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TAXATION I (Income Tax) Finals reviewer


Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
A. Introduction
Fisher v. Trinidad. Income, for tax purposes, is the amount of money coming to a person or corporation within a specified time, whether as payment
for services, interests, or profits from investment. It imports something distinct from principal or capital
1. History of the Philippine Income Tax Law
Madrigal v. Rafferty. Income means all wealth which flows into the taxpayer other than as a mere return on capital. It includes the forms of income
specifically described as gains derived from the sale or other disposition of capital
2. Meaning of Income
Eisner v. Macomber. Income is the gain derived capital, from labor, or both combined, provided it is understood to include profit gained through a
sale or conversion of capital assets
3. Classification of Income Taxpayers
4. General Principles of Income Taxation
NIRC, 23. General Principles of Income Taxation in the Philippines Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on
income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an
overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources
within the Philippines.
B. Tax on Individuals
Requisites for income to be taxable:
a. There must be gain gain need not be in cash; may be in any form, like property or services : it is sufficient that it may be appraised in terms of
money
b. The gain must be realized or received a mere increase in the value of property is not income but merely unrealized increase in capital; the
increase in value can oonly be taxed when a disposition of property has occurred
c. The gain must not be excluded by law from taxation
1. Kinds of individual taxpayers
NIRC, 24. Income Tax Rates
(A) Rates of income Tax on Individual Citizen and Individual Resident Alien of the Philippines
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this code, other than income subject under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the
Philippines residing therein;
(b) On the taxable income defined in Section 31 of this code, other than income subject under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is
residing outside of the Philippines including overseas contract workers referred to in Subsection (C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D)
of this section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of
the Philippines
(2) Rates of Tax on Taxable Income of Individuals The tax shall be computed in accordance with and at the rates established in the
following schedule:
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000
Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000
Over P500,000 P125,000 + 32% of the excess over P500,000
For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall compute separately their individual
income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as
income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on
their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax.
(B) Rate of Tax on Certain Passive Income
(1) Interests, Royalties, Prizes and Other Winnings A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements, royalties except on books, as well as other literary works and musical compositions, which shall be imposed a
final tax of ten percent (10%); prizes (except prizes amounting to ten thousand pesos [10,000] or less which shall be subject to tax
under Subsection [A] of Section 24); and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from
sources within the Philippines; Provided, however, That interest income received by an individual taxpayer (except non-resident
individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 %) of such interest income: Provided, further, That interest income from long-term deposit or
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TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate
pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%; and
Less than three (3) years 20%
(2) Cash and/or Property Dividends A final tax at the following rates shall be imposed upon the cash and/or property dividends actually
or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund
companies and regional operating headquarters of multinational companies, or the share of an individual in the net income after tax of
an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8) beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.
Provided, however, that the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming
part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to
this tax.
(C) Capital Gains from Sales of Stock not Traded in the Stock Exchange The provisions of Section 39(B) notwithstanding, a final tax at the rates
prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, excepts shares sold, or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
(D) Capital Gains from Sale of Real Property
(1) In General The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current
fair market value as determined in accordance with Section 6(E), of this Code, whichever is higher, is hereby imposed upon capital
gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippine, classified
as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts:
Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24(A) or
under this Subsection, at the option of the taxpayer;
(2) Exception The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been
realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring
or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt
from the capital gains tax imposed under this Subsection: Provided, further, That the historical cost or adjusted basis of the real
property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer with thirty (3) days from the date or sale or disposition through a
prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For
this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which
the unutilized amount bears to the gross selling price in order to determine the taxable portion and the and the tax prescribed under
paragraph (1) of this Subsection shall be imposed thereon.
NIRC, 25. Tax on Nonresident Alien Individual
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines
(1) In General A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a nonresident alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.
(2) Cash and/or Property Dividend from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional
Operating Headquarters of Multinational Company, or Share in the Distributable Net Income of a Partnership (except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association, Interests, Royalties, Prizes and Other Winnings Cash
and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or
from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net
income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a
member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to ten thousand pesos [10,000] or less
which shall be subject to tax under Subsection [B][1] of Section 24); and other winnings (except Philippine Charity Sweepstakes and
Lotto winnings), shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, That royalties
on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the
total amount thereof: Provided, further, that cinematographic films and similar works shall be subject to the tax provided under Section
28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally,
That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on
the entire income shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:
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TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Four (4) years to less than five (5) years 5%
Three (3) years to less than four (4) years 12%
Less than three (3) years 20%
(3) Capital Gains Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the
local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) and Section 24.
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines There shall be levied, collected and paid for each taxable
year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or
business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax
equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in
the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed
under Subsections (C) and (D) of Section 24.
(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies There shall be
levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area
headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, that the same tax treatment shall apply
to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this
Chapter, the term multinational companies means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units There shall be levied, collected and paid for each taxable year upon the gross income
received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and allowances, from such offshore banking units, a tax equal to fifteen
percent (15%) of such gross income: Provided, however, that the same tax treatment shall apply to Filipinos employed and occupying the same
position as those of aliens employed by these offshore banking units
(E) Alien Individual Employed by petroleum Service Contractor or Subcontractor An alien individual who is a permanent resident of a foreign
country who is employed and assigned in the Philippines by a foreign service contractor or be a foreign service subcontractor engaged in
petroleum operations in the Philippines shall be liable to a tax of fifteen (15%) of the salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same
tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof
shall be subject to the pertinent income, as the case may be, imposed under this Code.

2. Definition of each kind of taxpayer


NIRC, 22. Definitions When used in this Title:
(A) The term person means an individual, a trust, estate, or corporation
(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en
participacion) associations, or insurance companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the Government. General professional
partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
(C) The term domestic, when applied to a corporation, means created or organized in the Philippines or under its laws.
(D) The term foreign, when applied to a corporation, means a corporation which is not domestic.
(E) The term nonresident citizen means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives
in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or
to return to and reside in the Philippines as the case may be for purposes of this Section.
(F) The term resident alien means an individual whose residence is within the Philippines and who is not a citizen thereof.
(G) The term nonresident alien means an individual whose residence is not within the Philippines and who is not a citizen thereof.
(H) The term resident foreign corporation applies to a foreign corporation engaged in trade or business within the Philippines
(I) The term nonresident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines
(J) The term fiduciary means a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity
for any person
(K) The term withholding agent means any person required to deduct and withhold any tax under the provisions of Section 57.
(L) The term shares of stock shall include stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of
participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as
corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates
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TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(M) The term shareholder shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock, as well as a
holder of a unit of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint
ventures taxable as corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and a holder of a
mutual fund certificate, a member in an association, joint-stock company, or insurance company
(N) The term taxpayer means any person subject to tax imposed by this Title.
(O) The terms including and includes, when used in a definition contained in this Title, shall not be deemed to exclude other things otherwise
within the meaning of the term defined
(P) The term taxable year means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net
income is computed in this Title. Taxable year includes, in the case of a return made for a fractional part of a year under the provisions of
this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the period for
which such return is made.
(Q) The term fiscal year means an accounting period of twelve (12) months ending on the last day of the month other than December.
(R) The terms paid or incurred and paid or accrued shall be construed to the method of accounting upon the basis of which the net income is
computed under this Title.
(S) The term trade or business includes the performance of the functions of a public office.
(T) The term securities means shares of stock in a corporation and rights to subscribe for or to receive such shares. The term includes bonds,
debentures, notes or certificates, or other evidence of indebtedness, issued by any corporation, including those issued by a government or
political subdivision thereof, with interest coupons or in registered form.
(U) The term dealer in securities means a merchant of stocks or securities, whether an individual, partnership or corporation, with an
established place of business, regularly engaged in the purchase of securities and the resale thereof to customers; that is, one who, as a
merchant, buys securities and re-sells them to customers with a view to the gains and profits that may be derived therefrom.
(V) The term bank means every banking institution, as defined in Section 2 of Republic Act No. 337, as amended, otherwise known as the
General Banking Act. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank, or a specialized government
bank.
(W) The term non-bank fiduciary intermediary means a financial intermediary, as defined in Section 2(D)(c) of Republic Act No. 337, as
amended, otherwise known as the General Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking
activities.
(X) The term quasi-banking activities means borrowing funds from twenty (20) or more personal or corporate lenders at any one time,
through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or
through the issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of
relending or purchasing receivables and other similar obligations: Provided, however, That commercial, industrial and other non-financial
companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their
agents or dealers, shall not be considered as performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from
twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to
bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between
the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments
with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as
deposit substitute debt instruments.
(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in
Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as
'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1).
The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the
sale or exchange of property which is not a capital asset.
(AA) The term 'rank and file employees' shall mean all employees who are holding neither managerial nor supervisory position as defined under
existing provisions of the Labor Code of the Philippines, as amended.
(BB) The term 'mutual fund company' shall mean an open-end and close-end investment company as defined under the Investment Company Act.
(CC) The term 'trade, business or profession' shall not include performance of services by the taxpayer as an employee.
(DD) The term 'regional or area headquarters' shall mean a branch established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
(EE) The term 'regional operating headquarters' shall mean a branch established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development services and product development; technical support and
maintenance; data processing and communications; and business development.
(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of time deposit or investment in the form of savings, common
or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less
than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by
nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other
denominations as may be prescribed by the BSP.
(GG) The term statutory minimum wage earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by
the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE)
5
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the
public sector with compensation income of not more than the statutory minimum wage in the agricultural sector where he/she is assigned.
a. Resident citizens and resident aliens
RR-2, Sec. 5. Definition. A "non-resident alien individual" means an individual
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the
income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has
no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment,
and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to
return to his domicile abroad when the purpose for which he came has been consummated or abandoned.
RR-2, Sec. 6. Loss of residence by alien. An alien who has acquired residence in the Philippines retains his status as a resident until he
abandons the same and actually departs from the Philippines. An intention to change his residence does not change his status as a resident
alien to that of a nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a resident for the remainder of
his stay in the Philippines.
RR 2-98 [April 17,1998].
b. Non-resident citizens
RR 1-79.
RR 9-99 [April 19, 1999].
c. Non-resident aliens engaged in business in the Philippines
d. Senior Citizen Law, RA 7432, as amended by RA 9257 and RA 9994.
Carlos Superdrug v. DSWD, supra from Fundamentals.
3. Kinds of Income and Income Tax of Individuals
a. Income subject to ordinary tax
b. Income subject to final income tax interests, dividends, royalties, awards, capital gains, on sales of shares, realty
RR 10-98 [August 25, 1998].
RR 8-98 [August 25, 1998].
c. Compensation Income
4. Personal exemptions
NIRC, 35. Allowance of Personal Exemption for Individual Taxpayer
(A) In general For purposes of determining the tax provided in Section 24(A) of this title, there shall be allowed a basic personal exemption
amounting to fifty thousand pesos (P50,000) for each individual taxpayer.
In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal
exemption.
(B) Additional exemption for dependents There shall be allowed an additional exemption of twenty-five thousand pesos (P25,000) for each
dependent not exceeding four (4).
The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only be the spouse who has custody of the child or
children:
Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional
exemptions herein allowed.
For purposes of this Subsection, a dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living
with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such
dependent, regardless of age, is incapable of self-support because of mental or physical defect.
(C) Change of Status If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer
may claim the corresponding additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his
dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes
gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents dies,
or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.
(D) Personal exemption allowable to nonresident alien individual A nonresident alien individual engaged in trade, business or in the exercise of
a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax
law in the country of which he is a subject or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount
fixed in this Section as exemption for citizens or residents of the Philippines: Provided, That said nonresident alien should file a true and
accurate return of the total income received by him from all sources in the Philippines, as required by this Title.
5. Premium payments on health and/or hospitalization insurance
NIRC, 34(m). Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - the amount of premiums not to exceed
Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided,
That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in
the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.

6. Estates and Trusts
NIRC, 60. Imposition of Tax.
6
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust,
including:
(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is
to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan
of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or
both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with
such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than
for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to
him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment.
(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the
same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and such proportion of said tax shall be assessed and collected from
each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.
NIRC, 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of
an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for
the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian
of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing
the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not
be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of
income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an
additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be
allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the
beneficiaries.
NIRC, 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of
Twenty thousand pesos (P20,000) from the income of the estate or trust.
NIRC, 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the
grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the
income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income
therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.
NIRC, 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of
the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of
the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the
trust shall be included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor, either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of the part of the income in question.
NIRC, 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and all persons or corporations, acting in any
fiduciary capacity, shall render, in duplicate, a return of the income of the person, trust or estate for whom or which they act, and be subject to all
the provisions of this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty thousand pesos (P20,000)
or over during the taxable year. Such fiduciary or person filing the return for him or it, shall take oath that he has sufficient knowledge of the affairs
of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and
be subject to all the provisions of this Title which apply to individuals: Provided, That a return made by or for one or two or more joint fiduciaries
filed in the province where such fiduciaries reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.
NIRC, 66. Fiduciaries Indemnified Against Claims for Taxes Paid. - Trustees, executors, administrators and other fiduciaries are indemnified against
the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this Title, and
they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or
other fiduciaries.
RR-2, 207. Estates and trusts. "Fiduciary" is a term which applies to all persons or corporations that occupy positions of peculiar confidence
towards others, such as trustees, executors, or administrators; and a fiduciary, for income tax purposes, is any person or corporation that holds in
trust an estate of another person or persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be created.
7
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by and will be taxed
to the respective beneficiaries, but the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary
income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. Three exceptions to
this general rule are found in the law: (1) in the case of revocable trust (Section 59); (2) in the case of a trust the income of which, in whole or in
part, may be held or distributed for the benefit of the grantor (Section 60); and (3) in the case of a trust administered in a foreign country [Section
57(c)]. In the first case, the income from such part of the trust estate title to which may be revested in the grantor should be included in the
grantor's return. In the second case, part of the income of the trust, which may be held or distributed for the benefit of the grantor, should be
included in the grantor's return. In the third case, the trustee is not entitled to the deductions mentioned in subsections (a) and (b) of Section 57
and the net income of the trust undiminished by any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however,
the income included in the return of the trustees is not to be included in computing the income of the beneficiaries
RR-2, 208. Consolidation of incomes of two or more trusts. Section 56(b)(2) expressly requires the consolidation of the income of two or more
trusts where the creator of the trust in each instance is the same person and the beneficiary in each instance is the same. The tax due on the
consolidated income will be collected from the trustees in proportion to the net income of the of the respective trusts. (See Section 215 of these
regulations.)
RR-2, 209. Estates and trusts taxed to fiduciary. In the case of a decedent's estate the settlement of which is the object of testamentary or
intestate proceedings, the fiduciary, executor, or administrator is required to file an annual return for the estate up to the final settlement thereof.
In the same manner, the fiduciary is required to file a yearly return covering the income of a trust, whether created by will or deed, for
accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise. In both cases the income of the
estate or trust is taxed to the fiduciary. Where under the terms of a will or deed, the trustee, may in his discretion, distribute the income or
accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact
that an ultimate beneficiary may be a person exempt from tax.
RR-2, 210. Estate and trust taxed to beneficiaries. In the case of (a) a trust the income of which is to be distributed annually or regularly; (b) an
estate of a decedent the settlement of which is not the object of judicial testamentary or intestate proceedings; and (c) properties held under a co-
ownership or tenancy in common, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his
distributive share of the net income of the trust, estate, or co-ownership. In the case of trusts which are in whole or in part subject to revocation by
the grantor, or which are for the benefit of the grantor, the income of the trust is to be included in computing the net income of the grantor.
RR-2, 211. Decedent's estate administration. The "period of administration or settlement of the estate" is the period required by the executor or
administrator to perform the ordinary duties pertaining to administration, in particular, the collection of assets and the payment of debts and
legacies. Estates during the period of administration have but one beneficiary and that beneficiary is the estate.
No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent, even though it
may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is
realized. Where, however, prior to the settlement of the estate, the executor or administrator sells property of a decedent's estate for more than the
appraised value placed upon it at the death of the decedent, the excess is income, taxable to the estate. Where property is sold after the settlement
of the estate by the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he inherited the property from the
decedent, he is taxable individually on any profit derived. An allowance paid a widow or heir out of the corpus of the estate is not deductible from
gross income.
RR-2, 212. Liability for tax on estate or trusts. Liability for payment of the tax attaches to the person of an executor or administrator up to and
after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining
whether or not such obligations existed. Liability for the tax also follows the estate itself, and when the estate has been distributed, the heirs,
devisees, legatees, and distributors may be required to discharge the amount of the tax due and unpaid, to the extent of and in proportion to any
share received. The same consideration apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary,
the net income on which the tax is paid is free from tax when distributed to the beneficiaries.
RR-2, 213. Exemption allowed to estate or trusts. An estate or a trust is allowed a personal exemption of P1,800. Each beneficiary is entitled to
but one personal exemption, no matter from how many trusts he may receive income.
a. General rule on taxability: fiduciary or beneficiary
b. Personal exemption allowed
c. Decedents estate administration
Revocable Trusts
d. Income for benefit of grantor
C. Tax on Corporations
1. Definition of Corporations
NIRC, 22, supra
CIR v BTCo. When the Tax Code includes "partnerships" among the entities subject to the tax on corporations, it must refer to organizations which
are not necessarily partnerships in the technical sense of the term, and that furthermore, said law defined the term "corporation" as including
partnerships no matter how created or organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on
corporations"; that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and
"associations", none of which has a legal personality independent of that of its members.
Oa v CIR. It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of
the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners,
but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the
heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to
be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National
Internal Revenue Code. || as already observed earlier, the income derived from inherited properties may be considered as individual income of the
respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares
8
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered
as the part of the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.
BIR Ruling 317-92 [Oct 28, 1992].
Obillos v CIR. To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the
dictum that the power to tax involves the power to destroy. That eventuality should be obviated. As testified by Jose Obillos, Jr., they had no such
intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the
lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then
they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-
ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.
2. Classification of corporations and the tax rates
a. In general
NIRC, 27. Rates of Income Tax on Domestic Corporations
(A) In General Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived during each taxable year from all sources within the Philippines by every corporation, as defined in Section 22(B) of
the Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to
the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon recommendation of the Secretary of Finance, may, effective January 1, 2000, allow
corporations the option to be taxed at fifteen (15%) on gross income as defined herein, after the following conditions have been
satisfied
(1) A tax effort ratio of twenty percent (20%) of the Gross National Product (GNP);
(2) A ration of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of the Gross National Product (GNP);
(4) A 0.9 percent (0.9%) ration of the Consolidated Public Sector Financial Position (CPSFP) to GNP
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during
which the corporation is qualified under the scheme.
For purposes of this Section, the term gross income derived from business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold. Cost of goods sold shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For trading or merchandising concern, cost of goods sold shall include the invoice cost of goods sold, plus import duties, freight
in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, cost of goods manufactured and sold shall include all costs of production of finished goods, such
as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring
the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, gross income means gross receipts less sales returns, allowances and
discounts.
(B) Proprietary Educational Institutions and Hospitals Proprietary educational institutions and hospitals which are nonprofit shall pay a
tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income
from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, the term unrelated trade, business or activity means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose
or function. A proprietary educational institution is any private school maintained and administered by private individuals or groups
with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission of Higher
Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
(C) Government-owned or Controlled Corporations, Agencies or Instrumentalities The provisions of existing special or general laws to the
contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the
Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC),
and the Philippine Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in a similar business, industry, or activity.
(D) Rate of Tax on Certain Passive Incomes
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar
Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however,
That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be
imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of through the stock exchange:
9
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Not over P100,000. 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the
Philippines, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance,
upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks; Provided, however, that
interest income from foreign currency loans granted by such depository banks under said expanded foreign system to residents
other than offshore banking units in the Philippines or other depository banks under the expanded system, shall be subject to a
final tax at the rate of ten percent (10%)
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the
expanded system shall be exempt from income tax.
(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject
to tax.
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby
imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market
value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.
(E) Minimum Corporate Income Tax on Domestic Corporations
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when the minimum income tax is greater than
the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three
(3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to
suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules
and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the
term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties,
freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred
to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include
interest expense.
NIRC, 28. Rates of Income Tax on Foreign Corporations
(A) Tax on Resident Foreign Corporations
(1) In general Except as otherwise provided in this Code, a corporation organized, authorized or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 2009 the rate of income tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to
the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on
gross income under the same conditions, as provided in Section 27(A).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross
income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this Subsection.
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2
1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the
place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated,
10
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from
the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.
(4) Offshore Banking units The provisions of any law to the contrary notwithstanding, income derived by offshore banking units
authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency transactions with nonresidents, other offshore banking
units, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP)
to transact business with offshore banking units shall be exempt from all taxes except net income from such transactions as may be
specified by the Secretary of Finance, upon recommendation of the Monetary Board, which shall be subject to the regular income
tax payable by banks. Provided, however, That any interest income derived from foreign currency loans granted to residents other
than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP
to transact with offshore banking units, shall be subject only to a final tax at the rate of ten percent (10%).
Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be
exempt from income tax.
(5) Tax on Branch Profits Remittances Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which
shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except
those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same
manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration
for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual
gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business
in the Philippines.
(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.
(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements
and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident
foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(b) Income derived under the Expanded Foreign Currency Deposit System Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the
Philippines, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks; Provided,
however, that interest income from foreign currency loans granted by such depository banks under said expanded foreign
system to residents other than offshore banking units in the Philippines or other depository banks under the expanded
system, shall be subject to a final tax at the rate of ten percent (10%)
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax
under this Code shall not be subject to tax under this Title.
(B) Tax on Nonresident Foreign Corporation
(1) In General Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business within the
Philippines, shall pay a tax equal to thirty-five percent (35%) of the gross income received during the taxable year from all sources
within the Philippines, such as interests, dividends, rents royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fixed determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains
subject to tax under subparagraph 5(c); Provided, That effective January 1, 2009 the rate of income tax shall be thirty percent
(30%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax
of twenty-five percent (25%) of its gross income from all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject
to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a
nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of
gross rentals or fees.
11
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(5) Tax on Certain incomes Received by a Nonresident Foreign corporation
(a) Interest on foreign loans A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash
and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section
57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall
allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent
(35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph; Provided, That effective January 1,
2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the
regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:
Not over P100,000.. 5%
On any amount in excess of P100,000 10%
(1) Domestic
(2) Resident
(3) Non-resident
b. Special corporations
(1) Private educational institutions and non-profit hospitals
Sec 4[3] Article XIV, 1987 Constitution.
(2) Non-resident cinematographic film owner, lessor or distributor
(3) International carriers
CIR v. BOAC, supra.
United Airlines v. CIR.
(4) Non-resident owner of vessels
(5) Non-resident lessor of aircraft, machineries and other equipment
(6) Foreign currency deposit system/Offshore banking units
(7) Petroleum service contractor and sub-contractor
PD 1354.
PD 87.
(8) Enterprise Registered under Bases Conversion and Development Act of 1992 and Philippine Economic Act of 1995.
Clarification of Coverage of 5% preferential rate by RR 20-2002 [Oct. 14, 2002] as amended by RR 2-2005 [Feb 8, 2005] amending RR 1-
95 and RR 16-99.
John Hay Peoples Alternative Coalition v. Victor Lim, BCDA. First, there is absolutely nothing in R.A. No. 7227 which can be
considered a grant of tax exemption in favor of public respondent BCDA. Rather, the beneficiaries of the tax exemptions and other
incentives in Section 12 (the only provision in R.A. No. 7227 which expressly grants tax exemptions) are clearly the business enterprises
located within the Subic SEZ. To be sure, nowhere in any of respondents' pleadings is it pretended that the legislature exempted the
BCDA from taxation in order to accomplish its mandate. On the contrary, the alleged tax exemptions and financial incentives are plainly
asserted to be in favor of private enterprises doing business in the John Hay SEZ. Second, as noted above, the liberal construction of tax
exemptions in favor of the government is premised on their resulting only in a reduction in infra-governmental fund transfers, but not
government revenue. Evidently, this rationale does not apply, whether by analogy or otherwise, in favor of private business enterprises,
such as respondent-in-intervention CJHDC. Consequently, respondents' arguments for a liberal construction of R.A. 7227 in favor of tax
exemptions and incentives to business enterprises in the John Hay SEZ must necessarily fail.
CORA v Ruben Torres, supra.
(9) RA 9400 gives tax privileges to Clark & John Hay; RA 9399 grants Tax Amnesty to locators of Clark & John Hay
3. Kinds of Taxes
a. Income subject to corporate income tax
CIR v. Procter and Gamble. P&G failed to meet certain conditions necessary in order that the dividends received by the non-resident parent
company in the US may be subject to the preferential 15%tax instead of the 35%, among which are: (a) to show the actual amount credited by
the US government against the IT due from P&G USA; (2) to present the ITR of its mother company for the years the dividends were received;
and, (3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in the Philippines
CIR v. Procter and Gamble, MR. P&G entitle to refund/tax credit/ The ordinary 35% tax rate applicable to dividend remittances to
nonresident corporate stockholders of a Philippine corporation goes down to 15% if the country of domicile of the foreign corporation shall
allow" such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. Such tax credit for taxes deemed paid in the Philippines must, as a minimum, reach an
amount equivalent to 20%. The NIRC does not require that the US tax law deem the parent corporation to have paid the 20% points of
dividend tax waived by the Philippines. It only requires that the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent
to the 20% points waived by the Phils. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a provision which
specifies when a particular (reduced) tax rate is legally applicable.
CIR v. Wander Phils. As a matter of fact, Switzerland does not even impose any income tax on dividends received by Swiss corporations
domiciled in foreign countries. Thus, it should be deemed that the condition in Section 24(b)(1) requiring at least 20% tax be credited by the
foreign government is fully satisfied. Wander is entitled to the tax refund. || Domestic corporations which are wholly-owned by foreign
corporations become the withholding agents of the government is not by choice but by compulsion under Sec. 53(b) of the NIRC. It is a device
to insure the collection by the Philippine government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside
the taxing jurisdiction of the court.
b. Income subject to final income tax
12
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
4. Branch Profit Remittance Tax
RMC 55-80.
NIRC, Sec. 28[A][5]. Tax on Branch Profits Remittances Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%)
which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in
Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the Philippines.
5. Minimum Corporate Income Tax
NIRC, 27[e]. Minimum Corporate Income Tax on Domestic Corporations
(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding
taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the
imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and
regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a
meritorious case.
(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross
income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all
business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw
materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and
cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, 'cost of services' shall include interest expense.
NIRC, 28[A][2]. Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross
income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable
under paragraph (1) of this Subsection.
RR 9-98 [Aug. 25, 1998].
Exceptions to application of MCIT
o MCIT shall apply only to domestic corporations subject to the normal corporate income tax
o No MCIT on proprietary educational institutions and hospitals [taxed at 10%]
o No MCIT on depository banks under the expanded FCD System
o No MCIT on firms taxed under a special income tax regime
6. Improperly Accumulated Earnings Tax special penalty tax imposed on corporations for improper or unreasonable accumulations of profits or
surplus
- Not in lieu of, but in addition to, the regular corporate income tax
- Purpose: to prevent individual taxpayers from avoiding income tax by employing the corporate form for the accumulation of taxable income
NIRC, 29.
(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated
taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of
the improperly accumulated taxable income.
(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax.
(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or
availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax.
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of
a purpose to avoid the tax upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by the clear preponderance of evidence, shall prove to the contrary.
13
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable
income' adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on
improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the
improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period
of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably
anticipated needs of the business.
RR 2-2001 [Feb 12, 2001].
Cyanamid Phils v. CA. The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed. ||
If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate, and the taxpayer
contested such a determination, the burden of proving the determination wrong, together with the corresponding burden of first going forward
with evidence, is on the taxpayer. This applies even if the corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits.27
In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it must be shown that the
controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared subsequently, which are mere afterthoughts.
Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable year. In the instant case, petitioner did
not establish, by clear and convincing evidence, that such accumulation of profit was for the immediate needs of the business.
7. Fringe benefits tax
NIRC, 33.
(A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and
thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when
the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be
paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven
percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That
fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates
imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value
of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C),
(D), and (E) of Section 25.
(B) Fringe Benefit defined.- For purposes of this Section, the term 'fringe benefit' means any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the
following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar
organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are
necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade,
business or profession of the employer.

