CIR V GENERAL FOODS 14 FEB GR No. 143672| April 24, 2003 | J.
Corona Test of Reasonableness
Facts: Respondent corporation General Foods (Phils , which is engaged in the manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.
General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA dismissing the company’s appeal.
Issue: W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible under the NIRC
Held: No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions;
hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, the expense must be ordinary and necessary; (b it must have been paid or incurred during the taxable year; (c it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d it must be supported by receipts, records or other pertinent papers.
“reasonableness” of the amount incurred and second. the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged. the amount incurred must not be a capital outlay to create “goodwill” for the product and/or private respondent’s business. the nature of the expenditure itself. the volume and amount of its net earnings. the intention of the taxpayer and the general economic
. the expense must be considered a capital expenditure to be spread out over a reasonable time. Otherwise. There being no hard and fast rule on the matter. There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense.
If the expenditures are for the advertising of the first kind. in whole or in part.
advertising to stimulate the current sale of merchandise or use of services and (2
advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred. even if it is necessary. to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. Therefore.conditions. It is the interplay of these. it cannot be considered an ordinary expense deductible under then Section 29 (a Advertising is generally of two kinds: (1 (1 (A of the NIRC. that will yield a proper evaluation. except as to
. The Court finds the subject expense for the advertisement of a single product to be inordinately large. then. among other factors and properly weighed.
The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under review. then normally they should be spread out over a reasonable period of time. the expenditures are for advertising of the second kind. Petition granted.
. judgment reversed and set aside. If. there is no doubt such expenditures are deductible as business expenses. however.the question of the reasonableness of amount.
148187 (April 16 Post under case Civil Law digests Tuesday Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to
which resulted in petitioners’ withdrawal as manager of the mine.R. CIR [G.00. amount from its 112 gross income in its annual tax income return as “loss on the settlement of
. The parties executed a “Compromise
If you are not a corporate tax payer cash method February 21 2012 Posted by Schizophrenic Mind wherein the debt 136 000. No. Petitioner of Baguio deducted said amounted to Php.Philex Mining 2008)] Corporation vs.
The PA indicates that the parties had intended to create a PAT and establish a common fund for the purpose. BIR disallowed the amount as deduction for bad debt. They also had a joint interest in the profits of the business as shown
. Court of Tax Appeals (CTA) rejected the claim and held that it is a partnership rather than an agency. Petitioner claims that it entered a contract of agency evidenced by the “power of attorney” executed by them and the advances made by petitioners is in the nature of a loan and thus can be deducted from its gross income. The parties’ agreement was denominated as “Power of Attorney”. Held: No. Mine.manage the Dation latter’s mining Payment” claim know as the Sto. CA affirmed CTA
Issue: Whether or not it is an agency. The mine suffered continuing losses over the years
receivables from Baguio Gold against reserves and allowances”. The lower courts correctly held that the “Power of Attorney” (PA) is the instrument material that is material in determining the true nature of the business relationship between petitioner and it has been held that it may enter into a joint venture which is akin to a particular partnership.
An examination of the said PA reveals that a partnership or joint venture was indeed intended by the parties. Thus
it cannot be inferred from the stipulation that it is an agency
. While a corporation like the petitioner cannot generally enter into a contract of partnership unless authorized by law or its charter Moreover in an coupled interest
by the 50-50 sharing of income of the mine. In this case the nonrevocation or nonwithdrawal under the PA applies to the advances made by the petitioner who is the agent and not the principal under the contract.
agency it is the agency with that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it or the mutual interest of both principal and agent.Baguio.
Petitioner deducted said amount from its gross income in its annual tax income return as “loss on the settlement of receivables from Baguio Gold against reserves and allowances”. The mine suffered continuing losses over the yearswhich resulted in petitioners’ withdrawal as manager of the mine.
