Republic of the Philippines Couht of Tax Appeals Manilla Arthur vs. « Collector of Internal Ast

DECISION

This is a petition seeking the refynd of or the credit to any future tax liability of peti- tioner the sum of #7,858,51 allegedly paid in excess of the income tax due during the tax years 1948 to 1952, The petitioner, Arthur Henderson, is the president of the American International Under- ! writers for the Philippines, Inc,, a domestic cor- poration engaged in insurance business, For the tax years 1948 to 1952, inclusive, petitioner filed his income tax returns on the basis of which he paid the corresponding income taxes, Subsequently, on July 14, 1955, respondent determined against pe- titioner the following deficiency income tax.

Sa...

1948 0 «eee eos o 6 04,3R,.% 1949 © ee ee ee ee © 3,662,23 1950 ee eee ee ee © 3,023.00 195le2ee ee ee = = = 2,058.00 MR setescerse« “eee

DEi IJION •

• T. •

~SE

• 237 Income Items determined by {esoondent as raxaole W!!

ill2.

12.21 1952 Rental Expen e ---· 7, 20 • onus, 1947 re- ceived 1948 ------ anagers resi den• tial c pense --·-- 1,40 .co ~anagers residen- tial expense ··-·· 1, 49. 2 Capital loss no~ deductible) --····

Bonus -··••••••••••

dental fro 1 A. I.u. - 1, ubsistence llow- .oo ance ----·-------- 6, 51. 50 ent, electricity, water allo~~~u'- e -- House rental al• . ~73. 73 lo anc --·--··-- - 5 , 782 .~1 Income taxe paid ~o. -------~---- - - Travel allowances-- Allowance f or rent- 3, 247. 40 7 ,(,44. (, 7

Conceded

raxaule y retitioner 6, .oo ~ . 24 8 . 84 3, 857.75 fiJO .OO However, prior o the a ove inal -cer~J.na• tion, petition r a pai d t he aforesaid deficiencies on February 27, 1Jo4, under eparate official re• ceipts but , on the sii o the deficiencies aoove deter ined by respondent, petitioner had in fac ~ overpaid the income tax or 1 48 by t e sum of o6.

which r spondent concedes to oe re unda le. o ever , petiti oner was not satisfio ~ith the above u cision ' of respondent, hence, thi& appeal. 245

DECISION -

C . i . ~ .

SE NO. 237 etitioner, according to evidence, enter• tained ofiicials, guests and customers of his am- ployer-corpor~tion, in apartments furnished by th latter and successively occupiad by him as pt-e ident thereoi.

In 19:.>2, pe"titioner' s wife, s.

ari Hen rson , upon request of Mr. c. v. tarr, chai~ ma n oi the parent corporation of the Am rican International Underwr ters for the Phil • ippines, Inc., un ertook a trf p to ~tew 'fork in conn ction with t e purchase o a lot in Dewey oulevar y peLi~ioner • s e ployer-eorporation, the consuuction of a buil ing thereon , the araw- ing O;a; pro p ctus nc plan for &aid building, and other relat ma t rs.

On t e eory nat all a ·oresaid allowances recorded s such in the books of the mployer•corp• oration were co~p n ation or inco e in addition to petitioner's ~asic annual salary of ~ ,000.00, res• pondent deter ine ag in t petitioner deficiency income taxes, which the latter paid ana now seeks to regain as refund or tax credit. lowac The issues involved in this caee are as fol•

1. Whether or not tne rentals of the quarLers furnist o ~itloner y his employer-ccrporation are taxable as peti• '"i t • d ... o. r :.1.. c o .... c ; a:1 2 • • hethir or not '-• e allo\i ance givea by said employer-corporation to petitioner'• wif is taxabl as inco~a of pet'ti~•er. 246 DECISI .

..

