CTA Case No. 4 (Decision)

liPUBLIC 0 T1 P I IPPINEI COUR.f OF APPEALS ML.A fl<:ftENCIO HE'{E!) , o. 4 I ~titioner, - versus � COLLECT " F D T L VENUE , e po dent. X� � - � - - - ~ � - � -x EI I This r fer& to t he appeal oy petitioner from t he decision of respondent dat ed June 26, 195 � old� ing t he for er liable for d!fic iency income taxes inc luding penalties for the taxable years 1947, 1 48 and 1949� n the respective a ounts of 114, 76~.23, 190, 8. 19, and 146,976. 11 or a total of 451,837 . 53. On the sis of the stipulation of facts (here� inafter c ited as Stifac ts) and the additional vidence su itted y the partie 1 tho following facts have been atablis d . etitio.er is the &ole roprietor and n ger of the business under the tr de n me of loreuc io ~ yes <.;o. dealing �n general orchandi c, spec ally hard are, .1d construction materials, and sell them more particularly to the ov r nt by con racts warded thru comp titive public bi ddin (p r . 1, if cts, p. lOB, . T. A. rec.) . Fro 192u to 1 45 , the bu !ness was administered personally y pet t : on r . However, due to his ill health whic h re uired th t he e ur.der edic al tre atment both here and abroad, th~ ~ 535 553

lSI � � I �� CASE � 4 - 2- an nt o the ousine s was ntrusted to .eti� ti ner ' s c !1dren h ad d by An el eyes , as evidenced titio er '& u or direct v addr ssed to t h Chief cc ountant tt . Lontoc dated July 18 , 1945 and arked as E.xt.ici't M (p. 215, I r c.; see ar . ' 4 nd An. ex �x tifacts, p. 162, . T. � rec . ). Pur� suant to t his e or ndu , the childr n re .given the follow n respective ass�gn ents: Angel , an ger; a on , rchasin Agent; Jo , uperv sorJ Flor nc o Jr� � S eret ry to nag r; o ario, 1ni trative fie r; Oliv , Inchar e of S lea; ranc sea, Inch r e of Cred t Collect on; T resa , Cash er; ar elit , Assistant C sh r; Ant ro� ch r of t r�J nd ol d , Assis ant Incharge f etai1 ( ee p � 2, xhib t ). ( In 1 6, th t ur n h y ar di tely proc g th taxa e y ara n stion (1947, 1 4 d 1949) , th siness registered a gross sale of 21 234, 641.18, ith n t prof t of 46, 744.26�. o � nu �� then eel re � p. nnex "II � p . 51, c . r. � rec .; lao xh� " � pp. 5- ' IR ree.) Dur g the years 19 7-49 , cluaiv , th uai� n $ 1 de th fol1o ing gross sales and ft ~ d uet� - 9 xpenses ( i eluding nuses) r sulted in net fit , to wita Yea ( par. 5, 536 55

1.11:.\,~ .l.\A'f - �4 C. T.A. CASE - 3- As per e orandu , Exhibit , t bonus , marked as compen at1on for services of th children shall be n an amount �not exceeding of the net profits�, th s to ap o ione as foll s � 3 for ~ An el in addition t o his basic ont hly salary of . oo, an 25 for the rest o t ' e ehil en who do not receiv any onthly salary in t proportion aa ay e det r !ned by Angel eyes (pa � J , Exh � bit M) . fhe bonuses e r arked and cr clit d to t he chil- dren in 1947, 1948 , nd 1949� 5 ell as those pal~ t t e fifty five 55) regular e plo es of petitioner .u-e a followsa onu earned for 348 ,035.00 540, 000. 865, c.oo. oo the year Lesss onus dis- 29 , 002.9 7 ,ooo.oo tribu e to 55 319 , 032. 10 490, 000. regular e - p.Loyees 203, 020. 50 240, CCO. OO 312, 060o96 a l anc e Distribution 11, 1.16 3, 286�., 2 of bonus to the follotw!ng 11, 001. 16 20,000. 00 33, 286. 72 childrens Angel � R yea 11,601. 16 20,oco. 33, 6. 72 Oliva � 11, 601. 16 45,769 . 22 Arevalo 11, 601. 16 20, 000. 00 45,769.22 Fr ncisca R. e Juot!niani 20, . oo aro � de Av cilia on eye Teresa eyes 537 551

