Philex Mining vs Commissioner of Internal Revenue FACTS: Philex Mining Corp.

entered into an agreement with Baguio Gold Mining Co. for the former to manage and operate the latters mining claim, known as the Sto. Nino Mine. agreement was denominated as !Power of "ttorne#$ which he parties inter pro%ides

alia&'. (ithin three )*+ #ears from date thereof, the P,-NC-P". )Baguio Gold+ shall make a%aila /le tothe M"N"G0,S )Philex Mining+ up to 0.010N M-..-2N P0S2S )P33,444,444.44+, in such amounts as from time to time ma# /e re5uired /# the M"N"G0,S within the said *6#ear period, for use in the M"N"G0M0N of the S 2. N-N2 M-N0. he said 0.010N M-..-2N P0S2S )P33,444,444.44+ shall /e deemed, for internal audit purposes, as the owners account in the Sto. Nino P,270C . "n# part of an# income of the P,-NC-P". from the S 2. N-N2 M-N0, which is left with the Sto. Nino P,270C , shall /e added to such owners account.8. (hene%er the M"N"G0,S shall deem it necessar# and con%enient in connection wi th theM"N"G0M0N of the S 2. N-N2 M-N0, the# ma# transfer their own funds or propert# to the Sto. Nino P,270C , in accordance with the following arrangements& )a+ he properties shall /e appraised and, together with the cash, shall /e carried /# the Sto. Nino P,270C as a special fund to /e known as the M"N"G0,S account. )/+ he total of the M"N"G0,S account shall not exceed P33,444,444.44, except with priorapp ro%al of the P,-NC-P".9 pro%ided, howe%er, that if the compensation of the M"N"G0,S as herein pro%ided cannot /e paid in cash from the Sto. Nino P,270C , the amount not so paid in cash shall /eaded to the M"N"G0,S account. )c+ he cash and propert# shall not thereafter /e withdrawn from the Sto. Nino P,270C until termination of this "genc#. )d+ he M"N"G0,S account shall not accrue interest. Since it is the desire of the P,-NC-P". to extend to the M"N"G0,S the /enefit of su/se5uent appreciation of propert#, upon a pro:ected termination of this "genc#, the ratio which the M"N"G0,S account has to the owners account will /e determined, and the corresponding proportion of the entire assets of the S 2. N-N2 M-N0, excluding the claims, shall /e transferred to the M"N"G0,S, except that such transferred assets shall not include mine de%elopment, roads, /uildings, and similar

propert# which will /e %alueless, or of slight %alue, to the M"N"G0,S. he M"N"G0,S can, on the other hand, re5uire at their option that propert# originall# transferred /# them to the Sto. Nino P,270C /e re6transferred to them. ;ntil such assets are transferred to the M"N"G0,S, this "genc# shall remain su/sisting. xxxx 3<. he compensation of the Nino P,270C /efore after M"N"G0, shall /e fift# per cent )84=+ of the net profit of the Sto.

income tax. -t is understood that the M"N"G0,S shall pa# income tax on their compensation, while the P,-NC-P". shall pa# income tax on the net profit of the Sto. Nino P,270C deduction there from of the M"N"G0,S compensation. Philex Mininingmade ad%ances of cash and propert# in accordance with paragraph 8 of the agreement. >owe%er, the mine suffered continuing losses o%er the #ears which resulted to Philex Minings withdrawal as manager of the mine and in the e%entual cessation of mine operations. he parties executed a !Compromise with ?ation in Pa#ment$ wherein Baguio Gold admitted an inde/tedness to petitioner in the amount of P3@A,*A',444.44 and agreed to pa# the same in three segments /# first assigning Baguio Golds tangi/le assets to Philex Mining, transferring to the latter Baguio Golds e5uita/le title in its Philo drill assets and finall# settling the remaining lia/ilit# through properties that Baguio Gold ma# ac5uire in the future. he parties executed an !"mendment to Compromise with ?ation in Pa#ment$ where the parties determined that Baguio Golds inde/tedness to petitioner actuall# amounted to P<8A,3*@,<'8.44,which sum included lia/ilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. and Citi/ank 3.44 and then N.". transferring its his e5uita/le hese lia/ilities pertained to long6term loans time, title in its Baguio Philo drill assets Gold for

