ARTICLE 1767. By the contract of partnership two or more persons a.

Common fund
bind themselves to contribute money, property, or industry to a Lim Tong Lim v. Philippine Fishing Gear, G.R. No.
common fund, with the intention of dividing the profits among 136448 November 3, 1999
themselves. Two or more persons may also form a partnership for the AFISCO v. CA G.R. No. 112675, January 25, 1999
exercise of a profession. (1665a)
Contribution of money, property, or industry to a common fund.
Concept of partnership. (1) Existence of proprietary interest. — The partners must have
The above article gives the legal definition of partnership a proprietary interest in the business or undertaking, that is, they
(often called “co-partnership”) from the viewpoint of a contract. must contribute capital which may be money or property, or their
There are, however, other definitions. Thus: services, or both, to the common business. The very definition of
(1) “A partnership is a contract of two or more competent persons to partnership in Article 1767 provides for this element. Without the
place their money, effects, labor and skill, or some or all of them, in element of mutual contribution to a common fund there can be no
lawful commerce or business and to divide the profits and bear the partnership (see Art. 1784.), although its presence is not necessarily
losses in certain proportions.” (40 Am. Jur. 126, 474; 68 C.J.S. 398.) a conclusive evidence of the existence of partnership.

(2) “A partnership is an association of two or more persons to carry (a) Money. — The term is to be understood as referring to
on as co-owners of a business for profit.” (Uniform Partnership Act, currency which is legal tender in the Philippines. It must
Sec. 6.) be pointed out that checks, drafts, promissory notes
payable to order, and other mercantile documents are not
(3) “A partnership is a legal relation based upon the express or money but only representatives of money. Consequently,
implied agreement of two or more competent persons whereby they there is no contribution of money until they have been
unite their property, labor or skill in carrying on some lawful business cashed. (Art. 1249.)
as principals for their joint profit.” (Mechem, Elements of the Law of
Partnership [1923], p. 1.) (b) Property. — The property contributed may be real or
personal, corporeal or incorporeal. Hence, credit such as
(4) “A partnership is the status arising out of a contract entered into promissory note or other evidence of obligation or even a
by two or more persons whereby they agree to share as common mere goodwill may be contributed, as they are considered
owners the profits of a business carried on by all or any of them on property (see City of Manila vs. Cumbe, 13 Phil. 677
behalf of all of them.” (31 Words and Phrases [1957 ed.], p. 291.) [1909].) It has been held that a license to construct and
operate a cockpit may be given as a contribution to a
(5) “A partnership is an organization for production of income to which partnership. (Balon vs. Pajarillo, [C.A.] No. 146-R, Nov.
each partner contributes one or both of the ingredients of income, 29, 1956.)
which are capital or service.” (Ibid., p. 292.)
(c) Industry. — In the absence of money or property, or in

(6) “A partnership is an entity, distinct and apart from the members concurrence with these two, the law permits the

