Partnership, Agency, Trust

Atty. Charlton Jules Romer

Litonjua, Jr. v. Litonjua, Sr.

G.R. NOS. 166299-300
December, 2005
Garcia, J

/When real property was contributed, an inventory of the contributed property duly signed by the
parties should be attached to the public instrument, otherwise, no partnership to speak of./

Facts: Petitioner Aurelio Litonjua and respondent Eduardo Litonjua are brothers. It was agreed
that in consideration of Aurelio’s retaining his share in the family businesses and contributing his
industry to the continued operation of the same, he will be given P1 Million or 10% equity in all
these businesses and those to be subsequently acquired by them whichever is greater.
Sometime in 1992, the relations between the brothers became sour and so Aurelio requested
for an accounting and liquidation of his share in the joint venture/partnership. However, these
demands were not heeded. Eduardo filed a Motion in which the trial court denied. They sought
relief from the Court of Appeals which reversed and set aside the assailed orders of the court a
quo. Hence, petitioners present recourse on the contention that the Court of Appeals erred
when it ruled that there was no partnership created by the actionable document (Annex A-1)
which he depicts in his complaint to be the contract of partnership/joint venture and which he
seeks to enforce

Issue: Whether or not petitioner Aurelio and respondent Eduardo are partners in the
businesses, as one claims but which the other denies.

Held: The petition is denied. No partnership.

Definition of Contract of Partnership - Article 1767 (Civil Code)

A contract of partnership is defined by the Civil Code as one where two or more persons bound
themselves to contribute money, property, or industry to a common fund with the intention of
dividing the profits among themselves. A joint venture, on the other hand, is hardly
distinguishable from, and may be likened to, a partnership since their elements are similar.
Being a form of partnership, a joint venture is generally governed by the law on partnership.

Existence of a valid Contract of Partnership

Articles 1771 to 1773 (Civil Code)

Annex A-1, on its face, contains typewritten entries, personal in tone, but is unsigned and
undated. As an unsigned document, there can be no quibbling that Annex A-1 does not meet
the public instrumentation requirements exacted under Article 1771 of the Civil Code. Moreover,
being unsigned and doubtless referring to a partnership involving more than P3,000.00 in
money or property, Annex A-1 cannot be presented for notarization, let alone registered with the

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Securities and Exchange Commission (SEC), as called for under the Article 1772 of the Code.
The contract-validating inventory requirement under Article 1773 of the Civil Code also applies
as long as real property or real rights are initially brought into the partnership. In context, the
more important consideration is that real property was contributed, in which case an inventory of
the contributed property duly signed by the parties should be attached to the public instrument,
or else there is legally no partnership to speak of. Annex A-1, in fine, cannot support the
existence of the partnership sued upon and sought to be enforced.

Statute of Frauds
Accordingly, the agreement embodied in Annex A-1 is covered by the Statute of Frauds and
ergo unenforceable for non-compliance therewith. By force of the statute of frauds, an
agreement that by its terms is not to be performed within a year from the making thereof shall
be unenforceable by action, unless the same, or some note or memorandum thereof, be in
writing and subscribed by the party charged. Corollarily, no action can be proved unless the
requirement exacted by the statute of frauds is complied with.

Notes:

Pertinent Civil Code provisions:

Art. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in
money or property, shall appear in a public instrument, which must be recorded in the Office of
the Securities and Exchange Commission. Failure to comply with the requirement of the
preceding paragraph shall not affect the liability of the partnership and the members thereof to
third persons.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto,
if an inventory of said property is not made, signed by the parties, and attached to the public
instrument.

A partnership may be constituted in any form, save when immovable property or real rights are
contributed thereto or when the partnership has a capital of at least P3,000.00, in which case a
public instrument shall be necessary. An inventory to be signed by the parties and attached to
the public instrument is also indispensable to the validity of the partnership whenever
immovable property is contributed to it.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Heirs of Tan Eng Kee v. Court of Appeals

G.R. No. 126881
October, 2000
De Leon, Jr. J.