= %
68

General Rule: The amount of taxable fringe benefit and the fringe benefit tax shall constitute allowable deductions from gross income of the employer
14
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
D. Exempt Entities
1. Partnership/joint ventures formed for the purpose of undertaking construction projects or engaging in energy operations
NIRC, 26. Tax Liability of Members of General Professional Partnerships A general professional partnership as such shall not be subject to the
income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same
manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
Professional partnership of real estate brokers exempt from income tax BIR Ruling 294-22 [July 5, 1988]
2. Co-ownership
Obillos v. CIR, supra.
3. NIRC, 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by
them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated
for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating
under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life,
sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their
dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or
for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer
or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the
benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished
by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
Sinco v. CIR. It is indeed too sweeping if not unfair to conclude that part of the income of the Appellee as an institution inured to the benefit of one
of its stockholders simply because part of the income was carried in its books as accumulated salaries of its president and teacher. Much less can it
be said that the payments made by the college to the Community Publishers, Inc. redounded to the personal benefit of Sinco simply because he is
one of its stockholders. The fact is that, as it has been established, the Appellee is a non-profit institution and since its organization it has never
distributed any dividend or profit to its stockholders. Of course, part of its income went to the payment of its teachers or professors and to the other
expenses of the college incident to an educational institution but none of the income has ever been channeled to the benefit of any individual
stockholder. The authorities are clear to the effect that whatever payment is made to those who work for a school or college as a remuneration for
their services is not considered as distribution of profit as would make the school one conducted for profit.
4. Under special laws
RP-US Income Tax Treaty [sgd on October 1,1976; effective January 1, 1983]
Omnibus Investment Code income tax holiday incentive, as amended by EO 226
Special Economic Zone Act of 1995 [RA 7916]
Bases Conversion and Development Act [RA 7227, as amended]
Jewelry Industry Development Act of 1998 (RA 8502), as implemented by RR 1-99 [January 6, 1999]
Cooperative Code of the Philippines (RA 6983, as implemented by RR 20-2001, November 12, 2001)
RA 9178, Barangay Micro Business Enterprises (BMBEs), implemented by DO 17-04, April 20, 2004.
E. Inclusions and exclusions from Gross Income
NIRC, 32. Gross Income
(A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not
limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
15
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(11) Partner's distributive share from the net income of the general professional partnership.
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum
or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included
in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon
surrender of the contract.
(3) Gifts, Bequests, and Devises. The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such
property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in
gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such
injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the
Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether
individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at
the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or
employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made
by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and
principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of
the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or
employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of
the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other
similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by
the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and
employees.
(7) Miscellaneous Items.
i. Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by
foreign governments.
ii. Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.
iii. Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.
iv. Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations.
v. 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however,
That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated
August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No.
28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos
(P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.
vi. GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.
vii. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.
viii. Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund
company as defined in Section 22 (BB) of this Code.
RR-2, 39. What gross income includes. Gross income includes, in general, compensation for personal and professional services, business income,
profits from sales of and dealings in property, interests, rents, dividends, and gains, profits, and income derived from any source whatever, unless
exempt from tax by law. In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include
16
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
profit gained through a sale or conversion of capital assets. Profit of citizens, resident aliens, or domestic corporations derived from sales in foreign
commerce must be included in their gross income. Income may be in the form of cash or of property.
For the treatment of dividends for purposes of the tax, see Sections 250 to 256 of these regulations. For the treatment of capital gains, see Sections
132 to 135 of these regulations.
RR-2, 40. Compensation for personal services. Where no determination of compensation is had until the completion of the services, the amount
received is ordinarily income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which
received, if the return is rendered on a receipts and disbursements basis. Commissions paid salesman, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, and pensions or retiring allowances paid by private persons or by the Government of
the United States or of the Philippines (except pensions exempt by law from tax) are income to the recipients; as are also marriage fees, baptismal
offerings, sums paid for saying masses for the dead, and other contributions received by a clergyman, evangelists, or religious worker for services
rendered. However, so-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and are not taxable.
RR-2, 41. Compensation paid other than in cash. Where services are paid for with something other than money, the fair market value of the thing
taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary,
such price will be presumed to be the fair value of the compensation received. Compensation paid an employee of a corporation in its stock is to be
treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters are furnished in addition to cash
salary, the rental value of such quarters should be reported as income.
RR-2, 42. Compensation paid in promissory notes. Promissory notes or other evidence of indebtedness received in payment for services, and not
merely as security for such payment, constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded
as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at that
time. Thus, if it appears that such a note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the
amount of its face value less discount computed at the prevailing rate for such transactions.
If the payment due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so
much thereof as represents recovery for the discount originally deducted.
RR-2, 43. Gross income from business. In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales, less
the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income,
subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods
sold.
RR-2, 44. Long term contracts. Income from long-term contracts is taxable for the period in which the income is determined, such determination
depending upon the nature and terms of the particular contract. As used herein the term "long-term" contracts means building, installation, or
construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in par from such contracts may, as to such
income, prepare their returns upon the following bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the
return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under
contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being
taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract
but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for
any year or years, the Commissioner of Internal Revenue may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent
practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from
gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and
supplies charged to the work under the contract but remaining on hand at the time of the completion.
Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such
method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method
of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and
used in connection with the method of accounting formerly employed by him, should accompany his return.
RR-2, 45. Gross income of farmers. A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is
used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale
of live stock and produce which were raised during the taxable year or prior years, (2) the profit from the sale of any live stock or other items which
were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased is to be
ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that in the case of the sale of animals purchased as
draft or work animals, or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales prices over the
amount representing the difference between the cost and the depreciation theretofore sustained and allowed as a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are ascertained by
adding to the inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock products, and
miscellaneous receipts for hire of teams, machinery, and the like, during the year, and deducting from this sum the inventory value of live stock and
products on hand at the beginning of the year and the cost of live stock and products purchased during the year. In such cases all live stock raised or
purchased for sale shall be included in the inventory at their proper valuation determined in accordance with the method authorized and adopted for the
purpose. Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may be included in the inventory, instead of being treated as
capital assets subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any live stock included in an
inventory their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory.
In every case of the sale of machinery, farm equipment, or other capital assets (which are not to be included in an inventory if one is used to
determine profits) any excess over the cost thereof less the amount of depreciation theretofore sustained and allowed as a deduction in computing net
income, shall be included as gross income. Where farm produce is exchanged for merchandise, groceries, or the like, the market value of the article
received in exchange is to be included in gross income. Rents received in crop shares shall be returned as of the year in which the crop shares are
reduced to money or a money equivalent. Proceeds of insurance, such as fire and typhoon insurance on growing crops, should be included in gross
income to the amount received in cash or its equivalent for the crop injured or destroyed. If a farmer is engaged in producing crops which take more than
a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such
cases the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized.
17
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
As herein used the term "farm" embrace the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms, also
plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for
gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a farm for recreation or pleasure, the result of which
is a continual loss from year to year, is not regarded as a farmer.
RR-2, 46. Sale of patents and copyrights. A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom
by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1,
1913, should be ascertained in accordance with the provisions of section 136 of these regulations. The profit or loss thus ascertained should be increased
or decreased, as the case may be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1, 1913, or since the date
of acquisition if subsequent thereto.
RR-2, 47. Sale of goodwill. Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in
which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific
payment was not made for goodwill acquired after March 1, 1913, there can be no deductible loss with respect thereto, but gain may be realized from the
sale of goodwill built up through expenditures which have been currently deducted. It is immaterial that goodwill may never have been carried on the
books as an asset but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the goodwill sold.
RR-2, 48. Annuities and insurance policies. Annuities paid by religious, charitable, and educational corporations under an annuity contract are
subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the
contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other
sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross
income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, such as the so-called "dividends" of a mutual insurance company, which may be credited against the current premium, are not subject
to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends
and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporation at source.
RR-2, 49. Improvements by lessees. When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and
such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the
following bases;
(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or
improvements subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease
and report as income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or
control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the
lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount
already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the
premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the
lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of
such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the
buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to
the extent that such loss was not compensated for by insurance.
RR-2, 50. Forgiveness of indebtedness. The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital
transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the
debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the
latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend.
RR-2, 51. When income is to be reported. Gains, profits, and income are to be included in the gross income for the taxable year in which they are
received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a
person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is
realized in that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for
patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless,
which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were
charged off.
RR-2, 52. Income constructively received. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by
him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt
in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is
not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its
employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation
does not constitute receipt.
RR-2, 53. Examples of constructive receipt. When interest coupons have matured and are payable, but have not been cashed, such interest payment
though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year
during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons
are income for the year in which paid. The distributive share of the profits of a partner in a general co-partnership duly registered is regarded as
received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never
enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount
credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has taxable status as income
for the year of the credit. When the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount
of any share in excess of the aggregate amount paid in by the shareholder is income for the year of maturity of the share
RR-2, 54. Creation of corporate sinking fund. If a corporation in order solely to secure payment of its bonds or other indebtedness, places property in
trust, or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to
18
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is
income of the corporation and shall be included as such in its annual return.
RR-2, 55. Acquisition or disposition by a corporation of its own capital stock. Whether the acquisition or disposition by a corporation of share of its
own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts
and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither
taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same
manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale
of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been
made in any other property. Any gain derived from such transaction is subject to tax, and any loss sustained is allowable as deduction where permitted
by the provisions of Title II.
RR-2, 56. Contributions by shareholders. Where a corporation requires additional funds for conducting its business and obtains such needed money
through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account,
will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances
are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and
will be treated as an addition to and as a part of the operating capital of the company.
RR-2, 57. Sale and retirement of corporate bonds. (1) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or
loss. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price or face value, the excess of the
purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any
of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for
the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or
amortized over the life of the bond. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price
minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium
already returned as income (or over the face value plus any amount of premiums not yet returned as income) is a deductible expenses for the taxable
year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already
returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of
premium not yet returned as income) over the purchase price is gain or income for the taxable year.
(3) (a) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over
the life of the bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of
discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value
minus any amount of discount not yet deducted), is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any
of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of
discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable
year.
RR-2, 58. Income of corporation from leased property. Where a corporation has leased its property in consideration that the lessee shall pay in lieu of
other rental an amount equivalent to a certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding indebtedness,
together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation
as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The
fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for
which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or
shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and
the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns.
RR-2, 59. Gross income of a corporation in liquidation. When a corporation is dissolved, its affairs are usually wound up by a receiver or trustee in
dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustee stands in the
stead of the corporation for such purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining
the gain or loss.
RR-2, 60. Gross income of foreign corporations. The gross income of a foreign corporation subject to tax consists of its gross income from sources
within the Philippines. Gross income from sources within the Philippines, as applied to foreign corporations, shall include interest received on bonds,
notes, or other interest-bearing obligations issued by residents, corporate or otherwise, as well as income derived from dividends on the capital stock or
from the net earnings of domestic or resident foreign corporations, joint stock companies, associations, or insurance companies, dividends from other
foreign corporations to the extent provided in Section 37 of the Code, and likewise income from rentals and royalties from all sources within the
Philippines.Definition of Gross Income
1. Exclusions from Gross Income
NIRC, 61, supra.
NIRC, 62, supra
NIRC, 63, supra
NIRC, 64, supra.
RA 4917.
RA 7641 An act granting retirement benefits to private sector employees in absence of qualified plan
2. Exclusion of 13th month pay
RA 7822, January 1994 Inventors and Inventions Incentives Act of the Philippines
RR 2-95.
RMC 36-94.
F. Items of Gross Income
1. Compensation for personal services
a. In money
b. In kind
19
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
i. convenience-of-the-employer rule
Henderson v. CIR. In a case where the allowances for rental and utilities granted by the employer corporation exceeded the
personal needs of the taxpayer, it has been held that the latter was entitled only to a ratable value of the allowances and only the
reasonable amount should be subject to income tax and the rest considered as expenses of the corporation, it appearing that no part
of the allowances redounded to his personal benefit or was retained by him.
ii. RR 2-98, as amended and RR 3-98.
G. Interest Income
1. Taxable
2. Non-taxable
3. Imputable interest on inter-company loans/advances
NIRC, 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization,
trade or business.
Filinvest Devt Corp v. CIR.
CIR v. Filinvest.
H. Income Under Lease Agreements
RR-2, 49. Improvements by lessees. When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and
such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the
following bases;
(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or
improvements subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease
and report as income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or
control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the
lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount
already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the
premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the
lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of
such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the
buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to
the extent that such loss was not compensated for by insurance.
1. Rent
2. Obligations of lessor to third parties to assume and paid by lessee
3. Advance rental
4. Leasehold improvements. Options to report income for right of reversion of improvements to lessor
a. Option 1 report fair market value upon completion
b. Option 2 report over remaining life of lease depreciated value after expiration of lease period
I. Dividend Income
NIRC, 73. Distribution of dividends or Assets by Corporations.
(A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or in other property.
Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be.
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation
cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the
stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits.
(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a
corporation shall be deemed to have been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual
income of the distributee for the year in which received.
(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is
subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually
or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually
distributed or not.
RR-2, 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the ordinary course of
business, even though extraordinary in amount, made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account
(cuentas en participacion), association, or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1,
1913.
Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation, upon amalgamation
with the other funds of the corporation, such income loses its identity and when distributed to shareholders, is taxable to the same extent as other
dividend.
A taxable distribution made by a corporation to individual stockholders or members shall be included is the gross income of the distributees when
the cash of other property is unqualifiedly made subject to their demand. Dividends, in cash or other property received by an individual, are subject to
tax in his hands in the same manner another income.
20
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Dividends, whether in cash or other property, received by a domestic or resident foreign corporation from a domestic corporation are taxable only
to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation,
whether resident or nonresident, are taxable to the extent that they constitute income from sources within the Philippines, as provided in Section 37 (a)
(2) (b) of the Code. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. (For definition of the different
classes of corporations, see Section 84 of the Code).
RR-2, 251. Dividends paid in property. Dividends paid in securities or other property (other than its own stock), in which the earnings of a
corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of such dividends includible for purposes of the tax on corporations are specified in Section
24 of the Code. (See also Section 250 of these regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the stock
distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation the stock of which is distributed
as a dividend. Where a corporation declares a dividend payable in a stock of another corporation, setting aside the stock to be so distributed and
notifying the stockholders of its action, the income arising to the recipients of such stock is its market value at the time the dividend becomes payable.
Scrip dividends are subject to tax in the year in which the warrants are issued.
RR-2, 252. Stock dividends. A stock dividend which represents the transfer of surplus to capital account is not subject to income tax. However a
dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact that the officers or directors of the corporation (as
defined in Section 84) choose to call such distribution as a stock dividend. The distinction between a stock dividend which does not, and one which does,
constitute income taxable to the shareholder is the distinction between a stock dividend which works no change in the corporate entity, the same
interest in the same corporation being represented after the distribution by more shares of precisely the same character, and a stock dividend where
there either has been a change of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the
shareholders after the distribution is essentially different from his former interests. A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock holdings represented. A stock dividend does not constitute income if the new shares confer no
different rights or interests than did the old the new certificates plus the old representing the same proportionate interest in the net assets of the
corporation as did the old.
RR-2, 253. Sale of stock received as dividends. Stock issued by a corporation, as a dividend, does not constitute taxable income to a stockholder in
such corporation, but gain may be derived or loss sustained by the stockholder, whether individual or corporate, from the sale of such stock, which gain
or loss will be treated as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.) The amount of gain derived or loss sustained
from the sale of such stock, or from the sale of the stack with respect to which it is issued, shall be determined in accordance with the following rules:
(a) Where the stock issued as dividend is all or substantially the same character or preference as the stock upon which the stock dividend is paid, the
cost of each share (or when acquired prior to March 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair
market value) of the old shares of stock divided by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock
dividend is paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of such date) of the old shares of stock shall be
divided between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class of stock, old and new, at
the time the new shares of stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each
share of stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share belongs divided by the
number of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots
can. not be determined, any sale of the original stock, will be charged to the earliest purchases of such stock, and any sale of dividend stock issued
with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of
the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock
issued with respect to such stock can not be identified as having been issued with respect to any particular lot of such stock, then any sale of such
dividend stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the stock
dividend chargeable to such stock.
RR-2, 254. Declaration and subsequent redemption of a stock dividend. A true stock dividend is not subject to tax on its receipt in the hands of the
recipient. Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to cancel or redeem its stock at such time and in such manner
as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in
redemption or cancellation of the stocks shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation
since March 1, 1913.
RR-2, 255. Sources of distribution. For the purpose of income taxation every distribution made by a corporation is made out of earnings or profits to
the extent thereof and from the most recently accumulated earnings or profits. In determining the source of a distribution, consideration should be given
first, to the earnings or profits of the taxable year; second, to the earnings or profits accumulated since February 28, 1913, only in the case where, and to
the extent that, the distribution made during the taxable year are not regarded as out of the earnings or profits of the taxable year and all the earnings or
profits accumulated since February 28, 1913, have been distributed; and, fourth, to sources other than earnings or profits only after the earnings or
profits have been distributed.
RR-2, 256. Distribution in liquidation. In all cases where a corporation (as defined in Section 84) distributes all of its property or assets in complete
liquidation or dissolution, the gain realized from the transaction by the stockholder, whether individual or corporate, is taxable to the extent recognized
in Section 34(b) of the Code. For this purpose, the term "complete liquidation" includes any one of a series of distributions made by a corporation in
complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation under which the transfer of all the assets under
liquidation is to be complete within a reasonable time from the date of the first distribution, usually not to exceed one year from the time of such first
distribution. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, the loss in the transaction is
deductible to the extent allowed in Section 34(c) of the Code.
1. Kinds of dividends recognized in law
a. Cash
b. Property
BIR Ruling 108-93 [May 7, 1993].
c. Stock
21
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
CIR v. Manning. Treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation,
forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding
shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be reissued or sold again,
such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared
by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a
paid-for interest in the property of the corporation. The foregoing essential features of a treasury stock are lacking in the questioned shares.
Fisher v. Trinidad, supra.
2. Measure of income in cash and property dividend
3. Stock dividend
a. When taxable
(1) Measure of income
b. When not taxable
(1) Adjusted cost per share
4. Liquidating dividend
Wise & Co v. Meer. The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock in fact, they
surrendered and relinquished their stock in return for said distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn
ceased to exist in its own right as a going concern during its more or less brief administration of the business as trustee for the Manila Company, and
finally disappeared even as such trustee.
CIR v. CA. Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. It laid down the general rule known
as the proportionate test wherein stock dividends once issued form part of the capital and, thus, subject to income tax. Specifically, the general rule
states that: A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.Having been derived from a foreign
law, resort to the jurisprudence of its origin may shed light. Under the US Revenue Code, this provision originally referred to "stock dividends" only,
without any exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an "enrichment through increase in value of
capital investment." As capital, the stock dividends postpone the realization of profits because the "fund represented by the new stock has been
transferred from surplus to capital and no longer available for actual distribution." Income in tax law is "an amount of money coming to a person
within a specified time, whether as payment for services, interest, or profit from investment." It means cash or its equivalent. It is gain derived and
severed from capital, from labor or from both combined so that to tax a stock dividend would be to tax a capital increase rather than the income.
In a loose sense, stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to income tax until that gain
has been realized. Before the realization, stock dividends are nothing but a representation of an interest in the corporate properties. As capital, it is
not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or
the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. The
Exception: However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen.
J. Income from any Source Whatsoever
1. Bad Debt Recovery
RR-2, 50. Forgiveness of indebtedness. The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a
capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof
cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a
debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be
included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the
payment of a dividend.
2. Forgiveness of indebtedness
RR-2, 50. Forgiveness of indebtedness. The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a
capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof
cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a
debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be
included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the
payment of a dividend.
3. Tax refunds
RMC 13-80 [April 10, 1980]
4. Damage recovery
5. Prizes and winnings
6. Income from any source whatsoever
Gutierrez v. CTA. There is no question that the property expropriated being located in the Philippines, compensation or income derived therefrom
ordinarily has to be considered as income from sources within the Philippines and subject to the taxing jurisdiction of the Philippines. However, it is
to be remembered that said property was acquired by the Government through condemnation proceedings and appellants' stand is, therefore, that
same cannot be considered as sale as said acquisition was by force, there being practically no meeting of the minds between the parties.
Consequently, the taxpayers contend, this kind of transfer of ownership must perforce be distinguished from sale, for the purpose of Section 29-(a)
of the Tax Code. The proposition that income from expropriation proceedings is income from sales or exchange and therefore taxable has been
likewise upheld in the case of Lapham vs. U.S. (1949, 40 AFTR 1370) and in Kneipp vs. U.S. (1949, 85 F Suppl. 902). It appears then that the
acquisition by the Government of private properties through the exercise of the power of eminent domain, said properties being JUSTLY
compensated, is embraced within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within
the definition of gross income laid down by Section 29 of the Tax Code of the Philippines.
K. Classes of Deductions
22
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
NIRC, 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an
employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable
income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from
gross income;
(A) Expenses.
(1) Ordinary and Necessary Trade, Business or Professional Expenses.-
(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade,
business or exercise of a profession, including:
i. A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the
grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax
imposed under Section 33 hereof has been paid;
ii. A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or
profession;
iii. A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession,
for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which
he has no equity other than that of a lessee, user or possessor;
iv. A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly
connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly
related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the
needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or
public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted,
and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of
the trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local
government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or
representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment
constitutes a bribe or kickback.
(2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under this Chapter, a private
educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise
considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct
allowance for depreciation thereof under Subsection (F) hereof.
(B) Interest.-
(1) In general The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade
or business shall be allowed as a deduction from gross income: Provided, however, That the taxpayers otherwise allowable deduction for
interest expense shall be reduced by forty-two percent (42%) of the income interest subjected to final tax: Provided, That effective January 1,
2009, the percentage shall be thirty-three percent (33%)
(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid
in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is
paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or
(c) If the indebtedness is incurred to finance petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise
of a profession may be allowed as a deduction or treated as a capital expenditure.
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed
as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign
countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that
they are connected with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph,
the tax imposed by this Title shall be credited with:
23
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes
paid or incurred during the taxable year to any foreign country; and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an
estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during
the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this
Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed
under this paragraph.
(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire
taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's
taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if
any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the
year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by
the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but
not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties
satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any
amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the
Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective
of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject,
however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the
taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes
shall be allowed as a deduction in the same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the
Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such
amount to be determined under rules and regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such credits.
(D) Losses.
(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be
allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from
casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in
the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty
or robbery, theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a
deduction for estate tax purposes in the estate tax return.
(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained
during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not
compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so
prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the loss; and
(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for
the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided,
further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or
enterprise in that
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a
corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is
held by or on behalf of the same persons.
For purposes of this subsection, the term 'net operating loss' shall mean the excess of allowable deduction over gross income of the
business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive
Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of
operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The
24
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which
exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.
(4) Capital Losses.
(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39.
(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital
assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets.
(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38.
(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions.
(7) Abandonment Losses.
(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration
and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in
that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases,
notices of abandonment shall be filed with the Commissioner.
(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment
directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor:
Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service,
the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as
the case may be.
(E) Bad Debts.
(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36
(B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income tax benefit of said deduction.
(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the
taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company
incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
(F) Depreciation.
(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with
remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be
allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries
and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the
basis of the trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an
allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, under any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been
computed under the method described in Subsection (F) (1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.
(3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of
Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer
and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement.
The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change
in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the
taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to
the agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the
depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly
authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall
be considered binding for purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to
production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line
method.
The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted
by the Commissioner.
Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an
estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining
operations other than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or
25
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the
depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the
beginning of the depreciation period which depreciation rate allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a
nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of
Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is
located in the Philippines.
(G) Depletion of Oil and Gas Wells and Mines.
(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the
cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the
Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted:
Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling
costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be
deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred
are for producing wells and/or mines in the same contract area.
'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and
which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said
costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the
allowances for depreciation on such property shall be deductible under this Subsection.
Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall
not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion.
(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may
at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of
prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount
deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining
operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures
minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding
taxable years.
'Net income from mining operations', as used in this Subsection, shall mean gross income from operations less 'allowable deductions'
which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and
depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or
improvement of property of a character which is subject to the allowance for depreciation.
In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas.
The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent
or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit.
The term 'development expenditures' means expenditures paid or incurred during the development stage of the mine or other natural
deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to
exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a
nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil
and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within
the Philippines.
(H) Charitable and Other Contributions. -
(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any
of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations
organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for
the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations
promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit
of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in
the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this
and the following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or
entities shall be deductible in full;
(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions,
including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in
education, health, youth and sports development, human settlements, science and culture, and in economic development according to a
National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate
government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any
donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual
priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;
(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign institutions or international organizations
which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government
of the Philippines and the foreign institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization' means a non profit domestic
corporation:
26
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development,
health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the
benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in
which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or
function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with
the rules and regulations to be promulgated, upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total
expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for
similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be
used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means:
(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more
purposes for which the accredited nongovernment organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which
the accredited nongovernment organization was created or organized.
An amount set aside for a specific project which comes within one or more purposes of the accredited
nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited
nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the
specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of funds.
(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
(I) Research and Development.-
(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in
connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The
expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred.
(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development
expenditures may be treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;
(b) Not treated as expenses under paragraph 91) hereof; and
(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than
sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such
expenditures).
The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if
made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by
the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent
taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the
election.
(3) Limitations on deduction. - This Subsection shall not apply to:
(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research
and development of a character which is subject to depreciation and depletion; and
(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other
mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees
shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during
the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the
taxable year in excess of such contributions, but only if such amount (1)has not theretofore been allowed as a deduction, and (2) is apportioned in
equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken
into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a
deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction. In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24,
other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts
as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not
exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies his return to his intention to
elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding subsections. Such
election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, that an individual who is entitled
to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required in this
27
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross
sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during
the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - the amount of premiums not to exceed Two
thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided,
That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in
the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public
hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under
Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the
following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.

1. Optional Standard Deduction


-
2. Itemized deductions

Deductions are items or amounts which the law allows to be deducted from the gross income of a taxpayer in order to arrive at taxable income

*A taxpayer has the right to deduct all authorized allowances for the taxable year.

Basic Principles Governing Deductions:


(1) The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction
(2) He must be able to prove that he is entitled to the deduction authorized or allowed

Additional requirements for deductibility: NIRC, 34(K) withhold


L. Expenses in General
RR-2, 65. Business expenses. Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected
with or pertaining to the taxpayer's trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing
inventories, is deducted from gross sales is computing gross income. Among the items included in business expenses are management expenses,
commissions, labor, supplies, incidental repairs, operating expenses of transportation, equipment used in the trade or business, traveling expenses while
away from home solely in the pursuit of a trade or business, advertising and other selling expenses, together with insurance premiums against fire,
storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the
necessary expenses paid in carrying on his business from his gross income from whatever source.
RR-2, 66. Traveling expenses. Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is
undertaken for other than business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and
therefore, not deductible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals and
lodging, become business instead of personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a salary as full compensation for his services, without reimbursement for
traveling expenses, or is employed on a commission basis with no expense allowance, his traveling expenses, including the entire amount expended
far meals and lodging, are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in gross income, the amount so repaid and may
deduct such expenses.
(c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the
amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a business expense. Only such expenses as are reasonable and
necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to
herein must attach to his return a statement showing (1) the nature of the business in which he is engaged; (2) the number of days away from home
during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when required by the Commissioner of Internal Revenue by record showing in
detail the amount and nature of the expenses incurred.
RR-2, 67. Cost of materials. Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only
to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such
materials and supplies has not been deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies
on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be
permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased
during the year for which the return is made, provided the net income is clearly reflected by this method.
RR-2, 68. Repairs. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it
in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such
expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be
charged against the depreciation reserves if such account is kept.
RR-2, 69. Professional expenses. A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses
paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to
professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc.; used in such offices, and the hire of office
assistants. Amounts currently expended for books, furnitures, and professional instruments and equipment, the useful life of which is short, may be
28
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as
deductions.
RR-2, 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may
be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be
further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond
or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services
rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for
property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the
corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for
the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any
basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain
between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer
other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the
actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that
reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The
circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date
when the contract is questioned.
RR-2, 71. Treatment of excessive compensation. The income tax liability of the recipient in respect of an amount ostensibly paid to him as
compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive
payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or
profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a
capital expenditure and by the recipient as part of the purchase price.
RR-2, 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions from gross income when such payments are made in
good faith and as additional compensation for the services actually rendered by the employees, provided such payment, when added to the stipulated
salaries, do not exceed a reasonable compensation for the service rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in
cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable
compensation for services, are not deductible from gross income.
RR-2, 73. Pensions, compensation for injuries. Amounts paid for pensions to retired employees or to their families or others dependent upon them, or
on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary
and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an
officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such
payments may be deducted. Salaries paid by employers to employees who are absent in the military, naval or other service of the Government, but who
intend to return at the conclusion of such service, are allowable deductions. (See Section 118 of these regulations, relative to pension trust.)
RR-2, 74. Rentals. Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an
aliquot part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property
are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter.
The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment
and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross
income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be
in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the buildings erected, or of the
improvements made, this deduction shall take the form of an allowance for depreciation.
RR-2, 75. Expenses of farmers. A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts
actually expended in the carrying on of the business of farming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels,
rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual
outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops
which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop
basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment,
and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of
farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in
purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an
inventory in accordance with Section 149 of these regulations. The purchase price of transportation equipment even when wholly used in carrying on
farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation
equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or
convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or
convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for
recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the
entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal
expenses, will not constitute allowable deduction.
RR-2, 76. When charges are deductible. Each year's return, so far as practicable, both as to gross income and deductions therefrom, should be
complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses,
liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances
29
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
and it follows that if he does not within any year deduct certain of his expenses, losses, interests, taxes, or other charges, he can not deduct them from the
income of the next or any succeeding year. If it is recognized, however, that particularly in a going business of any magnitude there are certain
overlapping items both of income and deduction, and so long as these overlapping items do not materially distort the income, they may be included in
the year in which the taxpayer, pursuant to a consistent policy, takes them into his accounts. Judgments or other binding judicial adjudication, on account
of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless
taken under other methods of accounting which clearly reflect the correct deduction, less any amount of such damages as may have been compensated
for by insurance or otherwise: If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable
year which has not been deducted from gross income, he may render an amended return for such preceding taxable year including such amount of loss
in the deduction from gross income and may in proper cases file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in
the original return. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which
sustained.
1. Requisites for deductibility (ordinary, necessary)
Visayan Cebu Terminal v. CIR. representation ... expenses fall under the category of business expenses which" are allowable deductions from
gross income if they meet the conditions prescribed by law", particularly section 30(a) (1) of the National Internal Revenue Code; that, to be
deductible, said business expenses must "ordinary and necessary expenses paid or incurred in carrying on any trade or business"; that those
expenses "must also, meet the further test of reasonableness in amount", this test being "inherent in the phase `ordinary and necessary'"; that some
of the representation expenses claimed by appellant had been evidenced by vouchers or chits, but others were reimbursed "without presentation of
supporting papers; that the aforementioned vouchers or chits were allegedly "destroyed when the house of Buenaventura M. Veloso, treasurer of
appellant, where the records were kept was burned"; that, accordingly, "it is not possible to determine the actual amount covered by supporting
papers and the amount without supporting papers"; that the court should, therefore, "determine from all available data the amount properly
deductible as representation expenses"
Requisites for deductibility of business expenses by corporations:
(1) The expenses must be ordinary and necessary
*it is ordinary and necessary when it is commonly incurred in the trade or business of the taxpayer as distinguished from capital expenditures
* expense is considered necessary if it is appropriate and helpful to the taxpayers business or if it is intended to realize a profit or to minimize a loss
(2) They must be paid or incurred during the taxable year
*paid if the taxpayer keeps his books on the cash receipts basis, expenses are deductible in the year they are paid
*incurred if the taxpayer keeps his book on the accrual basis, expenses are deductible in the year they are incurred, whether paid or not
(3) They must be paid or incurred in carrying on any trade or business
*examples:
-mgt expenses
-commissions
-labor
-supplies
-incidental repairs
-operating expenses of transportation
-equipment used in the trade or business
-traveling expenses while away from home solely in the pursuit of trade or business
-advertising and other selling expenses
-insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business
-rental for the use of business property

