Taxable Effect of Partnership

July 28, 1960 BIR RULING NO. 333-60 Acoje Oil Exploration and Drilling Co., Inc. 5th Floor, Pilot Bldg. M. de La Industria, Manila Gentlemen : Reference is made to your letter dated January 5, 1960, stating the following: "The Acoje Oil Exploration and Drilling Co., Inc. a corporation duly organized and existing under the laws of the Philippines with principal offices at the City of Manila entered into an Operating Agreement with Hixber Mining Co., Inc., likewise a corporation duly organized and existing under the laws of the Philippines with principal offices in the City of Manila. This Operating Agreement was duly registered with and approved by the proper authorities." "The gist of the agreement is to the effect that Acoje Oil will explore, develop and exploit certain defined petroleum concessions belonging to Hixber with the former disbursing all the expenditures necessary in the premises. If gas or oil is found and income is realized as a result of said agreement, Acoje Oil shall be entitled to reimbursement of all its expenses plus an amount equivalent to one hundred per centum of all such disbursements as bonus. After Acoje Oil is thus compensated, all the income or produce shall be divided in equal shares between the parties. Under the agreement the parties may receive their respective shares either in kind or cash". You now request the opinion of this Office as to whether under the above "Operating Agreement" a partnership exists between you and Hixber Mining Co., Inc., for income tax purposes, and as to the taxable effect in case the members receive their respective shares in kind upon production, at cost, assuming the exclusive right to sell or dispose the same for their own account, if a partnership exists. In reply thereto, I have the honor to inform you that the Acoje Oil Exploration Drilling Co., Inc. and the Hixber Mining Co., Inc. have by the foregoing agreements, constituted themselves into a partnership within the meaning of Section 84(b) of the Tax Code. By contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves, (Art. 1767, New Civil Code) The term "corporation" under our Tax Code includes partnership as defined under the American law and legal personality of a partnership apart from its members is not a condition essential to the existence of a partnership referred to under Section 84(b) of the said Code for corporate income tax purposes. The term "partnership" as used under the United States Internal Revenue Code, includes a syndicate, group, pool, joint ventures, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. (Eufemia Evangelista v. Collector of Internal Revenue and the Court of Tax Appeals, G.R. No. L-9996). A "Joint Emergency Operation", or sole management, or joint venture in the operation of the business affairs of two transportation companies is a partnership within the meaning of section 84(b) of the Tax Code and taxable as a corporation under Section 24 thereof, even if such partnership has no juridical personality independent of its members. (Collector of Internal Revenue v. Batangas Transportation Company and Laguna-Tayabas Bus Co., G.R. No. L-9692, January 6, 1958) Where the partners receive their respective shares in kind upon production, at cost, and assume the exclusive right and responsibility of selling and/or disposing of the same for their own account, the fair market value thereof at the time of distribution shall be considered as the income of the partners. Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue