CTA Case No. 4386 (Decision)

" II, .. H E: P l I !II. J. C fl F 'L' ll I~ P I l I, U' f' Hflo.: !:.) CO UHT O.E" '1'1\X 1\PPE/\l.!l QUEZOU CJ 'i'Y GENI!:HAL FOOIJS, (Ph i J j_pp i n cs ) , Inc. , Petitioner , - vers u s - C. T.A . Case No . 438 6 CUHJIISSlONEH OF lN'i'E:R NAL HEVENIJE, Hes p o n dent. X- - - - - - - -- - - X Thi.~: is a n Rss~ss ment case for al l eged deficiency income tax in t h e a mo unt of P2 , 635 ,1 4 1 .42 for fisca l year ~ nrled Febru~ry 28 , 1985. PetiLion~r i s a do mest i c corporRtio n engaged in the m "tnufactur �~ c=tnd sale of various cons umer p roducts in t h e P h i 1 i p p i n e s s u c h a s " T a n g " , " Ca 1 u me t " a n d " I~ o o 1 - Ai cl " . By virtu~ o f its h avi ng been merged Hit h Kraft Foods , I n c ., it is now rnlled Kratt General foods (Philippin es ), Inc. On ,Tn n ~ 14, 198~1 , Petition el:' tiled i t. s Corporate I\ n ri u cl 1 I n r:� c;. nH~ 'l' a x R e t 11 r n f o r f i s c .:tl y e a r e n d e cl E' e b r u -:\ r y :;s , 1985 a nd claimed P9 ,461, L46. 00 as deduction under (ttedi a Advf:'rtising ). Re sponr.t~ n t . :�_ ,. '1�..� di sa ll otJ<::c1 fi ft y pe�cent (50 %) t h ereof or P4 ,7 30,G?3.00 o n tile 9rou nd Lh at s;=ticl expenses .:tre in t .he n ature o.f r:�apital (~: :pe nditure s vlhi c h sh0u lrl b e amortiz~rl :to r J:t.; r_)

Df:CISJ01 - C . '1' . A. Ci1 s e No . 4 3 8 6 - 2- ye ars . 'I' he clisallouance resulted to an alleged deficien c y income tax of P2 , 635 ,141. 42 computed as f ollovn:: Net inco me per ret_u r n ...... .. . .. . P34 , 65 1,089.00 1\cld : Uisa ll oHed medi a a dv ertis ing 4 ., ., 3 0 , 6 2 3 . 0 0 Ne t incom e per inv es tigati o n P3 9 , 38 1,712.00 Inc ome tax clue there on .... 13 , 7 73 ,5 99 .00 Less : Tax alrea dy assessed __!~11 7 , s s !_. oo_ De fic ien cy Income Ta x ... Add: '? O 'i-. interest from p 1, 655,7 18.0 0 G/ 16/85 to 5/ 3 1/88 . 979 ,4 23 .4 2 P 2 ,6 3 5 ,141.4 :Z TO'I'l\L l\110UN'l' DUE AND COLU;C'l'IBLfJ (E x h. 3 , BIR Records , p. 19 3 ) Th e so le is s u e in this appeal i ~ whether or not the me dia advertisi n g e x penses paid or incurred b y Petitioner consti t.ut e nr dLn ar y and necessary e~penses tuLly de du c tible under the Tax f'ode or s ho uld be co nsid ered as cap ita l exp e nditures s in c e they a r e e):pen ses paid i n orde r t o cre a �te g oodH ill a nd r eput a tion to th e E'etiti.o u e r a nd / or it :o: procluct( s ). '1' he p e r t in e n t p r o v i s i on o f t h e 'I' ax Co de a p p 1 i c a b 1 e to t h e cas(~ at bar i s Section .3 0 ( a ) ( 1) (A J ( noH Sec . 29 (C\)(l)(A) Vlhich prov ide s , thus: Sec. 30. Deductions fr om Gro ss Income. In co mputing n e t income, there sha ll b e allowed as ded uctions - ( a ) Expense s . ( 1) Business exp e n ses . ( 1\) I n General All ordinary and ne c ess a ry expenses paid or incurred duri ng th e taxable year in carryi ng on any tr a de or business , in cluding a reas ona ble a ll owan ce for sa larie s or ot her

