LORENZO T.

OA and HEIRS OF JULIA BUALES

vs.
THE COMMISSIONER OF INTERNAL REVENUE
Ruling:
Yes.

As already indicated, for tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for the heirs
in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason for this is simple. From the moment of such partition,
the heirs are entitled already to their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively his own without the intervention
of the other heirs, and, accordingly he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs under
a single management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate
is not distributed or, at least, partitioned, but the moment their respective known shares are used
as part of the common assets of the heirs to be used in making profits, it is but proper that the
income of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.

Gatchalian v. CIR
Ruling: Partnership

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt
from the payment of income tax under the law. But according to the stipulation facts the plaintiffs
organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in
the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon
the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the
office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the
prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner, in the same capacity, collected the said check. All these circumstances repel the idea
that the plaintiffs organized and formed a community of property only.

Having organized and constituted a partnership of a civil nature, the said entity is the one bound
to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No.
2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the
tax should be prorated among them and paid individually, resulting in their exemption from the
tax.
Munasque vs. CA
Issue:
Whether or not there existed a partnership between Munasque and Galan.
Is the payment made by Tropical to Galan constitutes good payment?
What is their liability towards Cebu Southern and Blue Diamond (third parties).
Ruling:
1. Yes.
This is readily seen in the first paragraph of the contract where it states:
This agreement made this 20th day of December in the year 1966 by Galan and Muasque
hereinafter called the Contractor, and Tropical Commercial Co., Inc., hereinafter called
the owner do hereby for and in consideration agree on the following: ... .
There is nothing in the records to indicate that the partnership organized by the two men was not a genuine
one. If there was a falling out or misunderstanding between the partners, such does not convert the
partnership into a sham organization.
Likewise, when Muasque received the first payment of Tropical in the amount of P7,000.00 with
a check made out in his name, he indorsed the check in favor of Galan. Respondent Tropical therefore,
had every right to presume that the petitioner and Galan were true partners. If they were not partners as
petitioner claims, then he has only himsel f to blame for making the relationship appear otherwise, not
only to Tropical but to their other creditors as well. The payments made to the partnership were,
therefore, valid payments.
2. Yes.
No error was committed by the appellate court in holding that the payment made by Tropical to
Galan was a good payment which binds both Galan and the petitioner. Since the two were partners when
the debts were incurred, they, are also both liable to third persons who extended credit to their
partnership. In the case of George Litton v. Hill and Ceron, et al, (67 Phil. 513, 514), we ruled:
There is a general presumption that each individual partner is an authorized agent for
the firm and that he has authority to bind the firm in carrying on the partnership
transactions. (Mills vs. Riggle,112 Pan, 617).
The presumption is sufficient to permit third persons to hold the firm liable on
transactions entered into by one of members of the firm acting apparently in its behalf
and within the scope of his authority. (Le Roy vs. Johnson, 7 U.S. (Law. ed.), 391.)
3. Solidary.
While it is true that under Article 1816 of the Civil Code,"All partners, including industrial ones,
shall be liable pro rata with all their property and after all the partnership assets have been exhausted,
for the contracts which may be entered into the name and fm the account cd the partnership, under its
signature and by a person authorized to act for the partner-ship. ...". this provision should be construed
together with Article 1824 which provides that:
"All partners are liable solidarily with the partnership for everything chargeable to the partnership
under Articles 1822 and 1823." In short, while the liability of the partners are merely joint in transactions
entered into by the partnership, a third person who transacted with said partnership can hold the partners
solidarily liable for the whole obligation if the case of the third person falls under Articles 1822 or 1823.
*However. as between the partners Muasque and Galan,justice also dictates that Muasque be
reimbursed by Galan for the payments made by the former representing the liability of their partnership
to herein intervenors, as it was satisfactorily established that Galan acted in bad faith in his dealings with
Muasque as a partner.
Deluao vs. Casteel
Issue: Is the contract of partnership entered into valid?
Ruling:
Too well-settled to require any citation of authority is the rule that everyone is conclusively
presumed to know the law. It must be assumed, conformably to such rule, that the parties entered into
the so-called "contract of service" cognizant of the mandatory and prohibitory laws governing the filing
of applications for fishpond permits. And since they were aware of the said laws, it must likewise be
assumed in fairness to the parties that they did not intend to violate them.
This view must perforce negate the appellees' allegation that exhibit A created a contract of co-
ownership between the parties over the disputed fishpond. Were we to admit the establishment of a co-
ownership violative of the prohibitory laws which will hereafter be discussed, we shall be compelled to
declare altogether the nullity of the contract. This would certainly not serve the cause of equity and
justice, considering that rights and obligations have already arisen between the parties. We shall therefore
construe the contract as one of partnership, divided into two parts namely, a contract of partnership
to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of
partnership to divide the fishpond between them after such award. The first is valid, the second illegal.
The arrangement under the so-called "contract of service" continued until the decisions both
dated September 15, 1950 were issued by the Secretary of Agriculture and Natural Resources in DANR
Cases 353 and 353-B. This development, by itself, brought about the dissolution of the partnership.
Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership
because each refused to share the fishpond with the other.
Art. 1830(3) of the Civil Code enumerates, as one of the causes for the dissolution of a partnership,
"... any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership." The approval of the appellant's fishpond application by the
decisions in DANR Cases 353 and 353-B brought to the fore several provisions of law which made the
continuation of the partnership unlawful and therefore caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the holder of a fishpond permit (the permittee)
from transferring or subletting the fishpond granted to him, without the previous consent or approval of
the Secretary of Agriculture and Natural Resources.
Since the partnership had for its object the division into two equal parts of the fishpond between
the appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged
the unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved
by the approval of his application and the award to him of the fishpond. The approval was an event which
made it unlawful for the business of the partnership to be carried on or for the members to carry it on
in partnership.
ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby
rendered: (1) dissolving the injunction issued against the appellant, (2) placing the latter back in
possession of the fishpond in litigation, and (3) remanding this case to the court of origin for the reception
of evidence relative to the accounting that the parties must perforce render in the premises, at the
termination of which the court shall render judgment accordingly. The appellant's counterclaim is
dismissed. No pronouncement as to costs.