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  • Alhambra Cigar Vs Commissioner

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    Ton Ton Cananea
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    The Court upheld the disallowance by the CTA of portions of salary, bonuses, commissions, and director's fees paid to the non-resident President and Vice-President of Alhambra Cigar. The Court found that the increases beyond reasonable amounts were not warranted given the officers' limited involvement in the company from abroad and that the additional payments resembled dividend distributions more than compensation for services. The Court affirmed that the analysis should consider whether personal services were actually rendered and what constitutes a reasonable allowance.

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    The Court upheld the disallowance by the CTA of portions of salary, bonuses, commissions, and director's fees paid to the non-resident President and Vice-President of Alhambra Cigar. The Court found that the increases beyond reasonable amounts were not warranted given the officers' limited involvement in the company from abroad and that the additional payments resembled dividend distributions more than compensation for services. The Court affirmed that the analysis should consider whether personal services were actually rendered and what constitutes a reasonable allowance.

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    2K views2 pages

    Alhambra Cigar Vs Commissioner

    Uploaded by

    Ton Ton Cananea
    The Court upheld the disallowance by the CTA of portions of salary, bonuses, commissions, and director's fees paid to the non-resident President and Vice-President of Alhambra Cigar. The Court found that the increases beyond reasonable amounts were not warranted given the officers' limited involvement in the company from abroad and that the additional payments resembled dividend distributions more than compensation for services. The Court affirmed that the analysis should consider whether personal services were actually rendered and what constitutes a reasonable allowance.

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    of 2

    Alhambra Cigar vs.

    Commissioner of Internal Revenue


    L-23226 | November 28, 1967 | Fernando, J.

    FACTS:

     A.P. Kuenzle and H.A. Streiff were the President and Vice-President of Alhambra Cigar and Cigarette
    Manufacturing Company.
     CTA disallowed as deductions (for the years 1954 to 1957) the following: (1) Portions of their salary and
    bonus in excess of determined amounts; and (2) director’s fees and commissions paid to them by the
    company.
    o CTA held that the two officers were entitled to a salary of only P6,000 each year and a bonus
    equal to the reduced bonus of W. Eggmann, the resident treasurer and manager.
    o Disallowances were made in light of Sec. 30 of the NIRC.
    o It also held that the company is liable for deficiency income taxes.

    Salary Allowed Disallowed


    1954
    1955
    P15,000 P6,000 P9,000
    1956
    1957
    Bonus
    1954 P14,750 P5,850 P8,900
    1955 P14,750 P7,000 P7,750
    1956 P14,750 P5,500 P9,250
    1957 P14,750 P8,250 P16,600
    Commissions to
    DISALLOWED
    managers
    Director’s fees DISALLOWED!!

     Before 1954, Kuenzle and Streiff were each paid an annual salary of P6,000 and a bonus of about four
    times as much as the annual salary.
    o In a previous case (decided May 29, 1959) involving the same parties, SC held that considering
    the nature of the services performed by the said officers, the given salary was reasonable and,
    therefore, deductions is ordinary and necessary business expense.
    o Bonus, however, was reduced to the amount equivalent to that paid to Eggman.
    o The disallowance of CTA basically followed that decision.
     Company’s defense:
    o Increase in salaries was on the ground of increased cost of living. (CTA: But they are non-
    residents; Officers only came to the Philippines every 2 years, staying for 5-8 weeks).
    o They attended meetings, inspections, discussions, etc. (CTA: They do not warrant payment of
    commissions and director’s fees. Services mentioned have been adequately compensated in the
    form of salaries and bonuses).

    WON disallowance was proper – YES

    Whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged
    compensation of officers of the taxpayer, two questions become material: (1) Have "personal services" been
    "actually rendered" by said officers? and (2) If yes, what is the "reasonable allowance" therefore?

    Based from the circumstances, SC found that the CTA correctly construed and applied Sec. 30 of NIRC.
    Being non-resident President and Vice-President of Alhambra Company, of which they are the controlling
    stockholders, the Court is more inclined to believe that said commissions and directors' fees, payment of which
    was based on a certain percentage of the annual profits of petitioner, are in the nature of dividend distributions.

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