DEClSlON C.T.A . Case No . 4386 3 -- co mp e n s ~tinn for p~rsonal servic~s actua lly re nd ered; trav e lling ex pen s es 11 bil e a11ay tr o m h ome iu the pursuit o f tr ad e , profession or busines s , rentals or othe r p a yments required to be made as a condi ti.on to the co ntinued u se or pos sess ion, for t b <? purp oses of th e tr a de o r busine ss , of property whi ch the t ax p o)"''r ha s not taken or is not taking t i t 1. e o r i n ""' h i c h h ~ h a s no e q u i t y . Un clel' th e above provision, before an expense i!:; a ll o Hecl <:r.s d educ tion fr o m gross incom_e, it must satisfy the follo 11i ng re qui. rements : 1) The expen se mu st 1 e b ot h ordinary a nd nece ssary; L ) 'l' h e e x p e n s e mu ;; t be p a i d o r i n c~ u r r e d within the taxabl e ye a r; a nd .3 ) The expen ses mu s t be incurre d in ca r ryi ng o n a trade o r business . 'l'h e Ler m '' a dve r ti s ing" i s h ere used in it s generally uncle r s to o d mP a n i n g , n a me 1 y , u s e o f t h e s p o k e n o r 1-1r i t t e n 1�1o r cl in p r i n t� e d matte r , mo v i e s , r ad i o and t e l e v i s i o n to a c qua i n t t h e p u b l i c \�1i t h t h e tax pay e r ' s me r c han d i s e o r services . Ev id e n ce showed that the questioned advertising e x p e n s e s u e t� e i n cl e e d " p a i d (> 1: i n c u r r e d l:l i t h i n the t ax a b 1 e y e ar" and that they were "incu rred in carrying o n a trad e 'Jr busin ess ". 'l'he re is n o dispute a h ou t that. But 11hat i s n o t c 1 e a r , ( a nd t h i s i s ~~he r e t h e bone o f 1.:: o n t e n t i o n li es ), is 11hether the questioned ad vertising expenses are ind eed " or di11 ar y a nd ne cessary". 1 0 tJ

IH:C lSJ 0 C . 't' .l\ . C<1SP N 0. 4JH6 'J'li is Co urt in tt1 t: C c'l ~>e of Visayan Cebu 'l'erminal Co . , Inc., vs. Co l. of Int. Rev.,(C'l'l\ Case No . 1 28 , .Jun e 2 9, 1 95"7) ron~3j rte re d an expense as necessary "Hher e exp,.:.udit ur r~ is ap propriate or helpful in the devel< pm ent of tlle ta x p ;=ty er' s business or that the sa me is proper for t.IH' pllrpos P of reali zi ng a pr nt it or minimizing a l osE:". J.L j~~: also r.::o nsid ��re cl necess ary "if i t is appropriate and h e lptul t�o th e ta.xpayer's business Ot' occupation. \'/h en ,""Ill is called necess ary , it merely (l j s t j n qu-i f ; l1"' d t rom p ~ L. so 11 a 1 expend i t u r e or t rom one n ot pert i n eut to the bu si 11 0ss ot the taxpayer". ( 1955 , CCH 1:' �" cl . 'l' ax Co u r ~; e , par. 4 0 3 ) 1/e cl o n o t, theref rJre , ;:tc-g ue aga in s t the necessity ot advertising expenses as part of mo dern bu f;i n ess for indeed , they are necessary for its survival . 'l' h e que s t i o n , h o \v e v e r , rem a i n s : 1'/e re those ;:1rl v e r t �i s i n g e x p e n s e s o r d i n a r y 'l Henc e , tor an adv erti s ing expe n se to be deductible, it shou ld not only be n ncesf::Jry, but also ordinary. One can not be separAted from th e other. This Court h as long recog ni zed that subject , ll o 1�1eve 1 , to tHo 1 i mit at ions , exp end itur e s for a r1 v e r tis in g are clecluctible in th e year Hhen paid or incurred. The first limit a. tion relates to the extent to Hhich the expenc!i.t ur es are actually ca pita l o u tl ays , thus 1 0.1

U 1�: t: .l S .l oN C.T.n . Cas e No . 4J8G s u e!, "X l' '"'l t d .Lt"ll r~"~�. (II ~ t�<: ns, Vo l . tJl\ ~5.38 p. 1 9 0, c i t ing c r: . l l . ;; h r: J. d (J ll {., 0 . 1 9 TC 481 (195 2 ); Halph I:.:. Dunca n, -1 0 'l'C' 381) ( I q ')P, ) anrl F11nkhouser Indus1: ri. es , In c ., 'l' C Hemo :1 ::J !J �7 - 1 9 I ) 'I' h e :::eco nd limit ation , n o t necessarily enti.re ly e:\c lu!'dve of th�~ fir s t , re.L -tt.es to \Jhe �ther the c :-: p e n d i t .u r e s '=' r e �J r d i n a r y and n e r� r: s s a r y , g i v i n g r i s e t o t t1e r e 01. s o n a lJ 1 e ll e s s o t: U 1e am o IJ 11 t ' d: s u c h e x p e n d i t u r e s . ( ~3 r=: r; l I(' r t .�~ 1�1;;; , i n t r a ; em ph a s i s f; u J.' p 1 i P rl ) l\ d v �' 1 I . i ;: i. t 1g .L s <J r: n r: J. C\ 1 J y o f t u o kin cl s , name 1 y : 1 ) .,,t,; PJ. t .i;�.L tl q t�) s timulate t h e CUlL': nt ;;a J e of merchancli ~:e n J II�:�� '' I ~' 01 l.' i. cr:s ; an d 2 ) Rd vr:J~ tising designed to s ,. i llfll I ;) f� Co t: It r: t u t u n': ;_: :1 .L<::: ot illr~ ll.! l t::t ndize or u se of service:::: . 'l'he latter type involves expenditures i. n r.: u r -e d , i n \"l h o l e o r i n p a r t , to c r e a t e o r ma i n t a i n s om e to n"l!__ o t __9_<?__o d u i 11 f o r the tax r�.-~ ye r ' s tr a de o r b u s i n e s s o r for t lH' indu str y or profession o f Hhich the t axp:=tyer is a }'I (:" lll JJ 0. l. . l f t h e exp e nditun~s a re for advertising of the fir s t kind, then, ot amou nt, there is no d o ubt suc h ex p c ndi t:.ur es etre d ed ucti ble a~:; bu s i11~ss e x p ens e s . It , h o\1ever , t h P expenditures are for a dv e rtising of the 1 02

ur:c Js_ro N r ~. 'J' . l\ . (';:) ~" Nn. 1 386 t 8 ~ :r,., y ~' t j ; � n n til e c: a~' h r:' r a c c r u o 1 l F I s is . The undet lyi n g tl! eoJ.�1� j_;3 !:.licit .:~ cap ita l. a:':'f''"" t 11 hi c h has a determi n able Ji .t-0 h cts b ee n ac:quir~'! a nd , theref ore , t h e e:-:pe nc!itur e :.:� h 0 u 1 ci IJ e s p ~~ e a r:l rnre 1� t h e _L i t e o f t h a t a s s e t . ( 11e r t e n s , s upr a , cit i_ng sevP.re~l Ameri c<t n j u ri s prud .:: n cc: ; e mphases In the case at. bi'lr , 1: h e Fet:itioner fa il ed in th e tu o limi.Lr:\tion s set by Americ a n juri s prud e n ce . T he first ts the test n n th e �� reaf~o n a bl e n ess " o t t h e a moun �t incurre d , a nd h enc~e , not ordi n ary . 'l'he seco nd i s the test o n 11ll e th er or not t h e qu es tion e d adv e r ti sin g e :q ) enses a r e act u al l y capital o utlays to create " 'J 0 0 d '.T i 11 " to the p ro du ct 8. n r!/ 0 r P et i t�ioner' s b u siness , a nd h ence , r�o n s j_d e r �~ d as r: a p i t a 1 e x p e n d i t u r e to be s p r e 3d o 'J e r t h e l i t .; o f t il e asse t . \'/ e ll o l d t h at e x p e n s e s , a 1 t h '=' u 'J ll h i g h 1 y n e c e s s a r y , c a 11 tw t b e de cl u c te d u n 1 e::: s 1: hey are a 1 so or rli nary. 1\11 "~:p�~ n se t o b e co ns i dered orcl in clLY must b e r easo n a ble in o. m0 u n t ( 1 9 8 8 C C1-! .E' e d . 'l' ax C o u r s e , p a r . 4 0 :3 ) � '1' h e r e i s , h 01.r ever, n o cr iterion as: to u h at is or d in ar y ex p e nse bec- <' use th ~r e is n o hard and fast r ul e as to 11h a t i ;, rc0sonab J e amo unt for j t to be co n s idered ordi n a r y. \'l e dn n o~ a ttempt t o draw the dividi n g l i n e . l'f e o n J y s a y i t r1ep en ds in eac h CrtSe 0 !1 t h e particu l ar f .-:tC' tS ~-Inc! th e

