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CIRvsHenderson

Principle/s:
Gross Income includes gains, profits, and income derived from salaries, wages, or compensation
for personal services whatever kind and in whatever form paid.

Collector of Internal Revenue vs Henderson


GR No. L-12954, 1961

FACTS:
In the foregoing assessments, the Bureau of Internal Revenue considered as part of the spouses
(American Citizens) taxable income the taxpayer husbands allowances for rental, residential
expenses, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to
the Marikina Gun and Country Club paid by his employer for his account; and traveling allowance
of his wife.
ISSUE:
Whether the allowances shall all be exempted from gross income?
HELD:
Gross Income includes gains, profits, and income derived from salaries, wages,
or compensation for personal service 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, dividends, securities, or the transactions of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatever.
Their bills for rental and utilities were paid directly by the employer-corporation to the creditors.
Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a
ratable value of the allowances in question, and only the amount of P4,800.00 annually, the
reasonable amount they have spent for home rental and utilities such as light, water, telephone,
etc., should be the amount subject to tax, and the excess considered as expenses of the
corporation.

Old Colony Trust Co. v. Commissioner


Citation. 279 U.S. 716
Brief Fact Summary. Wood was president of the American Woolen Company.
The company adopted a resolution wherein they would pay the tax obligations of
Wood
and
other
officers.
Synopsis of Rule of Law. The discharge of a taxpayers obligation by a third
party is equivalent to direct receipt by the taxpayer.
Facts. William Wood was president of the American Woolen Company for the
years 1918 through 1920. The company instated a policy for 1919 and 1920
wherein the company would pay the taxes of the president and other company
officers. The company paid $681,169.88 for 1918 and $351,179.27 for 1919 on
behalf of Wood. The Board of Tax Appeals held that these amounts paid were
income
of
Wood.
Issue. Were the taxes paid by the company additional income of Wood?

Held. Chief Justice Taft issued the opinion for the Supreme Court of the United
States affirming the lower court and holding that the taxes paid were income to
Wood.
Concurrence. A separate opinion of Justice McReynolds is omitted from the text.
Discussion. The Supreme Court notes that Wood and other employees received
a direct benefit when their tax obligation was discharged by the company. Wood
received a benefit in exchange for his services to the company. This was clearly
a taxable gain.

Benaglia v. Commissioner, 36 B.T.A. 838 (1937)

Petitioner is manager of hotels in Hawaii, for which he receives both a salary and free room
and board. The IRS Commissioner includes the room and board that he and his wife receive
as part of his taxable income. Petitioner argues he has to live in the hotel room as a
necessary part of his job as manager of the hotel, and that it should not be counted as
constituting part of his salary.

Issue(s)
Should petitioner's receipt of a room and board from his employer be counted as taxable
income when petitioner is living there at the request of his employer?

Holding and Dissent(s)


Reversed in favor of petitioner. Evidence from both the employer and employee was that
residence in the hotel was a necessary part of the job. Corporations books carried no
accounting for the petitioners meals, rooms, or service. Analogizes case to 1) Jones v.
United States, where the value of military quarters was not included in the taxable income of
an Army officer, and to 2) the English case of Tennant v. Smith, H.L. (1892), where a bank
employee was required to live in quarters located in the bank building, the value of which
was not included in his taxable income. Here, because the meal and room was supplied to
petitioner merely as a convenience to the hotels, they should not be included in taxable
income.
DISSENT: During the negotiations for employment, the petitioner made sure to mention the
free room and board. Distinguish this case from Jones v. US, because here the employment
was a matter of private contract, while in Jones, the compensation was fixed and subject to
military law. Petitioners constant presence here was not actually needed, since records show

he was responsible for two hotels and did not have a residence at both, and he was also
absent from Honolulu several times. Even if the employer required his residence in the
hotel, petitioner still benefited from it.

Analysis

and Discussion

The employer, in giving the room benefit to employee, has a purpose other than to
compensate employee (i.e. a responsibility to be available to fix hotel problems) >
convenience of employer

CIR v Castaneda (G.R. No. 96016)


FACTS:
Efren Castaneda retired from govt service as Revenue Attache in the Philippine Embassy,
London, England. Upon retirement, he received benefits such as the terminal leave pay. The
Commissioner of Internal Revenue withheld P12,557 allegedly representing that it was tax
income.
Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt
from income tax.
The Solicitor General contends that the terminal leave is based from an employer-employee
relationship and that as part of the services rendered by the employee, the terminal leave pay is
part of the gross income of the recipient.
CTA -> ruled in favor of Castaneda and ordered the refund.
CA -> affirmed decision of CTA. Hence, this petition for review on certiorari.
ISSUE:
Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income
tax.
HELD:
NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave
pays are subject to income tax is that:
. . commutation of leave credits, more commonly known as terminal leave, is applied for by an
officer or employee who retires, resigns or is separated from the service through no fault of his
own. In the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public servants, retirement pay is always
less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may
look forward to is thus avoided. Terminal leave payments are given not only at the same time but
also for the same policy considerations governing retirement benefits.
A terminal leave pay is a retirement benefit which is NOT subject to income tax.
*Petition denied.