c. r l�S�I c � �� E Jo e eyes 11, 601.16 20, 000. 00 45, 769. 22 o ario � Reyes 11 , 601 . 16 20, 000. 00 45, 769 . 22 oled E. eye 11, 601 .16 20, 000. 00 none Car lita e s 11, 601 . 16 no �� . F1orenc!o ey Jr . 11, 601. 16 (Par. 7, t facts. ) akin of H ever , i~ t is to b 0 erved t at n th the above apportio nt of the bonus , the children ctually rece e for 1947 only 55 of the net profits nd for 1948 nd 1 9 nly 5 and 47 r p ctively. Of t ese , ar.: , 28. 4 nd 2 � w llott to ng 1 yes for th ye l 7 , 1948 nd 1 49 , while th re t ere apportion d ong the othe children. th oth r h nd , th bonus d clar d by the afor ntione childr n of titioner �n th ir r sp c� tiv inco t X r turns for the .y ar 19 8 , 1949 , n 19 � ind c t d lo~' 1 eyes No r turn 2 , 000. 00 117, '>. 44 f!1 d liva � Ar v 1o 9 ,000. 20,000. 3 , 286. 72 ra cisca � d o return il d r turn u no o us us 1nian_ filed d cl r d ' eyes o return 20, 162. 4 45 , 769 . 22 Teresa eyes filed 20,000.00 45 , 769. 22 20, osario eyes 'o ret rn 5, 769. 22 i1 20, .oo o return filed 53

DECISI - C . T. A. CASE NO� ..,.. � - oledad -5 No return o r t rn filed file Car e lita eyes o return No return o return filed filed filed floreneio E. No return o return 1o return eyes Jr . filed filed filed (Par . 8 , tifacts.) e deduce that the bonuses recorded in petitioner ' s books for a given year as paid to and declared as !nco by the children in the succe ding y ar. As dmitted by the parties, Fr nci c � Jus- t in! ani , R on eyes , !ere a yes , Jos yei , osario E. eyes , Soledad e. eyes , Car l!ta eyes , and Florencio eye Jr. did not file any inco tax return for t e taxable year 1947; that Oliva � de Arevalo and paro � de vee !ll a reporte in their inco tax returns only the ounts of 9 , nd 9 , &>0. 00 1 their o u f or t he year 1 47; th t Fr ncisc � e Justin!a i did not declare the bonus of 3, 286. 72 in her return for t year 1949; that Angel � eyes did not file his re - t urn i n 19 ; and then in 19 , he reported in hi r turn a bonus of 117 , 092. 4 only (par. 9, Stif cts) . The recor ds aho that inco tax returns er filed y An el � ey s in 1947, 19 , and 1950 (An- nexes A, A� l , an A- 2); by Oliva � de Arev lo , in 1947 , 1948 and 19~ (Annex s B, B- 1, and � ); y f r aneisca � de J ustinian! in 1947 and 1 49 (Anne xe s C and C-1); by paro � Avecilla in 1947, 1948 , 1949, and 19~ (Annex�� D, D- 1 , D- 2 , and D- 3 ); by on eyes in 1949 and 19 (Annexes E and E�l ); by Teresa eyes I gnacio , 1n 1949 and 1950 (Annex s F and " I 539

