Anderson v Posadas (G.R. No. 44100)

Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the business is acquired in the course of its management and operation, it does form part of the capital with which it was established. It is an intangible moral profit which is subject to income tax.
FACTS:

William Anderson purchased the business of Erlanger & Galinger. He incorporated the partnership with an authorized capital of P600,000 (all of which were subscribed by Anderson). Anderson paid P70,000 and the amount left (totaling P530,000) was entered in an underwriting account.

A good will account was opened by Anderson. In 1918, he sold to Simon Feldstein 500 of his shares which amounted to P150,000 but in the course of their transactions incurred losses. In view of the said losses, Anderson deducted P125,000 from his taxable income which was approved by the BIR.

Juan Posadas, Commissioner of Internal Revenue attempted to collect a tax (P300,000) at which Anderson was assessed the goodwill of the business. Anderson agreed to eliminate the goodwill by debiting the sum in his capital account and crediting it to the good will account .

It appears, that with the P100,000 paid by Feldstein on account of his purchasing 500 shares, the loss (P125,000) has been recovered and it is but just that the P125,000 be restored as taxable income.

CFI Manila decided and held that P155,000 (which represents proceeds of the sale of the Goodwill Account) and that P125,000 (representing the recovered loss) is not subject to income tax.

ISSUES:
1. Whether or not goodwill account is subject to income tax

2. Whether or not the amount of P125,000 subject to income tax.

HELD:
1. YES. Good will is the reputation of good name of an establishment. If the good will, that is, the good reputation of the business is acquired in the course of its management and operation, it does form part of the capital with which it was established. It is an intangible moral profit, susceptible of valuation in money, acquired by the business by reason of the confidence reposed in it by the public, due to the efficiency and honesty shown by the manager and personnel thereof in conducting the same on account of the courtesy accorded its customers, which moral profit, once it is valuated and used, becomes a part of the assets.

In the case, the good will of P155,000 created by Anderson has been beneficial not only to him but also to Feldstein. Aside from the benefit, he also realized a gain of P70,838 from the sale of the 500 shares to Feldstein. When you add these two amounts, it totals to P161,250 which is more than what the CIR is trying to collect from Anderson.

2. YES. It is subject to income tax.* (no legal explanation given by the Court)

In the case, the loss of P125,000 suffered by Anderson (by reason of the sale of said 500 shares) has been recovered, and it is but just that the sum of P125,000, deducted from the profits by reason of losses suffered temporarily on the capital, be restored.