for Business Organization 1

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Pointers to Review for Business Organization 1Mid-term Examination

A. Prelim Term discussions

1. Partnershipa. as a contract (1767)

b. as a person (1768)2. Tests to determine existence of partnership (1769)3. Forms of partnership (1771 to 1773)4. Kinds of partnership (1778, 1780, 1783, 1785, 1843)5. Life of a partnership

a. Commencement (1784)b. Formation

i. Contribution (1790)ii. Property Rights (1810 to 1812)

c. Operation

i. Rules on industrial partners (1789)ii. Rules on capitalist partners (1808)iii. Rules on profit sharing (1797 to 1799)iv. Rules on management (1800)

d. Dissolution (1828, 1830)e. Liquidation(1828)

B. Midterm discussions

1. Agency (1868)2. Forms of Agency - (1869)

a. Couched in general terms (1877)b. Special Power of Attorney (1878)

3. Kinds of Agency / Agentsa. As to consideration onerous, gratuitous (1875)b. As to business general, special (1876)c. Commission Agents (1903 to 1905)

4. Principles involving agencya. Agents authority (1881)

i. If advantageous to Principal (1882)ii. If imminent loss to Principal (1888)

iii. Solidary agents (1894)

b. Agents conflict of interest (1889)c. Principals obligation (1910)

i. When agent exceeds power (1910)ii. When principal allowed agent to exceed power (1911)

iii. Solidary principals (1915)5. Extinguishment of Agency (1919, 1926 to 1932)

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Digest: Woodhouse vs Halili

Posted inDigest: BusOrg 1 (PAT) TaggedBusOrg,digest,law schoolLeave a comment

CHARLES F. WOODHOUSE, plaintiff-appellant, vs.

FORTUNATO F. HALILI, defendant-appellant.

G.R. No. L-4811 July 31, 1953

Subject: BusOrg 1 (PAT)

Doctrine: Fraud

FACTS

On November 29, 1947, plaintiff Woodhouse entered into a written agreement with defendantHalili stating among others that: 1) that they shall organize a partnership for the bottling anddistribution of Missionsoft drinks, plaintiff to act as industrial partner or manager, and the

defendant as a capitalist, furnishing the capital necessary therefore; 2) that plaintiff was to secure

the Mission Soft Drinks franchise for and in behalf of the proposed partnership and 3) that theplaintiff was to receive 30 per cent of the net profits of the business.

Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los

Angeles, California, that he had interested a prominent financier (defendant herein) in the

business, who was willing to invest half a milliondollars in the bottling and distribution of thesaid beverages, and requested, in order that he may close the deal with him, that the right to

bottle and distribute be granted him for a limited time under the condition that it will finally be

transferred to the corporation. Pursuant to this request, plaintiff was given a thirty days optionon exclusive bottling and distribution rights for the Philippines. The contract was finally signed

by plaintiff on December 3, 1947.

When the bottling plant was already in operation, plaintiff demanded of defendant that the

partnership papers be executed. Defendant Halili gave excuses and would not execute saidagreement, thus the complaint by the plaintiff.

Plaintiff prays for the : 1.execution of the contract of partnership; 2) accounting of profits and

3)share thereof of 30 percent with 4) damages in the amount of P200,000. The Defendant on theother hand claims that: 1) the defendants consent to the agreement, was secured by the

representation of plaintiff that he was the owner, or was about to become owner of an exclusive

bottling franchise, which representation was false, and that plaintiff did not secure the franchise

but was given to defendant himself 2) that defendant did not fail to carry out his undertakings,but that it was plaintiff who failed and 3)that plaintiff agreed to contribute to the exclusive

franchise to the partnership, but plaintiff failed to do so with a 4) counterclaim for P200,00 as

damages.The CFI ruling: 1) accounting of profits and to pay plaintiff 15 % of the profits and that the 2)

execution of contract cannot be enforced upon parties. Lastly, the 3) fraud wasnt proved

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ISSUES

1. WON plaintiff falsely represented that he had an exclusive franchise to bottle Mission

beverages

2. WON false representation, if it existed, annuls the agreement to form the partnership

HELD

1. Yes. Plaintiff did make false representations and this can be seen through his letters to Mission

Dry Corporation asking for the latter to grant him temporary franchise so that he could settle theagreement with defendant. The trial court reasoned, and the plaintiff on this appeal argues, that

plaintiff only undertook in the agreement to secure the Mission Dry franchise for and in behalf

of the proposed partnership. The existence of this provision in the final agreement does not

militate against plaintiff having represented that he had the exclusive franchise; it ratherstrengthens belief that he did actually make the representation. The defendant believed, or was

made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also

agreed upon that the franchise was to be transferred to the name of the partnership, and that,

upon its dissolution or termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did nothave the exclusive franchise, was to reduce, as he himself testified, plaintiffs participation in the

net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiffactually made him believe that he(plaintiff) was the exclusive grantee of the franchise.

2. No. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil)fraud, the causal fraud, which may be ground for the annulment of a contract, and the incidental

deceit, which only renders the party who employs it liable for damages only. The Supreme Court

has held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not

merely the incidental (dolo incidente) inducement to the making of the contract.The record abounds with circumstances indicative of the fact that the principal consideration, the

main cause that induced defendant to enter into the partnership agreement with plaintiff, was theability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or forthe partnership. The original draft prepared by defendants counsel was to the effect that plaintiff

obligated himself to secure a franchise for the defendant. But if plaintiff was guilty of a false

representation, this was not the causal consideration, or the principal inducement, that ledplaintiff to enter into the partnership agreement. On the other hand, this supposed ownership of

an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the

share of 30 per cent granted him in the net profits of the partnership business. Defendant agreed

to give plaintiff 30 per cent share in the net profits because he was transferring his exclusivefranchise to the partnership.

Having arrived at the conclusion that the contract cannot be declared null and void, may the

agreement be carried out or executed? The SC finds no merit in the claim of plaintiff that thepartnership was already a fait accompli from the time of the operation of the plant, as it isevident from the very language of the agreement that the parties intended that the execution of

the agreement to form a partnership was to be carried out at a later date. , The defendant may not

be compelled against his will to carry out the agreement nor execute the partnership papers. Thelaw recognizes the individuals freedom or liberty to do an act he has promised to do, or not to

do it, as he pleases.

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Dispostive Postion:With modification above indicated, the judg

Digest: Litton vs Hill & Ceron

Posted inDigest,Digest: BusOrg 1 (PAT)Leave a comment

GEORGE LITTON,petitioner-appellant,vs.