• r .• c. E • • 21 - - .

ilative to the first tssue, p titioner con• ten tiat hu so-called c ntal and subsi stenc al- lo-. ance furnished him ere f or th convenience, use and enef~t of h s player-corporation fr~ which no t xable inc e ari s a that even if otherwise, only the amount of • 4, .00 for e3cn tax tear is tax le as inco e , tne same bein the value to h~. of such quarters and eals or the amount uat suf• ficient to s c r an apartment ri. t utilities co. • mensurate to his own porsonal and family ne ds and his own standard of 1 ing.

Upon the ot er hand, respond nt maint ins t t the total a ount of h quarters an s oiiatenc allowances is taxable as compensation fer petitioner' s servi ces to the em- ploye=·corpcration.

The basic la upon which respon ent' & def!• ciency assessments are preaicat d is found in c- tion 29 (a) uhich provides: C. 29.

oss !nco .e. • (a) en- ~~--~~~ 1--i~o_.n. - •Groo~ !nco e 1 to=- galns, ro its, an inco • eri • f.o ~ ri s, ~ag•s , o cop nsnti for personal service of whatever kin an in at ver o_ ... p id, o fro.~ vrofe s · o s , vocationa, trade , u ine&ae , co ,erce, sales, c a~alin s in prop rv ' hether real or per onal, rowil ou~ of t owners ,i o_, ze o.~. or inter sr, in such property; also f rom interests, en ~ , divi , s , securities, or the t~ n

C•

tions o any bu~inesa carrie o or ain or profit, o...

ains, profits, nd lnco, derive fro any ource wha eve . u Pursuant to ~ectiona 4 nci 3~ of th ational Internal evenue OQ& , th~ ~ecaetary of in ce upon 247 - - - Oi;;.' ISION - 6 . t . A.

SE • • 237

- 5 - recommendation of the Coll ctor of Internal e" venue, pr~nulgated evenue egulations 1 o. 2, oc• tion 41 of which plement d th afore- quoted codal provision and ~hich reads:

" ec. 41.

x x x.

h n living quarters are furnis,ed in addition to c ash salary, th rental value of such quarters should be reporte as income." However, ~he foregoing r gulati on should be read toge,her ith ect!on 2 (a) of Rev ue e ul - t i ona

o. V-8, which imple ents the statutory provi- sions aff cting the withholding of inco~e tax s on wages.

The pertinent portion of ~ho latter regula- tion read5 as followsa vee. 2 (a) In general x

x x

X

X

X

X

1 X

X

X

X

"x x x.

If a person re- ceive& as remuneration for services rendere a salory and in addition there- to living quarters or meals, the v iu• to such person of the quarters and eals o furnished shall be dded to the rem~ ­ n ration other ise pai for the purpo~e o determining the amount of wages ub- ject to ithhol in • I , howev r , livin quarters or m als are furnished to an employe or the convenience of the em- plorer, the value thereof n ed not be inc uded as w ges suoj ct to withholding. 11 The le al estion r lative to the taxability or non-taxability o e value o ~uarter and meals furnished to a mployee y his nployer co es to us ~t first ins~ance .

fhere ein 0 r spru- dential authority or pronounce ent on this questi on, we are constrained to loo t o A rican judicial de- ,, .

248 - -

DECISION -

~ . T . A . CASE NO. 237 e1sions an administrative interpretatio s treat• 1ng of this particular receipt. cons! ering that ection 29 ( a) of our Tax ode was lifted and adopted odily fro ~ec tion 22 (a) of the u. • evenue Act of 19 e.

hen the legislative history of a l aw such as ection 29 {a) of our ax Code shows it to e of erican origin, A erican prec - dents are in point in determini g its co struction. ( i tsui u san i ha v. Hon kong hanghai ank, 36 Ph:t· 27. )

The prevailing judicial opini on is to the ef- feet that gen ra ly t va ue to the ployea of living quart rs and eals f rnished in addi~ion to salary, constitut s inco.

su ject to ilx.

