G.R. No. 136448. November 3, 1999.*

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

Partnerships; A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a “common fund,” as their contribution to such fund could be an intangible like credit or industry.—From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner’s brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term “common fund” under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.

Same; Appeals; Petitions for Review; Pleadings and Practice; Under Rule 45, a petition for review should involve only questions of law, and a petitioner, in assailing the factual findings of the two lower courts, effectively goes beyond the bounds of a petition for review.—We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present action is embraced by one of the exceptions to the rule. In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Same; Same; Same; A proper adjudication of claimants’ rights mandates that courts must review and thoroughly appraise all relevant facts.—A proper adjudication of claimants’ rights mandates that courts must review and thoroughly appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts’ factual findings mentioned above nullified petitioner’s argument that the existence of a partnership was based only on the Compromise Agreement.

Same; Loans; It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts.—Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels 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 the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset 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 creditor, Jesus Lim.

Same; Corporation Law; Estoppel; Corporation by Estoppel Doctrine; Agency; Those who act or purport to act as the representatives or agents of an ostensible corporate entity who is proven to be legally inexistent do so without authority and at their own risk.—Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. “The reason behind this doctrine is obvious—an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent.”

Same; Same; Same; Same; The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party; An unincorporated association, which represents itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relies in good faith on such representation.—The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits.

Same; Same; Same; Same; A third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation.—A third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.

Same; Same; Same; Same; Under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.—It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

Same; Same; Same; Same; A person who has reaped the benefits of a contract entered into by persons with whom he previously had an existing relationship is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.—Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor: “A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapier’s thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.” [Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728(1999)]

G.R. No. 84197. July 28, 1989.*

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157. July 28, 1989.*

JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC., FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Insurance; Real party in interest; The real party in interest with regard to the portion of the indemnity paid is the insurer and not insured; Petitioner was not the real party in interest in the complaint and therefore has no cause of action against the respondents.—Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (10 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]): “Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured.” (Italics supplied) It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer. Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner’s complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents.

Corporation Law; Partnership; Persons who attempt but fail to form a corporation and who carry on business under the corporate name occupy the position of partners inter se.—“While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the

statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized.”

Same; Same; Same; Such a relation does not necessarily exist however for ordinarily persons cannot be made to assume the relation of partners as between themselves when their purpose is that no partnership shall exist.—However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U. S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter.

Same; Same; Same; Same; Petitioner never had the intention to form a corporation with the respondents despite his representations to them.—It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement.

Same; Same; Same; Same; Same; No de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation.—Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. [Pioneer Insurance & Surety Corporation vs. Court of Appeals, 175 SCRA 668(1989)]

LORENZO T. OÑA,and HEIRS OF JULIA BUNALES,namely: RODOLFO B. OÑA,MARIANO B. OÑA,LUZ B. OÑA,VIRGINIA B. OÑA,and LORENZO B. OÑA,JR., petitioners, vs. THE

COMMISSIONER OF INTERNAL REVENUE,respondent.

Taxation; Partnership; When co-ownership converted to co-partnership.—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 extra-judicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason 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.

Same; Same; Corporation; Partnerships considered corporation for tax purposes.—For purposes of the tax on corporations, the National Internal Revenue Code, includes partnerships—with the exception only of duly registered general co-partnerships—within the purview of the term “corporation.”

Same; Same; When income derived from inherited properties deemed part of partnership income.—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 part of the taxable income of an unregistered partnership.

Same; Same; Effect on unregistered partnership profits individual income tax paid.—The partnership profits distributable to the partners should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the petioners in his individual capacity overpaid his income tax for the years in question. But as the individual income tax liabilities of petitioners are not in issue in the instant proceeding, it is not proper for the Court to pass upon the same.

Same; Same; Where right to refund of overpaid individual income tax has prescribed.—A taxpayer who did not pay the tax due on the income from an unregistered partnership, of which he is a partner, due to an erroneous belief that no partnership, but

only a co-ownership, existed between him and his co-heirs, and who due to the payment of the individual income tax corresponding to his share in the unregistered partnership profits, on the balance, overpaid his income tax has the right to be reimbursed what he has erroneously paid. However, the law is very clear that the claim and action for such reimbursement are subject to the bar of prescription. [Oña vs. Commissioner of Internal Revenue, 45 SCRA 74(1972)]

No. L-68118. October 29, 1985.*

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Taxation; The dictum that the power to tax involves the power to destroy should be obviated.—To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

Same; Partnership; Co-ownership; Where the father sold his rights over two parcels of land to his four children so they can build their residence, but the latter after one (1) year sold them and paid the capital gains, they should not be treated to have formed an unregistered partnership and taxed corporate income tax on the sale and dividend income tax on their shares of the profit's from the sale.—Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.

Same; Same; Same; Mere sharing of gross income from an isolated transaction does not establish a partnership.—Article 1769(3) of' the Civil Code provides that ''the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a j oint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. [Obillos, Jr. vs. Commissioner of Internal Revenue, 139 SCRA 436(1985)]

No. L-25532. February 28, 1969.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

Partnership; Where respondent company in the case at bar is considered a particular partnership and not universal.—The respondent company was not a universal partnership, but a particular one. As

appears f rom Articles 1674 and 1675 of the Spanish Civil Code of 1889 (law in force when firm 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.” Respondent company was not such a universal partnership, since the contributions of the partners were fixed sums of money and neither one of them was an industrial partner. It follows that respondent company was not a partnership that spouses were forbidden to enter by Article 1677 of the Civil Code of 1889. 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.

Same; Where marriage of partners does not make the company a single proprietorship.—The capital contributions of re spondents-partners 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.

Same; Partnership has distinct and separate personality from that of its partners; Section 24 of Internal Revenue Code is exception to the rule.—The basic tenet of ,the Spanish and Philippine law is that the partnership has a juridical personality of its own, distinct and separate from that of its partners, 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 copartnerships 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.

Same; Taxation; Change in membership does not remove partnership from coverage of section 24.—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 to laws. Regularity, not otherwise, is presumed. The limited partnership is taxable on its income and to require that income to be included in the indiviual tax return of respondent is to overstretch the letter and intent of the law.

Same; Same; Members and not firm are taxable in case of compañias colectivas.—In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant’s stand results in equal treatment, taxwise, of a general copartnership (compania 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 compañias 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.; Arañas, Anno. & Juris on the N.I.R.C., As Amended, Vol. 1, pp. 88–89).

Same; Same; Income of limited partnership forming part of the conjugal partnership is not wholly correct.—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 is not wholly correct. The fruits of the wife’s paraphernal 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 conf ines itself to the question of the legal personality of the limited partnership since the law taxes the income of ‘even joint accounts that have no personality of their own. (Agapito v. Molo, 59 Phil. 779; People’s Bank v. Register of Deeds of Manila, 60 Phil. 167; V. Evangelista v. Collector of Internal Revenue, 102 Phil. 140; Collector v. Batangas Transportation Co., 102 Phil. 822.)

Same; Same; What is taxable is income of both spouses, not the conjugal partnership.—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 partnernership 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.

Same; Same; Revenue code does not authorize consolidation of income of limited partnership and income of spouses.—The diff erence 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. [Commissioner of Internal Revenue vs. Suter, 27 SCRA 152(1969)]