composing it, and, for the purpose of which it was created, it is a contribution of industry. The word “industry” has been
interpreted to mean the active cooperation, the work of
person having its own assets and liabilities and any benefit or liability
the party associated, which may be either personal
attaching to a member of the partnership, results from the partnership
relation.” (Ibid., p. 293.) manual efforts or intellectual, and for which he receives a
share in the profits (not merely salary) of the business.
(11 Manresa 273-274.)
(7) “A partnership is a joint undertaking to share in the profit and
loss.” (Eastman vs. Clark, 53 N.H. 276, 16 Am. Rep. 192.)
Partnership is a legal concept, but the determination of the existence
of a partnership may involve inferences drawn from an analysis of all
the circumstances attending its creation and operation. (68 C.J.S.
399; see Art. 1769.) As a form of business organization, it falls
between two extremes of organizational form — the single
proprietorship and the corporation.
The contribution of a partner may be in the three forms Held: Yes: (1) Partnership formed by Chua, Yao, and Lim. — “From
of money, property and industry, or any two or one of them. the factual findings of both lower courts [Regional
A partnership may, therefore, exist even if it is shown that Trial Court and Court of Appeals], it is clear that Chua, Yao,
the partners have not contributed any capital of their own to and Lim had decided to engage in a fishing business, which
a “common fund’’ for the contribution may be in the form of they started by buying boats worth P3.35 million, financed by
credit or industry not necessarily cash or fixed assets. (Lim Tong Lim a loan secured from Jesus Lim who was petitioner’s brother.
vs. Philippine Fishing Gear Industries, Inc., 317 In their Compromise Agreement, they subsequently revealed
SCRA 728 [1999].) Note that the law does not specify the kind of their intention to pay the loan with the proceeds of the sale
industry that a partner may contribute. (see Evangelista & Co. vs. of the boats, and to divide equally among them the excess or
Abad Santos, 51 SCRA 416 [1973].) loss. These boats, the purchase and the repair of which were
A limited partner in a limited partnership, however, cannot contribute financed with borrowed money, fell under the term “common
mere industry or services. (Art. 1845.) fund” under Article 1767. The contribution to such fund need
not be cash or fixed assets; it could be an intangible like credit or
The partner contributing his industry or services must, however, be industry. That the parties agreed that any loss or profit from the sale
distinguished from a lessor of services in the and operation of the boats would be divided equally among them also
sense that the former is independent of the other partners, shows that they had indeed formed a partnership.
that is, he is not subject to the supervision of the other partners, while
the lessor is under the supervision of the Moreover, it is clear that the partnership extended not only
lessee or employer. (see Espiritu & Sibal, op. cit., p. 4.) to the purchase of the boat, but also to that of the nets and the floats.
The fishing nets and the floats, both essential to fishing, were
(2) Proof of contribution. — In partnership, proof is necessary that obviously acquired in furtherance of their business. It would have
there be contribution of money, property, or industry to a common been inconceivable for Lim to involve himself so much in buying the
fund with the intention of dividing the income or profits obtained boat but not in the acquisition of the aforesaid equipment, without
therefrom. (Tablason vs. Ballozos, [C.A.] 51 O.G. 1966; see which the business could not have proceeded.
Estanislao, Jr. vs. Court of Appeals, 160 SCRA 830 [1988].)
If the partnership agreement provides simply that one of the parties is Given the preceding facts, it is clear that there was, among petitioner,
to give and the other is to receive a half interest in the profits of an Chua and Yao, a partnership engaged in the fishing business. They
enterprise started by the former, without anything being promised by purchased the boats, which constituted the main assets of the
the latter toward the accomplishment of its object, no enforceable partnership, and they agreed that the proceeds from the sales and
contract exists, but if the latter takes part in carrying on the operations thereof would be divided among them.’’
enterprise, and thus subjects himself to partnership liability to
outsiders, he furnishes sufficient consideration for the former’s (2) Lim was a partner, not a lessor. — “We are not convinced
promise and acquires all the rights of a co-partner. (68 C.J.S. 414.) by petitioner’s argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His
ILLUSTRATIVE CASE: argument allegedly finds support in the Contract of Lease and the
Three persons decided to form a corporation which was not registration papers showing that he was the owner of the boats,
legally formed, and one of them did not directly act on behalf of the including F/B Lourdes where the nets were found.
corporation but reaped the benefits of the contract entered into by the
other two. His allegation defies logic. In effect, he would like this Court to believe
that he consented to the sale of his own boats to pay a debt of Chua
Facts: On behalf of F Corporation, Chua and Yao entered and Yao, with the excess of the proceeds to be divided among the
into a contract for the purchase of fishing nets and floats three of them. No lessor would do what petitioner did. Indeed, his
from G Corporation, claiming that they were engaged in a consent to the sale proved that there was a pre-existing partnership
business venture (fishing business) with petitioner Lim who, however, among all three.
was not a signatory to the agreement.
A suit was filed by G Corporation against the three in their capacities Verily, as found by the lower courts, petitioner entered into an
as general partners, on the allegation that F Corporation was a non- agreement with Chua and Yao, in which debts were undertaken in
existent corporation as shown by a certification from the Securities order to finance the acquisition and the upgrading of the vessels
and Exchange Commission. which would be used in their fishing business. The sale of the boats,
as well as the division among the three of the balance remaining after
Issue: Was Lim a partner of Chua and Yao in the fishing business the payment of their loans, proves beyond cavil that F/B Lourdes,
and may thus be held liable as such for the fishing nets and floats though registered in his name, was not his own property but an asset
purchased by them for the use of the partnership? of the partnership. It is not uncommon to register the properties
acquired from a loan in the name of the person the lender trusts, who
in this case is the petitioner himself. After all, he is the brother of the Thus, in the partnership X & Co., in which A and B are the
creditor, Jesus Lim. We stress that it is unreasonable — indeed, it is partners, there are three distinct persons, namely, the partnership X
absurd — for petitioner to sell his property to pay a debt he did not & Co., A, and B. As a consequence of the distinct legal personality
incur, if the relationship among the three of them was merely that of possessed by X & Co., it may be declared insolvent even if A and B
lessor-lessee, instead of partners.’’ are not. (Campos Rueda & Co. vs. Pacific Commercial & Co., 44 Phil.
916 [1923].) It may enter into contracts and may sue and be sued, it
(3) Lim benefited from the transaction. — “There is no dispute that being sufficient that service of summons or other process be served
the respondent, G Corporation, is entitled to be paid for the nets it on any partner (Vargas & Co. vs. Chan, 29 Phil. 446
sold. The only question here is whether petitioner should be held [1915].); and the death of either A or B is not a ground for the
jointly liable with Chua and Yao. Petitioner contests such liability, dismissal of a pending suit against X & Co. (Ngo Tian Tek vs. Phil.
insisting that only those who dealt in the name of the ostensible Education Co., 78 Phil. 275 [1947].)
corporation should be held liable. Since his name does not appear on
any of the contracts and since he never directly transacted with the Neither A nor B may sue on a cause of action belonging to X & Co.,
respondent corporation, ergo, he cannot be held liable. in his own name and for his own benefit. X & Co. may sue and be
sued in its firm name or by its duly authorized representative. (Tai
Unquestionably, petitioner benefited from the use of the Tong Chuache & Co. vs. Insurance Commission, 158 SCRA 336
nets found inside F/B Lourdes, the boat which has earlier been [1988]; see Arts. 1800-1803, 1818.) In view of the separate juridical
proven to be an asset of the partnership. He in fact questions the personality possessed by a partnership, the partners cannot be held
attachment of the nets, because the Writ has effectively stopped his liable for the obligations of the partnership unless it is shown that the
use of the fishing vessel. legal fiction of a different juridical personality is being used for a
It is difficult to disagree with the RTC and the CA that Lim, Chua and fraudulent, unfair, or illegal purpose (Aguila, Jr. vs. Court of Appeals,
Yao decided to form a corporation. Although it was 316 SCRA 246 [1999].) and except as provided in Article 1816.
never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in Effect of failure to comply with statutory requirements.
representation of it. Clearly, under the law on estoppel, on behalf of a (1) Under Article 1772. — This article makes it clear that even in case
corporation and those benefited by it, knowing it to be those acting on of failure to comply with the requirements of Article 1772, with
behalf of a corporation and those benefited by it, knowing it to be reference to the execution of a public instrument and registration of
without valid existence, are held liable as general partners. the same with the Securities and Exchange Commission in cases
when the partnership capital exceeds P3,000.00, such partnership
Technically, it is true that petitioner did not directly act on behalf of acquires juridical personality. (see Art. 1784.) The law recognizes that
the corporation. However, having reaped the benefits of the contract in the Philippines, most partnerships are created with very small
entered into by persons with whom he previously had an existing capital to engage in small business and it would be impractical to
relationship, he is deemed to be part of said association and is require that they appear in a public instrument and be registered as
covered by the scope of the doctrine of corporation by estoppel.’’ (Lim provided in Article 1772.
Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728
[1999].) (2) Under Articles 1773 and 1775. — However, in the case
contemplated in Article 1773, the partnership shall not acquire any
ART. 1768. The partnership has a juridical personality separate and juridical personality because the contract itself is void. This is also
distinct from that of each of the partners even in case of failure to true regarding secret associations or societies which do not acquire
comply with the requirements of Article 1772, first paragraph. (n) juridical personality under Article 1775.

