Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNL RE!ENUE, petitioner,
vs.
LGUE, INC., a"# T$E COURT OF T% PPELS, respondents.
CRU&, J.:
Taes are the lifeblood of the !overn"ent and so should be collected #ithout unnecessar$
hindrance On the other hand, such collection should be "ade in accordance #ith la# as an$
arbitrariness #ill ne!ate the ver$ reason for !overn"ent itself. It is therefore necessar$ to
reconcile the apparentl$ con%ictin! interests of the authorities and the tapa$ers so that the
real purpose of taation, #hich is the pro"otion of the co""on !ood, "a$ be achieved.
The "ain issue in this case is #hether or not the &ollector of Internal Revenue correctl$
disallo#ed the P'(,))).)) deduction clai"ed b$ private respondent *l!ue as le!iti"ate
business epenses in its inco"e ta returns. The corollar$ issue is #hether or not the appeal
of the private respondent fro" the decision of the &ollector of Internal Revenue #as "ade
on ti"e and in accordance #ith la#.
+e deal ,rst #ith the procedural -uestion.
The record sho#s that on .anuar$ /0, /12(, the private respondent, a do"estic corporation
en!a!ed in en!ineerin!, construction and other allied activities, received a letter fro" the
petitioner assessin! it in the total a"ount of P34,/34.3( as delin-uenc$ inco"e taes for the
$ears /1(3 and /1(1.
1
On .anuar$ /3, /12(, *l!ue %ied a letter of protest or re-uest for
reconsideration, #hich letter #as sta"p received on the sa"e da$ in the o5ce of the
petitioner.
2
On March /6, /12(, a #arrant of distraint and lev$ #as presented to the private
respondent, throu!h its counsel, *tt$. *lberto 7uevara, .r., #ho refused to receive it on the
!round of the pendin! protest.
'
* search of the protest in the doc8ets of the case proved
fruitless. *tt$. 7uevara produced his ,le cop$ and !ave a photostat to 9IR a!ent Ra"on
Re$es, #ho deferred service of the #arrant.
(
On *pril ', /12(, *tt$. 7uevara #as ,nall$
infor"ed that the 9IR #as not ta8in! an$ action on the protest and it #as onl$ then that he
accepted the #arrant of distraint and lev$ earlier sou!ht to be served.
)
Siteen da$s later,
on *pril 64, /12(, *l!ue ,led a petition for revie# of the decision of the &o""issioner of
Internal Revenue #ith the &ourt of Ta *ppeals.
6
The above chronolo!$ sho#s that the petition #as ,led seasonabl$. *ccordin! to Rep. *ct
No. //6(, the appeal "a$ be "ade #ithin thirt$ da$s after receipt of the decision or rulin!
challen!ed.
7
It is true that as a rule the #arrant of distraint and lev$ is :proof of the ,nalit$
of the assess"ent:
8
and renders hopeless a re-uest for reconsideration,:
9
bein!
:tanta"ount to an outri!ht denial thereof and "a8es the said re-uest dee"ed
re;ected.:
1*
9ut there is a special circu"stance in the case at bar that prevents application
of this accepted doctrine.
The proven fact is that four da$s after the private respondent received the petitioner<s notice
of assess"ent, it ,led its letter of protest. This #as apparentl$ not ta8en into account before
/ &o""issioner of Internal Revenue vs. *l!ue
Taation
the #arrant of distraint and lev$ #as issued= indeed, such protest could not be located in the
o5ce of the petitioner. It #as onl$ after *tt$. 7uevara !ave the 9IR a cop$ of the protest that
it #as, if at all, considered b$ the ta authorities. Durin! the intervenin! period, the #arrant
#as pre"ature and could therefore not be served.
*s the &ourt of Ta *ppeals correctl$ noted,:
11
the protest ,led b$ private respondent #as
not pro forma and #as based on stron! le!al considerations. It thus had the e>ect of
suspendin! on .anuar$ /3, /12(, #hen it #as ,led, the re!le"entar$ period #hich started on
the date the assess"ent #as received, vi?., .anuar$ /0, /12(. The period started runnin!
a!ain onl$ on *pril ', /12(, #hen the private respondent #as de,nitel$ infor"ed of the
i"plied re;ection of the said protest and the #arrant #as ,nall$ served on it. @ence, #hen
the appeal #as ,led on *pril 64, /12(, onl$ 6) da$s of the re!le"entar$ period had been
consu"ed.
No# for the substantive -uestion.
