Taxation and Tax Defined
COMMISSIONER OF INTERNAL REVENUE
vs.
ALGUE, INC., and CTA (1988)
Collector of Internal Revenue disallowed the P75K deductionclaimed by private respondent Algue as legitimate businessexpenses in its income tax returns. CTA agreed with Algue,allowing the deduction of P75K as legit business expenses.Collector of IR appealed CTA’s decision.Commissioner argues: deduction was not allowed bec it was notan ordinary reasonable or necessary business expense.CTA & Algue: the said amount had been legitimately paid by theAlgue for actual services rendered. The payment was in the formof
promotional fees
. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Phils (VOICP) and its subsequent purchase of the propertiesof the Philippine Sugar Estate Devt Company (PSEDC).
ISSUE
: Is the tax deduction proper? YES!
HELD
: In favor of CTA& Algue!Theamount was earned through the joint efforts of the personsamong whom it was distributed.It has been established that thePSEDC had earlier appointed Algue as its agent, authorizing it tosell its land, factories and oil manufacturing process. Pursuant tosuch authority, 5 others worked for the formation of the VOICP,inducing other persons to invest in it. Ultimately, after itsincorporation largely through the promotion of said 5persons, thisnew corporation purchased the PSEDC properties.
For this sale,Algue received as agent a commission of P126k, and it was fromthis commission that the P75k promotional fees were paid to the5persons.
There is no dispute that the payees duly reported their respectiveshares of the fees in their ITRs and paid the corresponding taxesthereon.
CTA also found that no distribution of dividends wasinvolved.
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Commissioner accuses Algue of
tax dodging
(attempt to evade alegitimate assessment by involving an imaginary deduction). Heclaimed that these payments are fictitious bec most of the payeesare members of the same family in control of Algue. In fact, noindication was made as to how such payments were made,whether by check or in cash, and there is not enoughsubstantiation of such payments.However, these suspicions were adequately met by Algue Incwhen its President, Guevara, and the accountant, de Jesus,testified that the payments were not made in 1 lump sum butperiodically and in different amounts as each payee's need arose.It should be remembered that Algue Inc was a family corporationwhere strict business procedures were not applied and immediateissuance of receipts was not required. Even so, at the end of theyear, when the books were to be closed, each payee made anaccounting of all of the fees received by him or her, to make up thetotal of P75,000.00. Admittedly, everything seemed to be informal.This arrangement was understandable, however, in view of theclose relationship among the persons in the family corporation.
The CTA was correct
that the amount of the
promotional feeswas not excessive.
The total commission paid by the PSEDC. toAlgue Inc was P125K. After deducting the said fees, Algue still hada balance of P50K as clear profit from the transaction. The amountof P75K was 60% of the total commission. This was a reasonableproportion, considering that it was the payees who did practicallyeverything, from the formation of the VOICP to the actual purchaseby it of the PSEDC properties. This finding of the respondent courtis in accord with Sec 30 of the Tax Code:
SEC. 30.
Deductions from gross income
.--In computing net income thereshall be allowed as deductions — (a) Expenses: (1)
In general
.--All the ordinary and necessary expenses paidor 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; ...
22
and Revenue Regulations No. 2, Section 70 (1):
SEC. 70.
Compensation for personal services
.--Among the ordinary andnecessary expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation forpersonal services actually rendered
. The
test of deductibility in the caseof compensation payments is whether they are reasonable and are, infact, payments purely for service.
This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may befurther stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is notdeductible. (a) An ostensible salary paid by a corporation may be adistribution of a dividend on stock. This is likely to occur in the case of acorporation having few stockholders, Practically all of whom drawsalaries. If in such a case the salaries are in excess of those ordinarilypaid for similar services, and the excessive payment correspond or beara close relationship to the stockholdings of the officers of employees, itwould seem likely that the salaries are not paid wholly for servicesrendered, but the excessive payments are a distribution of earnings uponthe stock
. . . .
It is worth noting at this point that most of the payees were not inthe regular employ of Algue nor were they its controllingstockholders.
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SolGen’s correct that the
burden is on the taxpayer to provethe validity of the claimed deduction
. In the present case,however, we find that the onus has been discharged satisfactorily.The private respondent has proved that the payment of the feeswas necessary and reasonable in the light of the efforts exerted bythe payees in inducing investors and prominent businessmen toventure in an experimental enterprise and involve themselves in anew business requiring millions of pesos. This was no mean featand should be, as it was, sufficiently recompensed.
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