G.R. No.

L-28896 February 17, 1988 the intervening period, the warrant was premature and could
therefore not be served.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. As the Court of Tax Appeals correctly noted," 11 the protest filed
ALGUE, INC., and THE COURT OF TAX by private respondent was not pro forma and was based on
APPEALS, respondents. strong legal considerations. It thus had the effect of suspending
on January 18, 1965, when it was filed, the reglementary period
CRUZ, J.: which started on the date the assessment was received, viz.,
January 14, 1965. The period started running again only on
April 7, 1965, when the private respondent was definitely
Taxes are the lifeblood of the government and so should be informed of the implied rejection of the said protest and the
collected without unnecessary hindrance On the other hand, warrant was finally served on it. Hence, when the appeal was
such collection should be made in accordance with law as any filed on April 23, 1965, only 20 days of the reglementary period
arbitrariness will negate the very reason for government itself. had been consumed.
It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common Now for the substantive question.
good, may be achieved.
The petitioner contends that the claimed deduction of
The main issue in this case is whether or not the Collector of P75,000.00 was properly disallowed because it was not an
Internal Revenue correctly disallowed the P75,000.00 ordinary reasonable or necessary business expense. The Court
deduction claimed by private respondent Algue as legitimate of Tax Appeals had seen it differently. Agreeing with Algue, it
business expenses in its income tax returns. The corollary issue held that the said amount had been legitimately paid by the
is whether or not the appeal of the private respondent from the private respondent for actual services rendered. The payment
decision of the Collector of Internal Revenue was made on time was in the form of promotional fees. These were collected by
and in accordance with law. the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar Estate
We deal first with the procedural question. Development Company.

The record shows that on January 14, 1965, the private Parenthetically, it may be observed that the petitioner had
respondent, a domestic corporation engaged in engineering, Originally claimed these promotional fees to be personal
construction and other allied activities, received a letter from holding company income 12 but later conformed to the decision
the petitioner assessing it in the total amount of P83,183.85 as of the respondent court rejecting this assertion.13 In fact, as the
delinquency income taxes for the years 1958 and 1959.1 On said court found, the amount was earned through the joint
January 18, 1965, Algue flied a letter of protest or request for efforts of the persons among whom it was distributed It has
reconsideration, which letter was stamp received on the same been established that the Philippine Sugar Estate Development
day in the office of the petitioner. 2 On March 12, 1965, a Company had earlier appointed Algue as its agent, authorizing
warrant of distraint and levy was presented to the private it to sell its land, factories and oil manufacturing process.
respondent, through its counsel, Atty. Alberto Guevara, Jr., Pursuant to such authority, Alberto Guevara, Jr., Eduardo
who refused to receive it on the ground of the pending Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
protest. 3 A search of the protest in the dockets of the case worked for the formation of the Vegetable Oil Investment
proved fruitless. Atty. Guevara produced his file copy and gave Corporation, inducing other persons to invest in
a photostat to BIR agent Ramon Reyes, who deferred service of it.14 Ultimately, after its incorporation largely through the
the warrant. 4 On April 7, 1965, Atty. Guevara was finally promotion of the said persons, this new corporation purchased
informed that the BIR was not taking any action on the protest the PSEDC properties.15 For this sale, Algue received as agent a
and it was only then that he accepted the warrant of distraint commission of P126,000.00, and it was from this commission
and levy earlier sought to be served.5 Sixteen days later, on that the P75,000.00 promotional fees were paid to the
April 23, 1965, Algue filed a petition for review of the decision aforenamed individuals.16
of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6
There is no dispute that the payees duly reported their
respective shares of the fees in their income tax returns and
The above chronology shows that the petition was filed paid the corresponding taxes thereon.17 The Court of Tax
seasonably. According to Rep. Act No. 1125, the appeal may be Appeals also found, after examining the evidence, that no
made within thirty days after receipt of the decision or ruling distribution of dividends was involved.18
challenged.7 It is true that as a rule the warrant of distraint and
levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9 being "tantamount to The petitioner claims that these payments are fictitious
an outright denial thereof and makes the said request deemed because most of the payees are members of the same family in
rejected." 10 But there is a special circumstance in the case at control of Algue. It is argued that no indication was made as to
bar that prevents application of this accepted doctrine. how such payments were made, whether by check or in cash,
and there is not enough substantiation of such payments. In
short, the petitioner suggests a tax dodge, an attempt to evade
The proven fact is that four days after the private respondent a legitimate assessment by involving an imaginary deduction.
