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THE COMMISSIONER OF
INTERNAL REVENUE
Facts:
Issue:
(1) Whether the purchase of the U.S.A. Treasury bonds by petitioner in
1951 can be construed as an investment to an unrelated business and
hence, such was availed of by petitioner for the purpose of preventing the
imposition of the surtax upon petitioner's shareholders by permitting its
earnings and profits to accumulate beyond the reasonable needs of the
business. YES
(2) Whether the penalty tax of twenty-five percent (25%) can be imposed
on such improper accumulation in 1957 despite the fact that the
accumulation occurred in 1951.
We are convinced that the Court of Tax Appeals is correct in finding that the
investment made by petitioner in the U.S.A. Treasury shares in 1951 was
an accumulation of profits in excess of the reasonable needs of petitioner's
business. As to the contention that that the surtax of 25% should be based
on the surplus accumulated in 1951 and not in 1957, the rule is now settled
in Our jurisprudence that undistributed earnings or profits of prior years are
taken into consideration in determining unreasonable accumulation for
purposes of the 25% surtax.
Facts:
1.P37,491.83 as deficiency income tax for the years 1975,1976, and 1978.
2.P161.49 as Deficiency corporate quarterly income tax for the first quarter.
Antonio Tuason, Inc did not object to the first and second items and
paid the amounts demanded.However, it protested the assessment on a
25% surtax on the third item on the ground that theaccumulation of
surplus profits during the years in question was solely for
the purpose of expanding itsbusiness operations as real estate
broker. The request for reinvestigation was granted on condition thata
waiver of the statute of limitations should be filed by the private respondent.
The latter replied thatthere was no need of a waiver of the statute
of limitations because the right of the Government toassess said tax does
not prescribe.
Antonio Tuason, Inc filed a petition for review in the CTA with a
request that pending determination ofthe case on the merits, an order be
issued restraining the Commissioner and/or his representatives
fromenforcing the warrants of distraint and levy
The private respondent filed a petition for review in the CTA, which set
aside the CIRs assessment.
Issue:
Held:
(b) Prima facie evidence. The fact that any corporation is a mere
holding company shall be prima facie evidence of a purpose to avoid the
tax upon its shareholders or members. Similar presumption will lie in the
case of an investment company where at any time during the taxable year
more than fifty per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
The CTA conceded that the CIRs determination that Antonio was a
mere holding or investment company, was presumptively correct, for the
corporation did not involve itself in the development of subdivisions but
merely subdivided its own lots and sold them for bigger profits. It derived its
income mostly from interest, dividends and rental realized from the sale of
realty. Another circumstance supporting that presumption is that 99.99% in
value of the outstanding stock of Antonio Tuason, Inc., is owned by Antonio
Tuason himself.
Facts :
(a) petitioner accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness,
Issue:
Whether Cyanamid Phils. is liable for the accumulated earnings tax for the
year 1981
Held:
(a) banks;
(b) non-bank financial intermediaries;
(c) insurance companies; and
(d) corporations organized primarily and authorized by the Central Bank to
hold shares of stocks of banks.
Taxation is the rule and exemption is the exception. The burden of proof
rests upon the party claiming the exemption to prove that it is, in fact,
covered by the exemption so claimed. This is a burden which Cyanamid
Phils. has failed to discharge. Unless rebutted, all presumptions are
generally indulged in favor of the correctness of the CIRs assessment and
against the taxpayer.
With Cyanamid Phils. failure to prove the CIR incorrect, clearly and
conclusively, this court is constrained to uphold the correctness of tax
courts ruling as affirmed by the CA.
ARTHUR HENDERSON, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
FACTS:
Sps. Arthur Henderson and Marie Henderson filed their annual income tax
with the BIR. Arthur is president of American International Underwriters for
the Philippines, Inc., which is a domestic corporation engaged in the
business of general non-life insurance, and represents a group of American
insurance companies engaged in the business of general non-life
insurance. Arthurs employer-corporation granted him an apartment where
he entertained officials, guests and customers of his employer-corporation,
and successively occupied by him as president thereof. In 1952, petitioner's
wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr, chairman of the
parent corporation of the American International Underwriters for the
Philippines, Inc., undertook a trip to New York in connection with the
purchase of a lot in Dewey Boulevardby petitioner's employer-corporatio,
the construction of a building thereon, the drawing of prospectus and plans
for said building, and other related matters.
