Keunzle & Streiff Inc. vs.

CIR
GR NO L-18840; MAY 29, 1969
REAN GONZALES
FACTS

 Kuenzel & Streiff Inc. (KSI) filed its income tax returns for years 1953 to 1955
Note: KSI reported to have suffered net losses in its business operations during the
three years in question.
 KSI was then assessed by the Commissioner deficiency income taxes for the said
years.
 According to the Commissioner, KSI was mistaken in considering as deductible
expenses bonuses paid by KSI to its officers and select staff members.
 Thus, the Commissioner totally disallowed some deductions, and partly disallowed
others.
 The CTA agreed with the Commissioner.
ARGUMENTS OF KSI

 “The Commissioner was mistaken in considering solely the fact that we reported
losses for the years in question.”
 “The bonuses paid to the staff members and officers met the criteria for
deductibility laid under Section 30(a)(1) of the NIRC.”
 “It is my right to fix my employees’ compensations and bonuses.”
 “The Commissioner allowed deductions for the same types of bonuses for
previous years (1950 to 1952); that the Commissioner is disallowing it now is
arbitrary on its part.”
RULING OF THE SC

 KSI is wrong.
 Yes, bonuses to employees made in good faith as additional compensation could
be deductible from the employer’s taxes.
 But for deductibility to apply, there are requisites.
 These requisites were met in 1950-52, but not in 1953-55.
3 REQUISITES FOR DEDUCTABILITY

1. Payment of bonuses is in fact compensation;

2. It must be for personal services actually rendered; and
3. Bonuses, when added to the salaries, are “reasonable”.
TEST OF REASONABLENESS

 There is no fixed test for determining reasonableness of a given bonus as

compensation. But in previous cases, the Court has considered the following
factors:
 Amount and quality of services performed with relation to the business
 Good faith in paying the bonus
 Net Earnings
 Locality
 Corporation’s salary policies
 But the SC clarified that “no single factor is decisive” & that reasonableness is
tested on a case-to-case basis.
TEST OF REASONABLENESS

 The SC pointed to 3 factors in deciding that there was no reasonableness in this

case.
 The bonuses were given to the officials who were not shown to be specially talented,
trained, or accomplished, insofar as the business is concerned.
 There was no pay increase for a good number of other employees.
 As stated, KSI suffered net losses in the years in question.

Note: KSI likewise claimed good faith to substantiate its claim of reasonableness. The Court
dismissed this too. To allow otherwise would allow rampant tax evasion by the mere defense of
good faith.
TAKEAWAY FROM THE CASE

 Therefore, to the mind of the SC, KSI’s bonuses did not pass the test of
reasonableness because it already was suffering business losses and yet it opted
to give huge bonuses.
 The SC was of the tone that while bonuses could indeed be deductions, it should
not be so when it results to a net loss for the employer.
 To hold otherwise would allow an evasion of payment of taxes.
 In this case, if KSI suffered losses, why give bonuses?
OTHER ISSUE

 Why was KSI allowed the deductions for years 1950-1952? Were they not the
same type of bonuses?
 They were the same type of bonuses but in those earlier years, KSI did not suffer from
a net business loss.
SUMMARY

 For the years 1953-55, KSI’s bonuses to its employees are disallowed as
deductions from KSI’s Income Tax as they are not considered “reasonable” as
required by Section 30 (a)(1) of the NIRC.