CTA Case No. 950 (Decision)

I Republic of the Philippines COURT OF TP:X APPEALS Manila ALHAMBRA CIGAR & CIGARETTe C. T. A. CAS'ffi N03.. 950 and 987 MANUFACTUii.ING COMPANY, Petitioner� - versus - THE COMJ\USS IONER OF INTERNAL REVENUE, Respondento X- - - - - ~ - - - - - - - X DECISION The petitioner has appealed from the decisions of the respondent holding it liable for the payment of defi- ciency income tax for the years 1954, 1955, 1956 and 1957o C.T.A. No. 950 is the appeal from the deficiency assessment for the year 1954 involving the sum of 24,603.00, while C.T.A. No.. 987 is the appeo1 from the deficiency assessment for the years 1955, 1956 and 1957 involving the sums of 24,823.40, 24,892.98 and . 24,.014.34, respectively. As the two cases involve the same parties and the same issues, they we~e heard jointly. The deficiency income tax assessment for each of the years under review was brought about by the disallow- ance by respondent of a portion of the salaries and bonuses of petitioner's non-resident President and Vice- President, and the total disallowance of their alleged commissions and directors' fees and certain expenses paid out of the discretionary fund of its resident Treas- urer and Assistant .Manager. For ready reference, the deficiency assessment for each of the years involved showing the items disallowed by respondent is itemized

DECISION - ""' 2 - C. T�.1\ . CASE NO .. 950 and CTA No . 987 below: 1954 DNeetduicntcioomnes dpiesralrleotwuernd b-y--r-e-s-p-o-n--d-e-n-t:-- ~ 757,938.66 1. Salaries-Officers (part)---------- ~ l8,ooo;oo .., I 87,864.64 2. Bonus-Dfficers ~ 845,80~.00 3, Com(pmairsts)ion--t-o------- 27,215.22 Managers -------- 23,009.42 228,826.00 2041!223.qo 4. Directors' fees --- 1,840._QQ p 24,60~.00 5. General expenses (discretionary Net incomefupnedr) re-s-p-o--n-d-e-n-t TLaexssd: ueAmthouenrteoansse-s-s-e-d--a-n-d- paid -~~---~~~---- Deficiency tax ---------- DNeetduicntcioomnes dpiesralrleotwuernd b-y--r-e-s-p-o-n-d--e-n-ts--- 1. Salaries-Officers (part)---------- '18 ,000.00 2. Bonus-Officers (part)---------- 15,500.00 3. Commission. to 28,195.24 Managers -------- 21,386.04 83,381.28 4. Directors' fees --- 839,338.00 5. General expenses 300.00 227,015.00 203.._668.00 (discretionary p 23.347.00 fund)-------- 1,476.40 Net income per respondent- 24,823.40 TLaexssd: ueAtmhoeurnetonass-e-s-s-e-d---- ... Q and paid ------- ~D%efmicoinetnhclyy tianxter-e--s-t -f-r-o-m-- 6/20/59-7/11/60 ~------ Total deficiency income tax and interest ------ 1956 Net income per return ---------------- J 766,837.04 Deductions disallowed by respondent: _ _E~3 9 5~2�.~q 1. Salaries-Officers (part)----------- P l8,000o00 2. Bonus-officers 3. Com(pmairsts)ion-s--t-o------- 18,500,00 Managers --------- 26,361.74 4. Directors' fees ---- 2<~,720.46

DECISION - C. T. A.. CASES NCS 950 and 987 -3 Net income per respondent- ' 850,419.00 Tax dua thereon ------- ~ 230,117,.00 Less: Amount assessed 206,114.00 23,403.00 and paid ~--~----- --------- Deficiency tax 1 t.48Q�.98 ~% interast from 6/20/59- Tot7a/l11d/e6f0ici-e-n-c-y--t-a-x--a-n-d--� interest ~---~-----~--- DNeetduicntcioomnes pdiesralrleotwuernd b-y--r-e-s-p-o-n-d-e-n-t-~--- p 885,857.,57 1~ Salaries-Officers 80,631.24 (part) ---------- 18,000.00 966,489.00 2. Bonus-Officers 262,417.00 3. Com(pmairsts)ion-s--t-o----- - 16,500o00 240.040.00 Managers -------- 26,288.58 �~ 22,577.00 4. Directors' fees --- 19,433~26 1;,.437. 34 5. General expenses e~ 24.014.34 . (discretionary furrl) .:...,...__409. 40 t ,, =;; a Net 1ncome per respondent TLaexssd: ueAmthouenrteoansse-s-s-e-d--a-n-d- paid ~------------ ~D%e fiinc iteenrceys t t afrxom- -6- -/ 2-0- -/ 5- -9-- T o7ta/1l1d/6e0fic-i~e-n-c-y---in-c-o-m--e tax and interest ----- Of the five items shown above as having been dis- allowed by respondent, petitioner has abandoned its claim with respect to the general expenses paid out of the dis- cretionary fund of its resident Manager. The sole issue, therefore, relates to the legality of the disallowance of part of the salaries and bonuses of petitioner's non- resident President and Vice-President , and the disallow- ance of the entire commissions and directors' fees paid to them as indicated above. Below is a tabulated state- ment of the items and the corresponding amounts disallowed for each of the years under review: 1. Salary - -~llowed ~~llowed (a) A.P. Kuenzle ~15,0CX).OO . 6,oco.oo 9,ooo.oo ((