/No partnership when the supposed partner receives sums as wages of an employee, as shown
by payrolls/

Facts: Following the death of Tan Eng Kee, his spouse and heirs filed suit against the
decedent’s brother TAN ENG LAY for accounting, liquidation and winding up of the alleged
partnership formed after World War II between Tan Eng Kee and his brother. It was alleged that
after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their resources and
industry together, entered into a partnership engaged in the business of selling lumber and
hardware and construction supplies. They named their enterprise Benguet Lumber which they
jointly managed until Tan Eng Kees death. Sometime in 1981, Tan Eng Lay and his children
caused the conversion of the partnership Benguet Lumber into a corporation called Benguet
Lumber Company. The incorporation was purportedly a ruse to deprive Tan Eng Kee and his
heirs of their rightful participation in the profits of the business. The trial court declared that there
was a partnership between the brothers. Private respondent sought relief before the Court of
Appeals which reversed the judgment of the trial court. Petitioners motion for reconsideration
was denied. Hence, the present petition. Petitioners claim that thr Court of Appeals erred in
holding that there was no partnership between the late Tan Eng Kee and his brother.

Issue: Whether or not Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber

Held: No partnership

Undoubtedly, the best evidence would have been the contract of partnership itself, or the
articles of partnership but there is none. The alleged partnership, though, was never formally
organized. Also, it is indeed odd that despite the forty years the partnership was allegedly in
existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the
partners share in the profits and losses. Each has the right to demand an accounting as long as
the partnership exists. A demand for periodic accounting is evidence of a partnership.
Furthermore, Exhibits 4 to 4-U which consists payrolls purporting to show that Tan Eng Kee was
an ordinary employee of Benguet Lumber, also shows that Tan Eng Kee received sums as
wages of an employee. In connection therewith, Article 1769 applies.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an
employee, not a partner. Even if the payrolls as evidence were discarded, petitioners would still
be back to square one, so to speak, since they did not present and offer evidence that would
show that Tan Eng Kee received amounts of money allegedly representing his share in the

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee,
received, if any, as his share in the profits of Benguet Lumber Company for any particular
period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the
profits of the business between themselves, which is one of the essential features of a
partnership.

Notes:

A contract of partnership is defined by law as one where two or more persons bind themselves
to contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves. Two or more persons may also form a partnership for the exercise of
a profession.
Thus, in order to constitute a partnership, it must be established that
(1) two or more persons bound themselves to contribute money, property, or industry to a
common fund, and
(2) they intend to divide the profits among themselves.

The agreement need not be formally reduced into writing, since statute allows the oral
constitution of a partnership, save in two instances:
(1) when immovable property or real rights are contributed, and
(2) when the partnership has a capital of three thousand pesos or more.

In both cases, a public instrument is required. An inventory to be signed by the parties and
attached to the public instrument is also indispensable to the validity of the partnership
whenever immovable property is contributed to the partnership.

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint
adventure, which it said is akin to a particular partnership.[20] A particular partnership is
distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal
partnership, with no firm name and no legal personality.
In a joint account, the participating merchants can transact business under their own name, and
can be individually liable therefor.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION,
although the business of pursuing to a successful termination may continue for a number of
years; a partnership generally relates to a continuing business of various transactions of a
certain kind.

It would seem therefore that under Philippine law, a joint adventure is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although a

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

corporation cannot enter into a partnership contract, it may however engage in a joint adventure
with others.
Article 1769 of the Civil Code provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not
partners as to third persons;
(2) Co-ownership or co-possession does not of 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 which the returns
are derived;
(4) The receipt by a person of a share of the profits of a business is ​prima facie ​evidence that he
is a partner in the business, but no such inference shall be drawn if such profits were received in
payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a landlord;
(b) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Jarantilla v. Jarantilla
G.R. No. 154486
December 1, 2010
Leonardo-De Castro, J

