G.R. No. L-68118, 29 October 1985

FACTS:

On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963 square metersof located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The Torrens titles issued to them showed that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canada for the total sum of P313,050. They derived from the sale a total profit of P134, 341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof. The petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Hence, the instant appeal.

ISSUE:

Whether or not the petitioners had indeed formed a partnership or joint venture and thus liable for corporate tax.

RULING:

NO. As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction.

The Supreme Court held that the petitioners should not be considered to have formed a partnership just because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves. To regard so would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. They did not contribute or invest additional ‘ capital to increase or expand the properties, nor was there an unmistakable.

*Case Digest by Earl M. Acoymo, JD-IV, Andres Bonifacio Law School, SY 2019-2020