G.R. No.

21639

September 25, 1924

The lower court erred

ALBERT F. KIEL, plaintiff-appellee, vs.ESTATE

OF P. S. SABERT, defendant-appellant.

(1) In finding this was an action to establish a

resulting trust in land.

J. F. Yeager for appellant.J. S. Alano for appellee.

(2) In finding a resulting trust in land could have

been established in public lands in favor of
plaintiff herein who was an aliaen subject at the
same time said alleged resulting trust was
created.

MALCOLM, J.:
This action relates to the legal right of Albert F.
Kiel to secure from the estate of P. S. Sabert the
sum of P20,000, on a claim first presented to the
commissioners and disallowed, then on appeal to
the Court of First Instance allowed, and ultimately
the subject-matter of the appeal taken to this
court.
A skeletonized statement of the case and the
facts based on the complaint, the findings of the
trial judge, and the record, may be made in the
following manner:
In 1907, Albert F. Kiel along with William Milfeil
commenced to work on certain public lands
situated in the municipality of Parang, Province of
Cotabato, known as Parang Plantation Company.
Kiel subsequently took over the interest of Milfeil.
In 1910, Kiel and P. S. Sabert entered into an
agreement to develop the Parang Plantation
Company. Sabert was to furnish the capital to run
the plantation and Kiel was to manage it. They
were to share and share alike in the property. It
seems that this partnership was formed so that
the land could be acquired in the name of Sabert,
Kiel being a German citizen and not deemed
eligible to acquire public lands in the Philippines.
By virtue of the agreement, from 1910 to 1917,
Kiel worked upon and developed the plantation.
During the World War, he was deported from the
Philippines.
On August 16, 1919, five persons, including P. S.
Sabert, organized the Nituan Plantation Company,
with a subscribed capital of P40,000. On April 10,
1922, P. S. Sabert transferred all of his rights in
two parcels of land situated in the municipality of
Parang, Province of Cotabato, embraced within his
homestead application No. 21045 and his
purchase application No. 1048, in consideration of
the sum of P1, to the Nituan Plantation Company.
In this same period, Kiel appears to have tried to
secure a settlement from Sabert. At least in a
letter dated June 6, 1918, Sabert wrote Kiel that
he had offered "to sell all property that I have for
P40,000 or take in a partner who is willing to
develop the plantation, to take up the K. & S. debt
no matter which way I will straiten out with you."
But Sabert's death came before any amicable
arrangement could be reached and before an
action by Kiel against Sabert could be decided. So
these proceedings against the estate of Sabert.
In this court, the defendant-appellant assigns the
following errors:

(3) In finding a resulting trust in land had been

established by the evidence in the case.
(4) In admitting the testimony of the plaintiff
herein.
(5) In admitting the testimony of William Milfeil,
John C. Beyersdorfer, Frank R. Lasage, Oscar C.
Butler and Stephen Jurika with reference to
alleged statements and declarations of the
deceased P. S. Sabert.
(6) In finding any copartnership existed between
plaintiff and the deceased Sabert.
(7) In rendering judgment for the plaintiff herein.
Errors 1, 2, and 3, relating to resulting trusts.
These three errors discussing the same subject
may be resolved together. In effect, as will soon
appear, we reach the conclusion that both parties
were in error in devoting so much time to the
elaboration of these questions, and that a ruling
on the same is not needed.
It is conceivable, that the facts in this case could
have been so presented to the court by means of
allegations in the complaint, as to disclose
characteristics of a resulting trust. But the
complaint as framed asks for a straight money
judgment against an estate. In no part of the
complaint did plaintiff allege any interest in land,
claim any interest in land, or pretend to establish
a resulting trust in land. That the plaintiff did not
care to press such an action is demonstrated by
the relation of the fact of alienage with the rule,
that a trust will not be created when, for the
purpose of evading the law prohibiting one from
taking or holding real property, he takes a
conveyance thereof in the name of a third person.
(26 R. C. L., 1214-1222; Leggett vs. Dubois
[1835], 5 Paige, N. Y., 114; 28 Am. Dec., 413.)
The parties are wrong in assuming that the trial
judge found that this was an action to establish a
resulting trust in land. In reality, all that the trial
judge did was to ground one point of his decision
on an authority coming from the Supreme Court
of California, which discussed the subject of
resulting trusts.
Error 4, relating to the admission of testimony of
the plaintiff herein. Well taken.
The Code of Civil Procedure in section 383, No. 7,
names as incompetent witnesses, parties to an

action or proceeding against an executor or

administrator of a deceased person upon a claim
or demand against the estate of such deceased
person, who "cannot testify as to any matter of
fact occuring before the death of such deceased
person." But the trial judge, misled somewhat by
the decision of the Supreme Court of California in
the city of Myers vs. Reinstein ([1885], 67 Cal.,
89), permitted this testimony to go in, whereas if
the decision had been read more carefully, it
would have been noted that "the action was not
on a claim or demand against the estate of
Reinstein." Here this is exactly the situation which
confronts us.
The case of Maxilom vs. Tabotabo ([1907], 9 Phil.,
390), is squarely on all fours with the case at bar.
It was there held that "A party to an action
against an executor or administrator of a
deceased person, upon a claim against the estate
of the latter, is absolutely prohibited by law from
giving testimony concerning such claim or
demand as to anything that occurred before the
death of the person against whose estate the
action is prosecuted."
Error 5, relating to the testimony of five witnesses
with reference to alleged statements and
declarations of the deceased P. S. Sabert. Not
well taken.
By section 282 of the Code of Civil Procedure, the
declaration, act, or omission of a deceased person
having sufficient knowledge of the subject,
against his pecuniary interest, is admissible as
evidence to that extent against his successor in
interest. By section 298, No. 4, of the same Code,
evidence may be given up a trial of the following
facts: ". . . the act or declaration of a deceased
person, done or made against his interest in
respect to his real property." (See Leonardo vs.
Santiago [1907], 7 Phil., 401.) The testimony of
these witnesses with reference to the acts or
declarations of Sabert was, therefore, properly
received for whatever they might be worth.
Error 6, relating to the existence of a
copartnership between Kiel and Sabert. Not
well taken.
No partnership agreement in writing was entered
into by Kiel and Sabert. The question
consequently is whether or not the alleged verbal
copartnership formed by Kiel and Sabert has been
proved, if we eliminate the testimony of Kiel and
only consider the relevant testimony of other
witnesses. In performing this task, we are not
unaware of the rule of partnership that the
declarations of one partner, not made in the
presence of his copartner, are not competent to
prove the existence of a partnership between
them as against such other partner, and that the
existence of a partnership cannot be established

by general reputation, rumor, or hearsay.

(Mechem on Partnership, sec. 65; 20 R. C. L., sec.
53; Owensboro Wagon Company vs. Bliss [1901],
132 Ala., 253.)
The testimony of the plaintiff's witnesses,
together with the documentary evidence, leaves
the firm impression with us that Kiel and Sabert
did enter into a partnership, and that they were to
share equally. Applying the tests as to the
existence of partnership, we feel that competent
evidence exists establishing the partnership. Even
more primary than any of the rules of partnership
above announced, is the injunction to seek out
the intention of the parties, as gathered from the
facts and as ascertained from their language and
conduct, and then to give this intention effect.
(Giles vs. Vette [1924], 263 U. S., 553.)
Error 7, relating to the judgment rendered for the
plaintiff. Well taken in part.
The judgment handed down, it will be
remembered, permitted the plaintiff to recover
from the estate the full amount claimed,
presumably on the assumption that Sabert having
sold by property to the Nituan Plantation
Company for P40,000, Kiel should have one-half
of the same, or P20,000. There is, however,
extant in the record absolutely no evidence as to
the precise amount received by Sabert from the
sale of this particular land. If it is true that Sabert
sold all his land to the Nituan Plantation Company
for P40,000, although this fact was not proven,
what part of the P40,000 would correspond to the
property which belonged to Kiel and Sabert under
their partnership agreement? It impresses us
further that Kiel under the facts had no standing
in court to ask for any part of the land and in fact
he does not do so; his only legal right is to ask for
what is in effect an accounting with reference to
its improvements and income as of 1917 when
Sabert became the trustee of the estate on behalf
of Kiel.
As we have already intimated, we do not think
that Kiel is entitled to any share in the land itself,
but we are of the opinion that he has clearly
shown his right to one-half of the value of the
improvements and personal property on the land
as to the date upon which he left the plantation.
Such improvements and personal property include
buildings, coconut palms, and other plantings,
cattle and other animals, implements, fences, and
other constructions, as well as outstanding
collectible credits, if any, belonging to the
partnership. The value of these improvements
and of the personal property cannot be
ascertained from the record and the case must
therefore be remanded for further proceedings.
In resume, we disregard errors 1, 2, and 3, we find
well taken, errors 4 and 7, and we find not well

taken, errors 5 and 6.

The judgment appealed from is set aside and the
record is returned to the lower court where the
plaintiff, if he so desires, may proceed further to
prove his claim against the estate of P. S. Sabert.
Without costs. So ordered.

G.R. No. L-414

November 9, 1903

HONGKONG BANK, plaintiffs-appellants, vs.

JURADO & CO., defendants-appellees.
Gibbs and Kincaid for appellants.Hartigan,
Marple and Solignac for appellees.
ON MOTION TO BE MADE A CODEFENDANT.
WILLARD, J.:
By the order of April 16, 1895, Don Ricardo
Regidor was expressly included in the
bankruptcy as a general partner of Jurado &
Co. No order setting aside this order has been
called to the court's attention, except the
order of December 12, 1898, dismissing the
entire proceeding. The order of April 6, 1898,
upon which Seor Regidor relies, simply
decided that this motion, in which he claimed
that he was not properly included in the
bankruptcy, should come up for hearing in
the ordinary way. It expressly stated that the
merits of said motion were not passes upon.
We have seen nothing in the progress of this
suit to show that this order of April 16, 1895,
was not correct. On the contrary, it appears
from the records of the court that, in the
hearing on October 15, 1903, Seor Regidor
as one of such partners, in open court,
appointed an attorney to argue for the firm
the motion then before this court.
As a partner of Jurado & Co. he is represented
by the firm and has no right to appear as an
individual separate from the firm. If he has
this right, then every partner would have the
same right. We see nothing in the case to
indicate that his rights will not be protected
by the lawyers whom the firm may see fit to
employ. His motion to be made a
codefendant is denied.
Torres, Cooper, Mapa, McDonough, and
Johnson, JJ., concur.Arellano, C.J., did not sit
in this case.

ON SUGGESTION OF DEATH OF LIQUIDATOR

OF DEFENDANT FIRM.
WILLARD, J.:
In this case the plaintiff, in April, 1903, made
a motion that the court assign a day for the
hearing of the case. This motion was
resubmitted on the 15th day of October,
1903, and is now us for decision.
The firm Jurado & Co. being in liquidation,
Don Basilio Teodoro, said the defendants to
the liquidator, died on July 12, 1903. This fact
can not interfere with the progress of this
suit. With the appointment of a new
liquidator the court has nothing to do. The
defendants are Jurado & Co. and not the
liquidator. If they do not see fit to appoint a
new liquidator, or to select attorneys in place
of those who it said were appointed only by
the deceased liquidator, any notices required
to be served upon the defendants by the
plaintiff, or usually given by the clerk, can be
served upon and given to any partner of
Jurado & Co, who may be found in the
Islands.lawphi1.net
The court, on March 8, 1902, made an order
providing the procedure to be pursued in the
case. If this order had been followed by the
parties, it would be resulted in a trial of the
case on its merits in August, 1902. It appears
that the proofs, pleadings, and briefs of the
plaintiffs have been filed, but no proofs nor
brief of the defendant have been presented.
It is ordered that the defendant deliver to the
plaintiffs on or before the 15th day of
December, 1903, three copies of their printed
pleadings, proofs, and brief, and file ten
copies thereof in the clerk's office on or
before that date, and that this case be placed
on the calendar of the January term, 1904,
for hearing on its merits.

was duly recorded with the Securities and

Exchange Commission on 20 December
1948.

G.R. No. L-25532

1969

February 28,

COMMISSIONER OF INTERNAL REVENUE,

petitioner, vs.WILLIAM J. SUTER and THE
COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Antonio P.
Barredo, Assistant Solicitor General
Felicisimo R. Rosete and Special Attorneys B.
Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for
respondents.
REYES, J.B.L., J.:
A limited partnership, named "William J. Suter
'Morcoin' Co., Ltd.," was formed on 30
September 1947 by herein respondent
William J. Suter as the general partner, and
Julia Spirig and Gustav Carlson, as the limited
partners.
The
partners
contributed,
respectively, P20,000.00, P18,000.00 and
P2,000.00 to the partnership. On 1 October
1947, the limited partnership was registered
with
the
Securities
and
Exchange
Commission. The firm engaged, among other
activities, in the importation, marketing,
distribution and operation of automatic
phonographs, radios, television sets and
amusement machines, their parts and
accessories. It had an office and held itself
out as a limited partnership, handling and
carrying merchandise, using invoices, bills
and letterheads bearing its trade-name,
maintaining its own books of accounts and
bank accounts, and had a quota allocation
with the Central Bank.
In 1948, however, general partner Suter and
limited partner Spirig got married and,
thereafter, on 18 December 1948, limited
partner Carlson sold his share in the
partnership to Suter and his wife. The sale

The limited partnership had been filing its

income tax returns as a corporation, without
objection
by
the
herein
petitioner,
Commissioner of Internal Revenue, until in
1959 when the latter, in an assessment,
consolidated the income of the firm and the
individual incomes of the partners-spouses
Suter and Spirig resulting in a determination
of a deficiency income tax against
respondent Suter in the amount of P2,678.06
for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment,
and
requested
its
cancellation
and
withdrawal, as not in accordance with law,
but his request was denied. Unable to secure
a reconsideration, he appealed to the Court
of Tax Appeals, which court, after trial,
rendered a decision, on 11 November 1965,
reversing that of the Commissioner of
Internal Revenue.
The present case is a petition for review, filed
by the Commissioner of Internal Revenue, of
the tax court's aforesaid decision. It raises
these issues:
(a) Whether or not the corporate personality
of the William J. Suter "Morcoin" Co., Ltd.
should be disregarded for income tax
purposes,
considering
that
respondent
William J. Suter and his wife, Julia Spirig Suter
actually formed a single taxable unit; and
(b) Whether or not the partnership was
dissolved after the marriage of the partners,
respondent William J. Suter and Julia Spirig
Suter and the subsequent sale to them by
the remaining partner, Gustav Carlson, of his
participation of P2,000.00 in the partnership
for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of
Internal Revenue, is that the marriage of
Suter and Spirig and their subsequent
acquisition of the interests of remaining
partner Carlson in the partnership dissolved
the limited partnership, and if they did not,
the fiction of juridical personality of the
partnership should be disregarded for income
tax purposes because the spouses have
exclusive ownership and control of the
business; consequently the income tax return
of respondent Suter for the years in question

should have included his and his wife's

individual incomes and that of the limited
partnership, in accordance with Section 45
(d) of the National Internal Revenue Code,
which provides as follows:
(d) Husband and wife. In the case of
married persons, whether citizens, residents
or non-residents, only one consolidated
return for the taxable year shall be filed by
either spouse to cover the income of both
spouses; ....
In refutation of the foregoing, respondent
Suter maintains, as the Court of Tax Appeals
held, that his marriage with limited partner
Spirig and their acquisition of Carlson's
interests in the partnership in 1948 is not a
ground for dissolution of the partnership,
either in the Code of Commerce or in the New
Civil Code, and that since its juridical
personality had not been affected and since,
as a limited partnership, as contra
distinguished from a duly registered general
partnership, it is taxable on its income
similarly with corporations, Suter was not
bound to include in his individual return the
income of the limited partnership.
We
find
the
unmeritorious.

