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February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,


vs.
ARTHUR HENDERSON, respondent.
ARTHUR HENDERSON, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Padilla, J.:
SUMMARY: Expat Company president and his wife were assessed deficiency income tax on various allowances
allegedly paid to them by the husbands employer among them country club membership, luxury apartment rentals
and utility bills, and travelling expense. Spouses argued that the expenses were necessary and incidental to the
husbands job as President of the company since they were part of alta sociedad and had to entertain guests and
business associates; that the travelling expense was for a trip made at the behest of the husbands boss, hence it
was a business trip; and that the allowances did not pass thru them but were instead paid direct to the landlord etc.;
therefore it did not redound to their benefit. SC agreed with them and held them liable only for the ratable value of the
benefits they received, i.e., the actual amount they would have spent for living expenses if the husband was not
required to entertain guests in his apartment; the rest being regarded as expenses of the corporation.
DOCTRINE: Old NIRC: Gross income includes gains, profits, and income derived from salaries, wages, or
compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership
or use of or interest, in such property; also from interest, rents, dividend, securities, or the transactions of any
business carried on for gain or profit, or gains, profits, an income derived; from any source whatever.
(akin lang naman): Only expenses/payments which redounded to the benefit of the taxpayer should be included in the
computation of taxable income.
NATURE: Petition for review of a CTA decision. Original action for tax refund before the BIR.
FACTS

The spouses ARTHUR and MARIE Henderson are expats living in the Philippines.
o Arthur is the President of the American International Underwriters for the Philippines, Inc. (AIU), a
domestic corporation engaged in non-life insurance.
o He receives an annual basic salary of P30,000/month, plus allowances for living expenses, travel
expenses and utility bills.
o From 1948-1950, the spouses Henderson lived in the Embassy Apartments on Dakota St., Malate,
Manila, where they had a 3-bedroom suite, with a large sala, 2 bathrooms, kitchen and porch
o From 1950-1952, they lived in the Rosaria Apartments (also on Dakota St.), where they had
similarly palatial living quarters.
o The Sps. Henderson are childless, but regularly host society events and parties for company
officials, customers and guests, as part of Arthurs job as President.

TAX RETURNS filed by the Sps. Henderson for the years 1948-1952
Net
Personal
Taxable
Income
Exemption
Income
1948 29,573.79
2,500
27,073.79
1949 31,817.66
2,500
29,317.66
1950 34,815.74
3,000
31,815.74
1951 32,605.83
3,000
29,605.33
1952 36,780.11
3,000
33,780.11

TAX ASSESSED BY BIR AND PAID by the Sps. Henderson for the period 1948-1952
1948
Paid on May 14, 1949
2,068,12
Paid on Sep. 12, 1949
2,068.11
TOTAL
4,136.23
1949
Paid on May 13, 1950
2,314.95
Paid on Sep. 15, 1950
2,314.94
TOTAL
4,629.89
1950
Paid on Apr. 27, 1951
7,273.00
1951
Withheld from salary
5,780.40

1952

Paid on May 15, 1952


Paid on Aug. 15, 1952
Withheld from salary
Paid on May 18, 1953
Paid on Aug. 18, 1953

TOTAL PAID

360.50
361.20
5,660.40
1,160.30
1,160.00
7,981.00

Nov. 28, 1953 the BIR reassessed the Sps. Hendersons income for the same period, as follows:
1948
Net income per return
P29,573.79
Add:
Rent expense
7,200.00
Additional bonus for 1947 received May 13, 1948
6,500.00
Other income:
Manager's residential expense (2|29|48a|c 4.51)
1,400.00
Manager's residential expense (refer to 1948 P & L)
1,849.32
Entrance feeMarikina Gun & Country Club
200.00
Net income per investigation
46,723.11
Less: Personal exemption
2,500.00
Net taxable income
P44,223.11
Tax due thereon
Less: Amount of tax already paid per OR 52991 &
4,136.23
160473
Deficiency tax still due & assessable
1949
Net income per return
Add disallowances Capital loss (no capital gain)
Undeclared bonus
Rental allowance from A.I.U.
Subsistence allowance from A.I.U.
Net income per investigation
Less Personal exemption
Amount of income subject to tax
Tax due thereon
Less tax already assessed paid per OR Nos. 232366
& 247918
Deficiency tax due
1950
Net Income per return
Add:
Rent, electricity, water allowances
Net income per investigation
Less: Personal exemption
Net taxable income
Tax due thereon
Less: Tax already paid per O.R. No. 323173
Deficiency tax still due & assessable
1951
Net income per return
Add house rental allowance from AIU
Net income per investigation
Less personal exemptions
Amount of income subject to tax
Tax due thereon
Less tax already assessed and paid per OR Nos.
A33250 & 383318
Deficiency tax due

