Title
Commissioner of Internal Revenue vs. Algue, Inc.
Case
G.R. No. L-28896
Decision Date
Feb 17, 1988
Algue, Inc. contested a P83,183.85 tax assessment, claiming P75,000 as legitimate promotional fees. The Court ruled the appeal timely and the deduction valid, affirming the fees as ordinary and necessary business expenses.
taxation
income tax
deduction

Case Summary (G.R. No. L-28896)

Factual Background

ALGUE, INC. was a domestic corporation engaged in engineering, construction and allied activities. On January 14, 1965, it received a notice assessing delinquent income taxes in the total amount of P83,183.85 for taxable years 1958 and 1959. ALGUE filed a letter of protest on January 18, 1965; the protest was stamp-received the same day but was misplaced in the office of the Commissioner. A warrant of distraint and levy was presented to ALGUE through its counsel on March 12, 1965; counsel initially refused to receive it on the ground of the pending protest and later produced a file copy and a photostat to the BIR agent, who deferred service. The BIR informed counsel on April 7, 1965 that it was not taking action on the protest and service of the warrant was then effected. On April 23, 1965, ALGUE filed a petition for review with the Court of Tax Appeals. Separately, ALGUE had acted as agent for the Philippine Sugar Estate Development Company in the sale of certain properties; ALGUE received a commission of P125,000.00 from which it distributed P75,000.00 in so-called promotional fees to five persons who had promoted and induced investors to form the Vegetable Oil Investment Corporation which ultimately purchased the properties. The payees reported their shares and paid the corresponding income taxes.

Procedural History

Following the filing of the petition for review on April 23, 1965, the Court of Tax Appeals ruled in favor of ALGUE, finding that the appeal was timely and that the P75,000.00 payments constituted deductible business expenses. The Commissioner appealed to this Court. The Supreme Court, through Justice Cruz, heard the case and on February 17, 1988 affirmed the decision of the Court of Tax Appeals in toto and without costs. Justices Teehankee, C.J., Narvasa, Gancayco, and Grino-Aquino concurred.

The Parties' Contentions

The Commissioner of Internal Revenue contended that the P75,000.00 claimed as a deduction was not an ordinary, reasonable or necessary business expense, was insufficiently substantiated, and was a device to evade a legitimate assessment; the Commissioner also had earlier characterized the payments as personal holding company income but later abandoned that position. ALGUE, INC. maintained that the payments were legitimate promotional fees for actual services rendered in forming the Vegetable Oil Investment Corporation and procuring investors, that the payees had reported and paid tax on their shares, and that the protest filed on January 18, 1965 suspended the reglementary period for filing an appeal under Rep. Act No. 1125 so that its petition to the Court of Tax Appeals was timely.

Court of Tax Appeals' Findings

The Court of Tax Appeals found that the protest filed by ALGUE on January 18, 1965 was bona fide and not pro forma; it thus suspended the thirty-day reglementary period which began on January 14, 1965 and resumed only on April 7, 1965 when ALGUE was definitively informed of the implied rejection and the warrant was finally served, leaving only twenty days of the period consumed when the petition for review was filed on April 23, 1965. On the merits, the Court of Tax Appeals found that the P75,000.00 was paid as compensation for services actually rendered by the named promoters in inducing investors and effecting the transfer; the payments were periodic and informal but were accounted for at year‑end, the payees had reported and paid taxes on their shares, and the payments were not excessive given that ALGUE retained P50,000.00 as profit from the P125,000.00 commission.

Supreme Court's Ruling

The Supreme Court affirmed the Court of Tax Appeals. The Court held that the appeal was timely under Rep. Act No. 1125 because the valid protest filed on January 18, 1965 suspended the running of the thirty-day period and the period resumed only upon definitive notice of implied rejection and service of the warrant on April 7, 1965. On the substantive issue the Court held that the P75,000.00 payments constituted deductible business expenses under the Tax Code and applicable regulations and therefore should not have been disallowed by the Commissioner. The appealed decision of the Court of Tax Appeals was affirmed in toto and without costs.

Legal Basis and Reasoning

The Court recognized the general rule that a warrant of distraint and levy is "proof of the finality of the assessment" and ordinarily renders a request for reconsideration deemed rejected, citing prior authority. It found, however, that the special circumstances of this case precluded application of the doctrine because the protest was filed four days after receipt of the assessment, was not located in the BIR files, and was only considered after counsel furnished a copy; in those circumstances the warrant issued prematurely and could not be treated as conclusively establishing finality until April 7, 1965. For deductibility the Court applied Sec. 30 of the Tax Code permitting as deductions "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered," and Revenue Regulations No. 2, Sec. 70 (1) which tests deductibility by reasonableness and whether

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