Partnership, a juridical person.

A partnership is sometimes referred to as a “firm’’ or a “company,’’
terms that connote an entity separate from its aggregate individual
partners.

Like the corporation, a partnership duly formed under the

law is a juridical person to which the law grants a juridical
personality separate and distinct from that of each of the
partners. (Art. 44, par. 3.) As an independent juridical person, a
partnership may enter into contracts, acquire and possess property of
all kinds in its name, as well as incur obligations and bring civil or
criminal actions in conformity with the laws and regulations of its
organizations. (Art. 46.)
Rules to determine existence of partnership. EXAMPLE:
Article 1769 lays down the rules for determining whether or not an If A and B are not partners as to each other, neither will they be
association is one of partnership. In general, to establish the partners with respect to C, a third person. But if A, with the consent of
existence of a partnership, all of its essential features or B, represents to C that they are partners, then A and B will be
characteristics must be shown as being present. considered partners as to C even if they are not really partners.
(1) Where terms of contract not clear. — In the typical contract of
partnership, the parties expressly agree to unite their property and Co-ownership or co-possession.
services as co-proprietors to carry on a business for profit, and to There is co-ownership (or co-possession) whenever the ownership
share the profits in stated proportions. Such a contract creates no (or co-possession) of an undivided thing or right belongs to different
difficulty in regard to the determination of the existence of a persons. (Art. 484.)
partnership relation. Sometimes, however, the contract between (1) Clear intent to derive profits from operation of business.
the persons engaged in a business enterprise which is supposed to — Coownership of property does not of itself establish the
create a partnership is uncertain in terms, or they have never existence of a partnership, although “co-ownership” is an
executed a formal expression of their relations. (59 Am. Jur. 2d 359.) essential element of partnership. (see Art. 1811.)
In case of doubt, Article 1769 shall apply. It must be observed that (a) Two or more persons may become co-owners without a
this article seeks to exclude from the category of partnership certain contract (e.g., by inheritance or by law) but they cannot be
features enumerated therein which, by themselves, are not indicative partners in the absence of contract. This is true even
of the existence of a partnership. though the co-owners share in the profits derived incident
(2) Where existence disputed. — The existence of a partnership may to the joint ownership. The profits must be derived from
be disputed by an interested party. The issue as to whether a the operation of the business or undertaking by the
partnership exists is a factual matter to be decided on the basis of all members of the association and not merely from property
circumstances. No single factor usually is controlling. Where ownership. A partner may transfer to the partnership, as
circumstances taken singly may be inadequate to prove the intent to his contribution, merely the use or enjoyment of a specific
form a partnership, nevertheless the collective effect of these thing, retaining the ownership thereof. (Art. 1830[4].) In
circumstances may be such as to support a finding of the existence of such case, the partners become co-owners, not of the
the parties’ intent. (Heirs of Tan Eng Kee vs. Court of Appeals, 341 property, but of the right to use such property.
SCRA 740 [2000].)
(b) The law does not imply a partnership between co-owners
Persons not partners as to each other. or co-possessors because of the fact that they develop or
Persons who are partners as between themselves are partners as to operate a common property, since they may rightfully do
third persons. Generally, the converse is true, to wit: if they are not this by virtue of their respective titles. (Crondale vs. Van
partners as between themselves, they cannot be partners as to third Boynburgk, 195 Pa. 377, cited in Teller, p. 14.) Thus, in a
persons. case, it was held that two isolated transactions whereby
(1) Intention to create partnership. — Partnership is a matter two persons purchased two (2) parcels of land and then
of intention, each party giving his consent to become a another three (3) parcels of land and sold the same a few
partner. Whether or not the parties call their relationship years thereafter, did not thereby make them partners.
or believe their relationship a partnership is immaterial. There must be a clear intent to form a partnership.
However, whether a partnership exists between the (Pascual vs. Commission of Internal Revenue, 166 SCRA
parties is a factual matter. Where the parties expressly 560 [1988].)
declare they are not partners, this, as a rule, settles the
(2) Existence of fiduciary relationship. — If the parties are
question as between themselves.
partners in the business undertaking, there is a well-

(2) Partnership by estoppel. — A partnership can never exist defined fiduciary relationship between them as partners.
On the other hand, if the parties are merely co-owners,
as to third persons if no contract of partnership, express
there is no fiduciary relationship between them. If the
or implied, has been entered into between the parties
themselves. (see Art. 1834, last par.) The exception refers parties are partners, the remedy for a dispute or
difference between them would be an action for
to partnership by estoppel. Thus, where persons by their
dissolution, termination, and accounting. Where the
acts, consent, or representations have misled third
persons or parties into believing that the former are relationship is that of co-owner, the remedy would be an

partners in a non-existing partnership, such persons action, as for instance, for non-performance of a contract.
(Barrett & Seago, op. cit., p. 21.)
become subject to liabilities of partners to all who, in good
faith, deal with them in their apparent relations. This
liability is predicated on the doctrine of estoppel provided
for in Article 1825.
EXAMPLES: 2. Two persons contributed money to buy a sweepstakes
(1) A and B inherited from their father an apartment which is ticket with the intention to divide the prize which they may
leased to third persons. Are they partners? No, they are win.
merely co-owners of the property, whether or not they
share in the profits made by the lease of the property, and Facts: A, B, etc. put up money to buy a sweepstakes
not of the lease business itself. ticket for the sole purpose of dividing equally the prize
(2) A, B, and C, joint owners of merchandise, consigned it for which they may win as they did in fact the amount of
sale abroad to the same consignee. Each gave separate P50,000.00. If a partnership had been formed by A, B,
instructions for his own share. In this case, the interests etc. then it was liable for income tax pursuant to law then
are “several” and they are not to be treated as “partners” in force; if merely a community of property, then such co-
in the adventure. (Berthold vs. Goldsmith, 65 U.S. 536; 31 ownership was not liable, not having a legal personality of
Words and Phrases 272.) its own.

ILLUSTRATIVE CASES: Issue: Did A, B, etc. form a partnership or merely a

1. Heirs agreed, after partition, to use common properties community of property?
and income therefrom as a common fund with the
intention of making profit for them in proportion to their Held: A, B, etc. formed a partnership. The partnership
shares in the inheritance. was not only formed, but upon the organization thereof
and the winning of the prize, it appeared that B personally
Facts: A and B are co-owners of inherited properties. appeared in the office of the Philippine Charity
They agreed to use the said common properties and the Sweepstakes, in his capacity as co-partner, and as such
income derived therefrom as a common fund with the collected the prize. All these circumstances repel the idea
intention to produce profits for them in proportion to their that A, B, etc. organized and formed a community of
respective shares in the inheritance as determined in a property only. (Gatchalian vs. Collector of Internal
project of partition. Revenue, 67 Phil. 666 [1939].)