/Shares to be paid out to the partners is limited only to its total resources, that is, to the assets
of the business enumerated in the contract/

Facts: The present case stems from the complaint filed by Antonieta. The respondents including
the petitioner, denied having formed a partnership with Antonieta. Later on, petitioner Federico
Jarantilla, Jr. entered into a compromise agreement with Antonieta wherein he supported
Antonietas claims and asserted that he too was entitled to six percent (6%) of the supposed
partnership. When the lower court decided in favor of Antonieta, both the petitioner and the
respondents appealed this decision to the Court of Appeals. The petitioner claimed that the RTC
erred in not rendering a complete judgment and ordering the partition of the co-ownership and
giving him six per centum (6%) of the properties. The challenged decision was set aside and a
petition for review was filed by petitioner. He contends that from this partnership, several other
corporations and businesses were established and several real properties were acquired in
which he asks for his 6% share in the subject real properties. He is relying on the
Acknowledgement of Participating Capital, on his own testimony, and Antonieta Jarantillas
testimony to support this contention.

Issue: Whether petitioner Federico Jarantilla, Jr. is entitled to six percent (6%) share in the
subject real properties of the supposed partnership

Held: The court held in the negative. Petitioner Federico Jarantilla, Jr is not entitled.

Both the petitioner and Antonieta Jarantilla characterize their relationship with the respondents
as a co-ownership, but in the same breath, assert that a verbal partnership was formed in 1946
and was affirmed in the 1957 Acknowledgement of Participating Capital. There is a
co-ownership when an undivided thing or right belongs to different persons. It is a partnership
when two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.

Pursuant to Article 1797 of the Civil Code, a partner is entitled only to his share as agreed upon,
or in the absence of such stipulation, then to his share in proportion to his contribution to the
partnership. The petitioner himself claims his share to be 6%, as stated in the
Acknowledgement of Participating Capital. However, petitioner fails to realize that this document
specifically enumerated the businesses covered by the partnership: Manila Athletic Supply,
Remotigue Trading in Iloilo City and Remotigue Trading in Cotabato City. Since there was a
clear agreement that the capital the partners contributed went to the three businesses, then

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

there is no reason to deviate from such agreement and go beyond the stipulations in the
document. Therefore, the Court of Appeals did not err in limiting petitioners share to the assets
of the businesses enumerated in the Acknowledgement of Participating Capital.

In ​Villareal v. Ramirez​, the Court held that the shares to be paid out to the partners is
necessarily limited only to its total resources. In other words, it can only pay out what it has in its
coffers, which consists of all its assets.

The petitioner has failed to show that the respondents used the partnerships money to purchase
the said properties. Even assuming ​arguendo ​that some partnership income was used to
acquire these properties, the petitioner should have successfully shown that these funds came
from his share in the partnership profits. Petitioner’s only piece of documentary evidence is the
Acknowledgement of Participating Capital, which failed to prove that the real properties he is
claiming co-ownership of were acquired out of the proceeds of the businesses covered by such
document. Therefore, petitioners theory has no factual or legal leg to stand on.

Notes:

The Court, in ​Pascual v. The Commissioner of Internal Revenue​, quoted the concurring opinion
of Mr. Justice Angelo Bautista in ​Evangelista v. The Collector of Internal Revenue ​to further
elucidate on the distinctions between a co-ownership and a partnership, to wit:
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.
(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;