1) as to allowances for rental and utilities, Arthur did not receive money for
the allowances. Instead, the apartment is furnished and paid for by his
employer-corporation (the mother company of American International), for
the employer corporations purposes. The spouses had no choice but to
live in the expensive apartment, since the company used it to entertain
guests, to accommodate officials, and to entertain customers. According to
taxpayers, only P 4,800 per year is the reasonable amount that the
spouses would be spending on rental if they were not required to live in
those apartments. Thus, it is the amount they deem is subject to tax. The
excess is to be treated as expense of the company.
2) The entrance fee should not be considered income since it is an
expense of his employer, and membership therein is merely incidental to
his duties of increasing and sustaining the business of his employer.
3) His wife merely accompanied him to New York on a business trip as his
secretary, and at the employer-corporations request, for the wife to look at
details of the plans of a building that his employer intended to construct.
Such must not be considered taxable income.
The Collector of Internal Revenue merely allowed the entrance fee as
nontaxable. The rent expense and travel expenses were still held to be
taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that such
expenses must not be considered part of taxable income. Letters of the
wife while in New York concerning the proposed building were presented as
evidence.
The taxpayers claim that the Court of Tax Appeals erred in considering the
amounts of P1,400 and P1,849.32, or a total of P3,249.32, for "manager's
residential expense" in 1948 as taxable income despite the fact "that they
were of the same nature as the rentals for the apartment, they being
expenses for utilities, such as light, water and telephone necessarily
incidental to the apartment furnished to him by his employer."
The taxpayers' claim is supported by the evidence. The total amount "for
manager's residential expense" in 1948 should be treated as rentals for
apartments and utilities and should not form part of the ratable value
subject to tax.
FACTS:
Castaneda filed a formal written claim with petitioner for a refund of the
P12,557.13, contending that the cash equivalent of his terminal leave is
exempt from income tax. To comply with the two-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July
1984 with the Court of Tax Appeals a Petition for Review, seeking the
refund of income tax withheld from his terminal leave pay.
The Court of Tax Appeals decided in favor of Castaneda and ordered the
CIR to refund Castaneda the sum of P12,557.13 withheld as income tax.
Petitioner appealed the above-mentioned Court of Tax Appeals decision to
this Court. In turn, we referred the case to the Court of Appeals for
resolution. On 26 September 1990, the Court of Appeals dismissed the
petition for review and affirmed the decision of the Court of Tax Appeals.
Hence, the present recourse by the Commissioner of Internal Revenue.
ISSUE:
Whether or not terminal leave pay received by a government official or
employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.
HELD:
The Court has already ruled that the terminal leave pay received by a
government official or employee is not subject to withholding (income) tax.
In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the
rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows: . . .
commutation of leave credits, more commonly known as terminal leave, is
applied for by an officer or employee who retires, resigns or is separated
from the service through no fault of his own. (Manual on Leave
Administration Course for Effectiveness published by the Civil Service
Commission, pages 16-17). In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. The
Government recognizes that for most public servants, retirement pay is
always less than generous if not meager and scrimpy. A modest nest egg
which the senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.
FACTS:
Defendant in error, being the owner of 2,200 shares of the old stock,
received certificates for 1, 100 additional shares, of which 18.07 percent, or
198.77 shares, par value $19,877, were treated as representing surplus
earned between March 1, 1913, and January 1, 1916. She was called upon
to pay, and did pay under protest, a tax imposed under the Revenue Act of
1916, based upon a supposed income of $19,877 because of the new
shares, and, an appeal to the Commissioner of Internal Revenue having
been disallowed, she brought action against the Collector to recover the
tax. In her complaint, she alleged the above facts and contended that, in
imposing such a tax the Revenue Act of 1916 violated article 1, 2, cl. 3,
and Article I, 9, cl. 4, of the Constitution of the United States, requiring
direct taxes to be apportioned according to population, and that the stock
dividend was not income within the meaning of the Sixteenth Amendment.