HILL & CERON, ET AL.,respondents-appellees.

G.R. No. L-45624 April 25, 1939

Subject: BusOrg 1

Facts:

This is a petition to review on certiorarithe decision of the Court of Appeals. On February 14,

1934, Litton sold and delivered to Carlos Ceron, who is one of the managing partners of Hill &Ceron, a certain number of mining claims, and by virtue of said transaction, Ceron delivered to

plaintiff adocument (receipt) acknowledging that he received from Litton certain share

certificates of Big Wedge Mining Company totaling P1870. Ceron paid to the plaintiff the sum

or P1,150 leaving an unpaid balance of P720, and unable to collect this sum either from Hill &Ceron or from its surety Visayan Surety & Insurance Corporation, Litton filed a complaint in the

Court of First Instance of Manila against the said defendants for the recovery of the said balance.

The lower court, after trial, ordered Carlos Ceron personally to pay the amount claimed and

absolved the partnership Hill & Ceron, Robert Hill and the Visayan Surety & InsuranceCorporation. On appeal to the CA, the latter affirmed the decision of the lower court, havingreached the conclusion that Ceron did not intend to represent and did not act for the firm Hill &

Ceron in the transaction involved in this litigation.

Issue:WON Cerons act binds the partnership.

Held:

Yes, we reach the conclusion that the transaction made by Ceron with the plaintiff should be

understood in law as effected by Hill & Ceron and binding upon it.

In the first place, it is an admitted fact by Robert Hill when he testified at the trial that he andCeron, during the partnership, had the same power to buy and sell; that in said partnership Hill as

well as Ceron made the transaction as partners in equal parts; that on the date of the transaction,

February 14, 1934, the partnership between Hill and Ceron was in existence.

According to the articles of copartnership of Hill & Ceron, a written contract of the firm can

only be signed by one of the partners if the other partner consented. Without the consent of one

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partner, the other cannot bind the firm by a written contract. Now, assuming for the moment thatCeron attempted to represent the firm in this contract with the plaintiff (the plaintiff conceded

that the firm name was not mentioned at that time), the latter has failed to prove that Hill had

consented to such contract. Also, third persons, like the plaintiff, are not bound in entering into a

contract with any of the two partners, to ascertain whether or not this partner with whom thetransaction is made has the consent of the other partner. The public need not make inquires as to

the agreements had between the partners. Its knowledge, is enough that it is contracting with the

partnership which is represented by one of the managing partners.

The respondent argues in its brief that even admitting that one of the partners could not, in hisindividual capacity, engage in a transaction similar to that in which the partnership is engaged

without binding the latter, nevertheless there is no law which prohibits a partner in the stock

brokerage business for engaging in other transactions different from those of the partnership, as

it happens in the present case, because the transaction made by Ceron is a mere personal loan,and this argument, so it is said, is corroborated by the Court of Appeals. We do not find this

alleged corroboration because the only finding of fact made by the Court of Appeals is to the

effect that the transaction made by Ceron with the plaintiff was in his individual capacity.

The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointlyand severally, the sum of P720, with legal interest, from the date of the filing of the complaint,

minus the commission of one-half per cent (%) from the original price of P1,870, with thecosts to the respondents. So ordered.

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Bachrach v La Protectora

Facts:

Nicolas Segundo, Antonio Adiarte, Ignacio Flores and Modesto Serrano (defendants) formed a civil

partnership called La Protectora for the purpose of engaging in the business of transporting

passengers and freight at Laoag, Ilocos Norte. Marcelo Barba, acting as manager, negotiated for the

purchase of 2 automobile trucks from E. M. Bachrach for P16,500. Barba paid P3,000 in cash and for the

balance executed promissory notes.

One of these promissory notes was signed in the following manner:

P.P La Protectora, By Marcelo Barba Marcelo Barba

The other 2 notes were signed in the same way but the word by was omitted. It was obvious that in

signing the notes, Barba intended to bind both the partnership and himself.

The defendants executed a document in which they declared that they were members of La Protectora

and that they had granted to its president full authority to contract for the purchase of the 2

automobiles. The document was delivered by Barba to Bachrach at the time the vehicles were

purchased.

Barba incurred a debt amounting to P2,617.57 and Bachrach foreclosed a chattel mortgage on the

trucks but there was still balance. To recover the balance, action was instituted against the defendants.

Judgment was rendered against the defendants.

Issue:

a.Whether or not the defendants are liable for the firm debts.

b.Whether or not Barba had authority to incur expenses for the partnership (relevant issue)

Held:

a.Yes. Promissory notes constitute the obligation exclusively of La Protectora and Barba. They do not

constitute an obligation directly binding the defendants. Their liability is based on the principles of

partnership liability. A member is not liable in solidum with his fellows for the entire indebtedness but is

liable with them or his aliquot part.

SC obiter: the document was intended merely as an authority to enable Barba to bind the partnership

and that the parties to the instrument did not intend to confer upon Barba an authority to bind them

personally.

b. Yes. Under Art 1804, every partner may associate another person with him in his share. All partners

are considered agents of the partnership. Barba must be held to have authority to incur these expenses.

He is shown to have been in fact the president/manager, and there can be no doubt that he had actualauthority to incur obligation.

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.R. No. L-5236 January 10, 1910

PEDRO MARTINEZ,plaintiff-appellee,vs.

ONG PONG CO and ONG LAY,defendants.

ONG PONG CO.,appellant.

Fernando de la Cantera for appellant.

O'Brien and DeWitt for appellee.

ARELLANO, C.J.:

On the 12th of December, 1900, the plaintiff herein delivered P1,500 to the defendants who, in a

private document, acknowledged that they had received the same with the agreement, as stated

by them, "that we are to invest the amount in a store, the profits or losses of which we are todivide with the former, in equal shares."

The plaintiff filed a complaint on April 25, 1907, in order to compel the defendants to render himan accounting of the partnership as agreed to, or else to refund him the P1,500 that he had given

them for the said purpose. Ong Pong Co alone appeared to answer the complaint; he admitted the

fact of the agreement and the delivery to him and to Ong Lay of the P1,500 for the purpose

aforesaid, but he alleged that Ong Lay, who was then deceased, was the one who had managed

the business, and that nothing had resulted therefrom save the loss of the capital of P1,500, towhich loss the plaintiff agreed.

The judge of the Court of First Instance of the city of Manila who tried the case ordered Ong

Pong Co to return to the plaintiff one-half of the said capital of P1,500 which, together with Ong

Lay, he had received from the plaintiff, to wit, P750, plus P90 as one-half of the profits,calculated at the rate of 12 per cent per annum for the six months that the store was supposed to

have been open, both sums in Philippine currency, making a total of P840, with legal interest

thereon at the rate of 6 per cent per annum, from the 12th of June, 1901, when the business

terminated and on which date he ought to have returned the said amount to the plaintiff, until thefull payment thereof with costs.

From this judgment Ong Pong Co appealed to this court, and assigned the following errors:

1. For not having taken into consideration the fact that the reason for the closing of thestore was the ejectment from the premises occupied by it.

2. For not having considered the fact that there were losses.

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3. For holding that there should have been profits.

4. For having applied article 1138 of the Civil Code.

5. and 6. For holding that the capital ought to have yielded profits, and that the latter

should be calculated 12 per cent per annum; and

7. The findings of the ejectment.

As to the first assignment of error, the fact that the store was closed by virtue of ejectment

proceedings is of no importance for the effects of the suit. The whole action is based upon the

fact that the defendants received certain capital from the plaintiff for the purpose of organizing acompany; they, according to the agreement, were to handle the said money and invest it in a

store which was the object of the association; they, in the absence of a special agreement vesting

in one sole person the management of the business, were the actual administrators thereof; as

such administrators they were the agent of the company and incurred the liabilities peculiar toevery agent, among which is that of rendering account to the principal of their transactions, and

paying him everything they may have received by virtue of the mandatum. (Arts. 1695 and 1720,

Civil Code.) Neither of them has rendered such account nor proven the losses referred to by OngPong Co; they are therefore obliged to refund the money that they received for the purpose of

establishing the said storethe object of the association. This was the principal pronouncement

of the judgment.

With regard to the second and third assignments of error, this court, like the court below, finds

no evidence that the entire capital or any part thereof was lost. It is no evidence of such loss toaver, without proof, that the effects of the store were ejected. Even though this were proven, it

could not be inferred therefrom that the ejectment was due to the fact that no rents were paid, and

that the rent was not paid on account of the loss of the capital belonging to the enterprise.

With regard to the possible profits, the finding of the court below are based on the statements ofthe defendant Ong Pong Co, to the effect that "there were some profits, but not large ones." This

court, however, does not find that the amount thereof has been proven, nor deem it possible toestimate them to be a certain sum, and for a given period of time; hence, it can not admit the

estimate, made in the judgment, of 12 per cent per annum for the period of six months.

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part

of a partner who acted as agent in receiving money for a given purpose, for which he has

rendered no accounting, such agent is responsible only for the losses which, by a violation of the

provisions of the law, he incurred. This being an obligation to pay in cash, there are no otherlosses than the legal interest, which interest is not due except from the time of the judicial

demand, or, in the present case, from the filing of the complaint. (Arts. 1108 and 1100, CivilCode.) We do not consider that article 1688 is applicable in this case, in so far as it provides "thatthe partnership is liable to every partner for the amounts he may have disbursed on account of

the same and for the proper interest," for the reason that no other money than that contributed as

is involved.

As in the partnership there were two administrators or agents liable for the above-named amount,

article 1138 of the Civil Code has been invoked; this latter deals with debts of a partnership

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where the obligation is not a joint one, as is likewise provided by article 1723 of said code withrespect to the liability of two or more agents with respect to the return of the money that they

received from their principal. Therefore, the other errors assigned have not been committed.

In view of the foregoing judgment appealed from is hereby affirmed, provided, however, that the

defendant Ong Pong Co shall only pay the plaintiff the sum of P750 with the legal interest

thereon at the rate of 6 per cent per annum from the time of the filing of the complaint, and thecosts, without special ruling as to the costs of this instance. So ordered.

Torres, Johnson, Carson, and Moreland, JJ.,concur.

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Commissioner of Internal Revenue vs. Suter, 27 SCRA 152, L-25532, February

28, 1969Posted by Alchemy Business Center and Marketing Consultancy at9:15 PMLabels:1969,27 SCRA 152,

Civil Law Review,Commissioner of Internal Revenue vs. Suter,February 28,L-25532

Commissioner of Internal Revenue vs. Suter, 27 SCRA 152, L-25532, February 28, 1969 G.R. No. L-25532 February 28, 1969

COMMISSIONER OF INTERNAL REVENUE,petitioner,

vs.

WILLIAM J. SUTER and THE COURT OF TAX APPEALS,respondents.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and

Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.

A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September

1947 by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson,

as the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 tothe partnership. On 1 October 1947, the limited partnership was registered with the Securities and

Exchange Commission. The firm engaged, among other activities, in the importation, marketing,

distribution and operation of automatic phonographs, radios, television sets and amusement machines,

their parts and accessories. It had an office and held itself out as a limited partnership, handling and

carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own

books of accounts and bank accounts, and had a quota allocation with the Central Bank.

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In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on

18 December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The

sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.

The limited partnership had been filing its income tax returns as a corporation, without objection

by the herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an

assessment, consolidated the income of the firm and the individual incomes of the partners-spouses

Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in the

amount of P2,678.06 for 1954 and P4,567.00 for 1955.Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not

in accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to

the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing

that of the Commissioner of Internal Revenue.

The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax

court's aforesaid decision. It raises these issues:

(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be

disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia

Spirig Suter actually formed a single taxable unit; and

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent

William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, GustavCarlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and

Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the partnership

dissolved the limited partnership, and if they did not, the fiction of juridical personality of the

partnership should be disregarded for income tax purposes because the spouses have exclusive

ownership and control of the business; consequently the income tax return of respondent Suter for the

years in question should have included his and his wife's individual incomes and that of the limited

partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as

follows:

(d) Husband and wife. In the case of married persons, whether citizens, residents or non-

residents, only one consolidated return for the taxable year shall be filed by either spouse to cover the

income of both spouses; ....

