30MAY1980UNGAB VS CUSICONCEPCION JR., J FACTS:B I R E x a m i n e r B e n G a r ci a e x a mi n e d t h e i n c o m e t a x r e t u rn s f i l e d b y t h e herein petitioner, Quirico P. Ungab, for the calendar year ending December 31,1973.

In the course of his examination, he discovered that the petitioner failed tor e p o r t h i s i n c o m e d e r i v e d f r o m s a l e s o f b a n a n a s a p l i n g s . A s a r e s u l t , t h e B I R District Revenue Officer at Davao City sent a "Notice of Taxpayer" to the petitionerinforming him that there is due from him (petitioner) the amount of P104,980.81,r e p r e s e n t i n g i n c o m e , b u si n es s t a x a n d f o r e s t c h a r g e s f o r t h e y e a r 1 9 73 a n d inviting petitioner to an informal conference where the petitioner, duly assisted bycounsel, may present his objections to the findings of the BIR Examiner. Uponr e c e i p t o f t h e n o t i c e , t h e p e t i t i o n e r w r o t e t h e B I R D i s t r i c t R e v e n u e Offi cerprot esti ng the ass ess ment, claimi ng that he wa s onl y a deal er or age nt o n commission basis in the banana sapling business and that his income, as reportedin his income tax returns for the said year, was accurately stated. BIR ExaminerBen Garcia, however, was fully convinced that the petitioner had filed a fraudulentincome tax return so that he submitted a "Fraud Referral Report," to the Tax FraudUnit of the Bureau of Internal Revenue. After examining the records of the case,t h e S p e c i a l I n v e s t i g a t i o n D i v i s i o n o f t h e B u r e a u o f I n t e r n a l R e v e n u e f o u n d sufficient proof that the herein petitioner is guilty of tax evasion for the taxableyear 1973 and recommended his prosecution. In a second indorsement to the Chief of theProsecution Division, dated December 12, 1974, the Commissioner of Internal Revenue approved the prosecution of the petitioner. Thereafter, State Prosecutor Jesus Aceb es who had been designated toassist all Provincial and City Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all violations of the National Internal Revenue Code, as amended, and other related laws, in Administrative Order No. 116 dated December 5, 1974, and to whom the case wasassigned, conducted a preliminary investigation of the case, and finding probable cause, filed six (6)informations against the petitioner with the Court of First Instance of Davao City. On September 16,1 9 7 5 , t h e pet i ti oner fil ed a motion to quash the i nfo rma ti ons upon t he grounds that: ( 1) t h e informations are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-e n t i t l e d ca s e s i n v i e w o f h i s p e n d i n g p r o t e s t a g a i n s t t h e a s s e ss m e n t m a d e b y t h e B I R E x a m i n e r . However, the trial court denied the motion on October 22, 1975. Whereupon, the petitioner filed theinstant recourse. ISSUE:W h e t h e r o r n o t t h e t r i a l c o u r t h a s j u r i s d i c t i o n t o t a k e c o g n i z a n c e o f t h e cases?HELD: Y E S . W h a t i s i n v o l v e d h e r e i s n o t t h e c o l l e c t i o n o f t a x e s w h e r e t h e assessment of the Commissioner of Internal Revenue may be reviewed by theC o u r t o f T a x A p p e a l s , b u t a c r i mi n a l p r o s e c u t i o n f o r v i o l a t i o n s o f t h e N a t i o n a l Internal Revenu e Code which is within the cognizance of courts of first instance.While there can be no civil action to enforce collection before the assessmen t procedures provided in the Code have been followed, there is no requirement forthe precise computation and assessment of the tax before there can be a criminalp r o s e c u t i o n u n d e r t h e C o d e . B e s i d e s , i t h a s b e e n r u l e d t h a t a p e t i t i o n f o r reconsideration of an assessment may affect the suspension of the prescriptiveperiod for the collection of taxes, but not the prescriptive period of a criminalaction for violation of law. Obviously, the protest of the petitioner against thea s s e s s m e n t o f t h e D i s t r i c t R e v e n u e O f f i c e r c a n n o t s t o p h i s p r o s e c u t i o n f o r violation of the National Internal Revenue Code.