Commissioner's

appeal

The thesis that the limited partnership,

William J. Suter "Morcoin" Co., Ltd., has been
dissolved by operation of law because of the
marriage of the only general partner, William
J. Suter to the originally limited partner, Julia
Spirig one year after the partnership was
organized is rested by the appellant upon the
opinion of now Senator Tolentino in
Commentaries
and
Jurisprudence
on
Commercial Laws of the Philippines, Vol. 1,
4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a
contract of general copartnership, because
under the Civil Code, which applies in the
absence of express provision in the Code of
Commerce, persons prohibited from making
donations to each other are prohibited from
entering into universal partnerships. (2
Echaverri 196) It follows that the marriage of
partners necessarily brings about the
dissolution of a pre-existing partnership. (1
Guy de Montella 58)
The petitioner-appellant has evidently failed
to observe the fact that William J. Suter

"Morcoin" Co., Ltd. was not a universal

partnership, but a particular one. As appears
from Articles 1674 and 1675 of the Spanish
Civil Code, of 1889 (which was the law in
force when the subject firm was organized in
1947), a universal partnership requires either
that the object of the association be all the
present property of the partners, as
contributed by them to the common fund, or
else "all that the partners may acquire by
their industry or work during the existence of
the partnership". William J. Suter "Morcoin"
Co., Ltd. was not such a universal
partnership, since the contributions of the
partners were fixed sums of money,
P20,000.00 by William Suter and P18,000.00
by Julia Spirig and neither one of them was
an industrial partner. It follows that William J.
Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to
enter by Article 1677 of the Civil Code of
1889.
The former Chief Justice of the Spanish
Supreme Court, D. Jose Casan, in his Derecho
Civil, 7th Edition, 1952, Volume 4, page 546,
footnote 1, says with regard to the prohibition
contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden
celebrar entre si el contrato de sociedad
universal, pero o podran constituir sociedad
particular? Aunque el punto ha sido muy
debatido, nos inclinamos a la tesis permisiva
de los contratos de sociedad particular entre
esposos, ya que ningun precepto de nuestro
Codigo los prohibe, y hay que estar a la
norma general segun la que toda persona es
capaz para contratar mientras no sea
declarado
incapaz
por
la
ley.
La
jurisprudencia de la Direccion de los
Registros fue favorable a esta misma tesis en
su resolution de 3 de febrero de 1936, mas
parece cambiar de rumbo en la de 9 de
marzo de 1943.
Nor could the subsequent marriage of the
partners operate to dissolve it, such marriage
not being one of the causes provided for that
purpose either by the Spanish Civil Code or
the Code of Commerce.
The appellant's view, that by the marriage of
both partners the company became a single
proprietorship, is equally erroneous. The
capital contributions of partners William J.
Suter and Julia Spirig were separately owned

and contributed by them before their

marriage; and after they were joined in
wedlock, such contributions remained their
respective separate property under the
Spanish Civil Code (Article 1396):
The following shall be the exclusive property
of each spouse:
(a) That which is brought to the marriage as
his or her own; ....
Thus, the individual interest of each consort
in William J. Suter "Morcoin" Co., Ltd. did not
become common property of both after their
marriage in 1948.
It being a basic tenet of the Spanish and
Philippine law that the partnership has a
juridical personality of its own, distinct and
separate from that of its partners (unlike
American and English law that does not
recognize
such
separate
juridical
personality), the bypassing of the existence
of the limited partnership as a taxpayer can
only be done by ignoring or disregarding
clear statutory mandates and basic principles
of our law. The limited partnership's separate
individuality makes it impossible to equate its
income with that of the component members.
True, section 24 of the Internal Revenue Code
merges registered general co-partnerships
(compaias colectivas) with the personality
of the individual partners for income tax
purposes. But this rule is exceptional in its
disregard of a cardinal tenet of our
partnership laws, and can not be extended by
mere implication to limited partnerships.
The rulings cited by the petitioner (Collector
of Internal Revenue vs. University of the
Visayas, L-13554, Resolution of 30 October
1964, and Koppel [Phil.], Inc. vs. Yatco, 77
Phil. 504) as authority for disregarding the
fiction of legal personality of the corporations
involved therein are not applicable to the
present case. In the cited cases, the
corporations were already subject to tax
when the fiction of their corporate personality
was pierced; in the present case, to do so
would exempt the limited partnership from
income taxation but would throw the tax
burden upon the partners-spouses in their
individual capacities. The corporations, in the
cases cited, merely served as business
conduits or alter egos of the stockholders, a
factor that justified a disregard of their
corporate personalities for tax purposes. This

is not true in the present case. Here, the

limited partnership is not a mere business
conduit of the partner-spouses; it was
organized for legitimate business purposes; it
conducted its own dealings with its
customers prior to appellee's marriage, and
had been filing its own income tax returns as
such independent entity. The change in its
membership, brought about by the marriage
of the partners and their subsequent
acquisition of all interest therein, is no ground
for withdrawing the partnership from the
coverage of Section 24 of the tax code,
requiring it to pay income tax. As far as the
records show, the partners did not enter into
matrimony and thereafter buy the interests
of
the
remaining
partner
with
the
premeditated scheme or design to use the
partnership as a business conduit to dodge
the tax laws. Regularity, not otherwise, is
presumed.
As
the
limited
partnership
under
consideration is taxable on its income, to
require that income to be included in the
individual tax return of respondent Suter is to
overstretch the letter and intent of the law. In
fact, it would even conflict with what it
specifically provides in its Section 24: for the
appellant Commissioner's stand results in
equal treatment, tax wise, of a general
copartnership (compaia colectiva) and a
limited partnership, when the code plainly
differentiates the two. Thus, the code taxes
the latter on its income, but not the former,
because it is in the case of compaias
colectivas that the members, and not the
firm, are taxable in their individual capacities
for any dividend or share of the profit derived
from the duly registered general partnership
(Section 26, N.I.R.C.; Araas, Anno. & Juris. on
the N.I.R.C., As Amended, Vol. 1, pp. 8889).lawphi1.nt
But it is argued that the income of the limited
partnership is actually or constructively the
income of the spouses and forms part of the
conjugal partnership of gains. This is not
wholly correct. As pointed out in Agapito vs.
Molo 50 Phil. 779, and People's Bank vs.
Register of Deeds of Manila, 60 Phil. 167, the
fruits of the wife's parapherna become
conjugal only when no longer needed to
defray the expenses for the administration
and preservation of the paraphernal capital
of the wife. Then again, the appellant's

argument erroneously confines itself to the

question of the legal personality of the
limited partnership, which is not essential to
the income taxability of the partnership since
the law taxes the income of even joint
accounts that have no personality of their
own. 1 Appellant is, likewise, mistaken in that
it assumes that the conjugal partnership of
gains is a taxable unit, which it is not. What is
taxable is the "income of both spouses"
(Section 45 [d] in their individual capacities.
Though the amount of income (income of the
conjugal partnership vis-a-vis the joint
income of husband and wife) may be the
same for a given taxable year, their
consequences would be different, as their
contributions in the business partnership are
not the same.
The difference in tax rates between the
income of the limited partnership being
consolidated with, and when split from the
income of the spouses, is not a justification
for requiring consolidation; the revenue code,
as it presently stands, does not authorize it,
and even bars it by requiring the limited
partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision
under review is hereby affirmed. No costs.

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON,
petitioners, vs.THE COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS,
respondents.
De la Cuesta, De las Alas and Callanta Law Offices for
petitioners.
The Solicitor General for respondents

GANCAYCO, J.:
The distinction between co-ownership and an
unregistered partnership or joint venture for income tax
purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of
land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land
from Juan Roque. The first two parcels of land were sold
by petitioners in 1968 toMarenir Development
Corporation, while the three parcels of land were sold

by petitioners to Erlinda Reyes and Maria Samson on

March 19,1970. Petitioners realized a net profit in the
sale made in 1968 in the amount of P165,224.70, while
they realized a net profit of P60,000.00 in the sale
made in 1970. The corresponding capital gains taxes
were paid by petitioners in 1973 and 1974 by availing
of the tax amnesties granted in the said years.
However, in a letter dated March
Acting BIR Commissioner Efren I.
were assessed and required to pay
P107,101.70 as alleged deficiency
taxes for the years 1968 and 1970.

31, 1979 of then

Plana, petitioners
a total amount of
corporate income

Petitioners protested the said assessment in a letter of

June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent
Commissioner informed petitioners that in the years
1968 and 1970, petitioners 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 1 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 petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them
from the tax liability of the unregistered partnership.
Hence, the petitioners were required to pay the
deficiency income tax assessed.
Petitioners filed a petition for review with the
respondent Court of Tax Appeals docketed as CTA Case
No. 3045. In due course, the respondent court by a
majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner
with costs against petitioners.
It ruled that on the basis of the principle enunciated in
Evangelista 3 an unregistered partnership was in fact
formed by petitioners which like a corporation was
subject to corporate income tax distinct from that
imposed on the partners.
In a separate dissenting opinion, Associate Judge
Constante Roaquin stated that considering the
circumstances of this case, although there might in fact
be a co-ownership between the petitioners, there was
no adequate basis for the conclusion that they thereby
formed an unregistered partnership which made "hem
liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis
thereof the following alleged errors of the respondent
court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE
DETERMINATION OF THE RESPONDENT COMMISSIONER,
TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF OFFERING
EVIDENCE IN OPPOSITION THERETO RESTS UPON THE
PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF
ISOLATED
SALE
TRANSACTIONS,
THAT
AN

UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING

THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO
THE EVANGELISTA CASE AND THEREFORE SHOULD BE
DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE
THE PETITIONERS FROM PAYMENT OF OTHER TAXES
FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 1213, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent
court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money
from their father which together with their own
personal funds they used in buying several real
properties. They appointed their brother to manage
their properties with full power to lease, collect, rent,
issue receipts, etc. They had the real properties rented
or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the
Collector of Internal Revenue demanded the payment
of income tax on a corporation, among others, from
them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject
to the tax on corporations provided for in section 24 of
Commonwealth Act No. 466, otherwise known as the
National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate
dealers' fixed tax. With respect to the tax on
corporations, the issue hinges on the meaning of the
terms corporation and partnership as used in sections
24 and 84 of said Code, the pertinent parts of which
read:
Sec. 24. Rate of the tax on corporations.There shall
be levied, assessed, collected, and paid annually upon
the total net income received in the preceding 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-partnerships
(companies
collectives), a tax upon such income equal to the sum
of the following: ...
Sec.
84(b).
The
term
"corporation"
includes
partnerships, no matter how created or organized, jointstock
companies,
joint
accounts
(cuentas
en
participation), associations or insurance companies, but
does not include duly registered general copartnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines
provides:
By the 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.
Pursuant to this article, the essential elements of a
partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common
fund; and (b) intent to divide the profits among the

contracting parties. The first element is undoubtedly

present in the case at bar, for, admittedly, petitioners
have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows
down to their intent in acting as they did. Upon
consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for
monetary gain and then divide the same among
themselves, because:
1. Said common fund was not something they found
already in existence. It was not a property inherited by
them pro indiviso. They created it purposely. What is
more they jointly borrowed a substantial portion thereof
in order to establish said common fund.
2. They invested the same, not merely in one
transaction, but in a series of transactions. On February
2, 1943, they bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for P18,000.00. This was
soon followed, on April 23, 1944, by the acquisition of
another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14.
The number of lots (24) acquired and transcations
undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not
limited to the conservation and preservation of the
aforementioned common fund or even of the property
acquired by petitioners in February, 1943. In other
words, one cannot but perceive a character of
habituality peculiar to business transactions engaged in
for purposes of gain.
3. The aforesaid lots were not devoted to residential
purposes or to other personal uses, of petitioners
herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid
the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners
do not even suggest that there has been any change in
the utilization thereof.
4. Since August, 1945, the properties have been under
the management of one person, namely, Simeon
Evangelists, with full power to lease, to collect rents, to
issue receipts, to bring suits, to sign letters and
contracts, and to indorse and deposit notes and checks.
Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or
business enterprise operated for profit.
5. The foregoing conditions have existed for more than
ten (10) years, or, to be exact, over fifteen (15) years,
since the first property was acquired, and over twelve
(12) years, since Simeon Evangelists became the
manager.
6. Petitioners have not testified or introduced any
evidence, either on their purpose in creating the set up
already adverted to, or on the causes for its continued
existence. They did not even try to offer an explanation
therefor.
Although, taken singly, they might not suffice to
establish the intent necessary to constitute a
partnership,
the
collective
effect
of
these
circumstances is such as to leave no room for doubt on
the existence of said intent in petitioners herein. Only
one or two of the aforementioned circumstances were

present in the cases cited by petitioners herein, and,

hence, those cases are not in point. 5
In the present case, there is no evidence that
petitioners entered into an agreement to contribute
money, property or industry to a common fund, and
that they intended to divide the profits among
themselves. Respondent commissioner and/ or his
representative just assumed these conditions to be
present on the basis of the fact that petitioners
purchased certain parcels of land and became coowners thereof.
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing
that the purpose was not limited to the conservation or
preservation of the common fund or even the
properties acquired by them. The character of
habituality peculiar to business transactions engaged in
for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels
of land in 1965. They did not sell the same nor make
any improvements thereon. In 1966, they bought
another three (3) parcels of land from one seller. It was
only 1968 when they sold the two (2) parcels of land
after which they did not make any additional or new
purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The
character
of
habituality
peculiar
to
business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to
tenants for several years. The business was under the
management of one of the partners. Such condition
existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The coownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo
Bautista in Evangelista he said:
I wish however to make the following observation
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, provides;
(2) Co-ownership or co-possession does not itself
establish a partnership, whether such co-owners or copossessors 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 (Padilla, Civil Code of the
Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
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.
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. (Elements of the Law of Partnership
by Flord D. Mechem 2nd Ed., section 83, p. 74.)
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. (Clark vs. Sideway, 142 U.S. 682,12 Ct.
327, 35 L. Ed., 1157.)
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. (Magee vs. Magee 123 N.E. 673, 233 Mass.
341.)
In order to constitute a partnership inter sese 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.-Municipal Paving Co. vs. Herring 150 P. 1067,
50 III 470.)
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.
(Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6
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 coownership 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.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership
with a distinct personality nor with assets that can be
held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as
partners for this unpaid obligation of the partnership p.
7
However, as petitioners have availed of the benefits
of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further
tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the
decision of the respondent Court of Tax Appeals of
March 30, 1987 is hereby REVERSED and SET ASIDE
and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this
case, without pronouncement as to costs.
SO ORDERED.

OA and LORENZO B. OA, JR., petitioners, vs.

THE COMMISSIONER OF INTERNAL REVENUE,
respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Felicisimo R. Rosete,
and Special Attorney Purificacion Ureta for
respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of
Tax Appeals in CTA Case No. 617, similarly entitled
as above, holding that petitioners have
constituted an unregistered partnership and are,
therefore, subject to the payment of the
deficiency corporate income taxes assessed
against them by respondent Commissioner of
Internal Revenue for the years 1955 and 1956 in
the total sum of P21,891.00, plus 5% surcharge
and 1% monthly interest from December 15,
1958, subject to the provisions of Section 51 (e)
(2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs
of the suit, 1 as well as the resolution of said court
denying petitioners' motion for reconsideration of
said decision.
The facts are stated in the decision of the Tax
Court as follows:
Julia Buales died on March 23, 1944, leaving as
heirs her surviving spouse, Lorenzo T. Oa and
her five children. In 1948, Civil Case No. 4519 was
instituted in the Court of First Instance of Manila
for the settlement of her estate. Later, Lorenzo T.
Oa the surviving spouse was appointed
administrator of the estate of said deceased
(Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949,
the administrator submitted the project of
partition, which was approved by the Court on
May 16, 1949 (See Exhibit K). Because three of
the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oa, were still minors when the project
of partition was approved, Lorenzo T. Oa, their
father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of
said minors. On November 14, 1949, the Court
appointed him guardian of the persons and
property of the aforenamed minors (See p. 3, BIR
rec.).

G.R. No. L-19342 May 25, 1972

LORENZO T. OA and HEIRS OF JULIA
BUALES, namely: RODOLFO B. OA,
MARIANO B. OA, LUZ B. OA, VIRGINIA B.

