CTA Case No. 237 (Decision)

EPU ~I C Oil' THR l'lllLIPPINWI t.OUH.l' OF 1 APPEAL.' MA II-A TKJR ~��.,.~"""� Petitioner, C.T.A. CAE NO. 237 Respondent. X� � � � � � � � � � � D CI I This is a petitio seeking the ~nd of or the er it to any uture ax liabili ty of peti- tioner the sum of 7, 858. 51 allegedly paid in exces& o� tne income tax due during the tax yeers 1948 to ).952. The petitioner, rthur Hend rson , !a the prealdent of the American International Under� writera for the Philippines, Inc. , a domestic cor- poration engaged in insurance business. For the tax yeara 1948 to 1952, inclusive, petitioner filed his inc~� cax returns on the baaia o which e pai the corresponding income taxes. ~ubsequently, on July 14, 1955, respondent determined against pe- t! toner the following ef!ciency income tax. 1948 � � � � � � � � � � t 4, 3l0.24 1949 - � - - - - - - - - 3, 662. 23 1950 - - - - - - � - - - 1951 - � - � - - � - - - 3,02 .oo 2 ,0~ .00 1952 - - - - - - - - � - 4,108.00 241 r/

DEi IJION � � T. � ~SE � 237 Income Items determined by {esoondent as raxaole Conceded raxaule y retitioner W!! 7, 20 � 6, .oo Rental Expen e ---� 1,40 .co onus , 1947 re- ceived 1948 --- --- 1 , 49 . 2 anagers resi den� tial c pense --�-- ~anagers residen- tial expense ��-�� ill2. Capital loss no~ 1, .oo ~ . 24 8 . 8 4 deductible) --���� 6, 51 . 50 3, 857.75 Bonus -������������ dental fro 1 A. I .u. - ubsistence llow- ance ----�-------- ent, electricity, . ~73. 73 water allo~~~u'- e -- 12.21 House rental al� 5 , 782 .~1 fiJO .OO 3, 247. 40 lo anc --�--��-- - 7 , (,44 . (, 7 1952 Income taxe paid T~roa.ve-l-a--ll-o-w-~a-n-c-e-s---- Allowance f or rent- However , prior o the a ove inal -cer~J.na� tion, pet ition r a pai d t he aforesaid deficiencies on February 27 , 1Jo4, under eparate official re� ceipts but , on the sii o the defic ienc ies 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 furnis hed 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 ct ion with t e purchase o a lot in Dewey oulevar y peLi~ioner � s e ployer- eorporation , the cons uuction 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 re corded 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 , whic h the latter paid ana now seeks to regain as refund or tax credit. The issues involved in this c aee are as fol� lowac 1. Whether or not tne rentals of the quarLers furnist o ~itloner y his employer-ccrporation are taxable as peti� .'.". io. r t :.�1.. c o....c ; a:1d 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

D�ErC.I�SI c. . .. � � 21 -- E . ilative to the first tssue , p titioner con� ten tiat hu so-c alled c ntal and subs i 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 allowanc es is taxable as c ompensation fer petitioner ' s servi c es to the em- ploye=�corpcration. The basic la upon which respon ent ' & def!� cienc y assessments are preaic at d is found in c- tion 29 (a) uhich provides: to=- C. 29 . oss !nco .e. � (a) en- ~~--~~~1--i~o_.n. - �Groo~ !nco e 1 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 , voc ationa, 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 suc h 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 fore going 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 1X 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-taxabil ity 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 quest i on, we are constrained to loo t o A rican judic ial 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 fr o ~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 judic ial 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, const itut 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 suc h pre� aident , had ~o entert ain and in xact ntertained offic ials , guests and customer s o his ployer , nevertheless , we do not see how his living in the suppl ied 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 president i al duty of ntertaining. .oreover, entertal in his mployer ' s ofiicials , uuests and c ust001ers 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 g iv n to h im as part of the co pensation for his employment and as suc h 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 requ i 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 petit i 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 Int ernational Underwr iter f or t he Philippines , Inc. , ay be cons ider d as apee l al agent or ployee of the latter corpor a ion an t herefore the expense for her t r avel c ould 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 c orporation 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 re sult ould be the sru e�-the incou would be offset by the deduction and does not affect J 253

(, > cD.SrC.ISI�ON,., � "� 237 ~E - 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 1952 1.944.00 3~. 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.