This was apparently not taken into account before the warrant of distraint and levy was issued. During the intervening period. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes." 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected. Hence. only 20 days of the reglementary period had been consumed. 3 A search of the protest in the dockets of the case proved fruitless. the warrant was premature and could therefore not be served. 6 The above chronology shows that the petition was filed seasonably. The period started running again only on April 7. Alberto Guevara. INC. 1965.000. We deal first with the procedural question. considered by the tax authorities. who refused to receive it on the ground of the pending protest.183. Atty. 4 On April 7. January 14. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75.: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand. when it was filed. 1965. Atty. As the Court of Tax Appeals correctly noted. According to Rep. a warrant of distraint and levy was presented to the private respondent.R. 1965. the private respondent." 10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. petitioner. indeed. respondents. 1965. such protest could not be located in the office of the petitioner. No.000.. which is the promotion of the common good. CRUZ. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. J. It thus had the effect of suspending on January 18. 1988 COMMISSIONER OF INTERNAL REVENUE. 1125. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. the reglementary period which started on the date the assessment was received. 1965. vs. viz. Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. Agreeing with Algue. The proven fact is that four days after the private respondent received the petitioner's notice of assessment. 1 On January 18. through its counsel.. The petitioner contends that the claimed deduction of P75.85 as delinquency income taxes for the years 1958 and 1959. 1965.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. it filed its letter of protest. Atty. The record shows that on January 14. the appeal may be made within thirty days after receipt of the decision or ruling challenged. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation. when the appeal was filed on April 23. The Court of Tax Appeals had seen it differently. It was only after Atty. 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. received a letter from the petitioner assessing it in the total amount of P83. a domestic corporation engaged in engineering. L-28896 February 17." 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations.G. if at all. which letter was stamp received on the same day in the office of the petitioner. Jr.. 1965. Now for the substantive question. who deferred service of the warrant. 2 On March 12. ALGUE. 1965. construction and other allied activities. when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. and THE COURT OF TAX APPEALS. Act No. on April 23. it held that the said amount had been legitimately paid by the private respondent for actual services .00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. 5 Sixteen days later. Algue flied a letter of protest or request for reconsideration. Guevara gave the BIR a copy of the protest that it was. 1965. such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. may be achieved.

30.--In computing net income there shall be allowed as deductions (a) Expenses: (1) In general. everything seemed to be informal. and Pablo Sanchez. The amount of P75. Algue received as agent a commission of P126. . This finding of the respondent court is in accord with the following provision of the Tax Code: SEC. The test of deductibility in the case of compensation payments is whether they are reasonable and are. Alberto Guevara. Section 70 (1).00.000. Isabel Guevara.00 was 60% of the total commission. Cecilia V.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. This arrangement was understandable. authorizing it to sell its land. after examining the evidence.00. Algue still had a balance of P50. Even so. in fact. the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent. 18 The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue.rendered.000. from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties.. and it was from this commission that the P75. 16 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 13 In fact. an attempt to evade a legitimate assessment by involving an imaginary deduction.000. at the end of the year.00 promotional fees were paid to the aforenamed individuals. whether by check or in cash. to the private respondent was P125. considering that it was the payees who did practically everything. 22 and Revenue Regulations No. when the books were to be closed. 14 Ultimately. Deductions from gross income. Jr. We find that these suspicions were adequately met by the private respondent when its President.000. The total commission paid by the Philippine Sugar Estate Development Co. testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 2. Parenthetically. it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. Pursuant to such authority. Edith. worked for the formation of the Vegetable Oil Investment Corporation. that no distribution of dividends was involved. 20 Admittedly. the petitioner suggests a tax dodge. We agree with the respondent court that the amount of the promotional fees was not excessive.. inducing other persons to invest in it.000. this new corporation purchased the PSEDC properties. factories and oil manufacturing process. as the said court found. and there is not enough substantiation of such payments. to make up the total of P75. in view of the close relationship among the persons in the family corporation. This test and deductibility in the case of compensation payments is whether they are . 70. Eduardo Guevara.. and the accountant. including a reasonable allowance for salaries or other compensation for personal services actually rendered. These were collected by 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 Development Company. 15 For this sale. The payment was in the form of promotional fees. O'Farell. payments purely for service.00. de Jesus. 17 The Court of Tax Appeals also found. after its incorporation largely through the promotion of the said persons. each payee made an accounting of all of the fees received by him or her. reading as follows: SEC. Alberto Guevara. however. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required.00 as clear profit from the transaction. Compensation for personal services. 21 After deducting the said fees. It is argued that no indication was made as to how such payments were made.000. In short.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. This was a reasonable proportion.