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that

his marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in

1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New

Civil Code, and that since its juridical personality had not been affected and since, as a limited

partnership, as contra distinguished from a duly registered general partnership, it is taxable on its

income similarly with corporations, Suter was not bound to include in his individual return the income of

the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by

operation of law because of the marriage of the only general partner, William J. Suter to the originally

limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant uponthe opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the

Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

A husband and a wife may not enter into a contract of generalcopartnership, because under the

Civil Code, which applies in the absence of express provision in the Code of Commerce, persons

prohibited from making donations to each other are prohibited from entering

into universalpartnerships. (2 Echaverri 196) It follows that the marriage of partners necessarily brings

about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)

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The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin"

Co., Ltd. wasnot a universalpartnership, but aparticular one. As appears from Articles 1674 and 1675 of

the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in

1947), a universal partnership requires either that the object of the association be all the present

property of the partners, as contributed by them to the common fund, or else "all that the partners may

acquire by their industry or work during the existence of the partnership". William J. Suter "Morcoin"

Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of

money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was anindustrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses

were forbidden to enter by Article 1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th

Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the

aforesaid Article 1677:

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o

podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis

permisiva de los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro

Codigo los prohibe, y hay que estar a la norma general segun la que toda persona es capaz para

contratar mientras no sea declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros

fue favorable a esta misma tesis en su resolution de 3 de febrero de 1936, mas parece cambiar derumbo en la de 9 de marzo de 1943.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being

one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single

proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia

Spirig were separately owned and contributed by them before their marriage; and after they were

joined in wedlock, such contributions remained their respective separate property under the Spanish

Civil Code (Article 1396):

The following shall be the exclusiveproperty of each spouse:

(a) That which is brought to the marriage as his or her own; ....

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become

common property of both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical

personality of its own, distinct and separate from that of its partners (unlike American and English law

that does not recognize such separate juridical personality), the bypassing of the existence of the limited

partnership as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and

basic principles of our law. The limited partnership's separate individuality makes it impossible to equate

its income with that of the component members. True, section 24 of the Internal Revenue Code merges

registered general co-partnerships (compaias colectivas) with the personality of the individual partners

for income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership

laws, and can not be extended by mere implication to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-

13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority fordisregarding the fiction of legal personality of the corporations involved therein are not applicable to the

present case. In the cited cases, the corporations were already subjectto tax when the fiction of their

corporate personality was pierced; in the present case, to do so would exempt the limited partnership

from income taxation but would throw the tax burden upon the partners-spouses in their individual

capacities. The corporations, in the cases cited, merely served as business conduits or alter egosof the

stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is

not true in the present case. Here, the limited partnership is not a mere business conduit of the partner-

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spouses; it was organized for legitimate business purposes; it conducted its own dealings with its

customers prior to appellee's marriage, and had been filing its own income tax returns as such

independent entity. The change in its membership, brought about by the marriage of the partners and

their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from

the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show,

the partners did not enter into matrimony and thereafter buy the interests of the remaining partner

with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax

laws. Regularity, not otherwise, is presumed.As the limited partnership under consideration is taxable on its income, to require that income to

be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the

law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant

Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia

colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes

the latter on its income, but not the former, because it is in the case of compaias colectivasthat the

members, and not the firm, are taxable in their individual capacities for any dividend or share of the

profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Araas, Anno. & Juris.

on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nt

But it is argued that the income of the limited partnership is actually or constructively the income

of the spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointedout in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the

fruits of the wife's parapherna become conjugal only when no longer needed to defray the expenses for

the administration and preservation of the paraphernal capital of the wife. Then again, the appellant's

argument erroneously confines itself to the question of the legal personality of the limited partnership,

which is not essential to the income taxability of the partnership since the law taxes the income of even

joint accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes

that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of

both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the

conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable

year, their consequences would be different, as their contributions in the business partnership are not

the same.

The difference in tax rates between the income of the limited partnership being consolidated with,

and when split from the income of the spouses, is not a justification for requiring consolidation; the

revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited

partnership to pay tax on its own income.

FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

The Case

afisco insurance

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These are the main questions raised in the Petition for Review on Certioraribefore us, assailingthe October 11, 1993 Decisioni[1]of the Court of Appealsii[2]in CA-GR SP 29502, which

dismissed petitioners appeal of the October 19, 1992 Decisioniii[3]of the Court of Tax

Appealsiv[4](CTA) which had previously sustained petitioners liability for deficiency income

tax, interest and withholding tax. The Court of Appeals ruled:

WHEREFORE, the petition is DISMISSED, with costs against petitioners.v[5]

The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolutionvi[6]

denying reconsideration.

The Facts

The antecedent facts,vii[7]as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of

the Philippines. Upon issuance by them of Erection, Machinery Breakdown, Boiler Explosion

and Contractors All Risk insurance policies, the petitioners on August 1, 1965 entered into a

Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the MunchenerRuckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance

corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool

composed of the petitioners was formed on the same day.

On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an

Information Return of Organization Exempt from Income Tax for the year ending in 1975, onthe basis of which it was assessed by the Commissioner of Internal Revenue deficiency corporate

taxes in the amount of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and

P89,438.68 on dividends paid to Munich and to the petitioners, respectively. These assessmentswere protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.

On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered thepetitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax, interest, and

with[h]olding tax, itemized as follows:

Net income per information

return P3,737,370.00

===========

Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76

to 4/15/79 545,193.60TOTAL AMOUNT DUE & P1,843,273.60

COLLECTIBLE ===========

Dividend paid to Munich

Reinsurance Company P3,728,412.00===========

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35% withholding tax atsource due thereon P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from

1/25/76 to 1/25/79 137,019.14Compromise penalty-

non-filing of return 300.00

late payment 300.00TOTAL AMOUNT DUE & P1,768,799.39

COLLECTIBLE ===========

Dividend paid to Pool Members P 655,636.00

===========

10% withholding tax at

source due thereon P 65,563.60

Add: 25% surcharge 16,390.9014% interest from

1/25/76 to 1/25/79 6,884.18Compromise penalty-

non-filing of return 300.00late payment 300.00

TOTAL AMOUNT DUE & P 89,438.68

COLLECTIBLE ===========viii[8]

The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a

corporation, and that the latters collection of premiums on behalf of its members, the cedingcompanies, was taxable income. It added that prescription did not bar the Bureau of Internal

Revenue (BIR) from collecting the taxes due, because the taxpayer cannot be located at the

address given in the information return filed. Hence, this Petition for Review before us.ix[9]

The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly

administrative functions, and which did not insure or assume any risk in its own name, was a

partnership or association subject to tax as a corporation;

2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of

reinsurance premiums, pertaining to their individual and separate contracts of reinsurance, weredividends subject to tax; and

3.Whether or not the respondent Commissioners right to assess the Clearing House had alreadyprescribed.x[10]

The Courts Ruling

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The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool istaxable as a corporation, and that the governments right to assess and collect the taxes had not

prescribed.

