G.R. Nos. L-12954 and L-13049. February 28, 1961
COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. ARTHUR HENDERSON, RESPONDENT. ARTHUR HENDERSON, PETITIONER, VS. COLLECTOR OF INTERNAL REVENUE, RESPONDENT.
PADILLA, J.:
No. L-12954) and by Arthur Henderson (G. R. No. L-13049) under the
provisions of section 18, Republic Act No. 1125, for review of a
judgment dated 26 June 1957 and a resolution dated 28 September 1957
rendered and adopted by the Court of Tax Appeals in Case No. 237.
The spouses Arthur Henderson and Marie B. Henderson (later referred, to
as the taxpayers) filed with the Bureau of Internal Revenue returns of
annual net income for the years 1948 to 1952, inclusive, where the
following net incomes, personal exemptions and amounts subject to tax
appear:
1948: Net Income Less Personal Exemption Amount Subject to tax 1949: Net Income Less Personal Exemption Amount subject to tax
1950: Net Income Less Personal Exemption Amount Subject to tax 1951: Net Income Less Personal Exemption Amount Subject to tax 1952: Net Income Less Personal Exemption Amount Subject to tax
(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers
received from the Bureau of Internal Revenue assessment notices Nos.
15840-48, 25450-49, 15255-50, 25705-51 and 22527-52 and paid the
amounts assessed as follows:
1948: 14 May 1949, O.R. No. 52991, Exhibit E 12 September 1949, O.R. No. 160473, Exhibit B-1 Total Paid
1949: 13 May 1950, O.R. No. 232366, Exhibit G 15 September 1950, O.R. No. 247918, Exhibit G-1 Total Paid
1950: 27 April 1951, O.R. No. 323173, Exhibit K
1951: Amount withheld from salary and paid by employer 15 May 1952, O.R. No. 33250, Exhibit O 15 August 1952, O.R. No. No. 383318, Exhibit O-1 Total Paid
1952: Amount withheld from salary and paid by employer 18 May 1953, O.R. No. 438026, Exhibit T 18 August 1953, O.R. No. 443483, Exhibit T-1 Total Paid
On 28 November 1953, after investigation and verification, the Bureau
of Internal Revenue reassessed the taxpayers’ income for the years 1948
to 1952, inclusive, as follows:
Net income per return Add: Rent expense Additional bonus for 1947 received May 13, 1948 Other income:
Manager’s residential expense (2|29|48a|c 4.51) Manager’s residential expense (refer to 1948 P & L) Entrance fee—Marikina Gun & Country Club
Net income per investigation Less: Personal exemption Net taxable income Tax due thereon Less: Amount of tax already paid per OR 52991 & 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 247918 Deficiency tax due (Should be 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 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 Tax already paid per O.R. Nos. 438026, 13484 Deficiency tax still due & collectible
Exhibits 2, 4, 6, 8, 10) and demanded payment of the deficiency taxes
on or before 28 February 1954 with respect to those due for the years
1948, 1949, 1950 and 1952 and on or before 15 February 1954 with
respect to that due for the year 1951 (Exhibits B-2, H, L, P, S).
In the foregoing assessments, the Bureau of Internal Revenue 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. On 26 and 27 January 1954 the
taxpayers asked for reconsideration of the foregoing assessments (pp.
