HENDERSON v CIR (1961/ Padilla) Arthur Henderson is the president of American Intl Underwriters for the Phil, Inc.

(a domestic corp engaged in the business of general non-life insurance, and represents a group of American insurance companies). He and wife Marie filed their annual income tax (from which they deducted their personal exemption) for the years 1948-1952 with the BIR. They received from the BIR assessment notices, and they paid the amounts assessed. The BIR then reassessed their income. The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part of taxable income: 1) Arthurs allowances for rental, residential expenses, subsistence, utilities; 2) entrance fee to the Marikina Gun and Country Club which was paid by his employer for his account; and 3) travelling allowance of his wife. The Sps say: 1) as to allowances for rental and utilities, Arthur did not receive the money. Instead, the apartment is furnished and paid for by his employer-corporation (the mother company of American Intl), for the its purposes. They had no choice but to live in the expensive apartment, since the company used it to accommodate officials and guests. Only P4,800/yr (P400/mo x 12 mos) is the reasonable amount that they would be spending on rental if they were not required to live there. Thus, it is the amount they deem is subject to tax. The excess is to be treated as expense of the company. 2) The entrance fee shouldnt be considered income since it is an expense of his employer, and membership there is merely incidental to his duties of increasing and sustaining the business. 3) His wife merely accompanied him to NY on a business trip as his secretary, and at the employers request, for the wife to look at details of the plans of a building that his employer intended to construct. Such must not be considered taxable income. The CIR allowed only the entrance fee as nontaxable. The rent expense and travel expenses were still held to be taxable. The Sps offered to settle the case on a more equitable basis by increasing the amount of the taxable portion of Arthurs allowances for rental, etc. No action from CIR. The Sps filed with the CTA a petition to review the decision of the CIR. The CTA ruled in favor of the Sps, that such expenses must not be considered part of taxable income. It held "that the inherent nature of Arthurs employment as president does not require him to occupy the apartments supplied by his employer." However, only P4,800, the ratable value to him of the quarters constitutes a part of taxable income; that since they did not receive any benefit out of the traveling expense allowance to Fe and that she merely undertook the trip abroad at the behest of her husband's employer, the same could not be considered as income; and that even if it were considered as such, still it could not be subject to tax because it was deductible as travel expense. The CIR ordered a refund. The Sps filed a MR asking for a higher amount, bec the residential expenses shouldnt be included in their taxable net income for the reason that they are of the same nature as the rentals for the apartment. The CIR also filed a MR claiming that his assessment was correct. Both denied. Both filed a notice of appeal to the CTA, and the Sps also filed a petition for review with the SC. ISSUE: Are the allowances for rental of the apartment furnished by Arthur's employer, including utilities, and the allowance for travel expenses given by his employer to his wife part of taxable income? YES. RATIO: NIRC Sec 29: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid The evidence presented1 at the hearing substantially supports the findings of the CTA. The sps are childless. The
Arthur testified that they lived in apartments chosen by his employer; that they lived at the Embassy Apartments where they had a large sala, three bedrooms, dining room, two bathrooms, kitchen and a large porch; that despite the fact that they were the only two in the family, they had to live in apartments of the size beyond their personal needs bec as president of the corporation, he and his wife had to entertain and put up houseguests; that were he not required by his employer to live in those apartments furnished to him, he and his wife would have chosen an apartment only large enough for them and spend P400/mo as rentals; so only P4,800 annually (P400/mo x 12), the maximum they would have spent for rental, should be considered as taxable income and the excess treated as expense of the company; and that the trip to New York undertaken by his wife in 1952, for which she was granted travelling expense allowance was made at the behest of his employer to assist its architect in the preparation of the plans for a proposed building in Manila, hence the said amount should not be considered as
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quarters, therefore, exceeded their personal needs. But the exigencies of Arthur's high executive position, not to mention social standing, demanded and compelled them to live in amore spacious and pretentious quarters. Although entertaining and putting up houseguests were not his predominant occupation as president, yet he had to. So the fact that they had to live or did not have to live in the apartments chosen by the employer is of no moment, for no part of the allowances redounded to their personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the employer-corporation to the creditors. Neverthelss, as correctly held by the CTA, they are entitled only to a ratable value of the allowances in question, and only the amount of P4,800/yr (the reasonable amount they would have spent for house rental and utilities) should be the amount subject to tax, and the excess considered as expenses of the corporation. Re: wifes travel expenses That she had to make the trip to NY at the behest of her husband's employer to help in drawing up the plans and specifications of a proposed building, is also supported by evidence2. The parts of the letters written by her to Arthur while in NY, and the letter written by Arthur to Mr. C. V. Starr (chairman of the board of directors) support the findings. No part of the travelling expenses redounded to their benefit, or was retained by them. That she had herself operated on for tumors while in NY was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. The sps claim that the CTA erred in considering P3,249.32, for "manager's residential expense" in 1948 as taxable income despite the fact "that they were of the same nature as the rentals for the apartment, they being expenses for utilities, such as light, water and telephone necessarily incidental to the apartment furnished to him by his employer." - An examiner of the BIR who examined the books of account of the employer, testified that P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as manager's residential expense while the amount of P1,849.32 was entered as profit and loss account." - The acting head of the accounting dept of the employer testified that rentals and utilities of executives were entered in the books of account as "subsistence allowances and expenses;" that there was a separate account for salaries and wages of employees and officers; and that expenses for rentals and other utilities were not charged to salary accounts. The sps claim is supported by the evidence. The P3,249.32 "for manager's residential expense" in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax. Their computation is correct. Adding to the amount of their net income per return, the amount of bonus received, and the taxable ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom their personal exemption, the amount subject to income tax is P38,373.79. So the income tax due on this amount is P6,957.19 only. Dispositive: The judgment under review is modified. The CIR is ordered to refund

part of taxable income. In support of his claim, letters written by his wife while in New York concerning the proposed building, inquiring about the progress made in the acquisition of the lot, and informing him of the wishes of Mr. C. V. Starr, and a letter written by the witness to Mr. C. V. Starr concerning the proposed building, were presented in evidence. Marie testified that for almost 3 years, they gave parties every Friday night at their apartment; that their guests were officials of Arthurs employer and other corporations; that they also entertained during luncheons and breakfasts; that these involved and necessitated the services of additional servants; and that she was asked by Mr. C. V. Starr to come to NY to take up problems concerning the proposed building and entertainment because Arthur could not make the trip himself, and because "the woman of the family is closer to those problems."
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