First Issue:

Pool Taxable as a Corporation

Petitioners contend 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. They point out that

the reinsurance policies were written by them individually and separately, and that theirliability was limited to the extent of their allocated share in the original risks thus

reinsured.xi[11] Hence, the pool did not act or earn income as a reinsurer.xii[12] Its role was

limited to its principal function of allocating and distributing the risk(s) arising from the originalinsurance among the signatories to the treaty or the members of the pool based on their ability to

absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records,

maintenance, collection and custody of funds, etc.xiii[13]

Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did

not share the same risk or solidary liability;xiv[14](2) there was no common fund;xv[15] (3)the executive board of the pool did not exercise control and management of its funds, unlike theboard of directors of a corporation;xvi[16]and (4) the pool or clearing house was not and

could not possibly have engaged in the business of reinsurance from which it could have derived

income for itself.xvii[17]

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the

agency tasked with the enforcement of tax laws, is accorded much weight and even finality,

when there is no showing that it is patently wrong,xviii[18]particularly in this case where thefindings and conclusions of the internal revenue commissioner were subsequently affirmed by

the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and the

Court of Appeals.xix[19] Indeed,

[I]t has been the long standing policy and practice of this Court to respect the conclusions ofquasi-judicial agencies, such as the Court of Tax Appeals which, by the nature of its functions, is

dedicated exclusively to the study and consideration of tax problems and has necessarily

developed an expertise on the subject, unless there has been an abuse or improvident exercise of

its authority.xx[20]

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained

the internal revenue commissioner, committed no reversible error. Section 24 of the NIRC, asworded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax ishereby imposed upon the taxable net income received during each taxable year from all sources

by every corporation organized in, or existing under the laws of the Philippines, no matter how

created or organized, but not including duly registered general co-partnership (compaiascolectivas), general professional partnerships, private educational institutions, and building and

loan associations xxx.

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Ineludibly, the Philippine legislature included in the concept of corporations those entities thatresembled them such as unregistered partnerships and associations. Parenthetically, theNLRCs

inclusion of such entities in the tax on corporations was made even clearer by the Tax Reform

Act of 1997,xxi[21]which amended the Tax Code. Pertinent provisions of the new law read as

follows:

SEC. 27. Rates of Income Tax on Domestic Corporations. --

(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five

percent (35%) is hereby imposed upon the taxable income derived during each taxable year fromall sources within and without the Philippines by every corporation, as defined in Section 22 (B)

of this Code, and taxable under this Title as a corporation xxx.

SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx

(B) The term corporationshall include partnerships, no matter how created or

organized, joint-stock companies, joint accounts (cuentas en participacion),associations, or insurance companies, but does not include general professional

partnerships [or] a joint venture or consortium formed for the purpose of undertaking

construction projects or engaging in petroleum, coal, geothermal and other energyoperations pursuant to an operating or consortium agreement under a service contract

without the Government. General professional partnerships are partnerships

formed by persons for the sole purpose of exercising their common profession, no partof the income of which is derived from engaging in any trade or business.

xxx xxx xxx."

Thus, the Court inEvangelista v. Collector of Internal Revenuexxii[22]held that Section 24covered these unregistered partnerships and even associations or joint accounts, which had nolegal personalities apart from their individual members.xxiii[23]The Court of Appeals astutely

appliedEvangelista:xxiv[24]

xxx Accordingly, a pool of individual real property owners dealing in real estate business was

considered a corporation for purposes of the tax in sec. 24 of the Tax Code inEvangelista v.

Collector of Internal Revenue, supra. The Supreme Court said:

The term partnership includes a syndicate, group, pool, jointventure 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)

Article 1767 of the Civil Code recognizes the crea tion 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.xxv[25]Its requisites are: (1) mutualcontribution to a common stock, and (2) a joint interest in the profits.xxvi[26]In other words,

a partnership is formed when persons contract to devote to a common purpose either money,

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property, or labor with the intention of dividing the profits between themselves.xxvii[27]Meanwhile, an association implies associates who enter into a joint enterprise x x x for the

transaction of business.xxviii[28]

In the case before us, the ceding companies entered into a Pool Agreementxxix[29]or an

associationxxx[30]that would handle all the insurance businesses covered under their quota-

share reinsurance treatyxxxi[31]and surplus reinsurance treatyxxxii[32]with Munich. Thefollowing unmistakably indicates a partnership or an association covered by Section 24 of the

NIRC:

(1) The pool has a common fund, consisting of money and other valuables that are deposited in

the name and credit of the pool.xxxiii[33]This common fund pays for the administration and

operation expenses of the pool.xxxiv[34]

(2) The pool functions through an executive board, which resembles the board of directors of a

corporation, composed of one representative for each of the ceding companies.xxxv[35]

(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its

work is indispensable, beneficial and economically useful to the business of the cedingcompanies and Munich, because without it they would not have received their premiums. The

ceding companies share in the business ceded to the pool and in the expenses according to a

Rules of Distribution annexed to the Pool Agreement.xxxvi[36] Profit motive or business is,therefore, the primordial reason for the pools formation. As aptly found by the CTA:

xxx The fact that the pool does not retain any profit or income does not obliterate anantecedent fact, that of the pool being used in the transaction of business for profit. It is

apparent, and petitioners admit, that their association or coaction was indispensable [to]

the transaction of the business. x x x 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 only a matter of consequence, as it implies thatprofit actually resulted.xxxvii[37]

The petitioners reliance onPascual v. Commissionerxxxviii[38]is misplaced, because the facts

obtaining therein are not on all fours with the present case. InPascual, there was no

unregistered partnership, but merely a co-ownership which took up only two isolatedtransactions.xxxix[39] The Court of Appeals did not err in applyingEvangelista, which

involved a partnership that engaged in a series of transactions spanning more than ten years, as in

the case before us.

Second Issue:

Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich

are not dividends subject to tax. They insist that taxing such remittances contravene Sections 24(b) (I) and 263 of the 1977 NIRC and would be tantamount to an illegal double taxation, as it

would result in taxing the same premium income twice in the hands of the same taxpayer. xl[40]

Moreover, petitioners argue that since Munich was not a signatory to the Pool Agreement, the

remittances it received from the pool cannot be deemed dividends.xli[41]They add that even if

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such remittances were treated as dividends, they would have been exempt under the previouslymentioned sections of the 1977 NIRC,xlii[42]as well as Article 7 of paragraph 1xliii[43]and

Article 5 of paragraph 5xliv[44]of the RP-West German Tax Treaty.xlv[45]

Petitioners are clutching at straws. Double taxation means taxing the same property twice when

it should be taxed only once. That is, xxx taxing the same person twice by the same jurisdiction

for the same thing.xlvi[46]In the instant case, the pool is a taxable entity distinct from theindividual corporate entities of the ceding companies. The tax on its income is obviously

different from the tax on the dividends received by the said companies. Clearly, there is no

double taxation here.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto

remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are thelifeblood of the nation. Hence, exemptions therefrom are highly disfavored in law and he who

claims tax exemption must be able to justify his claim or right.xlvii[47] Petitioners have failed

to discharge this burden of proof. The sections of the 1977 NIRC which they cite are

inapplicable, because these were not yet in effect when the income was earned and when thesubject information return for the year ending 1975 was filed.

Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannotjustify the exemptions claimed. Section 255 provides that no tax shall xxx be paid upon

reinsurance by any company that has already paid the tax xxx. This cannot be applied to the

present case because, as previously discussed, the pool is a taxable entity distinct from the cedingcompanies; therefore, the latter cannot individually claim the income tax paid by the former as

their own.

On the other hand, Section 24 (b) (1)xlviii[48]pertains to tax on foreign corporations; hence, itcannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a

foreign corporation, be granted exemption based solely on this provision of the Tax Code,

because the same subsection specifically taxes dividends, the type of remittances forwarded to itby the pool. Although not a signatory to the Pool Agreement, Munich is patently an associate of

the ceding companies in the entity formed, pursuant to their reinsurance treaties which required

the creation of said pool.

Under its pool arrangement with the ceding companies, Munich shared in their income and loss.

This is manifest from a reading of Articles 3xlix[49]and 10l[50]of the Quota Share ReinsuranceTreaty and Articles 3li[51]and 10lii[52]of the Surplus Reinsurance Treaty. The foregoing

interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be

construedstrictissimi juris, and the statutory exemption claimed must be expressed in a language

too plain to be mistaken.liii[53]

Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German TaxTreaty is likewise unpersuasive, because the internal revenue commissioner assessed the pool for

corporate taxes on the basis of the information return it had submitted for the year ending 1975, a

taxable year when said treaty was not yet in effect.liv[54]Although petitioners omitted in theirpleadings the date of effectivity of the treaty, the Court takes judicial notice that it took effect

only later, on December 14, 1984.lv[55]

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Third Issue:Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had

prescribed. They claim that the subject information return was filed by the pool on April 14,1976. On the basis of this return, the BIR telephoned petitioners on November 11, 1981, to give

them notice of its letter of assessment dated March 27, 1981. Thus, the petitioners contend that

the five-year statute of limitations then provided in the NIRC had already lapsed, and that theinternal revenue commissioner was already barred by prescription from making an

assessment.lvi[56]

We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive

period was tolled under then Section 333 of the NIRC,lvii[57]because the taxpayer cannot be

located at the address given in the information return filed and for which reason there was delayin sending the assessment.lviii[58]Indeed, whether the governments right to collect and assess

the tax has prescribed involves facts which have been ruled upon by the lower courts. It is

axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as

in this case, this Court must not overturn the factual findings of the CA and the CTA.

Furthermore, petitioners admitted in their Motion for Reconsideration before the Court ofAppeals that the pool changed its address, for they stated that the pools information return filedin 1980 indicated therein its present address. The Court finds thatthis falls short of the

requirement of Section 333 of the NIRC for the suspension of the prescriptive period. The law

clearly states that the said period will be suspended only if the taxpayer informs theCommissioner of Internal Revenue of any change in the address.

WHEREFORE, the petition isDENIED. The Resolutions of the Court of Appeals dated

October 11, 1993 and November 15, 1993 are herebyAFFIRMED. Costs against petitioners.

SO ORDERED

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PhilippineLaw.infoJurisprudence1903February

PhilippineLaw.infoJurisprudencePhil. Rep.Vol. 1

G.R. No. 413, Fernandez v. De La Rosa, 1 Phil. 671

Republic of the Philippines

SUPREME COURTManila

EN BANC

February 2, 1903

G.R. No. 413

JOSE FERNANDEZ,plaintiff-appellant,

vs.

FRANCISCO DE LA ROSA,defendant-appellee.

Vicente Miranda, for appellant.

Simplicio del Rosario, for appellee.

LADD, J.:

The object of this action is to obtain from the court a declaration that a partnership exists

between the parties, that the plaintiff has a consequent interested in certain cascoes which are

alleged to be partnership property, and that the defendant is bound to render an account of hisadministration of the cascoes and the business carried on with them.

Judgment was rendered for the defendant in the court below and the plaintiff appealed.

The respective claims of the parties as to the facts, so far as it is necessary to state them in order

to indicate the point in dispute, may be briefly summarized. The plaintiff alleges that in January,1900, he entered into a verbal agreement with the defendant to form a partnership for the

purchase of cascoes and the carrying on of the business of letting the same for hire in Manila, the

defendant to buy the cascoes and each partner to furnish for that purpose such amount of moneyas he could, the profits to be divided proportionately; that in the same January the plaintiff

furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the

defendant did purchase for 500 pesos of Doa Isabel Vales, taking the title in his own name; that

the plaintiff furnished further sums aggregating about 300 pesos for repairs on this casco; that on

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the fifth of the following March he furnished the defendant 825 pesos to purchase another cascodesignated as No. 2089, which the defendant did purchase for 1,000 pesos of Luis R. Yangco,

taking the title to this casco also in his own name; that in April the parties undertook to draw up

articles of partnership for the purpose of embodying the same in an authentic document, but that

the defendant having proposed a draft of such articles which differed materially from the termsof the earlier verbal agreement, and being unwillingly to include casco No. 2089 in the

partnership, they were unable to come to any understanding and no written agreement wasexecuted; that the defendant having in the meantime had the control and management of the twocascoes, the plaintiff made a demand for an accounting upon him, which the defendant refused to

render, denying the existence of the partnership altogether.

The defendant admits that the project of forming a partnership in the casco business in which he

was already engaged to some extent individually was discussed between himself and the plaintiff

in January, 1900, and earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery

business, being also a party to the negotiations, but he denies that any agreement was everconsummated. He denies that the plaintiff furnished any money in January, 1900, for the

purchase of casco No. 1515, or for repairs on the same, but claims that he borrowed 300 pesos on

his individual account in January from the bakery firm, consisting of the plaintiff, MarcosAngulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff

March 5, he claims was for the purchase of casco No. 1515, which he alleged was bought March

12, and he alleges that he never received anything from the defendant toward the purchase ofcasco No. 2089. He claims to have paid, exclusive of repairs, 1,200 pesos for the first casco and

2,000 pesos for the second one.

