VOL.

158, FEBRUARY 17, 1988 9 10

Commissioner of lnternal Revenue
1 SUPREME COURT
vs. Algue, Inc.
0 REPORTS ANNOTATED
No. L-28896. February 17, 1988.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and Commissioner of lnternal
THE COURT OF TAX APPEALS, respondents. Revenue vs. Algue, Inc.
copy of the protest that it was, if at all, considered by the tax
Taxation;  Nature of taxes;  Purpose of taxation;  Collection of taxes authorities. During the intervening period, the warrant was premature and
should be made in accordance with law.—Taxes are the lifeblood of the could therefore not be served.
government and so should be collected without unnecessary hindrance. On Same;  Same;  Same;  Same;  Protest filed, not pro forma, and was based
the other hand, such collection should be made in accordance with law as on strong legal considerations; Case at bar.—As the Court of Tax Appeals
any arbitrariness will negate the very reason for government itself. It is correctly noted, the protest filed by private respondent was not pro forma
therefore necessary to reconcile the apparently conflicting interests of the and was based on strong legal considerations. It thus had the effect of
authorities and the taxpayers so that the real purpose of taxation, which is suspending on January 18, 1965, when it was filed, the reglementary period
the promotion of the common good, may be achieved. which started on the date the assessment was received, viz., January 14,
Same;  Appeal;  Appeal from a decision of the Commissioner of Internal 1965. The period started running again only on April 7, 1965, when the
Revenue with the Court of Tax Appeals is 30 days from receipt thereof. —The private respondent was definitely informed of the implied rejection of the
above chronology shows that the petition was filed seasonably. According to said protest and the warrant was finally served on it. Hence, when the
Rep. Act No. 1125, the appeal may be made within thirty days after receipt appeal was filed on April 23, 1965, only 20 days of the reglementary period
of the decision or ruling challenged. had been consumed.
Same;  Warrant of distraint and levy;  Rule that the warrant of distraint Same;  Income Tax;  Payments in promotional fees, not
and levy is proof of the finality of the assessment; Exception is where there is fictitious; Claimed deduction of P75,000 proper; Strict business procedures
a letter of protest after receipt of notice of assessment.—It is true that as a not applied in a family corporation.—We find that these suspicions were
rule the warrant of distraint and levy is "proof of the finality of the adequately met by the private respondent when its President, Alberto
assessment" and "renders hopeless a request for reconsideration," being Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments
"tantamount to an outright denial thereof and makes the said request were not made in one lump sum but periodically and in different amounts
deemed rejected." But there is a special circumstance in the case at bar that as each payee's need arose. It should be remembered that this was a family
prevents application of this accepted doctrine. The proven fact is that four corporation where strict business procedures were not applied and
days after the private respondent received the petitioner's notice of immediate issuance of receipts was not required. Even so, at the end of the
assessment, it filed its letter of protest. This was apparently not taken into year, when the books were to be closed, each payee made an accounting of
account before the warrant of distraint and levy was issued; indeed, such all of the fees received by him or her, to make up the total of P75,000.00.
protest could not be located in the office of the petitioner. It was only after Admittedly, everything seemed to be informal. This arrangement was
Atty. Guevara gave the BIR a understandable, however, in view of the close relationship among the
_______________ persons in the family corporation.
Same;  Same;  Same;  Same;  Amount of promotional fees, not excessive.
*
 FIRST DIVISION. —We agree with the respondent court that the amount of the promotional

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fees was not excessive. The total commission paid by the Philippine Sugar APPEAL from the decision of the Court of Tax Appeals.
Estate Development Co. to the private respondent was P1 25,000.00. After
deducting the said fees, Algue still had a balance of P50,000.00 as clear The facts are stated in the opinion of the Court.
profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the CRUZ, J.:
payees who did practically everything, from the formation of the Vegetable
Oil Investment Corporation to the actual purchase by it of the Sugar Estate Taxes are the lifeblood of the government and so should be collected
properties. without unnecessary hindrance. On the other hand, such collection should
Same;  Same;  Same;  Same;  Burden on taxpayer to prove validity of the be made in accordance with law as any arbitrariness will negate the very
claimed deduction, successfully discharged; Payment of the fees was reason for government itself. It is therefore necessary to reconcile the
11 apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good,
VOL. 158, FEBRUARY 17, may be achieved.
1988 1 The main issue in this case is whether or not the Collector of Internal
Commissioner of lnternal Revenue correctly disallowed the P75,000.00 deduction claimed by private
Revenue vs. Algue, Inc. respondent Algue as legitimate business expenses in its income tax returns.
The corollary issue is whether or not the appeal of the private respondent
necessary and reasonable.—The Solicitor General is correct when he
from the decision of the Collector of Internal Revenue was made on time
says that the burden is on the taxpayer to prove the validity of the claimed
and in accordance with law.
deduction. In the present case, however, we find that the onus has been
12
discharged satisfactorily. The private respondent has proved that the
payment of the fees was necessary and reasonable in the light of the efforts 12 SUPREME COURT REPORTS
exerted by the payees in inducing investors and prominent businessmen to ANNOTATED
venture in an experimental enterprise and involve themselves in a new Commissioner of lnternal Revenue
business requiring millions of pesos. This was no mean feat and should be, vs. Algue, Inc.
as it was, sufficiently recompensed. We deal first with the procedural question.
Same;  Same;  Rationale of taxation.—It is said that taxes are what we The record shows that on January 14, 1965, the private respondent, a
pay for civilized society. Without taxes, the government would be paralyzed domestic corporation engaged in engineering, construction and other allied
for lack of the motive power to activate and operate it. Hence, despite the activities, received a letter from the petitioner assessing it in the total
natural reluctance to surrender part of one's hard-earned income to the amount of P83,183.85 as delinquency income taxes for the years 1958 and
taxing authorities, every person who is able to must contribute his share in 1959.1 On January 18, 1965, Algue filed a letter of protest or request for
the running of the government. The government, for its part, is expected to reconsideration, which letter was stamp-received on the same day in the
respond in the form of tangible and intangible benefits intended to improve office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy
the lives of the people and enhance their moral and material values, This was presented to the private respondent, through its counsel, Atty. Alberto
symbiotic relationship is the rationale of taxation and should dispel the Guevara, Jr., who refused to receive it on the ground of the pending
erroneous notion that it is an arbitrary method of exaction by those in the protest.3 A search of the protest in the dockets of the case proved fruitless.
seat of power. Atty. Guevara produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty.
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Guevara was finally informed that the BIR was not taking any action on the that it was, if at all, considered by the tax authorities. During the intervening
protest and it was only then that he accepted the warrant of distraint and period, the warrant was premature and could therefore not be served.
levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue As the Court of Tax Appeals correctly noted, 11 the protest filed by private
filed a petition for review of the decision of the Commissioner of Internal respondent was not pro forma and was based on strong legal
Revenue with the Court of Tax Appeals. 6 considerations. It thus had the effect of suspending on January 18, 1965,
The above chronology shows that the petition was filed seasonably. when it was filed, the reglementary period which started on the date the
According to Rep. Act No. 1125, the appeal may be made within thirty days assessment was received, viz., Jaauary 14, 1965. The period started running
after receipt of the decision or ruling challenged. 7 It is true that as a rule the again only on Ap 7, 1965, when the private respondent was definitely
warrant of distraint and levy is "proof of the finality of the assessment" 8 and informed of the implied rejection of the said protest and the warrant was
"renders hopeless a request for reconsideration," 9 being "tantamount to an finally served on it. Hence, when the appeal was filed on April 23, 1965, only
outright denial thereof and makes the said request deemed rejected." 10 20 days of the reglementary period had been consumed.
