Commissioner of Internal Revenue vs. William J.

Suter and the Court of Tax Appeals

G.R. No. L-25532 February 28, 1969
REYES, J.B.L., J.:

FACTS:

William J. Suter 'Morcoin' Co., Ltd was a limited partnership registered with the SEC. The following were
its members and their respective contributions:

1. William J. Suter (general partner) = Php 20,000

2. Julia Spirig (limited partner) = Php 18,000
3. Gustav Carlson (limited partner) = Php 2,000

The firm engaged in the importation, marketing, distribution and operation of automatic phonographs,
radios, television sets and amusement machines, their parts and accessories.

When Suter and SPirig got married in 1948, Carlson sold his shares in the partnership to Suter and his wife.
The sale was recorded in SEC. Thereafter the partnership had been filing its income tax returns as a
corporation without any objections from the CIR; however, on 1959 CIR consolidated the income of the
firm and the individual incomes of Suter and Spirig. It resulted to a deficiency income tax in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955. Suter protested the assessment but such protest was denied.

The CIR believed 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 theyspouse to cover the
income of both spouses;

On the other hand, Suter contested that 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, 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.

ISSUES:
1.) Whether the partnership was dissolved by virtue of the marriage of the partners and the subsequent sale
to them of the shares of the remaining partner.

2,) Whether or not the corporate personality of the partnership 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.
RULING:

1.) No, the marriage and the sale did not dissolve the partnership. A 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.

CIR’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.

2.) No, the the corporate personality of the partnership should not be disregarded for income tax purposes.

The rulings (CIR vs. University of Visayas and Koppel Inc. vs. Yatco) cited by the CIR cannot be applied
in the case at bar. In the aforementioned cases, the corporations, 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 (compañia 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.
 Lim Tong Lim Vs. Philippine Fishing Gear Industries, Inc.
G.R. No. 136448 November 3, 1999
PANGANIBAN, J.:

FACTS:
Antonio Chua and Peter Yao, on behalf of Ocean Quest Fishing Corporation, purchased fishing nets from
Philippine Fishing Gear Industries, Inc. (“PFGI”). Chua and Yao claimed that they were engaged in a
business venture with Lim Tong Lim.

When the buyers failed to pay for the fishing nets, PHGI filed a collection suit with a prayer for a
preliminary attachment against Chua, Yao, and Lim, in their capacities as general partners on the allegation
that "Ocean Quest Fishing Corporation" was a non-existent corporation.

The trial court ruled that PFGI was entitled to the Writ of Attachment and that Chua, Yao and Lim, as
general partners, were jointly liable to pay respondent. Such ruling was based on the testimonies of
the witnesses and the contents of a compromise agreement between the three which stated the
following: a) that the parties agree to have the four vessels sold in the amount of P5,750,000.00 and
which shall be applied as full payment for P3,250,000.00 in favor of JL Holdings C orporation and/or
Lim Tong Lim; b) If the four vessels and the fishing net will be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1 /3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall
be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter
Yao.

The trial court noted that the Compromise Agreement was silent as to the nature of their obl igations,
but that joint liability could be presumed from the equal distribution of the profit and loss .

Lim appealed to the CA, but CA affirmed the decision of the trial court. CA maintained that the evidence
establishes that all the undertook a partnership for a specific undertaking, that is for commercial
fishing. Since the ultimate undertaking of the defendants was to divide the profits among themselves
which is what a partnership essentially is.

Hence, petitioner elevated the issue to the Supreme Court.

ISSUE:

Whether Lim Tong Lim should be considered as a partner based on the compromise agreement
entered into by the parties.

RULING:

Yes, Lim Tong Lim should be considered as a partner based on the compromise agreement.

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.

Moreover, it is clear that the partnership extended not only 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 obviously
acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself
so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be divided
among them.

The Supreme Court is also not convinced 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 argument allegedly finds supp ort
in the Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdes where the nets were found.

