CIR v. Algue, Inc.

Algue, Inc., a domestic corporation engaged in engineering, construction and allied activities, received on January 14, 1965 an assessment of P83,183.85 in delinquency income taxes for 1958 and 1959. It filed a protest on January 18, 1965. On March 12, 1965 a warrant of distraint and levy was presented to its counsel, who refused it because the protest was pending. The protest could not be found in the BIR dockets, so counsel gave a BIR agent a copy and service was deferred. On April 7, 1965 counsel was told the BIR was not acting on the protest, and he accepted the warrant. Algue petitioned the Court of Tax Appeals on April 23, 1965. On the merits, the Commissioner had disallowed a P75,000 deduction for promotional fees Algue paid to several individuals. They had worked to form the Vegetable Oil Investment Corporation, which then bought the properties of the Philippine Sugar Estate Development Company. Algue earned a commission on that sale as agent. The Commissioner called the payments fictitious, a tax dodge, because most payees belonged to the family controlling Algue. The CTA ruled for Algue.

1. 1Whether Algue's appeal to the Court of Tax Appeals was filed on time under Rep. Act No. 1125.
2. 2Whether the Commissioner correctly disallowed the P75,000 promotional fees as a deductible business expense.

Both issues were resolved for Algue. On timeliness: a warrant of distraint and levy is, as a rule, proof that the assessment is final and amounts to a denial of any request for reconsideration. Here, though, Algue had protested four days after receiving the assessment, and the protest was not pro forma. The protest suspended the 30-day appeal period under Rep. Act No. 1125 from January 18, 1965. The period ran again only on April 7, 1965, when Algue learned the protest had been rejected. Only 20 days had been used when it appealed. On the deduction: Section 30(a)(1) of the Tax Code allows ordinary and necessary expenses, including a reasonable allowance for compensation for personal services actually rendered. Revenue Regulations No. 2, Section 70(1), states that "The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service." The taxpayer bears the burden of proving a deduction, and Algue met it. Its president and accountant testified that the fees were paid periodically as the payees needed them, which was an informal but understandable arrangement in a family corporation. The payees reported the fees and paid tax on them. The CTA found that no dividends were distributed. The P75,000 was 60% of the commission, a reasonable share because the payees had done practically all the work. The Court said taxes "are the lifeblood of the government and so should be collected without unnecessary hindrance", but collection "should be made in accordance with law as any arbitrariness will negate the very reason for government itself." The CTA decision was affirmed in toto, without costs.