WESTERN INSTITUTE OF TECHNOLOGY vs SALAS

Facts: Private respondents are the majority and controlling members of the Board of Trustees of
Western Institute of Technology, Inc. a stock corporation engaged in the operation, among others, of an
educational institution. Then, the board of directors amended their by laws giving the members of
board of directors a compensation. The ten per centum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. Few years later, the private respondents were
charged of falsification of public documents and estafa. The charge for falsification of public document
was anchored on the private respondents submission of WITs income statement for the fiscal year
1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of
corporate funds making it appear that the same was passed by the board on March 30, 1986, when in
truth, the same was actually passed on June 1, 1986, a date not covered by the corporations fiscal year
1985-1986. After a full-blown hearing TC handed down a verdict of acquittal on both counts without
imposing any civil liability against the accused therein.

Issue: WON the compensation of the board of directors as stated in their by laws violates the
corporation code?

Held: NO. There is no argument that directors or trustees, as the case may be, are not entitled to salary
or other compensation when they perform nothing more than the usual and ordinary duties of their
office. This rule is founded upon a presumption that directors/trustees render service gratuitously, and
that the return upon their shares adequately furnishes the motives for service, without compensation.

Under the foregoing section, there are only two (2) ways by which members of the board can be
granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws
fixing their compensation; and (2) when the stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders meeting agree to give it to them. In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity
as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute of Technology. Clearly, therefore, the
prohibition with respect to granting compensation to corporate directors/trustees as such under Section
30 is not violated in this particular case.

KUENZLE & STREIFF, INC. VS. CIR

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.

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses.
2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the
amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as
deductible expenses, of the bonuses paid by the corporation to its officers, upon the ground that they
were not ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of
the National Internal Revenue Code.

3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments.
CTA favored the CIR, however lowered the tax due on 1954. The corporation moved for
reconsideration, but still lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary
manner", and erred in not considering individually the total compensation paid to each of petitioner's
officers and staff members in determining the reasonableness of the bonuses in question, and that it
erred likewise in holding that there was nothing in the record indicating that the actuation of the
respondent was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just 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.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter
alia, the following factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other
the record discloses no evidence nor has petitioner ever made the claim that all or some of them were
gifted with some special talent, or had undergone some extraordinary training, or had accomplished any
particular task, that contributed materially to the success of petitioner's business during the taxable
years in question.

2) All the other employees received no pay increase in the said years.
3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the
corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not
question the basic salaries paid by petitioner to the officers and employees, but disallowed only the
bonuses paid to petitioner's top officers at the end of the taxable years in question.