Alhambra Cigar v CIR (1959) Concenpcion, J.

*note: case has nothing to do with private educational institutions Facts The company is a domestic corp engaged in the business of manufacturing cigars and cigarettes The CIR assessed deficiency taxes amounting to P240,560, later reduced to P103,604. The CIR disallowed certain deductions claimed by the company, including bonuses, directors fees, and cmmissions for Kuenzle and Steiff, Prez and VP, respectively o Kuenzle and Steiff were also the owners of almost all the shares of stocks. They were also aliens permanently absent from the Philippines o Their actual services were limited to setting general policies, without executive supervision and functional control o The amounts for one year (1959) Directors fees: 20,500 Salary: 6k Bonus: 25k Commission: 25,800

Issue: Should compensation given to Kuenzle and Steiff be allowed as deductions? Held: Only to the extent of what is reasonably commensurate with personal services actually rendered the extraordinary and unusual amounts paid by petitioner to these directors in the guise of compensation for their supposed services, w/o any relation to the measure of their services cannot be regarded as ordinary and necessary expenses within the meaning of the law In this case, there is no proof of the extent of services actually rendered More convincing proof is required. The proof must also show that these bonuses are not just disguised distributions of profits 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 o Have personal services been actually rendered? o What is the reasonable allowance therefor? But the services of Kuenzle and Streiff are not totally worthless. A reasonable allowance of 6K is proper Other issues Has the action prescribed? The action was filed 3 years and 8 months after the ITR was filed o NO. The period of 3 years is for refers to immediate collection of taxes due (summary proceeding or distraint). For collection by judicial action, its five years. Are the expenses for the construction of a fence around a factory deductible? o Company claims that this was simply to keep the factory in an efficient working condition o NO. To determine whether the expense is a capital one or chargeable against operating income, it is necessary to look at its purpose Chargeable against operating income merely keeps the property in an operating condition within its probable useful life Capital increases the value, changes the use, prolong the life of the property o The construction of the hollow block fence increases the value of the property and prolonged the life of the factory. It was not a maintenance charge.