Cases on Partnerships

CASES ON PARTNERSHIPS/CO-OWNERSHIP/ JOINT VENTURE

TAX 1 REPORTRicky A. Sabornay

2001-05695

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Partnership

• Article 1767. 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.

• Two or more persons may also form a partnership for the exercise of a profession. (1665a)

• Article 1768. The partnership has a juridical personality separate and distinct from that of each

of the partners, even in case of failure to comply with the requirements of article 1772, first paragraph. (n)

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Partnership

• Two kinds:

1. General Co-Partnership – all or part of its income derived from the conduct of trade or business ( income taxable)

2. General Professional Partnership – formed for the sole purpose of exercising common profession of which no part of income is derived from engaging in any trade or business. (income tax-exempt)

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Partnership

• Sec. 22 (B) The term "corporation" shall include partnerships, NO MATTER HOW CREATED OR ORGANIZED, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from 4

Partnership

• SEC. 26. Tax Liability of Members of General

Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

• For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

• Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

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Partnership

• SEC 73 (D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.

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JOINT VENTURE

• Business activity organized or established only for a temporary or short-period of time.

• It is dissolved once its business objective is accomplished.

• Income taxed like a corporation.

• But unincorporated joint venture formed for the purpose of undertaking a construction project or engaging in petroleum operations pursuant to the consortium agreement with the Philippine Government not subject to corporate income tax.

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CO-OWNERSHIP

• Article 484. There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.

• In default of contracts, or of special provisions, co-ownership shall be governed by the provisions of this Title.

• Generally, tax-exempt because activities are usually intended to preserve the property and to collect income from the property.

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CO-OWNERSHIP

• Following circumstances would render a co-ownership subject to corporate income tax:

1. Co-ownership is formed or established voluntarily, or upon agreement.

2. Individual co-owner reinvested his share in the co-ownership to produce another income-generating activity.

3. Inherited property remain undivided for more than ten years, and no attempt was ever made to divide the same among co-heirs, nor was the property under administration proceedings nor held in trust.

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ONA v. CIR• Co-ownership is not taxable

but partnership is.

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ONA v. CIR

• FACTS: Julia Bunales died on March 23, 1944 leaving as heirs her surviving spouse Lorenzo T. Oña and her five children. A civil case was instituted in the CFI of Manila for the settlement of her estate. Lorenzo was appointed administrator of the deceased’s estate.

A project of partition shows that the heirs have undivided ½ interest in 10 parcels of land, 6 houses and an undetermined amount to be collected from the War Damage Commission. Although the court approved the project of partition, no attempt was made to divide the properties listed therein. Instead, the properties remained under the management of Lorenzo who used the said properties in business by leasing or letting them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities.

•

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ONA v. CIR

• As a result, petitioner’s properties and investment gradually increased from P 105,405.00 in 1949 to P 480,0005.20 in 1956.

Respondent CIR decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax pursuant to Section 24, in relation to Section 84(b) of the Tax Code.

Petitioners protested against the assessment and asked for reconsideration of the ruling that they have formed an unregistered partnership

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ONA v. CIR

ISSUE: Did petitioners constitute an unregistered partnership, and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against them by respondent CIR.

HELD: From the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionately, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the provisions of the Tax Code.

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OBILLOS JR. v. CIR

• “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 a property from which the returns are derived (Article 1769.3).” There must be an unmistakable intention to form a partnership or joint venture.

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OBILLOS JR. v. CIR

FACTS• Jose Obillos Sr. purchased lots located in Greenhills, San Juan and

transferred the rights to the same to his four children, the petitioners, to enable them to build their residences.

• After having held the lots for more than a year, the petitioners sold them to the Walled City Securities Corporation and Olga Canda. They treated the profit derived from the sale as capital gain and paid an income tax on one-half thereof.

• The CIR required the petitioners to pay corporate income tax on the total profit in addition to individual income tax on their shares thereof. The Commissioner also considered the share of the profits of each petitioner in the sum as distributive dividend taxable in full and required them to pay deficiency income taxes.

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OBILLOS JR. v. CIR

ISSUE: Whether the petitioners have formed a taxable unregistered partnership

HELD: NO. The Court held that it was an error to consider the petitioners as having formed a partnership under Article 1767 NCC simply because they allegedly contributed money to buy the two lots, sold the same and divided the profit among themselves.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to sell the lots to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership.

