Deductibility of Gross Contribution for Income Tax Purposes

June 9, 1988 BIR RULING NO. 281-88 29 (a) (1) (A) 000-00 281-88 Gentlemen : This refers to your letter dated April 27, 1988 requesting a ruling as to whether the gross contribution of your client, Dart Philippines, Inc. (DPI) to the Vanguard Managers Matching Program may be treated as a deductible expense for income tax purposes. cdti It is represented that DPI is a corporation organized and existing under the laws of the Philippines; that it is a wholly-owned subsidiary of a foreign corporation organized and existing under the laws of Florida and principally engaged in the manufacture of a wide variety of "Tupperware" brand plastic products; that for the distribution of Tupperware products in the Philippines, DPI entered into a distributorship agreement with several distributors; that these distributors have dealers-managers to whom a kit of Tupperware products is consigned without any formal agreement; that these dealers-managers are not employees of the distributors nor of DPI but just independent businesswomen or salespersons; that experience showed that these dealers-managers stay with the job only for a maximum of sixteen months; that in order to serve as an incentive for them to stay longer, DPI thought of offering them some sort of savings plan, out of which the idea of the "Vanguard Manager's Matching Program" was conceived; that the plan shall cover all Vanguard managers; that Vanguard managers refer to dealers-managers whose unit sales reached a certain quota of sales per month and are entitled to Vanguard bonus; that these Vanguard Managers will contribute a certain percentage of their Vanguard bonus to the Plan and DPI will in turn match such contribution; that these contributions will be held in a Fund to be managed by a Board of Trustees; that the right to the benefits which consist of the dealers-managers' contribution and DPI's matching contributions inclusive of interest earned shall be vested to the dealers-managers after a number of years of membership as stated in the Plan; that DPI would treat the contributions in its books as awards and is willing to withhold the 20% tax which will be grossed up and shouldered by DPI; and that upon contribution to the Plan, DPI's matching contribution will be treated as net of tax and the corresponding tax will be remitted to the BIR. In reply, I have the honor to inform you that pursuant to Section 29(a)(1)(A) of the Tax Code, as amended all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be allowed as deductions from gross income. Expenses which are "ordinary and necessary" generally contemplate expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. (Deputy v. Du Pont, 308 U.S. 488; Welch v. Helvering, 290 U.S. 111, 78 L. ed. 212; Hicks vs. Collector of Internal Revenue, CTA Case No. 38, Oct. 19, 1955; Gancayco vs. Collector of Internal Revenue, CTA Case No. 287, Nov. 14, 1957) Accordingly, the gross contribution of Dart Philippines, Inc. to the "Vanguard Managers Matching Program," which was conceived as an incentive to dealers-managers of Tupperware products for them to continue to sell and promote said product, being ordinary and necessary business expense is deductible at the time actual contributions are made to the said Plan for income tax purposes. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner