CIR vs Henderson

TAXATION 1 | B2015 CASE DIGESTS

CIR vs. Henderson February 28, 1961 J. Padilla Mabel Africa

SUMMARY: The BIR assessed the Spouses Henderson for their 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 Hendersons argue that they are not income, but are rather expenses of the company. The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent expense and travel expenses were still held to be taxable. Then, The Court of Tax Appeals ruled in favor of the taxpayers, that such expenses must not be considered part of taxable income. The SC appreciated the pieces of evidence submitted by the Hendersons in proving that neither of the allowance given to them redounded to their personal benefit, thus they are not taxable. DOCTRINE: Rental and travel allowance are not part of the taxable income because, as supported by evidence, they are used to further the business of the company. FACTS: 1.

Arthur Henderson is the president of the American International Underwriters for the Philippines, Inc. a) The said domestic company is engaged in the business of general non-life insurance, and represents a group of American insurance companies engaged in the same business.

2.

Arthur Henderson, and his spouse Marie Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. They clearly indicated their net income for each year, the

personal exemptions to be deducted, and the resulting amount subject to tax. 3.

The BIR then sent the spouses assessment notices. The spouses subsequently paid the amounts assessed.

4.

On Nov. 28, 1953, the BIR again sent assessment notices to the spouses regarding their tax income for the years 1948 to 1952, which have been reassessed. According to the reassessment, the following should form part of their taxable income: a) Arthur’s allowances for rental, residential expenses, subsistence, water, electricity and telephone expenses b) Entrance fee to the Marikina Gun and Country Club which was paid by his employer for his account and c) Travelling allowance of his wife.

5.

The taxpayers asked for a reconsideration and presented the following arguments: a) As to the allowances for rental and utilities – i. They are not received by Arthur for allowances. The employer-corporation is the one who furnishes them, for the employercorporation’s purposes, with the apartment. ii. The spouses often entertain guests, accommodate officials, and entertain customers. This is part of the nature of Arthur’s work. They do not have a choice but to live in the expensive apartment. iii. If only they have a choice, the spouses would rather live in a simpler apartment and spend a reasonable amount of Php 4,800/year for the rent. According to them, this is the amount

TAXATION 1 | B2015 CASE DIGESTS

subject to tax. The excess is to be treated as expense of the company.

b) The spouses did not receive any benefit from the allowances received c) Substantial evidence were presented Henderson’s to support their claim

b) As to the entrance fee i. It should not be considered taxable income because it is an expense of the employer.

1.

c) As to the travel allowance of the wife

6.

The Collector of Internal revenue only accepted the argument regarding the entrance fee and thus considered it nontaxable. a) The spouses requested for a reconsideration. They offered to settle the case and proposed a “more equitable basis of increasing the amount of the taxable portion of Arthur’s allowances”. Also, they requested for a refund of the amounts they paid in excess. b) The CIR did not take any action.

7.

The Court of Tax Appeals ruled in favor of the Hendersons on the following grounds: a) It considered the inherent nature of Arthur’s employment

the

i. Testimonies of an examiner of the BIR and of the acting head of the accounting department of the employer-corporation

ii. The membership is merely incidental to Arthur’s duties of increasing and sustaining the business of his employer.

i. The wife only accompanied Arthur’s business trip to New York as his secretary – Marie (wife) studied and looked into the details of the plans of a building that his employer intended to construct. The task was assigned to her because “the woman of the family is closer to those problems”. 

by

The amounts given to the Hendersons are entered in the books of accouns as subsistence allowances and expenses

ii. Letters of the wife sent during the business trip talked about the proposed building. 8.

The CIR appealed the said CTA decision

ISSUE: WON the rental allowances and travel allowances furnished and given by the employer-corporation are part of taxable income? RATIO: No, substantial evidence supports the claim of the Hendersons. The allowance given to them are used to further the business of the company (hence, are company expenses) and are not used for their personal benefit, thus, are not part of their income. Being such, it does not form part of the taxable income. RULING: 1. No part of the allowances redounded to their personal benefit nor were such amounts retained by them 2. The accounting books of the corporation showed that the bills were paid directly by the employer-corporation to the creditors. 3. The SC sustains the claim of the CTA regarding the rental expenses & subsistence allowances that such are necessary to Arthur’s high executive position and social standing. Hence, must not form of the taxable income.

TAXATION 1 | B2015 CASE DIGESTS

Arthur’s high executive position and social standing, demanded and compelled the couple to live in a more spacious and expensive quarters. b. The ‘subsistence allowance’ was a SEPARATE account from the account for salaries and wages of employees. c. 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. a.

DISPOSITIVE: The taxpayers’ claim is supported by the evidence. The total amount of Php 3,249.32 “for manager’s residential expense” in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax. The computation made by the taxpayers is correct…The CIR is ordered to refund to the taxpayers the sum of Php 5, 986.61, without pronouncement as to costs. Judgment modified.