The petitioner contends that the clai"ed deduction of P'(,))).)) #as properl$ disallo#ed
because it #as not an ordinar$ reasonable or necessar$ business epense. The &ourt of Ta
*ppeals had seen it di>erentl$. *!reein! #ith *l!ue, it held that the said a"ount had been
le!iti"atel$ paid b$ the private respondent for actual services rendered. The pa$"ent #as
in the for" of pro"otional fees. These #ere collected b$ the Pa$ees for their #or8 in the
creation of the Ve!etable Oil Invest"ent &orporation of the Philippines and its subse-uent
purchase of the properties of the Philippine Su!ar Astate Develop"ent &o"pan$.
Parentheticall$, it "a$ be observed that the petitioner had Ori!inall$ clai"ed these
pro"otional fees to be personal holdin! co"pan$ inco"e
12
but later confor"ed to the
decision of the respondent court re;ectin! this assertion.
1'
In fact, as the said court found,
the a"ount #as earned throu!h the ;oint e>orts of the persons a"on! #ho" it #as
distributed It has been established that the Philippine Su!ar Astate Develop"ent &o"pan$
had earlier appointed *l!ue as its a!ent, authori?in! it to sell its land, factories and oil
"anufacturin! process. Pursuant to such authorit$, *lberto 7uevara, .r., Aduardo 7uevara,
Isabel 7uevara, Adith, O<Farell, and Pablo Sanche?, #or8ed for the for"ation of the Ve!etable
Oil Invest"ent &orporation, inducin! other persons to invest in it.
1(
Blti"atel$, after its
incorporation lar!el$ throu!h the pro"otion of the said persons, this ne# corporation
purchased the PSAD& properties.
1)
For this sale, *l!ue received as a!ent a co""ission of
P/62,))).)), and it #as fro" this co""ission that the P'(,))).)) pro"otional fees #ere
paid to the aforena"ed individuals.
16
There is no dispute that the pa$ees dul$ reported their respective shares of the fees in their
inco"e ta returns and paid the correspondin! taes thereon.
17
The &ourt of Ta *ppeals
also found, after ea"inin! the evidence, that no distribution of dividends #as involved.
18
The petitioner clai"s that these pa$"ents are ,ctitious because "ost of the pa$ees are
"e"bers of the sa"e fa"il$ in control of *l!ue. It is ar!ued that no indication #as "ade as
to ho# such pa$"ents #ere "ade, #hether b$ chec8 or in cash, and there is not enou!h
substantiation of such pa$"ents. In short, the petitioner su!!ests a ta dod!e, an atte"pt
to evade a le!iti"ate assess"ent b$ involvin! an i"a!inar$ deduction.
+e ,nd that these suspicions #ere ade-uatel$ "et b$ the private respondent #hen its
President, *lberto 7uevara, and the accountant, &ecilia V. de .esus, testi,ed that the
pa$"ents #ere not "ade in one lu"p su" but periodicall$ and in di>erent a"ounts as each
pa$ee<s need arose.
19
It should be re"e"bered that this #as a fa"il$ corporation #here
strict business procedures #ere not applied and i""ediate issuance of receipts #as not
6 &o""issioner of Internal Revenue vs. *l!ue
Taation
re-uired. Aven so, at the end of the $ear, #hen the boo8s #ere to be closed, each pa$ee
"ade an accountin! of all of the fees received b$ hi" or her, to "a8e up the total of
P'(,))).)).
2*
*d"ittedl$, ever$thin! see"ed to be infor"al. This arran!e"ent #as
understandable, ho#ever, in vie# of the close relationship a"on! the persons in the fa"il$
corporation.
+e a!ree #ith the respondent court that the a"ount of the pro"otional fees #as not
ecessive. The total co""ission paid b$ the Philippine Su!ar Astate Develop"ent &o. to the
private respondent #as P/6(,))).)).
21
*fter deductin! the said fees, *l!ue still had a
balance of P(),))).)) as clear pro,t fro" the transaction. The a"ount of P'(,))).)) #as
2)C of the total co""ission. This #as a reasonable proportion, considerin! that it #as the
pa$ees #ho did practicall$ ever$thin!, fro" the for"ation of the Ve!etable Oil Invest"ent
&orporation to the actual purchase b$ it of the Su!ar Astate properties. This ,ndin! of the
respondent court is in accord #ith the follo#in! provision of the Ta &odeD
SA&. 4). Deductions from gross income.EEIn co"putin! net inco"e there shall be allo#ed as
deductions F
GaH ApensesD
G/H In general.EE*ll the ordinar$ and necessar$ epenses paid or incurred durin! the taable
$ear in carr$in! on an$ trade or business, includin! a reasonable allo#ance for salaries or
other co"pensation for personal services actuall$ rendered= ...
