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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.:

These are petitioner filed by the Collector of Internal Revenue (G.R. No. L-12954) and by Arthur Henderson (G.R. No. L-13049) under the provisions of section 18, Republic Act No. 1125, for review of a judgment dated 26 June 1957 and a resolution dated 28 September 1957 rendered and adopted by the Court of Tax Appeals in Case No. 237.

The spouses Artuhur Henderson and Marie B. Henderson (later referred to as the taxpayers) filed with the Bureau of Internal Revenue returns of annual net income for the years 1948 to 1952, inclusive, where the following net incomes, personal exemptions and amounts subject to tax appear:

1948:
	Net Income .......................................................	P29,573.79
	Less:Personal Exemption ..............................	2,500.00
	Amount subject to tax .......................................	P27,073.79
1949:
	Net Income .......................................................	P31,817.66
	Less:Personal Exemption ..............................	2,500.00
	Amount subject to tax .......................................	P29,317.66
1950:
	Net Income .......................................................	P34,815.74
	Less:Personal Exemption ..............................	3,000.00
	Amount subject to tax .......................................	P31,815.74
1951:
	Net Income ........................................................	P32,605.83
	Less:Personal Exemption ..............................	3,000.00
	Amount subject to tax .......................................	P29,605.83
1952:
	Net Income .......................................................	P36,780.11
	Less:Personal Exemption ..............................	3,000.00
	Amount subject to tax .......................................	P33,780.11

(Exhibits 1, 3, 5, 7, 9, A, F, J, N, R). In due time the taxpayers received from the Bureau of Internal Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and paid the amounts assessed as follows:

1948:
	14 May 1949, O.R. No. 52991, Exhibit B ....………..	P2,068.12
	12 September 1950, O.R. No. 160473, Exhibit B-1 .	2,068.11
	Total Paid .........................................................	P4,136.23
1949:
	13 May 1950, O.R. No. 232366, Exhibit G ...........…	P2,314.95
	15 September 1950, O.R. No. 247918, Exhibit G-1 .	2,314.94
	Total Paid .........................................................	P4,629.89
1950:
	27 April 1951, O.R. No. 323173, Exhibit K ...……….	P7,273.00
1951:
	Amount withheld from salary and paid by employer .	P5,780.40
	15 May 1952, O.R. No. 33250, Exhibit O .................	360.50
	15 August 1952, O.R. No. 383318, Exhibit O-1 ..…..	361.20
	Total Paid .........................................................	P6,502.10
1952:
	Amount withheld from salary and paid by employer .	P5,660.40
	18 May 1953, O.R. No. 438026, Exhibit T ..…………	1,160.30
	13 August 1953, O.R. No. 443483, Exhibit T-1 ...…..	1,160.30
	Total Paid .........................................................	P7,981.00

On 28 November 1953, after investigation and verification, the Bureay of Internal Revenue reassessed the taxpayers'income for the years 1948 to 1952, inclusive, as follows:

1948:
Net income per return ..................................………………………			P29,573.79
Add:
	Rent expense .........................................................……..		7,200.00
	Additional bonus for 1947 received May 13, 1948 .………		6,500.00
	Other income:
		Manager's residential expense (2/29/48 a/c/#4.51)	1,400.00
		Manager's residential expense (refer to 1948 P & L) ..	1,849.32
		Entrance fee — Marikina Gun & Country Club ..……..	200.00
Net income per investigation .........................................………...			P46,723.11
Less: Personal exemption ...............................................……….			2,500.00
Net taxable income ..........................................................………			P44,223.11
Tax due thereon ...............................................................………			P8,562.47
	Less: Amount of tax already paid per OR #52991 & 160473 ..………………………………………………………		4,136.23
Deficiency tax still due & assessable ............................			P4,426.24

1949:
Net income per return ..................................………………………			P31,817.66
Add: disallowances —
	Capital loss (no capital gain) ...................	P3,248.84
	Undeclared bonus ...................…………..	3,857.75
	Rental allowance from A.I.U. ...................	1,800.00
	Subsistence allowance from A.I.U. .……..	6,051.30	14,958.09
Net income per investigation .........................................………...			P46,775.75
Less: Personal exemption ...............................................………..			2,500.00
Amount of income subject to tax ..................................………….			43,275.75
Tax due thereon ...............................................................……….			P8,292.21
Less: tax already assessed & paid per OR Nos. 232366 & 247918			4,629.89
Deficiency tax due ............................................................……….			P3,662.23
(Should be) ......................................................................			3,662.32

1950:
Net income per return ..................................………………………		P34,815.74
Add:
	Rent, electricity, water allowances .......................………..	8,373.73
Net income per investigation .........................................………...		P43,189.47
Less: Personal exemption ...............................................………..		3,000.00
Net taxable income ..........................................................………..		P40,189.47
Tax due thereon ...............................................................……….		P10,296.00
Less: tax already paid per OR No. #323173		7,273.00
Deficiency tax due & assessable .................……………………..		P3,023.00

1951:
Net income per return ..................................………………………		P32,605.83
Add: house rental allowance from AIU		5,782.91
Net income per investigation .........................................………...		P83,388.74
Less: Personal exemption ...............................................………..		3,000.00
Amount of income subject to tax ..................................…………..		P35,388.74
Tax due thereon ...............................................................……….		P 8,560.00
Less: tax already assessed and paid per O.R. Nos. A33250 & 383318 .......................………………………………………		6,502.00
Deficiency tax due .................……………………………………….		P2,058.00

1952:
Net income per return ..................................………………………			P36,780.11
Add:
	Withholding tax paid by company .....................................		600.00
	Travelling allowances .......................................................		3,247.40
	Allowances for rent, telephone, water, electricity, etc. .....		7,044.67
Net income per investigation .........................................………...			P47,672.18
Less: Personal exemption ...............................................………..			3,000.00
Net taxable income ..................................…………………………			P44,672.18
Tax due thereon ...............................................................……….			P12,089.00
Less: Tax already withheld		P5,660.40
Tax already paid per O.R. Nos. #438026, 443484		2,320.60	7,981.00
Deficiency tax still due & collectible ...............................…………			P4,108.00

(Exhibits 2, 4, 6, 8, 10) and demanded payment of thedeficiency taxes on or before 28 February 1954 with respectto those due for the years 1948, 1949, 1950 and 1952and on or before 15 February 1954 with respect to thatdue for the year 1951 (Exhibits B-2, H, L, P, S).

In the foregoing assessments, the Bureau of InternalRevenue considered as part of their taxable income thetaxpayer-husband's allowances for rental, residential expenses,subsistence, water, electricity and telephone; bonuspaid to him; withholding tax and entrance fee to the Marikinagun and Country Bluc paid by his employer for hisaccount; and travelling allowance of his wife. On 26 and27 January 1954 the taxpayers asked for reconsiderationof the foregoing assessment (pp. 29, 31, BIR rec.) andon 11 Februayr 1954 and 28 February 1955 stated thegrounds and reasons in support of their request for reconsideration (pp. 36-38, 62-66, BIR rec.). The claimthat as regards the husband-taxpayer's allowances forrental and utilities such as water, electricity and telephone,he did not receive the money for said allowances, but thatthey lieved in the apartment furnished and paid for byhis employer for its convenience; that they had no choicebut live in the said apartment furnished by his employer,otherwise they would have lived in a less expensive one;that as regards his allowances for rental of P7,200 andresidential expenses of P1,400 and P1,849.32 in 1948, rentalof P1,800 and subsistence of P6,051.50 (the latter merelyconsisting of allowances for rent and utilities such as light,water, telephone, etc.) in 1949 rental, electricity and waterof P8,373.73 in 1950, rental of P5,782.91 in 1951 and rental,telephone, water, electricity, etc. of P7,044.67 in 1952, onlythe amount of P3,900 for each year, which is the amountthey would have spent for rental of an apartment includingutilities, should be taxed; that as regards the amount ofP200 representing entrance fee to the Marikina Gun andCountry Club paid for him by his employer in 1948, thesame should not be considered as part of their income forit was an expense of his employer and his membershiptherein was merely incidental to his duties of increasingand sustaining the business of his employer; and that asregards the wife-taxpayer's travelling allowance of P3,247.40 in 1952, it should not be considered as part of theirincome because she merely accompanied him in his businesstrip to New York as his secretary and, at the behestof her husband's employer, to study and look into the detailsof the plans and decorations of the building intendedto be constructed byn his employer in its property at DeweyBoulevard. On 15 and 27 February 1954, the taxpayerspaid the deficiency taxes assessed under Official ReceiptsNos. 451841, 451842, 451843, 451748 and 451844 (ExhibitsC, I, M, Q, and Y). After hearing conducted by theConference Staff of the Bureau of Internal Revenue on5 October 1954 (pp. 74-85, BIR rec.), on 27 May 1955the Staff recommended to the Collector of Internal Revenuethat the assessments made on 28 November 1953 (Exhibits2, 4, 6, 8, 10) be sustained except that the amountof P200 as entrance fee to the Marikina Gun and CountryClub paid for the husband-taxpayer's account by his employerin 1948 should not be considered as part of thetaxpayers' taxable income for that year (pp. 95-107, BIRrec.). On 14 July 1955, in line with the recommendationof the Conference Staff, the Collector of Internal Revenuedenied the taxpayers' request for reconsideration, exceptas regards the assessment of their income tax due for theyear 1948, which was modified as follows:

Net income per return		P29,573.79
Add: Rent expense		7,200.00
	Additional bonus for 1947 received on May 13, 1948	6,500.00
	Manager's residential expense (2/29/48 a/c #4.41)	1,400.00
	Manager's residential expense (1948 profit and loss)	1,849.32
Net income per investigation		P46,523.11
Less: Personal exemption		2,500.00
Net taxable income		P44,023.11
Tax due thereon		P 8,506.47
Less; Amount already paid		4,136.23
Deficiency tax still due		P 4,370.24

and demanded payment of the deficiency taxes of P4,370.24for 1948, P3,662.23 for 1949, P3,023 for 1950, P2,058 for1951 and P4,108 for 1952, 5% surcharge and 1% monthlyinterest thereon from 1 March 1954 to the date of paymentand P80 as administrative penalty for late payment,to the City Treasurer of Manila not later than 31 July1955 (Exhibit 14). On 30 January 1956 the taxpayersagain sought a reconsideration of the denial of their requestfor reconsideration and offered to settle the case ona more equitable basis by increasing the amount of thetaxable portion of the husband-taxpayer's allowances forrental, etc. from P3,000 yearly to P4,800 yearly, which "isthe value to the employee of the benefits he derived therefrommeasured by what he had saved on account thereof'in the ordinary course of his life ... for which hewould have spent in any case'". The taxpayers also reiteratedtheir previous stand regarding the transportationallowance of the wife-taxpayer of P3,247.40 in 1952 andrequested the refund of the amounts of P3,477.18, P569.33,P1,294, P354 and P2,164, or a total of P7,858.51, (Exhibit Z). On 10 February 1956 the taxpayers again requestedthe Collector of Internal Revenue to refund to them theamounts allegedly paid in excess as income taxes for theyears 1948 to 1952, inclusive (Exhibit Z-1). The Collectorof Internal Revenue did not take any action on the taxpayers'request for refund.

On 15 February 1956 the taxpayers filed in the Courtof Tax Appeals a petition to review the decision of theCollector of Internal Revenue (C.T.A. Case No. 237). Afterhearing, on 26 June 1957 the Court rendered judgmentholding "that the inherent nature of petitioner's(the husband-taxpayer) employment as president of theAmerican International Underwriters as president of theAmerican International Underwriters of the Philippines,Inc. does not require him to occupy the apartments suppliedby his employer-corporation;" that, however, onlythe amount of P4,800 annually, the ratable value to him ofthe quarters furnished constitutes a part of taxable income;that since the taxpayers did not receive any benefitout of the P3,247.40 traveling expense allowance grantedin 1952 to the wife-taxpayer and that she merely undertookthe trip abroad at the behest of her husband's employer,the same could not be considered as income; andthat even if it were considered as such, still it could not besubject to tax because it was deductible as travel expense;and ordering the Collector of Internal Revenue to refundto the taxpayers the amount of P5,109.33 with interestfrom 27 February 1954, without pronouncement as tocosts. The taxpayers filed a motion for reconsiderationclaiming that the amount of P5,986.61 is the amount refundableto them because the amounts of P1,400 and P1,849.32 as manager's residential expenses in 1948 shouldnot be included in their taxable net income for the reasonthat they are of the same nature as the rentals for theapartment, they being mainly expenses for utilities aslight, water and telephone in the apartment furnished bythe husbant-taxpayer's employer. The Collector of InternalRevenue filed an opposition to their motion for reconsideration.He also filed a separate motion for reconsiderationof the decision claiming that his assessmentunder review was correct and should have been affirmed.The taxpayers filed an opposition to this motion for reconsiderationof the Collector of Internal Revenue; thelatter, a reply thereto. On 28 September 1957 the Courtdenied both motions for reconsideration. On 7 October1957 the Collector of Internal Revenue filed a notice ofappeal in the Court of Tax Appeals and on 21 October1957, within the extension of time previously granted bythis Court, a petition for review (G.R. No. L-12954). On29 October 1957 the taxpayers filed a notice of appealin the Court of Tax Appeals and a petition for review inthis Court (G.R. No. L-13049).