From the above it appears that the fact that those who agree to form a co- ownership share or
do not share any profits made by the use of the property held in common does not convert their
venture into a partnership. Or the sharing of the gross returns does not of itself establish a
partnership whether or not the persons sharing therein have a joint or common right or interest
in the property. This only means that, aside from the circumstance of profit, the presence of
other elements constituting partnership is necessary, such as the clear intent to form a
partnership, the existence of a juridical personality different from that of the individual partners,
and the freedom to transfer or assign any interest in the property by one with the consent of the
others. It is evident that an isolated transaction whereby two or more persons contribute funds
to buy certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Persons who contribute property or funds for a common enterprise and agree to share the gross
returns of that enterprise in proportion to their contribution, but who severally retain the title to
their respective contribution, are not thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in the business itself which the
proceeds derived. A joint purchase of land, by two, does not constitute a co-partnership in
respect thereto; nor does an agreement to share the profits and losses on the sale of land
create a partnership; the parties are only tenants in common. Where plaintiff, his brother, and
another agreed to become owners of a single tract of realty, holding as tenants in common, and
to divide the profits of disposing of it, the brother and the other not being entitled to share in
plaintiffs commission, no partnership existed as between the three parties, whatever their
relation may have been as to third parties.

In order to constitute a partnership inter se there must be:

(a) An intent to form the same;
(b) generally participating in both profits and losses;
(c) and such a community of interest, as far as third persons are concerned as enables each
party to make contract, manage the business, and dispose of the whole property.

The common ownership of property does not itself create a partnership between the owners,
though they may use it for the purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management, and use of such property and the
application of the proceeds therefrom.

In ​Pigao v. Rabanillo​, this Court explained the concept of trusts, to wit:

Express trusts are created by the intention of the trustor or of the parties, while implied trusts
come into being by operation of law, either through implication of an intention to create a trust
as a matter of law or through the imposition of the trust irrespective of, and even contrary to, any
such intention. In turn, implied trusts are either resulting or constructive trusts. Resulting trusts
are based on the equitable doctrine that valuable consideration and not legal title determines
the equitable title or interest and are presumed always to have been contemplated by the
parties. They arise from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title but is obligated in
equity to hold his legal title for the benefit of another.

As a rule, the burden of proving the existence of a trust is on the party asserting its existence,
and such proof must be clear and satisfactorily show the existence of the trust and its elements.
While implied trusts may be proved by oral evidence, the evidence must be trustworthy and
received by the courts with extreme caution, and should not be made to rest on loose, equivocal
or indefinite declarations. Trustworthy evidence is required because oral evidence can easily be
fabricated.

Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership:

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

(a) an agreement to contribute money, property or industry to a common fund; and

(b) intent to divide the profits among the contracting parties​.

Article 1797 of the Civil Code provides:

Art. 1797. The losses and profits shall be distributed in conformity with the agreement.
If only the share of each partner in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such share as may be just and
equitable under the circumstances. If besides his services he has contributed capital, he shall
also receive a share in the profits in proportion to his capital. (Emphases supplied.)

Before the partners can be paid their shares, the creditors of the partnership must first be
compensated. After all the creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners shares.

Others:
It has been held that while tax declarations and realty tax receipts do not conclusively prove
ownership, they may constitute strong evidence of ownership when accompanied by possession
for a period sufficient for prescription. Moreover, it is a rule that testimonial evidence cannot
prevail over documentary evidence.

In ​Ocampo v. Ocampo,​ a case on partition of a co-ownership, held that:

Petitioners assert that their claim of co-ownership of the property was sufficiently proved by their
witnesses - We disagree. Their testimonies cannot prevail over the array of documents
presented by Belen. A claim of ownership cannot be based simply on the testimonies of
witnesses; much less on those of interested parties, self-serving as they are.

It is true that a certificate of title is merely an evidence of ownership or title over the particular
property described therein. Registration in the Torrens system does not create or vest title as
registration is not a mode of acquiring ownership; hence, this cannot deprive an aggrieved party
of a remedy in law.

Section 48 of Presidential Decree No. 1529, the Property Registration Decree.

SEC. 48. ​Certificate not subject to collateral attack​.
A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or
cancelled except in a direct proceeding in accordance with law.

In ​Aguilar v. Alfaro​, this Court further distinguished between a direct and an indirect or collateral
attack, as follows:

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

A collateral attack transpires when, in another action to obtain a different relief and as an
incident to the present action, an attack is made against the judgment granting the title. This
manner of attack is to be distinguished from a direct attack against a judgment granting the title,
through an action whose main objective is to annul, set aside, or enjoin the enforcement of such
judgment if not yet implemented, or to seek recovery if the property titled under the judgment
had been disposed of.