fH:C J.S 1 UN - c . 'l' 1\ c "~ e No . 13 e <-' l- on t. h e ~~ x t e n L :t n c1 p e r man e 11 c y o t �t h e 11 o r d a c c om p 1 i s he d b y exp e nd :L t u re (~ee 1\tlas Consolidated Mining an d De e lopment Corporation, vs. Commi ss ione r o f Internal H e v P. n u e I N (\ . L -�� 2 (j 9 1 1 I cl ::t n . 2 7 I I ~I 8 1 , 1 0 2 s c H I\ 2 4 b ) . In pre s ent cas e, Petitio ner �.;l�:imed as rl �~ clu c t� jJ )If\ mecl.i.a l\r\v 0rt i ~: ing ~:.-:pe n ~-:"' in t h e :t mnu nt: nt P 9 , 4 G 1 , 2 '� 6 \"1 h i L' h i r: a lm o s t on e - h a 1 t ( ~ ) o f P e t. i t i o n e r ' s cla im toL "J!arl~eting Exp e ns e~: " . S u c h a mount d oes n o t iu cJ l.t<l e th" u mou nt ot 1:' 2 , G78 , 328 111li c h j s claimed und0r " 0 t lt e r ~ cl v e r t i s i n g .J u cl p r o mo t i on s " <:> ~: p e n s e . � 'l'l ~ ami) IJI1t ot l '':1 ,4 G1 , :~ 11 i tor rt eclia 1\cl er:ti.s ing expense i ~; almost t u j r: �~ �J v e ,. G e n e r <t.l a n d /\ d mi n .i ~-; t r a t i v e I~ :~ p e n s e s . For cJ.�~are r und ers t a nding, Petiti onr=>!' s ~-ichedule 1 - G, eneral F: :: I' f:' 11 f.'� P. s tor Lt1 e .E' i s c et 1 Year e n r\ e d E' e b r u a r y :~ n , 1 9 8 5 i s hereby qu o ted thuf.::: GCUERAL f0 0DS FH!L!FPI,CS 1 IN~. ~CHEDU! E I GE!:8RAL EUG!ISF:S FOR THE FISCAL YEAR EHDBU FEBRUARY 28 , 1g8 5 GEHER AL AUD ADU ! ~~ 2 TPATI V E EIFENSES 1, 79?, 706 S'l~ri�E and v ag~5 101 , 2~: Empl0y~~ henPfi t ~ ~nd !llov~nc@E !J 71726 St!ti0n�ry ~r1 g~n o ral o porq~iog ~uppli~s 11 8, ~ 8 P�p1irs 1nd m3!ntenan~! 11 152 8 FreiJ~t. s~~ r3 ~� and cartag ~ 15I 6e9 P~nt 2] 4,~ 1"\ l ? 0 5~ 3 1~ 1 t � l~phon~ and t~l!graph 101, 17 ~ Eg ~ [J y e~ p :�� qr E & ~ rt exp~ns~s l O'i

DI':CISJ CHI �- C.T . A . CnsP No . 4386 - 8- Tr1� � ~ll!!l] ~zpcnse s 173 ,4 32 113 , 51� al ~. ~J r '/ ~ 1~ L' 1~ :} p~~ l 1t l n1 .: .. F'! nsa s 121 , ~30 R~p~~~�nt2t1 0 n and entertainment PrJ[~~s!:~ ~l �n 1 !�g~l fe~s H~, 646 FIJ J IF :It i �1 ns 3nd a~ s0~ i 1 t i :� n ro' 11 I]~ rshi r d11 n,. 6 1, H~ 8a;,v "h�q�c 13 5' 999 H 1 n ! ~ 1.. ~ 1 ?_ 13 'i '1 <: -- ___u_~i]i :GS!O ,6Jt M~ ~j_'~-~ d v~ t_i_~_!__r~j 1, 518 ,01'1 2,67e , 12e C �~n sum~r p t~~~ tion ~ , 0 Q 8 ,055 n ~ h~ r ~c'�:�:- ~'2.'~\ 111 _ 1n:~. ~-r~_:: tic r ~ 65E ,6 ~ 1 :! H f: o t t :~~~I�:~ 93 9' 326 1,28? ,080 a~minlstr~ti;� ; ~1 pr01~ c ~10n mana;em�nt __[_!_;__? 1,3 8~ r'!plV,' oxp� nso. --~~.. %_!_,t 1! ( IJ J n 1 ~ r: cord:=: , p . 11 .:1 ) 1�1j tl1 f' 'l�.'l l a '::fEirgan tuan ~:: t~ r: n se J o r t h '" a dverti se ment ot p ro du e L , \llt.L c ll eve ll exc lu d�~s "o ther <tr! v f' , . t. i s i n q a 11 d prom o t. i o n s " e ::p en ;;.: e s , H r: are n c� t prep ared L o accept that suc h a mount :i :-.; reasonab l e " In :o:t i mul a t e c urrent sa le o t me rcha n clis e" r e g ar dle ss of !:' e l i 1 i o n e r r: Ax plan at i o n th:=tt such e::rense not s j tun t j_<) ll l. a l-; ing pla ce atter the Aquino assa ssi natio n c ltaracteri ?. �.: r.l IJy l:a pital tligllL, strOil':J deteri ora ti o n o f tJJ r putl: h asi ng pn\ler o t th e l-' ll i.!Jpp1ne p eso a nd t h e ~-; L<'t <:: Le D J '' q d 1-; II! a n d tor: co n s 1t 111 e r p L o cl u c t s" (l-' P l i.t i o ne r ' s ll e l1l U l' C\ 1\d IIIII , l~ 'J' 1\ He C 0 UJ S p . \I e are n o L c �J n v .Ln c e d 1 00