______________ Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was
1
 Rollo, pp. 28-29. properly disallowed because it was not an ordinary, reasonable or necessary
2
 Ibid., pp. 29; 42. business expense. The Court of Tax Appeals had seen it differently. Agreeing
3
 Id., p. 29. with Algue, it held that the said amount had been legitimately paid by the
4
 Respondent's Brief, p. 11. private respondent for actual services rendered. The payment was in the
5
 Id., p. 29. form of promotional fees. These were collected by the payees for their work
6
 Id. in the creation of the Vegetable Oil Investment Corporation of the
7
 Sec. 11. Philippines and its subsequent purchase of the properties of the Philippine
8
 Phil. Planters Investment Co. Inc. v. Acting Comm. of Internal Revenue, Sugar Estate Development Company.
CTA Case No. 1266, Nov. 11,1962; Rollo, p. 30. Parenthetically, it may be observed that the petitioner had originally
9
 Vicente Hilado v. Comm. of Internal Revenue, CTA Case No. 1256, Oct. claimed these promotional fees to be personal holding
22,1962; Rollo, p. 30. _______________
10
 Ibid.
11
 Penned by Associate Judge Estanislao R. Alvarez, concurred by
13 Presiding Judge Ramon M. Umali and Associate Judge Ramon L. Avanceña.
VOL. 158, FEBRUARY 17, 1988 13
Commissioner of lnternal Revenue 14
vs. Algue, Inc. 14 SUPREME COURT REPORTS
But there is a special circumstance in the case at bar that prevents ANNOTATED
application of this accepted doctrine. Commissioner of lnternal Revenue
The proven fact is that four days after the private respondent received vs. Algue, Inc.
the petitioner's notice of assessment, it filed its letter of protest. This was company income12 but later conformed to the decision of the respondent
apparently not taken into account before the warrant of distraint and levy court rejecting this assertion.13 In fact, as the said court found, the amount
was issued; indeed, such protest could not be located in the office of the was earned through the joint efforts of the persons among whom it was
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest distributed. It has been established that the Philippine Sugar Estate
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Development Company had earlier appointed Algue as its agent, authorizing vs. Algue, Inc.
it to sell its land. factories and oil manufacturing process. Pursuant to such amounts as each payee's need arose. 19 It should be remembered that this
authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith was a family corporation where strict business procedures were not applied
O'Farell, and Pablo Sanchez worked for the formation of the Vegetable Oil and immediate issuance of receipts was not required. Even so, at the end of
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, the year, when the books were to be closed, each payee made an
after its incorporation largely through the promotion of the said persons, accounting of all of the fees received by him or her, to make up the total of
this new corporation purchased the PSEDC properties. 15 For this sale, Algue P75,000.00.20 Admittedly, everything seemed to be informal. This
received as agent a commission of P125,000.00, and it was from this arrangement was understandable, however, in view of the close
commission that the P75,000.00 promotional fees were paid to the relationship among the persons in the family corporation.
aforenamed individuals.16 We agree with the respondent court that the amount of the promotional
There is no dispute that the payees duly reported their respective shares fees was not excessive. The total commission paid by the Philippine Sugar
of the fees in their income tax returns and paid the corresponding taxes Estate Development Co. to the private respondent was P125,000.00. 21 After
thereon.17 The Court of Tax Appeals also found, after examining the deducting the said fees, Algue still had a balance of P50,000.00 as clear
evidence, that no distribution of dividends was involved. 18 profit from the transaction. The amount of P75,000.00 was 60% of the total
The petitioner claims that these payments are fictitious because most of commission. This was a reasonable proportion, considering that it was the
the payees are members of the same family in control of Algue. It is argued payees who did practically everything, from the formation of the Vegetable
that no indication was made as to how such payments were made, whether Oil Investment Corporation to the actual purchase by it of the Sugar Estate
by check or in cash, and there is not enough substantiation of such properties.
payments. In short, the petitioner suggests a tax dodge, an attempt to evade This finding of the respondent court is in accord with the following
a legitimate assessment by involving an imaginary deduction. provision of the Tax Code:
We find that these suspicions were adequately met by the private "SEC. 30. Deductions from gross income.—In computing net income there
respondent when its President, Alberto Guevara, and the accountant, Cecilia shall be allowed as deductions—
V. de Jesus, testified that the payments were not made in one lump sum but
periodically and in different 1. (a)Expenses:
_______________
12
1. (1)In general.—All the ordinary and necessary expenses paid or
 Rollo, p, 33, incurred during the taxable year in carrying on any trade or
13
 Ibid., pp. 7-8; Petition, pp. 2-3. business, including a reasonable allowance for salaries or other
14
 Id., p. 37. compensation for personal services actually rendered; x x x" 22
15
 Id.
