I. Cases - Case Digest on Law on Partnership PDF

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PARTNERSHIP CASESLITONJUA VS. LITONJUAFacts:Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started when, on 2002, in the RTC Aurelio filed a suit against his brother Eduardo and... respondent Robert ...

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PARTNERSHIP CASES LITONJUA VS. LITONJUA Facts: Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers. The legal dispute between them started when, on 2002, in the RTC Aurelio filed a suit against his brother Eduardo and... respondent Robert T. Yang (Yang) and several corporations for specific performance and accounting. In his complaint Aurelio... alleged that, since 1973, he and Eduardo are into a joint venture/partnership arrangement in the Odeon Theater business which had expanded thru investment in Cineplex, Inc., LCM Theatrical Enterprises, Odeon Realty Corporation (operator of Odeon I and II theatres), Avenue Realty, Inc., owner of lands and buildings, among other corporations. Yang is described in the complaint as petitioner's and Eduardo's partner in their Odeon Theater investment.The same complaint also contained the following material averments: It was then agreed upon between [Aurelio] and Eduardo that in consideration of [Aurelio's] retaining his share in the remaining family businesses... and contributing his industry to the continued operation of... these businesses, [Aurelio] will be given P1 Million or 10% equity in all these businesses and those to be subsequently acquired by them whichever is greater. . . . In addition... the joint venture/partnership... had also acquired [various other assets], but Eduardo caused to be registered in the names of other parties.... Sometime in 1992, the relations between [Aurelio] and Eduardo became sour so that [Aurelio] requested for an accounting and liquidation of his share in the joint venture/partnership [but these demands for complete accounting and liquidation were not heeded]. What is worse, [Aurelio] has reasonable cause to believe that Eduardo and/or the corporate defendants as well as Bobby [Yang], are transferring... various real properties of the corporations belonging to the joint venture/partnership to other parties in fraud of [Aurelio]. In consequence, [Aurelio] is therefore causing at this time the annotation on the titles of these real properties' a notice of lis pendens Eduardo and the corporate respondents, as defendants a quo, filed a joint ANSWER... denying under oath the material allegations of the complaint, more particularly that portion... depicting petitioner... and Eduardo as having entered into a contract of partnership. For his part, Yang... moved to dismiss on the ground... that... as to him, petitioner has no cause of action and the complaint does not state any. Petitioner's demand... in the petitory portion of his complaint... is for delivery or payment to him, as Eduardo's and Yang's partner, of his partnership/joint venture share, after an accounting has been duly conducted of what he deems to be... partnership/joint venture property. Issues: whether or not petitioner and respondent Eduardo are partners in the theatre, shipping and realty business Ruling: The petition lacks merit. Petitioner's demand... in the petitory portion of his complaint... is for delivery or payment to him, as Eduardo's and Yang's partner, of his partnership/joint venture share, after an accounting has been duly conducted of what he deems to be... partnership/joint venture property. A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses between them. A contract of... partnership is defined by the Civil Code as one where two or more persons bound themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. A joint venture, on the other hand, is... hardly distinguishable from, and may be likened to, a partnership since their elements are similar, i.e., community of interests in the business and sharing of profits and losses. Being a form of partnership, a joint venture is generally governed by the law on... partnership. Clearly,... a look at the legal provisions determinative of the existence, or defining the formal requisites, of a partnership is indicated. Foremost of these are the following provisions of the Civil Code: Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirement of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. Annex "A-1", on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As an unsigned document, there can be no quibbling that Annex "A-1" does not meet the public instrumentation requirements exacted under Article 1771... of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership involving more than P3,000.00 in money or property, Annex "A-1" cannot be presented for notarization, let alone registered with the Securities and Exchange Commission (SEC), as... called for under the Article 1772 of the Code. And inasmuch as the inventory requirement under the succeeding Article 1773 goes into the matter of validity when immovable property is contributed to the partnership, the next logical point of inquiry turns on the nature of... petitioner's contribution, if any, to the supposed partnership. A partnership may be constituted in any form, save when immovable property or real rights are... contributed thereto or when the partnership has a capital of at least P3,000.00, in which case a public instrument shall be necessary. And if only to stress what has repeatedly been articulated, an inventory to be signed by the parties and attached to... the public instrument is also indispensable to the validity of the partnership whenever immovable property is contributed to it. Considering that the allegations in the complaint showed that [petitioner] contributed immovable properties to the alleged partnership, the "Memorandum"... which purports to establish the said "partnership/joint venture" is NOT a public... instrument and there was NO inventory of the immovable property duly signed by the parties. As such, the said "Memorandum" ... is null and void for purposes of establishing the existence of a valid contract of partnership. Indeed, because of the failure to comply with the... essential formalities of a valid contract, the purported "partnership/joint venture" is legally inexistent and it produces no effect whatsoever. Necessarily, a void or legally inexistent contract cannot be the source of any contractual or legal right. Accordingly, the... allegations in the complaint, including the actionable document attached thereto, clearly demonstrates that [petitioner] has NO valid contractual or legal right which could be violated by the [individual respondents] herein. As a consequence, [petitioner's] complaint does NOT state a valid cause of action because NOT all the essential elements of a cause of action are present.

