G.R. No.

21639

September 25, 1924

ALBERT F. KIEL, plaintiff-appellee, vs.ESTATE OF P. S. SABERT,

defendant-appellant.
J. F. Yeager for appellant.J. S. Alano for appellee.
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:
The lower court erred
(1) In finding this was an action to establish a resulting trust in land.
(2) In finding a resulting trust in land could have been established in
public lands in favor of plaintiff herein who was an alien subject at the
same time said alleged resulting trust was created.
(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 onehalf 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.

G.R. No. L-25532

February 28, 1969

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 tradename, 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 was duly recorded with the Securities and Exchange
Commission on 20 December 1948.
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 Commissioner's appeal unmeritorious.

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. 88-89).
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.

.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 31, 1979 of then Acting BIR
Commissioner Efren I. Plana, petitioners were assessed and required
to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970.
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

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. 12-13, 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, joint-stock companies, joint accounts

(cuentas en participation), associations or insurance companies, but
does not include duly registered general co-partnerships (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 co-owners 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 co-ownership
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 co-possessors do or do not
share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived;
From the above it appears that the fact that those who agree to form
a co- ownership share or do not share any profits made by the use of

the property held in common does not convert their venture into a
partnership. Or the sharing of the gross returns does not of itself
establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of
other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical
personality different from that of the individual partners, and the
freedom to transfer or assign any interest in the property by one with
the consent of the others (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 co-ownership 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.

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.
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.).
The project of partition (Exhibit K; see also pp. 77-70, 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

P87,860.00

P17,590.00

1950

P24,657.65

128,566.72

96,076.26

1951

51,301.31

120,349.28

110,605.11

1952

67,927.52

87,065.28

152,674.39

1953

61,258.27

84,925.68

161,463.83

1954

63,623.37

99,001.20

167,962.04

1955

100,786.00

120,249.78

169,262.52

1956

175,028.68

135,714.68

169,262.52

(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 ................ P40,209.89Income tax
due
thereon
...............................
8,042.0025%
surcharge .............................................. 2,010.50Compromise for
non-filing
..........................
50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.0025% surcharge
..............................................
3,462.25Compromise
for
nonfiling
..........................
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 CO-OWNERS 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 coowners and not unregistered co-partners, 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 co-partners 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.)
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 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.

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 cases 1 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 respected 4 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. Consequently they allege
that the reliance by respondent Court of Tax Appeals was
1wph1.t

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.

G.R. No. 31057

September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees, vs.VICENTE

POLISTICO, ET AL., defendants-appellants.
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:
Member's shares............................

97,263.70

Credits paid................................

6,196.55

Interest received...........................

4,569.45

Miscellaneous...............................

1,891.00
P109,620.7
0

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.
As to the first point, the decision on the case of Borlasa vs. Polistico,
supra, must be followed.
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:
A partnership must have a lawful object, and must be established for
the common benefit of the partners.
When the dissolution of an unlawful partnership is decreed, the profits
shall be given to charitable institutions of the domicile of the
partnership, or, in default of such, to those of the province.
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.

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

LA COMPAIA MARITIMA, plaintiff-appellant, vs.FRANCISCO
MUOZ, ET AL., defendants-appellees.
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 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.
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: Three-fourths 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 twothirds. 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 one-eighth 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: "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
lawphil.net

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., plaintiffs-appellants, 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 above-mentioned 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 ....................................................................................................

2. Gregoria Cristobal ...............................................................................................

3. Saturnina Silva ....................................................................................................
4. Guillermo Tapia ...................................................................................................
5. Jesus Legaspi ......................................................................................................
6. Jose Silva .............................................................................................................
7. Tomasa Mercado ................................................................................................
8. Julio Gatchalian ...................................................................................................
9. Emiliana Santiago ................................................................................................
10. Maria C. Legaspi ...............................................................................................
11. Francisco Cabral ...............................................................................................
12. Gonzalo Javier ....................................................................................................
13. Maria Santiago ...................................................................................................
14. Buenaventura Guzman ......................................................................................
15. Mariano Santos .................................................................................................

Total ........................................................................................................
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 D1 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 fortyfour 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:
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:
Amou
nt

Address

1. Mariano Santos ...........................................

P0.14

Pulilan,
Bulacan.

2. Buenaventura Guzman ...............................

.13

Purchaser

- Do -

3. Maria Santiago ............................................

.17

- Do -

4. Gonzalo Javier ..............................................

.14

- Do -

5. Francisco Cabral ..........................................

.13

- Do -

6. Maria C. Legaspi ..........................................

.16

- Do -

7. Emiliana Santiago .........................................

.13

- Do -

8. Julio Gatchalian ............................................

.13

- Do -

9. Jose Silva ......................................................

.07

- Do -

10. Tomasa Mercado .......................................

.08

- Do -

11. Jesus Legaspi .............................................

.15

- Do -

12. Guillermo Tapia ...........................................

.13

- Do -

13. Saturnina Silva ............................................

.08

- Do -

14. Gregoria Cristobal .......................................

.18

- Do -

15. Jose
Gatchalian ............................................

.18

- Do -

Total cost of
2.00 said
ticket; and that, therefore, the persons named above are entitled to
the parts of whatever prize that might be won by said ticket.
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

Exhibit

Purchas Price

Expens

No.
1. Jose Gatchalian .......................................... D-1

e
Price

Won

es

P0.18

P4,4
25

P 480

2. Gregoria Cristobal ......................................

D-2

.18

4,57
5

2,000

3. Saturnina
Silva .............................................

D-3

.08

1,87
5

360

4. Guillermo Tapia ..........................................

D-4

.13

3,32
5

360

5. Jesus Legaspi by Maria Cristobal .........

D-5

.15

3,82
5

720

6. Jose
Silva ....................................................

D-6

.08

1,87
5

360

7. Tomasa Mercado .......................................

D-7

.07

1,87
5

360

8. Julio Gatchalian by Beatriz Guzman .......

D-8

.13

3,15
0

240

9. Emiliana Santiago ......................................

D-9

.13

3,32
5

360

10. Maria C. Legaspi ......................................

D-10

.16

4,10
0

960

11. Francisco Cabral ......................................

D-11

.13

3,32
5

360

12. Gonzalo Javier .......................................... D-12

.14

3,32
5

360

13. Maria Santiago .......................................... D-13

.17

4,35
0

360

14. Buenaventura Guzman ...........................

.13

3,32
5

360

D-14

15. Mariano Santos ........................................

D-15

.14

3,32
5

2.00

50,0
00

The legal questions raised in plaintiffs-appellants' 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 on which
the normal tax has been paid.

360

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.

G.R. No. L-39607

February 6, 1934

ENCARNACION MAGALONA, ET AL., plaintiffs-appellees, 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, 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".
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 the partnership
agreement was not in writing.
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, 1278-1280, 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 counterclaim 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.