amounting to ;SB33,444,444.44 contracted /# Baguio Gold from the Bank of "merica N C S" undertook to pa# petitioner in two segments /# first assigning its tangi/le assets forP3<@,D*D,48 P3E,*4<,'<E.44. he parties then ascertained that Baguio Gold had a remaining outstanding inde/tedness to petitioner in the amount of P33',AAE,@ED.44. Philex Mining wrote off in its 3AD< /ooks of account the remaining outstanding inde/tedness of Baguio Gold /# charging P33<,3*E,444.44 to allowances and reser%es that were set up in 3AD3 andP<,DE4,@ED.44 to the 3AD< operations.

-n its 3AD< annual income tax return, Philex Mining deducted from its gross income the amount of P33<,3*E,444.44 as !loss on settlement of recei%a/les from reser%es and allowances.$ >owe%er, the B-, disallowed Baguio Gold against the amount as deduction for

/ad de/t and assessed petitioner a deficienc# income tax of PE<,D33,3E3.*A. Philex Mining protested /efore the B-, arguing that the deduction must /e allowed since all re5uisites for a /ad de/t deduction were satisfied, to wit& )a+ there was a %alid and existing de/t9 )/+ the de/t was ascertained to /e worthless9 and )c+ it was charged off within the taxa/le #ear when it was determined to /e worthless. B-, denied petitioners protest. -t held that the alleged de/t was not ascertained to /e worthless since Baguio Gold remained existing and had not filed a petition for /ankruptc#9 and that the deduction did not consist of a %alid and su/sisting de/t considering that, under the management contract, petitioner was to /e paid 84= of the pro:ects net profit. ISSUE: (hether or Not the parties entered into a contract of agenc# coupled with an interest which is not re%oca/le at will HEL : No. "n examination of the !Power of "ttorne#$ re%eals that a partnership or :oint %enture was indeed intended /# the parties. -n an agenc# coupled with interest, it is the agenc# that cannot /e re%oked or withdrawn /# the principal due to an interest of a third part# that depends upon it, or the mutual interest of /oth principal and agent. -n this case, the non6re%ocation or non6withdrawal under paragraph 8)c+ applies to the ad%ances made /# petitioner who is supposedl# the agent and not the principal under the contract. hus, it cannot /e inferred from the stipulation that the parties relation under the agreement is one of agenc# coupled with an interest and not a partnership. Neither can paragraph 3E of the agreement /e taken as an indication that the relationship of the parties was one of agenc# and not a partnership. "lthough the said pro%ision states that !this "genc# shall /e irre%oca/le while an# o/ligation of the P,-NC-P". in fa%or of the M"N"G0,S is outstanding, inclusi%e of the M"N"G0,S account,$ it does not necessaril# follow that the

parties entered into an agenc# contract coupled with an interest that cannot /e withdrawn /# Baguio Gold. he main o/:ect of the !Power of "ttorne#$ was not to confer a power in fa%or of petitioner to contract with third persons on /ehalf of Baguio Gold /ut to create a /usiness relationship /etween petitioner and Baguio Gold, in which the former was to manage and operate the latters mine through the parties mutual contri/ution of material resources and industr#. he essence of an agenc#, e%en one that is coupled with interest, is the agents a/ilit# to represent his principal and /ring a/out /usiness relations /etween the latter and third persons. he strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it would recei%e 84= of the net profits as !compensation$ under paragraph 3< of the agreement. heentiret# of the parties contractual stipulations simpl# leads to no other conclusio n than thatpetitioners !compensation$ is actuall# its share in the income of the :oint %enture. "rticle 3@EA )'+ of the Ci%il Code explicitl# pro%ides that the !receipt /# a person of a share in the profits of a /usiness is prima facie e%idence that he is a partner in the /usiness.$