CIR v. General Foods (Phils.), Inc.

(Requisites for deductibility, nature: ordinary and necessary) FACTS : General Foods (Phils.) Inc. manufactures beverages such as Kool-Aid, Calumet and Tang. In Feb 1985, they claimed as deduction P9,461,246 (the media advertising for Tang). CIR disallowed half of this amount and assessed the company a deficiency income tax of P2,635,141.42. MR was denied, CTA affirmed CIR. CA reversed CTA and cancelled the assessment. ISSUE: Whether or not the subject media advertising expense for "Tang" incurred by respondent corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC)? NO HELD: The advertising expense is not an ordinary and necessary expense, but a capital expenditure that should be spread out over a reasonable time. It failed to meet the two conditions set by US jurisprudence: (1) reasonableness of the amount incurred [their advertising expense was almost double the amount of their administrative expense] and (2) not be a capital outlay to create goodwill. Advertising is generally of 2kinds: (1) stimulate current sale of merchandise and (2)stimulate future sale of merchandise. The first kind is allowed, subject to reasonableness of the expenditure. The second is normally spread out over time. The companys advertising expense falls under the second kind, as the company admitted it is to protect the brand franchise