(4) They must be substantiated by adequate proof; and


-evidence such as official receipts or other adequate records, otherwise the same will be disallowed
-evidence must establish: (1) the amount of the expense being deducted, and (2) the direct connection or relation of the expense to the development,
management, operation and/or conduct of the trade, business or profession of the taxpayer
-where no records are available, the taxpayer may still prove by other evidence that the deductions were really paid or incurred and are allowable
(5) They must not be against law, morals, public policy or public order
2. Compensation for personal services
Kuenzle & Streif v. CIR. It would appear that all ordinary and necessary expenses paid or incurred in carrying on a trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually rendered, may be allowed as deductions in computing the
taxable income during the year. It likewise appears that the amount of interests paid within the taxable year on any indebtedness may also be
deducted from the gross income. Here it is admitted that the bonuses paid to the officers and employees of petitioner, whether resident or non-
resident, were paid to them as additional compensation for personal services actually rendered and as such can be considered as ordinary and
necessary expenses incurred in the business within the meaning of the law, the only question in dispute being how much of said bonuses may be
considered reasonable in order that it may be allowed as deduction. || It is a general rule that "Bonuses to employees made in good faith and as
additional compensation for the services actually rendered by the employees are deductible, provided such payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for the services rendered" (4 Mertens, Law of Federal Income Taxation, Sec. 25.50, p. 410). The
condition precedents to the deduction of bonuses to employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for
personal services actually rendered; and (3) the bonuses, when added to the salaries, are reasonable when measured by the amount and quality of
the services performed with relation to the business of the particular taxpayer" (Idem, Sec. 25.44, p. 395). Here it is admitted that the bonuses are in
fact compensation and were paid for services actually rendered. The only question is whether the payment of said bonuses is reasonable. || There is
no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being "the amount
and the quality of the services performed with relation to the business." Other tests suggested are: payment must be "made in good faith"; "the
character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary
policy of the corporation"; "the size of the particular business"; "the employees' qualifications and contributions to the business venture"; and
"general economic conditions" (4 Mertens, Law of Federal Income Taxation, Sec. 25.44, 25.49, 25.50, 25.51, pp. 407-412). However, "in determining
whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole.
30
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
In General: The payments deductible include salaries, wages, fees for professional services, commissions, mgt expenses, bonuses, vacation and retirement pay,
pensions, and compensation for injuries

REQUISITES [in addition to general requisites for deductibility of business expense]:


(1) Reasonable
(2) They are, in fact, payments purely for service

Factors that may be considered for the reasonableness test:


(1) Payment made in good faith
(2) Character of the business
(3) Volume and amount of its net earnings
(4) Locality in which the business is in
(5) Type and extent of the services rendered
(6) Salary policy of the corporation
(7) Size
(8) EEs qualifications and contributions to the business
(9) General economic conditions

Pensions and compensations for injuries when the amount of the salary is paid for a limited period after his death to his heirs, in recognition of services
rendered
3. Traveling/Transportation expenses
RR 3-98.
Travel expenses in general include transportation expenses and meals and lodging, here and/or abroad of an EE paid for by the ER

REQUISITES:
(1) Must be reasonable and necessary
(2) Must be incurred or paid while away from home home=tax home=principal place of business
(3) Must be paid or incurred in the conduct of trade or business
PROOF OF DEDUCTIBILITY statement attached in return showing
(1) Nature of business engaged in
(2) Number of days away from home during the taxable year
(3) Total amount of travel expenses incident to business
4. Cost of materials
RR-2, 67. Cost of materials. Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and
supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the
cost of such materials and supplies has not been deducted in determining the net income for any previous year. If a taxpayer carries incidental
materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are
not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and
materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method.
2 methods:
(1) Actual consumption computed by the inventory method [beginning inventory; add:purchases; less ending inventory=materials and supplies used]
(2) Total purchases all purchases
5. Repairs
RR-2, 68. Repairs. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but
keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the
amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of
the property should be charged against the depreciation reserves if such account is kept.
DEDUCTIBLE WHEN such repairs are incidental or ordinary, i.e. made to keep the property used in the business of the taxpayer in an ordinarily efficient
operating condition

*They do not materially add to the value of the property nor appreciably prolong its life
*Repairs in the nature of replacement to the extent that they arrest deterioration and prolong the life are capital expenditures and should be debited against
the corresponding allowances for depreciation
6. Expenses under lease agreements
RR-2, 74. Rentals. Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return
an aliquot part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business
property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being
deductible by the latter. The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held
to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual
deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the
term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable
life of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation.
Generally deductible only if the payment is made for the use of the property be the lessee for its trade or business
(1) Leasehold acquired for a certain sum e.g. 720K for 5 years = aliquot part each year
(2) Taxes paid be the lessee considered as additional rent rent for the year + realty tax
(3) Repairs and improvements made by the lessee capital investment, NOT deductible as business expense
31
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines

=

Or

=

Denominator Whichever is shorter
7.Expenses for professionals
RR-2, 69. Professional expenses. A professional may claim as deductions the cost of supplies used by him in the practice of his profession,
expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and
subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc.; used in such offices, and
the hire of office assistants. Amounts currently expended for books, furnitures, and professional instruments and equipment, the useful life of which
is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are
not allowable as deductions.
8. Expenses for farmers
RR-2, 75. Expenses of farmers. A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all
amounts actually expended in the carrying on of the business of farming. The cost of ordinary tools of short life or small cost, such as hand tools,
including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such
cost represents actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is
engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may
be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The
cost of farm machinery, equipment, and farm buildings represents a capital investment and is not an allowable deduction as an item of expense.
Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as
investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be
depreciated unless such animals are included in an inventory in accordance with Section 149 of these regulations. The purchase price of
transportation equipment even when wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The
cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if
used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according
to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business
purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses
incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in
rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction.
9. Entertainment expenses
RR 3-98.
entertainment, amusement and recreation expenses includes representation expenses and/or depreciation or rental expense relating to entertainment
facilities

(a) Representation expenses incurred by taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing
amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting
event, and other similar events or places
(b) Entertainment facilities (1) yacht/vacation home/condominium; (2) any similar item of real or personal property used by the taxpayer primarily for
the entertainment, amusement or recreation of guests or employees
(c) Exclusions expenses treated as compensation/fringe benefit; expenses for charitable/fund raising events; expenses for attending/sponsoring to a
business league or professional organization meeting expenses for event organized for promotion, marketing and advertising

REQUISITES FOR DEDUCTIBILITY


(1) Must be paid or incurred during the taxable year
(2) Must be: (a) directly connected to the development, management and operation of the trade, business or profession of the TP; or (b) directly related to or
in furtherance of the conduct of his or its trade, business, or exercise of a profession
(3) Must not be contrary to law, morals, good customs public policy or public order
(4) Must not have been paid, directly or indirectly, to anyone of it constitutes a bribe/kickback/etc
(5) Must be duly substituted by adequate proof
(6) The appropriate amount of withholding tax, if applicable, should have been withheld.

Maximum percentage ceiling: in no case shall such deduction exceed 50% of the net sales (i.e. Gross sale less gross returns/allowances and sales discount) if
TP engaged in sale of goods or properties; or 100% of net revenue (i.e. gross revenue less discounts) for TP engaged in sale of services
10. Expenses of private educational institutions
Alhambra Cigar v. CIR.
Expenses for police protection is illegal
Calanoc v. CIR. We have examined the records of the case and we agree with the lower court that most of the items of expenditures contained in
the statement submitted to the agent are either exorbitant or not supported by receipts. We agree with the tax court that the payment of P461.65
for police protection is illegal as it is a consideration given by the petitioner to the police for the performance by the latter of the functions required
of them to be rendered by law. The expenditures of P460.00 for gifts, P1,880.05 for parties and other items for representation are rather excessive,
considering that the purpose of the exhibition was for a charitable cause.
11. Constructive dividends
RR-2, 70. Compensation for personal services. Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the
32
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application
may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid
by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders,
practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are
not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary
may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners
agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for
services, but in part constitute payment for the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on
any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free
bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of
the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction
even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume
that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances.
The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the
date when the contract is questioned.
RR 10-2002, Ceilings for entertainment, amusement and recreational expenses
M. Interest Interest is the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits
1. Interest deductible from gross income
General rule: any amount of interest paid or incurred within the taxable year on indebtedness in connection with the TPs trade, business or
profession may be deducted from the gross income
Only interests on business debts are deductible
Requisites
o There must be an indebtedness
o The indebtedness must be that of the taxpayer
o The indebtedness must be connected with the trade, business or profession of the taxpayer
o The interest must have been paid or incurred during the taxable year
o The interest must be legally due
o The interest must have been stipulated in writing
o Must not be from loans between related taxpayers
2. Interest not deductible from gross income
Interest paid or incurred ABROAD by a nonresident parent lending institution in respect of which no deduction is allowable to its branch in
the Philippines
Interest on preferred stocks which in reality is dividend thereon
Interest calculated for cost-keeping or other purposes on account of capital or surplus invested in the business which does not represent a
charge under interest-bearing obligation
Interest on loans between related taxpayers
Interest paid on earned but unclaimed salary
Interest on indebtedness incurred to finance petroleum explorations
Interest on indebtedness for purely personal reasons
3. Prepaid interest of individual on cash method of accounting
If within the taxable year an individual reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance
through discount, such interest is not deductible. The deduction shall be allowed in the year the indebtedness is paid.
In the case of indebtedness which is payable in periodic amortizations, the amount of interest which corresponds to the amount of the
principal amortized or paid during the year shall be allowed as a deduction in such taxable year
CIR v. vda. de Prieto [note: now, not deductible]. Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that
there should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year.
4. Reduction of interest expense on interest income subjected to final tax
The TPs otherwise allowable deduction for interest expense shall be reduced by the amount equal to 33% of the interest income subjected to
final tax
RR 13-2000, November 20, 2000 requirement for deductibility of interest expense
N. Taxes
RR-2, 80. Taxes in general. As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit
deduction. However, in the case of a non-resident alien individual and a foreign corporation, deduction is allowed only if and to the extent that the taxes
for which deduction is claimed are connected with income from sources within the Philippines.
Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every
name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes
proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax.
Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants'
sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item.
In computing the net income of an individual no deduction is allowed for the taxes imposed upon his interest as shareholder of a bank or other
corporation, which are paid by the corporation without reimbursement from the taxpayer. The amount so paid should not be included in the income of
the shareholder.
33
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
In the case of corporate bonds or other obligations containing a tax-free covenant clause the corporation paying a tax or any part of it, for someone
else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground.
RR-2, 81. Income tax imposed by the Government of the Philippines. The law does not permit the deduction of the income tax paid to or accrued in
favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction.
RR-2, 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. Income, war-profits, and excess-profits taxes
imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does
not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries.
In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income
tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed
as deduction.
1. Deductible from gross income
General rule: taxes are deductible with the exception of those with respect to which the law does not permit deduction
in the case of a nonresident alien individual and a foreign corporation ETB, deduction is allowed only if and to the extent that the taxes for
which deduction is claimed are connected with income from sources within the Philippines
import duties to customs offices, if the importation is in connection with the trade or business
business taxes, i.e. VAT, other percentage taxes, and excise taxes
license taxes
privilege taxes
DST
Any other taxes of every amount and nature paid directly to the government
2. Not deductible from gross income
Phil. Income Tax
Income taxes imposed by the authority of any foreign country but this deduction is allowed in the case of TP who is entitled to tax credit but
does not avail the same
Estate and donors taxes
Special assessments or levies (which arent really taxes)
Energy tax on electrical power consumption
Tax not connected with the trade/business/profession of TP
Final taxes
RR-2, 82, supra.
RR-2, 83. Estate, inheritance, and gift taxes: taxes assessed against local benefits. Estate, inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed
because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable
deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property
benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those
levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities
have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments
paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are
made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible.
Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation
of the amounts assessed to the different purposes. If the allocation cannot be made, none of the amounts so paid is deductible.
3. Meaning of the term taxes refers to taxes proper and deductions are not allowed in amounts representing: (1) surcharges, (2) penalties, or (3)
fines incident to delinquency
4. Tax credits v Tax Deduction
CIR v. Lednicky. The wording of Sec 30 shows the code's intent that the right to deduct income taxes paid to foreign government from the
taxpayer's gross income is given only as an ALTERNATIVE to his right to claim a tax credit for such foreign income taxes under Sec 30 so that unless
the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross
income. The law provides that the deduction shall be allowed if the taxpayer in his return does not signify his desire to have the benefits of tax
credits for taxes paid to foreign countries. Thus, the statutes assumes that the taxpayer in question may also signify his desire to claim a tax credit
and waive the deduction.
CIR v. Bicolandia Drug Corp.
Tax Credit refers to the taxpayers right to deduct from the income tax due the amount of tax he has paid to a foreign country subject to limitations
*allowed to lessen the rigor of intl double or multiple income taxation
Persons entitled: resident citizens; domestic corporations; members of GPP and beneficiaries of estates and trusts
Persons not entitled: nonresident citizens; aliens (whether resident or nonresident) and foreign corporations (whether resident or nonresident

Tax credits for foreign taxes are allowed only for income derived from sources outside the Philippines

Tax deduction Tax credit


Taxes are deducted from the gross income in computing the taxable income Taxes are deducted from the Philippine income tax itself
All taxes, as a general rule, are allowed as deduction with the exception of Only foreign income taxes may be claimed as credits against Phil. Income tax
those expressly excluded

Limitations on tax credit: Tax credit to be taken is the lower amount between amount actually paid and the computed tax credit
1. For taxes paid to one foreign country
34
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines

. =

2. For taxes paid to 2 or more foreign countries

. =

5. Fines and Penalties
Gutierrez v. CIR. Fines and penalties paid for late payment of taxes are not deductible. Gutierrez also claimed for deduction the fines and penalties
which he paid for late payment of taxes. While Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and
penalties to be so deducted. Deductions from gross income are matters of legislative grace; what is not expressly granted by Congress is withheld.
Moreover, when acts are condemned by law and their commission is made punishable by fines or forfeitures, to allow them to be deducted from the
wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment.

O. Losses implies an unintentional parting with something of value; it is used in the income tax law in a very broad sense to comprehend all losses which
are not general or natural to the ordinary course of business and are not covered under some other heading such as bad debts, inventory losses,
depreciation, etc.
RR-2, 93. Losses by individuals. Losses sustained by individuals during the year not compensated for by insurance or otherwise are fully deductible
(except by non-resident aliens)
(a) If incurred in a taxpayer's trade; or
(b) If incurred in any transaction entered into for profits; or
(c) Of property not connected with the trade or business if arising from fires, storm, shipwreck, or other casualty, or from robbery, theft or
embezzlement. No loss shall, however, be allowed as a deduction if at the time of filing of the return, such loss has been claimed as deduction for
estate or inheritance tax purposes in the estate or inheritance tax return.
RR-2, 94. Losses by corporations. Domestic corporations may deduct losses actually sustained and charged off within the year and not compensated
for by insurance or otherwise.
RR-2,95. Losses by non-resident alien and foreign corporation. Non-resident aliens and foreign corporations are allowed only losses sustained in
business or trade conducted within the Philippines, losses of property within the Philippines arising from fires, storms, shipwreck, or other casualty and
from robbery, theft, or embezzlement, and losses actually sustained in transactions entered into for profit in the Philippines, although not connected with
their trade or business, not compensated by insurance or otherwise.
RR-2,96. Losses generally. Losses must usually be evidenced by closed and completed transactions. Proper adjustment must be made in each case for
expenditures or items of loss properly chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion. Moreover, the
amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvage value, if any, of the property. A
loss on the sale of residential property is not deductible unless the property was purchased or constructed by the taxpayer with a view to its subsequent
sale for pecuniary profit. No loss is sustained by the transfer of property by gift or death. Losses sustained in illegal transactions are not deductible.
RR-2,97. Voluntary removal of buildings. Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery,
equipment, etc., incident to renewals and replacements will be deductible from gross income. When a taxpayer buys real estate upon which is located a
building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible
expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price
of the land and building plus the cost of removing the useless building.
RR-2,98. Loss of useful value. When through some change in business conditions, the usefulness in the business of some or all of the capital assets is
suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use of such business, he may claim as
deduction the actual loss sustained. In determinating the amount of the loss, adjustment must be made, however, for improvements, depreciation and
the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of
some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the
manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new
legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful
life of property terminates solely as a result of those gradual processes for which depreciation allowance are authorized. It does not apply to inventories
or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically
different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off
in the books and fully explained in returns of income.
RR-2,99. Shrinkage in value of stocks. A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss
merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. The loss allowable in such case is that actually
suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these
regulations may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness
be made, as in the case of bad debts.
RR-2,100. Losses of farmers. Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are
held for favorable markets, no deduction on account of shrinkage in weight or physical value or by deterioration in storage shall be allowed, except as
such shrinkage may be reflected in an inventory if used to determine profits. The total loss by storm, flood, or fire of a prospective crop is not a
deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the
value of animals that perish from among those animals that were raised on the farm, except as such loss is reflected in an inventory if used. If livestock
has been purchased after March 1, 1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the authorities,
the actual purchase price of such stock, less any depreciation allowable as a deduction in computing net income, with respect to such perished, livestock,
and also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property (with proper adjustment for depreciation),
which is destroyed by order of the authorities, may in like manner be claimed as a loss; but if reimbursement is made in whole or in part on account of
stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. The cost of any feed,
pasturage, or care which has been deducted as an expense of operation shall not be included as part of the cost of the stock for the purpose of
ascertaining the amount of a deductible loss. If gross income is ascertained by inventories, no deduction can be made for livestock or products lost
during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock
35
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business or calling,
and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources,
provided the farm is not operated for recreation or pleasure.
RR-2,101. Capital losses; losses on wash sales of stock or securities. Losses on sales or exchanges of capital assets are allowed to the extent
provided in section 34 of the Code. If any securities which are capital assets become worthless during the taxable year, the loss resulting therefrom shall
be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. Losses on "wash sales" of stock or securities are
treated in section 33 of the Code.