Issue: What is the effect of such agreement on the A partnership, whether registered or not, other than a
existing co-ownership? general professional partnership, is now considered for
tax purposes a corporation and the partners are
Held: The co-ownership is automatically converted into a considered stockholders. (see Sec. 26, The National
partnership. From the moment of partition, A and B, as Internal Revenue Code.) Before the amendment of
heirs, are entitled already to their respective definite Section 26, only unregistered partnerships were taxable
shares of the estate and the income thereof, for each of as corporations.
them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, 3. Children sold lots given by their father and divided the
accordingly, he becomes liable individually for all taxes in proceeds.
connection therewith. If, after such partition, an heir allows
his shares to be held in common with his co-heirs under a Facts: O, after completing payment to S on two lots,
single management to be used with the intent of making transferred his rights to his four children, C, etc. to enable
profit thereby in proportion to his share, there can be no them to build their residences. S sold the two lots for
doubt that, even if no document or instrument were P178,708.12 to C, etc. who resold them more than a year
executed for the purpose, for tax purposes, at least, an later to T for P313,050, treating the profit of P134,341.88
unregistered17 partnership is formed. (Ona vs. as capital gains and paying an income tax on one-half of
Commissioner of Internal Revenue, 45 SCRA 74 [1972].) their respective shares (or P33,584) of the profit.

Issue: Did C, etc. form a partnership under Article 1767?

