partners must signi fy such intent to the others and enter into an agreement, either oral or written, that they will share in the profits and losses of the enterprise. (Hoopei Body Corp., 60,168 P-H Memo TC.) The law of the State of Virginia, in the United States, which is the same as ours in the Philippines, defines "partnership" as "an association of two or more� persons to carry on as co-owners a business for profit." It was said that the statutory rules of the State of Virginia for determining the existence of partnership include one which provides that "Joint tenancy, tenancy in comil\on 1 tenancy by the entire- ties, joint pr operty, common property, or part owner- ship does not of i tself establish a partnership, whether such co-owners. do or do not share any profits made by the use of the property," and another providing that I "The sharing of gross returns does not itself establish

DISSENTING OPI NI ON - CTA CASE NO . 3211 - 18 - a partnership, whether or not the persons sharing them have a joint o r c ommon right or inter e st in any property . f rom which t he returns are derived. (Hooper Body Corp ., 60 1 168 P-H Memo TC. ) J udicial pronounce,ments in the State of Virginia have amplifie�d the bate words of the statute. In Walker, Mosby & Calbert v. Burgess, 153 V~ 779 , 151 S.E. 165 , 167 (1930 ) ~ the Supreme Court of Appeals there said that "carrying on" a business, as used in the statutory definition of " partnership, " was~ well- defined term and meant the conduct of a business for a sustaine:d peri od for the purposes of live lihood or profit , and not merely the carrying on of some single transaction . It was in this case that the court stated another essential element of partnership which was I the ele�ment of "co-ownership ." This same cour t has also said that the particular test as to the existence of the partnership relat i on wh i ch is most widely accepted and which is applicable especially as between the parties themselves, irre:spective of the rights of third persons , is that a partnership i s formed and exists only when it was the intention of the� parties th~they should be pijrtners. Partnership contracts , like other contracts, are governed by the intention I of the parties. Every partnership rests on t he mutual

DISSENTING OPINION - CTA CASE NO. 3211 - 19 - consent of the� members . This inten t may be manifested by the te�rms of the agreement if there is one or by the: conduct of the par ties to each other under i t , or by the circumstanc:es surrounding the tr ansaction . In respe ct to . the ex.iste�nce of a partnership as to third persons, the court concluded that it was generally agreed that it is essent ial that the parties charged a s partners have a community of interest as common owners of the business which constitutes the joint undertaking, and that this community of i nterest be of such nature� as make�s each membe�r a c o-princi pal and an agent of all membe:rs , with joint authority or right i n the administration , control , disposal of the business or its property. Partner ship relations, said the court , are formed by a contract expressed or implied between two or more parties for joining to- . gethe r their money , goods, labor or skill in a ventu r e or business, upon an agree�men t to d i vide the gain s or l osses be tween them. x x. ~ ." (Hooper Body Corp. , 60,168 P-H Memo TC . ) � In the case of Lorenzo T. Ona, et. al . vs. The Commissioner of Internal Revenue (G. R. L- ~9342, May 25 , 19 72) ~ the _petitioners in said O~a case, who are father and children , had actually j oined together and engaged themselves in a business en t erprise by using

DISSENTING OPINION - CTA CASE NO . 3211 - 20 - their properties, and the pr of its derived were made a part of the common f und. I n said case, pe,ti t ioners t herein have actually engaged themselves i n the pur- chase and sell of real properties and secur i tie�s . They earned con siderable profi ts fr om such transactions. They have�, therefore , al l owed not only their shares of the inheritance and their inherited properti es and gross e ar nings to be used as a common fu nd in under - taking several tr:ansacti1ns and in engaging business with the clearest intention of deriving profit to be proportionately shared by them. They have thereby formed , in effect, an unre'g istered partnership . In t he case of Evangelista v . Cell . of I nt. Re- venu e (1 02 Ph il . 140, 1 45) '� petitioners t here�in have cre�ated a c:ommon fund for purposes of profits . In contrast, in the case at bar , petitioners have not ~ ~ created a common fund f or bus:iness purposes . Th'ey have not contr ibu ted property f or pur poses of business either . The only i nference which can be gathered from th e evidenc�e of both �parties i s that the petitioners, Obillos brother s and sisters, only jointly bought two parcels of l and which they later sold, which as a whole, is not constitutive of a "se r ies of t' ra nsaction ~' or w~ich cannot properl y dubbed as a business t ransactidn characterized by