Classification of losses:
(1) Ordinary losses
(a) Losses incurred in trade/business/profession
(b) Losses incurred of property connected with T/B/P if due to casualty or from robbery, theft or embezzlement
(2) Capital losses
(a) Losses from sales or exchanges of capital assets
(b) Losses resulting from securities becoming worthless, and which are capital assets
(c) Losses from short sales of property
(d) Losses due to failure to exercise privileges or options to buy or sell property
(3) Special kinds of losses
(a) Losses from wash sales of stock or securities
(b) Losses due to voluntary removal of buildings, machinery, etc. incident to renewal or replacement
(c) Losses of the useful value of capital assets due to some change in business conditions
(d) Abandonment losses in petroleum operations
REQUISITES:
(a) The loss must be that of the taxpayer
(b) It must be actually sustained and charged off within the taxable year
(c) It must have been incurred in the trade/business/profession
(d) Must be evidenced by a closed and completed transaction
(e) Must not be compensated for by insurance or other form of indemnity
(f) In case of casualty loss, a sworn declaration of the loss must be filed within 45 days after the date of the occurrence of casualty or
robbery/theft/embezzlement
(g) Taxpayer must prove elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss
1. Kinds of taxpayers and their losses
2. Completed transactions
There should be an identifiable event which justifies the loss
Determination of amount deductible: GR the amount of casualty
=
o But shall not exceed an amount equal to the cost or other adjusted basis of the property, or depreciated cost in the case of property
used in business, reduced by any insurance or other compensation received
Fernandez Hermanos v. CIR.
Quick Facts: Fernandez Hermanos Inc. is a domestic corporation organized for the principal purpose of engaging in business as an investment
company. The CIR disallowed the following deductions:
1. losses in Mati Lumber Co in 1950
2. losses or bad debts in Palawan Manganese Mines Inc in 1951
3. losses in Balamban Coal Mines in 1950 and 1951
4. losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954
Held: The Supreme Court discussed the allowance or disallowance of each in the following manner:
1. Allowed. These losses represent the shares of stock (worth P8,050) petitioner acquired from Mati in Jan. 1, 1948. The petitioner was
correct in writing off and claiming as a deduction in 1950 the amount on the ground that the lumber company had ceased operations and
became insolvent in that year. The CIR was incorrect in arguing that since the company still owned a sawmill and some equipment, the
shares of stock still had value. The proper assessment would be to treat as income for the year in which petitioner gets the proceeds from
the liquidation of those assets.
2. Disallowed. These losses represent part of the loans extended by the petitioner to its 100% owned subsidiary. Petitioner advanced
financial assistance to Palawan from 1945 to 1952. By way of payment, Palawan was to give petitioner 15% of net profits. Whether
Palawan was able to pay the loans or not because it continued to operate at a loss is immaterial. Petitioner cannot properly claim as a loss
the advances given to Palawan in 1951 for that year. There can be no partial writing off as a loss or bad debt under the Tax Code. Those
losses or bad debts ascertained within the taxable year are deductible in full or not at all. Petitioner continued to give Palawan advances
even beyond 1951. It was only in 1956 when Palawan decided to cease operations.
3. Disallowed. These losses represent sums spent by the petitioner for the operation of its Balamban coal mines in 1950 and 1951. The
petitioner should have treated them as losses in 1952 when the mines were abandoned and not in 1950 and 1951 on the ground that the
mines made no sales of coal during those years.
4. Allowed. These losses represent sums spent by petitioner for the operation of the 2 haciendas. The amounts were properly reported as
deductions for the correct years. The only reason why the CIR disallowed them was on the ground that the farms were operated solely
for pleasure or as a hobby and not for profit. But the Supreme Court is not convinced, and being for business, the petitioner may properly
deduct the same.
36
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
3. Special rules on losses
a. Voluntary removal of buildings
- Demolition incident to renewals or replacements deductible
- Demolition with a view to erecting another building no deductible expense the value of the real estate being presumably equal to
the purchase of the land and the building plus the cost of removing the useless building
b. Loss of useful value of assets
(1) Change in business conditions
(2) Proof required
(3) When not deductible: where the useful life of property terminates solely as a result of depreciation; also does not apply tio inventories or
to other than capital assets
c. Shrinkage in value of stocks
- A person possessing stock of a corporation CANNOT deduct from gross income any amount claimed as a loss merely on account of
shrinkage in value of such stock through fluctuation of the market or otherwise the loss allowable is that actually suffered when the
stock is disposed of
4. Wagering losses
5. RR 12-77, substantiation of losses
6. Foreign exchange losses
BIR Ruling 144-85 [Aug. 26, 1985].
RMC 26-85 [July 15, 185]; inter-bank guiding rate.
7. Abandonment losses Sec 34[D][7], NIRC
8. Net operating loss carry-over [as implemented by RR 14-2001; August 27, 2001]
In general the net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which
has not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3
consecutive taxable years immediately following the year of such loss.
BUT, any net loss incurred in a taxable year during which the taxpayer was exempt from IT shall not be allowed as a deduction
Taxpayers entitled to NOLCO: any individual and domestic and resident foreign corporations subject to the normal income tax or preferential
tax rates (private educational insti/hospital/regional operating headquarters
TP not entitled to NOLCO
o OBU of a foreigning banking corporation, and FCDU
o Enterprise registered with the BOI with respect to its BOI-registered activity enjoying IT Holiday incentive
o An enterprise registered with PEZA
o An enterprises registered under the Bases Conversion and Devt Act [RA 7227]
o Foreign corporations engaged in intl shipping or air carriage business in the Philippnines
o In general any person enjoying exemption from IT
A taxpayer who claims the 40% OSD shall not simultaneously claim deduction of the NOLCO. The 3-year reglementary period shall continue to
run notwithstanding the fact that the aforesaid taxpayer availed of the OSD during the said period
Domestic and resident foreign corporations taxed during the taxable year with MCIT cannot enjoy the benefit of NOLCO. Nevertheless, the
running of the 3 year period for the expiry of NOLCO is NOT interrupted by the fact that such corporation is subject to MCIT
NOLCO shall be availed of on a first-in, first-out basis
a. Three-year period
b. No substantial change in ownership [75% rule]
P. Bad Debts debts due to the taxpayer when actually ascertained to be worthless and charged-off within the taxable year
RR-2, 102. Bad debts. Where all the surrounding circumstances indicate that a debt is worthless, and the debt is charged off on the books of the
taxpayer within the year, the same may be allowed as a deduction in computing net income. There should accompany the return a statement showing the
propriety of any deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate,
with a reasonable degree of certainty, the uncollectibility of the debt. Any amount subsequently received on account of a bad debt previously charged off
and allowed as a deduction for income tax purposes, must he included in gross income for the taxable year in which received. In determining whether a
debt is worthless the Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt
and the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all pro-
ability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for
the purpose of deduction. Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. Actual
determination of worthlessness in bankruptcy is sometimes possible before and at other times only when a settlement in bankruptcy shall have been
had. Where a taxpayer ascertained a debt to be worthless and charged it off in one year, the mere fact that bankruptcy proceedings instituted against the
debtor are terminated in a later year, confirming the conclusion that the debt is worthless, will not authorize shifting the deduction to such later year. If a
taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair market value when received, which may be less
than their face value, the amount deductible for bad debts in any case is limited to such original valuation.
RR-2, 103. Examples of bad debts. Worthless debts arising from unpaid wages, salaries, rents, and similar items of taxable income will not be allowed
as a deduction unless the income such items represent has been included in the return of income for the year in which the deduction as a bad debt is
sought to be made or in a previous year. Only the difference between the amount received in distribution of the assets of a bankrupt and the amount of
the claim may be deducted as a bad debt. The difference between the amount received by a creditor of a decedent in distribution of the assets of the
decedent's estate and the amount of his claim may be considered a worthless debt. A purchaser of accounts receivable which cannot be collected and are
consequently charged off the hooks as bad debt is entitled to deduct them, the amount of deduction to be based upon the price he paid for them and not
upon their face value.
Where under foreclosure of a mortgage, the mortgagee buys the mortgaged property and credits the indebtedness with the purchase price, the
difference between the purchase price and the indebtedness will not be allowable as a deduction for a bad debt, for the property which was security for
the debt stands in the place of the debt. The determination of loss in such case is deferred until the disposal of the property.
37
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
RR-2, 104. Securities becoming worthless. If any securities which are capital assets are ascertained to be worthless and charged off within the taxable
year, the loss resulting therefrom shall, except in the case of a bank or trust company incorporated under the laws of the Philippines or of the United
States a substantial part of whose business is the receipt of deposits, be considered as a loss from the sale or exchange, on the last day of such taxable
year, of capital assets.
1. Requirements for deductibility
CIR v. Goodrich. CRITERIA FOR ASCERTAINING WORTHLESSNESS OF DEBTS.- The statute permits the deduction of debts "actually ascertained to
be worthless within the taxable year" obviously to prevent arbitrary action by the taxpayer to unduly avoid tax liability. The ascertainment of
worthlessness of bad debts requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be worthless in the year the deduction
is sought; and (2) in so doing, he acted in good faith. Good faith is not enough. The taxpayer must show that he had reasonably investigated the
relevant facts and had drawn a reasonable inference from the information thus obtained by him. || WHERE SMALL AMOUNTS ARE INVOLVED,
WRITING THEM OFF, WHEN JUSTIFIED.- Considering the small amounts involved, the taxpayer may be justified in feeling that the unsuccessful
efforts therefore exerted to collect the same would suffice to warrant their being written off. "It is foolish to spend good money after bad."
REQUISITES:
(1) There must be an existing indebtedness due to the TP which must be valid and legally demandable
(2) The same must be connected with the taxpayers T/B/P
(3) The same must not be sustained in a transaction entered into between related parties
(4) The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year
(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.

CIRCUMSTANCES affecting worthlessness


(1) Flight or disappearance of debtor
(2) Insufficiency of collateral
(3) Bankruptcy or insolvency
(4) Loss of evidence of indebtedness
(5) Death of debtor leaving no assets
(6) Injury to debtor incapacitating him from work
(7) Absence of visible properties of debtor
(8) Fruitless efforts to collect small amounts from debtors scattered all over the country
2. Tax benefit rule
The recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of
recovery to the extent of the income tax benefit of said deduction
Example: if by reason of the write-off, the income of TP [corporation] is reduced by 10,000, the tax benefit to him is 30% of 10,000, which shall
be included as part of the GI
RR 5-99, March 10, 1999.
3. Bad Debts between related parties
NIRC, 36[B]. Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of
losses from sales or exchanges of property directly or indirectly
(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of
the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company
or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each
trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
4. RR 5-99, requirements for deductibility of bad debts including banks
Philex Mining v. CIR. Unpaid advances where are, in fact, in the nature of investments in a business, cannot be deducted from gross income or bad
debts. In a contract of loan, a person who receives a loan or money acquires ownership thereof and is bound to pay the creditor an equal amount of
the same kind and quality. The advances are not debts since there is no unconditional obligation.
Q. Depreciation the gradual diminution in the useful value of tangible property used in trade or business resulting from exhaustion, wear and tear, and
normal obsolescence; also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in
duration
RR-2, 105. Depreciation. A reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business may
be deducted from gross income. For convenience such an allowance will usually be referred to as depreciation, excluding from the term any idea of a
mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. The proper allowance for such depreciation of any
property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan
whereby the aggregate of the amount so set aside, plus the salvage value, will, at the end of the useful life of the property in business, equal the basis of
the property. Due regard must also be given to expenditures for current upkeep.
RR-2, 106. Depreciable property. The necessity for a depreciation allowance arises from the fact that certain property used in the business gradually
approaches a point where its usefulness is exhausted. The allowances should be confined to property of this nature. In the case of tangible property, it
applies to that which is subject to wear and tear, to decay or decline from natural causes, to exhaustion and to obsolescence due to the normal progress
of the art, as where machinery or other property must be replaced by a new invention, or due to the inadequacy of the property to the growing needs of
the business. It does not apply to inventories or to stock in trade, nor to land apart from the improvements or physical development added to it. It does
not apply to bodies of minerals which through the process of removal suffer depletion. Property kept in repair may, nevertheless, be the subject of a
38
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
depreciation allowance. The deduction of an allowance for depreciation is limited to property used in the taxpayer's trade or business. No such
allowance may be made in respect to automobiles or other transportation equipment used solely for the pleasure, a building used by the taxpayer solely
as his residence, nor in respect of furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a
business, such as theatrical business, may be the subject of a depreciation allowance.
RR-2, 107. Depreciation of intangible property. Intangibles, the use of which in the trade or business is definitely limited in duration, may be the
subject of a depreciation allowance. Examples are patents, copyrights, and franchises. Intangibles, the use of which in the business or trade is not so
limited, will not usually be a proper subject of such an allowance. If however, an intangible asset acquired through capital outlay is known from
experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such
intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the
Commissioner of Internal Revenue.
RR-2, 108. Capital sum recoverable through depreciation allowances. The capital sum to be replaced by depreciation allowances is the cost or other
basis of the property in respect of which the allowance is made. To this amount should be added from time to time the cost of improvements, additions,
and betterment and from it should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty,
as distinguished from the gradual exhaustion of its utility which is the basis of the depreciation allowance. Where the lessee of real property erects
buildings, or makes permanent improvements which become part of the realty and income has been returned by the lessor as a result thereof, as
provided in Section 49 of these regulations, the capital sum to be replaced by depreciation allowance is the same as though no such buildings had been
erected or such improvements made. No depreciation deduction will be allowed in the case of property which has been amortized to its scrap value and
is no longer in use.
RR-2, 109. Method of computing depreciation allowance. The capital sum to be replaced should be charged off over the useful life of the property,
either in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of the capital sum over units of
production. Whatever plan or method of apportionment is adopted must be reasonable and must have due regard to operating conditions during the
taxable period. While the burden of proof must rest upon the taxpayer to sustain the deductions taken by him, such deductions must not be disallowed
unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim for depreciation shall be determined upon the
conditions known to exist at the end of the period for which the return is made. If it develops that the useful life of the property will be longer or shorter
than the useful life as originally estimated under all the then known facts, the portion of the cost or other basis of the property not already provided for
through depreciation allowances should be spread over the remaining useful life of the property as reestimated in the light of the subsequent facts, and
depreciation deductions taken accordingly.
RR-2, 110. Obsolescence. With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by
economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions
alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in
addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for
obsolescence is made. No deductions for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete
at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and can not
be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due.
RR-2, 111. Depreciation of patent or copyright. In computing depreciation allowance in the case of a patent or copyright, the capital sum to be
replaced is the cost or other basis of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the
patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may
be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experimental models,
attorney's fees, development or experimental expenses, etc., actually paid. Depreciation of a patent can be taken on the basis of the fair market value as of
March 1, 1913, only when affirmative and satisfactory evidence of such value is offered. Such evidence should whenever practicable be submitted with
the return. If the patent becomes obsolete prior to its expiration, such proportion of the amount on which its depreciation may be based as the number of
years of its remaining life bears to the whole number of years intervening between the basic date when it legally expires may be deducted, if permission
to do so is specifically secured from the Commissioner of Internal Revenue. Owing to the difficulty of allocating to a particular year the obsolescence of a
patent, such permission will be granted only if affirmative and satisfactory evidence that the patent became obsolete in the year for which the return is
made is submitted to the Commissioner of Internal Revenue. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to
deduct in any taxable year a greater amount for depreciation than would otherwise be allowable.
RR-2, 112. Depreciation of drawings and models. Where a taxpayer has incurred expenditures in his business for designs, drawings, patterns, models,
or work of an experimental nature calculated to result in improvement of his facilities or his product, if the period of usefulness of any such asset may be
estimated from experience with reasonable accuracy, it may be the subject of depreciation allowances spread over such estimated period of usefulness.
The facts must be fully shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue. Except for such depreciation
allowances no deduction shall be made by the taxpayer against any sum so set up as an asset except on the sale or other disposition of such asset at a loss
or on proof of a total loss thereof.
RR-2, 113. Charging off depreciation. A depreciation allowance, in order to constitute an allowable deduction from gross income, must be charged off.
The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allowance for depreciation must be
either deducted directly from the book value of the assets or preferably credited to a depreciation reserve account, which must be reflected in the annual
balance sheet. The allowances should be computed and charged off with express reference to specific items, units, or groups of property, each item or
unit being considered separately or specifically included in a group with others to which the same factors apply. The taxpayer should keep such records
to each item or unit of depreciable property as will permit the ready verification of the factors used in computing the allowance for each year for each
item, unit, or group.
RR-2, 114. Depreciation in the case of farmers. A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling
occupied by the owner), farm machinery, and other physical property. A reasonable allowance for depreciation may also be claimed on live stock
acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with these regulations.
Such depreciation should be based on the cost or other basis and the estimated life of the live stock. If such live stock be included in an inventory no
depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the inventory.
RR-2, 115. Statement to be attached to return. To each return in which depreciation charges are claimed, there should be attached a statement
showing the item, unit, or group of depreciable property, the cost price or its market value as of March 1, 1913, if acquired prior to that date, the rate of
charge, amount previously deducted, and the amount claimed in the return. These data must agree with those appearing in the books of the taxpayer.
Necessity Theory arises from the fact that ceratin property used gradually approaches a point where its usefulness is exhausted
39
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines

REQUISITES FOR DEDUCTIBILITY:


(1) The allowance for depreciation must be reasonable must have due regard to the operating conditions duting the taxable period
(2) It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year
(3) Must be charged-off during the taxable year
(4) A statement on the allowance must be attached to the return
1. Depreciation base
Zamora v. CIR. The CTA was approximately correct in holding that the rate of depreciation must be 2.5%. An average hotel buildings estimated
useful life is 5 years, but inasmuch as it also depends on the use and location, change in population and other, it is allowed a deprecation rate of
2.5% which corresponds to a useful life of 40 years. It is true that Bulletin F has no binding force, but it has a strong persuasive effect considering
that the same has been the result of scientific studies and observation for a long period in the United States after whose Income Tax Law ours is
patterned." Verily, courts are permitted to look into and investigate the antecedents or the legislative history of the statutes involved.
2. Methods of depreciation (straight line, declining balance, sum of the digits)
a. Straight line

=

b. Declining balance
1
2 1.5 =

=
Ex:
Year Computation Accum. Depn Book Depn Value
1 10,000 x 40% 4,000.00 4,000.00 6,000.00
2 6,000 x 40% 2,400.00 6,400.00 3,600.00
3 3,600 x 40% 1,440.00 7,840.00 2,160.00
4 2,160 x 40% 864.00 8,704.00 1,296.00
5 1,296 x 40% 518.40 9,222.40 777.60
c. Working hours method

( =

# =
d. Unit of production method

( =

# =
e. Sum of the digits
#
=

3. Depreciation rates
i. Bulletin F
ii. RR 19-86, Annex A
R. Depletion the exhaustion of natural resources like mines and oil or gas wells as a result of production or severance from such mines or wells
Theory in the case of that for depreciation, is that as the product of the mine is sold, a gradual sale is being made of the TPs capital interest in the
property
Only allowed to mining entities which own an economic interest in mineral deposits
Manner of computation

= # 2011
# . 2010
RR 5-76, April 2, 1976.
Number of units of minerals remaining as of the taxable year = the number of units of minerals remaining at the end of the period to be
recovered from the property (incuding units recovered but not sold) plus the number of units sold within the year
Number of units sold within the taxable year =
o If cash basis include units for which payments were received within the taxable year although extracted or sold prior to the
period and exclude units sold but not paid for
o If accrual include all units extracted and sold during the period, whether paid or not
S. Pension Trust
RR-2, 118. Payments to employees' pension trusts. An employer who adopts or has adopted a reasonable pension plan, actuarially sound, and who
establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to his employees shall be allowed to deduct from
gross income reasonable amounts paid to such trust, in accordance with the pension plan (including any reasonable amendment thereof), as follows:
(a) If the plan contemplates the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pensions
payments, then (1) reasonable amounts paid to the trust during the taxable year representing the pension liability applicable to such year,
determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in
addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension
liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a
deduction for the taxable year and for each of the nine succeeding taxable years.
40
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future
pension payments, then (1) reasonable amounts paid to the trust during the taxable year representing the present value of the expected future
payments in respect of pensions granted to employees retired during the taxable year shall be allowed as deduction for such year as an ordinary
and necessary business expense, and in addition (2) one tenth of a reasonable amount transferred or paid to the trust during the taxable year to
cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable
year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the
nine succeeding taxable years.
REQUISITES
(1) Employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees
(2) Pension plan is reasonable and actuarially sound
(3) Must be funded by the employer, i.e. the ER contributes cash to the plan
(4) Amount contribute must no longer be subject to its control or disposition
(5) Payment has not theretofore been allowed before as a deduction
(6) Amount is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which transfer/payment is made
Requisites for a reasonable retirement plan
(1) Must be a definite written program
(2) Must be permanent and continuing unless sooner terminated for valid business reason
(3) Must cover at least 70% of all officials and employees; if there are illegibility requirement and at least 70% are eligible, at least 80% of those
eligible must be covered
(4) Must provide for the non-diversion of the corpus (principal) or income of the trust fund to any purpose other than for the exclusive benefit of
officials and employees
(5) Must not provide for discrimination in contributions or benefits
(6) Must provide for the contribution to the trust fund by the ER of officials and employees, or both for the purpose of distributing to the
officials/EEs/beneficiaries, the corpus and income of the fund accumulated
(7) Must provide for non-forfeitable rights
T. Charitable and other Contributions
(1) Ordinary those which are subject to limitation as to the amount deductible from GI
(2) Special those which are deductible in full from GI
REQUISITES for deductibility:
(1) The contribution must be paid or made to the Philippine Government or ay political subdivision thereof or to any of the domestic corporations or
associations specified by the NIRC
(2) Must be made within the taxable year
(3) Must not exceed 10% of the individuals taxable income and 5% of the corporations taxable income before deducting the contribution
(4) Must be evidenced by adequate records or receipts
Certain types of deductible contributions see NIRC, 34[H][1]

Other deductible contributions:


To the Boy Scouts
To the School for the Deaf and Blind
To the Manila Police Trust fund
To the Phil. Herald fund for Manilas neediest families
To a committee organized by civic organizations to distribute relief goods and assistance to fire victims
Ti the Malacanang Christmas Festival
To the construction of a chapel of the Phil. Air Force
BIR-NEDA Reg 1-81 and 1-82
1. Fully deductible [see NIRC, 34[H][2]]
Donations to the government
Donations to certain foreign institutions or international organizations
Donations to certain accredited non-government organization
By virtue of PD 507, contributions, donations, gifts and bequests to social welfare, cultural and charitable institutions
2. Deductible, subject to limitations
a. Corporation 5%
b. Individuals 10%
3. RR 13-98 (Dec. 8, 1998) implementing Sec. 34(h), RA 8424 deductibility by actually paid or made to accredited done institution
U. Research and Development Expenses
In general: a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in
connection with his trade/business/profession as ordinary and necessary expenses NOT chargeable to capital account
NIRC, 34, supra.
a. When paid or incurred; or
b. Amortized for 60 months
V. Imposition of Ceilings on Deductions by the by the Secretary of Finance
NIRC, 34, last par. Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the
Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the
itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of
Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry;
and (2)effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to
ceilings under present law.
W. Additional Requirement for Deductibility
41
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
NIRC, 34(K). Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which
depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code.
RMO 38-83, November 14, 1983 on deficiency withholding.
X. Items not Deductible
NIRC, 36.
RR-2, 119. Personal, living, and family expenses. Personal, living, and family expenses are not deductible. Insurance paid on a dwelling owned and
occupied by a taxpayer is a personal expense and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a
professional man who rents a property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his
professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of the house
for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his
minor children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his
return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross income.
RR-2, 120. Capital expenditures. No deduction from gross income may be made for any amounts paid out for new buildings or for permanent
improvements or betterments made to increase the value of the taxpayer's property, or for any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. Amounts expended for
securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or
perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount expended for architect's services is
part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities
are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees, and executor's commissions, are
chargeable against the "corpus" of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between
bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any
purpose in return of income.
In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital
expenditures; but where such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year in
which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of
securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this
guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.
Capital expenditures are expenditures that result in obtaining benefits of a permanent nature such as lands, bldg, machineries
No deduction
o For new buildings
o For permanent improvements/betterments made to increase value or quality of property
o Any amount expended in restoring property or making good the exhaustion for which an allowance for depreciation/depletion has been made
Examples
o Cost of defending/perfecting title to property
o Architects fees
o Commissions paid in selling securities
o Expenses of administration of an estate
o Commissions paid in acquiring property
o Amounts expended for maps, abstracts, legal opinion
RR-2, 121. Premiums on life insurance of employees. Any amounts paid for premiums on any life insurance policy covering the life of an officer or
employee or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such
policy are not deductible.
Financially interested if TP is a stockholder or he is to receive as his compensation a share of the property of the business
RR-2, 122. Losses from sales or exchanges of property. No deduction is allowed in respect of losses from sales or exchanges of property, directly or
indirectly
(a) Between members of a family. As used in Section 31, the family of an individual shall include only his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descendants;
(b) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding
stock of which is owned, directly or indirectly, by or for such individual;
(c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value of the outstanding stock of each of which
is owned, directly or indirectly, by or for the same individual, if either one of such corporations with respect to the taxable year of the corporation
preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal
holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or
(f) Between a fiduciary of a trust and a beneficiary of such trust.
Atlas Consolidated v. CIR.
Quick Facts: Atlas is being assessed of deficiency income tax. Atlas protested the assessment asking for its reconsideration and cancellation. It is the
contention of Atlas that the amount paid for as annual public relations expenses is a deductible expense from gross income under sec 30 of the NIRC.
Atlas claimed that it was paid for services of a public relations firm, P.K. Macker, a reputable public relations consultant in New York, hence an
ordinary and necessary business expense.
Issue: Whether or not the expenses paid to create a favorable image of the corporation is a deductible expense?
Held: No, efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto are not business expense but
capital expenditures. To be deductible as business expense, the following requisites are imposed: 1. the expense must be ordinary and necessary, 2.
paid and incurred within the taxable year, 3. paid or incurred in carrying in a trade or business.
Y. Sale or Exchange of Property
a. Capital assets
42
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
NIRC, 38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that
within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer
has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact
or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the
claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities
sold or otherwise disposed of, then the particular shares of stock or securities, the loss from the sale or other disposition of which is not
deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the non-deductibility of the
loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
RR-2, 132. Definition of "capital assets." The law provides that the term "capital assets" shall be held to mean property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the
allowance for depreciation provided in subsection (f) of Section 30 of the Code. The term "capital asset" includes all classes of property not
specifically excluded by Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a character which is subject to the
allowance for depreciation provided in Section 30(f) of the Code is limited to property used by the taxpayer in the trade or business at the time of
the sale or exchange. It has no application to gains or losses arising from the sale of real property used in the trade or business to the extent that
such gain or loss is allocable to the land, as distinguished from depreciable improvements upon the land. To such gain or loss allocable to the land,
the limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate, but, if so, it is because he holds the land
primarily for sale to customers in the ordinary course of his trade or business, not because land is subject to a depreciation allowance). Gains or
losses from the sale or exchange of property used in the trade or business of the taxpayer of a character which is subject to the allowance for
depreciation provided in Section 30(f) of the Code, will not be subject to the percentage provisions of Section 34(b) and losses from such
transactions will not be subject to the limitation of losses provided in Section 30(c). (Real property used in taxpayer's trade or business is no longer
capital asset per Am. R.A. 82.)
RR-2, 133. Percentage taken into account. In computing net income, only 50 per cent of the gain or loss recognized upon the sale or exchange for
a capital asset shall be taken into account. Thus, in the case of a merchandising concern which has an "ordinary net income" (net income exclusive
of net gains from the sale or exchange of capital assets) of P10,000 and a net capital gain of P5,000, the net income subject to tax will be P10,000
plus P2,500 (50 % of P5,000), of P12,500.
RR-2, 134. Limitation on capital losses. Losses from sales or exchanges of capital assets are allowed only to the extent of the gains from such
sales or exchanges. If the dealings of the taxpayer in capital assets during the year result in a net capital loss, such loss cannot be deducted from his
ordinary income, inasmuch as capital losses are allowable only to the extent of capital gains. In the case, for example, of a taxpayer, engaged in
buying and selling goods, having an ordinary net income of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable net income is
computed as follows:

Ordinary net income P20,000

Gains from sales of capital assets


(as stocks or securities) P5,000
50% of such gains P2,500
Losses from sales of capital assets P3,000
50% of such losses P1,500
Net taxable capital gains 1,000

Taxable net income P21,000
=======
If such taxpayer had an ordinary net income of P20,000, capital gains of P2,000 and capital losses of P7,000, the taxable net income would be computed as
follows:
Ordinary net income P20,000
Losses from sales of capital assets
(as stocks or securities) P7,000
50% of such losses P3,500
Gains from sales of capital assets 2,000
50% of such gains 1,000

Net capital losses P2,500
Taxable net income P20,000
======
(The net capital loss of P2,500 is not deductible in arriving at the taxable net income inasmuch as capital losses are allowed only to the extent of capital gains.)

SECTION 134-A. Capital loss carry-over-Illustration. A, an individual has the following incomes and losses:
1946 Net income from business 1,000
Dividends received 750
Interest earned 500
Capital gains on capital assets held for 8 months 5,000
43
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Capital losses on capital assets held for 9 months 10,000
1947 Net income from business 2,000
Interest earned 200
Capital gains on capital assets held for 15 months 5,000
In 1946, his taxable income is computed as follows:
Income from business, dividends and interest P2,250
Capital gains and losses:
Capital gains P5,000
Less-Capital losses 10,000

Net loss carried over to 1947 (P5,000)

Net income subject to tax P2,250
In 1947, his taxable income is computed as follows:
Income from business and interest P2,200
Capital gains and losses:
Capital gains P5,000

One-half P2,500

Less-Capital loss carried over (#) 2,250
Net capital gain 250

Net income subject to tax P2,450
======
The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is reduced to P2,250 for the reason that the net income from
business and other sources (not including capital gain), for the year 1946 is only P2,250.
If a bank or trust company incorporated under the laws of the Philippines or of the United States, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued
by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject
to the limitation contained in Section 34(c) and shall not be included in determining the applicability of such limitation to other losses.
RR-2, 135. Gains and losses from short sales. For income tax purposes, a short sale is not deemed to be consummated until the delivery of
property to cover the short sale. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not
deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the brokers to
replace the property borrowed by such broker.
Definition of capital asset
RR 7-2003, Feb. 11, 2003.
Guidelines in determining whether a real property is capital or ordinary asset
1. Definition of ordinary income
NIRC, 22[Z]. The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property
described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section
39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the
sale or exchange of property which is not a capital asset.
Calasanz v. CIR.
Quick Facts: Ursula Calasanz inherited from her father an agricultural land. Improvements were introduced to make such land saleable and
later in it was sold to the public at a profit. The Revenue examiner adjudged Ursula and her spouse as engaged in business as real estate
dealers and required them to pay the real estate dealers tax.
Issue: Whether or not the gains realized from the sale of the lots are taxable in full as ordinary income or capital gains taxable at capital gain
rates?
Held: The activities of Calasanz are indistinguishable from those invariably employed by one engaged in the business of selling real estate.
One strong factor is the business element of development which is very much in evidence. They did not sell the land in the condition in
which they acquired it. Inherited land which an heir subdivides and makes improvements several times higher than the original cost of the
land is not a capital asset but an ordinary asses. Thus, in the course of selling the subdivided lots, they engaged in the real estate business
and accordingly the gains from the sale of the lots are ordinary income taxable in full.
2. Net capital gain, net capital loss
Measure of gain or loss in general
o The disposition of property for money or for other property or for a combination of both, results in a gain or loss, because of the
difference between the TPs investment and the value in what he received
o GR: the amount of the gain or loss, as the case may be, arising therefrom is a taxable gain or a deductible loss
Factors in determining gain or loss
o Basis of property disposed of [cost at which property is acquired]
o Adjustments to the basis [additions (capital expenditures) or recoveries (depreciation)]
o Amount realized from disposal of property
o Nature or character of the property disposed of
o Period during which the property was held by the TP
3. Ordinary loss
44
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
4. Percentage taken into account (long term short term) by taxpayers other than a corporation
5. Limitation on capital loss
6. Meaning of sale or exchange requirement for capital gain
b. Determination of gain or loss from sale or transfer of property
=
=
NIRC, 40. Determination of Amount and Recognition of Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom
over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over
the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair
market value of the property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be -
(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by
whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then,
for the purpose of determining loss, the basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the
amount paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized
under paragraph (C)(2) of this Section.
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may
be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party
to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another
corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation,
solely for stock or securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for
property.
(3) Exchange Not Solely in Kind.
(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation
receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or
property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair
market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received
has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain
recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if
any, of the gain recognized shall be treated as a capital gain.
(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted
to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving
such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation
shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it
in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an
amount not in excess of the sum of such money and the fair market value of such other property so received, which is not
distributed.
(4) Assumption of Liability.
(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be
permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration,
another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then
such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being
within the exceptions.
(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the
adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale
or exchange of a capital asset or of property which is not a capital asset, as the case may be.
(5) Basis
(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same
as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the
other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that
was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided,
further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or
acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor
45
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes
of stocks or securities.
(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor
increased by the amount of the gain recognized to the transferor on the transfer.
(6) Definitions.
(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration.
(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or
consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for
stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be
undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further,
That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the
whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the
property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include
the cash assets of the transferor.
(c) The term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent
(51%) of the total voting power of all classes of stocks entitled to vote.
The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the
purpose 'substantially all' and for the proper implementation of this Section.

RR-2, 136. Basis for determining gain or loss from sale of property. For the purpose of ascertaining the gain or loss from the sale or exchange of
property, the basis is the cost of such property, or in the case of property which should be included in the inventory, its latest inventory value. But
in the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the gain to be included in
gross income is the excess of the amount realized therefor over such fair market value. (See illustration I, Section 137 of these regulations). Also in
the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost the deductible loss is the excess
of such fair market value over the amount realized therefor. (See Illustration II, Id.). No gain or loss is recognized in the case of property sold or
exchanged (a) at more than cost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.), or (b) at less than cost but at more
than its fair market value as of March 1, 1913. (See Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing gain or loss
from the exchange or sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income; the amount
of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless shown by clear and convincing
evidence to be incorrect. What the fair market value of property was as of March 1, 1913, is a question of fact to be established by evidence which
will reasonably and adequately make it appear. The nature and extent of the sales and the circumstances under which they were made should be
considered. Prices received at forced sales or for small lots of property may be and often are no real indication of the value of the amount of
property in question. For instance, sales from time to time of a small number of shares of stock is little indication of the value of a large or
controlling interest in the corporation. If the taxpayer can not determine the cost of securities purchased prior to March 1, 1913, because of the loss,
destruction, or failure to keep records, the value of the securities at the date of approximate date of acquisition may be used in determining the cost
basis for purposes of computing the gain or loss from the sale of the securities. When the date or approximate date of acquisition is unknown, no
general rule can be stated for determining the cost value of such securities. Each case must be considered separately upon its own facts.
RR-2, 137. Illustrations of the computation of gain or loss from the sale or exchange of property acquired prior to March 1, 1913. To avoid
complexity no adjustment has been made in these examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the taxable gain is the
excess of the amount realized therefor over such fair market value.

ILLUSTRATION I
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P30,000 P40,000 P10,000
Excess of amount realized over fair
market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.
In the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost, the deductible loss is the
excess of such fair market value over the amount realized therefor.

ILLUSTRATION II
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P10,000 P6,000 P4,000
Excess of fair market value over
amount realized. Loss attributable to
the period prior to March 1, 1913, not
deductible.
No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at more than cost but at less than
its fair market value as of that date.

ILLUSTRATION III
Fair Market
46
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P60,000 P40,000 No taxable gain or deductible loss.
Reason: A gain on whole transaction,
which gain is attributed to period prior
to March 1,1913.
No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at less than cost but at more than
its fair market value as of that date.

ILLUSTRATION IV
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P6,000 P10,000 No taxable gain or deductible loss.
Reason: A loss on whole transaction,
which loss is attributable to period
prior to March 1, 1913.
Where the cost is equal to or greater than the fair market value as of March 1, 1913, and the selling price exceeds the cost, the gain to be included in gross
income is the excess of the selling price over the cost.

ILLUSTRATION V
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P10,000 P40,000 P20,000
Reason: Gain on whole transaction,
all of which is attributable to period
subsequent to March 1, 1913.
Where the fair market value as of March 1, 1913, is equal to or greater than the cost and the selling price is less than the cost, the deductible loss is the amount
by which the cost exceeds the selling price.

ILLUSTRATION VI
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P30,000 P10,000 P10,000
Reason: Loss on whole transaction, all
of which is attributable to period
subsequent to March 1, 1913. Only
actual loss sustained deductible.

RR-2, 138. Sale of property acquired by gift. In computing the gain or loss from the sale or other disposition of property acquired by gift, the
basis shall be the selling price and the fair market value of the property at the time the gift was made, or its fair market value as of March 1, 1913, if
acquired prior thereto, determined in accordance with the next two preceding sections. In the case of gifts made on or after July 1, 1939, the value
taken as a basis for gift tax purposes shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the
property.
RR-2, 139. Sale of property acquired by devise, bequests, or inheritance. In computing the gain or loss from the sale or other disposition of
property acquired by devise, bequest, or inheritance, the basis shall be the fair market price or value of such property at the time of the death of the
decedent. The term "property acquired by bequest, devise, or inheritance" as used herein includes (a) such property interests as the taxpayer has
received as the result of a transfer, or creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death,
and (b) such property interest as the taxpayer has received as the result of the exercise by a person of a general power of appointment (1) by will,
or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after death. In the case of property acquired
by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other disposition thereof shall be
computed in accordance with sections 136 and 137 of these regulations. In the case of property acquired by bequest, devise or inheritance, its value
as appraised for the purpose of the inheritance tax shall be deemed to be its fair market value when acquired.
RR-2, 140. Exchange of property. Gain or loss arising from the acquisition and subsequent disposition of property is realized only when as the
result of a transaction between the owner and another person the property is converted into other property (a) that is essentially different from the
property disposed of, and (b) that has a market value. The requirement that the property received in exchange must be "essentially different from
the property disposed of" implies that there must be a change in substance and not merely a change in form. By way of illustration, if a taxpayer
owning ten shares of stock exchanges his stock certificate for a voting trust certificate, no income is realized. The term "market value" means the
fair value of the property in money as between one who wishes to purchase and one who wishes to sell. It is not, however, what can be obtained for
the property when the owner is under peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value which an owner could
not reasonably expect to obtain for the property although he might possibly be fortunate enough to do so. "Market value" is the price at which a
seller willing to sell at a fair price and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. Evidence as to
the assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock.
RR-2, 141. Determination of gain or loss from the exchange of property. The amount of income derived or loss sustained from an exchange of
property is the difference between the market value at the time of the exchange of the property received in exchange and the original cost, or other
basis, of the property exchange. If the property exchanged was acquired prior to March 1, 1913, see Sections 136 and 137 of these regulations.
47
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
RR-2, 142. Readjustment of interest in a registered copartnership. When a partner retires from a duly registered copartnership, or the
partnership is dissolved, he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of his
interest in the partnership including in such cost the amount of his share in any undistributed partnership net income earned since he became a
partner on which the income tax has been paid. However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as
hereinbefore provided and the amount of such interest as of date, plus the amount of the shares in any undistributed partnership net income
earned since March 1, 1913, on which the income tax has been paid, shall be ascertained and the taxable gain derived or the deductible loss
sustained shall be computed as provided in Sections 136 and 137 of these regulations. If the partnership distributes its assets in kind and not in
cash, the partner realizes gain or suffers loss according to the market value of the property received in liquidation. Whenever a new partner is
admitted, to a partnership, or any existing partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the
next return of income, in order that the Commissioner of Internal Revenue may determine whether any gain or loss has been realized by any
partner.
RR-2, 143. Basis of stock or securities acquired in "wash sales". In the sale or other disposition of stocks or securities the acquisition of which (or
the contract or option to acquire which) resulted in the non deductibility of the loss from the sale or other disposition of substantially identical
stock or securities the basis shall be the basis of the substantially identical stock so sold or disposed of, increased or decreased, as the case may be,
by the difference, if any, between the price at which the stock or securities was acquired and the price at which such substantially identical stock or
securities were sold or otherwise disposed of. The application of this rule may be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936, which he sold January 15, 1940, for P80.00. On
February 1, 1940, he purchased a share of common stock of the same corporation for P90.00. No loss from the sale is recognized under Section 33
of the Code. The basis of the new share is P110; that is, the basis of the old share (P100) increased by P10, excess of the price at which the new
share was acquired (P90) over the price at which the old share was sold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936, which he sold January 15, 1940, for P80. On January 1,
1940, he purchased a share of common stock of the same corporation for P70. No loss from the sale is recognized under Section 33 of the Code. The
basis of the new share is P90; that is, the basis of the old share (P100) decreased by P10, the excess of the price at which the old share was sold
(P80) over the price at which the new share was acquired (P70). (See Section 131 of these regulations).
1. Computation of gain or loss
CIR v. Aquafresh Seafood. It is undisputed that at the time of the sale of the subject properties, the same were classified as RR, or
residential, based on the 1995 Revised Zonal Value of Real Properties. Petitioner CIR, thus, cannot unilaterally change the zonal valuation of
such properties to commercial without first conducting a re-evaluation of the zonal values as mandated under Section 6(E) of the NIRC.
Petitioner failed to prove that it had complied with Revenue Memorandum No. 58-69 and that a revision of the 1995 Revised Zonal Values of
Real Properties was made prior to the sale of the subject properties.
2. Cost or basis for income tax purposes
3. Exchange of property tax-free exchange
NIRC, 40(c)(2). Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and
a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the
extent that they are connected with income from sources within the Philippines.
i. Merger or consolidation
+ =
+ =
BIR Ruling 383-87, November 25, 1987.
CIR v. Vicente Rufino. The Court of Tax Appeals did not err in finding that no taxable gain was derived by the private respondents from
the questioned transaction. There was a valid merger although the actual transfer of the properties subject of the Deed of Assignment
was not made on the date of the merger. The Court finds no impediment to the exchange of property for stock between the two
corporations being considered to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the
Deed of Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set forth in the
merger agreement shall be deemed to be taking place simultaneously on January 1. 1959, when the Deed of Assignment became
operative. The certificates of stock subsequently delivered by the New Corporation to the private respondents were only evidence of the
ownership of such stocks. Although these certificates could be issued to them only after the approval by the SEC of the increase in
capitalization of the New Corporation, the title thereto, legally speaking, was transferred to them on the date the merger took effect, in
accordance with the Deed of Assignment. Our ruling then is that the merger in question involved a pooling of resources aimed at the
continuation and expansion of business and so came under the latter and intendment of the National Internal Revenue code, as amended
by the above-cited law, exempting from the capital gains tax exchanges of property effected under lawful corporate combinations.
The basis consideration, of course, is the purpose of the merger, as this would determine whether the exchange of properties involved
therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the merger "must be undertaken for a
bona fide" business purpose and not solely for the purpose of escaping the burden of taxation."
ii. Transfer of substantially all the assets
iii. Transfer of property for shares of stocks
iv. Administrative requirements in case of tax-free exchanges
v. De facto merger
4. Cost basis in tax-free exchanges
5. Assumption of liability in tax-free exchanges
6. Business purpose
Gergory v. Helvering. In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking,
though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate
reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because
the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the
statutory provision in question of all serious purpose.
48
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
c. Losses from wash sales of stocks or securities

NIRC, 34.
RR-2, 131. Losses from wash sales of stock or securities. (a) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or
other disposition of stock or securities, if, within a period beginning thirty days before the date of such sale or disposition and ending thirty days
after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or by an exchange upon which the entire
amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities.
However, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in
the ordinary course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock
or securities, the provisions of this section shall be applied to the losses in the order in which the stock or securities the disposition of which
resulted in the respective losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock or securities disposed
of at a loss on the same day cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they
were originally acquired (beginning with earliest acquisition).\
(c) Where the amount of stock or securities acquired within the sixty-one day period is less than the amount of stock or securities
sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible
shall be those with which the stock or securities acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the order of their acquisition (beginning with the earliest
acquisition) with an equal number of the shares of stock or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixty- one-day period is not less than the amount of stock or
securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which resulted in the nondeductibility of
the loss shall be those with which the stock or securities disposed of are matched in accordance with the following rule:
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired
in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
(e) The acquisition of any security which results in the non-deductibility of a loss under the provisions of this section shall be
disregarded in determining the deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by purchase or by an exchange upon which the entire amount of
gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-one-day
period to acquire by purchase or by such an exchange.