DEClS I ON - C . f .A. c.;�.3E NO. 4 - 6- F� l); by Jose Reyes in 1949 and 19~ (Annexes G and - 1); by osario � Reyes in 194~ and 1950 (Annexes H and H� l); by Soledad E. eyes in 1949 (Annex !) ; and Flor ncio eyes Jr . filed no returns. Pars. 10- 19 , tifacts. r om the evidence presented it also appears that Florencio eyes Jr. as enrolled and attended school in De La Salle College during the school y ar 1947-1940 with the follo ing schedule of cl sses: 8:00 a�� to 12:25; 1:30 p.m. to 2,50 p. m. , being t hen in the second year (par . 19 and Annex 'J , � ~ t ifac ts); a,d that Soledad eyes was enrolled and at ten ed &chool in Loly host College during the sc,oo1 year s 1945-1946, 1946-1947 , and 1947-1948 , with the following schedule of classes: 7:20 a . m. to 12 �15 p�� and 1100 p.m. to 5:40p.m., ing then i the second , third and fourth ye r high ~chool , resp ctively (par . 20 and Annex '1K" , S tifacts). liva � de Arevalo , rancisca � de Just.niani and A paro R. de Avecilla ha usinasses of t ir own , separate and distinct from that f lorencio eye Co., wit h t he following gross receipts or e y rs indicated as follows: that of Cliva "� d Arevalo, ~73 , 824 . 72 in 1947; 176, 035. i 1948 , a d 102,- 677 . 41 ~n 1949; Francisca x. de Justiani , 42 ,0~4.60 in 1947 and 131 , 026. 04 �n 1949; and A.paro � de Ave- c illa , 32, 238. 85 in 1947 und ?5 , 79 . 60 �n 1948 (pars . 21 , 22 ~nd 23 , Stifnct s) . 51. 0

DECISI - C. T. A. CASE � 4 - 7- a result of th examination of petitioner' $ records , respondent disallowed th entire amount of bon s paid to petition r' children h1ch re cla ed s d duction d s essed petitioner the t otal sum of 1 ,149, 830.53 as d f elency !nco e tax for the years 1947 , 1948 and 1949. Petitioner, how- ever, sought a recon !deration of the ass as nt , an upon a rev: w ther of, t sse sm t re uce to 4~1 , 837. 53 after respo nt co c e to p it! ner the deduction as co pens t o. f r t ervice o the s id cl lldr n n t for f onus in the lOUnt 1 to 25,.o of the n t p of�t ( e tt r of res ondent dated Dece cr 29 , 1 5 nd un 26, 1 5t att c ed 6 Annex s "C� and .., " of etition or ' v � so also Exhibits J.J" n "LL , pp . 241- 2 ite s cln d r rec.). Und this .l t e:r ction as de uctions in etlti cr'G co. e t x r turn~ for the y ars indicat d ut disall~wod y res ond nt , are as follo ' 1947 , 346.2~ 185, 087.80 48 , 818.64 ov�dent Fund -.-- -.-- enalties 2,375.77 urcharges r veling Ex- p nses , Per- sonal onus to Chil- dren, excess 186,102. 06 285, 833. 3 431,666. 66 Fro this dec� ion of r sponde t , pet ti ner institut d the present ap eal. 5 1'

1Jt:.(.; ,J;;, J. - T.A. CASE � 4 - 8- Petitioner raises no !ssu affecting. the dis� allowance of the deductions f or (1) rovident fund, (2) tax penalt!e and surcharges , and (3) traveiin expen es. take it that pet tioner a its the re- sultlng deficiency inco t x insof r a th &e tems are concerned. H nee , th princ pal nd only qu st ion here is whether or not the onus in it entirety ay ~be claimed as a de,uc tion for purposes of t he inco e tax returns of petitioner for th y r& 1947, 1948 an 1949. It is to b noted that h!le petitioner has cla d d uction of onuses paid to his children in . -,;.~ an unt equ valent to 55~ (1 s in 1948 nd l 9) of the net profit of t usin sa for t d duction of such bonuse , respon ent r co niz d and allo d the deduction of such onus only to the ext nt equal to of such n t profits . !hi uction as allo d y r pondent , h vin d ter in d in his decision th t �your (petition r ' s) children actually r nder d ser� vices to your (p titioner ' s) tore a v rifi d y the investigating exa in rs (see neex A� in rel t!on to Annex ~� of et!tion for vi nc , th es- t!on is limite o ther or not th onus or co pen- sat!on to petitioner ' eh ldren and claim d y peti- tioner as de c ions re re on ble in ount !thin the rv!ew of the Inco r x L w. The rule re ardin the d ucti i l.ty of co pen� aation for services rendered, includ ng bonu es is f ound in ection 30 of he evenue Cod , the pertinent 542