29, 31, BIR rec.) and on 11 February 1954 and 28 February 1955 stated
the grounds and reasons in support of their request for reconsideration
(pp. 36-38, 62-66, BIR rec). They claim that as regards the
husband-taxpayer’s allowances for rental and utilities such as water,
electricity and telephone, he did not receive the money for said
allowances, but that they lived in the apartment furnished and paid for
by his employer for its convenience; that they had no choice but live
in the said apartment furnished by his employer, otherwise they would
have lived in a less expensive one that as regards his allowances for
rental of P7,200 and residential expenses of P1,400 and P1,849.32 in
1948, rental of P1,800 and subsistence of P6,051.50 (the latter merely
consisting of allowances for rent and utilities such as light, water,
telephone, etc.) in 1949 rental, electricity and water of P8,373.73 in
1950, rental of P5,782.91 in 1951 and rental, telephone, water,
electricity, etc. of P7,044.67 in 1952, only the amount of P3.900, for
each year, which is the amount they would have spent for rental of an
apartment including utilities, should be taxed; that as regards the
amount of P200 representing entrance fee to the Marikina Gun and
Country Club paid for him by his employer in 1948, the same should not
be considered as part of their income for it was an expense of his
employer and his membership therein was merely incidental to his duties
of increasing and sustaining the business of his employer; and that as
regards the wife-taxpayer’s travelling allowance of P3,247.40 in 1952,
it should not be considered as part of their income because she merely
accompanied him in his business trip to New York as his secretary and,
at the behest of her husband’s employer, to study and look into the
details of the plans and decorations of the building intended to be
constructed by his employer in its property at Dewey Boulevard. On 15
and 27 February 1954, the taxpayers paid the deficiency taxes assessed
under Official Receipts Nos. 451841, 451842, 451843, 451748 and 451844
(Exhibits C, I, M, Q and Y). After hearing conducted by the Conference
Staff of the Bureau of Internal Revenue on 5 October 1954 (pp. 74-85,
BIR rec), on 27 May 1955 the Staff recommended to the Collector of
Internal Revenue that the assessments made on 28 November 1953,
Exhibits 2, 4, 6, 8, 10) be sustained except that the amount of P200 as
entrance fee to the Marikina Gun and Country Club paid for the
husband-taxpayer’s account by his employer in 1948 should not be
considered as part of the taxpayer’s taxable income for that year (pp.
95-107, BIR rec). On 14 July 1955, in line with the recommendation of
the Conference Staff, the Collector of Internal Revenue denied the
taxpayer’s request for reconsideration, except as regards the
assessment of their income tax due for the year 1948, which was
modified as follows:
Net income per return Add: Rent expense Additional bonus for 1947 received on May 13,
1948Manager’s residential expense (2|29|48a|c No. 4.41) Manager’s residential expense (1948 profit and less) Net income per investigation Less: Personal exemption Net taxable income Tax due thereon Less Amount already paid Deficiency Tax still due
and demanded payment of the deficiency taxes of P4,370.24 for 1948,
P3,662.23 for 1949, P3,023 for 1950, P2,058 for 1951 and P4,108 for
1952, 5% surcharge and 1% monthly interest thereon from 1 March 1954 to
the date of payment and P80 as administrative penalty for late payment,
to the City Treasurer of Manila not later than 31 July 1955 (Exhibit
14). On 30 January 1956 the taxpayers again sought a reconsideration of
the denial of their request for reconsideration and offered to settle
the case on a more equitable basis by increasing the amount of taxable
portion of the husband-taxpayer’s allowances for rental, etc. from
P3,900 yearly to P4,800 yearly, which “is the value to the employee 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.’ The taxpayers also reiterated their
previous stand regarding the transportation allowance of the wife
taxpayer of P3,247.40 in 1952 and requested the refund of the amounts
of P3,477.18, P569.33, P1,294, P345 and P2,164, or a total of P7,858.51
(Exhibit Z). On 10 February 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, inclusive
(Exhibit Z-1). The Collector of Internal Revenue did not take any
action on the taxpayer’s request for refund.
On 15 February
1956 the taxpayers filed in the Court of Tax Appeals a petition to
review the decision of the Collector of Internal Revenue (C.T.A. Case
No. 237). After hearing, on 26 June 1957 the Court rendered judgment
holding “that the inherent nature of petitioner’s (the
husband-taxpayer) employment as president of the American International
Underwriters of the Philippines, Inc. does not require him to occupy
the apartments supplied by his employer-corporation;” that, however,
only the amount of P4,800 annually, the ratable value to him of the
quarters furnished constitutes a part of taxable income; that since the
taxpayers did not receive any benefit out of the P3,247.40 travelling
expense allowance granted in 1952 to the wife-taxpayers and that she
merely undertook the trip abroad at the behest of her husband’s
employer, the same could not be considered as income; and that even if
it were considered as such, still it could not be subject to tax
because it was deductible as travel expense; and ordering the Collector
of Internal Revenue to refund to the taxpayers the amount of P5,109.33
with interest from 27 February 1954, without pronouncement as to costs.