EXAMPLE (1): A, whose taxable year is the calendar year, on December 1, 1939, purchased 100 shares of common stock in the M Company for
P10,000 and on December 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940, he sold the 100 shares purchased on
December 1, 1939, for P9,000. Because of the provisions of Section 33 no loss from the sale is allowable as a deduction.

EXAMPLE (2): A, whose taxable year is the calendar year, on September 21, 1939, purchased 100 shares of the common stock of the M Company for
P5,000. On December 21, 1939, he purchased 50 shares of substantially identical stock for P2,750, and on December 26, 1939, he purchased 25
additional shares of such stock for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased on September 21, 1939. There is an
indicated loss of P1,000 on the sale of the 100 shares. Since within the sixty-one-day period A purchased 75 shares of substantially identical stock,
the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750) is not allowable as a deduction because of the provisions of Section 33. The loss
on the sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject to the limitations provided in Sections 31(b) and 34. The
basis of the 50 shares purchased December 21, 1939, the acquisition of which resulted in the non-deductibility of the loss (P500) sustained on 50 of
the 100 shares sold on January 2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750 [the difference between the
purchase price of the 50 shares acquired on December 21, 1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940
(P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26, 1939, the acquisition of which resulted in the nondeductibility
of the loss (P250) sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375. (See Section 143 of these regulations.)

A calendar year

09/21/39 purchased 100 shares of common stock for 5,000


12/21/39 purchased 50 shares for 2,750
12/26/39 purchase 25 shares for 1,125
01/02/1940 sold 100 shares for 4,000 [indicated loss of 1,000]

BUT since within the 61-day period A purchased 75 shares of substantially identical stock, the loss on the sale of the 75 shares = NOT DEDUCTIBLE
Loss on the sale of the remaining 25 shares = deductible subject to the limitations

EXAMPLE (3): A, whose taxable year is the calendar year, on September 15, 1938, purchased 100 shares of the stock of the M Company for P5,000.
He sold these shares on February 1, 1940, for P4,000. On each of the four days from February 15, 1940, to February 18, 1940, he purchased 50
shares of substantially identical stock for P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 1940, but since
within the sixty-one-day period A purchased not less than 100 shares of substantially identical stock, the loss is not deductible. The particular
shares of stock the purchase of which resulted in the nondeductibility of the loss are the first 100 shares purchased within such period, that is, the
50 shares purchased on February 15, 1940, and the 50 shares purchased on February 16, 1940.
d. Exemption from capital gains tax of certain individuals from the sale or exchange of principal residence
NIRC, 24 (D)(2). Exception The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have
been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, further, That the historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer
49
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
with thirty (3) days from the date or sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned:
Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization
of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which
the unutilized amount bears to the gross selling price in order to determine the taxable portion and the and the tax prescribed under paragraph (1)
of this Subsection shall be imposed thereon.

=

e. RA 9480 (Tax Amnesty) effective June 16, 2006.


f. RR 6-2008, Taxation of Shares of Stocks (April 22, 2008)

CAPITAL GAINS AND LOSSES

Classification:
(1) Ordinary assets
*stock in trade of the TP or other properties which would be properly be included in the inventory of the TP
*property held primarily for sale
*property used in trade or business subject to depreciation
*real property used in trade or business
(2) Capital assets
*accounts receivable
*property subdivided and sold to tenants at govt instance
*sugar quota
*interest in partnership
*properties held for investments
*membership in the PSE
Definition of terms:
*Capital gain gain derived from the sale/exchange of capital assets
*capital loss loss incurred from the sale or exchange of capital assets
*Net Capital gain the Excess of the gains over the losses
*Net Capital Loss the excess of the losses over the gains
*net capital loss carry over NCL cannot be deducted from ordinary income but which could be carried over to the next taxable year by a TP other than a
corporation as a deduction against NCG
*short-term CG/L gain or loss arising from sale/exchange of CA held for 12months or less
*long-term CG/L -- gain or loss arising from sale/exchange of CA held for more than 12months
*ordinary income excess of income over expenses

Requisites for recognition of CG/L


(1) The transaction must involve property classified as capital asset
(2) Transaction must arise from sale or exchange
*where TP = individual, short term or long term || if corporation = holding period not significant

Limitation on Capital Losses


*GR: losses are allowed only to the extent of the gains from such sales/exchanges
Z. Situs of Taxation Sources from Within and Without the Philippines
NIRC, 42. Income from Sources Within the Philippines.-
(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within
the Philippines:
(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of
residents, corporate or otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period
ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation
has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an
amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources
within the Philippines bears to its gross income from all sources.
(3) Services. - Compensation for labor or personal services performed in the Philippines;
(4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals
or royalties for
(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
(c) The supply of scientific, technical, industrial or commercial knowledge or information;
(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of,
any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such
knowledge or information as is mentioned in paragraph (c);
50
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;
(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial
or commercial undertaking, venture, project or scheme; and
(g) The use of or the right to use:
i. Motion picture films;
ii. Films or video tapes for use in connection with television; and
iii. Tapes for use in connection with radio broadcasting.
(5) Sale of Real Property. - gains, profits and income from the sale of real property located in the Philippines; and
(6) Sale of Personal Property. - gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines.
(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and
other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with
the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income:
Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The
remainder, if any, shall be treated in full as taxable income from sources within the Philippines.
(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A)
unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the
Philippines.
(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the
Philippines:
(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section;
(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section;
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the
use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade
brands, franchises and other like properties; and
(5) Gains, profits and income from the sale of real property located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall
be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than
those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are
separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the
expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions
which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from
sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any
expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable
income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the
Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines.
Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the
purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in
which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources
within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any
share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner
a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall
be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.
(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced' includes 'created',
'fabricated,' 'manufactured', 'extracted,' 'processed', 'cured' or 'aged.'
RR-2, 152. Income from sources within the Philippines. The law divides the income of taxpayers into three classes:
(1) Income which is derived in full from sources within the Philippines;
(2) Income which is derived in full from sources without the Philippines; and
(3) Income which is derived partly from sources within and partly from sources without the Philippines.
Non-resident alien individuals and foreign corporations are taxable only upon income from sources within the Philippines. Citizens and residents of
the Philippines and domestic corporations are taxable upon income derived from sources both within and without the Philippines.
The taxable income from sources within the Philippines includes that derived in full from sources within the Philippines and that portion of the
income which is derived partly from sources within and partly from sources without the Philippines which is allocated or apportioned to sources within
the Philippines.
RR-2, 153. Interest. Interest on bonds or notes or other interest bearing obligations of residents, corporate or otherwise, constitutes income from
sources within the Philippines.
RR-2, 154. Dividends. Gross income from sources within the Philippines includes dividends, as defined by Section 83 of the Code:
(a) From a domestic corporation; and
51
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(b) From a foreign corporation unless less than 50 per cent of its gross income for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends, or for such part of such period as it has been in existence, was derived from sources within the
Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived
from sources within the Philippines bears to its gross income from all sources.
Dividends will be treated as an income from sources within the Philippines unless the taxpayer submits sufficient data to establish to the
satisfaction of the Commissioner of Internal Revenue that they should be excluded from gross income under Section 37(a)(2)(B).
RR-2, 155. Compensation for labor or personal services. Gross income from sources within the Philippines includes compensation for labor or
personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of
the place of payment. If a specific amount is paid for labor or personal services performed in the Philippines, such amount shall be included in the gross
income. If no accurate allocation or segregation of compensation for labor or personal services performed in the Philippines can be made, or when such
labor or service is performed partly within and partly without the Philippines, the amount to be included in the gross income shall be determined by an
apportionment of the time basis, i.e., there shall be included in the gross income an amount which bears the same relation to the total compensation as
the number of days of performance of the labor or services within the Philippines bears to the total number of days performance of labor or services for
which the payment is made. Wages received for services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on
a coastwise vessel are to be regarded as from sources within the Philippines.
RR-2, 156. Rentals and royalties. Gross income from sources within the Philippines includes rentals or royalties from property located within the
Philippines or from any interest in such property, including rentals or royalties for the use of or the privilege of using in the Philippines, patents,
copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. The income arising from the rental of
property whether tangible or intangible located within the Philippines, or from the use of property, whether tangible or intangible, located within the
Philippines, is from sources within the Philippines.
RR-2, 157. Sale of real property. Gross income from sources within the Philippines includes gain, computed under the provisions of Section 35,
derived from the sale or other disposition of real property located in the Philippines. For the treatment of capital gains and losses, see Sections 132 to
135 of these regulations.
RR-2, 158. Income from sources without the Philippines. Gross income from sources without the Philippines includes:
(1) Interest other than that specified in Section 37(a)(1), as being derived from sources within the Philippines;
(2) Dividends other than those derived from sources within the Philippines as provided in Section 37(a)(2);
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties derived from property without the Philippines or from any interest in such property, including rentals or royalties for the use of
or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trade-marks, trade brands,
franchises, and other like property; and
(5) Gain derived from the sale of real property located without the Philippines.
RR-2, 159. Sale of personal property. Income derived from the purchase and sale of personal property shall be treated as derived entirely from the
country in which sold. The world "sold" includes "exchanged". The "country in which sold" ordinarily means the place where the property is marketed.
This section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the
Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See Section 162 of these regulations.)
RR-2, 160. Apportionment of deductions. From the items specified in Section 37(a) as being derived specifically from sources within the Philippines
there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income
from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross
income.

EXAMPLE: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000,
including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000

TotalP36,000

that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the
Philippines, determined under Section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is properly allocated to income from sources within
the Philippines and the amount of P40,000 is properly allocated to income from sources without the Philippines.

The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income
from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, there are
deducted from the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 (representing P8,000 properly apportioned
to the income from sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of
gross income). The remainder, P22,000, is the net income from sources within the Philippines.

RR-2, 161. Other income from sources within the Philippines. Items of gross income other than those specified in Section 37(a) and (c) shall be
allocated or apportioned to sources within or without the Philippines, as provided in Section (37)(e).
The income derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or timber, located within the
Philippines, and from the sale by the producer of the products thereof within or without the Philippines, shall ordinarily be included in gross income
from sources within the Philippines. If, however, it is shown to the satisfaction of the Commissioner of Internal Revenue that due to the peculiar
52
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
conditions of productions and sale in a specific case or for other reasons all of such gross income should not be allocated to sources within the
Philippines and to sources without the Philippines shall be made as provided in Section 162 of these regulations.
Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted therefrom, in computing net
income, the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income.
RR-2, 162. Income from the sale of personal property derived from sources partly within and partly without the Philippines. Items of gross income
not allocated by Sections 152 to 159 or 161 of these regulations to sources from within or without the Philippines shall (unless unmistakably from a
source within or a source without the Philippines) be treated as derived from sources partly within and partly without the Philippines.
The portion of such income derived from sources partly within the Philippines and partly within a foreign country which is attributable to sources
within the Philippines shall be determined according to the following rules and cases:

PERSONAL PROPERTY PRODUCED AND SOLD: Gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer
within the Philippines and sold within a foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold within the
Philippines shall be treated as derived partly from sources within the Philippines and partly from sources within a foreign country under one of the cases
below. As used herein the word "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.

CASE 1. Where the manufacturer or producer regularly sells a part of his output to wholly independent distributors or other selling concerns in such a way
as to establish fairly an independent factory or production price or shows to the satisfaction of the Commissioner of Internal Revenue that such an
independent factory or production price has been otherwise established unaffected by considerations of tax liability, and the selling or distributing branch
or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income
attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department
of the business to the distributing or selling department at the independent factory price as established. In all such cases the basis of the accounting shall be
fully explained in a statement attached to the return.

CASE 2. Where an independent factory or production price has not been established as provided under Case 1, the net income shall first be computed by
deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold
within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or
other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be
allocated to some item or class of gross income. Of the amount of net income so determined, one-half shall be apportioned in accordance with the value of the
taxpayer's property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by
multiplying such one half by a fraction the numerator of which consists of the value of the taxpayer's property within the Philippines, and the denominator of
which consists of the value of the taxpayer's property both within the Philippines and within the foreign country. The remaining one-half of such net income
shall be apportioned in accordance with the gross sales of the taxpayer within the Philippines and within the foreign country, the portion attributable to
sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the taxpayer's gross sales for
the taxable year or period within the Philippines, and the denominator of which consists of the taxpayer's gross sales for the taxable year, or period both
within the Philippines and within the foreign country. The "gross sales of the taxpayer within the Philippines" means the gross sales made during the taxable
year which were principally secured, negotiated, or effected by employees, agents, offices, or branches of the taxpayer's business resident or located in the
Philippines. The term "gross sales" as used in this paragraph refers only to the sales of personal property produced (in whole or in part) by the taxpayer
within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the
Philippines, and the term "property" includes only the property held or used to produce income which is derived from such sales. Such property should be
taken at its actual value, which in the case of property valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation
shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative
evidence showing such value to be greater or less than the actual value. The average value during the taxable year or period shall be employed. The average
value of property as above prescribed at the beginning and end of the taxable year or period ordinarily may be used, unless by reason of material changes
during the taxable year or period such average does not fairly represent the average for such year or period, in which event the average shall be determined
upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason for a different treatment is shown) be assigned or allocated to the
Philippines when the debtor resides in the Philippines.

CASE 3. Applications for permission to base the return upon the taxpayer's books of account will be considered by the Commissioner of Internal Revenue in
the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of
receipts and expenditures which reflects more clearly than the processes or formulas herein prescribed, the income derived from sources within the
Philippines.

RR-2, 163. Foreign steamship companies. The returns of foreign steamship companies whose vessels touch ports of the Philippines should include as
gross income, the total receipts of all out-going business whether freight or passengers. With the gross income thus ascertained, the ratio existing
between it and the gross income from all parts, both within and without the Philippines of all vessels, whether touching ports of the Philippines or not,
should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed
upon a basis which recognizes that the income arising and accruing from business done if any from this country shall bear its share, and no more, of
expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross
income arising from business done both within and without this country. In other words, the net income of a foreign steamship company doing business
in or from this country is ascertained for the purpose of the income tax, by deducting from the gross receipts from outgoing business such a portion of
the aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels, including in each case incoming of a
nonshipping character but incidental, to the shipping business such as dividends from investments, interests on deposits, etc. For example

Given
(a) Gross receipts from outgoing freights and passengers
from P.I. ports P20,000
(b) Gross receipts from outgoing freights and passengers
53
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
from all ports other than those of P. I 200,000
(c) Interests and other nonshipping income received by P.I.
office 5,000
(d) Interests, dividends, and other nonshipping income received
by all offices other than those in P.I. 50,000
(e) Total expenses and deductions of the company as a whole,
including those incurred by P.I. office 150,000
Computation of P.I. Net Income
(f) P.I. Gross Income:
Freights and passengers P20,000
Interest and other income 5,000

Total25,000
(g) P.I. expenses:
P.I. gross income
x World's expenses, or
World's gross income
20,000 plus 5,000
x 150,000, or
200,000 plus 20,000 plus 50,000 plus 5,000
25,000
x 150,000 = 13,636
275,000
(h) P.I. net income:
P.I. gross income less P.I. expenses, or
P25,000 less P13,636 = P11,364

RR-2, 164. Telegraph and cable service. A foreign corporation carrying on the business of transmission of telegraph or cable messages between
points in the Philippines and points outside the Philippines derives income partly from sources within and partly from sources without the Philippines.
(1) GROSS INCOME. The gross income from sources within the Philippines derived from such services shall be determined by adding (a) its gross
revenues derived from messages originating in the Philippines and (b) amounts collected abroad on collect messages originating in the Philippines
and deducting from such sum amounts paid or accrued for transmission of messages beyond the company's own circuit. Amounts received by the
company in the Philippines with respect to collect messages originating without the Philippines shall be excluded from gross income.
(2) NET INCOME. In computing net income from sources within the Philippines there shall be allowed as deductions from gross income determined
in accordance with paragraph (1): (a) all expenses incurred in the Philippines (not including any general overhead expenses), incident to the
carrying on of the business in the Philippines; (b) all direct expenses incurred abroad in the transmission of messages originating in the Philippines
(not including any general overhead expenses or maintenance, repairs, and depreciation of cable and not including any amount already deducted in
computing gross income); (c) depreciation of property (other than cables) located in the Philippines and used in the trade or business therein; and
(d) a proportionate part of the general overhead expenses [not including any items incurred abroad corresponding to those enumerated in (a), (b),
and (c)], and of maintenance, repairs, and depreciation of cables of the entire cable system of the enterprise based on the ratio which the number of
words originating in the Philippines bears to the total words transmitted by the enterprise.
RR-2, 165. Computation of income. If a taxpayer has gross income from sources within or without the Philippines as defined by Section 37 (a) or (c)
together with gross income derived partly from sources within and partly from sources without the Philippines, the amounts thereof, together with the
expenses and investment applicable thereto, shall be segregated, and the net income from sources within the Philippines shall be separately computed
therefrom.
1. Gross income from sources within Philippines
2. Taxable income from sources within the Philippines
CIR v. CTA and Smith Kline. The governing law is found in section 37 of the old NIRC which reads: Xxx (b) Net income from sources in the
Philippines. From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be
allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the Philippines.
Rev. Audit Memo Order 1-86 (income from constructive trading of multinationals)
RR 16-86.
RAMO 4-86 (allocation of head office overhead expenses)
RAMO 1-95 (audit guidelines on determination of income tax of branches of multinationals)
3. Gross income from sources without the Philippines
4. Income from sources partly within or without the Philippines
5. Situs of sale of stocks in a domestic corporation
6. Definition of royalties
Philamlife v. CTA.
CIR v. Marubeni, supra.
RMC 44-2005 [September 1, 2005] Guideline for computer software payment, royalties, services or business income
AA. Accounting Periods and Methods
NIRC, 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as
the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined
54
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall
be computed on the basis of the calendar year.
NIRC, 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable
year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted
for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls
the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.
NIRC, 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be taken for the taxable year in which 'paid or
accrued' or 'paid or incurred', dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect
the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such
period or a prior period.
NIRC, 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from
calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of
such new accounting period, subject to the provisions of Section 47.
NIRC, 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.
(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the
Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for
the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to
fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made
and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment
return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under Subsection (A) on account of a change
in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall
be computed on the basis of the period for which separate final or adjustment return is made.
NIRC, 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for tax purposes in the manner as provided in this
Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The
return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the
entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of
the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work
under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or require an amended return.
NIRC, 49. Installment Basis.
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in
any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when
payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price
exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed
twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the
term 'initial payments' means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable
period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital
asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable
income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any
such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