Howe r, where the quarters and ,eals ar furnish d for the convenience of the e ploy r , the ratable value of the sa e need not e ad ed to t e alary or cash compensation of the employe for inco tax pur- poses:] ( riggs & riggs v. u •• , Par. 72, 319 P-H Fed.

1~56; enaglia ena lia v.

ommissioner, 36 TA 838; Ellis Ellis v.

o miss~oner , 6 V 1~8;

Ha&e!

• ar ichael v. Co issioner , (1 48) 7 TC 278J .oulder & .. oulder v. om:nissioner ar. 72,442 · h Fed. 1956.)

To the sa e ... nor and effect is ection 29.22 ( a) 3 of u •• Treasury e ulation

o. lll (U •• !nco e Tax egulations) . he "convenience of the employer rule," aa qualifying the valu of quarters and meal& to non- ' ' 249 •

c. f •• NO. 237 • 7 - t axable ite l and th refore cxclu ible fr~ the t axable income of the employee, has een inter• preted thus:.

1 1 onvenience of the ployer' has Deen 9enerally hereLo ore inter- preted as 1 eanin~ not 1erely the re- quest , direction or pleasure of the employer but that the inherent nature of the e ploy ent require that the employe occupy premises supplied by the employer, in which the occ pation of th desiynated quarters becomes an inherent part of t he servi es perfor ed.

Under

such c~cu stances, the rental value of th quarters occupied is not included in ~h employee ' s taxable income.

How-

cv r . lf livin in th supplied quart rs is not an essential element of~e tax- pay r •s e.ployment. even thou h such occupadc t may bo requested by the em• ployer, and convenient to the employer, the rc,t'l valuo of the occupied quar- ers co .• ,es a part of the employee' s taxnble ·i:1co. e." { armichael vs. Com• issioner, supra.)

ased upon these JUdicial decisions and admi• ni&trati.ve regulations , and the factual evidence adduced during the hearing of this case, we find that the inherent nature of petitioner' s employment as president of the American International Under• writers of the Philipp~nes , Inc. does not require him to occupy the apartments supplied by his em- ployer •corporation.

hile petitioner, as such pre• aident, had ~o entert ain and in xact ntertained officials , guests and customers o his ployer, nevertheless , we do not see how his living in the supplied quarters could be an essen~ial ele ent of his employment.

He could have ent rtai d in hotels or other quarters rented out to the public without ,, 250 DEC!ti!O • • T.A. ~ " $E lO. 237 - 8 - renderin improper and inefficient the performance of his presidenti al duty of ntertaining. .oreover, entertal in his mployer ' s ofiicials, uuests and cust001ers is not t e predo, inant occupation of p - titioner a pr sident.

~e oeliove that it s ore for petitioner' s convenience than his employer ' s to dNell in the urnished apartnants. Consequ ntly, the rental and subsistence allowances giv n to h im as part of the co pensation for his employment and as such constituted taxa le income. The cases cited y petitioner are distinguish• able fro and inapplicable to the instant case pon th f ct tha petitioners h re·n 1orked und r con• di~ions wnich requi re tho., as part of their e • ployment and for t conv nicnce of t heir ployers , to be 01 du y oro or le s continuously in the pr - miaea of their emplo~.cnt . In the case at r , w do not find the sa~ .• e si uation. Petitioner argues , L addendu , ·that nas 1\lC h as there was at least a tacit approval by respo - dent' s pr decessor-in-office of t he d uction o rental an utility llo~ances , it ~oul d e unJUS~ and i e ita le if ~he u in as to the 'axa i l ity of t ese allo ances, w ich was made in 195~ , should be applied retro ctively to the tax years in ques- tion.

anting ar ucndo that respondent ' s predecessor opined that the rental and utility allowances were deductible !te s , such opinion could not bind this Court nor could i t control the operati on of our •;

a

DEC

IO

• C. T.A. CAS& • 237 in~om• tax la • And besid~s. the •construction of a atatuta by thoso administering it is not binding on th or o t heir successors if thereafter they become sati f i d t hat iff r t construction should be gi v n. • (A soci~tion of Cl r~cal Em• ploy••• v. rother hood of R. & • s. Clerks (OCA 7th) 85 2d 1 52, 109 A 345 cited in Hilado v.