The project of partition (Exhibit K; see also pp. 7770, BIR rec.) shows that the heirs have undivided
one-half (1/2) interest in ten parcels of land with a
total assessed value of P87,860.00, six houses
with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the
War Damage Commission. Later, they received
from said Commission the amount of P50,000.00,

more or less. This amount was not divided among

them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p.
46). Of the ten parcels of land aforementioned,
two were acquired after the death of the decedent
with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p.
24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate
shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of
P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of
Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by
the Court on May 16, 1949, no attempt was made
to divide the properties therein listed. Instead, the
properties remained under the management of
Lorenzo T. Oa who used said properties in
business by leasing or selling them and investing
the income derived therefrom and the proceeds
from the sales thereof in real properties and
securities. As a result, petitioners' properties and
investments
gradually
increased
from
P105,450.00 in 1949 to P480,005.20 in 1956 as
can be gleaned from the following year-end
balances:
Year

Investment

Land

Building

Account

Account

Account

1949

P87,860.0
0

P17,590.00

1950

P24,657.6
5

128,566.7
2

96,076.26

1951

51,301.31

120,349.2
8

110,605.1
1

1952

67,927.52

87,065.28

152,674.3
9

1953

61,258.27

84,925.68

161,463.8
3

1954

1955

63,623.37

100,786.0
0

99,001.20

120,249.7
8

167,962.0
4
169,262.5
2

1956

175,028.6
8

135,714.6
8

169,262.5
2

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50,

102-104)
From said investments and properties petitioners
derived such incomes as profits from installment
sales of subdivided lots, profits from sales of
stocks, dividends, rentals and interests (see p. 3
of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The
said incomes are recorded in the books of account
kept by Lorenzo T. Oa where the corresponding
shares of the petitioners in the net income for the
year are also known. Every year, petitioners
returned for income tax purposes their shares in
the net income derived from said properties and
securities and/or from transactions involving them
(Exhibit 3, supra; t.s.n., pp. 25-26). However,
petitioners did not actually receive their shares in
the yearly income. (t.s.n., pp. 25-26, 40, 98, 100).
The income was always left in the hands of
Lorenzo T. Oa who, as heretofore pointed out,
invested them in real properties and securities.
(See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent
(Commissioner of Internal Revenue) decided that
petitioners formed an unregistered partnership
and therefore, subject to the corporate income
tax, pursuant to Section 24, in relation to Section
84(b), of the Tax Code. Accordingly, he assessed
against the petitioners the amounts of P8,092.00
and P13,899.00 as corporate income taxes for
1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.).
Petitioners protested against the assessment and
asked for reconsideration of the ruling of
respondent
that
they
have
formed
an
unregistered partnership. Finding no merit in
petitioners' request, respondent denied it (See
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation
.. .P40,209.89
Income tax due thereon ...............................
8,042.00
25% surcharge ..............................................
2,010.50
Compromise for non-filing .......................... 50.00
Total .............................................................
P10,102.50
1956
Net income as per investigation ...............

P69,245.23
Income tax due thereon ...............................
13,849.00
25% surcharge ..............................................
3,462.25
Compromise for non-filing .......................... 50.00
Total .............................................................
P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25%
surcharge was eliminated in line with the ruling of
the Supreme Court in Collector v. Batangas
Transportation Co., G.R. No. L-9692, Jan. 6, 1958,
so that the questioned assessment refers solely to
the income tax proper for the years 1955 and
1956 and the "Compromise for non-filing," the
latter item obviously referring to the compromise
in lieu of the criminal liability for failure of
petitioners to file the corporate income tax
returns for said years. (See Exh. 17, page 86, BIR
records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged
errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING
THAT
THE
PETITIONERS
FORMED
AN
UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE COOWNERS OF THE PROPERTIES INHERITED AND
(THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING
THAT PETITIONERS WERE LIABLE FOR CORPORATE
INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP,
THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN
UNREGISTERED PARTNERSHIP TO THE EXTENT
ONLY THAT THEY INVESTED THE PROFITS FROM
THE PROPERTIES OWNED IN COMMON AND THE
LOANS
RECEIVED
USING
THE
INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE

VARIOUS AMOUNTS PAID BY THE PETITIONERS AS

INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE
PROPERTIES OWNED IN COMMON, FROM THE
DEFICIENCY
TAX
OF
THE
UNREGISTERED
PARTNERSHIP.
In other words, petitioners pose for our resolution
the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties
inherited by them from the deceased Julia
Buales and the profits derived from transactions
involving the same, or, must they be deemed to
have formed an unregistered partnership subject
to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this
not be only in the sense that they invested as a
common fund the profits earned by the properties
owned by them in common and the loans granted
to them upon the security of the said properties,
with the result that as far as their respective
shares in the inheritance are concerned, the total
income thereof should be considered as that of
co-owners
and
not
of
the
unregistered
partnership? And (3) assuming again that they are
taxable as an unregistered partnership, should
not the various amounts already paid by them for
the same years 1955 and 1956 as individual
income taxes on their respective shares of the
profits accruing from the properties they owned in
common be deducted from the deficiency
corporate taxes, herein involved, assessed
against such unregistered partnership by the
respondent Commissioner?
Pondering on these questions, the first thing that
has struck the Court is that whereas petitioners'
predecessor in interest died way back on March
23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949,
and presumably petitioners have been holding
their respective shares in their inheritance since
those dates admittedly under the administration
or management of the head of the family, the
widower and father Lorenzo T. Oa, the
assessment in question refers to the later years
1955 and 1956. We believe this point to be
important because, apparently, at the start, or in
the years 1944 to 1954, the respondent
Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate
tax, and it was only from 1955 that he considered
them as having formed an unregistered
partnership. At least, there is nothing in the
record indicating that an earlier assessment had
already been made. Such being the case, and We
see no reason how it could be otherwise, it is
easily understandable why petitioners' position
that they are co-owners and not unregistered copartners, for the purposes of the impugned

assessment, cannot be upheld. Truth to tell,

petitioners should find comfort in the fact that
they were not similarly assessed earlier by the
Bureau of Internal Revenue.
The Tax Court found that instead of actually
distributing the estate of the deceased among
themselves pursuant to the project of partition
approved in 1949, "the properties remained under
the management of Lorenzo T. Oa who used said
properties in business by leasing or selling them
and investing the income derived therefrom and
the proceed from the sales thereof in real
properties and securities," as a result of which
said
properties
and
investments
steadily
increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in
1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in
"building account" in 1956. And all these became
possible because, admittedly, petitioners never
actually received any share of the income or
profits from Lorenzo T. Oa and instead, they
allowed him to continue using said shares as part
of the common fund for their ventures, even as
they paid the corresponding income taxes on the
basis of their respective shares of the profits of
their common business as reported by the said
Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not,
contrary to their contention, merely limit
themselves to holding the properties inherited by
them. Indeed, it is admitted that during the
material years herein involved, some of the said
properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru
Lorenzo T. Oa, in the purchase and sale of
corporate securities. It is likewise admitted that all
the profits from these ventures were divided
among petitioners proportionately in accordance
with their respective shares in the inheritance. In
these circumstances, it is Our considered view
that from the moment petitioners allowed not
only the incomes from their respective shares of
the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions
or in business, with the intention of deriving profit
to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes
to a common fund and, in effect, they thereby
formed an unregistered partnership within the
purview of the above-mentioned provisions of the
Tax Code.
It is but logical that in cases of inheritance, there
should be a period when the heirs can be
considered as co-owners rather than unregistered
co-partners within the contemplation of our
corporate tax laws aforementioned. Before the
partition and distribution of the estate of the

deceased, all the income thereof does belong

commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners,
but it does not necessarily follow that such status
as co-owners continues until the inheritance is
actually and physically distributed among the
heirs, for it is easily conceivable that after
knowing their respective shares in the partition,
they might decide to continue holding said shares
under the common management of the
administrator or executor or of anyone chosen by
them and engage in business on that basis.
Withal, if this were to be allowed, it would be the
easiest thing for heirs in any inheritance to
circumvent and render meaningless Sections 24
and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil.
140, it was stated, among the reasons for holding
the appellants therein to be unregistered copartners for tax purposes, that their common fund
"was not something they found already in
existence" and that "it was not a property
inherited by them pro indiviso," but it is certainly
far fetched to argue therefrom, as petitioners are
doing here, that ergo, in all instances where an
inheritance is not actually divided, there can be
no unregistered co-partnership. 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.
In this connection, petitioners' reliance on Article
1769, paragraph (3), of the Civil Code, providing
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," and, for that matter, on any

other provision of said code on partnerships is
unavailing. In Evangelista, supra, this Court
clearly differentiated the concept of partnerships
under the Civil Code from that of unregistered
partnerships
which
are
considered
as
"corporations" under Sections 24 and 84(b) of the
National Internal Revenue Code. Mr. Justice
Roberto Concepcion, now Chief Justice, elucidated
on this point thus:
To begin with, the tax in question is one imposed
upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When
our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on
"corporations", said Code must allude, therefore,
to organizations which are not necessarily
"partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code
exempts from the aforementioned tax "duly
registered general partnerships," which constitute
precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how
created or organized." This qualifying expression
clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in
confirmity with the usual requirements of the law
on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en participacion)"
and "associations", none of which has a legal
personality of its own, independent of that of its
members. Accordingly, the lawmaker could not
have regarded that personality as a condition
essential to the existence of the partnerships
therein referred to. In fact, as above stated, "duly
registered general co-partnerships" which are
possessed of the aforementioned personality
have been expressly excluded by law (sections 24
and 84[b]) from the connotation of the term
"corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership.
Under the term "partnership" it includes not only
a partnership as known in common law but, as
well, a syndicate, group, pool, joint venture, or
other unincorporated organization which carries
on any business, financial operation, or venture,
and which is not, within the meaning of the Code,
a trust, estate, or a corporation. ... . (7A Merten's
Law of Federal Income Taxation, p. 789; emphasis
ours.)
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. ... . (8 Merten's Law of Federal Income
Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our
National Internal Revenue Code includes these
partnerships with the exception only of duly
registered general copartnerships within the
purview of the term "corporation." It is, therefore,
clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando,
in Reyes vs. Commissioner of Internal Revenue, G.
R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198,
wherein the Court ruled against a theory of coownership pursued by appellants therein.
As regards the second question raised by
petitioners about the segregation, for the
purposes of the corporate taxes in question, of
their inherited properties from those acquired by
them subsequently, We consider as justified the
following ratiocination of the Tax Court in denying
their motion for reconsideration:
In connection with the second ground, it is alleged
that, if there was an unregistered partnership, the
holding should be limited to the business engaged
in apart from the properties inherited by
petitioners. In other words, the taxable income of
the partnership should be limited to the income
derived from the acquisition and sale of real
properties and corporate securities and should not
include the income derived from the inherited
properties. It is admitted that the inherited
properties and the income derived therefrom were
used in the business of buying and selling other
real
properties
and
corporate
securities.
Accordingly, the partnership income must include
not only the income derived from the purchase
and sale of other properties but also the income
of the inherited properties.
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.
Likewise, the third question of petitioners appears
to have been adequately resolved by the Tax
Court in the aforementioned resolution denying

petitioners' motion for reconsideration of the

decision of said court. Pertinently, the court ruled
this wise:
In support of the third ground, counsel for
petitioners alleges:
Even if we were to yield to the decision of this
Honorable Court that the herein petitioners have
formed
an
unregistered
partnership
and,
therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual
income tax returns reported their shares of the
profits of the unregistered partnership. We think it
only fair and equitable that the various amounts
paid by the individual petitioners as income tax
on their respective shares of the unregistered
partnership should be deducted from the
deficiency income tax found by this Honorable
Court against the unregistered partnership. (page
7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)

right to virtually disregard prescription merely

upon the ground that the reason for the delay is
precisely because the taxpayers failed to make
the proper return and payment of the corporate
taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws
in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax
obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of
the Court of Tax Appeals appealed from is affirm
with costs against petitioners.

In other words, it is the position of petitioners that

the taxable income of the partnership must be
reduced by the amounts of income tax paid by
each petitioner on his share of partnership profits.
This is not correct; rather, it should be the other
way around. The partnership profits distributable
to the partners (petitioners herein) should be
reduced by the amounts of income tax assessed
against the partnership. Consequently, each of
the petitioners in his individual capacity overpaid
his income tax for the years in question, but the
income tax due from the partnership has been
correctly assessed. Since the individual income
tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass
upon the same.
Petitioners insist that it was error for the Tax Court
to so rule that whatever excess they might have
paid as individual income tax cannot be credited
as part payment of the taxes herein in question. It
is argued that to sanction the view of the Tax
Court is to oblige petitioners to pay double
income tax on the same income, and, worse,
considering the time that has lapsed since they
paid their individual income taxes, they may
already be barred by prescription from recovering
their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as
regards the point under discussion is simply that
of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate
taxes in question was not deliberate. Of course,
such taxpayer has the right to be reimbursed
what he has erroneously paid, but the law is very
clear that the claim and action for such
reimbursement are subject to the bar of
prescription. And since the period for the recovery
of the excess income taxes in the case of herein
petitioners has already lapsed, it would not seem

G.R. Nos. L-24020-21

July 29, 1968

FLORENCIO REYES and ANGEL REYES,

petitioners, vs.COMMISSIONER OF INTERNAL
REVENUE and HON. COURT OF TAX APPEALS,
respondents.
Jose W. Diokno and Domingo Sandoval for
petitioners.Office of the Solicitor General for
respondents.

FERNANDO, J.:
Petitioners in this case were assessed by respondent
Commissioner of Internal Revenue the sum of
P46,647.00 as income tax,
surcharge and
compromise for the years 1951 to 1954, an
assessment subsequently reduced to P37,528.00.
This assessment sought to be reconsidered
unsuccessfully was the subject of an appeal to
respondent Court of Tax Appeals. Thereafter, another
assessment was made against petitioners, this time
for back income taxes plus surcharge and
compromise in the total sum of P25,973.75, covering
the years 1955 and 1956. There being a failure on
their part to have such assessments reconsidered,
the matter was likewise taken to the respondent
Court of Tax Appeals. The two cases1 involving as
they did identical issues and ultimately traceable to
facts similar in character were heard jointly with only
one decision being rendered.
In that joint decision of respondent Court of Tax
Appeals, the tax liability for the years 1951 to 1954
was reduced to P37,128.00 and for the years 1955
and 1956, to P20,619.00 as income tax due "from
the partnership formed" by petitioners. 2 The
reduction was due to the elimination of surcharge,
the failure to file the income tax return being
accepted as due to petitioners honest belief that no
such liability was incurred as well as the compromise
penalties for such failure to file.3 A reconsideration of
the aforesaid decision was sought and denied by
respondent Court of Tax Appeals. Hence this petition
for review.
The facts as found by respondent Court of Tax
Appeals, which being supported by substantial
evidence, must be respected4 follow: "On October
31, 1950, petitioners, father and son, purchased a
lot and building, known as the Gibbs Building,
situated at 671 Dasmarias Street, Manila, for
P835,000.00, of which they paid the sum of
P375,000.00, leaving a balance of P460,000.00,
representing the mortgage obligation of the vendors
with the China Banking Corporation, which mortgage
obligations were assumed by the vendees. The initial
payment of P375,000.00 was shared equally by
petitioners. At the time of the purchase, the building
was leased to various tenants, whose rights under
the lease contracts with the original owners, the
purchasers, petitioners herein, agreed to respect.
The administration of the building was entrusted to
an administrator who collected the rents; kept its
books and records and rendered statements of
accounts to the owners; negotiated leases; made
necessary
repairs
and
disbursed
payments,
whenever necessary, after approval by the owners;
and performed such other functions necessary for
the conservation and preservation of the building.
Petitioners divided equally the income of operation
and maintenance. The gross income from rentals of
the building amounted to about P90,000.00
annually."5
From the above facts, the respondent Court of Tax
Appeals applying the appropriate provisions of the