Held: No. (1) Division of profits was merely incidental. —

They were co-owners pure and simple. To consider them
as partners would obliterate the distinction between a co-
ownership and a partnership. C, etc. were not engaged in
any joint venture by reason of that isolated transaction.
The original purpose was to divide the lots for residential purposes. If Partnership distinguished from a voluntary association.
later on they found it not feasible to do so because of the high cost of A partnership is distinguished from voluntary associations organized
construction, then they had no choice but to resell the same to for social purposes (such as social clubs, committees, lodges,
dissolve the co-ownership. The division of the profits was merely fraternal societies, etc.) as follows:
incidental to the dissolution of the co-ownership which was, in the (1) Juridical personality. — A partnership has a juridical personality,
nature of things, a temporary state. It has to be terminated sooner or while a voluntary association has none;
later. (2) Purpose. — A partnership is always organized for pecuniary profit,
(3) There must be an unmistakable intention to form a while in a voluntary association, this objective is lacking;
partnership. — Article 1769(3) provides that “the sharing (3) Contributions of members. — In a partnership, there is a
of gross returns does not of itself establish a partnership contribution of capital, either in the form of money, property, or
whether or not the persons sharing them have a joint or services, while in a voluntary association for social purposes,
common right or interest in any property from which the although fees are usually collected from the members to maintain the
returns are derived.” There must be an unmistakable organization, there is no contribution of capital; and
intention to form a partnership or joint venture. (4) Liability of members. — The partnership, as a rule, is the one
liable in the first place for the debts of the firm, while in a voluntary
The Commissioner of Internal Revenue acted on the theory that
association, the members are individually liable for the debts of the
C, etc., had formed an unregistered partnership or joint venture
association, authorized by them either expressly or impliedly, or
within the meaning of Sections 24(a) and 76(b) of the National
subsequently ratified by them. (Mechem, op. cit., p. 115.)
Internal Revenue Code. He required C, etc. to pay corporate
income tax on the total profit in addition to individual income tax
The members of such associations, societies, or clubs are not strictly
on their shares thereof, considering the share of the profits of
partners, though the organization may possess business features and
each (P33,584) as a distributive dividend taxable in full (not a
be conducted partly for pecuniary gain. The property rights and the
mere capital gain of which 1/2 is taxable).
legal liabilities of the members depend, as between themselves, on
Such intent was present in the Gatchalian case (supra.)
the constitution and rules of the association or club. (40 Am. Jur.
where 15 persons contributed small amounts to purchase
130.) If in a particular case such members are held personally liable
a two-peso sweepstakes ticket with the agreement that
for the acts or obligations of the association, their liability is based on
they would divide the prize. The ticket won the third prize
the law of agency, and such agency must be clearly shown.
of P50,000. The 15 persons were held liable for income
tax as an unregistered partnership. The instant case is
ILLUSTRATIVE CASE:
distinguishable from the case where the parties engaged
Pursuant to “reinsurance treaties,’’ a number of local insurance firms
in joint ventures of profit. Thus, in the Ona case (supra.),
formed themselves into a “pool’’ in order to facilitate the handling of
where after an extrajudicial settlement the coheirs used
business contracted with a non-resident foreign insurance company.
the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was
Facts: The petitioners are 41 non-life insurance corporations,
held that they were taxable as an unregistered
organized and existing under the laws of the Philippines. Upon
partnership. It is likewise different from Reyes vs.
issuance by them of Erection, Machinery Breakdown, Boiler
Commissioner of Internal Revenue (24 SCRA 198 [1968])
Explosion and Contractors’ All Risk insurance policies, the petitioners
where father and son purchased a lot and building,
on August 1, 1965 entered into a Quota Share Reinsurance Treaty
entrusted the administration of the building to an
and a Surplus Reinsurance Treaty with the MUNICH, a non-resident
administrator, and divided equally the net income, and
foreign insurance corporation. The reinsurance treaties required
from Evangelista vs. Collector of Internal Revenue (102
petitioners to form a [p]ool. Accordingly, a pool composed of the
Phil. 140 [1957]) where three sisters bought four pieces of
petitioners was formed on the same day.
real property which they leased to various tenants and
derived rentals therefrom. Clearly, the petitioners in these
On April 14, 1976, the pool of machinery insurers submitted a
two cases had formed an unregistered partnership.
financial statement and filed an “Information Return of Organization
(Obillos, Jr. vs. Commissioner of Internal Revenue, 139
Exempt from Income Tax” for the year ending in 1975, on the basis of
SCRA 436 [1985].)
which it was assessed by the Commissioner of Internal Revenue
deficiency corporate taxes in the amount of P1,843,273.60, and
withholding taxes in the amount of P1,768,799.39 and P89,438.68 on
dividends paid to Munich and to the petitioners, respectively.
On January 27, 1986, the Commissioner of Internal Revenue
denied the protest and ordered the petitioners, assessed as
“Pool of Machinery Insurers,” to pay deficiency income tax, interest,
and withholding tax.
The Court of Appeals ruled in the main that the pool of machinery (c) True, the pool itself is not a reinsurer and does not issue any
insurers was a partnership taxable as a corporation, and that the insurance policy; however, its work is indispensable, beneficial and
latter’s collection of premiums on behalf of its members, the ceding economically useful to the business of the ceding companies and
companies, was taxable income. Munich, because without it they would not have received their
Petitioners belie the existence of a partnership in this case, because: premiums. The ceding companies share ‘in the business ceded to the
(1) they, the insurers, did not share the same risk or solidary liability; pool’ and in the ‘expenses’ according to a ‘Rules of Distribution’
(2) there was no common fund; (3) the executive board of the pool annexed to the Pool Agreement. Profit motive or business is,
did not exercise control and management of its funds, unlike the therefore, the primordial reason for the pool’s formation.’’
board of directors of a corporation; and (4) the pool or clearing house (d) Insurers become partners not mere co-owners. — “The
“was not and could not possibly have engaged in the business of petitioner’s reliance on Pascual vs. Commissioner (166 SCRA 560
reinsurance from which it could have derived income for itself.’’ [1988].) is misplaced, because the facts obtaining therein are not on
all fours with the present case. In Pascual, there was no unregistered
Issue: One of the three (3) issues raised by the petitioners is partnership, but merely a coownership which took up only two
whether or not the Clearing House, acting as a mere agent and isolated transactions. The Court of Appeals did not err in applying
performing strictly administrative functions, and which did not Evangelista, which involved a partnership that engaged in a series of
insure or assume any risk in its own name, was a partnership transactions spanning more than ten years, as in the case at bar.’’
or association subject to tax as a corporation. (AFISCO Insurance Corporation vs. Court of Appeals, 302 SCRA 1
[1999].)
Held: (1) Business partnerships taxable as corporation. —
“Under Sections 20 and 24 (now Secs. 22 and 27) of the National III.