A general demurrer to the complaint was overruled upon the authority
of Towne v. Eisner, 245 U. S. 418, and, defendant having failed to plead
further, final judgment went against him. To review it, the present writ of
error is prosecuted.
ISSUES:
HELD:
No.
Such a dividend is not to be regarded as "income" or "dividends" within the
meaning of the Act of 1913, we are unable to see how it can be brought
within the meaning of "incomes" in the Sixteenth Amendment, it being very
clear that Congress intended in that act to exert its power to the extent
permitted by the amendment. In Towne v. Eisner, it was not contended that
any construction of the statute could make it narrower than the
constitutional grant; rather the contrary.
The fact that the dividend was charged against profits earned before the
Act of 1913 took effect, even before the amendment was adopted, was
neither relied upon nor alluded to in our consideration of the merits in that
case. Not only so, but had we considered that a stock dividend constituted
income in any true sense, it would have been held taxable under the Act of
1913 notwithstanding it was based upon profits earned before the
amendment. We ruled at the same term, in Lynch v. Hornby, 247 U. S. 339,
that a cash dividend extraordinary in amount, and in Peabody v.
Eisner, 247 U. S. 347, that a dividend paid in stock of another company,
were taxable as income although based upon earnings that accrued before
adoption of the amendment. In the former case, concerning "corporate
profits that accumulated before the act took effect," we declared (pp. 247 U.
S. 343-344):
"Just as we deem the legislative intent manifest to tax the stockholder with
respect to such accumulations only if and when, and to the extent that, his
interest in them comes to fruition as income, that is, in dividends declared,
so we can perceive no constitutional obstacle that stands in the way of
carrying out this intent when dividends are declared out of a preexisting
surplus. . . . Congress was at liberty under the amendment to tax as
income, without apportionment, everything that became income, in the
ordinary sense of the word, after the adoption of the amendment, including
dividends received in the ordinary course by a stockholder from a
corporation, even though they were extraordinary in amount and might
appear upon analysis to be a mere realization in possession of an inchoate
and contingent interest that the stockholder had in a surplus of corporate
assets previously existing."
In the present case, the corporation had surplus and undivided profits
invested in plant, property, and business, and required for the purposes of
the corporation, amounting to about $45,000,000, in addition to outstanding
capital stock of $50,000,000. In this, the case is not extraordinary. The
profits of a corporation, as they appear upon the balance sheet at the end
of the year, need not be in the form of money on hand in excess of what is
required to meet current liabilities and finance current operations of the
company. Often, especially in a growing business, only a part, sometimes a
small part, of the year's profits is in property capable of division, the
remainder having been absorbed in the acquisition of increased plant,
equipment, stock in trade, or accounts receivable, or in decrease of
outstanding liabilities. When only a part is available for dividends, the
balance of the year's profits is carried to the credit of undivided profits, or
surplus, or some other account having like significance. If thereafter the
company finds itself in funds beyond current needs, it may declare
dividends out of such surplus or undivided profits; otherwise it may go on
for years conducting a successful business, but requiring more and more
working capital because of the extension of its operations, and therefore
unable to declare dividends approximating the amount of its profits. Thus,
the surplus may increase until it equals or even exceeds the par value of
the outstanding capital stock. This may be adjusted upon the books in the
mode adopted in the case at bar -- by declaring a "stock dividend." This,
however, is no more than a book adjustment, in essence -- not a dividend,
but rather the opposite; no part of the assets of the company is separated
from the common fund, nothing distributed except paper certificates that
evidence an antecedent increase in the value of the stockholder's capital
interest resulting from an accumulation of profits by the company, but
profits so far absorbed in the business as to render it impracticable to
separate them for withdrawal and distribution. In order to make the
adjustment, a charge is made against surplus account with corresponding
credit to capital stock account, equal to the proposed "dividend;" the new
stock is issued against this and the certificates delivered to the existing
stockholders in proportion to their previous holdings. This, however, is
merely bookkeeping that does not affect the aggregate assets of the
corporation or its outstanding liabilities; it affects only the form, not the
essence, of the "liability" acknowledged by the corporation to its own
shareholders, and this through a readjustment of accounts on one side of
the balance sheet only, increasing "capital stock" at the expense of
"surplus"; it does not alter the preexisting proportionate interest of any
stockholder or increase the intrinsic value of his holding or of the aggregate
holdings of the other stockholders as they stood before. The new
certificates simply increase the number of the shares, with consequent
dilution of the value of each share.