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GATCHALIAN v. CIR

• FACTS• The plaintiffs contributed money to purchase a sweepstakes ticket,

which was registered in the name of Gatchalian and Company. The ticket won one of the prizes amounting to P 50 000.00 and the corresponding check was drawn in favor of Gatchalian and Company.

• Gatchalian was required by the income tax examiner to file the corresponding income tax return covering the prize won. The CIR made an assessment against Gatchalian and Company. The plaintiffs requested exemption from payment but was denied. The plaintiffs paid under protest then brought an action to recover their payment.

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GATCHALIAN v. CIR

• ISSUE: Whether the plaintiffs formed a partnership and therefore liable for the payment of income tax

• HELD:YES. The plaintiffs organized a partnership of 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. The partnership was not only formed but upon the organization thereof and the winning of the prize, Gatchalian personally claimed the prize in his capacity as co-partner.

• Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax, which the defendant collected.

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EVANGELISTA v. CIR

Facts: The Evangelistas purchased various lands using the money they borrowed from their father. These lands were leased. CIR claims income tax (on corporations, real estate dealer, corporation residence) from them.

Issue: WON Evangelistas are liable to pay income tax

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EVANGELISTA v. CIR

• Held:        Yes.  They are liable to pay income tax.• Ratio:       Petitioners are liable for to pay income tax on

corporations. They have formed a partnership which is taxable as a corporation under the NIRC. The proof of real estate business are: i)  Common fund is created purposely, borrowed from father, ii) Invested money in series of transactions, iii) Lots are not used for residential purposes, iv)  Properties are managed by one person, v) Condition (business) existing for 10 years, vi) Petitioners did not give evidence contrary to purpose of a business.

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Collector v Batangas

• Joint Emergency Operations - taxable

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CIR vs. BATANGAS TRANSPORTATION COMPANY

Facts:       Batangas Transportation and Laguna-Tayabas Bus were placed under joint management (“Joint Emergency Operation”) to economize overhead expenses. CIR claims tax deficiencies from the two companies on the basis that the Joint Emergency Operation is a corporation distinct from the two companies.

Issue:       WON the Joint Emergency Operation is liable to pay for deficiency income tax

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CIR vs. BATANGAS TRANSPORTATION COMPANY

Held:         Yes. They are liable because it is a separate entity from the two companies.

Ratio:       The Joint Emergency Operation operates as a single entity, company or partnership obtaining profits from operations. Two companies contributed money to a common fund to pay for operational expenses. Expenses and income are merged. The Joint Emergency Operation falls under the definition of a corporation (Sec 84(b)The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations or insurance companies, but does not include duly registered general co-partnerships)  under the NIRC, hence is liable to pay income tax.

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Pascual v CIR• Sharing not taxable

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Pascual v CIR

Facts:

Petitioners Pascual and Dragon bought two (2) parcels of land on June 22, 1965 and another three (3) parcels of land on May 28, 1966. They sold the first two parcels in 1968 and the three parcels in 1970. They paid the corresponding capital gains taxes in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, in 1979, they were assessed and required to pay deficiency corporate income taxes for the years 1968 and 1970.

The respondent Commissioner informed petitioners that in 1968 and 1970, petitioners as co-owners in real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Sec. 20(b) and its income was subject to the taxes prescribed under Sec. 24, both of the NIRC.

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Pascual v CIR

Issue: WON the co-ownership between the petitioners constitutes an unregistered partnership/joint venture which is taxable as a corporation.

Held: The co-ownership between the petitioners does not constitute an unregistered partnership. The petitioners shall be relieved of the corporate tax liability.

The court also held that that 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.

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Afisco Insurance v. CIR

• Taxed a corporation the pool of insurance companies.

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

Facts:

The petitioners are 41 local insurance firms which entered into Reinsurance Treaties with Munich, a non-resident foreign insurance corporation. The reinsurance treaties required them to form an “insurance pool” or “clearing house” in order to facilitate the handling of the business they contracted with Munich. The CIR assessed the insurance pool deficiency corporate taxes and withholding taxes on dividends paid on Munich and to the petitioners respectively. The assessments were protested by the petitioners.