22
and Revenue Re!ulations No. 6, Section ') G/H, readin! as follo#sD
SA&. '). Compensation for personal services.EE*"on! the ordinar$ and necessar$ epenses
paid or incurred in carr$in! on an$ trade or business "a$ be included a reasonable
allo#ance for salaries or other co"pensation for personal services actuall$ rendered. The
test of deductibilit$ in the case of co"pensation pa$"ents is #hether the$ are reasonable
and are, in fact, pa$"ents purel$ for service. This test and deductibilit$ in the case of
co"pensation pa$"ents is #hether the$ are reasonable and are, in fact, pa$"ents purel$
for service. This test and its practical application "a$ be further stated and illustrated as
follo#sD
*n$ a"ount paid in the for" of co"pensation, but not in fact as the purchase price of
services, is not deductible. GaH *n ostensible salar$ paid b$ a corporation "a$ be a
distribution of a dividend on stoc8. This is li8el$ to occur in the case of a corporation havin!
fe# stoc8holders, Practicall$ all of #ho" dra# salaries. If in such a case the salaries are in
ecess of those ordinaril$ paid for si"ilar services, and the ecessive pa$"ent correspond or
bear a close relationship to the stoc8holdin!s of the o5cers of e"plo$ees, it #ould see"
li8el$ that the salaries are not paid #holl$ for services rendered, but the ecessive pa$"ents
are a distribution of earnin!s upon the stoc8. . . . GPro"ul!ated Feb. //, /14/, 4) O.7. No.
/3, 46(.H
It is #orth notin! at this point that "ost of the pa$ees #ere not in the re!ular e"plo$ of
*l!ue nor #ere the$ its controllin! stoc8holders.
2'
The Solicitor 7eneral is correct #hen he sa$s that the burden is on the tapa$er to prove the
validit$ of the clai"ed deduction. In the present case, ho#ever, #e ,nd that the onus has
been dischar!ed satisfactoril$. The private respondent has proved that the pa$"ent of the
fees #as necessar$ and reasonable in the li!ht of the e>orts eerted b$ the pa$ees in
inducin! investors and pro"inent business"en to venture in an eperi"ental enterprise and
4 &o""issioner of Internal Revenue vs. *l!ue
Taation
involve the"selves in a ne# business re-uirin! "illions of pesos. This #as no "ean feat and
should be, as it #as, su5cientl$ reco"pensed.
It is said that taes are #hat #e pa$ for civili?ation societ$. +ithout taes, the !overn"ent
#ould be paral$?ed for lac8 of the "otive po#er to activate and operate it. @ence, despite
the natural reluctance to surrender part of one<s hard earned inco"e to the tain!
authorities, ever$ person #ho is able to "ust contribute his share in the runnin! of the
!overn"ent. The !overn"ent for its part, is epected to respond in the for" of tan!ible and
intan!ible bene,ts intended to i"prove the lives of the people and enhance their "oral and
"aterial values. This s$"biotic relationship is the rationale of taation and should dispel the
erroneous notion that it is an arbitrar$ "ethod of eaction b$ those in the seat of po#er.
9ut even as #e concede the inevitabilit$ and indispensabilit$ of taation, it is a re-uire"ent
in all de"ocratic re!i"es that it be eercised reasonabl$ and in accordance #ith the
prescribed procedure. If it is not, then the tapa$er has a ri!ht to co"plain and the courts
#ill then co"e to his succor. For all the a#eso"e po#er of the ta collector, he "a$ still be
stopped in his trac8s if the tapa$er can de"onstrate, as it has here, that the la# has not
been observed.
+e hold that the appeal of the private respondent fro" the decision of the petitioner #as
,led on ti"e #ith the respondent court in accordance #ith Rep. *ct No. //6(. *nd #e also
,nd that the clai"ed deduction b$ the private respondent #as per"itted under the Internal
Revenue &ode and should therefore not have been disallo#ed b$ the petitioner.
*&&ORDIN7IJ, the appealed decision of the &ourt of Ta *ppeals is *FFIRMAD in
toto, #ithout costs.
SO ORDARAD.
Teehankee, C.J., Narvasa, Gancayco and Grio!"uino, JJ., concur.
0 &o""issioner of Internal Revenue vs. *l!ue
Taation