P4,426.24
P31,817.66
P3,248.84
3,857.75
1,800.00
6,051.60

P14,958.09
P46,775.75
2,500.00
P43,275.75
P8,292.21
4,629.89
P3,662.32
P34,815.74
8,373.73
P43,189.47
3,000.00
P40,189.47
P10,296.00
7,273.00
P3,023.00
P32,605.83
5,782.91
P38,388.74
3,000.00
P35,388.00
P8,560.00
6,502.00
P2,058.00

1952
Net income per return
Add:
Withholding tax paid by company
Traveling allowances
Allowances for rent, telephone, water, electricity,
etc.
Net income per investigation
Less: Personal exemption
Net taxable income
Tax due thereon
Less: Tax already withheld

P36,780.11
600.00
3,247.40
7,044.67
47,672.18
3,000.00
P44,672.18
P12,089.00
P5,660.40

Tax already paid per O.R. Nos. 438026, 13484


2,320.00
7,981.00
Deficiency tax still due & collectible
P4,108.00

The BIR added to the Sps. Hendersons taxable income their expenses for rent, utility bills, Marikina
Country Club membership and Maries travels to New York.

Jan. 26 & 27, 1954 Sps. Henderson moved for the reconsideration of the revised assessments.
They argued that:
o They did not receive said allowances because these were paid by AIU directly to the landlord,
utility. etc.
o They had no choice but to live in the apartments provided by AIU, since the entertainment functions
were part of Arthurs functions as President.
o If ever the utility bills were to be added to taxable income, only the amount of P3,900 should be
added since this is the amount which the Sps. Henderson would have spent on rent and utility had
it been up to them to choose their living arrangements, since they were childless and needed less
living space than was provided to them by AIU
o The expense for Marikina Country Club membership is incidental to Arthurs functions as President
o Maries traveling expense should not be added because she only went to New York at the behest of
the AIU Chairman to study the details of the plans and decorations of the building which AIU
planned to build on its Dewey (now Roxas) Boulevard property, because Arthur could not come and
the chairman felt that Marie was more closer to those problems.

May 27, 1955 The BIR Conference Staff recommended the affirmance of the assessments to the CIR,
with the exception of the P200 membership fee for the Marikina Country Club.

The CIR adopted the recommendation of the Conference Staff and demanded the payment of deficiency
taxes for the years 1948-1952, plus 5% surcharge and 1% monthly interest from Mar. 1, 1954, on top of P80
late payment penalty, to be paid to the Manila City Treasurer not later than July 31, 1955.

Jan. 30, 1956 Sps. Henderson filed another request for reconsideration, proposing that the BIR add
P4,800 to their taxable income, representing the value to [Arthur] of the benefits he derived therefrom
measured by what he had saved on account thereof in the ordinary course of his life * * * for which he would
have spent in any case. (i.e., yung natira sa ibinigay ng AIU kung hindi sila required mamuhay nang
marangya); and reiterating the arguments in their 1st request for reconsideration.

Feb. 10, 1956 The Sps. filed a refund request with the BIR for overpayment of income tax for the years
1948-52. The BIR (as usual) did not act on the request.

Feb. 15, 1956 Sps. Henderson filed with the CTA a petition for review of the BIR decision.

June 26, 1957 CTA DECISION


o Inherent nature of Arthurs job did not require him to live in such luxurious apartments
o Upheld the spouses contention with respect to the P4,800 ratable value of the benefits
o The travelling expense should not be added to taxable income (it was merely at the behest of
Arthurs boss and is deductible in any case)
o CIR ordered to refund P5,109.33 to the Sps. Henderson

Both parties filed motions for reconsideration.


o Sps. Henderson argue that the proper amount of refund is P5,986.,61 because the residential
expense for 1948 [see facts] should not be included in taxable income since it is of the same nature
as rentals (both paid directly by AIU and do not pass into the Sps. hands)
o CIR argues that the revised assessment should be upheld.
o Both motions denied.

Both parties filed petitions for review before the SC.