Internal Revenue Code (NIRC), (business) partnerships are included Limitations upon the right to form a partnership.
in the term “corporation’’ and taxable as such. Persons who are prohibited by law to give donations cannot enter into
Thus, in Evangelista vs. Collector of Internal Revenue (102 Phil. 140 a universal partnership for the reason that each of the partners
[1957]), it was held that Section 24 covered these unregistered virtually makes a donation. To allow persons who are prohibited to
partnerships and even associations or joint accounts, which had no give each other any donation or advantage to form a universal
legal personalities apart from their individual members.’’ partnership will be like permitting them to do indirectly what the law
expressly prohibits.
(2) Formation of a partnership. — Article 1767 of the Civil Code A partnership formed in violation of this article is null and void. (Art.
recognizes the creation of a contract of partnership when ‘two or 1409[7].) Consequently, no legal personality is acquired.
more persons bind themselves to contribute money, property, or A husband and his wife, however, may enter into a particular
industry to a common fund, with the intention of dividing the profits partnership or be members thereof. (see Commissioner of Internal
among themselves.’ Its requisites are: ‘(1) mutual contribution to a Revenue vs. Suter, 27 SCRA 152 [1969].)
common stock, and (2) a joint interest in the profits.’ In other words, a
partnership is formed when persons contract ‘to devote to a common ILLUSTRATIVE CASE:
purpose either money, property, or labor with the intention of dividing In a particular partnership composed of three members, two of the
the profits between themselves.’ Meanwhile, an association implies partners got married and the third partner subsequently sold, for a
associates who enter into a ‘joint enterprise x x x for the transaction nominal amount, his share to them.
of business.’
Facts: A, B, and C formed a limited partnership to engage, among
(3) Pool of machinery insurers formed a partnership. — “In the case other activities, in the importation, marketing and operation of
before us, the ceding companies entered into a Pool Agreement or an automatic phonographs, radios, television sets and amusement
association that would handle all the insurance business covered machines, their parts and accessories, with B and C as limited
under their quota-share reinsurance treaty and surplus reinsurance partners. Subsequently, A and B got married and, thereafter, C sold
treaty with Munich. The following unmistakably indicates a his share to A and B. For a taxable year, A and B filed a separate
partnership or an association covered by Section 24 of the NIRC. income return for the limited partnership and a consolidated return for
them as spouses.
(a) The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the pool. This The Commissioner of Internal Revenue consolidated the income of
common fund pays for the administration and operation expenses of the firm and the individual income of the partners resulting in the
the pool. determination of a deficiency income tax. A and B protested the
(b) The pool functions through an executive board, which resembles assessment. The issues are:
the board of directors of a corporation, composed of one
representative for each of the ceding companies.
Issues: (1) Whether or not the separate personality of the partnership ART. 1783. A particular partnership has for its object determinate
should be disregarded for income tax purposes considering that A things, their use or fruits, or a specific undertaking, or the exercise of
and B actually formed a single taxable unit; and a profession or vocation.
(2) Whether or not the partnership was dissolved after the marriage of
A and B and the subsequent sale to them by C of the latter’s Particular partnership explained.
participation for the amount of P1.00. The above article defines a particular partnership. In other words, it is
a partnership which is neither a universal partnership of present
Held: (1) Partners retained their separate interests. — The view that property nor a universal partnership of profits. The fundamental
by the marriage of A and B the company became a single difference between a universal partnership and a particular
proprietorship is erroneous. Their capital contributions were partnership lies in the scope of their subject matter or object. In the
separately owned and contributed by them before their marriage; and former, the object is vague and indefinite, contemplating a general
after they were joined in wedlock, such contributions remained their business with some degree of continuity, while in the latter, it is
respective separate property. (see Art. 148[1], Civil Code.31) Thus, limited and well-defined, being confined to an undertaking of a single,
the individual interest of A and B did not become common property of temporary, or ad hoc nature.
both after their marriage. The change in the membership of the firm is
no ground for withdrawing the partnership from the coverage of Examples of particular partnerships are those formed for the
Section 24 of the National Internal Revenue Code requiring it to pay acquisition of an immovable property for the purpose of reselling it at
income tax. A and B did not enter into matrimony and thereafter buy a profit or for the common enjoyment of its use and the benefits
the interests of C with the premeditated scheme or design to use the derived therefrom, or those established for the purpose of carrying
partnership as a business conduit to dodge the tax laws. out a specific enterprise such as the construction of a building, or
(2) Partnership, a particular one. — The firm was not a universal those formed for the practice of a profession or vocation. (11
partnership, but a particular one. It follows that the partnership was Manresa, 318-319.) Hence, two or more persons as accountants
not one that A and B were forbidden to enter under Article 1677. (now associating themselves in the practice of accountancy or two or more
Art. 1782.) Nor could the subsequent marriage of the partners lawyers in the practice of law form a particular partnership. “A firm
operate to dissolve it, such marriage not being one of the causes engaged, among other activities, in the importation, marketing,
provided for that purpose by law. (Commissioner of Internal Revenue distribution and operation of automatic phonographs, radios,
vs. Suter, supra.) television sets and amusement machines, their parts and
accessories” is a particular partnership. (Commissioner of Internal
In connection with Article 1782, the following provisions must be Revenue vs. Suter, supra.)
noted:
“Art. 87. Every donation or grant of gratuitous advantage, direct or Business of partnership need not be continuing in nature.
indirect, between the spouses during the marriage shall be void, It may be inferred from Articles 1767 and 1783 that the carrying on of
except moderate gifts, which the spouses may give to each other on a business of a continuing nature is not essential to constitute a
the occasion of any family rejoicing. The prohibition shall also apply partnership. An agreement to undertake a particular piece of work or
to persons living together as husband and wife without a valid a single transaction or a limited number of transactions and
marriage.” (Family Code.) immediately divide the resulting profits would seem to fall within the
“Art. 739. The following donations shall be void: meaning of the term “partnership” as used in the law.
(1) Those made between persons who were guilty of adultery or
concubinage at the time of the donation; (1) Rule under American law. — The above is not true under the
(2) Those made between persons found guilty of the same criminal Uniform Partnership Act which defines a partnership as “an
offense, in consideration thereof; association of two or more persons to carry on as co-owners a
(3) Those made to a public officer or his wife, descendants and business for profit” (Sec. 6 thereof.) and states that “business
ascendants, by reason of his office. includes every trade, occupation, or profession.” (Sec. 2 thereof.)

