Creation of Partnership

March 16, 1981 BIR RULING NO. 054-81 24-a 000-00 054-81 Messrs. Duavit, Gozon, Elma & Berenguer Attorneys-at-Law 6th Floor, Legaspi Towers 200 107 Paseo de Roxas, Legaspi Village Makati, Metro Manila Attention: Felipe L . Gozon Counsel for Fil-Am Resources, Inc . Gentlemen : This refers to your letter dated February 3, 1981 requesting a ruling whether, for purposes of the corporate income tax imposed by Section 24 (a) of the Tax Code, a partnership has been created between Fil-Am Resources, Inc. as claimowner, and Golden Arrow Mining Co., Inc., under their agreement executed on November 26, 1980. You have represented that under said agreement, Fil-Am has engaged the services of Golden Arrow to explore, develop, exploit and operate certain specific mining claims of Fil-Am and to market all concentrates and mineral products that may be extracted, recovered or produced therefrom; that Golden Arrow was given a period of one (1) year to investigate, examine and explore the property for the purpose of determining, in the sole judgment of Golden Arrow , whether the property can be operated as a viable project (par. 4); that after such determination, Golden Arrow shall solely finance the development of the mining claims and the acquisition and construction of the necessary buildings, machinery, equipment and other infrastructure and solely carry on, conduct and manage the operations therein; and that all liabilities to be incurred by Golden Arrow shall be its sole responsibility and Fil-Am is not responsible to pay such liabilities. cdtech It appears also that Fil-Am shall receive as royalty consisting of 30% of the net proceeds (excess of gross receipts over disbursements) from the operation of the mining claims; that any loss sustained by Golden Arrow in operating the mining claims shall be borne solely by Golden Arrow; that no loans incurred in any years shall be carried forward to any subsequent year for the purpose of computing the royalty due to Fil-Am (Par. 20 and 21); that Golden Arrow has the right to terminate the agreement any time if, in its sole and exclusive judgment, the mining claims cannot be operated on a profitable basis, in which event, Golden Arrow shall have the right to remove all the improvements it had introduced in the property and that Golden Arrow shall turn over the possession and occupancy of the mining claims to Fil-Am (par. 26, 28 and 29); and that it is expressly agreed that nothing in the agreement is intended to give rise to a partnership or joint venture arrangement (par. 36). In reply, I have the honor to inform you that a partnership is formed by two or more persons who contribute money, property or industry to a common fund with the intention of dividing the profits among themselves. (Art. 1767, Civil Code). In the instant case, it cannot be said that there is contribution by the parties to the common fund. In fact, the parties remain the owners of the assets used in the operation of the mining claim. Moreover, an agreement to share both profits and losses tends to strongly establish the existence of a partnership. This is lacking in the agreement of the parties. In fact, it is expressly stipulated that losses shall be borne solely by Golden Arrow. In view thereof, this Office believes, and so holds, that for purposes of Section 24(a) of the Tax Code holding partnerships, no matter how created or organized, liable for the payment of the corporate income tax, no joint venture or partnership has been created by Fil-Am Resources, Inc. and Golden Arrow Mining Co., Inc. under the agreement for the operation of the mining claims of the former. The facts upon which this ruling is based are subject to investigation. Consequently, if upon investigation, the parties deviate from the terms of the agreement, this ruling shall not apply. Very truly yours, RUBEN B. ANCHETA Acting Commissioner