The case comes to this court under the old procedure, and it is therefore necessary for us the

review the evidence and pass upon the facts. Our general conclusions may be stated as follows:

(1) Doa Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale

was made and the casco delivered in January, although the public document of sale was notexecuted till some time afterwards. This witness is apparently disinterested, and we think it issafe to rely upon the truth of her testimony, especially as the defendant, while asserting that the

sale was in March, admits that he had the casco taken to the ways for repairs in January.

It is true that the public document of sale was executed March 10, and that the vendor declares

therein that she is the owner of the casco, but such declaration does not exclude proof as to the

actual date of the sale, at least as against the plaintiff, who was not a party to the instrument.

(Civil Code, sec. 1218.) It often happens, of course, in such cases, that the actual sale precedesby a considerable time the execution of the formal instrument of transfer, and this is what we

think occurred here.

(2) The plaintiff presented in evidence the following receipt: "I have this day received from D.

Jose Fernandez eight hundred and twenty-five pesos for the cost of a casco which we are to

purchase in company. Manila, March 5, 1900. Francisco de la Rosa." The authenticity of thisreceipt is admitted by the defendant. If casco No. 1515 was bought, as we think it was, in

January, the casco referred to in the receipt which the parties "are to purchase in company" must

be casco No. 2089, which was bought March 22. We find this to be the fact, and that the plaintiff

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furnished and the defendant received 825 pesos toward the purchase of this casco, with theunderstanding that it was to be purchased on joint account.

(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulogive the defendant, in the name of the plaintiff, a sum of money, the amount of which he is

unable to state, for the purchase of a casco to be used in the plaintiff's and defendant's business.

Antonio Angulo also testifies, but the defendant claims that the fact that Angulo was a partner ofthe plaintiff rendered him incompetent as a witness under the provisions of article 643 of the thenCode of Civil Procedure,and without deciding whether this point is well taken, we have

discarded his testimony altogether in considering the case. The defendant admits the receipt of

300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan fromthe firm. Yet he sets up the claim that the 825 pesos which he received from the plaintiff in

March were furnished toward the purchase of casco No. 1515, thereby virtually admitting that

casco was purchased in company with the plaintiff. We discover nothing in the evidence to

support the claim that the 300 pesos received in January was a loan, unless it may be the fact thatthe defendant had on previous occasions borrowed money from the bakery firm. We think all the

probabilities of the case point to the truth of the evidence of Antonio Fernandez as to this

transaction, and we find the fact to be that the sum in question was furnished by the plaintifftoward the purchase for joint ownership of casco No. 1515, and that the defendant received it

with the understanding that it was to be used for this purposed. We also find that the plaintiff

furnished some further sums of money for the repair of casco.

(4) The balance of the purchase price of each of the two cascoes over and above the amount

contributed by the plaintiff was furnished by the defendant.

(5) We are unable to find upon the evidence before us that there was any specific verbal

agreement of partnership, except such as may be implied from the fact as to the purchase of thecasco.

(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probablethan otherwise that no attempt was made to agree upon articles of partnership till about the

middle of the April following the purchase of the cascoes.

(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and

after the defendant had been operating the cascoes for some time, the defendant returned to the

plaintiff 1,125 pesos, in two different sums, one of 300 and one of 825 pesos. The only evidencein the record as to the circumstances under which the plaintiff received these sums is contained

in his answer to the interrogatories proposed to him by the defendant, and the whole of his

statement on this point may properly be considered in determining the fact as being in the nature

of an indivisible admission. He states that both sums were received with an express reservationon his part of all his rights as a partner. We find this to be the fact.

Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the

parties? (2) If such partnership existed, was it terminated as a result of the act of the defendant in

receiving back the 1,125 pesos?

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(1) "Partnership is a contract by which two or more persons bind themselves to contributemoney, property, or industry to a common fund, with the intention of dividing the profits among

themselves." (Civil Code, art. 1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership

are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If

the contract contains these two elements the partnership relation results, and the law itself fixesthe incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendantwith the understanding that it was to be used for the purchase of the cascoes in question. This

establishes the first element of the contract, namely, mutual contribution to a common stock. The

second element, namely, the intention to share profits, appears to be an unavoidable deduction

from the fact of the purchase of the cascoes in common, in the absence of any other explanationof the object of the parties in making the purchase in that form, and, it may be added, in view of

the admitted fact that prior to the purchase of the first casco the formation of a partnership had

been a subject of negotiation between them.

Under other circumstances the relation of joint ownership, a relation distinct though perhaps not

essentially different in its practical consequence from that of partnership, might have been theresult of the joint purchase. If, for instance, it were shown that the object of the parties in

purchasing in company had been to make a more favorable bargain for the two cascoes that they

could have done by purchasing them separately, and that they had no ulterior object except toeffect a division of the common property when once they had acquired it, the affectio

societatiswould be lacking and the parties would have become joint tenants only; but, as nothing

of this sort appears in the case, we must assume that the object of the purchase was active use

and profit and not mere passive ownership in common.

It is thus apparent that a complete and perfect contract of partnership was entered into by theparties. This contract, it is true, might have been subject to a suspensive condition, postponing itsoperation until an agreement was reached as to the respective participation of the partners in the

profits, the character of the partnership as collective or en comandita, and other details, but

although it is asserted by counsel for the defendant that such was the case, there is little ornothing in the record to support this claim, and that fact that the defendant did actually go on and

purchase the boat, as it would seem, before any attempt had been made to formulate partnership

articles, strongly discountenances the theory.

The execution of a written agreement was not necessary in order to give efficacy to the verbal

contract of partnership as a civil contract, the contributions of the partners not having been in the

form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provisioncited, requiring the execution of a public writing in the single case mentioned and dispensing

with all formal requirements in other cases, renders inapplicable to this species of contract the

general provisions of article 1280 of the Civil Code.

(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the

money returned to him by the defendant after the definitive failure of the attempt to agree uponpartnership articles. The amount returned fell short, in our view of the facts, of that which the

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plaintiff had contributed to the capital of the partnership, since it did not include the sum whichhe had furnished for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by

the plaintiff, that a profit may have been realized from the business during the period in which

the defendant have been administering it prior to the return of the money, and if so he still

retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff didnot have the effect of terminating the legal existence of the partnership by converting it into

asocietas leonina, as claimed by counsel for the defendant.

Did the defendant waive his right to such interest as remained to him in the partnership property

by receiving the money? Did he by so doing waive his right to an accounting of the profits

already realized, if any, and a participation in them in proportion to the amount he had originallycontributed to the common fund? Was the partnership dissolved by the "will or withdrawal of

one of the partners" under article 1705 of the Civil Code? We think these questions must be

answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights

as a partner, nor is there any evidence that by anything that he said or by anything that he omitted

to say he gave the defendant any ground whatever to believe that he intended to relinquish them.On the contrary he notified the defendant that he waived none of his rights in the partnership.

