PASCUAL V. CIR, – G.R. NO. 78133, OCTOBER 18, 1988

Pascual and Dragon bought two (2) parcels of land and a year after, they bought another three (3) parcels of land. They subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding capital gains taxes were paid in 1973 and 1974 by availing of the tax amnesties granted in the said years.

The Acting BIR Commissioner assessed and required Pascual and Dragon to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Pascual and Dragon protested the said assessment asserting that they had availed of tax amnesties way back in 1974.

Respondent Commissioner informed Pascual and Dragon that in the years 1968 and 1970, Pascual and Dragon as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by Pascual and Dragon, relieved them of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, Pascual and Dragon were required to pay the deficiency income tax assessed.

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of income tax. (co-ownership)

No, The Petitioners are simply under the regime of co-ownership and not under an unregistered partnership. Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provide: (2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) 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;

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property. In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co-owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.


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