Without taxes. despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities. 30 O. SO ORDERED. but the excessive payments are a distribution of earnings upon the stock. 18. is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. If in such a case the salaries are in excess of those ordinarily paid for similar services. it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. (Promulgated Feb.) It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. as it has here. If it is not. 11. and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees. It is said that taxes are what we pay for civilization society. No. but not in fact as the purchase price of services. . Hence. In the present case. 1125.reasonable and are. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. ACCORDINGLY. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner. in fact. payments purely for service.G. then the taxpayer has a right to complain and the courts will then come to his succor. is not deductible. We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. the government would be paralyzed for lack of the motive power to activate and operate it. that the law has not been observed. 325. This was no mean feat and should be. sufficiently recompensed. The government for its part. Practically all of whom draw salaries. This test and its practical application may be further stated and illustrated as follows: Any amount paid in the form of compensation. . he may still be stopped in his tracks if the taxpayer can demonstrate. 1931. it would seem likely that the salaries are not paid wholly for services rendered. as it was. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. . we find that the onus has been discharged satisfactorily. Act No. For all the awesome power of the tax collector. without costs. This is likely to occur in the case of a corporation having few stockholders. however. the appealed decision of the Court of Tax Appeals is AFFIRMED in toto. every person who is able to must contribute his share in the running of the government. 23 The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. . But even as we concede the inevitability and indispensability of taxation.

the requirement of nobody being made worse off for a gain to others is met. This is called the first welfare theorem. the monopolist will be made worse off. Moreover. However. transaction costs are negligible. and therefore can be made more Pareto efficient through a Pareto improvement. the result does not rigorously establish welfare results for real economies because of the restrictive assumptions necessary for the proof (markets exist for all possible goods. In real-world practice compensations have substantial frictional costs. and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. if a change in economic policy dictates that a legally protected monopoly ceases to exist and that market subsequently becomes competitive and more efficient. The change thus results in distribution effects in addition to any Pareto improvement that might have taken place. for the alleged Pareto improvement (say from public regulation of the monopolist or removal of tariffs) some losers are not (fully) compensated. If economic allocation in any system is not Pareto efficient. it can be shown that a system of free markets will lead to a Pareto efficient outcome. In the real world ensuring that nobody is disadvantaged by a change aimed at improving economic efficiency may require compensation of one or more parties. there is potential for a Pareto improvement²an increase in Pareto efficiency: through reallocation.[3] Under certain idealized conditions. They can also lead to incentive distortions over time since most real-world policy changes occur with players who are not atomistic. That is. also called Potential Pareto Criterion. Here 'better off' is often interpreted as "put in a preferred position." It is commonly accepted that outcomes that are not Pareto efficient are to be avoided. For instance. In real-world practice. there must be no externalities. the loss to the monopolist will be more than offset by the gain in efficiency.[4] = . The theory of hypothetical compensation is part of Kaldor-Hicks efficiency. it has since been demonstrated mathematically that. However. This means the monopolist can be compensated for its loss while still leaving an efficiency gain to be realized by others in the economy. Compensation attempts may therefore lead to substantial practical problems of misrepresentation and moral hazard and considerable inefficiency as players behave opportunistically and with guile. It was first demonstrated mathematically by economists Kenneth Arrow and Gerard Debreu. the compensation principle often appealed to is hypothetical. Thus. outcomes will generically be Pareto inefficient (the Greenwald-Stiglitz theorem).An economic system that is not Pareto efficient implies that a certain change in allocation of goods (for example) may result in some individuals being made "better off" with no individual being made worse off. rather who have considerable market power (or political power) over time and may use it in a game theoretic manner. in the absence of perfect information or complete markets. and market participants must have perfect information). markets are perfectly competitive. improvements to at least one participant's well-being can be made better without reducing any other participant's well-being. all markets are in full equilibrium.