[41] SMITH v.
CIR (Recio) husband and wife, for sums spent by Lillie Smith in employing
December 7, 1939 | Judge Opper | Deductions; Personal v. Business Expenses nursemaids [nanny] to care for Sps. Smith’s young child, since both the
wife and husband are employed.
3. Sps. Smith ask the Court to apply the "but for" test.
PETITIONER: HENRY C. AND LILLIE M. WRIGHT SMITH
a. “But for” test [this explanation wasn’t included in the case, but
RESPONDENTS: COMMISSIONER OF INTERNAL REVENUE
I’m adding it for context] → The test asks, "but for the existence of
X, would Y have occurred?" If the answer is yes, then factor X is
SUMMARY: Respondent CIR determined a deficiency in Sps. Smith’s 1937
an actual cause of result Y.
income tax due to the disallowance of a deduction claimed by the Spouses for
4. Sps. Smith propose that:
sums spent by Lillie Smith in employing a nursemaid to take care of her child at
a. BUT FOR the nurses, Lillie Smith could not leave her child;
home while both Spouses work. Sps. Smith ask the Court to apply the “but for”
b. BUT FOR the freedom to be able to leave her child, Lillie Smith
test and contend that BUT FOR the freedom secured by hiring a nursemaid,
could not pursue her gainful labors;
Lillie Smith would have no income; thus, nothing to tax. THUS, the fees paid to
c. BUT FOR the freedom secured by hiring a nursemaid, Lillie
such nursemaid must be considered an “ordinary or usual expense directly
Smith would have no income; thus, nothing to tax. THUS, the
accompanying business pursuits”/necessary business expenses, which the law
fees paid to such nursemaid must be considered an “ordinary
considered as deductible from the taxable gross income. WoN sums spent in
or usual expense directly accompanying business
employing nursemaids retained to care for infant children may be considered an
pursuits”/necessary business expenses, which the law
ordinary and necessary business expense. - NO, because the care of children,
considered as deductible from the taxable gross income.
like similar aspects of family and household life, is a PERSONAL
CONCERN. The Court noted that if they accepted the contention of Sps. Smith,
ISSUE:
other personal expenses such as medical expenses, clothing, housing, and food
1. WoN sums spent in employing nursemaids retained to care for infant
which enable a person to work would be considered as a “necessary business
children may be considered an ordinary and necessary business expense,
expense,” when they are in fact, PERSONAL EXPENSES. Payments made for
making such deductible from Sps. Smith’s taxable income. - NO, because
the services of a nursemaid which enable a wife to work is considered as an
the care of children, like similar aspects of family and household life, is
expense which, though they may in some indirect and tenuous degree relate to
a PERSONAL CONCERN.
the circumstances of a profitable occupation, are nevertheless personal in their
nature. Since only ordinary and necessary business expenses are deductible from
RULING: Decision will be entered for the respondent (CIR).
taxable gross income, such payments to the nursemaid are NOT DEDUCTIBLE.
RATIO:
DOCTRINE: It may for practical purposes be said to constitute a distinction
Issue 1: NOT DEDUCTIBLE.
between those activities which, as a matter of common acceptance and universal
1. We are told that the working wife is a new phenomenon.
experience, are "ordinary" or usual as the direct accompaniment of business
a. This is relied on to account for the apparent inconsistency that the
pursuits, on the one hand; and those which, though they may in some indirect
expenses in issue are now a commonplace, yet have not been the
and tenuous degree relate to the circumstances of a profitable occupation, are
subject of legislation, ruling, or adjudicated controversy.
nevertheless personal in their nature, of a character applicable to human beings
b. But if that is true it becomes all the more necessary to apply
generally, and which exist on that plane regardless of the occupation, though not
accepted principles to the novel facts.
necessarily of the station in life, of the individuals concerned.
2. If the Court follows Sps. Smith’s contentions, other expenses such as the fee
to the doctor, but for whose healing service, the earner of the family income
FACTS: could not leave his sickbed; the cost of the laborer's clothing, for how can
1. Context of this case: This is a 1939 case. The concept of wives working the world proceed about its business unclothed; the very home which gives
instead of staying home was a relatively new idea. ALSO, THIS IS A us shelter and rest and the food which provides energy, might all by an
DECISION BY THE BOARD OF TAX APPEALS, NOT THE SC!!! extension of the same proposition be construed as necessary to the operation
2. Commissioner of Internal Revenue (CIR) determined a deficiency of of business and to the creation of income. HOWEVER, these expenses are
$23.62 in Sps. Smith’s 1937 income tax. This was due to the disallowance the very essence of “personal expenses” - the deductibility of which is
of a deduction claimed by Sps. Smith (Henry and Lillie Smith), who are expressly DENIED.
3. Thus, the Court is not prepared to say that the care of children, like
similar aspects of family and household life, is not a “personal”
concern. The wife's services as custodian of the home and protector of its
children are ordinarily rendered without monetary compensation.
a. There results no taxable income from the performance of this
service and the correlative expenditure is personal and not
susceptible of deduction.
4. Here, Lillie Smith has chosen to employ others to discharge her domestic
function and the services she performs are rendered outside the home. They
are a source of actual income and taxable as such.
a. But that does not deprive the same work performed by others of its
personal character nor furnish a reason why its cost should be
treated as an offset in the guise of a deductible item.
5. The Court is not unmindful that, as Sps. Smith suggest, certain
disbursements normally personal may become deductible by reason of
their intimate connection with an occupation carried on for profit.
a. These deductible disbursements include entertainment, travelling
expenses, and the cost of an actor’s wardrobe.
6. The line is not always an easy one to draw nor the test simple to apply. But
we think its principle is clear.
7. It may for practical purposes be said to constitute a distinction between
those activities which, as a matter of common acceptance and universal
experience, are:
a. (1) "ordinary" or usual as the direct accompaniment of
business pursuits; [NOTE: THIS IS CONSIDERED
DEDUCTIBLE INCOME UNDER PHILIPPINE LAW!!!] and
(2) those which, though they may in some indirect and tenuous
degree relate to the circumstances of a profitable occupation,
are nevertheless personal in their nature, of a character
applicable to human beings generally, and which exist on that
plane regardless of the occupation, though not necessarily of the
station in life, of the individuals concerned.
b. In the latter category, we think, include payments made to
servants or others occupied in looking to the personal wants of
their employers. And we include in this group nursemaids
retained to care for infant children.