Nor was the acceptance of the money an act which was in itself inconsistent with the continuance

of the partnership relation, as would have been the case had the plaintiff withdrawn his entireinterest in the partnership. There is, therefore, nothing upon which a waiver, either express or

implied, can be predicated. The defendant might have himself terminated the partnership relation

at any time, if he had chosen to do so, by recognizing the plaintiff's right in the partnershipproperty and in the profits. Having failed to do this he can not be permitted to force a dissolution

upon his co-partner upon terms which the latter is unwilling to accept. We see nothing in the case

which can give the transaction in question any other aspect than that of the withdrawal by one

partner with the consent of the other of a portion of the common capital.

The result is that we hold and declare that a partnership was formed between the parties inJanuary, 1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515

and 2089 constitute partnership property, and that the plaintiff is entitled to an accounting of the

defendant's administration of such property, and of the profits derived therefrom. This

declaration does not involve an adjudication as to any disputed items of the partnership account.

The judgment of the court below will be reversed without costs, and the record returned for the

execution of the judgment now rendered. So ordered.

Arellano, C.J., Torres, Cooper, and Mapa, JJ., concur.

Willard, J., dissenting.

ON MOTION FOR A REHEARING.

MAPA, J.:

This case has been decided on appeal in favor of the plaintiff, and the defendant has moved for a

rehearing upon the following grounds:

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1. Because that part of the decision which refers to the existence of the partnership which is theobject of the complaint is not based upon clear and decisive legal grounds; and

2. Because, upon the supposition of the existence of the partnership, the decision does not clearlydetermine whether the juridical relation between the partners suffered any modification in

consequence of the withdrawal by the plaintiff of the sum of 1,125 pesos from the funds of the

partnership, or if it continued as before, the parties being thereby deprived, he alleges, of one ofthe principal bases for determining with exactness the amount due to each.

With respect to the first point, the appellant cites the fifth conclusion of the decision, which is asfollows: "We are unable to find from the evidence before us that there was any specific verbal

agreement of partnership, except such as may be implied from the facts as to the purchase of the

cascoes."

Discussing this part of the decision, the defendant says that, in the judgment of the court, if on

the one hand there is no direct evidence of a contract, on the other its existence can only be

inferred from certain facts, and the defendant adds that the possibility of an inference is not

sufficient ground upon which to consider as existing what may be inferred to exist, and still lessas sufficient ground for declaring its efficacy to produce legal effects.

This reasoning rests upon a false basis. We have not taken into consideration the mere possibility

of an inference, as the appellant gratuitously stated, for the purpose of arriving at a conclusion

that a contract of partnership was entered into between him and the plaintiff, but have consideredthe proof which is derived from the facts connected with the purchase of the cascoes. It is stated

in the decision that with the exception of this evidence we find no other which shows the making

of the contract. But this does not mean (for it says exactly the contrary) that this fact is not

absolutely proven, as the defendant erroneously appears to think. From this data we infer a factwhich to our mind is certain and positive, and not a mere possibility; we infer not that it is

possible that the contract may have existed, but that it actually did exist. The proofs constitutedby the facts referred to, although it is the only evidence, and in spite of the fact that it is notdirect, we consider, however, sufficient to produce such a conviction, which may certainly be

founded upon any of the various classes of evidence which the law admits. There is all the more

reason for its being so in this case, because a civil partnership may be constituted in any form,according to article 1667 of the Civil Code, unless real property or real rights are contributed to it

the only case of exception in which it is necessary that the agreement be recorded in a public

instrument.

It is of no importance that the parties have failed to reach an agreement with respect to the minor

details of contract. These details pertain to the accidental and not to the essential part of the

contract. We have already stated in the opinion what are the essential requisites of a contract ofpartnership, according to the definition of article 1665. Considering as a whole the probatory

facts which appears from the record, we have reached the conclusion that the plaintiff and the

defendant agreed to the essential parts of that contract, and did in fact constitute a partnership,with the funds of which were purchased the cascoes with which this litigation deals, although it

is true that they did not take the precaution to precisely establish and determine from the

beginning the conditions with respect to the participation of each partner in the profits or lossesof the partnership. The disagreements subsequently arising between them, when endeavoring to

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fix these conditions, should not and can not produce the effect of destroying that which has beendone, to the prejudice of one of the partners, nor could it divest his rights under the partnership

which had accrued by the actual contribution of capital which followed the agreement to enter

into a partnership, together with the transactions effected with partnership funds. The law has

foreseen the possibility of the constitution of a partnership without an express stipulation by thepartners upon those conditions, and has established rules which may serve as a basis for the

distribution of profits and losses among the partners. (Art. 1689 of the Civil Code. ) We considerthat the partnership entered into by the plaintiff and the defendant falls within the provisions ofthis article.

With respect to the second point, it is obvious that upon declaring the existence of a partnershipand the right of the plaintiff to demand from the defendant an itemized accounting of his

management thereof, it was impossible at the same time to determine the effects which might

have been produced with respect to the interest of the partnership by the withdrawal by the

plaintiff of the sum of 1,125 pesos. This could only be determined after a liquidation of thepartnership. Then, and only then, can it be known if this sum is to be charged to the capital

contributed by the plaintiff, or to his share of the profits, or to both. It might well be that the

partnership has earned profits, and that the plaintiff's participation therein is equivalent to orexceeds the sum mentioned. In this case it is evident that, notwithstanding that payment, his

interest in the partnership would still continue. This is one case. It would be easy to imagine

many others, as the possible results of a liquidation are innumerable. The liquidation will finallydetermine the condition of the legal relations of the partnersinter seat the time of the withdrawal

of the sum mentioned. It was not, nor is it possible to determine this statusa priori without

prejudging the result, as yet unknown, of the litigation. Therefore it is that in the decision no

direct statement has been made upon this point. It is for the same reason that it was expresslystated in the decision that it "does not involve an adjudication as to any disputed item of the

partnership account."

The contentions advanced by the moving party are so evidently unfounded that we can not seethe necessity or convenience of granting the rehearing prayed for, and the motion is therefore

denied.

Arellano, C.J., Torres, Cooper, and Ladd, JJ., concur.

Willard and McDonough, JJ., did not sit in this case.

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Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P.OBILLOS, brothers and sisters, petitionersvs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of landwhich they had acquired from their father.