Collector, G •• No. L-9408, Cctober 31. 1956. ) e a~ree however with petiti onex's view t hat the taxable !nco e 1& the ratable value to him of · the quarters furnished by his employ•r in accord with the regulations and tax jurisprudence cit~d above.

Fr

the uncontroverted evidence, we find that the quarters provided by petitioner' s e - ployer was the choice of the latter and that the apart..nt (consisting of a large sala, dining roo , 3 bedrooms, 2 bathrooms, kitchen and a large porch) waa large for petitioner' • family (himself and his wife only) and far beyond his requirements. Pet!• tiontr teatified t hat given his own choice, he would have provided or a leas expensive residence. Con• aiduing the aize of petitioner's family •nd the character of hi• employment and financial position, we believe that quarters with a aonthly rental'" coat of 400.00 (or t4, .oo annually) within the vic!• . nity of Manila would be rea•onably •ufficient for petitioner' s needs and would repre .. nt the aquiva• lent value to him of the quarters provided y his employer and which amount would constitute taxable income to petitioner.

1.. ~ . -~ 2 52

DECISIO

• T. A.

' E NO. 237 • 10 - In respect of the second ! ssu•, pet i t i oner asserts that his wife, t hough not a regular em• ployee o th American International Underwr iter f or t he Philippines , Inc. , ay be consider d as a pee l al agent or ployee of the latter corpor a ion an t herefore the expense for her t r avel could not be r egard d as part ot his t xa le income nor o his wi fe. It i the con rary cont ntion of respon- clent, t hat th travelling expens of

s. Hende.rso , f or med part of the allo ances ivan o pe itioner by his employer in consideration of his hi h po i · t1on and valua le services and therefore ax le as petitioner ' s inco • pon the findin that rs.

Henderson, at the behest of the chair n of th parent corporation o peti~ion r ' s e ployer, mad the trip to ew York in connection Jith the usinesa affairs of the I erican Int rnational Underwriters f or the Ph.!ippines, Inc. the same constituted an expense of the latt r for which no benefit as re- tained by p titioner.

P t tioner hexein ha~ not gained nor profi~e fro the travel allONance fur- nished "tO his wife.

And if grantin "th&'t the s e was inc ome of petitioner's wife , th fact that the same ount was incurred by her for tr vel in pur- •uance of the nature of t erv·ces render ed, she was entitled to the deduction thereof as trav 1 ex• penses.

Tho result ould be the sru e•-the incou would be offset by the deduction and does not affect 253

J

(, >

DSCISION •

c. r. • ,.,

~ E "· 237

- ll • the taxable net income.

It follows that he cannot be legally taxed therefore. On the basis of the it .. a admitted by peti• , tioner as taxable which we have earlier enumerated and on the items we have determined to be taxable, a r~omputation of the i~om• tax liability of pe- titioner for the ytara in question will 1how the following amounts a• refundable• ~

Rtfundtd

1948 3, 698. 24 4,426. 24 728.00 1949 3,092.90 3, 662. 23 569. 33 1950 1 , 729. 00 3,023.00 1,294.00 1951 1, 704.00 2,058. 00 3~.00 1952 1.944.00 4, 108.00

2. 164.00 TOTAL AMouNt TO BE REFUNDED • •5, 109. 33 HEREFOii, the decision on appeal is modified and respondent Collector of Internal Revenue ta hereby ~rdered to refund to petitioner Arthur Htnderaon the amount of 51109.33, with interest froa February 27, 1954, without pronounctmant aa to coats. 0 awERED.

anila, Philippines, June 26, 1957,

I COtCURa

I reserve ny vote.