The taxpayers filed a motion for reconsideration Claiming that the
amount of P5,986.61 is the amount refundable to them because the
amounts of P1,400 and P1,849.32 as manager’s residential expenses in
1948 should not be included in their taxable net income for the reason
that they are of the same nature as the rentals for the apartment, they
being mainly expenses for utilities as light, water and telephone in
the apartment furnished by the husband-taxpayer’s employer. The
Collector of Internal Revenue filed an opposition to their motion for
reconsideration. He also filed a separate motion for reconsideration of
the decision claiming that his assessment under review was correct and
should have been affirmed. The taxpayers filed an opposition to this
motion for reconsideration of the Collector of Internal Revenue; the
latter, a reply thereto. On 28 September 1957 the Court denied both
motions for reconsideration. On 7 October 1957 the Collector of
Internal Revenue filed a notice of appeal in the Court of Tax Appeals
and on 21 October 1957, within the extension of time previously granted
by this Court, a petition for review (G. R. No. L-12954). On 29 October
1957 the taxpayers filed a notice of appeal in the Court of Tax Appeals
and a petition for review in this Court (G. R. No. L-13049).
The Collector of Internal Revenue has assigned the following errors allegedly committed by the Court of Tax Appeals:
-
The Court of Tax Appeals erred in finding that the herein respondent
did not have any choice in the selection of the living quarters
occupied by him. - The Court of Tax
Appeals erred in not considering the fact that respondent is not a
minor company official but the President of his employer-corporation,
in the appreciation of respondent’s alleged lack of choice in the
matter of the selection of the quarters occupied by him. -
The Court of Tax Appeals erred in giving full weight and credence to
respondent’s allegation, a self-serving and unsupported declaration
that the ratable value to him of the living quarters and subsistence
allowance was only P400.00 a month. -
The Court of Tax Appeals erred in holding that only the ratable value
of P4,800.00 per annum, or P400.00 a month constitutes income to
respondent. - The Court of Tax
Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum,
or P400.00 a month as the only amount taxable against respondent during
the five tax years in question. -
The Court of Tax Appeals erred in not finding that travelling allowance
in the amount of P3,247.40 constituted income to respondent and,
therefore, subject to the income tax. -
The Court of Tax Appeals erred in ordering the refund of the sum of
P5,109.33 with interest from February 17, 1954. (G. R. No. L-12954.)
The taxpayers have assigned the following errors allegedly Committed by the Court of Tax Appeals:
-
The Court of Tax Appeals erred in its computation of the 1948 income
tax and consequently in the amount that should be refunded for that
year. - The Court of Tax Appeals
erred in denying our motion for reconsideration as contained in its
resolution dated September 28, 1957. (G. R. No. 13049.)
The Government’s appeal:
The Collector of Internal Revenue raises questions of fact. He claims
that the evidence is not sufficient to support the findings and
conclusion of the Court of Tax Appeals that the quarters occupied by
the taxpayers were not of their choice but that of the
husband-taxpayers employer; that it did not take into consideration the
fact that the husband-taxpayer is not a mere minor company official,
but the highest executive of Ms employer-corporation; and that the
wife-taxpayer’s trip abroad in 1952 was not, as found by the Court, a
business but a vacation trip. In Collector of Internal Revenue vs.
Aznar, 102 Phil., 979; 56 Off. Gaz. 2386, this Court held that in
petitions for review under section 18, Republic Act No. 1125, it may
review the findings of fact of the Court of Tax Appeals.
