ATLAS CONSOLIDATED MINING V. CIR (TAX)

The decisive question is whether or not the expenses paid for the services rendered by a public relations firm labelled as stockholders relation service fee is an allowable deduction as business expense under the NIRC.

The law allowing expenses as deductions from gross income for purposes of income tax is Sec 30(a)(1) of the NIRC which allows a deduction of "all the ordinary expenses paid or incurred during the taxable year in carrying on a trade or business." an item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.

The statutory TEST OF DEDUCTIBILITY where it is axiomatic that to be deductible as a business expense, 3 conditions are imposed, namely:

1. the expense must be ordinary and necessary;
2. it must be paid or incurred within the taxable year; and
3. it must be paid or incurred in carrying in a trade or business.

In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

We sustain the ruling of the tax court that the expenditure paid as compensation for services carrying on the selling campaign in an effort to sell Atlas' additional capital stock is NOT an ordinary expense in line with the decision of the US Board of Tax Appeals in several cases. Accordingly, as found by the CTA, the said expense is not deductible from Atlas' gross income because the expenses relating to recapitalization and reorganization of the corporation, the cost of obtaining stock subscription, promotion expenses, and commission or fees paid for the sale of stock reorganization are CAPITAL EXPENDITURES.

That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the public's and its stockholders patronage, does not make it deductible as business expense. Efforts to establish reputation are akin to acquisition of capital assets, and therefore, expenses related thereto are not business expense but capital expenditure.