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

• The CA ruled that the insurance pool was a partnership taxable as a corporation and that the latter’s collection of premiums on behalf of its members was taxable income.

• The petitioners belie the existence of a partnership because, according to them, the reinsurers did not share the same risk or solidary liability, there was no common fund, the executive board of the pool did not exercise control and management of its funds and the pool was not engaged in business of reinsurance from which it could have derived income for itself.

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

Issues:

May the insurance pool be deemed a partnership or an association that is taxable as a corporation?

Should the pool’s remittances to member companies and to Munich be taxable as dividends?

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

Ruling: The pool is taxable as a corporation.  

In the present case, the ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-sharing reinsurance treaty and surplus reinsurance treaty with Munich. There are unmistakable indicators that it is a partnership or an association covered by NIRC.

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

• The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of the pool.

• The pool functions through an executive board which resembles the BOD of a corporation.

• Though the pool itself is not a reinsurer, its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich because without it they would not have received their premiums. Profit motive or business is therefore the primordial reason for the pool’s formation.

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Afisco Insurance Corp. et al. vs. CA, CTA and CIR

• The fact that the pool does not retain any profit or income does not obliterate an antecedent fact that of the pool is being used in the transaction of business for profit. It is apparent, and petitioners admit that their association or co-action was indispensable to the transaction of the business. If together they have conducted business, profit must have been the object as indeed, profit was earned. Though the profit was apportioned among the members, this is one a matter of consequence as it implies that profit actually resulted.

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Solidbank Corporation vs. CIR

Facts:

Solidbank and Susana Realty, Inc. became co-owners of three (3) parcels of land with a four-storey building thereon when Solidbank acquired ½ ownership and interest of Susana Realty. Years after, Solidbank filed a complaint for partition. It demanded the portion of the property owned in common pursuant to Art. 494 of the Civil Code and asserted that a “Buy-Out” of the share of one to the other co-owner is a more practical solution. The parties agreed to settle amicably and the court rendered judgment approving the compromise agreement. The title of the property was awarded to Solidbank.

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Solidbank Corporation vs. CIR

• A former employee of Susana Realty filed an information against Solidbank and Susana Realty stating that as a result of the amicable settlement, Solidbank and Susana Realty waived their claims against each other and are therefore subject to and liable for donor’s tax.

• The CIR denied the letter of protest of the petitioners and held:

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Solidbank Corporation vs. CIR

• that they were unregistered partners of the subject property and are subject to corporate income tax. The CIR said that since the purpose and activities that arose from the transaction was a leasing business activity, it follows that the petitioners did not merely enter into a co-ownership agreement; rather, they in fact entered into a joint venture and engaged in leasing business, hence, formed a taxable corporation.

• Susana Realty, on the other hand, pointed out that the true intention of the parties are not to become parties and to operate the acquired property for profit but for it to ultimately sell and convey the acquired property in favor of Solidbank in the future since the latter was using the building as its head office in its banking operations

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Solidbank Corporation vs. CIR

Issue: WON Solidbank and Susana Realty formed an unregistered partnership which is subject to corporate income tax.

Ruling: What Solidbank and Susana Realty had entered into under the “Deed of Sale with Option and Agreement for Administration of Property” (Deed) is a transaction resulting in co-ownership and not unregistered partnership. The agreement for administration of property is but a mere incident of the co-ownership and not an act reflective of their intention to engage in a mutual fund for profit or business.

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Solidbank Corporation vs. CIR

• There are two essential elements of a 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. At first glance, the petitioners would seem to be covered by the essential elements. CIR has alleged that they contributed capital to engage in a leasing business activity. However, a more exhaustive scrutiny of the facts and jurisprudence led the court to believe that no agreement, direct or implied, was reached by the petitioners to purposely contribute money, property or industry to a common fund and that no intent to divide the profits arising from the use of the common fund in a business activity was ever contemplated by the parties.

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Solidbank Corporation vs. CIR

• It is manifest from the wordings of the Deed that the real intention was to sell petitioner Susana Realty’s share to Solidbank. It is also important to note that Solidbank demolished the ½ portion of the building and constructed a new 10-storey building without the prior approval and consent of Susana Realty. These facts established the absence of intent to form a partnership over the property in question. Solidbank acted on its own in handling its business affairs.

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THANK YOU!

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