24 Gutierrez vs CTA May 31, 1957 FACTS:

Maria Morales, married to Gutierrez(spouses), was the owner of an agricultural land. The U.S. Gov t wanted to expropriate the land of Morales to expand the Clark Field Air Base and so it instituted condemnation proceedings. The Republic deposited a sum of Php 152k to be able to take immediate possession. The spouses wanted consequential damages but instead settled with a compromise agreement where the parties agreed to keep the value of Php 2,500 per hectare. In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for the year 1950. The spouses contend that the expropriation was not taxable because it is not "income derived from sale, dealing or disposition of property" as defined in Sec. 29 of the Tax Code; and that they did not realize any profit in the said transaction. CIR did not agree.

ISSUE:
Whether or not that for income tax purposes, the expropriation should be deemed as income from sale and any profit derived therefrom is subject to income taxes capital gain.

HELD:
It is subject to income tax. Section 29 of the NIRC provides that: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in property, whether real or personal, growing out of ownership or use of or interest in such property; also from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit, or gains, profits, and income derived from any source whatsoever. Also SEC. 37.thereof provides that gains, profits and income from the SALE of real property located in the Philippines shall be treated as gross income. In this case, it appears then that the acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of the Tax Code of the Philippines.

25 Visayan Cebu Terminal Co. vs CIR

May 1960 Facts: Petitioner is a corporation organized for handling arrastre operations in the port of Cebu. It filed its income tax return for 1951 and claimed deductions which include, among others, the representation expenses in the amount of P75, 885.88. The CIR disallowed the deduction for representation expenses. On appeal, the CTA allowed a deduction of P10,000 as reasonable representation expenses for years 1950- 1952. Issue: Whether Visayan is entiled to claim deductions for representation expenses in the amount of P75,885.88? Held: No. "Representation expenses fall under the category of business expenses which" are allowable deductions from gross income if they meet the conditions prescribed by law", particularly section 30(a) (1) of the NIRC. To be deductible, said business expenses must "ordinary and necessary expenses paid or incurred in carrying on any trade or business". Further, those expenses "must also, meet the test of reasonableness in amount", this test being "inherent in the phase `ordinary and necessary'". The evidence bears out the fact that the expenses were not liquidated. The receipts or vouchers were allegedly lost and no proof other than oral testimony served to substantiate the claims or deductions. Thus the CTA was fully justified in extrapolating the allowable deductions from the data available to it. Further, the amount of P10 000.00 appears reasonable in light of the expenses and gross income for the other years. The Court noted that far from being arbitrary, the CTA was rather liberal in allowing P10 000.00 as representation expenses, there being absolutely no concrete evidence to substantiate the actual amount spent. Thus the decision of the CTA allowing ONLY P10 000.00 as representation expenses must be upheld.

26 Kuenzle & Streiff, Inc. vs CIR

October 20, 1959 Facts: Petitioner is a domestic corporation engaged in the importation of textiles, hardware, wines and liquor. It deducted from its gross income certain items, among which are the bonuses given to its non-resident president and vice-president and to its resident officers and employees. Respondent disallowed the deductions of the said items. The CTA also disallowed the bonuses insofar as they exceed the salaries of the recipients, as well as the interests on earned but unpaid salaries and bonuses.

ISSUE: Whether or not the bonuses in question is to be allowed as a deduction. HELD:

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. 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.