DISSENTING OPINION - CT~ CASE NO . 3211 - 21 - habituality for purposes of gain . What petitioners i n this case: did is an isolate~d transaction which they never repeatedly pursued since there was no showing that they have s:u bse:que:ntly bought othe:r lots or propertie:s from out o f the proceeds of the two lots for purposes of resell. In f act , and in reality, their intention was only to buy a l ot to finally locate their residence from out of the proce,eds of the orig,ina l sales of their lots. At the time of the sale: of the two lots owned by them in c ommon, they were handicapped by the circums:tance of the increase of the costs of construction of buildings and said costs were: beyond their financial capabi- l i ties to de:fray. These circumstances, unlike in the Evangelista c:ase, where: the circumstance'S there were sufficiently strong to arrive at a finding that they had an inte,ntion to create,, as among them, a partner- ship, petitioners, the Ob� illos brothers and sisters in this case, did no t create a partnership for busi- nes�s purposes. There i s another analogous American case wherein under a judi' cial settlement i11 1941, T.J. Rester and

DISSENTING OPIN I ON - CTA CASE NO . 3211 - .22 - Coffin, the parties of an. alleged partnership (Coffin v . U.S . ,. 120 F Suppl 9, 10} '� became the owners of an undivided one-h.alf intere'st of t wo tracts of land which were to be subdivided and the lots sold there�- from . The�. proceeds from the said sales of the lots, . after expenses, \<1e�re equally divided between them. There was not a t i me , after the acquisition of the property , or during the existence of their relation- ship , that they were formed as a partnership; no partnership return was filed , no r was there a test i- mony that their relationship were that of partners . Although the sales were made during their relation- ship , and the profits reported on the parties ' .indi- . vidual returns, neither party i ndicated such profits were from a partnership . The United States District Court S . D. Alabama , S.D., in the aforecited case , on page 11 , based on the above facts, made a finding and arrived at a final conclusion that - "5. A partnership did not exist between pla i ntiff (Coffin ) and Rester. during the t ime i n quest i on. ~ursuant to t he ( judi- cial) .settlement in 1941 , the parties be- came tenants in common , each own i ng an un- . divi ded one- hal f interest i n the property s et f orth in t he agreement . They chose to avail themselves of the us:e of a trustee to facilitate the liquidation of their in- terest; but this use did not transform the{r status as tenants in common into partners. "~t X X XXX XXX

DI SSENTING OPINION - CTA CASE NO. 3211 23 "Conclusions of Law "x x x. XXX XX X "[]] The ownership of property by tenants in c ommon does not make such tenants partners in the absence of an intention to become partners. Gilfo rd v. Cpmm i s sioner of Internal Revenue , 2 Cir. , 201 F . 2d 735 ; Appleby ' ~ Estate v . Comm issioner of Internal Revenue , 41 B. T.A . 18, af f ' d 2 Cir ., 123 F 2d 700 , on othe r grounds . " There is in the above c ited case a complete analogy with t he f act s of the ca se at bar . Con sequentl y , it is my strong opinion th a t what was created by t he Obillos brothers and sisters , is a tenancy in common , or co -~wne r shi p as understood in this jurisdiction . Hence, my dissent to the majority c onclus ion that there was in this case a partnership, which is li able to corporat e t ax as a corpora tion under Section 24 (a ) of the Na tiona l I nternal Re venue Code . In the cas e at bar , my view that there was c:o- ownership is not wi thou t authority to s uppor t it . In t his i nstant case , the Obill os brothers and sisters have agrc�e d to purchas.e a piece of land and each one paying a part of the purchase price wi t h the intention to use the property f or t he building of , their respective reside�nce~. Each one had a n und iv ided interest over the two l o ts they have pu r chased . (20 Am Jur 2d 115, ' 116 ; Art . 484, Civi l Cod~ o f t he Philippines . ) Under

DISSENTING OPINION - CTA CASE NO. 3211 - 24 - their re:latio n , there was a co-ownership as the said brothers and sisters owned and were in possession of .. an undivided part over the two properties. Everyone of them is the co-owner of the propertie:s , and over which they e:x;e:r.cise domain , but each one owns a por- tion and which is not _concretely determined or physi- cally divided . (Felice�r vs . Coleg.ado, 35 SCRA 173 , 178; Paras ~ Civil Code of the Philippines Annotated, Vol. II, 9th ed., p . 244.) . A co-~wner cannot sell a de�finite part of his property. (Lopez v. Illustre, 5 Phil. 5G8-~G9 .) . Had they bought proper tie�s subse�- queht to the sale of the two (2) real properties , or have othe~ rwise expanded their gain by using the pro- . ceeds of the:ir selling price to embark in an expanded business venture, like in t he c ase of Jose de Leon et. al . vs . The Commissioner (CTA Case No . 738, Sept . 11, .1961 ) '� t hey should have been conside:re�d as a partner- ship; or had they � invested their gross returns for the sale of their two ( 2 ) _lots in the purchase of another l ot f or resel l at a profit, or a s~ries of transactions had been pursued by them, and the said ente:rprise placed under the management of one person , like in the Reyes v. Comm . o:e Int . Rev. Case: (24 SCRA 198, 203) '� then their relation could have been validly considered a partnership subject to corpor'ate t ax as a corporation.