National Internal Revenue Code, the first of which

imposes an income tax on corporations "organized
in, or existing under the laws of the Philippines, no
matter how created or organized but not including
duly registered general co-partnerships (companias
colectivas), ...,"6 a term, which according to the
second provision cited, includes partnerships "no
matter how created or organized, ...,"7 and applying
the leading case of Evangelista v. Collector of
Internal Revenue,8 sustained the action of
respondent Commissioner of Internal Revenue, but
reduced the tax liability of petitioners, as previously
noted.
Petitioners maintain the view that the Evangelista
ruling does not apply; for them, the situation is
dissimilar.1wph1.t Consequently they allege that
the reliance by respondent Court of Tax Appeals was
unwarranted and the decision should be set aside. If
their interpretation of the authoritative doctrine
therein set forth commands assent, then clearly
what respondent Court of Tax Appeals did fails to
find shelter in the law. That is the crux of the matter.
A perusal of the Evangelista decision is therefore
unavoidable.
As noted in the opinion of the Court, penned by the
present Chief Justice, the issue was whether
petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No.
466, otherwise known as the National Internal
Revenue Code, ..."9 After referring to another section
of the National Internal Revenue Code, which
explicitly provides that the term corporation
"includes partnerships" and then to Article 1767 of
the Civil Code of the Philippines, defining what a
contract of partnership is, the opinion goes on to
state that "the essential elements of a partnership
are two, namely: (a) an agreement to contribute
money, property or industry to a common fund; and
(b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in
the case at bar, for, admittedly, petitioners have
agreed to and did, contribute money and property to
a common fund. Hence, the issue narrows down to
their intent in acting as they did. Upon consideration
of all the facts and circumstances surrounding the
case, we are fully satisfied that their purpose was to
engage in real estate transactions for monetary gain
and then divide the same among themselves, ..."10
In support of the above conclusion, reference was
made to the following circumstances, namely, the
common fund being created purposely not
something already found in existence, the
investment of the same not merely in one
transaction but in a series of transactions; the lots
thus acquired not being devoted to residential
purposes or to other personal uses of petitioners in
that case; such properties having been under the
management of one person with full power to lease,
to collect rents, to issue receipts, to bring suits, to
sign letters and contracts and to endorse notes and
checks; the above conditions having existed for
more than 10 years since the acquisition of the

above properties; and no testimony having been

introduced as to the purpose "in creating the set up
already adverted to, or on the causes for its
continued existence."11 The conclusion that emerged
had all the imprint of inevitability. Thus: "Although,
taken singly, they might not suffice to establish the
intent necessary to constitute a partnership, the
collective effect of these circumstances is such as to
leave no room for doubt on the existence of said
intent in petitioners herein."12
It may be said that there could be a differentiation
made between the circumstances above detailed
and those existing in the present case. It does not
suffice though to preclude the applicability of the
Evangelista decision. Petitioners could harp on these
being only one transaction. They could stress that an
affidavit of one of them found in the Bureau of
Internal Revenue records would indicate that their
intention was to house in the building acquired by
them the respective enterprises, coupled with a plan
of effecting a division in 10 years. It is a little
surprising then that while the purchase was made on
October 31, 1950 and their brief as petitioners filed
on October 20, 1965, almost 15 years later, there
was no allegation that such division as between
them was in fact made. Moreover, the facts as found
and as submitted in the brief made clear that the
building in question continued to be leased by other
parties with petitioners dividing "equally the
income ... after deducting the expenses of operation
and maintenance ..."13 Differences of such slight
significance do not call for a different ruling.
It is obvious that petitioners' effort to avoid the
controlling force of the Evangelista ruling cannot be
deemed successful. Respondent Court of Tax
Appeals acted correctly. It yielded to the command
of an authoritative decision; it recognized its binding
character. There is clearly no merit to the second
error assigned by petitioners, who would deny its
applicability to their situation.
The first alleged error committed by respondent
Court of Tax Appeals in holding that petitioners, in
acquiring the Gibbs Building, established a
partnership subject to income tax as a corporation
under the National Internal Revenue Code is likewise
untenable. In their discussion in their brief of this
alleged error, stress is laid on their being co-owners
and not partners. Such an allegation was likewise
made in the Evangelista case.
This is the way it was disposed of in the opinion of
the present Chief Justice: "This pretense was
correctly rejected by the Court of Tax Appeals."14
Then came the explanation why: "To begin with, the
tax in question is one imposed upon "corporations",
which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities
subject to the tax on "corporations", said Code must
allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code
exempts from the aforementioned tax "duly

registered general partnerships", which constitute

precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined
in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or
organized." This qualifying expression clearly
indicates that a joint venture need not be
undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on
partnerships, in order that one could be deemed
constituted for purposes of the tax on corporations.
Again, pursuant to said section 84(b), the term
"corporation" includes, among others, "joint
accounts,
(cuentas
en
participacion)"
and
"associations", none of which has a legal personality
of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded
that personality as a condition essential to the
existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general
copartnerships" which are possessed of the
aforementioned personality - have been expressly
excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation"." 15 The opinion
went on to summarize the matter aptly: "For
purposes of the tax on corporations, our National
Internal Revenue Code, include these partnerships
with the exception only of duly registered general
co-partnerships within the purview of the term
"corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar
as said Code is concerned, and are subject to the
income tax for corporations."16
In the light of the above, it cannot be said that the
respondent Court of Tax Appeals decided the matter
incorrectly. There is no warrant for the assertion that
it failed to apply the settled law to uncontroverted
facts. Its decision cannot be successfully assailed.
Moreover, an observation made in Alhambra Cigar &
Cigarette Manufacturing Co. v. Commissioner of
Internal Revenue,17 is well-worth recalling. Thus:
"Nor as a matter of principle is it advisable for this
Court to set aside the conclusion reached by an
agency such as the Court of Tax Appeals which is, by
the very nature of its functions, dedicated
exclusively to the study and consideration of tax
problems and has necessarily developed an
expertise on the subject, unless, as did not happen
here, there has been an abuse or improvident
exercise of its authority."
WHEREFORE, the decision of the respondent Court of
Tax Appeals ordering petitioners "to pay the sums of
P37,128.00 as income tax due from the partnership
formed by herein petitioners for the years 1951 to
1954 and P20,619.00 for the years 1955 and 1956
within thirty days from the date this decision
becomes final, plus the corresponding surcharge and
interest in case of delinquency," is affirmed. With
costs against petitioners.

Member's shares.

G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffsappellees, vs.VICENTE POLISTICO, ET AL.,

defendants-appellants.

97,263.70

Credits paid

6,196.55

Interest received

4,569.45

Miscellaneous

1,891.00
P109,620.7
0

Marcelino Lontok and Manuel dela Rosa for

appellants.Sumulong & Lavides for appellees.
VILLAMOR, J.:
This is an action to bring about liquidation of
the funds and property of the association
called "Turnuhan Polistico & Co." The
plaintiffs were members or shareholders, and
the
defendants
were
designated
as
president-treasurer, directors and secretary
of said association.
It is well to remember that this case is now
brought before the consideration of this court
for the second time. The first one was when
the same plaintiffs appeared from the order
of the court below sustaining the defendant's
demurrer, and requiring the former to amend
their complaint within a period, so as to
include all the members of "Turnuhan
Polistico & Co.," either as plaintiffs or as a
defendants. This court held then that in an
action against the officers of a voluntary
association to wind up its affairs and enforce
an accounting for money and property in
their possessions, it is not necessary that all
members of the association be made parties
to the action. (Borlasa vs. Polistico, 47 Phil.,
345.) The case having been remanded to the
court of origin, both parties amend,
respectively, their complaint and their
answer, and by agreement of the parties, the
court appointed Amadeo R. Quintos, of the
Insular Auditor's Office, commissioner to
examine all the books, documents, and
accounts of "Turnuhan Polistico & Co.," and to
receive whatever evidence the parties might
desire to present.
The commissioner rendered his report, which
is attached to the record, with the following
resume:
Income:

Expenses:
Premiums to members

68,146.25

Loans on real-estate

9,827.00

Loans on promissory
notes

4,258.55

Salaries

1,095.00

Miscellaneous
1,686.10

85,012.90
Cash on hand
24,607.80

The
defendants
objected
to
the
commissioner's report, but the trial court,
having examined the reasons for the
objection, found the same sufficiently
explained in the report and the evidence, and
accepting it, rendered judgment, holding that
the association "Turnuhan Polistico & Co." is
unlawful, and sentencing the defendants
jointly and severally to return the amount of
P24,607.80, as well as the documents
showing the uncollected credits of the
association, to the plaintiffs in this case, and
to the rest of the members of the said
association represented by said plaintiffs,
with costs against the defendants.
The defendants assigned several errors as
grounds for their appeal, but we believe they
can all be reduced to two points, to wit: (1)
That not all persons having an interest in this
association are included as plaintiffs or

defendants; (2) that the objection to the

commissioner's report should have been
admitted by the court below.

A partnership must have a lawful object, and

must be established for the common benefit
of the partners.

As to the first point, the decision on the case

of Borlasa vs. Polistico, supra, must be
followed.

When the dissolution of an

partnership is decreed, the profits
given to charitable institutions of the
of the partnership, or, in default of
those of the province.

With regard to the second point, despite the

praiseworthy efforts of the attorney of the
defendants, we are of opinion that, the trial
court having examined all the evidence
touching the grounds for the objection and
having found that they had been explained
away in the commissioner's report, the
conclusion reached by the court below,
accepting and adopting the findings of fact
contained in said report, and especially those
referring
to
the
disposition
of
the
association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan
Siuco (5 Phil., 516), it was held that the
findings of facts made by a referee appointed
under the provisions of section 135 of the
Code of Civil Procedure stand upon the same
basis, when approved by the Court, as
findings made by the judge himself. And in
Kriedt vs. E. C. McCullogh & Co.(37 Phil.,
474), the court held: "Under section 140 of
the Code of Civil Procedure it is made the
duty of the court to render judgment in
accordance with the report of the referee
unless the court shall unless for cause shown
set aside the report or recommit it to the
referee. This provision places upon the
litigant parties of the duty of discovering and
exhibiting to the court any error that may be
contained therein." The appellants stated the
grounds for their objection. The trial
examined
the
evidence
and
the
commissioner's report, and accepted the
findings of fact made in the report. We find
no convincing arguments on the appellant's
brief to justify a reversal of the trial court's
conclusion admitting the commissioner's
findings.
There is no question that "Turnuhan Polistico
& Co." is an unlawful partnership (U.S. vs.
Baguio, 39 Phil., 962), but the appellants
allege that because it is so, some charitable
institution to whom the partnership funds
may be ordered to be turned over, should be
included, as a party defendant. The
appellants refer to article 1666 of the Civil
Code, which provides:

unlawful
shall be
domicile
such, to

Appellant's contention on this point is

untenable. According to said article, no
charitable institution is a necessary party in
the present case of determination of the
rights of the parties. The action which may
arise from said article, in the case of unlawful
partnership, is that for the recovery of the
amounts paid by the member from those in
charge of the administration of said
partnership, and it is not necessary for the
said parties to base their action to the
existence of the partnership, but on the fact
that of having contributed some money to
the partnership capital. And hence, the
charitable institution of the domicile of the
partnership, and in the default thereof, those
of the province are not necessary parties in
this case. The article cited above permits no
action for the purpose of obtaining the
earnings made by the unlawful partnership,
during its existence as result of the business
in which it was engaged, because for the
purpose, as Manresa remarks, the partner
will have to base his action upon the
partnership contract, which is to annul and
without legal existence by reason of its
unlawful object; and it is self evident that
what does not exist cannot be a cause of
action. Hence, paragraph 2 of the same
article provides that when the dissolution of
the unlawful partnership is decreed, the
profits cannot inure to the benefit of the
partners, but must be given to some
charitable institution.
We deem in pertinent to quote Manresa's
commentaries on article 1666 at length, as a
clear explanation of the scope and spirit of
the provision of the Civil Code which we are
concerned. Commenting on said article
Manresa, among other things says:
When the subscriptions of the members have
been paid to the management of the
partnership, and employed by the latter in
transactions consistent with the purposes of
the partnership may the former demand the

return of the reimbursement thereof from the

manager or administrator withholding them?
Apropos of this, it is asserted: If the
partnership has no valid existence, if it is
considered
juridically
non-existent,
the
contract entered into can have no legal
effect; and in that case, how can it give rise
to an action in favor of the partners to
judicially demand from the manager or the
administrator of the partnership capital, each
one's contribution?
The authors discuss this point at great
length, but Ricci decides the matter quite
clearly, dispelling all doubts thereon. He
holds that the partner who limits himself to
demanding only the amount contributed by
him need not resort to the partnership
contract on which to base his action. And he
adds in explanation that the partner makes
his contribution, which passes to the
managing partner for the purpose of carrying
on the business or industry which is the
object of the partnership; or in other words,
to breathe the breath of life into a
partnership contract with an objection
forbidden by law. And as said contrast does
not exist in the eyes of the law, the purpose
from which the contribution was made has
not
come
into
existence,
and
the
administrator of the partnership holding said
contribution retains what belongs to others,
without any consideration; for which reason
he is not bound to return it and he who has
paid in his share is entitled to recover it.
But this is not the case with regard to profits
earned in the course of the partnership,
because they do not constitute or represent
the partner's contribution but are the result
of the industry, business or speculation which
is the object of the partnership, and therefor,
in order to demand the proportional part of
the said profits, the partner would have to
base his action on the contract which is null
and void, since this partition or distribution of
the profits is one of the juridical effects
thereof. Wherefore considering this contract
as non-existent, by reason of its illicit object,
it cannot give rise to the necessary action,
which must be the basis of the judicial
complaint. Furthermore, it would be immoral
and unjust for the law to permit a profit from
an industry prohibited by it.
Hence the distinction made in the second

paragraph of this article of this Code,

providing that the profits obtained by
unlawful means shall not enrich the partners,
but shall upon the dissolution of the
partnership, be given to the charitable
institutions of the domicile of the partnership,
or, in default of such, to those of the
province.
This is a new rule, unprecedented by our law,
introduced to supply an obvious deficiency of
the former law, which did not describe the
purpose to which those profits denied the
partners were to be applied, nor state what
to be done with them.
The profits are so applied, and not the
contributions, because this would be an
excessive and unjust sanction for, as we have
seen, there is no reason, in such a case, for
depriving the partner of the portion of the
capital
that
he
contributed,
the
circumstances of the two cases being entirely
different.
Our Code does not state whether, upon the
dissolution of the unlawful partnership, the
amounts contributed are to be returned by
the partners, because it only deals with the
disposition of the profits; but the fact that
said contributions are not included in the
disposal prescribed profits, shows that in
consequences of said exclusion, the general
law must be followed, and hence the partners
should reimburse the amount of their
respective contributions. Any other solution is
immoral, and the law will not consent to the
latter remaining in the possession of the
manager or administrator who has refused to
return them, by denying to the partners the
action
to
demand
them.
(Manresa,
Commentaries on the Spanish Civil Code, vol.
XI, pp. 262-264)
The judgment appealed from, being in
accordance with law, should be, as it is
hereby, affirmed with costs against the
appellants;
provided,
however,
the
defendants shall pay the legal interest on the
sum of P24,607.80 from the date of the
decision of the court, and provided, further,
that the defendants shall deposit this sum of
money and other documents evidencing
uncollected credits in the office of the clerk of
the trial court, in order that said court may
distribute them among the members of said

association, upon being duly identified in the

manner that it may deem proper. So ordered.

Franciso Muoz & Sons, and against Francisco

Muoz de Bustillo, Emilio Muoz de Bustillo, and
Rafael Naval to recover the sum of P26,828.30,
with interest and costs. Judgment was rendered in
the court below acquitting Emilio Muoz de
Bustillo and Rafael Naval of the complaint, and in
favor of the plaintiff and against the defendant
partnership, Francisco Muoz & Sons, and
Francisco Muoz de Bustillo form the sum of
P26,828.30 with interest at the rate of 8 per cent
per annum from the 31st day of March, 1905, and
costs. From this judgment the plaintiff appealed.
On the 31st day of March, 1905, the defendants
Francisco Muoz, Emilio Muoz, and Rafael Naval
formed
on
ordinary
general
mercantile
partnership under the name of Francisco Muoz &
Sons for the purpose of carrying on the mercantile
business in the Province of Albay which had
formerly been carried on by Francisco Muoz.
Francisco Muoz was a capitalist partner and
Emilio Muoz and Rafael Naval were industrial
partners.
It is said in the decision of the court below that in
the articles of partnership it was called an
ordinary, general mercantile partnership, but that
from the article it does not appear to be such a
partnership. In the brief of the appellees it is also
claimed that it is not an ordinary, general
commercial partnership. We see nothing in the
case to support either the statement of the court
below in its decision or the claim of the appellees
in their brief. In the articles of partnership signed
by the partners it is expressly stated that they
have agreed to form, and do form, an ordinary,
general mercantile partnership. The object of the
partnership, as stated in the fourth paragraph of
the articles, is a purely mercantile one and all the
requirements of the Code of Commerce in
reference to such partnership were complied with.
The articles of partnership were recorded in the
mercantile registry in the Province of Albay. If it
should be held that the contract made in this case
did not create an ordinary, general mercantile
partnership we do not see how one could be
created.