DE:ClSlON - C. T.n . Cas e No . 4386 - 9- Hith s u c h a n explanation. Th e stagger ing e x pen se l ed u s to beli P.ve t h <:~t s u c h ex p e nd i t ur e 11as incurred "to create o r ma int ain some form of go od Hill for the t ax p a yer's trade or h11siness o r for the indu s try or profes sion of 11h ic h the tax pay er i s a membe r. " The term "good vlill " r~a n l1 ar dl y b-: S<'lirl to h ave any pr ec i se signification ; i t is genera lly used to d e note the b e nefit arisi ng from co nnecti o n and re put atio n. ( 1�1o r d s and P h r a s e s , V o 1 . 1 8 p. 55 6 c it ing Douhar t vs. La ogan, 86 Ill. App. 294). As h e l d in t h e case of We l c h vs. He lve ring, ~f forts to \ es tabli s h reputation are akin t o acquisition of capital c1s sets a nd, tll<:!retore , expe n ses re l a ted thereto are n ot bu s in ess ex p ense but capita l ~x penditures . (Atl as tl ining an cl Dev e l o pm ent Corp . , vs. Co mmissioner of Int erna l R<:!v e nu e , s up ra ). for s u re s u r:: h ex p e nditur e Has me a nt n ot o nl y t o generate present sa le s but more for future a n d prospect. ive_ benefit s . Hen ce , "abnorma lly large ex pt-~ nclitur es for a d ver t i si ng are usually to be spread ove r the peri o d of years during whi c h th e ben ef it s of t h e expenditures are rece i ved" (!1erten s , supra, ci ti n g C o 1 o n i a 1 1 c e C r e ;:un Co . , 7 BTA 1 5 4 ) . WHEREFORE, i n a ll the foregoing , a nd fi nd ing n o error in the case appealed from , \~e h ere by RES OLVE to DIS MISS t h e instant p e titio n tor la c k of merit and ORDER 1 ()()

Df~CISIUN -- C. T . A. Case ~ o . 4386 - 10 - t h e PeUtio!l er to p ay the re s pondent Co mmi ss ioner the as sesse d a mount of P2 , 635 , 141.4 2 representing its defi c iency i n co me ta x liab ility for the f is c a l year ended Februa ry 28 , 1 985. SO ORDE:HED. Que z o n Ci t y , tIe t r o t1 a ni 1 a , !:' e b r u a r y 8 , ~ Assoc iat IIJ F~ CONC UR : p: ;j 7 c\J~g :;_ RJ\HON 0. DE tri: YIR A l-\ ss ociate Ju&lge C: E 1? '.T "~- .E� _z- C:'./.1 ~r __r (_"'"J N - 1 h e reby ~e rtify t h at the � decis ion was reac hed after cl1 0 co nsult atio n a mo ng the memb e rs of the Court of Tax Appea l s in accor dance with Sectio n 1 3 , Arti c l e VIII of t he Co nstitu tion . ~.. ~Q.~ Ck.J_ ERNESTO D. ACOSTJ\ Presidin g Judge Court of Tax Appeals 1 0 1j .l. I