Republic of the Philippines v. Orfinada, Sr.​:

A Torrens title is generally conclusive evidence of ownership of the land referred to therein, and
a strong presumption exists that a Torrens title was regularly issued and valid. A Torrens title is
incontrovertible against any ​informacion possessoria​, of other title existing prior to the issuance
thereof not annotated on the Torrens title. Moreover, persons dealing with property covered by a
Torrens certificate of title are not required to go beyond what appears on its face

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Sy v. Court of Appeals
G.R. No. 142293
February 27, 2003
Quisumbing, J

/No partnership in the absence of the circumstances under Article 1767 and of written
agreement to prove its existence/

Facts: Private respondent Jaime Sahot started working as a truck helper for petitioners
family-owned trucking business named Vicente Sy Trucking which changed its name numerous
times. When Sahot was already 59 years old, he had been incurring absences as he was
suffering from various ailments particularly his pained left thigh, which greatly affected his work.
Sahot then filed a week-long leave and later applied for extension of his leave. It was at this
time when petitioners allegedly threatened to terminate his employment should he refuse to go
back to work. At this point, Sahot found himself in a dilemma. He was facing dismissal if he
refused to work, but he could not retire on pension because petitioners never paid his correct
SSS premiums. Petitioners then carried out their threat and dismissed him from work. He ended
up sick, jobless and penniless. Sahot filed with the NLRC NCR Arbitration Branch, a complaint
for illegal dismissal which ruled that there was no illegal dismissal. On appeal, the National
Labor Relations Commission modified the judgment of the Labor Arbiter and declared that
private respondent was an employee, not an industrial partner, since the start. Petitioners
assailed the decision but the appellate court affirmed with modification said judgment of the
NLRC. Hence, this instant petition.

Issue: Whether Jaime Sahot was not an industrial partner but an employee of petitioners

Held: The court held in the positive. Sahot is not an industrial partner, but merely an employee

Petitioners invoke the decision of the Labor Arbiter which found that respondent Sahot was an
industrial partner. Private respondent, for his part, denies that he was ever an industrial partner
of petitioners. There was no written agreement, no proof that he received a share in petitioners
profits, nor was there anything to show he had any participation with respect to the running of
the business.

The elements to determine the existence of an employment relationship are:

(a) the selection and engagement of the employee;
(b) the payment of wages;
(c) the power of dismissal; and
(d) the employers power to control the employees conduct.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

The most important element is the employers control of the employees conduct, not only as to
the result of the work to be done, but also as to the means and methods to accomplish it.

As found by the appellate court, records of the case show that private respondent actually
engaged in work as an employee. He merely followed instructions of petitioners and was
content to do so, as long as he was paid his wages. Indeed, private respondent had worked as
a truck helper and driver of petitioners not for his own pleasure but under the latters control.

Article 1767 of the Civil Code states that in a contract of partnership two or more persons bind
themselves to contribute money, property or industry to a common fund, with the intention of
dividing the profits among themselves. Not one of these circumstances is present in this case.
No written agreement exists to prove the partnership between the parties. Private respondent
did not contribute money, property or industry for the purpose of engaging in the supposed
business. There is no proof that he was receiving a share in the profits. Neither is there any
proof that he had actively participated in the management, administration and adoption of
policies of the business. Thus, the NLRC and the CA did not err in reversing the finding of the
Labor Arbiter that private respondent was an industrial partner from 1958 to 1994. The
existence of an employer-employee relationship is ultimately a question of fact and the findings
by the NLRC deserve not only respect but finality when supported by substantial evidence.