DECISION - C. T. A. CASE NOl, 950 & '987 -4- - (b) H.A. Streiff j 15,000.00 6,oco.oo ~ 9,000.00 5,850.00 8,900.00 2. Bonus 5,850. 00 8,900o00 ~a~ A. P. Kuenzle 14,750.00 b, H. A. Streiff 14,750.00 ...... 13,607.61 - ~a~ 13,607.61 --...... 11,504.71 b _j_l.504! 71 3. Commissions 23,700.00 ~86 , 024.64 Kuenz le 13,60 7o61 A. P. Streiff 13,607.61 H. A. - ~a~ b 411 Directors' fee1s Kuenz1e 11,504.71 HA.. PA.. Streiff . ~~.._504 .. 71 Totals --P109 ,724.. 64 1. Salary - ~ 6 ,ooo.oo !1 9,000.. 00 9 ,000.00 (a) A.P. Kuenz1a ~ 15,000.00 6 ,000.00 7,750.. 00 (b) H. A. Streiff 15,000.00 7,ooo.oo 7,750.00 7,000,.00 2... Bonus - 14,097.62 -- 14,097.62 (a) A.P. Kuenzle 14,750.00 10,693.�02 ~26 , 000.00 10,693.. 02 (b) H.A. Streiff 14,750.00 3. Commissions ... \ ~ 83,081.28 (a) A. P. Kuenz1e 14,097.62 (b) H. A. Streiff 14,097.62 4. Directors' fees - (a) A.P~ Kuenzle 10,693.02 (b) H.A. Streiff _ 10 1 693.02 Totals --fl09,081.28 1. Salary - 6 ,ooo.oo ~ 9 ,oco. oo (a) A. P. Kuenzle 15,000..00 (b) H. A. Streiff 15,000.00 6,000.00 9,000.00 5,500.,00 9,250.00 2. Bonus - 5,500.00 9,250.00 (a) A.P. Kuenzle 14,750.00 -- 13,180.87 {b) H.A. Streiff 14,750.00 13,180,.87 -- 10,360. 23 3. Commissions - ~- -- 10,360.23 {a) A.P. Kuenz1e 13,180.87 ' 23,000.00 i83,582.20 (b) H.A. Streiff 13,180.87 4. Directors ' fees - (a) A.P. Kuenzle 10 ,360.. 23 (b) H.A. Stre iff 10,360.23 Totals --i1106,582.20 1. Salary ... -1957 ~a~ A.P. Kuenzle 66,,o0c0o0..o0o0 p 9,000 00 b H.A. Streiff i 15,000.00 9,000.00 2. Bonus - 15,000.00 ~a~ Kuenzle 14,750.00 6,500.00 8,250.00 b; HA.. AP.. Streiff 14,750.00 6p500.00 8,250o00 3, Commissions - 13,144.29 13,144.29 (a~ A. P. Kuenzle 13 ,144. 29 ---- -- 13 ,144.29 (b H.A. Streiff I

