OBILLOS V. CIR, – G.R. NO. L-68118, OCTOBER 29, 1985

The children of Jose Obillos Sr. are co-owners of parcel of lots. The children sold the lots to Walled City Securities Corporation and Olga Canada. The children treated the profit as a capital gain to which they paid an income tax. After some time, the Commissioner of Internal Revenue required the children of Obillos Sr. to as liable for corporate income taxes. The Commissioner claimed that the children formed an unregistered partnership or joint venture since they contributed a sum of money to buy the lots which they resold and divided the profits among themselves.

The children rebut that they were simply co-owners and to consider them partners would obliterate the distinction between co-ownership and partnership. Their purpose was to divide the lots for residential purposes, and they later found that it was not feasible because of the high cost of construction and had no choice but to resell, division of profit was merely incidental to the dissolution of co-ownership.

Whether a partnership formed when the co-owners of the subject lots resold the lots and divided profits among themselves that would make them liable for corporate income tax and for the taxes for an unregistered partnership?

No. The children of Obillos Sr. were simply co-owners where the division of the profits from the sale of the lots was incidental to the dissolution of the co-ownership. Under 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. Also, as cited in the De Leon case, Co-Ownership, with properties that produce income should not automatically be considered partners of an unregistered partnership within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships 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.


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