CIS - -9- C.T.A. CASE � 4 � portion of ich provide&s In� � shall In t case of lh a Ci Ci r tt .tanu- f c urin ny vs. Coll ctor of intern 1 (l,.l. � (.;as o. 14..J, dat uly 31, 1956, 5 ff . ~. o. O, p. 1 ) this Court held: uar - nue 139- Proceeding furth r on th ti n of th d � ductib1l!ty of onu es, in a t on to 1 r s th a ourt also t~te s it not norm effie rs their jud n e nt r � 543

De.CIS ION - C� � A. C E O. <4 - 10 - Case No . 143, Janu ry 31 , 1956, 53 Off. Gaz. 3lf~ at 3157; und rscor ing add ~ .) In th c as of Ku�nz1 &Str iff , Inc . vs . Col- l ector of Inter, 1 evenuc , c. r.A. Cuce No. 169 , dated July 18, 19 6, 1 ld' ,. T r r v ri. ou f cto.r � .hic h nr \ ppl d s i i t d 119 th c on lenes s of l 1. y r c � cn'Hl't lo1. , viz: ( ) r t'o 0 Licular sco.la y 0 ro s i nco e; ( b) si ~ cf th rticular . .. ' (c x cnt nd scope CJf 1,. 1 e ploye ' � JOr �; (dJ e ploy...cls al "f c ut' on end con- tribut on to t e ~ninc ~ u v ntur ; c) s Jari v ni to a part icul r l oyeo in p~ � or ( f) n r al eco o : condition; ( ) r v e s perform~ng ui 1 r r v c s � n c o pora le nterpri~o; (h) avai1ab t. ity of others t fill th

E I~I � C . T. � CASE NO. -i - 11 - off i ce held by t he particular employees; {i) sal~y poli c y of the co~poration. But no s ngle f ctor is dec isive. It is the interpl y of these factors, properly etghted !n relation to the p rticular case , that must furnish the co rect yardstick of reason� abl eness . ( ertens Law of Federal Income Taxation , Vol. 4 , Section 2~.~1 , p. 412.) In this connect f o~ , "t is �rnportant to note t hat the act of petitioner ln determ!nu1g the a ount of the compensation to be paid to his chilc.ren was made in his directive xhibit '1N which pre- dat es t he actual rendition of services nd the payment of t he onus or compensation in question . here. Respon� dent does not question the genuineness and due execu� t i on of this directive and consequently admits its val i dity. The directive fixed the a ount of compen- sation payable to the children �n an amount not exc eed� ing of the net profits and the amount ctually paid t hem was in fact 55 or les s , for the y ars in ques t on. hil r espondent admits that petitioner ' s chil dren had ctually rendered service neverth less re pondent dis- al l o ed a portion thereof and allo~ed only the deduc - tion equal t o 25. of t he net profits. However , res- pondent gave no reaaon nor basis for his determina- t ! on. Hence , shal l proceed to conside~ the mat ter on the facts established by the parties. 545

� c.r.A. E � - 12 - The facts show that during the year 1946 when p�t!tion r himself wo.s managing his own bu~iness and ililaed!at ly pr ceding t !'le tim when the anagement to thereof was entrusted his children h aded by Angel eyes, t he business registered gross sales of only P 2, 234 , 641~18 , with a net profit of 6 ,744.26 with- out any bonus pai � Ho ever, durin�g the subs quent years (1947 , 1948 and 1949) when th usiness operat on waa already under the ~na o ent of th childrGn , the � bu !ness registered the folio ing gross sales and net profit, to wit.: s 1947 4 , 677, 65 � 232, 23. 33 19 6, 394 , 554. 03 304, 212.20 1949 9 , 159,180.44 402 , 705. 28 Fro the a ove figures the follo �ng conparisons an o servations are noted: n 1947, the gross sales were incr as d considerably in that they ere or than t ric those . ade in 1946 and yet , desp�ta the pay ent f onus the net profit ~eal!zed was lve t~, s that r alized in 1946y nd oth in 948 ard 1949 , the sale& and net profits further �ncreas d by abo t 2% to 44% over those of the preceding year. r us by 1949, th sales ~ad increased nd er re t han four tirncs those r gistercd in 1946, hile the re�liz d net profits even after paying bonus were eight nd one- h lf ( 8-1/2) tim s that in 1946. These tre endous and m teoric r1se in the gross sales ~nd .uc h nore so !n t e net profits realized by the business during t he tax bl y ars 1947 , " .. 54 6

� aJg,J.~ .~ovn C. T. A. CASE r . 4. - 13- 1948, and 1949 when the bustn��� anage..nt was al� ready entrusted to petitioner ' � children should be considered in the deter !nation of the r�asonable- ness of th co pensation. The benefits obtained by petitioner fro the services of his children are further shown by the fol� lowing figures on the percentage of net profit in re� lation to petitioner' invested capital for the year 1946 and comparing the sa e tth thos f r the ye rs when the childr n took he anage ent of petitioner's bu inesss After ~s Paid 1947 l942 Annual eturn 22.3% 29. I on Invested Capital While respondent admits that petitioner' s chll� \ ~ dren actua.lly rendered service for the usiness, how� ever, the extent , value and contribution of said service to the expansion and prosperity of the business , and the magnitude of the profits realized, appear to have been overlooked by respondent. After the children took over the anage ent of petitioner's business, th gross sales and net profit& of the usines increased by leaps and bOunds. .oreover, even after the bonus �n question had been paid to petitioner' ch ldren, there still existed more than a fair return of investment. All these �r factors material in determining the reason� ableness of the comp nsation claimed as deduction. 547 �"41

DE.C �� C��A. - 14 - "The reasonabl laries ay t ted y a co p rison f alar!e paid wit ross lr.c � and ne\. ~ ..,c � (H. Levine ros. , Inc. v. Co s. , 01 F (2nd) 391, 0C 7th , 1 3 ) X X X hil it s expect d that business 111 e rn ir r turn on the ey inv r; � tl e f ct th t th rear no profit .ft r ~ � laries a paia do s not, in or it lf , ndicat t at the salari s r nnre able (Hayg oot o o. � 29 BTA 118 � s~ o Lo r Coast �onstruction Corp., H o Op. Dkt. 100839, y 26 , 1 41)." st exist a pro relatlon- ind a- ar te .or ov r, shoul t f c ~t in s. ci 1 circu t anc s in t c s t 0 r . r a unt of th o us s ~ c pens ti n for the s rvic s of petit ooer ' s chtl en 1 d p nd nt p n the rofit r liz 1n t s ness , that is , 1., an o nt not to xc 0 t e net prof ts ( e Exhibit "AA } . n al ou h co - p e a on is cont n cr.t, th i t r in d in ' vance efore th y ar � ~ prof�t r no 0 t si o a cert perc nt r of. ce , !n t v nt no profits ar bt !nod, th c ildr ct c lly have no pay for t c s v c s r n red y t o. hat 54

