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436 SUPREME COURT REPORTS ANNOTATED

Obillos, Jr. vs. Commissioner of Internal Revenue
*
No. L-68118. October 29, 1985.

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P.

OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners, vs. COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.

Taxation; The dictum that the power to tax involves the power to
destroy should be obviated.·To regard the petitioners as having
formed a taxable unregistered partnership would result in
oppressive

________________

* SECOND DIVISION.

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VOL. 139, OCTOBER 29, 1985 437

Obillos, Jr. vs. Commissioner of Internal Revenue

taxation and confirm the dictum that the power to tax involves the
power to destroy. That eventuality should be obviated.
Same; Partnership; Co-ownership; Where the father sold his
rights over two parcels of land to his four children so they can build
their residence, but the latter after one (1) year sold them and paid
the capital gains, they should not be treated to have formed an

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unregistered partnership and taxed corporate income tax on the sale

and dividend income tax on their shares of the profit's from the sale.
·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 resell the same to dissolve the
coownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later.
Same; Same; Same; Mere sharing of gross income from an
isolated transaction does not establish a partnership.·Article
1769(3) of' the Civil Code provides that ''the sharing of gross returns
does not of itself establish a partnership, whether or not the persons
sharing them have a j oint or common right or interest in any
property from which the returns are derived". There must be an
unmistakable intention to form a partnership or joint venture.

PETITION to review the judgment of the Court of Tax

Appeals.

The facts are stated in the opinion of the Court.

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 land which they had
acquired from their father.
On March 2. 1973 Jose Obillos, Sr. completed payment
to Ortigas & Co., Ltd. on two lots with areas of 1,124 and
963 square meters located at Greenhills, San Juan, Rizal.
The next day he transferred his rights to his four children,
the petitioners, to enable them to build their residences.
The company sold the two lots to petitioners for
P178,708.12 on March 13

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Obillos, Jr. vs. Commissioner of Internal Revenue

(Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles

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issued to them would show that they were co-owners of the

two lots.
In 1974, or after having held the two lots for more than
a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total
sum of P313,050 (Exh. C and D). They derived from the
sale a total profit of P134,341.88 or P33,584 for each of
them. They treated the profit as a capital gain and paid an
income tax on one-half thereof or on P16,792.
In April, 1980, or one day before the expiration of the
fiveyear prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate
income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof. He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or
a total of P71,074.56.
Not only that. He considered the share of the profits of
each petitioner in the sum of P33,584 as a "distributive
dividend" taxable in full (not a mere capital gain of which ½
is taxable) and required them to pay deficiency income
taxes aggregating P56,707.20 including the 50% fraud
surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency
income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains
already paid by them.
The Commissioner acted on the theory that the four
petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of
the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
The petitioners contested the assessments, Two Judges
of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as
having formed a partnership under article 1767 of the Civil
Code

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VOL. 139, OCTOBER 29, 1985 439

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SUPREME COURT REPORTS ANNOTATED VOLUME 139 6/17/21, 5)54 AM

Obillos, Jr. vs. Commissioner of Internal Revenue

simply because they allegedly contributed P178,708.12 to

buy the two lots, resold the same and divided the profit
among themselves.
To regard the petitioners as having formed a taxable
unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax
involves the power to destroy. That eventuality should be
obviated.
As testified by Jose Obillos, Jr., they had no such
intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction
between a coownership and a partnership. The petitioners
were not engaged in any joint venture by reason of that
isolated transaction.
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 resell the same
to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had
to be terminated sooner or later. Castan Tobeñas says:

"Cómo establecer el deslinde entre la comunidad ordinaria o

copropiedad y la sociedad?
"El criterio diferencial·según la doctrina más generalizada·
está: por razón del origen, en que la sociedad presupone
necesariamente la convención, mientras que la comunidad puede
existir y existe ordinariamente sin ella; y por razón del fin u objecto,
en que el objeto de la sociedad es obtener lucro, mientras que el de
la indivisión es sólo mantener en su integridad la cosa común y
favorecer su conservación.
"Reflejo de este criterio es la sentencia de 15 de octubre de 1940,
en la que se dice que si en nuestro Derecho positivo se ofrecen a
veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna orientación
de la doctrina cientifíca señala como nota fundamental de
diferenciación, aparte del origen o fuente de que surgen, no siempre
uniforme, la finalidad perseguida por los interesados: lucro común
partible en la sociedad, y mera conservación y aprovechamiento en

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la comunidad." (Derecho Civil Español, Vol. 2, Part 1,10 Ed, 1971,

328-329).