The Collector of Internal Revenue had assigned the followingerrors allegedly committed by the Court of TaxAppeals:

I. The Court of Tax Appeals erred in finding that theherein respondent did not have any choice in the selection ofthe living quarters occupied by him.

II. The Court of Tax Appeals erred in not consideringthe fact that respondent is not a minor company official butthe President of his employer-corporation, in the appreciationof respondent's alleged lack of choice in the matter of the selectionof the quarters occupied by him.

III. The Court of Tax Appeals erred in giving full weightand credence to respondent's allegation, a self-serving and unsupported declaration that the ratable value to him of the living quarters and subsistence allowance was only P400.00 a month.

IV. The Court of Tax Appeals erred in holding that only the ratable value of P4,800.00 per annum, or P400.00 a month constitutes income to respondent.

V. The Court of Tax Appeals erred in arbitrarily fixing the amount of P4,800.00 per annum, or P400.00 a month as the only amount taxable aganst respondent during the five tax years in question.

VI. The Court of Tax Appeals erred in not finding that travelling allowance in the amount of P3,247.40 constituted income to respondent and, therefore, subject to the income tax.

VII. The Court of Tax Appeals erred in ordering the refund of the sum of P5,109.33 with interest from February 17, 1954. (G.R. No. L-12954.)

The taxpayers have assigned the following errors allegedly committed by the Court of Tax Appeals:

I. The Court of Tax Appeals erred in its computation of the 1948 income tax and consequently in the amount that should be refunded for that year.

II. The Court of Tax Appeals erred in denying our motion for reconsideration as contained in its resolution dated September 28, 1957. (G.R. No. L-13049.)

The Government's appeal:

The Collector of Internal Revenue raises questions of fact. He claims that the evidence is not sufficient to support the findings and conclusion of the Court of Tax Appeals that the quarters occupied by the taxpayers were not of their choice but that of the husband-taxpayer's employer; that it did not take into consideration the fact that the husband-taxpayer is not a mere minor company official, but the highest executive of his employer-corporation; and that the wife-taxpayer's trip abroad in 1952 was not, as found by the Court, a business but a vacation trip. In Collector of Internal Revenue vs. Aznar, 56, Off. Gaz. 2386, this Court held that in petitions for review under section 18, Republic Act No. 1125, it may review the findings of fact of the Court of Tax Appeals.

The determination of the main issue in the case requires a review of the evidence. Are the allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of taxable income? Section 29, Commonwealth Act No. 466, National Internal Revenue Code, provides:

"Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of 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 dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. (Emphasis ours.)

The Court of Tax Appeals found that the husband-taxpayer "is the president of the American International Underwriters for the Philippines, Inc., a domestic corporation engaged in insurance business;" that the taxpayers "entertained officials, guests and customers of his employer-corporation, in apartments furnished by the latter and successively occupied by him as president thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V. Starr, chairman of the parent corporation of the American International Underwriters for the Philippines, Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey Boulevardby petitioner's employer-corporatio, the construction of a building thereon, the drawing of prospectus and plans for said building, and other related matters."

Arthur H. Henderson testified that he is the President of American International Underwriters for the Philippines, Inc., which representa a group of American insurance companies engagad in the business of general insurance except life insurance; that he receives a basic annual salary of P30,000 and allowance for house rental and utilities like light, water, telephone, etc.; that he and his wife are childless and are the only two in the family; that during the years 1948 to 1952, they lived in apartments chosen by his employer; that from 1948 to the early part of 1950, they lived at the Embassy Apartments on Dakota Street, Manila, where they had a large sala, three bedrooms, dining room, two bathrooms, kitchen and a large porch, and from the early part of 1950 to 1952, they lived at the Rosaria Apartments on the same street where they had a kitchen, sala, dining room two bedrooms and bathroom; that despite the fact that they were the only two in the family, they had to live in apartments of the size beyond their personal needs because as president of the corporation, he and his wife had to entertain and put up houseguests; that during all those years of 1948 to 1952, inclusive, they entertained and put up houseguests of his company's officials, guests and customers such as the president of C, V. Starr & Company, Inc., who spent four weeks in his apartment, Thomas Cocklin, a lawyer from Washington, D.C., and Manuel Elizalde, a stockholder of AIUPI; that were he not required by his employer to live in those apartments furnished to him, he and his wife would have chosen an apartment only large enough for them and spend from P300 to P400 monthly for rental; that of the allowances granted to him, only the amount of P4,800 annually, the maximum they would have spent for rental, should be considered as taxable income and the excess treated as expense of the company; and that the trip to New York undertaken by his wife in 1952, for which she was granted by his employer-corporation travelling expense allowance of P3,247.40, was made at the behest of his employer to assist its architect in the preparation of the plans for a proposed building in Manila and procurement of supplies and materials for its use, hence the said amount should not be considered as part of taxable income. In support of his claim, letters written by his wife while in New York concerning the proposed building, inquiring about the progress made in the acquisition of the lot, and informing him of the wishes of Mr. C. V. Starr, chairman of the board of directors of the parent-corporation (Exhibits U-1, U-1-A, V, V-1 and W) and a letter written by the witness to Mr. C. V. Starr concerning the proposed building (Exhibits X, X-1) were presented in evidence.

