KUENZLE & STREIFF v.

COLLECTOR OF INTERNAL REVENUE

Oct 20, 1959 | BAUTISTA-ANGELO, J.| Deductions > Compensation for Personal Services
PETITIONERS: KUENZLE & STREIFF, INC.
RESPONDENTS: COLLECTOR OF INTERNAL REVENUE
SUMMARY: Petitioner appeals the CTA decision which held them liable for deficiency income tax as
they included bonuses, salaries, and interests in their ITRs. The portion being appealed is that wherein the
reasonableness of the deductions made. SC affirmed CTA. See doctrine and linked portions of Held.
.
DOCTRINE: Deduction of bonuses: #4
Reasonableness: #5 and 6; As to application, see #8
Interests as indebtedness: #10

FACTS:
1. Petition for review of CTA decision that declared petitioner liable for deficiency income tax for 1950-
1952.
2. Petitioner deals with import of various products; insurance and lumber; and exports. In its ITRs for
1950-1952, it deducted from its gross income certain items such as salaries, bonuses, and interests on
earned but unpaid salaries.
3. Respondent disallowed the deductions above, and assessed (and demanded) petitioner income tax
deficiencies (around P124k for the 3 years). Petitioner requested for re-examination of assessment.
4. Respondent modified the assessment and allowed the fees and salaries of its officers to be deducted,
but disallowed the rest for they were in excess of the salaries of such. The new assessment was at
around P57k for the 3 years. Upon appeal to the CTA, the assessment was further modified to amount
to around P33k.
5. Petitioner: appeals the portion of the CTA ruling which holds that the measure of the reasonableness
of the bonuses paid to its non-resident officers should also be applied to its resident officers and
employees in determining their deductibility.
6. Respondent: appeals the portion of the ruling which allows the deduction of so much of the bonuses
which are in excess of the yearly salaries the recipients were already receiving.

ISSUE: WN the CTA erred in allowing the deductions: - NO

HELD:
1) Court cites Sec 30 (a1) and (b1)
a) Expenses
i) 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 services actually rendered.
b) Interests
i) The amount of interest paid within the taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the interest upon which is exempt from
taxation as income under this Title
2) It said that it appeared as though all the ordinary and necessary expenses incurred by a business,
including a reasonable allowance for salaries or other compensation for personal services actually
rendered, may be allowed as deductions in the computation of taxable income. Interests may also be
deducted if it is paid within the taxable year.
3) Court noted that petitioner gave its non-resident officers bonuses equal to 133-1/2% of their annual
salaries. It also gave its resident officers bonuses equal to 125 2/3% for the year 1952, on the alleged
reason that they deserved them because of their valuable contribution to the business
a) CTA: while the bonuses given to the non-resident officers are reasonable considering their yearly
salaries and the services actually rendered by them, the bonuses given to the resident officers and
employees are, however, quite excessive.
b) "there is no special reason for granting greater bonuses to such lower ranking officers than those
given to Messrs. Kuenzle and Streiff."
4) General Rule: bonuses to employees made in good faith and as additional compensation for the
services actually rendered by the employees are deductible, provided such payments, when
 added to the stipulated salaries, do not exceed a reasonable compensation for the services
rendered
a) Condition precedents for deduction of bonuses to employees:
i) the payment of the bonuses is in fact compensation;
ii) for personal services actually rendered;
iii) the bonuses are reasonable when measured by the amount and quality of the services
performed with relation to the business of the particular taxpayer
b) In this case, it is admitted that the bonuses are in fact compensation and were paid for services
actually rendered.
5) (As to reasonableness) Court notes that there is no fixed test for determining the
reasonableness of a given bonus as compensation, as this depends upon several factors:
i) Amount and quality of services performed in relation to business
ii) Payment was made in good faith
iii) Character of taxpayers business
iv) Volume and amount of its net earnings
v) Locality
vi) Type and extent of services rendered
vii) Salary policy of the corporation
viii) Size of the business
ix) Employees qualifications and contributions to the business
x) General economic conditions (Mertens, Law of Federal Income Taxation)
6) However, the situation must be considered as a whole. A single factors is not conclusive, and it
is ordinarily the interplay of several factors which are properly weighed in the given case that
decides reasonableness.
7) Petitioner: error to apply the same measure of reasonableness to both resident and non-resident
officers because the nature, extent and quality of the services performed by each with relation to the
business of the corporation widely differ. Its counsel outlined the facts and figures to show that the
resident officers and employees contributed significantly to the profits that the company realized in the
said years. This was in line with the companys policy of giving low salaries due to the recent war and
the controls on exports and imports, but also giving bonuses if the companys financial situation would
allow them to do so. The General Manager of the company, Jung, testified that the bonuses were based
on the amount of work performed, the nature of responsibility, the years of service, and the cost of
living.
8) The Court stated that the fact that the resident officers performed their duties well does not necessarily
entail that they may be given greater amounts of additional compensation/bonuses. This is because in
the opinion of the company itself, the non-resident officers rendered the same amount of service to
deserve equal treatment in compensation. Petitioners counsel outlined the contributions made by
Kuenzle and Streiff while abroad, including purchases of supplies, making contracts, controlling
operations, etc. Essentially, they were made out to be policy-makers. Hence, there was no special
reason in giving greater bonuses to lower ranking officers than those given to Kuenzle and Streiff.
9) (As to respondents contention that TC erred in allowing the deduction of bonuses in excess of annual
salaries) Court considered the circumstances, particularly the post-war policy on giving low salaries,
etc. Taking these, the Court held that payment of bonuses in amounts a little more than the yearly
salaries received considering the prevailing circumstances is in our opinion reasonable.
10) (As to interests disallowed) Court noted that such accrued on unclaimed salaries and bonus
participation of shareholders and employees. The law, however, provides that such interest
must be paid on indebtedness. In this case, the unclaimed salaries and bonus participation do
not constitute indebtedness because while they are obligations of the corporation, it is not their
fault that such are unclaimed. Indebtedness refers to the amount which one contracted to pay
for the use of borrowed money. As the company had sufficient funds to pay the salaries,
whatever the employees may fail to collect are not indebtedness as it is the concern of the
employee to collect it.

CONCLUSION: Petition denied. CTA affirmed.