A "stock dividend" shows that the company's accumulated profits have
been capitalized, instead of distributed to the stockholders or retained as
surplus available for distribution in money or in kind should opportunity
offer. Far from being a realization of profits of the stockholder, it tends
rather to postpone such realization, in that the fund represented by the new
stock has been transferred from surplus to capital, and no longer is
available for actual distribution.
The essential and controlling fact is that the stockholder has received
nothing out of the company's assets for his separate use and benefit; on
the contrary, every dollar of his original investment, together with whatever
accretions and accumulations have resulted from employment of his money
and that of the other stockholders in the business of the company, still
remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very
truth of the matter, to substance and not to form, he has received nothing
that answers the definition of income within the meaning of the Sixteenth
Amendment.
Being concerned only with the true character and effect of such a dividend
when lawfully made, we lay aside the question whether, in a particular
case, a stock dividend may be authorized by the local law governing the
corporation, or whether the capitalization of profits may be the result of
correct judgment and proper business policy on the part of its
management, and a due regard for the interests of the stockholders. And
we are considering the taxability of bona fidestock dividends only.
We are clear that not only does a stock dividend really take nothing from
the property of the corporation and add nothing to that of the shareholder,
but that the antecedent accumulation of profits evidenced thereby, while
indicating that the shareholder is the richer because of an increase of his
capital, at the same time shows he has not realized or received any income
in the transaction.
It is said that a stockholder may sell the new shares acquired in the stock
dividend, and so he may, if he can find a buyer. It is equally true that, if he
does sell, and in doing so realizes a profit, such profit, like any other, is
income, and, so far as it may have arisen since the Sixteenth Amendment,
is taxable by Congress without apportionment. The same would be true
were he to sell some of his original shares at a profit. But if a shareholder
sells dividend stock, he necessarily disposes of a part of his capital interest,
just as if he should sell a part of his old stock, either before or after the
dividend. What he retains no longer entitles him to the same proportion of
future dividends as before the sale. His part in the control of the company
likewise is diminished. Thus, if one holding $60,000 out of a total $100,000
of the capital stock of a corporation should receive in common with other
stockholders a 50 percent stock dividend, and should sell his part, he
thereby would be reduced from a majority to a minority stockholder, having
six-fifteenths instead of six-tenths of the total stock outstanding. A
corresponding and proportionate decrease in capital interest and in voting
power would befall a minority holder should he sell dividend stock, it being
in the nature of things impossible for one to dispose of any part of such an
issue without a proportionate disturbance of the distribution of the entire
capital stock and a like diminution of the seller's comparative voting power
-- that "right preservative of rights" in the control of a corporation.
We have no doubt of the power or duty of a court to look through the form
of the corporation and determine the question of the stockholder's right in
order to ascertain whether he has received income taxable by Congress
without apportionment. But, looking through the form,
Conceding that the mere issue of a stock dividend makes the recipient no
richer than before, the government nevertheless contends that the new
certificates measure the extent to which the gains accumulated by the
corporation have made him the richer. There are two insuperable difficulties
with this. In the first place, it would depend upon how long he had held the
stock whether the stock dividend indicated the extent to which he had been
enriched by the operations of the company; unless he had held it
throughout such operations, the measure would not hold true. Secondly,
and more important for present purposes, enrichment through increase in
value of capital investment is not income in any proper meaning of the
term.
RULING:
We are constrained to hold that the judgment of the district court must be
affirmed, first, because the question at issue is controlled by Towne v.
