Solidbank v.

CIR
CTA Case No. 4868, 19 June 1997

Facts:

Solidbank Corporation (SBC) and Susana Reality Inc (SRI), in a "Deed of Sale With
Option and Agreement for Administration of Property" became co- owners of 3 parcels of
land together with a 4 storey building thereon when SBC acquired from SRI ownership
and interest of SRI and for which earnest money of P50,000.00 was paid for by SBC to
SRI
SBC filed complaint with the RTC for Partition. As co- owner, SBC demanded the portion
of the property owned in common pursuant to CC Art. 494 because physical division of
the building and improvements thereon would not be compatible to the best interest of
the parties and that a more practical solution is "Buy- Out" or "Sell- Out" of the share of
one to the other co-owner or sale to any party
After several hearings, realizing the futility of their claims and the adverse effect the case
may bring on their respective business establishments and business reputations, SBC
and SRI agreed to settle the case amicably
The Court approved the compromise agreement and terminated the co- ownership of the
parties and vesting the sole, absolute, exclusive and indefeasible title in favor of SBC
a former employee of SRI became an informer (perhaps to collect reward through NIRC
Sec. 281) filed an information denouncing SBC and SRI. The informer opined that as a
result of said amicable settlement, SRI and SBC waived and completely gave away their
claims against each other and are therefore subject to and Iiable for donors tax
prescribed under NIRC Sections 120 and 121 (now 91 and 92)
Note: Art. 3 of the deed of sale was an agreement for administration of property, giving
SBC shall administer the property (collect rents from tenants, advertise vacant space, do
repairs, etc.)

Issues:

WON petitioners formed an unregistered partnership which is subject to corporate income tax
prescribed under Sec. 24(a) in relation to Sect i on 20(b) of the Tax Code. NO

Ruling w/ Doctrine:
 They formed a co-ownership, not a partnership. The agreement for administration of
property (Art. 3 of deed of sale) is but a mere incident of the co-ownership and not an act
reflective of their intention to engage in a mutual fund for profit or business.
CC 1767 prescribes two essential elements of a partnership, 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.
At first glance, SRI and SBC seem to fulfil the above essential elements, however, after
an exhaustive study, it is apparent that no agreement, direct or implied was reached by
SRI and SBC to purposely contribute money, property or industry to a common fund, and
that, no such intent to divide the profits arising from the use of the common fund in a
business activity was ever contemplated by the parties.
The deed of sale gave SBC the option to buy ownership and interest of SRI over the
property within 5 years from execution. The real intention of the parties was to sell SRIs
share to SBC
SBC even demolished portion of the building and built a new 10-storey building for
itself
SRI and SBC only entered into an isolated transaction. They simply bought and co-
owned the four-storey building inclusive of the land where it stands and invested nothing
more. The act of leasing the building cannot be deemed as a series of transactions
indicating habituality in a business either, SBC mainly occupied the rentable areas
thereof (85%) for nearly 20 years for its own personal use.
THEREFORE, since the agreement between SBC and SRI DID NOT produce a
partnership with a separate juridical personality, they cannot be assessed for withholding
tax for inter-corporate dividends.
Re assessment of doners tax: SRI availed of a tax amnesty under EO 41 as amended
by EO 64 since the donation arose by virtue of a compromise agreement between the
two parties.