Philex Mining Corporation v.
Commissioner of Internal Revenue then ascertained that Baguio Gold had a remaining outstanding indebtedness
April 16, 2008 | Ynares-Santiago, J. | Partnership – Elements & Characteristics
PETITIONER: Philex Mining Corporation
RESPONDENT: Commissioner of Internal Revenue
SUMMARY: Philex Mining Corporation entered into an agreement
denominated as “Power of Attorney” with Baguio Gold Mining Company for
the former to manage and operate the latter’s mining claim. Since the mine
suffered continuing losses, Philex withdrew as manager, and the parties
executed a Compromise with Dation in Payment wherein Baguio Gold
recognized its indebtedness to Philex. Thus, in its annual tax income return,
Philex Mining deducted from its gross income the amount of P112,136,000.00
as bad debt. However, the BIR disallowed the amount as deduction for bad debt
and assessed Philex Mining a deficiency income tax. Philex protested. The SC
affirmed and held that Philex could not claim the advances as a bad debt
deduction since they were actually investments in a partnership and not in the
nature of a loan. The SC came to this conclusion because:
1) Under the agreement, Philex Mining was merely entitled to a proportionate
return of the mine’s assets upon dissolution of the parties’ business relations and
not an unconditional return of the advances it made.
2) It was unlikely that Philex would lend hundreds of millions of pesos to
another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans.
3) Under the agreement, Philex Mining would receive 50% of the net profits as
"compensation.”
FACTS:
1. Philex Mining Corporation entered into an agreement denominated as
“Power of Attorney” with Baguio Gold Mining Company for the former to
manage and operate the latter’s mining claim, known as the Sto. Nino mine.
2. In the course of managing and operating the project, Philex Mining made
advances of cash and property in accordance with the agreement. However,
the mine suffered continuing losses over the years which resulted to Philex
Mining’s withdrawal as manager of the mine and in the eventual cessation of
mine operation.
3. Thereafter, the parties executed a "Compromise with Dation in Payment,”
and later on an "Amendment to Compromise with Dation in Payment,”
where the parties determined that Baguio Gold was indebted to Philex
Mining in the amount of P259,137,245.00. After the payment, the parties
in the amount of P114,996,768.00.
4. In its 1982 annual income tax return, Philex Mining deducted from its gross
income the amount of P112,136,000.00 as "loss on settlement of receivables
from Baguio Gold against reserves and allowances." However, the BIR
disallowed the amount as deduction for bad debt and assessed Philex Mining
a deficiency income tax of P62,811,161.39.
5. Philex Mining argued that the deduction must be allowed since all requisites
for a bad debt deduction were satisfied. The BIR denied the protest.
6. On appeal, the CTA affirmed the BIR. The CTA rejected Philex Mining’s
assertion that the advances it made for the mine were in the nature of a loan.
It characterized the advances as Philex’s investment in a partnership with
Baguio Gold for the development and exploitation of the mine. The CTA
held that the "Power of Attorney" was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could
not be deducted as a bad debt from Philex’s gross income.
ISSUE/S:
1. WON Philex Mining can claim the advances as a bad debt deduction
from its gross income – NO
RATIO:
1.
a. An examination of the "Power of Attorney" reveals that a
partnership or joint venture was indeed intended by the parties.
While a corporation like Philex Mining cannot generally enter into a
contract of partnership unless authorized by law or its charter, it
may enter into a joint venture which is akin to a particular
partnership:
i. The legal concept of a joint venture is of common law
origin. It has no precise legal definition, but it has been
generally understood to mean an organization formed for
some temporary purpose. It is in fact hardly distinguishable
from the partnership, since their elements are similar –
community of interest in the business, sharing of profits
and losses, and a mutual right of control. The main
distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction,
and is thus of a temporary nature. This observation is not
 entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific
undertaking. It would seem therefore that under Philippine
law, a joint venture is a form of partnership and should be
governed by the law of partnerships. 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.
b. The "Power of Attorney" indicates that the parties had intended to
create a partnership and establish a common fund for the purpose.
They also had a joint interest in the profits of the business as shown
by a 50-50 sharing in the income of the mine.
c. There is a substantive equivalence in the respective contributions of
the parties to the development and operation of the mine. Pursuant
to the agreement, Baguio Gold would contribute P11M in addition
to its actual mining claim, while Philex Mining’s contribution
would consist of its expertise in the management and operation of
mines, as well as the manager’s account which is comprised of
P11M.
d. Philex Mining asserts that it could not have entered into a
partnership agreement with Baguio Gold because it did not "bind"
itself to contribute money or property to the project; that under the
agreement, it was only optional for Philex Mining to transfer funds
or property to the Sto. Niño project "(w)henever the MANAGERS
shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NIÑO MINE."
i. SC: Under paragraph 5(c), Philex is prohibited from
withdrawing the advances until termination of the parties’
business relations. Hence, Philex became bound by its
contributions once the transfers were made.  business."
e. Philex Mining claims that the parties entered into a contract of
agency coupled with an interest and not a partnership.
i. SC: The main object of the "Power of Attorney" was not to
confer a power in favor of Philex Mining to contract with
third persons on behalf of Baguio Gold but to create a
business relationship between the parties, in which the
Philex Mining was to manage and operate Baguio Gold’s
mine through the parties’ mutual contribution of material
resources and industry.
f. The totality of the circumstances and the stipulations in the
agreement indubitably lead to the conclusion that a partnership was
formed.
i. First, it does not appear that Baguio Gold was
unconditionally obligated to return the advances made
by Philex Mining. Under the agreement, Philex Mining
was merely entitled to a proportionate return of the mine’s
assets upon dissolution. In a contract of loan, a person who
receives a loan is bound to pay the creditor an equal
amount of the same kind and quality. In this case, however,
there was no stipulation for Baguio Gold to actually repay
petitioner the cash and property that it had advanced, but
only the return of an amount pegged at a ratio which the
manager’s account had to the owner’s account. Thus, there
is also no basis for the execution of the two compromise
agreements in which Baguio Gold recognized a debt in
favor of Philex.
ii. Next, it is unlikely for a business corporation to lend
hundreds of millions of pesos to another corporation
with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The
parties also did not provide a specific maturity date for the
advances to become due and demandable, and the manner
of payment was unclear. All these point to the inevitable
conclusion that the advances were not loans but capital
contributions to a partnership.
iii. Lastly, the strongest indication that petitioner was a
partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation.”
Article 1769 (4) of the Civil Code explicitly provides that
the "receipt by a person of a share in the profits of a
business is prima facie evidence that he is a partner in the
iv. Philex Mining argues that its share in the profits was in the
nature of compensation or "wages of an employee", under
the exception provided in Article 1769 (4) (b).
1. SC: Philex Mining was not an employee of Baguio
Gold. It was the manager of the project and had
put substantial sums into the venture. By pegging
its compensation to profits, Philex Mining also
stood not to be remunerated in case the mine had
no income. Philex Mining would not take the risk
of not being paid at all for its services, if it were
truly just an ordinary employee. Nor would Philex
Mining be entitled to an equal share in the income
of the mine if it were just an employee.