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Obillos, Jr. vs. Commissioner of lnternal Revenue

Article 1769(3) of the Civil Code provides that "the sharing

of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or
common right or interest in any property from which the
returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.**
Such intent was present in Gatchalian vs. Collector of
Internal Revenue, 67 Phil. 666 where 15 persons
contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would
divide the prize. The ticket won the third prize of P50,000.
The 15 persons were held liable for income tax as an
unregistered partnership.
The instant case is distinguishable from the cases where
the parties engaged in joint ventures for profit. Thus, in
Oña vs.

** This view is supported by the following rulings of respondent

Commissioner:
"Co-ownership distinguished from partnership.·We find that the
case at bar is fundamentally similar to the De Leon case. Thus, like
the De Leon heirs, the Longa heirs inherited the 'hacienda' in
question pro-indiviso from their deceased parents; they did not
contribute or invest additional capital to increase or expand the
inherited properties; they merely continued dedicating the property
to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding
shares in the income and expenses of the 'hacienda', and they
continued for many years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the 'hacienda') value and
to continue the existing contractual relations with the Central
Azucarera de Bais for milling purposes/ " (Longa vs. Aranas, CTA
Case No. 653, July 31, 1963).
"All co-ownerships are not deemed unregistered partnership.·Co-

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SUPREME COURT REPORTS ANNOTATED VOLUME 139 6/17/21, 5)54 AM

heirs who own properties which produce income should not

automatically be considered partners of an unregistered
partnership, or a corporation, within the purview of the income tax
law. To hold otherwise, would be to subject the income of all
coownerships of inherited properties to the tax on corporations,
inasmuch as if a property does not produce an income at all, it is
not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation." (De Leon vs. CIR,
CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78),

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VOL. 139, OCTOBER 29, 1985 441

Obillos, Jr. vs. Commissioner of lnternal Revenue

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45

SCRA 74, where after an extrajudicial settlement the coheirs used
the inheritance or the incomes derived therefrom as a common fund
to produce profits for themselves, it was held that they were taxable
as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of

Internal Revenue, 24 SCRA 198 where father and son
purchased a lot and building, entrusted the administration
of the building to an administrator and divided equally the
net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140 where the three Evangelista sisters
bought four pieces of real property which they leased to
various tenants and derived rentals therefrom. Clearly, the
petitioners in these two cases had formed an unregistered
partnership.
In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to
the petitioners and whether he paid the donor's tax (See
art. 1448, Civil Code), We are not prejudging this matter. It
might have already prescribed.
WHEREFORE, the judgment of the Tax Court is
reversed and set aside. The assessments are cancelled. No
costs.
SO ORDERED.

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Abad Santos, Escolin, Cuevas and Alampay, JJ.,

concur.
Concepcion, Jr., on leave.

Judgment reversed and set aside.

Notes.·Taxes being the chief source of revenue for the

Government to keep it running must be paid immediately
and without delay. (Collector of Internal Revenue vs. Yuseco,
3 SCRA 313.)
As the sale of the bakery in question was not a single
asset but of individual assets that made up the business, it
was incumbent upon the owner to point out what part of
the price he had received could be fairly attributed to each
asset so that the capital and/or ordinary gains taxes
properly payable upon the sale of the business could be
ascertained, His failure to do so is

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Obillos, Jr. vs. Commissioner of lnternal Revenue

sufficient reason for denying his petition for refund of the

taxes he paid. (Ferrer vs. Commissioner of Internal
Revenue, 5 SCRA 1022.)
Mere sharing of gross returns does not establish a
partnership, since in a partnership, the partners share net
profits after satisfying all the partnership's liabilities (See
Article 1839, Civil Code.)
The receipt, however, of a share in the net profits
establishes a prima facie evidence to partnership which,
however, may be rebutted by proof that what has been
received were not profits. Thus, the receipt of share in the
profits as (a) payment of a debt by installment or
otherwise, as (b) wages of an employee or rent to a
landlord, as (c) annuity to a widow or representative of the
deceased partner, as (d) interest on a loan, or as (e) a
consideration for the sale of goodwill, cannot be considered
as indicative of establishment of a partnership.
By the weight of authority, an agreement to share both
profits and the losses tends strongly to establish the

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existence of a partnership, and conversely, lack of such

agreement tends strongly to negative the existence of a
partnership. (40 Am. Jur., Sec. 39.)
The participation in profits is undoubtedly prima facie
evidence of a partnership, as well as generally as under the
Uniform Partnership Act, and, in the absence of
contradictory evidence, will control. But the presumption of
partnership arising from a participation in profits may be
rebutted, and outweighed by other circumstances, such as
evidence that the participation was referable to some other
reason, such as compensation for services rendered as
agent, broker, salesman or otherwise. (40 Am. Jur., Sec. 38,
pp. 151-152.)

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