0 ~I c. r�. E O. 4 - 15 - ay appear therefore , as excessive in ordinary cases ay e justifiable compensation due to the peculiar circumstance of attending risks involv d. (Alal>ama Coc a Cola ottling Co . v. Co � � 1 'dTA 837; see also Trust o. 5522 and Trust o. 5644, all urst Syn- dic ate et al. 83 F 2d 801 , cited in ertens , Law of Federal Income Taxation , Vol . 4 , Sec. 25.o7 pp. 42 - 421.) Und r such circumstance& , the cop nsation to petitioner ' s children in the form of onus was fixed with an eye to the effective resul~ of t e ervicas to be rendered y petitioner. oreover, such advance determin tion of the coupensation 1n relatio to prof"t to e realized, rules out ny putation f alic or b d faith on the part of t e taxp yer th t the direc- tive , Exhibit 11AA , was mad as an anticipatory dis- tribution of �nco e to ev ~axes, for th re son th t , as sho ~ by th evidence , prior to the children's ctiv part cipatio in the anagc ent, the usiness in l~q6 , had only a net profit of 46, 7 4. 26 with ut bonus de- cl rat on dea ite a gross sale of 2 , 2 , 641 . 18. The fact that, as rec�p ents of the nus, t c ch ildren omitted to or did not repor th t ue a. oun of bonus rece ved by each o tne in t ir r s ctive 1nd1vidu 1 nco e tax return is 110t by uch fac alone a v lid ground for disallo ing s i pay en as d due- t!ons from petitioner ' s inco e. or fraud is imputa 1 for the o is i n t us co itted, tho respon bili.ty i. not the petitioner's, at the pa es of such onuses. 549 �

... 0 lSI - C. T. A. CAE � 4 - 16 - Another element indic at ing error nd arbitra� rines i n respondent ' s assess nt , is the fact that the 2 of t he net prof t allo d as compensation t o t he c hildren , was alloc t ithout distinction des� pit e t he diff r ce n t p ition and r s onsib� lity � had or i n the serv ces hich e ch child r n red. t h o h r ha�d t apportionment of th bonus , on the u~hority of pet t on r ' s directive , y n e! e s in ounts re or le qu 1 , ng his brot rs nd s sters without t king into ccount t e nature of th erv ces r ndered evidently doe not co ort w th the tat tory qu lific t one of re son bl ness. T via nc t t the eleven chil old diff ent n 1 tinct po itlon , re ch o ' &sed of ffer ent xp r ence , nd lif �c tion , an rfor diff r nt ln ith 1 t ct t" c ules . To lstr1 t ro r t t co e tio llo ed , oul d be unfair if not ri !culou � 11 so are al ready old nd xp r nc � th th rs re then still igh choo tua n young in ~ bile o ar technic lly tr in , o rs r not; n rhile o are loy on i , oth r , by rea on of th 1r pr � ccup t1o, lth oth r c 1vi- i h ve to rv on p :t� t rk. It obviou tlat n 1 e s, t e na iv n th s ount of salary wit lor nei y tn still min r , a hi h chool ud nt , cr tary to the na er. 01 rio y s. inis- trative officer o w or i n full t si , 550

ECISI � C.T. A. CASE O. 4 - 17 - g ven th sa e aalary a Oliva � d Ar valo , Fran- c sea � de Justini ni and A paro � de Avectlla , who ha p r t cstablishm nts of their om and ere � working on p rt-tim b sis in p litioner�s busine s. Ih co p ns t on or b nus di tr bution t b e 1- tably di tributed co nsur te ith the serv ces c- tually r nd rod. Dis pprov 1 , ho v r , of r spond nt ' s 5 does not nee arily e n p rov 1 of p tition r ' s claim for a llowanc e s d duction of th co p ns ion iv n in the form of bonus. h 1e th Court "11 not - subs itute it judg nt for th t of u ines~ n nt aa to t con titut s r on bl c p n tion . the 1 tter� finding s not d od conclusiv or th t t co ort w th t tutory lif cations ( nz r .. Co i sion r, TA 1214). Th disput d uctio r pres nt s 1 ios or bonu pnid to th childr n of p t"tion r. or obv�ous r o ons th fixing of th ount of co p ns ion c nnot aid to b found ntir lyon _gu_ 11�_ "tr ns ction t r s- 1 ngth". ctio 1 c nnot of the p rt lity th t s fro th lo t of on � s own child d th t th cop nr. t "on ix d y not n - c rily on th actu l rv c 5 r nd r d ut y tncl ount p id ost nsibly s lari s ut c n titute f ct n ctu 1 r t c ipatory d stri� ution of earning � In th a cas � e not th t as r :rds t t n children (oth r than Ang 1 ey s} their co pens tion 551 53t

