Pirovano v.

CIR (14 SCRA 232)

Sec. 32[B] of the NIRC provides that Gifts, bequests and devises are excluded from gross income liable to tax. Instead, such donations are subject to
estate or gift taxes. However, if the amount is received on account of services rendered, whether constituting a demandable debt or not (such as
remuneratory donations under Civil Law), the donation is considered taxable income.
Facts: De la Rama Steamship Co. insured the life of Enrico Pirovano who was then its President and General Manager. The company initially
designated itself as the beneficiary of the policies but, after Pirovanos death, it renounced all its rights, title and interest therein, in favor of
Pirovanos heirs.
The CIR subjected the donation to gift tax. Pirovanos heirs contended that the grant was not subject to such donees tax because it was not a
simple donation, as it was made for a full and adequate compensation for the valuable services by the late Priovano (i.e. that it was remuneratory).
Issue: WON the donation is remuneratory and therefore not subject to donees tax, but rather taxable as part of gross income.
Held: No. the donation is not remuneratory. There is nothing on record to show that when the late Enrico Pirovano rendered services as President
and General Manager of the De la Rama Steamship Co. and was largely responsible for the rapid and very successful development of the activities
of the company", he was not fully compensated for such services. The fact that his services contributed in a large measure to the success of the
company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or a donation. The
companys gratitude was the true consideration for the donation, and not the services themselves.

C. M. Hoskins & Co. Inc. v Commissioner of Internal Revenue
Facts:
Hoskins, a domestic corporation engaged in the real estate business as broker, managing agents and administrators, filed its income tax return (ITR)
showing a net income of P92,540.25 and a tax liability of P18,508 which it paid.
CIR disallowed 4 items of deductions in the ITR. Court of Tax Appeals upheld the disallowance of an item which was paid to Mr. C. Hoskins
representing 50% of supervision fees earned and set aside the disallowance of the other 3 items.
Issue:
Whether or not the disallowance of the 4 items were proper.
Held:
NOT deductible. It did not pass the test of reasonableness which is:
General rule, bonuses to employees made in good faith and as additional compensation for services actually rendered by the employees are
deductible, provided such payments, when added to the salaries do not exceed the compensation for services rendered.
The conditions precedent to the deduction of bonuses to employees are:
Payment of bonuses is in fact compensation
Must be for personal services actually rendered
Bonuses when added to salaries are reasonable when measured by the amount and quality of services performed with relation to the
business of the particular taxpayer.
There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors. In the case, Hoskins
fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins of the sum P99,977.91 as 50% share of
supervision fees received by the company was inordinately large and could not be treated as an ordinary and necessary expenses allowed for
deduction.
it should be noted that we have here a case practically of a sole proprietorship of C. M. Hoskins, who however chose to incorporate his business
with himself holding virtually absolute control thereof with 99.6% of its stock with four other nominal shareholders holding one share each. Having
chosen to use the corporate form with its legal advantages of a separate corporate personality as distinguished from his individual personality, the
corporation so created, i.e., petitioner, is bound to comport itself in accordance with corporate norms and comply with its corporate obligations.
Specifically, it is bound to pay the income tax imposed by law on corporations and may not legally be permitted, by way of corporate resolutions
authorizing payment of inordinately large commissions and fees to its controlling stockholder, to dilute and diminish its corresponding corporate
tax liability.||| (C. M. Hoskins & Co., Inc. v. Commr., G.R. No. L-24059, November 28, 1969)




ESSO Standard Eastern INC. vs CIR
Facts: In CTA Case No. 1251, Esso Standard Eastern Inc. (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. This claim was disallowed by the
Commissioner of Internal Revenue (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. Esso then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin
fees it had paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid on the ground that
the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses.
Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid contending that the margin fees were
deductible from gross income either as a tax or as an ordinary and necessary business expense. However, Essos appeal was denied.
Issues:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and ordinary business expenses.
Held:
(1) No. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's
international reserves. The margin fee was imposed by the State in the exercise of its police power and not the power of taxation.
(2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances.
Since the margin fees in question were incurred for the remittance of funds to Esso's Head Office in New York, which is a separate and distinct
income taxpayer from the 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 Esso's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs
of Esso's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all,
the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Esso in New York, but certainly not in the Philippines.

Philex Mining Corp. vs CIR
Facts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage the latters mining claim know
as the Sto. Mine. The parties agreement was denominated as Power of Attorney. The mine suffered continuing losses over the years, which
resulted in petitioners withdrawal as manager of the mine. The parties executed a Compromise Dation in Payment, wherein the debt of Baguio
amounted to Php. 112,136,000.00. Petitioner deducted said amount from its gross income in its annual tax income return as loss on the
settlement of receivables from Baguio Gold against reserves and allowances. BIR disallowed the amount as deduction for bad debt. Petitioner
claims that it entered a contract of agency evidenced by the power of attorney executed by them and the advances made by petitioners is in the
nature of a loan and thus can be deducted from its gross income. Court of Tax Appeals (CTA) rejected the claim and held that it is a partnership
rather than an agency. CA affirmed CTA
Issue: Whether or not it is an agency.
Held: No. The lower courts correctly held that the Power of Attorney (PA) is the instrument material that is material in determining the true
nature of the business relationship between petitioner and Baguio. An examination of the said PA reveals that a partnership or joint venture was
indeed intended by the parties. While a corporation like the petitioner cannot generally enter into a contract of partnership unless authorized by
law or its charter, it has been held that it may enter into a joint venture, which is akin to a particular partnership. The PA indicates that the parties
had intended to create a PAT and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by
the 50-50 sharing of income of the mine.
Moreover, in an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third
party that depends upon it or the mutual interest of both principal and agent. In this case the non-revocation or non-withdrawal under the PA
applies to the advances made by the petitioner who is the agent and not the principal under the contract. Thus, it cannot be inferred from the
stipulation that it is an agency.