Dc.ETC.IASI.ONCA-S� T~ 950 and 987 .. 5 - 4. Directors ' fees ~ (a) A.P. Kuenzle 9,716.63 ~- - - -- 9,716.63 (b) H"A" Streiff 9 . 716.63 -- -- -- 9 716.63 Totals .__..;_ l55,221. 84 25 ,000.00 �80,221.84 The evidence shows that prior to 1954, Messrs .. A, P. Kuenzle and H.A. Streiff , President and Vice- President , respectively, of petitioner corporation ~ were each paid an annual salary of ~,ooo.oo and a bonus of about four times as much as the annual salary. In Alham~ bra Cigar and Cigarette Manufacturing Company v9 Call. of Int. Rev., c. r .A. No. 143i JaRuary 31 , 1957 (affd. in G.H. Nos. L-12026 & L-12131 , Ma y 29 , 1959), this Court held that considering the nature of the services perform- ed by Messrs. Kuenzle and Streiff �, the salary of ,ooo.oo paid to each of them was reasonable and , therefore, deductible as ordinary and necessary business expense. The bonus paid to each of said. officers was however re- duced to the amount equivalent to that paid to Mr. W. Eggmann , the resident Treasurer and Manager of petition - er. Following the decision of the Supreme Court in G.R. Nos. L-12026 & L-12131 , supra, respondent allowed as deduction f6,ooo.oo as salary to Messrs . Kuenzle and Streiff and a bonus equivalent to that paid annually to Mr. Eggmann from 1954 to 1957, as indicated above. In disallowing a portion of the salary and bonus paid to said officers, respondent stated: In disallowing -9 1000.,00 e~ch from the salaries (�-15,000.,00 ) received by Messrs . A.P. Kuenzle and H. A. Streiff for the year 1954, this Office merely followed the Supreme Court decision in the case entitled �Alhambra Cigar & Cigarette Manufacturing Company v., Collector of Internal Revenue*p G. R. Noi. L-12026 and L-1213lp involving a similar is- sue for the years 1949 to 1953 in which the II � r

DECISION .. C. T .A. CASES NeG 950 and 987 -6 - High oTf rPib6u,onoaol.oaollofwoerdthaes salary only the sum aforementioned officers. The increase in s alary of these two (2 officials from P6pOOO.OO to 15 7000.00 for 1954 is not justified. It was verified by examine r s of this Office that there was no i ncrease of res- ponsibility or of services re nde r ed in the ye2r 1954 to wa r r ant the additional compen- sation. In the investigation, it was defi- nitely ascertained from a responsible offi- cer of your client that the increase in salary of ~9,000.00 was a me re shift from the bonuses account to the salaries account for 1954 purposely to avoid the danger of being disallowed by t his Office pursuant to Supreme Court ruling ab ove-citedv The bonus allowed to Mr. w~ Eggmann, treasurer and acting manager of the company f er the year 1954 in the sum of r-5,850.00 was used as a pattern for the bonuses al- lowed to Messrs. Kuenzle and Streiff for the ye a r in question* 'fuen Mr~ F. Koller, a responsible officer of your client was iry- terviewed by our examiners regarding the ad- justments of bonus given to these two offi- cials, he could not give any reason for the decrease of the bonus of Mr. Eggmann except that the increase in salary and decrease of bonus of the latter official was purposely made so that the reasonableness of the bonus payments could not later on be questioned by this Office, Accordingly , based on the aforecited decisi on of the Supreme Court, the bonus allowed to Messrs. Kuenzle and Streiff should only be r-5,850.00 e~ch, which is the same as the bonus al l owed to Mr. '�'� Eggmann. (Exh. 15, PP� 49-50, BIP_ records, C.T.A . No. 950.) Upon the evidence of record, we find no justifi- cation to reverse or modify the decision of respondent with respect to the disallowance of a portion of the salaries and honuses paid to Messrs. Kuenzle and Streiff. Petitioner seeks to justify the increase in the salaries of Messers. Kuenzle and Streiff on the ground of increased cost of living. The said officers of petitioner are, however, non-residents of the Philippines. In connection with the commissions paid to Messrs, I

DECISION ... . C. T . A. CASES NCS 950 J and 987 ' - 7- Kuenzle a.nd Streiff, there is no evidence of any parti- cular service rendered by them to petitioner to warrant payment of commissions. Counsel for petitioner sought to prove the various types of services performed by said of.. ficers, but the services mentioned are those for which they have been more than adequately compansated in the form of salaries and bonuses. As regards the directors ' fees, it is admitted that MessrsG Kuenzle and Streiff �usually came to the Philippines every two years, and generally stayed from five to eight weeks.M (Page 17, Memorandum for Petitioner. ) le cannot see any justifi- cation for the payment of director's fees of about ~10,000.00 to each of said officers for coming to the Philippines to visit their corporation once in two years. Being non-resident President and Vice-President of peti- tior:er corporation of which they are the controlling stockholders, we are more inclined to believe that said commissions and directors' fees, payment of which was based on a certain percentage of the annual profits of petitioner; are in the nature of dividend distributions. Finding no error in the decisions appealed from, the same are hereby affirmed, with costs against peti- tioner. SO ORDERED. Manila , May 30, 1964. ROI'MN M ~ UMALI Associate Judge WE CONCUR : II