. BIR disallowed the amount as deduction for bad debt. No. The lower courts correctly held that the “Power of Attorney” (PA) is the instrument material that is material in determining the true nature of the business relationship between petitioner and Baguio.R. Mine. The PA indicates that the parties had intended to create a PAT and establish a common fund for the purpose. The parties’ agreement was denominated as “Power of Attorney”. The parties executed a “Compromise Dation in Payment” wherein the debt of Baguio amounted to Php. 112 136 000. Petitioner claims that it entered a contract of agency evidenced by the “power of attorney” executed by them and the advances made by petitioners is in the nature of a loan and thus can be deducted from its gross income. CIR [G.
Held: No. CA affirmed CTA
Issue: Whether or not it is an agency.00.Philex Mining Corporation vs. They also had a joint interest in the profits of the business as shown by the 50-50 sharing of income of the mine. While a corporation like the petitioner cannot generally enter into a contract of partnership unless authorized by law or its charter it has been held that it may enter into a joint venture which is akin to a particular partnership. An examination of the said PA reveals that a partnership or joint venture was indeed intended by the parties. Court of Tax Appeals (CTA) rejected the claim and held that it is a partnership rather than an agency. 148187 (April 16 corporate tax payer cash method Post under case digests Civil Law at Tuesday February 21
2012 Posted by Schizophrenic Mind
Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage the latter’s mining claim know as the Sto.
ruled that following the accrual method of accounting. 172231 REVENUE. 172231. No. 2007.Moreover in an agency coupled with interest it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it or the mutual interest of both principal and agent. must be claimed in the year when the same was incurred and not when the same was paid.R.
. In this case the non-revocation or non-withdrawal under the PA applies to the advances made by the petitioner who is the agent and not the principal under the contract. Petitioner. Thus it cannot be inferred from the stipulation that it is an agency
DOCTRINE: The Supreme Court in G. dated February 12. No.
COMMISSIONER OF INTERNAL G.R. though the amount of which is an estimate only. an expense.
5211. which respondent cancelled and set Isabela Cultural aside the Corporation (ICC Assessment Notices for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR
The facts show that on February 23.. Chico-Nazario. ICC. ISABELA CULTURAL CORPORATION.:
Petitioner assails the Commissioner of September 30. (Chairperson Austria-Martinez. JJ. Ynares-Santiago. a domestic
. Promulgated: Respondent. against .Present: versus .R. 1990. SP No.x DECISION YNARESSANTIAGO. 78426 affirming the February 26. Internal Revenue 2005 Decision (CIR of the Court of Appeals in CA-G. Callejo. Sr.. February 12. 2007 x ------------------------------------------------------------------------------------. J. J. and Nachura. 2003 Decision of the Court of Tax Appeals (CTA
in CTA Case No.
79.196.86. FAS-186-90-000681 for deficiency expanded withholding tax in the amount of P4.196. for the year ending December 31. to wit: Expenses for the auditing services of SGV & Co.897. inclusive of surcharges and interest. received from the BIR Assessment Notice No. and Assessment Notice No. both for the taxable year 1986. The deficiency income tax of P333.86. arose from: (1 The BIR’s disallowance of ICC’s claimed expense deductions for professional and security services billed to and paid by ICC in 1986.corporation. FAS-186-90-000680 for deficiency income tax in the amount of P333. 1985. Expenses for the legal services
ICC sought a reconsideration of the subject assessments. was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244. however. The alleged understatement of ICC’s interest income on the three promissory notes due from Realty Investment. On February 9. 1990.[inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985. (c Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986.897.890.79 (inclusive of interest and surcharge
On March 23.
The deficiency expanded withholding tax of P4. 1995. it received a final notice before
.00 deduction for security services. Inc.
the CTA rendered a decision canceling and setting aside the assessment
. 2001. This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax. 135210. This conclusion was sustained by this Court on July 1. in G. The case was thus remanded to the CTA for further proceedings. Hence. it brought the case to the CTA which held that the petition is premature because the final notice of assessment cannot be considered as a final decision appealable to the tax court.R.seizure demanding payment of the amounts stated in the said notices. On February 26. No. 2003. amounts to a final decision on the protested assessment and may therefore be questioned before the CTA.
It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence. Inc. It found that it was the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of Realty Investment. it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time.
.notices issued against ICC. The CTA also held that ICC did not understate its interest income on the subject promissory notes. even if some of these professional services were rendered to ICC in 1984 or 1985..
despite the absence of a stipulation in the contract providing for a compounded interest. nor of a circumstance. The dispositive portion of the CTA’s Decision. reads: WHEREFORE. like delay in payment or breach of contract. FAS-1-86-90000680 for deficiency income tax in the amount of P333. FAS-186-90-000681 for deficiency expanded
. the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security services as shown by the various payment orders and confirmation receipts it presented as evidence. in view of all the foregoing. and Assessment Notice No. Likewise. that would justify the application of compounded interest.196.86. Assessment Notice No.
both for the taxable year 1986. petitioner. it could be considered as deductible expenses only in 1986 when ICC received the billing statements for said services. SO ORDERED. It further ruled that ICC did not understate its interest income from the promissory notes of Realty Investment. hence. the cost of the services was not yet determinable at that time.897. through the Office of the Solicitor
..79. Inc. which affirmed the CTA decision. and that ICC properly withheld and remitted taxes on the payments for security services for the taxable year 1986.withholding tax in the amount of P4. inclusive of surcharges and interest. Petitioner filed a petition for review with the Court of Appeals.
Hence. holding that although the professional services (legal and auditing services were rendered to ICC in 1984 and 1985. are hereby CANCELLED and SET ASIDE.
and (2 held that ICC did not understate its interest income from the promissory notes of Realty Investment. should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. and that ICC withheld the required 1% withholding tax
. As to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment. The issue for resolution is whether the Court of Appeals correctly: (1 sustained the deduction of the expenses for professional and security services from ICC’s gross income. filed the instant petition contending that since ICC is using the accrual method of accounting. the expenses for the professional services that accrued in 1984 and 1985.General. petitioner invoked the presumption that the assessment notices issued by the BIR are valid. Inc.
Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. it must have been paid or incurred in carrying on the trade or business of the taxpayer.from the deductions for security services. The requisites for the expense must it must have been the deductibility of be ordinary and paid or incurred ordinary and necessary. are: (a The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC which states that: “*t]he deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’. like expenses paid for legal and auditing services. dependent upon the method of accounting upon the basis of which the net income is computed x x x”. records or other pertinent papers. and (d it must be supported by receipts. (b during the taxable necessary trade. the accounting method used by ICC is the accrual method. In the instant case. year. Revenue Audit Memorandum
. or professional expenses.
in opposition to actual receipt or payment. expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. provides that under the accrual method of accounting. where there is created an enforceable
. which characterizes the cash method of accounting. 1-2000. a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. Amounts of income accrue where the right to receive them become fixed. Thus.Order No. The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them.
liability. However. only that a taxpayer the availability of the reasonable accurate determination of such income or liability. and (2 determinative question is.
. For a taxpayer fixing of a right to using the accrual income or liability method. liabilities are accrued when fixed and determinable in amount. the to pay. This test requires: (1 The all-events test requires the right to income or liability be fixed. and the amount of such income or liability be determined with reasonable accuracy. without regard to indeterminacy merely of time of payment. Similarly. the test does not demand that the amount of income or liability be known absolutely. when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met.
. or could reasonably be expected to have known.has at his disposal the information necessary to compute the amount with reasonable accuracy. if its basis is unchangeable. but is not as much as unknowable. The propriety of an accrual must be judged by the facts that a taxpayer knew. it must be determined with “reasonable accuracy. the term “reasonable accuracy” implies something less than an exact or completely accurate amount. at the closing of its books for the taxable year. The allevents test is satisfied where computation remains uncertain. The amount of liability does not have to be determined exactly.” Accordingly. within the taxable year. the test is satisfied where a computation may be unknown.
the expenses for professional fees
. and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. And since a deduction for income tax purposes partakes of the nature of a tax exemption. it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. then it must also be strictly construed. In the instant case. Corollarily.Accrual method of accounting presents largely a question of fact. An exemption from the common burden cannot be permitted to exist upon vague implications.
