Associated Sugar, Inc. vs. Commissionkr of Internal Revenue, et al.

DECISION

This is an appeal from the decision of respondent dated May 29, 1963 holding petitioner liable for the sums of 93,256.80 and §2,365.90, as deficiency income ‘tax and interest for the years 1958 and 1959, re spectively.

The facts of the case are stated in the memo- randum of respondent's examiners dated December 10, 1962, from which we quotes "The Associated Sugar, Inc. ia « duly wholessie s orgenizations, more particularly the a lag bnown Siaay wiline Gn . liing >, and Mesa tear Central Co., its books ef accounts and eceounting records reflect trensactions that have direct bearing to these companies. in the course of inves- See pp. 65-66, rec.

The deficiency assesement resulted from the die- allowanee of petitioner's claim for deduction of the compensation peid to Nessrs. Jose Ma. Veloso and Heraeio Borromeo in the total amount of #13,806,00 im 1958 and ©14,400,00 in 1999 for professional services. | Petitioner also questions the imposition of }% monthly interest by respomient pursuant to Seetion 51(@) of the Neverme “ode, as anended by Nepublic Act 64 —

DECISION «

CTA CASE M0, 1405 Ho. 2343.

The issue presented for our consideration is whether or not the alleged psyments for professional services in the sums of 13,900.00 and 14,400.00 for the years 1958 and 1959, respectively, are ordinary and necessary expenses paid or incurred in carrying on petitioner's business.

The law applicable is Section 30(a)(1) of the Nevenue Code, whieh provides:

"SEC. 30, Pg ee deductions - "“Ca) Expensess aes wena Se Tet, during the taxa year in cerrying on Peasonable silowanes for salaries oF maya: : 2 / ime are three conditions fer deductibility of e business expense. It must be shown thet the expense was (1) incurred in carrying on a trade or business,

(2) ordinary and necessary, snd (3) paid or ineourred within the taxable year\(Nertens, The Lew of Federal Income Taxation, Vol. 4, per. 25.07, Chap. 25, pe 18, Coll. of Int. Nev. v. The Phil. Bducation Co, Ince, L-8505, Mey 30, 1956). There is no dispute that the questioned amounts were paid to Messrs. “Noraeio tor- romeo and Jose Ma. Veloso as public relations officer and financial advisers, respectively, of petitioner during the years in question (fxhs. A to 0, ppe 16-

Rs 65

DECISION .

CTA CASE NO, 1405 140, CTA reese It is respondent's theory that the expenses in- curred were properly @isallowed because they are not ordinary and necessary in the conduct of petitioner's businese or trade. It is alleged that these expendi- tures did not help in the development of the business and neither were they helpful for the purpose of real~ izing profit or minimising loss (pp. 160-161, CTA Nee.)s In other words, the employment of public relations officer and financial adviser did not in any way help in the promotion and development of petitioner's busi- ness (See pe 161, Nemo. for respondents pp. 12, 5o, 33, BIR ree.).

This view of respondent, in our opinion, is too strict and technical, Petitioner is engaged in the wholesale and retail of sugar of all kinds and in goods, wares or merchandise of any and all kinds and nature whatscever, It acts as the marketing agent of its sister corporations, specially in the export of suger. it also handles a great portion of the busi- ness of ite affiliated organizations, more particular- ly the suger centrals known as Bacolod-Murcia Milling Co., Talisay-Silay Milling Co., and Ma~ao Sugar Central Ce, Because of these mitifarious business activities, petitioner hired the serviees of Horacio borromeo and Jose Ma. Velose. Mr, Noracio Berromeo, a newspaper- man, was employed by petitioner as its public relations officer and also acted as financial adviser to lr.

66

DECISION «

CTA CASE NO, 1405 $ Aranete, The neture of his work as testified to by Jose A. Sanches, petitioner's ehief aceountant, is as follows:

“x x x For instanee, whenever we had some difficulty with our export if- the Central Bank, he used to tne red tape.

needed bottoms for the ship-~ business matters, like for instance, the forecasting of the sarket for the priee of suger." (pp. 5-9, t.5.ne) Om the other hand, Mr. Jose Ma. Yeloso performed about the same functions as Hr. Sorromeo, except the publie relations phase which wae not hanfled by him (pe 9, teaeme). As financial sdviser, he was specifieally utilized in following up the transaetions of petitioner with banks, goverrment offiees and shipping companies (py 22, team).

We are convinced that the amounts paid to Messrs. Horacio Sorromeo and Jose Ma, Veloso vere appropriate ené helpful in the development of petitioner's business, The services rendered by them were necessary in carrying on the business of petitioner considering the varied activities it was engaged in, An expense is necessary if it 4s appropriate and helpful in developing and maintaining the taxpayer's business (General Electric Lee Ie7 Inte ve Comm. of Int. Neve, CTA Gaose 1117, July th, 1963, not appealed). Sesides, modern tsiness

DECISION «

CTA CASE 0, 1405 ® trends and practices require good public relations for any kind of business. As marketing agent of several suger centrals, petitioner has to apply for export ‘licenses with the Central Bank, secure the availability of bottems for the shipment of sugar, and the avail-e ability of credit accommodations from banks te finance the exports of its principels, ‘eedless to say, these activities cannot be said to have no direct bearing nor relation toe the conduct or operations of petitioner's business. That petitioner ineurred losses in sone years despite the services of Messrs. Borromeo and Veloso does not megn that the saleries paid to then were not ordinary and necessary in the conduct of its business. in order that the taxpayer's ectivities may constitute the carrying on of a “trade or business,“ it is not essential that the net result be profit. It is enough that the enterprise be conducted in good faith with an intention of waking « profit or of pro~- @ucing income. The element of profit is only signi- ficent insofar as it affords a means of distinguishing between an enterprise carried om in good faith as a "trade or business" and an enterprise merely carried on as a hobby (Mertens, The Law of Pederal Income T,x- ation, Vol. 4, pare 25-08, Chap. 25, pe 21)s Anent the contention of respondent that petitioner impliedly edmitted the validity of the herein disallow- anees when it peid in 1960 the deficieney income tax resulting from the disallowance of #15,000.00, 68

DECISION -

CTA CASE NO, 1405 7 representing similar payment for professional services, suffice it te say that payment in e previous year does not preelude a taxpayer from questioning the correct- ness of similar payments in future years. ‘The fact that petitioner protested the assessment under review is a clear indication that it considered as erroneous its previous decision to pay deficiency income tax on similar disallowances, IN VIEW OF THE FORRGOING CONSIDERATIONS, the assessment appealed from is hereby reversed ant set aside, without pronouncement ag to costs.

80 ORDERED, Quezon City, April 7, 1966. i ROMAN M. UMALI

Acting Presiding Judge

I CONCUR:

Associate Judge

— ) / Chikicz Lag ty .