G.R. No. L-3704 December 12, 1907

LA COMPAIA MARITIMA, plaintiff-appellant,
vs.FRANCISCO MUOZ, ET AL., defendantsappellees.
Rosado, Sanz and Opisso, for appellant.
Haussermann, Cohn and Williams, for appellees.
WILLARD, J.:
The plaintiff brought this action in the Court of
First Instance of Manila against the partnership of

The claim of the appellees that Emilio Muoz

contributed nothing to the partnership, either in
property, money, or industry, can not be
sustained. He contributed as much as did the
other industrial partner, Rafael Naval, the
difference between the two being that Rafael
Naval was entitled by the articles of agreement to
a fixed salary of P2,500 as long as he was in
charge of the branch office established at Ligao. If
he had left that branch office soon after the
partnership was organized, he would have been in
the same condition then that Emilio Muoz was
from the beginning. Such a change would have
deprived him of the salary P2,500, but would not

have affected in any way the partnership nor

have produced the effect of relieving him from
liability as a partner. The argument of the
appellees seems to be that, because no yearly or
monthly salary was assigned to Emilio Muoz, he
contributed nothing to the partnership and
received nothing from it. By the articles
themselves he was to receive at the end of five
years one-eighth of the profits. It can not be said,
therefore, that he received nothing from the
partnership. The fact that the receipt of this
money was postponed for five years is not
important. If the contention of the appellees were
sound, it would result that, where the articles of
partnership provided for a distribution of profits at
the end of each year, but did not assign any
specific salary to an industrial partner during that
time, he would not be a member of the
partnership. Industrial partners, by signing the
articles, agree to contribute their work to the
partnership and article 138 of the Code of
Commerce prohibits them from engaging in other
work except by the express consent of the
partnership. With reference to civil partnerships,
section 1683 of the Civil Code relates to the same
manner.
It is also said in the brief of the appellees that
Emilio Muoz was entirely excluded from the
management of the business. It rather should be
said that he excluded himself from such
management, for he signed the articles of
partnership by the terms of which the
management was expressly conferred by him and
the others upon the persons therein named. That
partners in their articles can do this, admits of no
doubt. Article 125 of the Code of Commerce
requires them to state the partners to whom the
management is intrusted. This right is recognized
also in article 132. In the case of Reyes vs. The
Compania Maritima (3 Phil. Rep., 519) the articles
of association provided that the directors for the
first eight years should be certain persons named
therein. This court not only held that such
provision was valid but also held that those
directors could not be removed from office during
the eight years, even by a majority vote of all the
stockholders of the company.
Emilio Muoz was, therefore, a general partner,
and the important question in the case is
whether, as such general partner, he is liable to
third persons for the obligations contracted by the
partnership, or whether he relieved from such
liability, either because he is an industrial partner
or because he was so relieved by the express
terms of the articles of partnership.
Paragraph 12 of the articles of partnership is as
follows:
Twelfth. All profits arising from mercantile
transactions carried on, as well as such as may be

obtained from the sale of property and other

assets which constitute the corporate capital,
shall be distributed, on completion of the term of
five years agreed to for the continuation of the
partnership, in the following manner: Threefourths thereof for the capitalist partner Francisco
Muoz de Bustillo and one-eighth thereof for the
industrial partner Emilio Muoz de Bustillo y
Carpiso, and the remaining one-eighth thereof for
the partner Rafael Naval y Garcia. If, in lieu of
profits, losses should result in the winding up of
the partnership, the same shall be for the sole
and exclusive account of the capitalist partner
Francisco Muoz de Bustillo, without either of the
two industrial partners participating in such
losses.
Articles 140 and 141 of the Code of Commerce
are as follows:
ART. 140. Should there not have been stated in
the articles of copartnership the portion of the
profits to be received by each partner, said profits
shall be divided pro rata, in accordance with the
interest each one has on the copartnership,
partners who have not contributed any capital,
but giving their services, receiving in the
distribution the same amount as the partner who
contributed the smallest capital.
ART. 141. Losses shall be charged in the same
proportion among the partners who have
contributed capital, without including those who
have not, unless by special agreement the latter
have been constituted as participants therein.
A comparison of these articles with the twelfth
paragraph above quoted will show that the latter
is simply a statement of the rule laid down in the
former. The article do not, therefore, change the
rights of the industrial partners as they are
declared by the code, and the question may be
reduced to the very simple one namely, Is an
industrial partner in an ordinary, general
mercantile partnership liable to third persons for
the debts and obligations contracted by the
partnership?
In limited partnership the Code of Commerce
recognizes a difference between general and
special partners, but in a general partnership
there is no such distinction-- all the members are
general partners. The fact that some may be
industrial and some capitalist partners does not
make the members of either of these classes
alone such general partners. There is nothing in
the code which says that the industrial partners
shall be the only general partners, nor is there
anything which says that the capitalist partners
shall be the only general partners.
Article 127 of the Code of Commerce is as follows:
All the members of the general copartnership, be

they or be they not managing partners of the

same, are liable personally and in solidum with all
their property for the results of the transactions
made in the name and for the account of the
partnership, under the signature of the latter, and
by a person authorized to make use thereof.
Do the words "all the partners" found in this
article include industrial partners? The same
expression is found in other articles of the code.
In article 129 it is said that, if the management of
the partnership has not been limited by special
act to one of the partners, all shall have the right
to participate in the management. Does this mean
that the capitalist partners are the only ones who
have that right, or does it include also industrial
partners? Article 132 provides that, when in the
articles of partnership the management has been
intrusted to a particular person, he can not be
deprived of such management, but that in certain
cases the remaining partners may appoint a
comanager. Does the phrase "remaining partners"
include industrial partners, or is it limited to
capitalist partners, and do industrial partners
have no right to participate in the selection of the
comanager? Article 133 provides that all the
partners shall have the right to examine the
books of the partnership. Under this article are
the capitalist partners the only ones who have
such right? Article 135 provides that the partners
can not use the firm name in their private
business. Does this limitation apply only to
capitalist partners or does it extend also to
industrial partners? Article 222 provides that a
general partnership shall be dissolve by the death
of one of the general partners unless it is
otherwise provided in the articles. Would such a
partnership continue if all the industrial partners
should die? Article 229 provides that upon a
dissolution of a general partnership it shall be
liquidated by the former managers, but, if all the
partners do not agree to this, a general meeting
shall be called, which shall determine to whom
the settlement of the affairs shall be intrusted.
Does this phrase "all the partners" include
industrial partners, or are the capitalist partners
the only ones who have a voice in the selection of
a manager during a period of liquidation? Article
237 provides that the private property of the
general partners shall not be taken in payment of
the obligations of the partnership until its
property has been exhausted. Does the phrase
"the general partners" include industrial partners?
In all of these articles the industrial partners must
be included. It can not have been intended that,
in such a partnership as the one in question,
where there were two industrial and only one
capitalist partner, the industrial partners should
have no voice in the management of the business
when the articles of partnership were silent on
that subject; that when the manager appointed

mismanages the business the industrial partners

should have no right to appoint a comanager; that
they should have no right to examine the books;
that they might use the firm name in their private
business; or that they have no voice in the
liquidation of the business after dissolution. To
give a person who contributed no more than, say,
P500, these rights and to take them away from a
person who contributed his services, worth,
perhaps, infinitely more than P500, would be
discriminate unfairly against industrial partners.
If the phrase "all the partners" as found in the
articles other than article 127 includes industrial
partners, then article 127 must include them and
they are liable by the terms thereof for the debts
of the firm.
But it is said that article 141 expressly declares to
the contrary. It is to be noticed in the first place
that this article does not say that they shall not be
liable for losses. Article 140 declares how the
profits shall be divided among the partners. This
article simply declares how the losses shall be
divided among the partners. The use of the words
se imputaran is significant. The verb means
abonar una partida a alguno en su cuenta o
deducirla de su debito. Article 141 says nothing
about third persons and nothing about the
obligations of the partnership.
While in this section the word "losses" stand's
alone, yet in other articles of the code, where it is
clearly intended to impose the liability to third
persons, it is not considered sufficient, but the
word "obligations" is added. Thus article 148, in
speaking of the liability of limited partners, uses
the phrase las obligaciones y perdidas. There is
the same use of the two same words in article
153, relating to anonymous partnership. In article
237 the word "obligations" is used and not the
word "losses."
The claim of the appellees is that this article 141
fixes the liability of the industrial partners to third
persons for the obligations of the company. If it
does, then it also fixes the liability of the capitalist
partners to the same persons for the same
obligations. If this article says that industrial
partners are not liable for the debts of the
concern, it also says that the capitalist partners
shall be only liable for such debts in proportion to
the amount of the money which they have
contributed to the partnership; that is to say, that
if there are only two capitalist partners, one of
whom has contributed two-thirds of the capital
and the other one-third, the latter is liable to a
creditor of the company for only one-third of the
debt and the former for only two-thirds. It is
apparent that, when given this construction,
article 141 is directly in conflict with article 127. It
is not disputed by the appellees that by the terms
of article 127 each one of the capitalist partners is

liable for all of the debts, regardless of the

amount of his contribution, but the construction
which they put upon article 141 makes such
capitalist partners liable for only a proportionate
part of the debts.
There is no injustice in imposing this liability upon
the industrial partners. They have a voice in the
management of the business, if no manager has
been named in the articles; they share in the
profits and as to third persons it is no more than
right that they should share in the obligations. It
is admitted that if in this case there had been a
capitalist partner who had contributed only P100
he would be liable for this entire debt of P26,000.
Our construction of the article is that it relates
exclusively to the settlement of the partnership
affairs among the partners themselves and has
nothing to do with the liability of the partners to
third persons; that each one of the industrial
partners is liable to third persons for the debts of
the firm; that if he has paid such debts out of his
private property during the life of the partnership,
when its affairs are settled he is entitled to credit
for the amount so paid, and if it results that there
is not enough property in the partnership to pay
him, then the capitalist partners must pay him. In
this particular case that view is strengthened by
the provisions of article 12, above quoted. There it
is stated that if, when the affairs of the
partnership are liquidated that is, at the end of
five years it turns out that there had been
losses instead of gains, then the capitalist
partner, Francisco Muoz, shall pay such losses
that is, pay them to the industrial partners if they
have been compelled to disburse their own
money in payment of the debts of the
partnership.
While this is a commercial partnership and must
be governed therefore by the rules of the Code of
Commerce, yet an examination of the provisions
of the Civil Code in reference to partnerships may
throw some light upon the question here to be
resolved. Articles 1689 and 1691 contain, in
substance, the provisions of articles 140 and 141
of the Code of Commerce. It is to be noticed that
these articles are found in section 1 of Chapter II
[Title VIII] of Book IV. That section treats of the
obligations of the partners between themselves.
The liability of the partners as to third persons is
treated in a distinct section, namely, section 2,
comprising articles from 1697 to 1699.
If industrial partners in commercial partnerships
are not responsible to third persons for the debts
of the firm, then industrial partners in civil
partnerships are not. Waiving the question as to
whether there can be a commercial partnership
composed entirely of industrial partners, it seems
clear that there can be such civil partnership, for
article 1678 of the Civil Code provides as follows:

A particular partnership has for its object specified

things only, their use of profits, or a specified
undertaking, or the exercise of a profession or art.
It might very easily happen, therefor, that a civil
partnership could be composed entirely of
industrial partners. If it were, according to the
claim of the appellees, there would be no personal
responsibility whatever for the debts of the
partnership. Creditors could rely only upon the
property which the partnership had, which in the
case of a partnership organized for the practice of
any art or profession would be practically nothing.
In the case of Agustin vs. Inocencio, 1 just
decided by this court, it was alleged in the
complaint, and admitted by the answer
That is partnership has been formed without
articles of association or capital other than the
personal work of each one of the partners, whose
profits are to be equally divided among
themselves.
Article 1675 of the Civil Code is as follows:
General partnership of profits include all that the
partners may acquire by their by their industry or
work during the continuation of the partnership.
Personal or real property which each of the
partners may possess at the time of the
celebration of the agreement shall continue to be
their private property, the usufruct only passing
to the partnership.
It might very well happen in partnership of this
kind that no one of the partners would have any
private property and that if they did the usufruct
thereof would be inconsiderable.
Having in mind these different cases which may
arise in the practice, that construction of the law
should be avoided which would enable two
persons, each with a large amount of private
property, to form and carry on a partnership and,
upon the bankruptcy of the latter, to say to its
creditors that they contributed no capital to the
company but only their services, and that their
private property is not, therefore, liable for its
debts.
But little light is thrown upon this question by the
authorities. No judgment of the supreme court of
Spain has been called to our attention, and we
have been able to find none which refers in any
way to this question. There is, therefore, no
authority from the tribunal for saying that an
industrial partner is not liable to third persons for
the debts of the partnership.
In a work published by Lorenzo Benito in 1889
(Lecciones de derecho mercantil) it is said that
industrial partners are not liable for debts. The
author, at page 127, divides general partnership
into ordinary and irregular. The irregular

partnership are those which include one or more

industrial partners. It may be said in passing that
his views can not apply to this case because the
articles of partnership directly state that it is an
ordinary partnership and do not state that it is an
irregular one. But his view of the law seems to be
derived from something other than the Code of
Commerce now in force. He says:
. . . but it has not been very fortunate in sketching
the characters of a regular collective partnership
(since it says nothing conclusive in reference to
the irregular partnership) . . . . (p. 127.)
And again:
This article would not need to be commented
upon were it not because the writer entirely
overlooked the fact that there might exist
industrial partners who did not contribute with
capital in money, credits, or goods, which
partners generally participate in the profits but
not in the losses, and whose position must also be
determined in the articles of copartnership. (p.
128.)
And again: lawphil.net
The only defect that can be pointed out in this
article is the fact that it has been forgotten that in
collective partnerships there are industrial
partners who, not being jointly liable for the
obligations of the copartnership, should not
include their names in that of the firm. (p. 129.)
As a logical result of his theory he says that an
industrial partner has no right to participate in the
administration of the partnership and that his
name can not appear in the firm name. In this last
respect his view is opposed to that of Manresa,
who says (Commentaries on the Spanish Civil
Code, vol. 11, p. 330):
It only remains to us to state that a partner who
contributes his industry to the concern can also
confer upon it the name or the corporate name
under which such industry should be carried on. In
this case, so long as the copartnership lasts, it
can enjoy the credit, reputation, and name or
corporate name under which such industry is
carried on; but upon dissolution thereof the
aforesaid name or corporate name pertains to the
partner who contributed the same, and he alone
is entitled to use it, because such a name or style
is an accessory to the work of industrial partner,
and upon recovering his work or his industry he
also recovers his name or the style under which
he exercised his activity. It has thus been decided
by the French court of cassation in a decision
dated June 6, 1859.
In speaking of limited partnerships Benito says (p.
144) that here are found two kinds of partners,
one with unlimited responsibility and the other
with limited responsibility, but adopting his view

as to industrial partners, it should be said that

there are three kinds of partners, one with
unlimited responsibility, another with limited
responsibility, and the third, the industrial partner,
with no responsibility at all. In Estasen's recent
publication on mercantile partnerships (Tratado
de las Sociedades Mercantiles) he quotes from the
work of Benito, but we do not understand that he
commits himself to the doctrines therein laid
down. In fact, in his former treatise, Instituciones
de Derecho Mercantil (vol. 3, pp. 1-99), we find
nothing which recognizes the existence of these
irregular general partnerships, or the exemption
from the liability to third persons of the industrial
partners. He says in his latter work (p. 186) that
according to Dr. Benito the irregular general
partner originated from the desire of the
partnership to associate with itself some old clerk
or employee as a reward for his services and the
interest which he had shown in the affairs of the
partnership, giving him in place of a fixed salary a
proportionate part of the profits of the business.
Article 269 of the Code of Commerce of 1829
relates to this subject and apparently provides
that such partners shall not be liable for debts. If
this article was the basis for Dr. Benito's view, it
can be so no longer, for it does not appear in the
present code. We held in the case of Fortis vs.
Gutirrez Hermanos (6 Phil. Rep., 100) that a mere
agreement of that kind does not make the
employee a partner.
An examination of the works of Manresa and
Sanchez Roman on the Civil Code, and of Blanco's
Mercantile Law, will shows that no one of these
mentions in any way the irregular general
partnership spoken of by Dr. Benito, nor is there
anything found in any one of these commentaries
which in any way indicates that an industrial
partner is not liable to third persons for the debts
of the partnership. An examination of the French
law will also show that no distinction of that kind
is therein anywhere made and nothing can be
found therein which indicates that the industrial
partners are not liable for the debts of the
partnership. (Fuzier-Herman, Repertoire de Droit
Francais, vol. 34, pp. 256, 361, 510, and 512.)
Our conclusion is upon this branch of the case
that neither on principle nor on authority can the
industrial partner be relieved from liability to third
persons for the debts of the partnership.
It is apparently claimed by the appellee in his
brief that one action can not be maintained
against the partnership and the individual
partners, this claim being based upon the
provisions of article 237 of the Code of Commerce
which provides that the private property of the
partners shall not be taken until the partnership
property has been exhausted. But this article
furnishes to argument in support of the appellee's

claim. An action can be maintained against the

partnership and partners, but the judgment
should recognize the rights of the individual
partners which are secured by said article
237.lawphil.net
The judgment of the court below is reversed and
judgment is ordered against all of the defendants
for the sum of P26,828.30, with interest thereon
at the rate of 8 per cent per annum since the 31st
day of March, 1905, and for the cost of this action.
Execution of such judgment shall not issue
against the private property of the defendants
Francisco Muoz, Emilio Muoz, or Rafael Naval
until the property of the defendant Francisco
Muoz & Sons is exhausted. No costs will be
allowed to their party in this court. So ordered.
Torres, Johnson and Tracey, JJ., concur.

