BIR Ruling No. 031-62

January 30, 1962 BIR RULING NO. 031-62 1st Indorsement Returned to the Regional Director, B.I.R. Regional District No. 9, Zamboanga City, the entire docket relative to the proposed assessment for income tax in the term of P12,657.80, against the ILIGAN LUMBER CO., INC., a domestic corporation engaged in the lumber business and P. B. MEJIA, an engineer and independent building contractor, who were allegedly associated in what section 84(b) of the Tax Code refers to as a "joint venture" or "cuentas en participation." The only is we involved in this case is whether or not the facts found and gathered by the investigating agent warrants the conclusion that there was a "joint venture" or "cuentas participation" as these terms are understood in section 84(b) of the Code. The facts of the case may be summarized briefly, as follows: In an investigation conducted by an internal revenue agent to determine any tax liability of the Iligan Lumber Co., Inc., he found that said corporation assumed or rather gave financial backing to certain construction projects undertaken by P. B. Mejia, and engineer and independent building contractor. The buildings under construction were the Provincial Capitol and certain annexes of the province of Lanao. Obviously, the engineer-contractor was without sufficient funds of his own to undertake the construction projects, so he approached Mr. P. B. Andrada, president of the corporation in question for the purpose of soliciting financial backing or guarantee in the construction projects he planned to undertake. Whatever agreement was reached between the parties was never reduced in writing. The advances made by the corporation were recorded in its own books of accounts and Mr. Mejia kept a similar record in his books of accounts. In fact most of the findings of the investigator, which were based mainly from the book entries in the books of accounts, were taken from the books of accounts kept by Mr. Mejia. According to the report of the investigation, the corporation advanced certain amounts to Mr. Mejia and the rest were made in the form of construction materials, like logs on lumber. The report also showed that Mr. Mejia bought certain quantities of materials but it was not definitely shown whether the money used for the purchase of said materials came from the separate funds of Mr. Mejia or from the advances made by the corporation. After the projects were completed, the accounts must have been liquidated and the corporation received a certain percentage of the profits realized. On the basis of these inclusive findings, the investigator inferred that an accidental partnership was formed, otherwise known as "joint venture" or joint account" (cuentas en participacion) as contemplated in section 84(b) of the Tax Code. OPINION . Extension of the credit facilities of one to another as well as a share in the profits, does not necessarily mean that a joint venture of account has been established or formed for purposes of section 84(b) of the Code. "Although one party's contribution to a joint adventure may be to provide the funds necessary to finance it, the mere fact that one loans or advances money to finance the scheme of another does not make him a joint adventurer with such other in carrying out the scheme. Nor, in general, does such a lender becomes a joint adventurer by reason of the borrower's agreement to pay him as compensation for advancing the money a share of the profits receives, where the lender has no control over or interest in the scheme itself beyond such right to a share of the profits, and does not share in the losses." (30 Am. Jur. page 688.) "Parties cannot be said to be engaged in 'joint venture' unless there is community of interest in objects or purposes of undertaking and an equal right to direct and govern movement of each other with respect thereto. Each must have some voice and right to be heard in its control and management." Dehham v. Taylor, 131 So. 614, 616, 15 La. pp. 545. (WORDS AND PHRASES, Vol. 23 p. 118). From the facts adduced, it is quite evident that the Iligan Lumber Co., Inc., had no say whatsoever in the project undertaken by P.B. Mejia. Its participacion was limited to the advancing of funds and the supplying of certain materials. In fact all that the investigator managed to allege but not prove was that the corporation manage the accounts. This conclusion, however, is not borne out by the facts. Mr. Mejia kept a separate account of his own and he had in his employ an account-auditor. The corporation also kept separate records of its accounts. The fact that each of them furnished the other with a copy of the voucher of purchases, militates against the conclusive that the corporation managed the so-called "joint account" established. The cases of EUFEMIA EVANGELISTA, ET. AL. vs. COLLECTOR OF INTERNAL REVENUE, ET. AL., G.R. No. L-9996 prom. Oct. 15, 1957 and COLLECTOR OF INTERNAL REVENUE vs. BATANGAS TRANSPORTATION COMPANY & LAGUNA-TAYABAS BUS COMPANY, G.R. No. L-9692 prom. January 6, 1958, cannot apply to the instant case. In both of those cases, there had been a definite showing that the parties had an equal right to direct and govern the activities of the other as shown by the agreements to appoint a general manager to manage the affairs of the business operations. In the instant case, each of the supposed partners managed his own separate business. There was no community of interests involved. The corporation was primarily interested in enhancing its sales of logs and lumber although in the transportation it incidentally acquired a certain percentage in the profits of the construction projects. Mr. Mejia was on the other hand primarily interested in completing the construction projects on time and to ensure the same he had to seek financial backing due obviously to his lack of sufficient funds to finance the construction even to the extent of giving out a certain percentage of his expected profits. In view of the foregoing, this Office is of the opinion, and so holds that neither a 'partnership' not 'joint account' as contemplated in section 84(b) of the Tax Code had been established. At most, the relationship established was that of debtor-creditor. It is not unique for one badly in need of funds to offer or grant concessions to another who provides him the same, and for the provider to impose certain conditions before giving to the other the use of his funds. aisadc He is advised to be guided accordingly. MELECIO R. DOMINGO Commissioner of Internal Revenue