16.

CIR V GENERAL FOODS

G.R. No. 143672 April 24, 2003

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) 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.

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, “reasonableness” of the amount incurred and
second, the amount incurred must not be a capital outlay to create “goodwill” for the product and/or
private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, 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
volume and amount of its net earnings; the nature of the expenditure itself; the intention of the
taxpayer and the general economic conditions. It is the interplay of these, among other factors and
properly weighed, that will yield a proper evaluation.

The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) 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, in whole or in part, 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. If the expenditures are for the advertising of the first kind, then, except as to the question of
the reasonableness of amount, there is no doubt such expenditures are deductible as business expenses.
If, however, the expenditures are for advertising of the second kind, then normally they should be spread
out over a reasonable period of time.

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.

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17. TUASON vs. LINGAD

[July 31, 1974; G.R. No. L-24248]

CASTRO, J

TOPIC: Ordinary gain, capital asset, NIRC Sec. 39 A (1)

DOCTRINE:

Captial Assets; definition: The term "capital assets" includes all the properties of a taxpayer whether or
not connected with his trade or business, except: (1) stock in trade or other property included in the
taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of his trade or
business; (3) property used in the trade or business of the taxpayer and subject to depreciation
allowance; and (4) real property used in trade or business. If the taxpayer sells or exchanges any of the
properties above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary loss;
the gain or loss from the sale or exchange of all other properties of the taxpayer is a capital gain or a
capital loss.

In the case at bar, Taxpayer operated a substantial rental business of several properties, not only those
subject in this case, such that the Taxpayer had to a real estate dealer's tax. Taxpayer's sales of the
several lots forming part of his rental business cannot be characterized as other than sales of non-capital
assets.
FACTS:

The mother of Taxpayer (Petitioner Antonio Tuason) owned a 7 hectare parcel of land located in the City
of Manila. She subdivided the land into twenty-nine (29) lots. Possession of the land was eventually
inherited by Taxpayer in 1948.

Taxpayer instructed his attorney-in-fact to sell the lots. Twenty-eight (28) out of the twenty-nine parcels
were all sold easily. The attorney-in-fact was not able to sell the twenty-ninth lot (hereinafter Lot 29)
immediately because it was located at a low elevation.

In 1952, Lot 29 was filled, subdivided and gravel roads were constructed. The small lots were then sold
over the years on a uniform 10-year annual amortization basis. The attorney-in-fact, did not employ any
broker nor did he put up advertisements in the matter of the sale thereof.

In 1953 and 1954 the Taxpayer reported his income from the sale of the small lots (P102,050.79 and
P103,468.56, respectively) as long-term capital gains. The CIR upheld Taxpayer's treatment of this tax.

In his 1957 tax return the Taxpayer as before treated his income from the sale of the small lots
(P119,072.18) as capital gains. This treatment was initially approved by the CIR, but by 1963, the CIR
reversed itself and considered the Taxpayer's profits from the sales of the lots as ordinary gainsc

The CIR assesed a deficiency of P31,095.36 from the Taxpayer.

Contention of Taxpayer: As he was engaged in the business of leasing the lots he inherited from his
mother as well other real properties, his subsequent sales of the mentioned lots cannot be recognized as
sales of capital assets but of “real property used in trade or business of the taxpayer.”

ISSUE/S:

Whether or not the properties in question which the Taxpayer had inherited and subsequently sold in
small lots to other persons should be regarded as capital assets.
HELD:

No. It is Ordinary Income

As thus defined by law, CAPITAL ASSETS include all properties of a taxpayer whether or not connected
with his trade or business, except:

stock in trade or other property included in the taxpayer's inventory;

property primarily for sale to customers in the ordinary course of his trade or business;

property used in the trade or business of the taxpayer and subject to depreciation allowance; and

real property used in trade or business.

If the taxpayer sells or exchanges any of the properties above, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the loss or gain from the sale or exchange of all other properties of the
taxpayer is a capital gain or a capital loss.

Under Section 34(b)(2) of the old Tax Code, if a gain is realized by a taxpayer (other than a corporation)
from the sale or exchange of capital assets held for more than 12 months, only 50% of the net capital
gain shall be taken into account in computing the net income.

The Tax Code's provisions on so-called long-term capital gains constitutes a statute of partial exemption.
In view of the familiar and settled rule that tax exemptions are construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, it is the taxpayer's burden to bring himself clearly
and squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will be
resolved against him.

In the case at bar, after a thoroughgoing study of all the circumstances, this Court is of the view and so
holds that Petitioner-Taxpayer's thesis is bereft of merit. Under the circumstances, Taxpayer's sales of the
several lots forming part of his rental business cannot be characterized as other than sales of non-capital
assets. the sales concluded on installment basis of the subdivided lots do not deserve a different
characterization for tax purposes.
This Court finds no error in the holding that the income of the Taxpayer from the sales of the lots in
question should be considered as ordinary income.

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