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Obillos, Jr. vs. Commissioner of Internal Revenue

G.R. No. L-68118, October 19, 1985, Aquino, J.
Pat Sevilla Law 173- Agency
Topic: Distinction from the other business relations and organizations: (e) Art. 1769
Father transferred his rights over two parcels of land to his children so that they can
build their house. The Siblings, however, eventually resold the lots to third parties where
they derived a profit. They paid income taxes based on such profit but the Commissioner
held them accountable for deficiency taxes allegedly because an unregistered partnership
was constituted between them. SC held that there was no intention to create a partnership
and that the Siblings are co-owners pure and simple.
FACTS
Jose Obillos, Sr. completed payment to Ortigas Company on two lots. The next
day, he transferred his rights to his four children (PET Siblings) to enable them to
build their residences.
The company then sold the two lots to the Siblings for P178,708.12. Presumably,
the Torrens titles issued to them show that they were co-owners.
After having held the two lots for more than a year, however, the Siblings resold
them to Walled City Securities Corp and Olga Canda for the total sum of
P311,050.
o The Siblings derived a total profit of P134, 341.88 or P33, 584 for each of
them.
o They treated the profit as a capital gain and paid an income tax on one-half
thereof.
Subsequently, the Commissioner of Internal Revenue required the Siblings to
pay corporate income tax on the total profit in addition to individual income tax.
o He assessed P37, 018 as corporate income tax, P18,509 as 50% fraud
surcharge, and 42% accumulated interest, or a total of P71, 074.56
o He also considered the share of the profits of each sibling as a
distributive dividend taxble in full (not a mere capital gain of which is
taxable and required them to pay deficiency income taxes plus fraud
surcharge and interests.
o In total, the Siblings are being held liable for deficiency income taxes and
penalties totaling P127, 78.76 on their profit of P134, 336, in addition to
the tax in capital gains already paid by them.
o The Commissioner acted on the theory that the Siblings formed an
unregistered partnership or joint venture within the meaning of
Sections 24(a) and 84(b) of the Tax Code.
Tax Courts: Sustained the assessment of deficiency income taxes
ISSUES & HOLDING
1. WoN a partnership was constituted between the Siblings- NO
RATIO

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The Siblings had no intention to form a partnership; they were co-owners pure and
simple.
The Siblings cannot be considered s having formed a partnership under Art. 1767.
NCC simply because they allegedly contributed P178,708.12 to buy the two lots,
resold the same and divided the profits among themselves.
They had no such intention. They were co-owners pure and simple. To consider
them partners would obliterate the distinction between a co-ownership and a
partnership. The Siblings were not engaged in any joint venture by reason of
that isolated transaction.
The Siblingss original purpose was to divide the lots for residential purposes.
o If later on they found it not feasible to build their residences on lots
because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership.
o 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.
Article 1769 (3), NCC: 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.
o There must be an unmistakable intention to form a partnership or
joint venture.
What the Commissioner should have investigated was whether the father donated
the two lots to his children and whether he paid the donors tax.