CIR V CA January 20, 1999


Facts: Sometime in the 1930s, Don Andres Soriano, a citizen and
resident of the United States, formed the corporation A. Soriano Y
Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization
divided into 10,000 common shares at a par value of P100/share.
ANSCOR is wholly owned and controlled by the family of Don Andres,
who are all non-resident aliens. In 1937, Don Andres subscribed to
4,963

shares

of

the

5,000

shares

originally

issued.

On September 12, 1945, ANSCORs authorized capital stock was


increased to P2,500,000.00 divided into 25,000 common shares with
the same par value. Of the additional 15,000 shares, only 10,000 was
issued which were all subscribed by Don Andres, after the other
stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues. This increased his subscription to 14,963
common shares. A month later, Don Andres transferred 1,250 shares
each to his two sons, Jose and Andres Jr., as their initial investments in
ANSCOR.

Both

sons

are

foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend


declarations were made between 1949 and December 20, 1963. On
December 30, 1964 Don Andres died. As of that date, the records
revealed that he has a total shareholdings of 185,154 shares. 50,495
of which are original issues and the balance of 134,659 shares as stock
dividend declarations. Correspondingly, one-half of that shareholdings
or 92,577 shares were transferred to his wife, Doa Carmen Soriano,
as her conjugal share. The offer half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital stock to
P20M and in 1966 further increased it to P30M. In the same year
(December 1966), stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate and Doa Carmen

from ANSCOR. Hence, increasing their accumulated shareholdings to


138,867

and

138,864

common

shares

each.

On December 28, 1967, Doa Carmen requested a ruling from the


United States Internal Revenue Service (IRS), inquiring if an exchange
of

common

with

preferred

shares

may

be

considered

as

taxavoidance scheme. By January 2, 1968, ANSCOR reclassified its


existing 300,000 common shares into 150,000 common and 150,000
preferred

shares.

In a letter-reply dated February 1968, the IRS opined that the


exchange is only a recapitalization scheme and not tax avoidance.
Consequently, on March 31, 1968 Doa Carmen exchanged her whole
138,864 common shares for 138,860 of the preferred shares. The
estate of Don Andres in turn exchanged 11,140 of its common shares
for

the

remaining

11,140

preferred

shares.

In 1973, after examining ANSCORs books of account and record


Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source, for the year 1968
and the 2nd quarter of 1969 based on the transaction of exchange and
redemption of stocks. BIR made the corresponding assessments.
ANSCORs subsequent protest on the assessments was denied in 1983
by petitioner. ANSCOR filed a petition for review with the CTA, the Tax
Court reversed petitioners ruling. CA affirmed the ruling of the CTA.
Hence

this

position.

Issue: Whether or not a person assessed for deficiency withholding


tax under Sec. 53 and 54 of the Tax Code is being held liable in its
capacity

as

withholding agent.

Held: An income taxpayer covers all persons who derive taxable


income. ANSCOR was assessed by petitioner for deficiency withholding
tax,

as

such,

it

is

withholdingagent and

being
not

in

held
its

liable

in

its

personality

capacity
as

as

taxpayer.

withholding agent, A. Soriano Corp. in this case, cannot be deemed a


taxpayer for it to availof a tax amnesty under a Presidential decree
that condones the collection of all internal revenue taxes including the
increments or penalties on account of non-payment as well as all civil,
criminal,

oradministrative liabilities

arising

from

or

incident

to

voluntary disclosures under the NIRC of previously untaxed income


and/or wealth realized here or abroad by any taxpayer, natural or
juridical. The Court explains: The withholding agent is not a taxpayer,
he is a mere tax collector. Under the withholding system, however,
the agent-payer becomes a payee by fiction of law. His liability is direct
and independent from the taxpayer, because the income tax is still
imposed and due from the latter. The agent is not liable for the tax as
no wealth flowed into him, he earned no income.