Subject: Tax 1

COLLECTOR OF INTERNAL REVENUE, petitioner

vs.
ARTHUR HENDERSON, respondent

G.R. No. L-12954

February 28, 1961

Ponente: PADILLA, J.

Principles/Doctrines:
Allowances that do not redound to the benefit of the employee are not subject to employee’s
income tax.

Nature of the Case: both parties appealed the decision of CTA

FACTS:
Sps. Arthur and Marie B. Henderson (taxpayers) filed annual net income for 1948-1952
to the BIR. Taxpayers received five Revenue assessment notices and paid the amounts assessed.
In 1932, after investigation and verification, the BIR reassessed the taxpayers’ income for the
years 1948-1952 and demanded payment of the deficiency taxes. The BIR considered as part of
their taxable income the taxpayer-husband's allowances for rental, residential expenses,
subsistence, 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 travelling
allowance of his wife. The taxpayers asked for reconsideration of the foregoing assessment.
They claimed that he did not receive the allowances for rentals and utilities as they merely lived
in the house provided by his employer (taxpayer-husband is President of American
International Underwriters for the Philippines, Inc.); that the entrance fee to the Marikina Gun
and Country Club was paid by his employer and merely incidental to his duties; and that
taxpayer-wife’s travel allowances should not be considered as part of their income because she
merely accompanied him in his business trip to New York as his secretary. Still, the taxpayers
paid the assessed amounts.
The CIR denied their request for reconsideration except for the income tax due for 1948
which was modified. The CIR demanded payment of deficiency taxes with 5% surcharge, 1%
monthly interest and P80 administrative penalty for late payment. Taxpayers sought again for
reconsideration and offered to settle on a more equitable basis. In 1956, the taxpayers again
requested the Collector of Internal Revenue to refund to them the amounts allegedly paid in
excess as income taxes for the years 1948 to 1952. The CIR did not take action on the request
for refund.
In 1956, taxpayers petitioned for review to CTA. The CTA held that the ratable value to
taxpayer-husband of the quarters furnished constitutes a part of taxable income; since the
taxpayers did not receive any benefit out of the travelling expenses allowed to taxpayer-wife, it
is not considered as income; and ordered the CIR to give refund to the taxpayers with interest.
The taxpayers filed a Motion for Reconsideration (MR) for a bigger refund on the ground that
manager’s residential expenses for utilities should not be included in the income as they are in
the nature of rentals. CIR filed MR for CTA to affirm its assessment. CTA denied both MR’s. Both
parties appealed to the SC.

ISSUES:

WON the allowances for rental of the apartment furnished by the husband-taxpayer's
employer-corporation, including utilities such as light, water, telephone, etc. and the allowance
for travel expenses given by his employer-corporation to his wife in 1952 part of taxable
income?

HELD:

For the allowances, the taxpayers are entitled only to a ratable value of the allowances (the
reasonable amount they would have spent for house rental and utilities such as light, water,
telephone) which is subject to tax. The excess is considered as expenses of the corporation.

For travelling expenses of wife, no part redounded to the benefit of the taxpayers. Neither was
a part thereof retained by them.

For manager’s residential expense, it should be treated as rentals for apartments and utilities
and should not form part of the ratable value subject to tax.

SC modified CTA’s judgment and ordered the CIR to refund to the taxpayers a bigger amount.