Henderson V. Cir

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 husband’s 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 husband’s 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 husband’s 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 Arthur’s 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. Henderson’s 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 fee—Marikina 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. Henderson’s taxable income their expenses for rent, utility bills, Marikina Country Club membership and Marie’s 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 Arthur’s 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 Arthur’s functions as President o Marie’s 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 Arthur’s 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 Arthur’s 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 Arthur’s 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 manager’s 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 “[Arthur’s] 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) MARIE’S 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.  Marie’s tumor operation was a mere incidence of the trip. She simply took advantage of her presence in the city. 4) CLAIM FOR DEDUCTION OF MANAGER’S RESIDENTIAL EXPENSE IS SUPPORTED BY EVIDENCE

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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 manager’s 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. Henderson’s claim that the 1948 entry for manager’s 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.