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 and Yao, with the excess of the proceeds to be divided among
the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that
there was a preexisting partnership among all three. 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 brot her of the
creditor, Jesus Lim.

Moreover, Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, the SC disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Thus, 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 representat ives 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 perfor med as
such agent.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for
the nets it sold. The only question here is whether petitioner should be held jointly liable with Chua
and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear on any of the contracts
and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing vessel.

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.
 Gregorio F. Ortega, Tomas O. Del Castillo, Jr., And Benjamin T. Bacorro Vs.
Hon. Court Of Appeals, Securities And Exchange Commission And Joaquin L. Misa
G.R. No. 109248 July 3, 1995
VITUG, J.:

FACTS:

Ross, Lawrence, Selph and Carrascoso was duly registered in the Mercantile Registry on 4 January
1937 and reconstituted with the Securities and Exchange Commission on 4 August 1948. The SEC
records show that there were several subsequent amendments to the articles of partnership which
includes the change of the firm name to Ross, Selph and Carrascoso; to Ross, Selph, Salcedo, Del
Rosario, Bito & Misa; Salcedo, Del Rosario, Bito, Misa & Lozada; Salcedo, Del Rosario, Bito, Misa &
Lozada; Del Rosario, Bito, Misa & Lozada; Bito, Misa & Lozada; [Joaquin L. Misa] appellees Jesus B.
Bito and Mariano M. Lozada associated themselves together, as senior partners with respondents-
appellees Gregorio F. Ortega, Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior partners.

On February 17, 1988, petitioner-appellant wrote the respondents-appellees a letter expressing his
intent to withdraw and retire from the firm. According to him, the partnership has ceased to be mutually
satisfactory because of the working conditions of the employees including the assistant attorneys.

On 30 June 1988, petitioner filed with this Commission's Securities Investigation and Clearing
Department (SICD) a petition for dissolution and liquidation of partnership, docketed as SEC Case No.
3384 praying for the dissolution and immediate liquidation of the partnership. He also prayed to enjoin
the respondents from using the firm name of Bito, Misa & Lozada in any of their correspondence,
checks and pleadings.

On 31 March 1989, the hearing officer rendered a decision ruling that petitioner's withdrawal from the
law firm Bito, Misa & Lozada did not dissolve the said law partnership. Accordingly, the petitioner and
respondents are hereby enjoined to abide by the provisions of the Agreement relative to the matter
governing the liquidation of the shares of any retiring or withd rawing partner in the partnership interest.

On appeal, the SEC en banc reversed the decision of the Hearing Officer and held that the withdrawal
of Attorney Joaquin L. Misa had dissolved the partnership of "Bito, Misa & Lozada." The Commission
ruled that, being a partnership at will, the law firm could be dissolved by any partner at anytime, such
as by his withdrawal therefrom, regardless of good faith or bad faith, since no partner can be forced
to continue in the partnership against his will.

ISSUE:

Whether the withdrawal of Misa dissolved the partnership regardless of his good or bad faith

RULING:

Yes, the withdrawal of Misa dissolved the partnership regardless of his good faith or bad faith.

The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners.
The right to choose with whom a person wishes to associate himself is the very foundation and
essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that
mutual resolve, along with each partner's capability to give it, and the absence of a cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate
a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of
bad faith can prevent the dissolution of the partnership 4 but that it can result in a liability for damages.

In passing, neither would the presence of a period for its specific duration or the statement of a
particular purpose for its creation prevent the dissolution of any partnership by an act or will of a
partner. Among partners, mutual agency arises and the doctrine of delectus personae allows them to
have the power, although not necessarily the right, to dissolve the partnership. An unjustified
dissolution by the partner can subject him to a possible action for damages.

The dissolution of a partnership is the change in the relation of the parties caused b y any partner
ceasing to be associated in the carrying on, as might be distinguished from the winding up of, the
business. Upon its dissolution, the partnership continues and its legal personality is retained until the
complete winding up of its business culminating in its termination.