Separate Opinions
ARELLANO, C. J., dissenting:
I consider that the judgment appealed from is
entirely in accordance with the law.lawphil.net
The question set up in the majority decision, "In a
regular collective commercial company, is an
industrial partner liable as to third persons by
reason of the debts and obligations contracted by
the copartnership?" I decide in a negative sense;
he is not; by express provision of the law he can
not be held to be liable, save, of course, and
agreement to the contrary, which in such case
would be a special law, and would set aside the
general law.
The basis for the contrary opinion and decision is
article 127 of the Code of Commerce:
All the members of the general copartnership, be
they or be they not managing partners of the
same, are personally and in solidum liable with all
their property for the results of the transactions
made in the name and for the account of the
partnership, under the signature of the latter, and
by a person authorized to ake use thereof.
Now, do the words "all the members" found in this
article include the industrial partners?
At first it would appear that they do. In order to
complete such reasoning the following premise
will be sufficient: That the industrial partners from
the collective partnership; therefore the industrial
partners are personally and jointly liable with all
their property for the results of the transactions
made in the name and for account of the
partnership.
But they form the collective partnership in the

manner in which our laws allows the same to be

formed that is, by contributing with their
industry, not with property.
And the word all, in reference to property, which
is common with the three classes of partnership
defined by the code, to wit, collective, limited
copartnership (comanditaria), and corporation
(anonima), gives the rule for such personal and
joint liability, which is the purpose of the provision
in the above-quoted article.
The above three classes of partnership agree in
that property must in each of them be
contributed. "The articles of general copartnership
must state . . . the capital which each partner
contributes in cash, credits, or property, stating
the value given the latter or the basis on which
their appraisal is to be made." (Art. 125.) "The
same statements shall be included in articles of
limited copartnerships (compaias en comandita)
which are required for those of general
copartnerships" that is, among other things,
the capital which each partner contributes. (Art.
145.)
"The
articles
of
incorporation
(of
corporations) must include . . . the corporate
capital, stating the value at which property, not
cash, contributed has been appraised, or the
basis on which the appraisal is to be made; and
the number of shares into which the corporate
capital is divided and represented." (Art. 151.)
Now, then, "The liability of the members of a
corporation for the obligations and losses of the
same shall be limited to the funds they
contributed or bound themselves to contribute to
the corporate capital." (Art. 153.) "The liability of
special partners for the obligations and losses of
the copartnership shall be limited to the funds
which they contributed or bound themselves to
contribute to the limited copartnership, with the
exception of the sense mentioned in article 147"
that is, if any of them include his name or
permit its conclusion in the firm name. (Art. 148,
par. 3.) However, in a collective partnership the
liability is not limited to the funds or property
contributed, but extends to all the property which
partners may own within or without the
copartnership.
In every mercantile copartnership it is the
corporate capital that responds for the obligations
of the same; this is elemental. The members of a
joint stock, a limited, or a collective company
respond with their capital for the obligations of
the association; in the joint stock concerns, with
their shares; in the limited class, with the amount
contributed; in the collective, with their
constituted capital. An industrial partner, with
what principal sum, share, or quota in the
corporate capital does he or can he respond for
the obligations of the collective partnership?
Evidently with none whatever.

If the capital of the association is exhausted, the

extreme case of losses incurred by the company
arises, and third persons can not recover the
amount of the obligations of the company from
the corporate capital, because the latter is
sufficient to recover them. Shareholders in the
case of a joint stock company, beyond the value
of their stock, have no longer to think of any
ulterior subsidiary responsibility. Neither do the
partners of a limited company. In either case the
partners are only liable to the extent of their
corporate capital. Collective partners have to
respond not only with their corporate capital but
also with the whole of their property outside of
the association. And it is desired that the
industrial
partner
who,
in
a
collective
copartnership, did not primarily respond with his
corporate capital, because he had none, shall
subsidiary respond with such property as he may
have outside of the company, and with which
nobody,
either
within
or
without
the
copartnership, had counted upon, since both
inside and outside of the company his industry or
work only had been reckoned with. Therefore, the
word all, of article 127 cited above, simply
denoted the extent of the ulterior or subsidiary
responsibility, and that which does not appear,
which does not materially exist, can hardly be
made to apply.
An industrial partner can not engage in
transactions of any class whatever, otherwise he
would be subject to serious consequences (art.
138), while a capitalist partner, as a rule, may so
engage without extending profits or liabilities to
the company (arts. 134 and 136); an industrial
partner, as regards profits, can only receive in the
distribution the same amount as the partner who
contributed the smallest amount of capital (art.
140); in the case at bar, one-eighth goes to each
of the two industrial partners, three-fourths being
for the capitalist, and even at the expiration of the
copartnership they run the risk of having the oneeighth of the profits earned in former years
absorbed by a total loss incurred during the last
year of the contract of copartnership; and it is
claimed that such industrial partner, so much
delayed with regard to profits, who has not the
same rights, shall be under the same obligations
as regards obligations because he is a collective
partner? This seems neither just nor logical.
And it is not so. Article 141 reads:lawphil.net
"Losses shall be charged in the same proportion
among the partners who have contributed capital,
without including" the industrial partners (since
they have not the same rights), and they should
not be included therein nor in the corporation of
the partner who contributed the smallest capital,
simply for the reason that the industrial partner
has nothing to lose, he not having contributed
anything which the company may lose when the

losses of the copartnership are considered, either

among the partners thereof or with regard to third
persons.
There need be no distinction made between
obligations and losses. During the existence of a
company the gains or the losses are set off the
one against the other, and the difference is either
in favor of or against the concern. As to the
industrial partner, in connection with the question
submitted, it is not a matter of striking a balance
from time to time, but one of the final adjustment
of assets and liabilities, because the matter under
discussion refers only to his private property,
which has nothing to do with the company nor
with losses in liquidating the same. Article 127 is
affected by article 237: "The private property of
the general partners which is not included in the
assets of the copartnership when it is established
can not be seized for the payment of the
obligations contracted by the copartnership until
after the common assets have been attached."
And such condition is stated in the majority
decision. As long as there is property belonging to
the company, obligations in favor of third persons
are covered by the primary and direct
responsibility of the company; the question arises
when the assets of the company are exhausted
and it becomes necessary to appeal to the ulterior
or subsidiary liability of the private property of the
partners; in this case such obligations constitute
the extreme losses in the liquidation of the
company.
The case at bar could only thus be set forth:
Should an industrial partner be responsible for
such losses, for such obligations in favor of third
persons? Article 141 expressly states that he shall
not. In order to state the contrary it would be
necessary to appeal to discriminations in the
wording of said article; and this is neither
permitted where the law does not make them nor
would they lead to anything after all. In the
aforesaid article 237 the corroboration of the word
all of article 127 may be found: "The private
property of the general partners which is not
included in the assets of the copartnership,"
differing from such as were included, can not
seized for the payment of obligations contracted
by the copartnership, until after the common
assets have been attached; after such attachment
all the assets, according to article 127, such as
were included, and those that were not included,
in this order, shall be subject to the results of the
transactions of the copartnership. An industrial
partner has not contributed any property
whatever; he therefore offers no subject for the
principal and direct seizure when the assets of the
copartnership are attached. How is it possible to
conceive any ulterior, subsidiary, indirect
responsibility over the property which it was not
even thought to be included, since he only

contributed to the company his industry and

work, not property of any class whatever? It
seems very anomalous that one who has not
obligated himself in the least should be
responsible or the greater part, that he who is not
comprehended within the explicit terms should be
included by implication, and that he who pledge
nothing should be held to respond with his
property.
As to the nature of the defendant company in this
action, I take it to be:lawphil.net
1. That the defendant company is really a
collective one such as is described in the Code of
Commerce; the firm of "F. Muoz & Sons" and the
terms of the articles of association prove it so
beyond all doubt.
2. That it is a regular collective company; the
word regular means, as employed in the Code of
Commerce, that the collective company is the
rule, the standard in all commercial associations,
the one combining all the effects which are
consequent upon this form of convention; and the
limited and the joint-stock companies are the
exception.
3. That it is not irrelevant in view of the manner in
which the present Code of Commerce, like the
former one of 1829, has defined the collective
company, that such a distinguished professor of
law as Doctor Lorenzo de Benito should have
established in his "Lessons on Mercantile Law" a
difference
between
the
regular
collective
associations and irregular collective companies;
"regular are those wherein, as article 122 reads,
all the members in a collective name and under a
firm name bind themselves to participate in the
proportion which they may establish with the
same rights and obligations." "And irregular,
those wherein one or more members who, though
not contributing toward the company with
anything but their industry, participate in the
profits in the manner agreed to in the articles of
association or as determined by law, and
ordinarily do not share in the losses which the
copartnership may sustain. Such members are
called industrial partners, and the collective
copartnership having a member of said class is
also sometimes called an association of capital
and industry.
This is what the law says (he continues), but it has
not been very fortunate in sketching the
characters of a regular collective partnership
(since in conclusion it says nothing in reference to
the irregular partnership), because precisely the
collective name and the corporate name are
applicable to both the collective and the limited
companies; and as to the covenant entered into
by the partners to participate in the proportion
which they may establish with the same rights

and obligations, this is inherent to all partnerships

without distinction as to class. What characterizes
this partnership is that all the members, "with the
exception of the industrial partners," are jointly
responsible and with all their property for the
corporate obligations.
4. That the code in force, by means of three
articles, 138, 140, and 141, among those which
regulate collective partnerships, has involved this
association of capital and industry; whence
irregularity necessarily arises; the irregularity of
such an irregular system is that in a collective
partnership wherein, besides the element
property, common or generic to the three
aforesaid classes, there appears this one, to wit,
industry, a special features only in collective
partnerships, according to the system of the code.
Had the system adopted by the codes of Portugal,
Brazil, and the Argentine Republic been followed,
a different classification would have been made of
the association of capital and industry which,
according to the last of the codes cited, is
properly characterized by means of the following
articles:
435. Habilitacion or association of capital and
industry is the name given to the partnership
formed on the one part by one or more persons
who furnish funds for a general business, or for
some particular commercial transaction, and on
the other part by one or more individuals who join
the copartnership with their industry alone.
438. The obligation of the partners who furnished
capital is in solidum, and extends beyond the
capital contributed by them to the concern.
439. The articles of association, besides the
requirements contained in article 395, must
specify the obligations of the industrial partner or
partners and the share in the profits to which they
are entitled in the apportionment.
In the absence of such declaration, the industrial
partner shall draw from the profits a share equal
to those of the partner who furnished the smallest
capital.
440. An industrial partner can not contract on
behalf of the partnership nor is he obligated with
his own property toward the creditors of the
company.
Nevertheless, if besides his industry he should
contribute some capital toward the company
either in money or thing of value, the association
shall then be considered as a collective one, and
the industrial partner, whatever might have been
stipulated, shall respond in solidum.
In my opinion it can not be denied that there is no
substantial difference between the three articles
of our code and those transcribed from that of the

Argentine Republic as regards the rights and

obligations of industrial partners in conjunction
with partners who furnish capital; there is no
difference except in the system, the code of the
Argentine Republic dealing with this class of
association of capital and industry separately
from the only three defined in our code, all of
them of capital only or essentially of partners who
furnish capital. Therefore, as said code has an
article almost literally identical with article 127 of
our code, this question can not possibly arise in
that country. That code contains article 454,
which reads: "All those who form a collective
commercial company, whether managing the
corporate funds or not, are obligated in solidum
(with all their property, as our code would state)
for the results of the transactions made in the
name and for account of the partnership," etc. To
the question, Do the words "all the partners"
found in said article include the industrial
partners? undoubtedly the answer would be no.
And it would not suffice to say that the above
article of the code of the Argentine Republic,
namely, "on collective copartnership," involves no
section which may refer to industrial partners,
and that, therefore, there can be no question as
to the words "all the members;" it is because, by
reason of the nature thereof, whether under one
system or another, the provisions and the
principles being identical, the conclusions can not
otherwise than identical. In a copartnership, and
as the result of the obligations thereunder, an
industrial partner can not lose except what he has
actually contributed thereto for a limited or an
unlimited purpose, subject ultimately to company
or personal obligations; this is all that law and
logic may demand of him; anything else would
not come under the law, but may be demanded of
him by reason of his express covenant, because
he has consented to something beyond the
character and the effects of the contract of
partnership of capital and industry entered into by
him, called collective; nothing else has been the
subject of his consent and obligation.
Manuel Duran y Bas, a former professor of the
University of Barcelona, in his addition to the work
of Marti de Eixala, which is so generally and
specially consulted in that eminently commercial
and industrial city, has offered no remarks to the
original text of said work which establish as an
elemental doctrine that "When the copartnership
is purely a collective one, each of its members is
jointly obligated for the result of the transactions
which
should
be
charged
to
the
copartnership . . . . From the general rule which
we have just set up the industrial partners who
contract no obligation to secure the liabilities of
the company should be excepted, unless there be
an express covenant to the contrary." (Art. 319 of
the code of 1829, identical with art. 141 of the

code now in force.)

During almost half a century no obligation has
been raised by the professors of law, the press, or
the bar, to this doctrine regarding the exemption,
not merely with respect to losses but to company
obligations of the industrial partner, on the
suppositions, which I do not admit, as already
shown, that it may be possible to discriminate
between losses and obligations in connection with
an industrial partner, for whom there are none but
the final losses, such as absorb the assets of the
company, which can not be otherwise than
outstanding obligations in favor of third parties
inasmuch as, so long as there are company
assets, no recourse can be held to the private
property of any partner.

G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffsappellants, vs.THE COLLECTOR OF

INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.Office of
the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover
from the defendant Collector of Internal
Revenue the sum of P1,863.44, with legal
interest thereon, which they paid under
protest by way of income tax. They appealed
from the decision rendered in the case on
October 23, 1936 by the Court of First
Instance of the City of Manila, which
dismissed the action with the costs against
them.

The case was submitted for decision upon the

following stipulation of facts:
Come now the parties to the abovementioned case, through their respective
undersigned attorneys, and hereby agree to
respectfully submit to this Honorable Court
the case upon the following statement of
facts:
1. That plaintiff are all residents of the
municipality of Pulilan, Bulacan, and that
defendant is the Collector of Internal
Revenue of the Philippines;
2. That prior to December 15, 1934 plaintiffs,
in order to enable them to purchase one
sweepstakes ticket valued at two pesos (P2),
subscribed and paid therefor the amounts as
follows:
1. Jose Gatchalian

