Kuenzle & Streiff, Inc. v.

CIR
G.R. L-118840– May 29, 1969
J. Dizon

Topic: Compensation Income

Doctrine: 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. While some reasons for giving bonuses are not necessary “unreasonable”, its
application should not result in producing a net loss for the employer at the end of the year, because if so, then the scheme
may be utilized to freely achieve some other purpose such as tax-evasion.

Petitioner: Kuenzle & Streiff, Inc.

Respondents: Commissioner of Internal Revenue

Case Summary: Kuenzle & Streiff had been giving very high bonuses to some of its employees despite the fact that their
company was already suffering from net losses. The CIR was then demanding for payment for a certain net taxable income,
which the company questioned, stating that the assessments were incorrect due to the fact that there were bonuses which
should be included in the deduction from gross income of all ordinary and necessary expenses during such taxable year. The
Court declared that the bonuses to employees must be in good faith and must be necessary and reasonable, among others. If
not, and if the application should result in a producing a net loss for the employer by the end of the year, then it may become
a scheme which will be utilized to achieve purposes such as tax-evasion. For this reason, the Court affirmed the decision of
the lower court and declared that the CIR assessment was in fact correct.

Facts: (taken from Pamana digest)

● Kuenzle & Streiff, Inc., a domestic corporation, filed its ITR for 1953, 1954 and 1955, declaring net losses of
P2,085.84, P4,953.91 and P9,246.07 respectively.
● Upon verification, CIR, on September 9, 1957, assessed against its deficiency income taxes, arrived at as follows:
○ 1953: By disallowing as deductions all amounts paid by Kuenzle as bonus to officers and staff-members in
the sum of P175,140, they incurred a net taxable income of P173,054.
○ 1954 and 1955: Similar disallowance as deductions of a portion of the bonuses in the sums of P88,193 and
P90,385, resulting in a net taxable income in the sum of P83,239.42 and P81,138, respectively.
● Kuenzle filed with the CTA a petition for review contesting the assessments, and the CTA affirmed the assessments
for 1953 and 1955. For 1954, it was modified to the due amount of P11,248.
● Kuenzle was ordered to pay within 30 days from the date of finality P40,455 and P16,228, plus 5% surcharge and
1% monthly interest from Oct. 1, 1957 until paid. It was also ordered to pay P11,248 within the same period; if not
fulfilled, pay a 5% surcharge and 1% monthly interest from the date of delinquency to date of payment.
● Kuenzle filed an MR, and the Court amended the decision to specify that in both cases, the maximum amount of
interest shall not exceed the amount corresponding to 3 years, pursuant to NIRC 51(e-2), as amended by RA 2343,
Sec. 8.
● Since the bonuses were paid for services rendered by the recipients, CTA proceeded to the question of
reasonableness. It construed NIRC 30(a-1) as allowing the deduction from gross income of all ordinary and
necessary expenses during the taxable year in carrying on the business, including a reasonable allowance for salaries
or other compensation for personal services rendered.
● Kuenzle contends that the total compensation paid to each of their officers and staff members, must be considered in
determining the reasonableness of the bonuses, and that the actuation of CIR was unreasonable and unjust.

Issues + Held:
1. W/N the bonuses were reasonable to be allowed as a tax deduction – NO
 It is a general rule that “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
○ The condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is
in fact compensation; (2) it must be for personal services actually rendered; and (3) bonuses, when added to
the salaries, are reasonable when measured by the amount and quality of the services performed with
relation to the business of the particular taxpayer.
 There is no fixed test for determining the reasonableness of a given bonus as a compensation, but it will depend on
many factors, such as:
 o Amount and quality of services rendered with relation to business; payment in good faith; character of
taxpayer’s business; volume and amount of net earnings; size of business; employee’s qualifications and
contributions to the business venture; general economic conditions; etc.
 In determining whether the particular salary or compensation payment is reasonable, the situation must be
considered as a whole. No single factor is decisive.
 In the years 1950-1952, Kuenzle was allowed to have deductible bonuses bigger than those allowed by CIR because
the company earned huge profits at that time
o In the case at bar, the ultimate and inevitable result of the payment questioned bonuses would be net losses
for the Company. In addition, the Court considered the following factors:
o 1953-1955: Kuenzle paid top officers substantial salaries and bonuses while a good number of mostly
Filipino employees and personnel, working under such officers received no bonuses and no pay increase at
all
 The bonuses were paid to the top officials despite the net losses for the years in question  in
fact, the gross assets of the company suffered a gradual decrease for those years
o Kuenzle admits that the bonuses were taken either from the year’s business operations, or from its general
reserve  since the company had to resort to the use of reserve funds, it could not be considered as
ordinary or necessary
 Kuenzle justifies such payment of bonuses by saying that the general policy of the company was to give a low salary
but to grant substantial bonuses each year-end  while not necessary “unreasonable”, its application should not
result in producing a net loss for the employer at the end of the year, because if so, then the scheme may be utilized
to freely achieve some other purpose such as tax-evasion
 Kuenzle claims that the disallowances should be considered a legitimate business expense, since they were paid in
good faith  Court declares that good faith cannot decide whether a business is reasonable or unreasonable for
purposes of income tax deduction
 The question of allowing or disallowing as deductible expenses the amounts paid to corporate officers by way of
bonus is determined by the CIR exclusively for income tax purposes.
○ While he has no authority to fix the amounts to be paid to corporate officers by way of basic salary, bonus
or additional remuneration (a matter more or less exclusive to the sound discretion of the corporation), this
right of the corporation cannot be exercised for the purpose of evading payment of taxes legitimately due to
the State.

Ruling: WHEREFORE, appealed decision is AFFIRMED.