The
determination of the main issue in the case requires a review of the
evidence. Are 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? Section 29, Commonwealth Act No. 466, National Internal Revenue
Code, provides:
“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. (Italics supplied.)
The Court of Tax Appeals found that the husband-taxpayer “is the
president of the American International Underwriters for the
Philippines, Inc., a domestic corporation engaged in insurance
business;” that the taxpayers “entertained officials, guests and
customers of his employer-corporation, in apartments furnished by the
latter and successively occupied by him as president thereof; that “In
1952, petitioner’s wife, Mrs. Marie Henderson, upon request of Mr. C.V.
Starr, chairman of the parent corporation of the American International
Underwriters for the Philippines, Inc., undertook a trip to New York in
connection with the purchase of a lot in Dewey Boulevard by
petitioner’s employer-corporation, the construction of a building
thereon, the drawing of prospectus and plans for said building, and
other related matters.”
Arthur H. Henderson testified that
he is the President of American International Underwriters for the
Philippines, Inc., which represents a group of American insurance
companies engaged in the business of general insurance except life
insurance; that he receives a basic annual salary of P30,000 and
allowances for houses rental and utilities like light, water,
telephone, etc., that he and his wife are childless and are the only
two in the family; that during the years 1948 to 1952, they lived in
apartments chosen by his employer; that from 1948 to the early part of
1950, they lived at the Embassy Apartments on Dakota Street, Manila,
where they had a large gala, three bedrooms, dining room, two
bathrooms, kitchen and a large porch, and from the early part of 1950
to 1952, they lived at the Rosaria Apartments on the same street where
they had a kitchen, sala, dining room, two bedrooms and bathrooms; that
despite the fact that they were the only two in the family, they had to
live in apartments of the size beyond their personal needs because as
president of the corporation, he and his wife had to entertain and put
up houseguests; that during all those years of 1948 to 1952, inclusive,
they entertained and put up houseguests of his company’s officials,
guests and customers such as the president of C. V. Starr &
Company, Inc., who spent four weeks in his apartment, Thomas Cocklin, a
lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of
AIUPI; that were he not required by his employer to live in those
apartments furnished to him, he said his wife would have chosen an
apartment only large enough for them and spend from P300 to P400
monthly for rental; that of the allowances granted to him, only the
amount of P4,800 annually, the maximum they would have spent for
rental, should be considered as taxable income and the excess treated
as expense of the company; and that the trip to New York undertaken by
his wife in 1952, for which she was granted by his employer-corporation
travelling expense allowance of P3,247.40, was made at the behest of
his employer to assist its architect in the preparation of the plans
for a proposed building in Manila and procurement of supplies and
materials for its use, hence the said amount should not be considered
as part of taxable income. In support of his claim, letters written by
his wife while in New York concerning the proposed building, inquiring
about the progress made in the acquisition of the lot, and informing
him of the wishes of Mr. C. V. Staff, chairman of the board of
directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W)
and letter written by the witness to Mr. C. V. Starr concerning the
proposed building (Exhibits X, X-1) were presented in evidence.
Mrs. Marie Henderson testified that for almost three years, she and her
husband gave parties every Friday night at their apartment for about 18
to 20 people; that their guests were officials of her husband’s
employer-corporation and other corporations; that during those parties
movies for the entertainment of the guests were shown after dinner;
that they also entertained during luncheons and breakfast; that these
involved and necessitated the services of additional servants; and that
in 1952 she was asked by Mr. C. V. Starr to come to New York to take up
problems concerning the proposed building and entertainment because her
husband could not make the trip himself, and because “the woman of the
family is closer to those problems.”
