Commissioner of Internal Revenue v. Algue, Inc. Jan. 14, 1965 - Algue Inc.

received a letter from CIR assessng it for P83,183.85 as delinquency income taxes for 1958 and 1959. Jan. 18, 1965 - Algue filed a letter of protest. It wanted to include as expenses the promotional fees it had paid to Philippine Sugar Estate Development Company, and Vegetable Oil Investment Corp. CIR contends: deduction of P75k was properly disallowed because it was not an ordinary, reasonable or necessary business expense. CIR suggests a tax dodge, claiming that these payments are fictitious because most payees in the 2 companies are "members in the same family in control of Algue." Also claims there was no indication as to how payments were made, and there is no substantiation of such payments. CTA held: Amount of P75k had been legitimately paid by Algue for actual service rendered, in the form of promotional fees. ISSUE: W/N the CIR correctly disallowed the P75,000 deduction claimed by Algue as legitimate business expenses in its income tax returns. HELD: NO. 1. Tax Code Sec. 30: In computing net income, there shall be allowed deductions-A) Expenses 1) In general. -- 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 service actually rendered. Revenue Regulations No. 2, Sec. 70 (1) Compensation for personal services. The test for deductability in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. SC: amount of promotional fees are NOT excessive. P75k was 60% of the total commission, which is a reasonable proportion, since it was the payees who did practically everything. 2. No tax dodge. Algue's President and accountant testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. Everything seemed informal (as to the manner of payment) but this is understandable because it's a family corporation. 3. Burden is on taxpayer to prove the validity of the claimed deduction, which in this case has been discharged satisfactorily. Algue has proved that the payment of the fees was necessary and reasonable.

"Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Every person who is able to pay must contribute his share in the running of the government. The Government, for his part, 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. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that is an arbitrary method of exaction by those in the seat of power. Tax collection, however, should be made in accordance with law as any arbitrariness will negate the very reason for government itself. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate that the law has not been observed."