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. Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered.

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible expenses, of the bonuses paid by the corporation to its officers, upon the ground that they were not ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the National Internal Revenue Code.

3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments. CTA favored the CIR, however lowered the tax due on 1954. The corporation moved for reconsideration, but still lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary manner", and erred in not considering individually the total compensation paid to each of petitioner's officers and staff members in determining the reasonableness of the bonuses in question, and that it erred likewise in holding that there was nothing in the record indicating that the actuation of the respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just to be allowed as a deduction?

HELD: No.

RATIO: 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. Here it is admitted that the bonuses are in fact compensation and were paid for services actually rendered. The only question is whether the payment of said bonuses is reasonable.

There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business. Other tests suggested are: payment must be 'made in good faith'; the character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the employees' qualifications and contributions to the business venture'; and 'general economic conditions. However, 'in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia, the following factors:
1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted with some special talent, or had undergone some extraordinary training, or had accomplished any particular task, that contributed materially to the success of petitioner's business during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not question the basic salaries paid by petitioner to the officers and employees, but disallowed only the bonuses paid to petitioner's top officers at the end of the taxable years in question.

KUENZLE & STREIFF, INC. VS. CIR- Taxable Additional Compensation