FORMULA for Installment Basis:



=

NIRC, 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade
or business.
RR-2, 166. General rule. The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his
income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not
regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the
Commissioner of Internal Revenue clearly reflects it. (See Section 137 of these regulations for computation of net income, and Section 38 for bases of
computation. For the use of inventories, see Sections 144 to 151 of these regulations.)
RR-2, 167. Methods of accounting. It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law
contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is
55
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved
standard method of accounting which reflects taxpayer's income may be adopted. Among the essentials are the following:
(1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income producing factor, inventories of the merchandise on
hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in
computing the net income of the year in accordance with Sections 144 to 151 of these regulations;
(2) Expenditures made during the year should be properly classified as between capital and income; that is to say, expenditures for items of plant,
equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense
account; and
(3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure
(other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the
appropriate reserve and not to current expenses.
RR-2, 168. Changes in accounting methods. The true income, computed under the law shall in all cases be entered in the return. If for any reason
the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and
for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted
as the result of such change.
A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for
purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this action, a change in the method of accounting
employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change from cash receipts and
disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see
Sections 144 to 151 of these regulations); a change from the cash or accrual method to the long-term contract method, or vice versa; a change in the long-
term contract method from the percentage of completion basis to the completed contract basis or vice versa (see Section 44 of these regulations); or a
change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for
permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning
of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts which would be duplicated
or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the
Commissioner of Internal Revenue agree to the terms and conditions under which the change will be effected.
RR-2, 169. Accounting period. Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be
made and their income computed for each calendar year ending on December 31st of every year. However, corporations, associations, or partnerships
may with the approval of the Commissioner of Internal Revenue first secured, file their returns and compute their income on the basis of a fiscal year
which means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual
taxpayers be authorized to establish a fiscal year as basis for filing their returns and computing their income. (For authority to file on fiscal year basis see
Section 172 of these regulations.)
RR-2, 170. When included in gross income. Except as otherwise provided in Section 39 in the case of the death of a taxpayer, gains, profits, and
income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different
period in accordance with the approved method of accounting followed by him. If a taxpayer has died there shall also be included in computing net
income for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period
or a prior period, regardless of the fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements.
RR-2, 171. "Paid or incurred" and "paid or accrued". (a) The terms "paid or incurred" and "paid or accrued" will be construed according to the
method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year
in which "paid or accrued" or "paid or incurred", unless in order clearly to reflect the income such deductions or credits should be taken as of a different
period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was "paid or accrued" or "paid or incurred",
he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a
complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period
in which it was actually "paid or incurred", or "paid or accrued", as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue
will decide whether the case is within the exception provided by the law, and the taxpayer will be advised as to the period for which the deduction or
credit is properly allowable.
(b) The provisions of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer
dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued up to the date of his death if not
otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his
returns on the basis of cash receipts and disbursements.
RR-2, 172. Change of accounting period. If a corporation, including a duly registered general co-partnership, desires to change its accounting
period from fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal year to another, it shall at any time not less than thirty
days prior to the date fixed in Section 46(b) of the Code for the filing of its return on the basis of its original accounting period submit a written
application to the Commissioner of Internal Revenue designating the proposed date for the closing of its new taxable year, together with a statement of
the date on which the books of account were opened and closed each year for the past three years, the date on which the taxable year began and ended
as shown on the returns filed for the past three years, and the reasons why the change in accounting period is desired.
RR-2, 173. Returns for periods of less than twelve months. No return can be made for a period of more than twelve months. A separate return for
a fractional part of a year is therefore required whenever there is a change, with the approval of the Commissioner of Internal Revenue, in the basis of
computing net income from one taxable year to another taxable year. The periods to be covered by such separate returns in the several cases are stated
in Section 42(a). The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing
of a return and the payment of tax for a full taxable year closing at the same time.
RR-2, 174. Sale of personal property on installment plan. Dealers in personal property ordinarily sell either for cash or on the personal credit of
the purchaser or on the installment plan. Dealers who sell on the installment plan usually adopt one of four ways of protecting themselves in case of
default
(a) By an agreement that title is to remain in the vendor until the purchaser has completely performed his part of the transaction;
(b) By a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the selling price;
(c) By a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the vendor; or
(d) By conveyance to a trustee pending performance of the contract and subject to its provisions.
56
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
The general purpose and effect being the same in all of these cases, the same rule is uniformly applicable. The general rule prescribed is that a
person who regularly sells or otherwise disposes of personal property on the installment plan, whether or not title remains in the vendor until the
property is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year
which the total or gross profit (that is, sales less cost of goods sold) realized or to be realized when the property is paid for, bears to the total contract
price. Thus the income of a dealer in personal property on the installment plan may be ascertained by taking as income that proportion of the total
payments received in the taxable year from installment sales (such payments being allocated to the year against the sales of which they apply) which the
total or gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made
during that respective year. No payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground
that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change by the
taxpayer to the installment basis of returning income. Deductible items are not to be allocated to the years in which the profits from the sales of a
particular year are to be returned as income, but must be deducted for the taxable year in which the items are "paid or incurred" or "paid or accrued", as
provided by Section 40 and 84(q) of the Code. A dealer who desires to compute his income on the installment basis shall maintain books of account in
such a manner as to enable an accurate computation to be made on such basis in accordance with the provisions of this section.
The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly be included in
inventory) may be reported on the installment basis only if (1) the sale price exceeds P1,000 and (2) the initial payments do not exceed 25 per cent of the
selling price.
If for any reason the purchaser defaults in any of his payments, and the vendor returning income on the installment basis repossesses the property
sold whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the repossession occurs is
to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the repossession or are applied by the vendor
to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property
repossessed and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper
adjustment for any other amounts realized or costs incurred in connection with the repossession. The basis in the hands of the vendor of the obligations
of the purchaser satisfied, discharged, or applied upon the repossession of the property shall be the excess of the face value of such obligations over an
amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on
account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged, or applied upon the
repossession, unless it is clearly shown that after the property was repossessed the purchaser remained liable for such portion; and in no event shall the
amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable
after the repossession. If the property repossessed is bid in by the vendor at a lawful public auction or judicial sale, the fair market value of the property
shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. The property repossessed shall be
carried on the books of the vendor at its fair market value at the time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income from installment sales on the straight accrual or cash receipts and
disbursement basis, such a course is permissible.
RR-2, 175. Sale of real property involving deferred payments. Under Section 43 deferred-payment sales of real property include (a) agreements to
purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has
been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.
Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of
the purchaser during the taxable year in which the sale is made do not exceed 25 per cent of the selling price.
(2) Deferred-payment sales not on the installment plan, that is sales in which the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price.
In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the
mortgage is assumed by the purchaser, shall be included as a part of the "selling price" but the amount of the mortgage, to the extent that it does not
exceed the basis to the vendor of the property sold, shall not be considered as a part of the "initial payments" or of the "total contract price", as those
terms are used in Section 43 of the Code, in Sections 174 and 176 of these regulations, and in this section. The term "initial payments" does not include
amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which
are due and payable in subsequent years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into
account in determining the amount of the "initial payments," the "total contract price", or "the selling price". The term "initial payments" contemplates at
least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment
during the first year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment
in cash or property, other than evidences of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two
or more payments, in later years.
RR-2, 176. Sale of real property on installment plan. In transactions included in class (1) in the preceding section the vendor may return as income
from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to
be realized when the property is paid for bears to the total contract price.
If the purchaser defaults in any of his payments, and the vendor returning income on the installment basis reacquires the property sold, whether
title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be
computed upon any installment obligations of the purchaser which are satisfied or discharged upon the reacquisition or are applied by the vendor to the
purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property acquired
(including the fair market value of any fixed improvements placed on the property by the purchaser) and the basis in the hands of the vendor of the
obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in
connection with the reacquisition. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged, or applied upon the
reacquisition of the property will be the excess of the face value of such obligations over an amount equal to the income which would be returnable were
the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the reacquisition of the property, unless it is clearly shown that after the
property was reacquired the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands
of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the acquisition. If the property reacquired is bid
in by the vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of
57
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for determining gain or loss is the fair market value
of the property at the date of reacquisition (including the fair market value of any fixed improvements placed on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income from installment sales on the straight accrual or cash receipts and
disbursements basis, such a course is permissible, and the sales will be treated as deferred-payment sales not on the installment plan.
RR-2, 177. Deferred-payment sale of real property not on installment plan. In transactions included in class (2) in Section 175 of these regulations,
the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property, the
difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor plus the fair-market value at the
time of repossession of fixed improvements placed on the property by the purchaser and (2) the sum of the profits previously returned as income in
connection therewith and an amount representing what would have been a proper adjustment for exhaustion, wear and tear, obsolescence, amortization,
and depletion of the property during the period the property was in the hands of the purchaser had the sale not been made will constitute gain or loss, as
the case may be to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the
original basis at the time of the sale plus the fair market value at the time of repossession, of fixed improvements placed on the property by the
purchaser. If the vendor has previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquired
the property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property for such of the purchaser's obligations as are
applied by the vendor to the purchase or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor
of gain or loss, as the case may be for the year of reacquisition, measured by the difference between the fair market value of the property including fixed
improvements placed by the purchaser on the property, and the amount of the obligations of the purchaser which were applied by the vendor to the
purchase or bid price of the property. The fair market value of the property reacquired shall be presumed to be the amount for which it is bid in by the
vendor in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold the basis for determining gain or loss
is the fair market value of the property at the date of reacquisition including the fair market value of the fixed improvements placed on the property by
the purchaser.
RR-2, 178. Sale of real estate in lots. Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the
entire fair market value as of March 1, 1913, or the cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or
parcels and made a matter of record on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be
returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel
sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel
will be treated as a separate transaction and the gain or loss will be accounted for accordingly.
RR-2, 179. Determination of the taxable net income of a controlled taxpayer. (A) DEFINITIONS. When used in this section
(1) The term "organization" includes any organization of any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation
or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of any kind, regardless of whether or where organized, whether owned
individually or otherwise, and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the
reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been
arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the
same interests.
(5) The terms "group" and "group of controlled taxpayers" mean the organizations, trades, or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer, the net income (or, as the case may be, any item or element affecting net
income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract,
transaction, arrangement, or other act) dealt with the other member or members of the group at arm's length. It does not mean the income, the
deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement,
the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding
upon the parties thereto).
(b) SCOPE AND PURPOSE. The purpose of Section 44 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests
controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its
transactions and accounting record truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has
not been done, and the taxable net incomes are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall
intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or
element affecting net income, between/or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled
taxpayer dealing at arm's length with another uncontrolled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section
44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to
apply such provisions.

(c) APPLICATION. Transactions between the controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common
control is being used to reduce, avoid, or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal
Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device
designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in
which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the
taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer.
RR-2, 51. When income is to be reported. Gains, profits, and income are to be included in the gross income for the taxable year in which they are
received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. If a
person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is
realized in that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for
patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless,
58
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were
charged off.
RR-2, 52. Income constructively received. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him
at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in
such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is
not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its
employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation
does not constitute receipt.
RR-2, 53. Examples of constructive receipt. When interest coupons have matured and are payable, but have not been cashed, such interest payment
though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year
during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons
are income for the year in which paid. The distributive share of the profits of a partner in a general co-partnership duly registered is regarded as
received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never
enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount
credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has taxable status as income
for the year of the credit. When the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount
of any share in excess of the aggregate amount paid in by the shareholder is income for the year of maturity of the share
i. General rule
ii. Accounting period
iii. Accounting method [cash (actual or constructive) or accrual]
Hybrid method
Consolidated Mines v. CTA.
Percentage of completion method
RR-2, 44, supra.
NIRC, 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for tax purposes in the manner as provided in
this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of
one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of
percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of
completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all
expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning
and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is
found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or
require an amended return.
iv. Change of accounting period
v. Installment basis
vi. Allocation of income and deductions
Yutivo Sons v. CIR, supra.
vii. Networth method
Perez v. CTA.
CIR v. Reyes.
viii. Tax evasion v. Tax Avoidance
CIR v. Toda, supra.
BB. Returns and Payment of Tax
1. Individual return
NIRC, 51. Individual Return.
(A) Requirements.
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35:
Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the
Philippine shall file an income tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the
Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an
individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income
tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds
Sixty thousand pesos (P60,000) shall also file an income tax return;
(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and
(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.
(3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an
information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.
(4) The income tax return shall be filed in duplicate by the following persons:
(a) A resident citizen - on his income from all sources;
59
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
(b) A nonresident citizen - on his income derived from sources within the Philippines;
(c) A resident alien - on his income derived from sources within the Philippines; and
(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.
(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue
District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or
principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the
Commissioner.
(C) When to File.
(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for
the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Section 24(c) shall file a
return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all
stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or
other disposition.
(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file
one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of
verification for the taxable year.
(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent
shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such
property is exempt from donor's tax.
(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or
representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.
(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that
the return was actually signed by him.
NIRC, 56. Payment and Assessment of Income Tax for Individuals and Corporation.
(A) Payment of Tax.
(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the
case of tramp vessels, the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file
the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the
return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of
the tax is presented or a sufficient bond is filed to answer for the tax due.
(2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may
elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the
second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller
submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments
shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and
regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the
penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof
of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of
such tax upon verification of his compliance with the requirements for such exemption.
In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from
each installment payment shall be paid within (30) days from the receipt of such payments.
No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner
or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.
(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of
the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.
As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the
amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a
deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which
the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously
assessed or collected without assessment shall first be decreased by the amounts previously abated, credited returned or otherwise
repaid in respect of such tax.
a. Who are required to file
b. Those not required to file
c. Where to file
d. When to file
e. Where to pay
f. Capital gains on shares of stocks and real estate
g. Quarterly declaration of income tax
60
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
NIRC, 74. Declaration of Income Tax for Individuals. -
(A) In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this
Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries,
wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on
or before April 15 of the same taxable year. In general, self-employment income consists of the earnings derived by the individual from
the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a
member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade
or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such
pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe.
An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.
(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with
respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid
at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The
fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to
be filed.
(C) Definition of Estimated Tax. - In the case of an individual, the term 'estimated tax' means the amount which the individual declared as
income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under
this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file
an amended declaration during any interval of installment payment dates.
h. RR 3-2002, March 22, 2002 (substituted filing of ITR of salaried individuals), as amended by RR 19-2002 (November 25, 2002)
i. RR 16-2002, October 11, 2002 (modes of payment of taxes through banks)
2. Corporate regular returns
NIRC, 52. Corporation Returns.
(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the
Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the
provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to
by such officer and by the treasurer or assistant treasurer.
(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return:
Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in
accordance with the provisions of Section 47 of this Code.
(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption
by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information
as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of
Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the
Securities and Exchange Commission.
(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving
capital gains from the sale or exchange of shares of stock not traded thru a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3),
27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all
transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.
NIRC, 50, supra
NIRC, 56, supra
a. Quarterly income
NIRC, 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly summary declaration of its
gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of
this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during
the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.
b. Final adjustment return
NIRC, 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown
on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor.
Commissioner v BPI. The phrase for that taxable period merely identifies the excess income tax, subject of the option, by referring to the
taxable period when it was acquired by the taxpayer. || When circumstances show that a choice has been made by the taxpayer to carry over
the excess income tax as credit, it should be respected; but when indubitable circumstances clearly show that another choice, a tax refund, is in
order, it should be granted. As to which option the taxpayer chose is generally a matter of evidence. || Technicalities and legalisms, however
61
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding
citizens.
c. When to file
d. Where to file
NIRC, 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax.
(A) Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the
final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection
Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.
(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of
each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of
April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.
(C) Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax
returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner
prescribed by the Commissioner.
e. When to pay
f. Capital gains on shares of stock
g. Return of corporations contemplating dissolution/reorganization
RR-2, 244. Return of corporation contemplating dissolution or retiring from business. All corporations, partnership, joint accounts and
associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such
resolution authorizing their dissolution, and within the same period after their retirement from business, file their income tax returns
covering the profit earned or business done by them from the beginning of the year up to the date of such dissolution or retirement and pay
the corresponding income tax due thereon upon demand by the Commissioner of Internal Revenue to addition to the income tax return
required to be filed they shall also submit within the same period the following:
(a) Copy of the resolution authorizing such dissolution;
(b) Balance sheet at the date of dissolution or retirement and a profit and loss statement covering the period from the beginning of the
taxable year to the date of dissolution or retirement;
(c) In the case of a corporation, the names end addresses of the shareholders and the number and par value of the shares held by each; and
in the case of a partnership, joint-account or association, the name of the partners or members and the capital contributed by each;
(d) The value and a description of, the assets received in liquidation by each shareholder;
(e) The name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution
together with a description and the value of the assets received by such individuals or corporations; and the consideration, if any, paid by
each of them for the assets received.
BPI v. CIR.
CC. Withholding Tax
1. Final withholding tax at source
NIRC, 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons
as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the taxable year.
(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign
corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee
or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or
permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds,
mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods,
and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid,
within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the
Philippines.
2. Withholding of creditable tax
RR 2-98 as amended.
Filsyn v. CA. when it was first paid to the corporation, especially in the case at bar where the corporation has already written-off the amounts as
business expense in its books (it already took advantage of the benefit allowing for deductionstherefore, you cannot now claim that the
withholding tax is due later (when you actually remit it) when you have already used its benefits || *the corp which is to withhold is considered
both the agent of the taxpayer (when he files the papers) and of the government (when he actually withholds) || *the law sets no condition for the
liability of the corp/govt agent to attach when the corp doesnt withhold what hes supposed to withhold, reason is to compel the withholding agent
to withhold under all circumstances!! So he is no ordinary agent of the govt, his duty is utmost!
3. Return and payment of tax
NIRC, 58. Returns and Payment of Taxes Withheld at Source.
(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be
covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or
62
TAXATION I (Income Tax) Finals reviewer
Prof. C. C. Laforteza
1 Semester A.Y. 2011-2012
st

Janz Hanna Ria N. Serrano


References: de Leon and de Leon, The Law on Income Taxation; Valencia and Roxas, Income Taxation:Principles and Laws; Mamalateo, Taxation Reviewer"
Special thanks to elmerrandom.blogspot.com for some of the case digests/doctrines
municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a
corporation, where the principal office is located.
The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the
collecting officers.
The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar
quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month
following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to
protect the interest of the government.
(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section
57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or
other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For
final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.
(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the
Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee
and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed
on or before January 31 of the succeeding year, and for creditable withholding taxes, not later than March 1 of the year following the year for
which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the
Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this
Title in respect to the income payments.
The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit
the return required in this Subsection.
(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the
return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the
provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance
with the provisions of Section 56.
All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds
and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or
creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the
Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation,
pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section
40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of
the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties
imposed under Section 269 of this Code.
4. Tax deemed paid on dividends
CIR v. Procter & Gamble, supra.
5. Withholding agent can file claim for refund
6. Withholding tax on dividends
Marubeni v. CIR. A resident foreign corp is one that is engaged in trade or business in the phils. Marubeni says they are one and the same as
AG&P, on the principal agent theory. SOLGEN says otherwise: that theory does not apply here. SC says marubeni is NOT resident foreign corp
because marubenis independent investment is attributable only to the head office. It was marubenis own investment, where it got its profits which
was remitted by AG&P. BUT even if that is the case, the CIR & CA were wrong in setting off the tax ratesit goes against basic rules in taxation.
7. Withholding on royalties
CIR v. CA & J&J. The Supreme Court interpreted the phrase "paid under similar circumstances" under the most-favored-nation clause of the RP-US
tax treaty as referring to the payment of taxes and not royalties. The Court did not allow the application of the lower rate of 10% under the RP-
Germany tax treaty for royalties paid to US residents because the RP-US tax treaty contains no "matching credit" provision similar to that found in
Article 24 of the RP-Germany tax treaty. On the other hand, the RP-China tax treaty does not contain a "matching credit" provision similar to that
found in the RP-Germany tax treaty. Thus, the tax on royalty payments to residents of US and China can be considered paid under similar
circumstances.
8. RMC 46-2002, tax on royalty payments to US entity adopts most favored nation clause under RP-China Tax Treaty effective Jan. 1, 2002
Golden Arches Devt Corp v. CIR.
9. Withholding on wages RR 2-98
10. Withholding tax by government agencies RR 2-98.

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