16
 Id.
17
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
 Id.
18
"SEC. 70. Compensation for personal services.—Among the ordinary and
 Id.
necessary expenses paid or incurred in carrying on any trade or business
15 may be included a reasonable allowance for salaries or other compensation
VOL. 158, FEBRUARY 17, 1988 15 for personal services actually rendered. The test of
_______________
Commissioner of lnternal Revenue
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 19
 Respondent's Brief, pp. 25-32. intangible benefits intended to improve the lives of the people and enhance
20
 Ibid., pp. 30-32. their moral and material values. This symbiotic relationship is the rationale
21
 Rollo, p. 37. of taxation and should dispel the erroneous notion that it is an arbitrary
22
 Now Sec. 30, (a) (1)—(A.), National Internal Revenue Code. method of
exaction by those in the seat of power.
deductibility in the case of compensation payments is whether they are But even as we concede the inevitability and indispensability of taxation,
reasonable and are, in fact, payments purely for service. This test and its it is a requirement in all democratic regimes that it be exercised reasonably
practical application may be further stated and illustrated as follows: and in accordance with the prescribed procedure. If it is not, then the
"Any amount paid in the form of compensation, but not in fact as the taxpayer has a right to complain and the courts will then come to his succor.
purchase price of services, is not deductible. (a) An ostensible salary paid by For all the awesome power of the tax collector, he may still be stopped in
a corporation may be a distribution of a dividend on stock. This is likely to his tracks if the taxpayer can demonstrate, as it has here, that the law has
occur in the case of a corporation having few stockholders, practically all of not been observed.
whom draw salaries. If in such a case the salaries are in excess of those We hold that the appeal of the private respondent from the decision of
ordinarily paid for similar services, and the excessive payment correspond or the petitioner was filed on time with the respondent court in accordance
bear a close relationship to the stockholdings of the officers of employees, it with Rep. Act No. 1125. And we also find that the claimed deduction by the
would seem likely that the salaries are not paid wholly for services private respondent was permitted under the Internal Revenue Code and
rendered, but the excessive payments are a distribution of earnings upon should therefore not have been disallowed by the petitioner.
the stock. x x x" (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) ACCORDINGLY, the appealed decision of the Court of Tax Appeals is
AFFIRMED in toto, without costs.
It is worth noting at this point that most of the payees were not in the
SO ORDERED.
regular employ of Algue nor were they its controlling stockholders. 23
Teehankee  (C.J.),  Narvasa,  Gancayco and Griño-Aquino, JJ., concur.
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present case, Decision affirmed.
however, we find that the onus has been discharged satisfactorily. The Notes.—Tax assessment by tax examiners are presumed correct and
private respondent has proved that the payment of the fees was necessary made in good faith. Taxpayer has duty to prove otherwise. (Commissioner of
and reasonable in the light of the efforts exerted by the payees in inducing lnternal Revenue vs. Construction Resources of Asia, Inc., 145 SCRA 671.)
investors and prominent businessmen to venture in an experimental Commission on Audit cannot make a final decision on tax
enterprise and involve themselves in a new business requiring millions of questions, (Phil, Telegraph and Telephone Corp. vs, Commission on
pesos. This was no mean feat and should be, as it was, sufficiently Audit, 146 SCRA 190.)
recompensed.
It is said that taxes are what we pay for civilized society. Without taxes, ——o0o——
the government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of 18
one's hard-earned income to the taxing authorities, every person who is © Copyright 2021 Central Book Supply, Inc. All rights reserved.
able to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and

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