Eisner, supra; secondly, because a reexamination of the question with the
additional light thrown upon it by elaborate arguments has confirmed the
view that the underlying ground of that decision is sound, that it disposes of
the question here presented, and that other fundamental considerations
lead to the same result.
G.R. No. 96016 October 17, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.
FACTS:
Castaneda filed a formal written claim with petitioner for a refund of the
P12,557.13, contending that the cash equivalent of his terminal leave is
exempt from income tax. To comply with the two-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July
1984 with the Court of Tax Appeals a Petition for Review, seeking the
refund of income tax withheld from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and
ordered the Commissioner of Internal Revenue to refund Castaneda the
sum of P12,557.13 withheld as income tax.
ISSUE:
RULING:
The Court has already ruled that the terminal leave pay received by a
government official or employee is not subject to withholding (income) tax.
In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al.,G.R. No. 96032, 31 July 1991, the Court explained
the rationale behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal
leave, is applied for by an officer or employee who retires, resigns or
is separated from the service through no fault of his own. (Manual on
Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17). In the exercise of sound
personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public
servants, retirement pay is always less than generous if not meager
and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not
only at the same time but also for the same policy considerations
governing retirement benefits.
In fine, not being part of the gross salary or income of a government official
or employee but a retirement benefit, terminal leave pay is not subject to
income tax.
FACTS:
Petitioner ESSO deducted from its gross income for 1959, as part of
its ordinary and necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions but it was disallowed
by respondent CIR on the ground that the expenses should be capitalized
and might be written off as a loss only when a dry hole should result.
Petitioner filed an amended return where it asked for the refund. Likewise,
claimed as ordinary and necessary expenses in the same return
representing margin fees paid to the Central Bank on its profit remittances
to NY office. The CIR granted a tax credit but disallowing the claimed
deduction for margin fees paid.
The CR also assessed a deficiency income tax for the year 1960,
plus 18% interest. This arose from the disallowance of the margin fees paid
by petitioner.
ESSO settled the deficiencies by applying the tax credit representing
its overpayment on its income tax for 1959 and paying under protest the
additional amount of P213,201.92. It claimed the refund as overpayment on
the interest on its deficiency income tax. It argued that the 18% should
have been imposed not on the total deficiency.
The claimed was denied by the CIR, and insisted on charging 18%
interest on the entire amount of deficiency tax. Likewise, denied the claims
of ESSO for refund of the overpayment of its 1959 and 1960 income taxes,
holding that the margin fees paid could not be considered taxes or allowed
deductible business expenses. Petitioner appealed but no to avail.
ISSUE:
WON the margin fees are deductible from gross income.
HELD:
In applying statutory test of deductibility, to be deductible as business
expense, three conditions are imposed: (1) the expense must be ordinary
and necessary, (2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify
its deduction.
NECESSARY where the expenditure is appropriate and helpful in the
development of the taxpayers business. ORDINARY when it connotes a
payment which is normal in relation to business of the taxpayer and the
surrounding circumstances.
Since the margin fees in question were incurred for the remittance of
funds to petitioners Head Office in NY, which is separate and distinct
income taxpayer from branch in the Philippines, for its disposal abroad, it
can never be said therefore that the margin fees were appropriate and
helpful in the development of petitioners business in the Philippines
exclusively or were incurred for purposes proper to the conduct of the
affairs of petitioners branch in the Philippines exclusively or for the purpose
of realizing a profit or of minimizing a loss in the Philippines exclusively.
ESSO has not shown that the remittance to the head office of part of
its profits was made in furtherance of its own trade or business. It is clear
that petitioner, having assumed an expense properly attributable to its head
office, cannot now claim this as an ordinary and necessary expense paid or
incurred in carrying on its own trade or business.
MARIANO ZAMORA vs. CIR
G.R. NO. L-15290
FACTS:
Mariano Zamora, owner of the Bay View Hotel and Farmacia Zamora,
Manila filed his income tax returns. The Collector of Internal Revenue found
that the promotion expenses incurred by his wife for the promotion of the
Bay View Hotel and Farmacia Zamora were not allowable deductions.