P0.1
8

2. Gregoria Cristobal

.18

3. Saturnina Silva

.08

4. Guillermo Tapia

.13

5. Jesus Legaspi

.15

6. Jose Silva

.07

7. Tomasa Mercado

.08

8. Julio Gatchalian

.13

9. Emiliana Santiago

.13

10. Maria C. Legaspi

.16

11. Francisco Cabral

.13

12. Gonzalo Javier

.14

13. Maria Santiago

.17

14. Buenaventura Guzman

.13

15. Mariano Santos

.14
2.00

3. That immediately thereafter but prior to

December 15, 1934, plaintiffs purchased, in
the ordinary course of business, from one of
the duly authorized agents of the National
Charity Sweepstakes Office one ticket
bearing No. 178637 for the sum of two pesos
(P2) and that the said ticket was registered in
the name of Jose Gatchalian and Company;
4. That as a result of the drawing of the
sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637
won one of the third prizes in the amount of
P50,000 and that the corresponding check
covering the above-mentioned prize of
P50,000 was drawn by the National Charity
Sweepstakes Office in favor of Jose
Gatchalian & Company against the Philippine
National Bank, which check was cashed
during the latter part of December, 1934 by
Jose Gatchalian & Company;
5. That on December 29, 1934, Jose
Gatchalian was required by income tax
examiner
Alfredo
David
to
file
the
corresponding income tax return covering the
prize won by Jose Gatchalian & Company and
that on December 29, 1934, the said return
was signed by Jose Gatchalian, a copy of
which return is enclosed as Exhibit A and
made a part hereof;
6. That on January 8, 1935, the defendant
made an assessment against Jose Gatchalian
& Company requesting the payment of the
sum of P1,499.94 to the deputy provincial
treasurer of Pulilan, Bulacan, giving to said
Jose Gatchalian & Company until January 20,
1935 within which to pay the said amount of
P1,499.94, a copy of which letter marked
Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs,
through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is
attached and made a part hereof, requesting
exemption from payment of the income tax
to which reply there were enclosed fifteen
(15) separate individual income tax returns
filed separately by each one of the plaintiffs,
copies of which returns are attached and
marked Exhibit D-1 to D-15, respectively, in
order of their names listed in the caption of
this case and made parts hereof; a statement
of sale signed by Jose Gatchalian showing the

amount put up by each of the plaintiffs to

cover up the attached and marked as Exhibit
E and made a part hereof; and a copy of the
affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked
Exhibit F and made part thereof;
8. That the defendant in his letter dated
January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs'
request of January 20, 1935, for exemption
from the payment of tax and reiterated his
demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs
until February 10, 1935 within which to pay
the said tax;
9. That in view of the failure of the plaintiffs
to pay the amount of tax demanded by the
defendant,
notwithstanding
subsequent
demand made by defendant upon the
plaintiffs through their attorney on March 23,
1935, a copy of which marked Exhibit H is
enclosed, defendant on May 13, 1935 issued
a warrant of distraint and levy against the
property of the plaintiffs, a copy of which
warrant marked Exhibit I is enclosed and
made a part hereof;
10. That to avoid embarrassment arising
from the embargo of the property of the
plaintiffs, the said plaintiffs on June 15, 1935,
through Gregoria Cristobal, Maria C. Legaspi
and Jesus Legaspi, paid under protest the
sum of P601.51 as part of the tax and
penalties to the municipal treasurer of
Pulilan, Bulacan, as evidenced by official
receipt No. 7454879 which is attached and
marked Exhibit J and made a part hereof, and
requested defendant that plaintiffs be
allowed to pay under protest the balance of
the
tax
and
penalties
by
monthly
installments;
11. That plaintiff's request to pay the balance
of the tax and penalties was granted by
defendant subject to the condition that
plaintiffs file the usual bond secured by two
solvent persons to guarantee prompt
payment of each installments as it becomes
due;
12. That on July 16, 1935, plaintiff filed a
bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to
guarantee the payment of the balance of the
alleged tax liability by monthly installments
at the rate of P118.70 a month, the first

payment under protest to be effected on or

before July 31, 1935;
13. That on July 16, 1935 the said plaintiffs
formally protested against the payment of
the sum of P602.51, a copy of which protest
is attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935
overruled the protest and denied the request
for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs
to pay the monthly installments in
accordance with the terms and conditions of
bond filed by them, the defendant in his
letter dated July 23, 1935, copy of which is
attached and marked Exhibit M, ordered the
municipal treasurer of Pulilan, Bulacan to
execute within five days the warrant of
distraint and levy issued against the plaintiffs
on May 13, 1935;
15. That in order to avoid annoyance and
embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936,
through Jose Gatchalian, Guillermo Tapia,
Maria Santiago and Emiliano Santiago, paid
under protest to the municipal treasurer of
Pulilan, Bulacan the sum of P1,260.93
representing the unpaid balance of the
income tax and penalties demanded by
defendant as evidenced by income tax
receipt No. 35811 which is attached and
marked Exhibit N and made a part hereof;
and that on September 3, 1936, the plaintiffs
formally protested to the defendant against
the payment of said amount and requested
the refund thereof, copy of which is attached
and marked Exhibit O and made part hereof;
but that on September 4, 1936, the
defendant overruled the protest and denied
the refund thereof; copy of which is attached
and marked Exhibit P and made a part
hereof; and
16. That plaintiffs demanded upon defendant
the refund of the total sum of one thousand
eight hundred and sixty three pesos and
forty-four centavos (P1,863.44) paid under
protest by them but that defendant refused
and still refuses to refund the said amount
notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to
present other and additional evidence if
necessary.
Exhibit E referred to in the stipulation is of

the following tenor:

whatever prize that might be won by said

ticket.

To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan,
Bulacan, married, of age, hereby certify, that
on the 11th day of August, 1934, I sold parts
of my shares on ticket No. 178637 to the
persons and for the amount indicated below
and the part of may share remaining is also
shown to wit:
Purchaser

1. Mariano Santos
2. Buenaventura
Guzman

Amou
nt
P0.14

.13

Address
Pulilan,
Bulacan.
- Do -

Pulilan, Bulacan, P.I.

(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is
inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME
TAX RETURNS FOR 1934 ALL DATED JANUARY
19, 1935 SUBMITTED TO THE COLLECTOR OF
INTERNAL REVENUE.
Name

Exhi
bit

Purchas
e

No.

Price

Price
Won

Expens
es

Net
prize

1. Jose
Gatchalian

D-1

P0.18

P4,425

P 480

3,945

2. Gregoria
Cristobal

D-2

.18

4,575

2,000

2,575

3. Maria Santiago

.17

- Do -

4. Gonzalo Javier

.14

- Do -

3. Saturnina
Silva

D-3

.08

1,875

360

1,515

5. Francisco Cabral

.13

- Do -

4. Guillermo
Tapia

D-4

.13

3,325

360

2,965

6. Maria C. Legaspi

.16

- Do -

D-5

.15

3,825

720

3,105

7. Emiliana Santiago

.13

- Do -

5. Jesus
Legaspi by
Maria
Cristobal

8. Julio Gatchalian

.13

- Do -

6. Jose Silva

D-6

.08

1,875

360

1,515

9. Jose Silva

.07

- Do -

7. Tomasa
Mercado

D-7

.07

1,875

360

1,515

10. Tomasa Mercado

.08

- Do -

D-8

.13

3,150

240

2,910

11. Jesus Legaspi

.15

- Do -

8. Julio
Gatchalian
by Beatriz
Guzman

12. Guillermo Tapia

.13

- Do -

9. Emiliana
Santiago

D-9

.13

3,325

360

2,965

13. Saturnina Silva

.08

- Do -

10. Maria C.
Legaspi

D10

.16

4,100

960

3,140

14. Gregoria Cristobal

.18

- Do -

11.
Francisco
Cabral

D11

.13

3,325

360

2,965

12. Gonzalo
Javier

D12

.14

3,325

360

2,965

13. Maria
Santiago

D13

.17

4,350

360

3,990

15. Jose Gatchalian

.18

- Do -

Total cost
2.00 of said
ticket; and that, therefore, the persons
named above are entitled to the parts of

on which the normal tax has been paid.

14.
Buenaventur
a Guzman

D14

.13

3,325

360

2,965

15. Mariano
Santos

D15

.14

3,325

360

2,965

2.00

50,000

The legal questions raised in plaintiffsappellants' five assigned errors may properly
be reduced to the two following: (1) Whether
the plaintiffs formed a partnership, or merely
a community of property without a
personality of its own; in the first case it is
admitted that the partnership thus formed is
liable for the payment of income tax,
whereas if there was merely a community of
property, they are exempt from such
payment; and (2) whether they should pay
the tax collectively or whether the latter
should be prorated among them and paid
individually.
The Collector of Internal Revenue collected
the tax under section 10 of Act No. 2833, as
last amended by section 2 of Act No. 3761,
reading as follows:
SEC. 10. (a) There shall be levied, assessed,
collected, and paid annually upon the total
net income received in the preceding
calendar year from all sources by every
corporation,
joint-stock
company,
partnership, joint account (cuenta en
participacion), association or insurance
company, organized in the Philippine Islands,
no matter how created or organized, but not
including
duly
registered
general
copartnership (compaias colectivas), a tax
of three per centum upon such income; and a
like tax shall be levied, assessed, collected,
and paid annually upon the total net income
received in the preceding calendar year from
all sources within the Philippine Islands by
every corporation, joint-stock company,
partnership, joint account (cuenta en
participacion), association, or insurance
company organized, authorized, or existing
under the laws of any foreign country,
including interest on bonds, notes, or other
interest-bearing obligations of residents,
corporate or otherwise: Provided, however,
That nothing in this section shall be
construed as permitting the taxation of the
income derived from dividends or net profits

The gain derived or loss sustained from the

sale or other disposition by a corporation,
joint-stock
company,
partnership,
joint
account
(cuenta
en
participacion),
association, or insurance company, or
property, real, personal, or mixed, shall be
ascertained in accordance with subsections
(c) and (d) of section two of Act Numbered
Two thousand eight hundred and thirty-three,
as amended by Act Numbered Twenty-nine
hundred and twenty-six.
The foregoing tax rate shall apply to the net
income
received
by
every
taxable
corporation,
joint-stock
company,
partnership, joint account (cuenta en
participacion), association, or insurance
company in the calendar year nineteen
hundred and twenty and in each year
thereafter.
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.

In view of the foregoing, the appealed

decision is affirmed, with the costs of this
instance to the plaintiffs appellants. So
ordered.

Encarnacion Magalona, Juan Sermeno, and the

defendant, Juan Pesayco, formed a partnership for
the purpose of catching "semillas de bagus o aua"
in the sea and rivers within the jurisdiction of the
municipality of San Jose, Antique Province, for the
year 1931. It was agreed that the defendant should
put in a bid for this privilege and that the partners
should each supply one third of the capital in case
the defendant was awarded the desired privilege.
The defendant, having had experience in this line,
was to be the manager in case his bid was accepted.
The defendant offered the sum of P5,550.09 for the
year ending December 31, 1931. As a deposit of
one-fourth of the amount of the bid was required
each of the partners put up one third of this amount.
This bid, being the highest, was accepted by the
municipality and the privilege was awarded to the
defendant. The latter entered upon his duties under
the contract and gave an account of two sales of
"semillas de bagus", to Tiburcio Lutero as
representative of the plaintiff Magalona. As the
defendant, on April 21, 1931, had on hand only P410
he wired, Exhibit A, Lutero for sufficient money to
complete the payment of the first quarter which was
to be paid within the first twenty days of the second
quarter of the year 1931. This telegram reads as
follows: "Hemos conseguido plazo hasta esta tarde
tenemos
aqui
cuatrocientos
diez
gira
telegraficamente restante." Lutero immediately sent
P1,000 to the municipal treasurer of San Jose,
Antique (Exhibit D).
The defendant managed the business from January
1,1931, and with the exception of the two sales
above-mentioned, never gave any account of his
catches or sales to his partners, the plaintiffs. In
view of this the herein complaint was filed April 21,
1931, in which it was prayed that a receiver be
appointed by the court to take charge of the funds of
the partnership and the management of its affairs;
that the defendant be ordered to render an account
of his management and to pay to the plaintiff their
participation in the profits thereof; that the
defendant be required to turn over to the receiver all
of the funds of the partnership and that the
defendant be condemned to pay the costs.
The plaintiffs put up a bond of P5,000 and a receiver
was appointed who also put up a bond for the same
amount.
The receiver took over the management and took
possession of all the devices and implements used in
the catching of "semillas de bagus".

G.R. No. L-39607

February 6, 1934

ENCARNACION MAGALONA, ET AL., plaintiffsappellees, vs.JUAN PESAYCO, defendant-appellant.

Manuel Polido and Pedro V. Jimenez for appellant.
Lutero and Lutero and Ramon Maza for appellee.
GODDARD, J.:
In the month of September, 1930, the plaintiffs,

At the trial it was proven that before April 20, 1931,

the defendant obtained and sold a total of 975,000
"semillas de bagus" the market value of which was
P3 per thousand. The defendant made no report of
this nor did he pay the plaintiffs any part of the
P2,925 realized by him on the sales thereof. This was
not denied.
In his two counter-complaints the defendant prays
that he be awarded damages in the sum of P34,700.
He denies that there was a partnership and depends

principally upon the fact that

agreement was not in writing.

the

partnership

The partnership was conclusively proven by the oral

testimony of the plaintiffs and other witnesses, two
of whom were Attorneys Lutero and Maza. The
defense made no objection to the questions asked
with regard to the forming of this partnership. This
court has held that if a party permits a contract,
which the law provides shall be in writing, to be
proved, without objection as to the form of the proof,
it is just as binding as if the statute had been
complied with.
However, we cannot agree with the appellant that
one of the requisites of a partnership agreement
such as the one under consideration, is that it should
be in writing.
Article 1667 of the Civil Code provides that "Civil
partnerships may be established in any form
whatever, unless real property or real rights are
contributed to the same, in which case a public
instrument shall be necessary."
Articles of partnership are not required to be in
writing except in the cases mentioned in article
1667, Civil Code, which controls article 1280 of the
same Code. (Fernandez vs. Dela Rosa, 1 Phil., 671.)
A verbal partnership agreement is valid between the
parties even though more than 1,500 pesetas are
involved and can be enforced without bringing
action under article 1279, Civil Code, to compel
execution of a written instrument. (Arts. 1261, 12781280, 1667, Civil Code; arts. 116-119, 51, Code of
Commerce.) Thunga Chui vs. Que Bentec, 2 Phil.,
561. (4 Phil. Digest, 3468.)
The dispositive part of the decision of the trial court
reads as follows:
Habiendose probado, sin pruebas en contrario, de
que el demandado obtuvo durante su administracion
de este negocio, semillas de bagus por valor de
P2,925 que no dio cuenta ni participacion a sus
consocios los demandantes, el Juzgado declara al
demandado en deber a la sociedad, compuesta por
demandantes y demandado, en la suma de P2,925,
importe de 975,000 semillas de bagus a P3 el
millar, y ordena que entregue esta suma al
depositario judicial nombrado, como fondos de dicha
sociedad.
Se sobreseen las contrademandas y se condena en
costas al demandado. Asi se ordena.
This decision is affirmed with costs in both instances
against the defendant-appellant. So ordered.

G.R. No. L-4811

July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.FORTUNATO F. HALILI, defendant-appellant.

Taada, Pelaez & Teehankee for defendant and
appellant.Gibbs, Gibbs, Chuidian & Quasha for
plaintiff and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a
written agreement, Exhibit A, with the defendant,
the most important provisions of which are (1)
that they shall organize a partnership for the
bottling and distribution of Mision soft drinks,
plaintiff to act as industrial partner or manager,
and the defendant as a capitalist, furnishing the
capital necessary therefor; (2) that the defendant
was to decide matters of general policy regarding
the business, while the plaintiff was to attend to
the operation and development of the bottling
plant; (3) that the plaintiff was to secure the
Mission Soft Drinks franchise for and in behalf of
the proposed partnership; and (4) that the
plaintiff was to receive 30 per cent of the net
profits of the business. The above agreement was
arrived at after various conferences and
consultations by and between them, with the
assistance of their respective attorneys. Prior to
entering into this agreement, plaintiff had
informed the Mission Dry Corporation of Los
Angeles, California, U.S.A., manufacturers of the
bases and ingridients of the beverages bearing its
name, that he had interested a prominent
financier (defendant herein) in the business, who
was willing to invest half a million dollars in the
bottling and distribution of the said beverages,
and requested, in order that he may close the
deal with him, that the right to bottle and
distribute be granted him for a limited time under
the condition that it will finally be transferred to
the corporation (Exhibit H). Pursuant for this
request, plaintiff was given "a thirty-days" option
on exclusive bottling and distribution rights for
the Philippines" (Exhibit J). Formal negotiations
between plaintiff and defendant began at a
meeting on November 27, 1947, at the Manila
Hotel, with their lawyers attending. Before this
meeting plaintiff's lawyer had prepared the draft
of the agreement, Exhibit II or OO, but this was
not satisfactory because a partnership, instead of
a corporation, was desired. Defendant's lawyer
prepared after the meeting his own draft, Exhibit
HH. This last draft appears to be the main basis of
the agreement, Exhibit A.
The contract was finally signed by plaintiff on
December 3, 1947. Plaintiff did not like to go to
the United States without the agreement being
not first signed. On that day plaintiff and
defendant went to the United States, and on
December 10, 1947, a franchise agreement
(Exhibit V) was entered into the Mission Dry
Corporation and Fortunato F. Halili and/or Charles
F. Woodhouse, granted defendant the exclusive

right, license, and authority to produce, bottle,

distribute, and sell Mision beverages in the
Philippines. The plaintiff and the defendant
thereafter returned to the Philippines. Plaintiff
reported for duty in January, 1948, but operations
were not begun until the first week of February,
1948. In January plaintiff was given as advance,
on account of profits, the sum of P2,000, besides
the use of a car; in February, 1948, also P2,000,
and in March only P1,000. The car was withdrawn
from plaintiff on March 9, 1948.
When the bottling plant was already on operation,
plaintiff demanded of defendant that the
partnership papers be executed. At first
defendant executed himself, saying there was no
hurry. Then he promised to do so after the sales of
the product had been increased to P50,000. As
nothing definite was forthcoming, after this
condition was attained, and as defendant refused
to give further allowances to plaintiff, the latter
caused his attorneys to take up the matter with
the defendant with a view to a possible
settlement. as none could be arrived at, the
present action was instituted.
In his complaint plaintiff asks for the execution of
the contract of partnership, an accounting of the
profits, and a share thereof of 30 per cent, as well
as damages in the amount of P200,000. In his
answer defendant alleges by way of defense (1)
that defendant's consent to the agreement,
Exhibit A, was secured by the representation of
plaintiff that he was the owner, or was about to
become owner of an exclusive bottling franchise,
which representation was false, and plaintiff did
not secure the franchise, but was given to
defendant himself; (2) that defendant did not fail
to carry out his undertakings, but that it was
plaintiff who failed; (3) that plaintiff agreed to
contribute the exclusive franchise to the
partnership, but plaintiff failed to do so. He also
presented a counter-claim for P200,000 as
damages. On these issues the parties went to
trial, and thereafter the Court of First Instance
rendered judgment ordering defendant to render
an accounting of the profits of the bottling and
distribution business, subject of the action, and to
pay plaintiff 15 percent thereof. it held that the
execution of the contract of partnership could not
be enforced upon the parties, but it also held that
the defense of fraud was not proved. Against this
judgment both parties have appealed.
The most important question of fact to be
determined is whether defendant had falsely
represented that he had an exclusive franchise to
bottle Mission beverages, and whether this false
representation or fraud, if it existed, annuls the
agreement to form the partnership. The trial court
found that it is improbable that defendant was
never shown the letter, Exhibit J, granting plaintiff