cDE. Cr � �I c � o. 4 ~E - 18 - as fixed by nge! �yes pursJant to petit ioner ' s di- rect ive , Exhibit � N in ore or les s qual amounts for e ch y r. Thus , th amount s lx d for ach person.,, s t t � f the n t prof�t for 1947 , 2. 4to of th net prof its for 19 8 nd 2. ~ or 3.6N for 1949. However , the f ct that th distri ution d in qual a ounts , ppc: ren t ly indicate the<~t the fixing of th co ad ith ut o .s d r tion of t e position occupi d , r sponsi il ty , rai in , exper nc an aye , of eac. pers n. , r ov r , h re i great diff renee t en th co p ns t .i. I p i ~.o An el y s an t o p id to his broth rs and sist rs . nee th factor iv n bov are ener lly or normally e ploy to t r ine th r ason 1 n ss of co pens tion , ro shall proce d to xa n ch in th light of -11 per� tinent factors. s e rli r st t d , tit on r ' s bus n ss 1as th n und r the xecut�ve d rect on nd superv s"on of ngel y nd h w pr nc pally r pons le for th !ncr �n th s 1 s and n t prof t thereof . Ho v r , d spite t incre se n th n t prof ts n 1~48 and 1949 ov r t at of 1947, rc ntag rate or a sur of th onus p id to h m � n fact r due d . ft r c n d r ng th ov , tog th r t 11 oth r f cts , f nd th t bonu y al to of th nu 1 net pro- its of p t t�on r �s� b n a r son 1 ount ich y e allo d due n for co:ne urp s s. fo ed a . s r gards a on R yes , nd th t h 552

.. DECISION � C.T. � E � 4 - 19 - function w !ch w~s a key to pet itioner ' s porting business, i.e. to insure selective purchasing and the continuity of the -supply of m rch nd se from abroad. nee , co p n ation to Ra on eyes 1n an amount equal to 2.5 of th annu 1 n t prof ts, but not to e,ceed that actually paid to h by pet tioner , is we b lieve , reasonable , and should be !lowed s a deduction. h!le Jose E. eyes , osario � eyes and Teresa � rgn c o, did p rform port nt ork in con- nection with petitioner ' busin ss , th sa d d not require as ch responsibility nd exercise of di cr � tion as on eyes. H nee , w 1 ev t at a co en- tation qual to of the nnual n t prof�ts for each of them is reasonaole and s ould li e~i uc tible. In th case of liv � d rev lo, Francisco � de Justinian! and A o � d Av cill , note th t they were preoccupied with their o n p r te u in ss esta- blia ent which co ld not h ve p r itted th to perform full�t e work. In f ct, n 1949,the other four bro- thers nd si ter n ed abov ho er ork n on full- t is r ceived bonus , very ch mor than Oliva R. ev lo , ranc i c � Justini ni nd A p o ~. d Av - cilla. As th y re then only on part- tim plo ent , alieve that co pensat on for their servic s e al t 1.5~ of th annual net profits for e ch of the oul ith the statutor y qualifications of reasonable� n s � !ng t o the co pen ation of Soledad E. yes, Car lita (Cl ra) E. Reyes and Flor nc o (Je u ) ey s Jr. the p r t inent facts in this instance ar briefly 553