received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before
the warrant of distraint and levy was issued; indeed, such We find that these suspicions were adequately met by the
protest could not be located in the office of the petitioner. It private respondent when its President, Alberto Guevara, and
was only after Atty. Guevara gave the BIR a copy of the protest the accountant, Cecilia V. de Jesus, testified that the payments
that it was, if at all, considered by the tax authorities. During were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be relationship to the stockholdings of the
remembered that this was a family corporation where strict officers of employees, it would seem likely
business procedures were not applied and immediate issuance that the salaries are not paid wholly for
of receipts was not required. Even so, at the end of the year, services rendered, but the excessive
when the books were to be closed, each payee made an payments are a distribution of earnings upon
accounting of all of the fees received by him or her, to make up the stock. . . . (Promulgated Feb. 11, 1931, 30
the total of P75,000.00. 20 Admittedly, everything seemed to be O.G. No. 18, 325.)
informal. This arrangement was understandable, however, in
view of the close relationship among the persons in the family It is worth noting at this point that most of the payees were not
corporation. in the regular employ of Algue nor were they its controlling
stockholders. 23
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid The Solicitor General is correct when he says that the burden is
by the Philippine Sugar Estate Development Co. to the private on the taxpayer to prove the validity of the claimed deduction.
respondent was P125,000.00. 21After deducting the said fees, In the present case, however, we find that the onus has been
Algue still had a balance of P50,000.00 as clear profit from the discharged satisfactorily. The private respondent has proved
transaction. The amount of P75,000.00 was 60% of the total that the payment of the fees was necessary and reasonable in
commission. This was a reasonable proportion, considering the light of the efforts exerted by the payees in inducing
that it was the payees who did practically everything, from the investors and prominent businessmen to venture in an
formation of the Vegetable Oil Investment Corporation to the experimental enterprise and involve themselves in a new
actual purchase by it of the Sugar Estate properties. This business requiring millions of pesos. This was no mean feat
finding of the respondent court is in accord with the following and should be, as it was, sufficiently recompensed.
provision of the Tax Code:
It is said that taxes are what we pay for civilization society.
SEC. 30. Deductions from gross income.--In Without taxes, the government would be paralyzed for lack of
computing net income there shall be allowed the motive power to activate and operate it. Hence, despite the
as deductions — natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to
(a) Expenses: must contribute his share in the running of the government.
The government for its part, is expected to respond in the form
(1) In general.--All the ordinary and of tangible and intangible benefits intended to improve the
necessary expenses paid or incurred during lives of the people and enhance their moral and material
the taxable year in carrying on any trade or values. This symbiotic relationship is the rationale of taxation
business, including a reasonable allowance and should dispel the erroneous notion that it is an arbitrary
for salaries or other compensation for method of exaction by those in the seat of power.
personal services actually rendered; ... 22
But even as we concede the inevitability and indispensability of
and Revenue Regulations No. 2, Section 70 (1), reading as taxation, it is a requirement in all democratic regimes that it be
follows: exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all the
SEC. 70. Compensation for personal awesome power of the tax collector, he may still be stopped in
services.--Among the ordinary and necessary his tracks if the taxpayer can demonstrate, as it has here, that
expenses paid or incurred in carrying on any the law has not been observed.
trade or business may be included a
reasonable allowance for salaries or other
compensation for personal services actually We hold that the appeal of the private respondent from the
rendered. The test of deductibility in the case decision of the petitioner was filed on time with the respondent
of compensation payments is whether they court in accordance with Rep. Act No. 1125. And we also find
are reasonable and are, in fact, payments that the claimed deduction by the private respondent was
purely for service. This test and deductibility permitted under the Internal Revenue Code and should
in the case of compensation payments is therefore not have been disallowed by the petitioner.
whether they are reasonable and are, in fact,
payments purely for service. This test and its ACCORDINGLY, the appealed decision of the Court of Tax
practical application may be further stated Appeals is AFFIRMED in toto, without costs.
and illustrated as follows:
SO ORDERED.
Any amount paid in the form of
compensation, but not in fact as the
purchase price of services, is not deductible.
(a) An ostensible salary paid by a corporation
may be a distribution of a dividend on stock.
This is likely to occur in the case of a
corporation having few stockholders,
Practically all of whom draw salaries. If in
such a case the salaries are in excess of those
ordinarily paid for similar services, and the
excessive payment correspond or bear a close