ISSUES (HELD)
1) W/N the nature of Arthurs job mandated the use of luxurious living quarters (YES)
2) W/N only the ratable value of the benefits to the spouses should be added to taxable income (YES)
3) W/N the traveling expense should be added to taxable income (NO)
4) W/N the 1948 managers residential expense should be added to taxable income (NO)
RATIO
PRELIMINARY: Sec. 29 of the then-prevailing NIRC (CA 466), defines gross income: Gross income includes
gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and
in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest, in such property; also from interest,
rents, dividend, securities, or the transactions of any business carried on for gain or profit, or gains, profits, an income
derived; from any source whatever.
1) HIGH EXECUTIVE POSITION AND SOCIAL STANDING OF ARTHUR DEMANDED AND COMPELLED [THE
SPOUSES] TO LIVE IN MORE SPACIOUS AND PRETENTIOUS QUARTERS LIKE THE ONES THEY HAD
OCCUPIED

CTA made the following factual findings:


o The two apartments rented by the Sps. Henderson were grand and spacious
o The Sps. regularly entertained houseguests such as the Chairman of AIU (who lived there for a
month, a Washington, D.C. lawyer, and Manuel Elizalde (an AIU stockholder).
o Marie testified that :

they hosted parties at their apartment every Friday night, there were 18-20 people at
every party and these included officials of AIU and other corporations.

movies were shown after these parties for the entertainment of the guests

they also entertained during luncheons and breakfasts (wow naman)


o Were he not required to live in the apartments provided by AIU, they would have chosen an
apartment large enough only for the two of them, and would have spent only P300-400 a month.
o The following facts establish that [Arthurs] high executive position, not to mention social standing,
demanded and compelled [the spouses] to live in a more spacious and pretentious quarters like the
ones they had occupied.
o It is for this reason that AIU shouldered the expense of rentals and utility bills, since it was
necessary for Arthur to host these parties as President of AIU, although that is not his primary
occupation.
o Ergo, no part of the residential allowance was retained by or redounded to the personal
benefit of the spouses, since these were paid by the corporation directly to the landlord and the
public utilities. The issue of whether or not the Sps. were required to live in the apartments chosen
by AIU is of no moment.
2) It therefore follows that the Sps. are entitled only to a ratable value of the allowances in question. SC upheld the
spouses contention that if they were not required to live the high life, they would only have taken a 300-to-400peso-a-month apartment. Therefore they would only have spent at most P4,800 a year for rentals and utilities. The
rest should be considered expenses of the corporation.
3) MARIES TRAVELLING EXPENSE DID NOT REDOUND TO THE BENEFIT OF THE SPOUSES

CTA made the following factual findings:


o The trip to New York, undertaken in 1952, was made at the behest of the AIU Chairman, for Marie
to assist the architect to assist in the preparation of the plans and procurement of materials and
supplies for a proposed building in Manila.
o Marie was sent because Arthur could not make it; and because the AIU Chairman believed that a
woman would be more suited to the task
o Marie was given a travelling expense allowance of P3,247.40 for the trip.

These are substantiated by the correspondence between Arthur and Marie while the latter was in New York,
as well as the letter written by Arthur addressed to the AIU Chairman.

No part of the allowance was retained by Marie or Arthur, nor did it redound to their benefit.

Maries tumor operation was a mere incidence of the trip. She simply took advantage of her presence in the
city.
4) CLAIM FOR DEDUCTION OF MANAGERS RESIDENTIAL EXPENSE IS SUPPORTED BY EVIDENCE

Testimony of BIR Examiner Ramos: P3,249.32 was placed in the books of AIU as living expenses of Mar
and Mrs. Henderson in the quarters they occupied in 1948 and that the amount of P1,400 was included
as managers residential expense while P1,849.32 was entered as profit and loss.
Testimony of Buenaventura Lobriza, acting head of AIU accounting department: rentals, utility, water, and
telephone bills of corporate executives were entered in the books as subsistence allowances and
expenses and salaries of employees and officers were kept in another separate account. The rental and
utility bills were not charged to salary accounts.
Such evidence supports the Sps. Hendersons claim that the 1948 entry for managers residential
expense should be treated as rentals and utilities expense and hence not part of the ratable value subject
to tax.

COMPUTATION OF THE SC
1948
Net income per return
ADD: Additional bonus for 1947
received May 13, 1948
Ratable value of benefits
Net income
Less: Personal exemption
Net taxable income
Tax due thereon

P29,573.79
6,500.00
4,800
40,873.79
2,500.00
P38,373.79
6.957.19

Less: Amount of tax already paid

8,562.47

Refundable amount
Add: Refundable amount for 1949
Refundable amount for 1950
Refundable amount for 1951
Refundable amount for 1952
TOTAL REFUNDABLE AMOUNT

1,605.28
569.33
1,294.00
354.00
2,164.00
5,986.61

DISPOSITION: Judgment modified. CIR ordered to refund P5,986.61 to the Sps. Henderson.