DISSENTING OPINION - CTA CASE NO . 3211 - 25 - Finally , I would like to quote at leng th a similar observation and admonition made by , or the words of caution of Justice Angelo Bautista i n the case of Evangelista, et . al . vs . Collector of Int. Rev . , ~� -cit., on pa.ge 150, where he pointed out that the sharing of the gross return does not, by itself , create a partnership, whether or not the persons sharing them have a j oint or common right or interest in the pro- perty ; that aside from the circumstance of profit, the presence of other elements is ne�cessary to arrive at a conclusion that a partnership existed, such as the clear intent to form a partnership, to create a juri- dical personality different from that of the individual partners, and to transfer or assign any interest in the property by one with the consent of the others . Said J ustice Angelo Bautista , i n his concurring opinion , in the Evangelista case: "I wish however to make the follo\'ling observation: Ar t icle 1769 of the New Civi l Code lays down the rule for. determining when a transaction should be deemed a partner- ship or a co- ownership . Said article para- graphs 2 .and 3, provides: "( 2) Co-ownership or co- possession does not of itse�lf �e:stablish a partnership, whe- ther such co-owners or co-possessors do or do not. share any profits made by the use of the property ; . "( 3) The sharing of qross re turns does not of itself establish a Partnership; whe- ther or not the persons sharing. them have a

DISSENTING OPINION - CTA CASE NO. 3211 - 26 - joint or common right or interest in any property f r om which the returns are derived;" "From the .above it appears that the fact that those who agree to form a co- ownership share or do not share any pro- . fits made by the use of the property held in coirr.!cn does not conve�rt their venture i n to a partnership. Or the: sharing of the gioss returns does nqt of itself e~stablish a partne:rship whether or not the persons sharing the:re�in have a join t or common right or intere'st in the pro- . perty. This on ly me ans that, aside from the circumstance of profit, the presence of other ele�ments constituting partner- ship is necessary, such as the clear in- . tent t o f orm a partnership, the existence . of a juridical personality different from that of the individual partners, and the fr eedom to transfer or assign any interest in the property by one: \'li th the cons:en t of the others (Padilla, Civil Code of the Philippines Annotated, Vol . I, 1953 ed., pp. 635-636) �. ~t is evident that an isolated trans- action where�by two or more persons contri- bute funds to buy certain real est ate for profit in t he absence of other circums- tances showing a contrary intention cannot be considered a partnership. " Persons who cont~ibute property or funds for a common e:nte�r.prise and agree to share t he gross returns of that enter- prise in proportion to their contribution, but who severally re:tain the title to their respective contribu-tion, are 'not thereby re�ndered partneTs. They have no common stock or capital , and no community of in- terest as principal propr ietors in the business itself which the proceeds derived . " (Elements of the law of Partnership by Floyd R. Mechem , 2n Ed . , s ection 83 , p. 74.) "A joint purchase of l and , by two, does � not constitute a co-partnership in respect the�reto; nor does an agreement to share the

I DISSENTING OPINION - CTA CASE NO. 3 211 - 27 - profits and losses on the sale of land create a partnership1 the parties are only tenants in common." (Clark vs. Sideway, 142 u.s. 682, 12 S. Ct. 327, 35 L. Ed ., 1157.) � "Where pl~intiff , his brother, and anothe~r agreed to become owners of a single t ract of realty, holding as tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitle'd to share in plaintiff's commi's.sions, no partnership existed as between the three parties, whatever their r elation may have been as to thi rd parties." (Magee vs. Magee , 123 N.E . 673, 233 Mass. 341.) "'I'he common ownership of �property does not its.elf create� a partnership between the: owne~rs, though the~y may use it for purpose of making gains1 and they may, wi thou t becoming partners, agree among themselves as to the management and use of such property and the applic- . ation of the proceeds therefrom." (Spur- lock vs. Wilson, 142 s.w . 363, 160 No. l~pp. 14.) "This is impliedly recognized i n the following portion of the decision: " Althoug~ taken singly, they might not suffice to establish the intent nece~ ss:ary to consti- tute a partnership, the collective' effect of these circumstances (referring to the s:eries of transactions) such as to l eave no room for doubt on th~ existence of said intent in petitioners herein." (underlining mine .) Hence , on the basis of th�e above discussion, I am of the humble opinion that there existed in this case a co-owne�rship, and for that I here�by register my dis�sent- ing vote�. CO~R/~QUIN Quezon City, July 6, 1984. / fissociate Judge