The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot
. the firm has been its counsel since the 1960’s. and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984.*19+ From the nature of the claimed deductions and the span of time during which the firm was retained. ICC can be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson. As testified by the Treasurer of ICC.consist of expenses for legal and auditing services.
or whether ICC
. ICC.thus be attributed solely to the delayed billing of these liabilities by the firm. especially so that it is using the accrual method of accounting. the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an expense or income. ICC failed to discharge this burden. For another. As previously stated. For one. in the exercise of due diligence could have inquired into the amount of their obligation to the firm. As to when the firm’s performance of its services in connection with the 1984 tax problems were completed. However. it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.
is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services. or whether it does or does not possess the information necessary to compute the amount of said liability with reasonable accuracy. are questions of fact which ICC never established. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. It simply relied on the defense of delayed billing by the firm and the company. In the same vein. the professional fees of SGV & Co.exercised reasonable diligence to inquire about the amount of its liability. This is so because ICC failed
. which under the circumstances.
they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR. it cannot determine the professional fees which said company would charge for its services.” as the standard to ascertain its liability to SGV & Co. in the year 1985. 1-2000. Hence. per Revenue Audit Memorandum Order No. As to the expenses for security services.to present evidence showing that even with only “reasonable accuracy. ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986. the records show that these expenses were incurred by ICC in 1986
Anent the purported understatement of interest income from the promissory notes of Realty Investment.and could therefore be properly claimed as deductions for the said year. Likewise. Inc. Under Article 1959 of the Civil Code. There is indeed no stipulation between the latter and ICC on the application of compounded interest. we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only simple interest computation and not a compounded one should have been applied by the BIR. unless there is a stipulation to the contrary. the findings of the CTA and the Court of Appeals that ICC
. interest due should not further earn interest..
Assessment Notice No. The Court of Appeal’s cancellation of Assessment Notice No.86 for deficiency income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for security services.196. the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside. Said Assessment is valid as to the BIR’s disallowance of ICC’s expenses for professional services. FAS-1-86-90000680 in the amount of P333. In sum.truly withheld the required withholding tax from its claimed deductions for security services and remitted the same to the BIR is supported by payment order and confirmation receipts. FAS-1-86-90000681 in the amount of
the petition is PARTIALLY GRANTED. and of the law firm.897. The decision is affirmed in all other respects. WHEREFORE. The case is remanded to the BIR for the computation of Isabela Cultural
. 2005 Decision of the Court of Appeals in CA-G. is declared valid only insofar as the expenses for the professional fees of SGV & Co.P4. FAS-186-90-000680. 78426. SP No. are concerned. is AFFIRMED with the MODIFICATION that Assessment Notice No. is sustained.R. Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson. The September 30. which disallowed the expense deduction of Isabela Cultural Corporation for professional and security services.79 for deficiency expanded withholding tax.
NACHURA Associate Justice
CONSUELO YNARESSANTIAGO Associate Justice WE CONCUR:
MA. SO ORDERED. SR. FAS-1-86-90000680. CALLEJO. CHICONAZARIO Associate Justice Associate Justice
ANTONIO EDUARDO B.Corporation’s liability under Assessment Notice No. MINITA V. ALICIA AUSTRIAMARTINEZ Associate Justice
. Article VIII of the Constitution and the Division Chairperson’s Attestation. it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
CONSUELO YNARESSANTIAGO Associate Justice Chairperson. Third Division
CERTIFICATION Pursuant to Section 13.I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
at 134143.  Sycip.” records.” id. Reyes and Josefina Guevara-Salonga. pp.  Rollo. p. *4+ Exhibits “O” to “T. pp.” id. Gorres.
. *6+ Exhibits “EE” to “II. Penned by Associate Justice Delilah VidallonMagtolis and concurred in by Associate Justices Bienvenido L. at 144-148. 56.REYNATO S. at 165-181. 4859. Velayo & Co. 128-133. PUNO Chief Justice
 Rollo. *5+ Exhibits “U” to “DD.  Id.