ECI I - C. T. A. CASE. NO. 4 - 20 - thusa that on the basis of petitioner's !nco e tax return& (Exhibits *'Nt~� and ") these children ere still minor in 1 47 , 1948 nd 1949 and in f ct going to sc ool (p�rs. 19 nd 20 , nnex s J*' and uK �ti- facts) during the gr ater port ion of the usiness hours of the day; th t the, adm tt dly r nd r d s rvices only on part-timo basis; and that they are then quipped ... with inadequate bus iness tra�ning , e xper ience and acu- en. o..1parative1 y , theretore , t ey should receive low r compensation than their orot 1ers or sisters. Und r t ese circu stanc s , we el ' eve that th r asonable co. � pensation for c of the for t ir serv!c s should be fixe at of the annu 1 n t profits except th t here no compensation w p !d t e in 1 8 nd 19 no de- duction ay e so c1 i o � In su , of the disputed bonus , petition r is llow d o d~ uct s co p ns tion in the form of saluries or bonus for s rvices rend red by his children in 1947 , 1948 and 1949 , the following amounts which v,e find to e reason b1e. ngel ey s i 116 ,011 . 67 168 , 842.44 253, 540. 86 a on � eyes 11 , 601.16 20, 000. 00 31 ,692.61 Jose E. eyes 11 , 601 . 16 16, 8 4. 24 25 ,3 4 . 09 o ario E. Reyes 11 , 601 . 16 16, 884.24 25 , 54.09 Teres � Ign c�o 11 , 601.16 16, 884.24 25,354. 9 Oliva � de Arev lo 8 , 700. 87 12, 663.18 19 , 015.56 Fr~ncisca R. de 8, 7 . 87 12, 663.18 19,015.56 Justinian! Amparo R. Aveci11 8 , 7 . 87 12, 663.18 S31/

DECISION - C.I.A. CASE O. 4 - 21 - oledad � Reyes 5, 800.58 8,442.12 ------ Car elita E. Reyes 5, 800.5 ......... Florencio eyes Jr. 5 , 800. -.-- --- In addition to the b nus paid tn exces& of the a ove a ount� thich should therefor be disallowed , we oelieve that the amounts of 90, 000. 00 and 145,000. 00, resp ct!vely, d dueted in 1948 and 1949 as bonus should also be di allo ed considering that th s ere not pald to anyone. n the b sis of the ove ther fore, th d fi- clancy !nco tax of petitioner for the year 1947, 1948 and 1949 ~ �elusive of surcharg s) �s co puted as follows: et Inc e as err turn ������ 232,023.32 dd: Disallo ance a 48,618. 64 2,375.77 rovident Fund ������������� T x Pen lt es nd ur- 12, oo::>. o o c arge ������������������ 408, 329. 17 Travelint.~ Expens , 4,500.00 p rsonal ���������������� � 403,829.J1 nus to children ( xc ss) 160, 18.00 nd onus Unpai �������� � otal ��� ������ ���������� ������ 79.727.73 L : xe tions �������������� su j ect to Inco Inc me Tax due thereo �������� Less: Tax alre dy as essed ���� ount still due �������������� 555

- 22- Net In as per r eturn � � ��� � , 212. 20 dds Disallo nc s � . 25 Prov dent Fund ������������� 12, 000. 00 Tr v lin Exp , 204 , 073.18 614, 631 . 63 p ron 1 ��������������� � � onus to chil en ( xc ) and onu Unpa d ��������� otal ����� �� �� � � �������������� ount ubj ect t o Inco r x �� Inco r x u th r on � � � � � � � � L 1 T X lr dy d ���� ,1'\UJCJunt till u � � � � � � � � � � � � � � 149 , 218. 18 et !nco p r r turn ��� ��� 4 2, 7 5. ddc i llo nc s: 185, 7. >rov d nt u � � � � � � � � � � � � � 09, 50. 66 4, onu to c hil dr ( XC ) . 66 nd onu Unp 1 ����� � � �� 13,01 . 3 ot 1 � � � � � � � � � � � � � � � � � � � � � � � � � L s X t on � � � � � � � � � � � � � � ount bj ct t o ax �� I nco X u t h r on � � � � � � �� Lesas X lr ount till u �������������� 556

'CISl O - C. T. � A E 0. 4 - 23 - CAPITUlATI 1941 � � �� � �� � ���� � 71,727.73 1948 149 , 21 .18 1949 �� � � � � � � ����� 89,307.59 ������������� ot 1 Inco e ax Due ��� � � � F 1 the decision appealed fro is hereby odified, in th ense th t petitioner is or ered to y to the respo d nt, ollector of Intern 1 \ venue th au of JJ;. 318 , 25 � as deficie cy !nco � tax for th y rs 19471 1946 and 194 , with co&t& against th petiti oner. SO aiD HED. t antla , Philippines, ~ept r 30, 1 57. ' I.E Presi ding Jud9e 557 5 3J