Collector v.

Henderson, 1 SCRA 649

Rental allowances and travel allowances by a company are not part of taxable income.

FACTS:

• Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is
president of American International Underwriters for the Philippines, Inc., which is a domestic corporation
engaged in the business of general non-life insurance, and represents a group of American insurance
companies engaged in the business of general non-life insurance.

• The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as part
of taxable income: 1) Arthur’s allowances for rental, residential expenses, subsistence, water, electricity
and telephone expenses 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 taxpayers justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead, the
apartment is furnished and paid for by his employer-corporation (the mother company of American
International), for the employer corporation’s purposes. The spouses had no choice but to live in the
expensive apartment, since the company used it to entertain guests, to accommodate officials, and to
entertain customers. According to taxpayers, only P 4,800 per year is the reasonable amount that the spouses
would be spending on rental if they were not required to live in those apartments. 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 should not be considered income since it is an expense of his employer, and membership
therein is merely incidental to his duties of increasing and sustaining the business of his employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the employer-
corporation’s 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 Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and
travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of the taxpayers, that
such expenses must not be considered part of taxable income. Letters of the wife while in New York
concerning the proposed building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel allowances furnished and given by the employer-
corporation are part of taxable income?
HELD: NO. Such claims are substantially supported by evidence.
These claims are therefore NOT part of taxable income. No part of the allowances in question redounded
to their personal benefit, nor were such amounts retained by them. These bills were paid directly by the
employer-corporation to the creditors. The rental expenses and subsistence allowances are to be considered
not subject to income tax. Arthur’s high executive position and social standing, demanded and compelled
the couple to live in a more spacious and expensive quarters. Such ‘subsistence allowance’ was a
SEPARATE account from the account for salaries and wages of employees. The company did not charge
rentals as deductible from the salaries of the employees. These expenses are COMPANY EXPENSES, not
income by employees which are subject to tax.