EVANGELISTA VS. CIR Facts: This is a petition, filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista,... for review of a decision of the Court of Tax Appeals,... hold that the petitioners are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949... in the total amount of P6,878.34,... It apears from the stipulation submitted by the parties:... petitioners borrowed from their father the sum of P59,140.00 which amount together with their personal monies was used by them for the purpose of buying real properties,... they appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring' suits against the defaulting... tenant; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them;... after having bought the above-mentioned real properties, the petitioners had the same rented or leased to various tenants... respondent Collector of Internal Revenue demanded the payment, of income tax... letter of demand and the corresponding assessments were delivered to petitioners, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in. his letter of demand... be reversed, and that they be absolved from the payment of the taxes in question Court of Tax Appeals rendered... decision for the respondent, and, a petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of the petitioners. Petitioners insist, however, that they are mere co-

owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the characteristics of partnerships... are lacking in the case at bar. Issues: whether petitioners are subject to the tax on corporations provided for in section 24 of National Internal Revenue Code Ruling: 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 dividing1 the profits amongthemselves." 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... created... purposely. What is more they jointly borrowed a substantial portion thereof in order to... establish said common fund. They invested the same, not merely in one transaction, but in a series of transactions strongly indicative of a pattern or common design that was not limited to... the conservation and preservation of the aforementioned common fund. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for... purposes of gain. 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... properties have been under the management of one person, namely, Simeon Evangelista Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit. as defined in section 84(6) 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 couid be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(6), the term "corporation"... includes, among other, "joint accounts, (cuentas en participation)" and "associations", none of which his 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 [6]) from the... connotation of the term "corporation." It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the management of one person even if true, on which we express no opinion tends... to increase the similarity between the nature of their venture and that of corporations, and is, therefore, an additional argument in favor of the imposition of said tax on corporations. 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. As regards the residence tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:

"Entities liable to residence tax. Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax... which, in no case, shall exceed one thousand pesos, in accordance with the following schedule: * * *.

"The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association or insurance company, no matter how created or organized." (italics ours.) Considering that the pertinent part of this provision is analogous to that of sections 24 and 84 (b) of our National Internal Revenue Code (Commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations. Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed

LIM TONG LIM VS. PH FISHING GEAR FACTS: Lim Tong Lim requested Peter Yao and Antonio Chuato engage in commercial fishing with him. The three agreed to purchase two fishing boats but since they do not have the money they borrowed from one Jesus Lim the brother of Lim Tong Lim. Subsequently, they again borrowed money for the purchase of fishing nets and other fishing equipments. Yao and Chua represented themselves as acting in behalf of “Ocean Quest Fishing Corporation” (OQFC) and they contracted with Philippine Fishing Gear Industries (PFGI) for the purchase of fishing nets amounting to more than P500k. However, they were unable to pay PFGI and hence were sued in their own names as Ocean Quest Fishing Corporation is a non-existent corporation. Chua admitted his liability while Lim Tong Lim refused such liability alleging that Chua and Yao acted without his knowledge and consent in representing themselves as a corporation.

ISSUE: Whether Lim Tong Lim is liable as a partner

HELD: Yes. It is apparent from the factual milieu that the three decided to engage in a fishing business. Moreover, their Compromise Agreement had revealed their intention to pay the loan with the proceeds of the sale and to divide equally among them the excess or loss. The boats and equipment used for their business entails their common fund. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. The principle of corporation by estoppel cannot apply in the case as Lim Tong Lim also benefited from the use of the nets in the boat, which was an asset of the partnership. Under the law on estoppel, those acting in behalf of a corporation and those benefited by it, knowing it to be without valid existence are held liable as general partners. Hence, the question as to whether such was legally formed for unknown reasons is immaterial to the case. AFISCO VS. CA Unregistered Partnerships and associations are considered as corporations for tax purposes – Under the old internal revenue code, “A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, xxx.” Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as unregistered partnerships and associations. Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation – In the case at bar, petitioners-insurance companies formed a Pool Agreement, or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich is considered a partnership or association which may be taxed as a ccorporation. Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same person twice by the same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince from the individual corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends received by the companies.

There is no double taxation. FACTS: The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool, which they complied with. In 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of Organization Exempt from Income Tax” for 1975. On the basis of this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively. The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal. The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter’s collection of premiums on behalf of its members, the ceding companies, was taxable income. ISSUE/S:

1. Whether or not the pool is taxable as a corporation. 2. Whether or not there is double taxation. HELD: 1) Yes: Pool taxable as a corporation Argument of Petitioner: The reinsurance policies were written by them “individually and separately,” and that their liability was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its principal function of “allocating and distributing the risk(s) arising from the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.” Argument of SC: According to Section 24 of the NIRC of 1975: “SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or exis...