Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-12954 February 28, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ARTHUR HENDERSON, respondent.

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G.R. No. L-13049 February 28, 1961

ARTHUR HENDERSON, petitioner,

vs.
COLLECTOR OF INTERNAL REVENUE, respondent.

Office of the Solicitor General for petitioner.

Formilleza & Latorre for respondent.

PADILLA, J.:

Collector vs. Henderson

FACTS:

Sps. Arthur Henderson and Marie Henderson filed their annual income tax with the BIR. Arthur is
president of American International Underwriters for the Philippines, Inc., which is a domestic
corporation engaged in the business of general non-life insurance, and represents a group of
American insurance companies engaged in the business of general non-life insurance.

The BIR demanded payment for alleged deficiency taxes. In their computation, the BIR included as
part of taxable income: 1) Arthurs 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 taxpayers justifications are as follows:

1) as to allowances for rental and utilities, Arthur did not receive money for the allowances. Instead,
the apartment is furnished and paid for by his employer-corporation (the mother company of
American International), for the employer corporations purposes. The spouses had no choice but to
live in the expensive apartment, since the company used it to entertain guests, to accommodate
officials, and to entertain customers. According to taxpayers, only P 4,800 per year is the reasonable
amount that the spouses would be spending on rental if they were not required to live in those
apartments. Thus, it is the amount they deem is subject to tax. The excess is to be treated as
expense of the company.

2) The entrance fee should not be considered income since it is an expense of his employer, and
membership therein is merely incidental to his duties of increasing and sustaining the business of his
employer.

3) His wife merely accompanied him to New York on a business trip as his secretary, and at the
employer-corporations request, for the wife to look at details of the plans of a building that his
employer intended to construct. Such must not be considered taxable income.

The Collector of Internal Revenue merely allowed the entrance fee as nontaxable. The rent
expense and travel expenses were still held to be taxable. The Court of Tax Appeals ruled in favor of
the taxpayers, that such expenses must not be considered part of taxable income. Letters of the wife
while in New York concerning the proposed building were presented as evidence.

ISSUE: Whether or not the rental allowances and travel

allowances furnished and given by the employer-
corporation are part of taxable income?

HELD: NO. Such claims are substantially supported by

evidence.
These claims are therefore NOT part of taxable income. No part of the allowances in question
redounded to their personal benefit, nor were such amounts retained by them. These bills were paid
directly by the employer-corporation to the creditors. The rental expenses and subsistence
allowances are to be considered not subject to income tax. Arthurs high executive position and
social standing, demanded and compelled the couple to live in a more spacious and expensive
quarters. Such subsistence allowance was a SEPARATE account from the account for salaries and
wages of employees. 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.