The evidence presented
at the hearing of the case substantially supports the findings of the
Court of Tax Appeals. The taxpayers are childless and are the only two
in the family. The quarters, therefore, that they occupied at the
Embassy Apartments consisting of a large sala, three bedrooms, dining
room, two bathrooms, kitchen and a large porch, and at the Rosaria
Apartments consisting of a kitchen, sala, dining room, two bedrooms and
a bathroom, exceeded their personal needs. But the exigencies of the
husband-taxpayer’s high executive position, not to mention social
standing, demanded and compelled them to live in a more spacious and
pretentious quarters like the ones they had occupied. Although
entertaining and putting up houseguests and guests of the
husband-taxpayer’s employer-corporation were not his predominant
occupation as president, yet he and his wife had to entertain and put
up houseguests in their apartments. That is why his
employer-corporation had to grant him allowances for rental and
utilities in addition to his annual basic salary to take care of those
extra expenses for rentals and utilities in excess of their personal
needs. Hence, the fact that the taxpayers had to live or did not have
to live in the apartments chosen by the husband-taxpayer’s
employer-corporation is of no moment, for no part of the allowances in
question redounded to their personal benefit or was retained by them.
Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors (Exhibits AA to DDD, inclusive;
pp. 104, 170-193, t.s.n.). 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 annually, the
reasonable amount they would have spent for house 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.
Likewise, the findings of the Court of Tax Appeals that the
wife-taxpayer had to make a trip to New York at the behest of her
husband’s employer-corporation to help in drawing up the plans and
specifications of a proposed building, is also supported by the
evidence. The parts of the letters written by the wife-taxpayer to her
husband while in New York and the letter written by the
husband-taxpayer to Mr. C. V. Starr support the said findings (Exhibits
U-2, V-1, W-1, X). No part of the allowance for travelling expenses
redounded to the benefit of the taxpayers. Neither was a part thereof
retained by them. The fact that she had herself operated on for tumors
while in New York was, but incidental to her stay there and she must
have merely taken advantage of her presence in that city to undergo the
operation.
The taxpayers’ appeal:
The
taxpayers claim that the Court of Tax Appeals erred in considering the
amount of P1,400 and P1,849.32, or a total of P3,249.32, for “manager’s
residential expense” in 1948 as taxable income despite the fact “that
they were of the same nature as the rentals for the apartment, they
being expenses for utilities, such as light, water and telephone
necessarily incidental to the apartment furnished to him by his
employer.”
Mrs. Cresencia Perez Ramos, an examiner of the
Bureau of Internal Revenue who examined the books of account of the
American International Underwriters for the Philippines, Inc.,
testified that the total amount of P3,249.32 was reflected in its books
as “living expenses of Mr. and Mrs. Arthur Henderson in the quarters
they occupied in 1948;” and that “the amount of P1,400 was included as
manager’s residential expense while the amount of P1,849.32 was entered
as profit and loss account.”
Buenaventura Loberiza, acting
head of the accounting department of the American International
Underwriters for the Philippines, Inc., testified that rentals
utilities, water, telephone and electric bills of executive of the
corporation were entered in the books of account as “subsistence
allowances and expenses;” that there was a separate account for
salaries and wages of employees and officers; and that expenses for
rentals and other utilities were not charged to salary accounts.
The taxpayers’ claim is supported by the evidence. The total amount of
P3,249.32 “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. Adding to the amount of P29,573.79, their net
income per return, the amounts of P6,500, the bonus received in 1948,
and P4,800, the taxable ratable value of the allowances, brings up
their gross income to P40,873.79. Deducting therefrom the amount of
P2,500 for personal exemption, the amount of P38,373.79 is the amount
subject to income tax. The income tax due on this amount is P6,957.19
only. Deducting the amount of income tax due, P6,957.19, from the
amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of
P1,605.28 is the amount refundable to the taxpayers. Add this amount to
P569.33, P1,294.00, P354.00 and P2,164.00, refundable to the taxpayers
for 1949, 1950, 1951 and 1952, and the total is P5,986.61.
The judgment under review is modified as above indicated. The Collector
of Internal Revenue is ordered to refund to the taxpayers the sum of
P5,986.61, without pronouncement as to costs.
Bengzon, Acting C. J., Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L., Barrera, Paredes and Dizon, JJ., concur.