In the case referred to in No. 1, the action for declaration of nullity The word “business,” as used in the Act, clearly means business in
may be brought by the spouse of the donor or donee; and the guilt of the commercial sense only, not merely “a joint venture’’ which exists
the donor and the donee may be proved by preponderance of for carrying on a single act or isolated transaction or a limited number
evidence in the same action.” (Civil Code.) of transactions. Thus, a distinction exists between a joint venture, a
legal concept of common law origin, on which the members are
In order that Article 739 may apply, it is not required that there be a interested only in a single transaction, and is thus of a temporary
previous conviction for adultery or concubinage. This can be inferred nature although the business of conducting it may continue for a
from the clause that “the guilt of the donor and the donee may be number of years, and a partnership in which the members (partners)
proved by preponderance of evidence.’’ (The Insular Life Assurance are interested in carrying on together of a general and continuing
Co., Ltd. vs. Ebrado, 80 SCRA 181 [1977].) business of a particular kind.
(2) Joint venture. — Sometimes called “joint adventure’’ or “joint Kilosbayan vs. Guingona (232 SCRA 110 [1994].) defines a joint
enterprise’’ in American law, it is essentially a partnership created for venture as “an association of persons or companies jointly
a limited purpose. While a joint venture is not a formal partnership in undertaking some commercial enterprise; generally, all contribute
the legal or technical sense, both are governed, subject to certain assets and share risks. It requires a community of interest in the
qualifications, practically by the same rules or principles of performance of the subject matter, a right to direct and govern the
partnership. This is logical since in a joint venture, like in a policy in connection therewith, and [a] duty which may be altered by
partnership, there is a community of interest in the business and a agreement to share both in profits and losses.’’ (see Information
mutual right of control and an agreement to share jointly in profits and Technology Foundation vs. Commission on Elections, 419 SCRA 141
losses resulting from the enterprise. [2004].)

The usual rules as regards the construction and operation of

contracts generally apply to a contract of a joint venture. (Aurbach vs.
Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989]; Litonjua,
Jr. vs. Litonjua, Sr., 477 SCRA 576 [2005]; see Philex Mining Corp.
vs. Comm. of Internal Revenue, 551 SCRA 428 [2008].)

(3) Corporation as a partner. — While under the Philippine Civil

Code, a joint venture is a form of partnership with a legal personality
separate and distinct from the parties composing it, and should thus
be governed by the law of partnership, the Supreme Court has,
however, recognized a distinction between these two business forms,
and has held that although a corporation cannot enter into a
partnership contract, it may, however, engage in a joint venture with
others (Tuazon vs. Bolanos, 95 Phil. 906 [1954].) through a contract
or agreement if the nature of the venture is authorized by its charter.
(SEC Opinion, April 29, 1985.)

A particular partnership has been distinguished from a joint

adventure, to wit:
(a) A joint adventure (an American concept similar to our joint
accounts) is a sort of informal partnership, with no firm
name and no legal personality. In a joint account, the
participating merchants can transact business under their
own name, and can be individually liable therefor.
(b) Usually, but not necessarily, a joint adventure is limited to
a SINGLE TRANSACTION, although the business of
pursuing to a successful termination may continue for a
number of years; a partnership generally relates to a
continuing business of various transactions of a certain
kind.

A joint venture “presupposes generally a parity of standing between

the joint co-ventures or partners, in which each party has an equal
proprietary interest in the capital or property contributed, and where
each party exercises equal rights in the conduct of the business.
(Heirs of Tan Eng Kee vs. Court of Appeals, 341 SCRA 740 [2000].)
Nonetheless, in Aurbach (supra.), the Supreme Court expressed the
view that a joint venture may be likened to a particular partnership.
(see Primelink Properties & Development Corp. vs. Lazatin-Magat,
493 SCRA 444 [2006].)