Mariano Zamora contends that the whole amount of the promotion
expenses in his income tax returns, should be allowed and not merely one-
half of it, on the ground that, while not all the itemized expenses are
supported by receipts. The absence of some supporting receipts has been
sufficiently and satisfactorily established.
ISSUE:
In the absence of receipts, WON to allow as deduction all or merely
one-half of the promotion expenses of Mrs. Zamora claimed in Mariano
Zamoras income tax returns.
HELD:
One-half only. Claims for the deduction of promotion expenses,
entertainment expenses must also be substantiated or supported by record
showing in details the amount and nature of the expenses incurred.
Considering that the application of Mrs. Zamora for dollar allocation shows
that she went abroad on a combined medical and business trip not all of
her expenses came under the category of ordinary and necessary
expenses part thereof constituted her personal expenses. There having
been no means by which to ascertain which expense was her personal
benefit, the Collector and the CTA in their decisions, considered 50% of the
said amount as business expense and the other 50%, as her personal
expenses. While in situations like the present, absolute certainty is usually
not possible.
C.M Hoskin vs. CIR
G.R. No. L-24059, November 28, 1969
FACTS:
Petitioner is a domestic corporation engaged in the real estate
business as brokers,managingagents and administrators, filed its income
tax return for the fiscal year endingSeptember 30, 1957. Upon verification,
the CIR disallowed four items of deduction andassessed against it an
income tax deficiency in the amount of P28,054.00 plus interests.The Court
of Tax Appeals upheld the respondents disallowance of the 50%
supervisionfees paid to Mr. Hoskins, its founder and principal
stockholder. .Petitioner questions the CTAs findings that the disallowed
payment to Hoskins was aninordinately large one, which bore a close
relationship to the recipients dominantstockholdings and therefore
amounted to a distribution of its earnings and profits.
ISSUE:
WON the share received by petitioner was inordinately large and
could not be accorded the treatment of ordinary and necessary expenses
allowed as deductible items in the Tax Code.
HELD:
The petition has no merit. Considering that in addition being
Chairman of theBoard of Directors of petitioner corporation, Hoskins owned
99.6% of its total authorizedcapital stock, was also salesman- broker for his
company receiving a 50% share of thesales commissions earned by
petitioner, besides monthly salary and other allowances and benefits, the
Tax court correctly ruler that the payment to Hoskins of his share in
thesupervision fees received by petitioner as managing agent of the real
estate projects of Paradise Farms and Realty Investments (of which he is
also a stockholder) wasinordinately large and could not be accorded the
treatment of ordinary and necessaryexpenses allowed as deductible items
in the Tax Code. The fact that such payment wasauthorized by petitioners
Board of Directors is of no moment, since Hoskins wieldtremendous power
and influence as Board chairman and controlling stockholder.Officers extra
fees, bonuses and commissions are upheld by the Court as not being
within the purview of ordinary and necessary expenses and not passing
the test of reasonable compensation thus are not deductible items.
In Kuenzle v CIR, the Court ruledthat Bonuses to employees made
in good faith and as additional compensation for theservices actually
rendered by the employees are deductible, provided such payments,when
added to the stipulated salaries, do not exceed a reasonable compensation
for theservices rendered. The conditions precedent to the deduction of
bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; 2) it must be for personalservices actually rendered; and 3)
the bonuses, when added to the salaries, arereasonablewhen measured
by the amount and quality of the services performed withrelation to the
business of the particular taxpayer.There is no fixed test for determining
the reasonableness of a given bonus ascompensations. This depends
upon many factors, among them being the amount andquality of the
services performed with relation to the business. In determining
whether the particular salary or compensation payment is reasonable,
the situation must beconsidered as a whole.The employer has the right to
fix the compensation of its officers and employees but the question of the
allowance or disallowance thereof as deductible expense for income tax
purposes is subject to the determination of the Commissioner. The right of
thecorporation to fix the amounts of remuneration are not absolute. It
cannot be exercisedfor the purpose of evading payment of taxes
legitimately due to the State.Accordingly, the decision appealed from is
hereby affirmed, with costs against petitioner.