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.