CIR V. GENERAL FOODS (TAX)

To be deductible from gross income, the subject advertising expense must comply with the following requisites:

1. the expense must be ordinary and necessary;
2. it must have been paid or incurred during the taxable year;
3. it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
4. it must be supported by receipts, records, or other papers.

The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These 2 requirements must be met.

The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the 2 conditions set by US jurisprudence:

1. reasonableness of the amount incurred; and
2. 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.

We find 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 NIRC.

Advertising is generally of 2 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 to create or maintain some form of goodwill for the taxpayer's trade or business. If the expenditures are for the advertising of the first kind, then except as to the question of the reasonableness of the 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.

We agree with the CTA that the subject advertising expense was of the second kind. Not only was the amount staggering, the respondent corporation itself also admitted, that the subject media expense was incurred in order to protect respondent corporation's brand franchise.

The protection of brand franchise is analogous to the maintenance of goodwill or title to one's property. This is a capital expenditure which should be spread out over a reasonable period of time. This was akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses but as capital expenditures.