had; that the drafts of the contract prior to the

final one can not be considered for the purpose of
determining the issue, as they are presumed to
have been already integrated into the final
agreement; that fraud is never presumed and
must be proved; that the parties were
represented by attorneys, and that if any party
thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this
appeal the defendant, as appellant, insists that
plaintiff did represent to the defendant that he
had an exclusive franchise, when as a matter of
fact, at the time of its execution, he no longer had
it as the same had expired, and that, therefore,
the consent of the defendant to the contract was
vitiated by fraud and it is, consequently, null and
void.
Our study of the record and a consideration of all
the surrounding circumstances lead us to believe
that defendant's contention is not without merit.
Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the
exclusive grantee of a franchise, thus:
A. I don't recall any discussion about that matter. I
took along with me the file of the office with
regards to this matter. I notice from the first draft
of the document which I prepared which calls for
the organization of a corporation, that the
manager, that is, Mr. Woodhouse, is represented
as being the exclusive grantee of a franchise from
the Mission Dry Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea
prepared, which was made before the Manila
Hotel conference on November 27th, expressly
states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:
Whereas, the manager is the exclusive grantee of
a franchise from the Mission Dry Corporation San
Francisco, California, for the bottling of Mission
products and their sale to the public throughout
the Philippines; . . . .
3. The manager, upon the organization of the said
corporation, shall forthwith transfer to the said
corporation his exclusive right to bottle Mission
products and to sell them throughout the
Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the
principle of integration of jural acts. We find that
the principle invoked is inapplicable, since the
purpose of considering the prior draft is not to
vary, alter, or modify the agreement, but to
discover the intent of the parties thereto and the
circumstances surrounding the execution of the
contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive
franchise? Certainly, his acts or statements prior

to the agreement are essential and relevant to

the determination of said issue. The act or
statement of the plaintiff was not sought to be
introduced to change or alter the terms of the
agreement, but to prove how he induced the
defendant to enter into it to prove the
representations or inducements, or fraud, with
which or by which he secured the other party's
consent thereto. These are expressly excluded
from the parol evidence rule. (Bough and Bough
vs. Cantiveros and Hanopol, 40 Phil., 209; port
Banga Lumber Co. vs. Export & Import Lumber
Co., 26 Phil., 602; III Moran 221,1952 rev. ed.)
Fraud and false representation are an incident to
the creation of a jural act, not to its integration,
and are not governed by the rules on integration.
Were parties prohibited from proving said
representations or inducements, on the ground
that the agreement had already been entered
into,
it
would
be
impossible
to
prove
misrepresentation or fraud. Furthermore, the parol
evidence rule expressly allows the evidence to be
introduced when the validity of an instrument is
put in issue by the pleadings (section 22, par. (a),
Rule 123, Rules of Court),as in this case.
That plaintiff did make the representation can also
be easily gleaned from his own letters and his
own testimony. In his letter to Mission Dry
Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was
able to speak with authority so that we could
come to terms as far as he and I were concerned.
That is the reason why the cable was sent.
Without this authority, I am in a poor bargaining
position. . .
I would propose that you grant me the exclusive
bottling and distributing rights for a limited period
of time, during which I may consummate my
plants. . . .
By virtue of this letter the option on exclusive
bottling was given to the plaintiff on October 14,
1947. (See Exhibit J.) If this option for an exclusive
franchise was intended by plaintiff as an
instrument with which to bargain with defendant
and close the deal with him, he must have used
his said option for the above-indicated purpose,
especially as it appears that he was able to
secure, through its use, what he wanted.
Plaintiff's own version of the preliminary
conversation he had with defendant is to the
effect that when plaintiff called on the latter, the
latter answered, "Well, come back to me when
you have the authority to operate. I am definitely
interested in the bottling business." (t. s. n., pp.
60-61.) When after the elections of 1949 plaintiff
went to see the defendant (and at that time he
had already the option), he must have exultantly
told defendant that he had the authority already.

It is improbable and incredible for him to have

disclosed the fact that he had only an option to
the exclusive franchise, which was to last thirty
days only, and still more improbable for him to
have disclosed that, at the time of the signing of
the formal agreement, his option had already
expired. Had he done so, he would have
destroyed all his bargaining power and authority,
and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this
appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise
for and in behalf of the proposed partnership."
The existence of this provision in the final
agreement does not militate against plaintiff
having represented that he had the exclusive
franchise; it rather strengthens belief that he did
actually make the representation. How could
plaintiff assure defendant that he would get the
franchise for the latter if he had not actually
obtained it for himself? Defendant would not have
gone into the business unless the franchise was
raised in his name, or at least in the name of the
partnership. Plaintiff assured defendant he could
get the franchise. Thus, in the draft prepared by
defendant's attorney, Exhibit HH, the above
provision is inserted, with the difference that
instead of securing the franchise for the
defendant, plaintiff was to secure it for the
partnership. To show that the insertion of the
above provision does not eliminate the probability
of plaintiff representing himself as the exclusive
grantee of the franchise, the final agreement
contains in its third paragraph the following:
. . . and the manager is ready and willing to allow
the capitalists to use the exclusive franchise . . .
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination of
the partnership, . . . the franchise from Mission
Dry Corporation shall be reassigned to the
manager.
These statements confirm the conclusion that
defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise.
Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the
partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the
plaintiff.
Again, the immediate reaction of defendant, when
in California he learned that plaintiff did not have
the exclusive franchise, was to reduce, as he
himself testified, plaintiff's participation in the net
profits to one half of that agreed upon. He could
not have had such a feeling had not plaintiff
actually made him believe that he (plaintiff) was
the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that

the assistance of counsel in the making of the
contract made fraud improbable. Not necessarily,
because the alleged representation took place
before the conferences were had, in other words,
plaintiff had already represented to defendant,
and the latter had already believed in, the
existence of plaintiff's exclusive franchise before
the formal negotiations, and they were assisted
by their lawyers only when said formal
negotiations actually took place. Furthermore,
plaintiff's attorney testified that plaintiff had said
that he had the exclusive franchise; and
defendant's
lawyer
testified
that
plaintiff
explained to him, upon being asked for the
franchise, that he had left the papers evidencing
it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff
did actually represent to defendant that he was
the holder of the exclusive franchise. The
defendant was made to believe, and he actually
believed, that plaintiff had the exclusive
franchise. Defendant would not perhaps have
gone to California and incurred expenses for the
trip, unless he believed that plaintiff did have that
exclusive privilege, and that the latter would be
able to get the same from the Mission Dry
Corporation itself. Plaintiff knew what defendant
believed about his (plaintiff's) exclusive franchise,
as he induced him to that belief, and he may not
be allowed to deny that defendant was induced
by that belief. (IX Wigmore, sec. 2423; Sec. 65,
Rule 123, Rules of Court.)
We now come to the legal aspect of the false
representation. Does it amount to a fraud that
would vitiate the contract? It must be noted that
fraud is manifested in illimitable number of
degrees or gradations, from the innocent praises
of a salesman about the excellence of his wares to
those malicious machinations and representations
that the law punishes as a crime. In consequence,
article 1270 of the Spanish Civil Code
distinguishes two kinds of (civil) fraud, the causal
fraud, which may be a ground for the annulment
of a contract, and the incidental deceit, which
only renders the party who employs it liable for
damages. This Court had held that in order that
fraud may vitiate consent, it must be the causal
(dolo causante), not merely the incidental (dolo
causante), inducement to the making of the
contract. (Article 1270, Spanish Civil Code; Hill vs.
Veloso, 31 Phil. 160.) The record abounds with
circumstances indicative that the fact that the
principal consideration, the main cause that
induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff
to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership.
The original draft prepared by defendant's
counsel was to the effect that plaintiff obligated

himself to secure a franchise for the defendant.

Correction appears in this same original draft, but
the change is made not as to the said obligation
but as to the grantee. In the corrected draft the
word
"capitalist"(grantee)
is
changed
to
"partnership." The contract in its final form retains
the substituted term "partnership." The defendant
was, therefore, led to the belief that plaintiff had
the exclusive franchise, but that the same was to
be secured for or transferred to the partnership.
The plaintiff no longer had the exclusive franchise,
or the option thereto, at the time the contract was
perfected. But while he had already lost his option
thereto (when the contract was entered into), the
principal obligation that he assumed or undertook
was to secure said franchise for the partnership,
as the bottler and distributor for the Mission Dry
Corporation. We declare, therefore, that if he was
guilty of a false representation, this was not the
causal consideration, or the principal inducement,
that led plaintiff to enter into the partnership
agreement.
But, on the other hand, this supposed ownership
of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange
for the share of 30 percent granted him in the net
profits of the partnership business. Defendant
agreed to give plaintiff 30 per cent share in the
net profits because he was transferring his
exclusive franchise to the partnership. Thus, in
the draft prepared by plaintiff's lawyer, Exhibit II,
the following provision exists:
3. That the MANAGER, upon the organization of
the said corporation, shall forthwith transfer to
the said corporation his exclusive right to bottle
Mission products and to sell them throughout the
Philippines. As a consideration for such transfer,
the CAPITALIST shall transfer to the Manager fully
paid non assessable shares of the said
corporation . . . twenty-five per centum of the
capital stock of the said corporation. (Par. 3,
Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he
never had experience in the production or
distribution of beverages. As a matter of fact,
when the bottling plant being built, all that he
suggested was about the toilet facilities for the
laborers.
We conclude from the above that while the
representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent to
the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net
profits; in other words, by pretending that he had
the exclusive franchise and promising to transfer
it to defendant, he obtained the consent of the
latter to give him (plaintiff) a big slice in the net
profits. This is the dolo incidente defined in article
1270 of the Spanish Civil Code, because it was

used to get the other party's consent to a big

share in the profits, an incidental matter in the
agreement.
El dolo incidental no es el que puede producirse
en el cumplimiento del contrato sino que significa
aqui, el que concurriendoen el consentimiento, o
precediendolo, no influyo para arrancar porsi solo
el consentimiento ni en la totalidad de la
obligacion, sinoen algun extremo o accidente de
esta, dando lugar tan solo a una accion para
reclamar indemnizacion de perjuicios. (8 Manresa
602.)
Having arrived at the conclusion that the
agreement may not be declared null and void, the
question that next comes before us is, May the
agreement be carried out or executed? We find no
merit in the claim of plaintiff that the partnership
was already a fait accompli from the time of the
operation of the plant, as it is evident from the
very language of the agreement that the parties
intended that the execution of the agreement to
form a partnership was to be carried out at a later
date. They expressly agreed that they shall form
a partnership. (Par. No. 1, Exhibit A.) As a matter
of fact, from the time that the franchise from the
Mission Dry Corporation was obtained in
California, plaintiff himself had been demanding
that defendant comply with the agreement. And
plaintiff's present action seeks the enforcement of
this agreement. Plaintiff's claim, therefore, is both
inconsistent with their intention and incompatible
with his own conduct and suit.
As the trial court correctly concluded, the
defendant may not be compelled against his will
to carry out the agreement nor execute the
partnership papers. Under the Spanish Civil Code,
the defendant has an obligation to do, not to give.
The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not
to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto
personalismo), of which courts may not compel
compliance, as it is considered an act of violence
to do so.
Efectos de las obligaciones consistentes en
hechos personalismo.Tratamos de la ejecucion
de las obligaciones de hacer en el solocaso de su
incumplimiento por parte del deudor, ya sean los
hechos personalisimos, ya se hallen en la facultad
de
un
tercero;
porque
el
complimiento
espontaneo de las mismas esta regido por los
preceptos relativos al pago, y en nada les afectan
las disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto
consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.
Se tiene por corriente entre los autores, y se
traslada generalmente sin observacion el

principio romano nemo potest precise cogi ad

factum. Nadie puede ser obligado violentamente
a haceruna cosa. Los que perciben la posibilidad
de la destruccion deeste principio, aaden que,
aun cuando se pudiera obligar al deudor, no
deberia hacerse, porque esto constituiria una
violencia, y noes la violenciamodo propio de
cumplir las obligaciones (Bigot, Rolland, etc.). El
maestro Antonio Gomez opinaba lo mismo
cuandodecia que obligar por la violencia seria
infrigir la libertad eimponer una especie de
esclavitud.
xxx

xxx

xxx

En efecto; las obligaciones contractuales no se

acomodan biencon el empleo de la fuerza fisica,
no ya precisamente porque seconstituya de este
modo una especie de esclavitud, segun el dichode
Antonio Gomez, sino porque se supone que el
acreedor tuvo encuenta el caracter personalisimo
del hecho ofrecido, y calculo sobre laposibilidad
de que por alguna razon no se realizase.
Repugna,ademas, a la conciencia social el empleo
de la fuerza publica, mediante coaccion sobre las
personas,
en
las
relaciones
puramente
particulares; porque la evolucion de las ideas ha
ido poniendo masde relieve cada dia el respeto a
la personalidad humana, y nose admite bien la
violencia sobre el individuo la cual tiene caracter
visiblemente penal, sino por motivos que
interesen a la colectividad de ciudadanos. Es,
pues, posible y licita esta violencia cuando setrata
de las obligaciones que hemos llamado ex lege,
que afectanal orden social y a la entidad de
Estado, y aparecen impuestas sinconsideracion a
las conveniencias particulares, y sin que por
estemotivo puedan tampoco ser modificadas;
pero no debe serlo cuandola obligacion reviste un
interes puramente particular, como sucedeen las
contractuales, y cuando, por consecuencia,
paraceria salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela fuerza colectiva,
las diferencias producidas entre los ciudadanos.
(19 Scaevola 428, 431-432.)
The last question for us to decide is that of
damages,damages that plaintiff is entitled to
receive because of defendant's refusal to form the
partnership, and damages that defendant is also
entitled to collect because of the falsity of
plaintiff's representation. (Article 1101, Spanish
Civil Code.) Under article 1106 of the Spanish Civil
Code the measure of damages is the actual loss
suffered and the profits reasonably expected to
be received, embraced in the terms dao
emergente and lucro cesante. Plaintiff is entitled
under the terms of the agreement to 30 per cent
of the net profits of the business. Against this
amount of damages, we must set off the damage
defendant
suffered
by
plaintiff's
misrepresentation that he had obtained a very

high percentage of share in the profits. We can do

no better than follow the appraisal that the
parties themselves had adopted.
When defendant learned in Los Angeles that
plaintiff did not have the exclusive franchise
which he pretended he had and which he had
agreed to transfer to the partnership, his
spontaneous reaction was to reduce plaintiff's
share form 30 per cent to 15 per cent only, to
which reduction defendant appears to have
readily given his assent. It was under this
understanding, which amounts to a virtual
modification of the contract, that the bottling
plant was established and plaintiff worked as
Manager for the first three months. If the contract
may not be considered modified as to plaintiff's
share in the profits, by the decision of defendant
to reduce the same to one-half and the assent
thereto of plaintiff, then we may consider the said
amount as a fair estimate of the damages plaintiff
is entitled to under the principle enunciated in the

case of Varadero de Manila vs. Insular Lumber

Co., 46 Phil. 176. Defendant's decision to reduce
plaintiff's share and plaintiff's consent thereto
amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share.
This same amount was fixed by the trial court.
The agreement contains the stipulation that upon
the termination of the partnership, defendant was
to convey the franchise back to plaintiff (Par. 11,
Exhibit A). The judgment of the trial court does
not fix the period within which these damages
shall be paid to plaintiff. In view of paragraph 11
of Exhibit A, we declare that plaintiff's share of 15
per cent of the net profits shall continue to be
paid while defendant uses the franchise from the
Mission Dry Corporation.
With the modification above indicated, the
judgment appealed from is hereby affirmed.
Without costs.