Mrs. Marie Henderson testified that for almost three years, she and her husband gave parties every Friday night at their apartment for about 18 to 20 people; that their guests were officials of her husband's employer-corporation and other corporations; that during those parties movies for the entertainment of the guests were shown after dinner; that they also entertained during luncheons and breakfasts; that these involved and necessitated the services of additional servants; and that in 1952 she was asked by Mr. C. V. Starr to come to New York to take up problems concerning the proposed building and entertainment because her husband could not make the trip himself, and because "the woman of the family is closer to those problems."

The evidence presented at the hearing of the case substantially supports the findings of the Court of Tax Appeals. The taxpayers are childless and are the only two in the family. The quarters, therefore, that they occupied at the Embassy Apartments consisting of a large sala, three bedrooms, dining room, two bathrooms, kitchen and a large porch, and at the Rosaria Apartments consisting of a kitchen, sala dining room, two bedrooms and a bathroom, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in amore spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the husbnad-taxpayer's employer-corporation were not his predominand occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the employer-corporation to the creditors (Exhibit AA to DDD, inclusive; pp. 104, 170-193, t.s.n.). Neverthelss, 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 annually, the reasonable amount they would have spent for house 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.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specificatins of a proposed building, is also supported by the evidence. The parts of the letters written by the wife-taxpayer to her husband while in New York and the letter written by the husband-taxpayer to Mr. C. V. Starr support the said findings (Exhibits U-2, V-1, W-1, X). No part of the allowance for travellking expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York wsa but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation.

The taxpayers' appeal:

The taxpayers claim that the Court of Tax Appeals erred in considering the amounts of P1,400 and P1,849.32, or a total of P3,249.32, for "manager's residential expense" in 1948 as taxable income despite the fact "that they were of the same nature as the rentals for the apartment, they being expenses for utilities, such as light, water and telephone necessarily incidental to the apartment furnished to him by his employer."

Mrs. Crescencia Perez Ramos, an examiner of the Bureau of Internal Revenue who examined the books of accound of the American International Underwriters for the Philippines, Inc., testified that he total amount of P3,249.32 was reflected in its books as "living expenses of Mr. and Mrs. Arthur Henderson in the quarters they occupied in 1948;" and that "the amount of P1,400 was included as manager's residential expense while the amount of P1,849.32 was entered as profit and loss account."

Buenaventura Loberiza, acting head of the accouting department of the American International Underwriters for the Philippines, Inc., testified that rentals, utilities, water, telephone and electric bills of executives of the corporation were entered in the books of account as "subsistence allowances and expenses;" that there was a separate account for salaries and wages of employees and officers; and that expenses for rentals and other utilities were not charged to salary accounts.

The taxpayers' claim is supported by the evidence. The total amount of P3,249.32 "for manager's residential expense" in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax.

The computation made by the taxpayers is correct. Adding to the amount of P29,573.79, their net income per return, the amount of P6,500, the bonus received in 1948, and P4,800, the taxable ratable value of the allowances, brings up their gross income to P40,873.79. Deducting therefrom the amount of P2,500 for personal exemption, the amount of P38,373.79 is the amount subject to income tax. The income tax due on this amount is P6,957.19 only. Deducting the amount of income tax due, P6,957.19, from the amount already paid, P8,562.47 (Exhibits B, B-1, C), the amount of P1,605.28 is the amount refundable to the taxpayers. Add this amount to P563.33, P1,294.00, P354.00 and P2,154.00, refundable to the taxpayers for 1949, 1950, 1951 and 1952 and the total is P5,986.61.

The judgment under review is modified as above indicated. The Collector of Internal Revenue is ordered to refund to the taxpayers the sum of P5,986.61, without pronouncement as to costs.

Bengzon, Actg. C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes and Dizon, JJ., concur.

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