Notes:

Substantial evidence is such amount of relevant evidence which a reasonable mind might
accept as adequate to justify a conclusion.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

Afisco Insurance Corporation v. Court of Appeals

G.R. No. 112675
January 25, 1999
Panganiban, J

/The fact that the pool does not retain any profit or income does not obliterate the fact that the
pool is being used for profit, as it was the primordial reason for the pools formation./

Facts: The petitioners are 41 non-life insurance corporations. They entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a pool and so they did accordingly. Later on,
the pool of machinery insurers filed an Information Return of Organization Exempt from Income
Tax and on the basis of which it was assessed by the Commissioner of Internal Revenue of
deficiency corporate taxes, withholding taxes, and dividends. These assessments were
protested by the petitioners. However, such protest was denied and petitioners, assessed as
Pool of Machinery Insurers, were ordered to pay such deficiency. On appeal, it was ruled that
the pool of machinery insurers was a partnership taxable as a corporation, and that the latters’
collection of premiums was taxable income. Hence, this Petition for Review. Petitioners contend
that the Court of Appeals erred in finding that the pool or clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. Petitioners belie the existence
of a partnership in this case, because (1) the reinsurers did not share the same risk or solidary
liability; (2) there was no common fund; (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a corporation; and (4) the
pool or clearing house was not and could not possibly have engaged in the business of
reinsurance from which it could have derived income for itself.

Issue: Whether the Clearing House or pool was subject to tax as a corporation

Held: The court ruled in the positive. The pool of machinery or Clearing House is considered as
a corporation for tax purposes

This Court rules that the Court of Appeals committed no reversible error. Furthermore, the Court
in ​Evangelista v. Collector of Internal Revenue held that Section 24 of the Tax Code covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. It was said that a pool of individual real
property owners dealing in real estate business was considered a corporation for purposes of
the tax in Section 24 of the Tax Code.

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

In this case, the ceding companies entered into a Pool Agreement or an association that would
handle all the insurance businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich. The following unmistakably indicates a partnership or an
association covered by Section 24:
(1) The pool has a common fund, consisting of money and other valuables that are deposited in
the name and credit of the pool. This common fund pays for the administration and operation
expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their premiums. The
ceding companies share in the business ceded to the pool and in the expenses according to a
Rules of Distribution annexed to the Pool Agreement. Profit motive or business is, therefore, the
primordial reason for the pools formation.

As found by the CTA, the fact that the pool does not retain any profit or income does not
obliterate the fact that the pool is being used for profit. Petitioners admit that their association or
coaction was indispensable to the business. Though the profit was apportioned among the
members, this is only a matter of consequence, as it implies that profit actually resulted

Notes:

Section 24 of the NIRC, as worded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations.
(a) Tax on domestic corporations. - A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized, but not including duly
registered general co-partnership (compaias colectivas), general professional partnerships,
private educational institutions, and building and loan associations Ineludibly, the Philippine
legislature included in the concept of corporations those entities that resembled them such as
unregistered partnerships and associations. Parenthetically, the NLRCs inclusion of such
entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997, which
amended the Tax Code.

Pertinent provisions of the new law read as follows:

SEC. 27. Rates of Income Tax on Domestic Corporations.

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all

Notes by: Aya Mae Maravilla

 Partnership, Agency, Trust
Atty. Charlton Jules Romer

sources within and without the Philippines by every corporation, as defined in Section 22 (B) of
this Code, and taxable under this Title as a corporation xxx

SEC. 22. -- Definition. -- When used in this Title:

(B) The term corporation shall include partnerships, no matter how created or organized, joint
stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. General professional
partnerships are partnerships formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.

The Supreme Court held that the term partnership includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on.

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or
more persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves. Its requisites are:
(1) mutual contribution to a common stock, and
(2) a joint interest in the profits.

In other words, a partnership is formed when persons contract to devote to a common purpose
either money, property, or labor with the intention of dividing the profits between themselves.
Meanwhile, an association implies associates who enter into a joint enterprise x x x for the
transaction of business.

Notes by: Aya Mae Maravilla