CIR 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 employercorporations 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 employercorporation 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.

OTHER

FACTS:
In the foregoing assessments, the Bureau of Internal Revenue considered as part of the spouses (American Citizens)
taxable income the taxpayer husbands allowances for rental, residential expenses, 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 traveling allowance of his wife.

ISSUE:
Whether the allowances shall all be exempted from gross income?

HELD:
Gross Income includes gains, profits, and income derived from salaries, wages, or compensation for personal
service 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, dividends, securities, or the transactions of any business carried on for gain or
profit, or gains, profits, and income derived from any source whatever.

Their bills for rental and utilities were paid directly by the employer-corporation to the creditors. 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 P4,800.00 annually, the reasonable amount they have spent for home 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.