TAX NOTES (LEGAL GROUND)

Lectures of Atty. Japar B. Dimampao

Supplement Bar Material
STATE POLICY
Declared Policy of the State: (Code:RDB-N)
1) to promote sustainable economic growth through the rationalization of the
Philippine
internal revenue tax system, including tax administration;
2) to provide, as much as possible, an equitable relief to a greater number of
taxpayers in
order to improve levels of disposable income and increase economic activity;
3) to create a robust environment for business to enable firms to compete
better in the
regional as well as the global market;
4) the State ensures that the Government is able to provide for the needs of
those under its
jurisdiction and care.
THE B.I.R.
1) Powers and duties of the BIR.
The BIR shall be under the supervision and control of the DOF and its powers
and duties
shall comprehend: (CODE: ACE-JP)
1) the assessment;
2) collection of all national internal revenue taxes, fees, and charges;
3) the enforcement of all forfeitures, penalties, and fines;
4) execution of judgments in all cases decided in favor by the CTA and
ordinary courts
5) give effect and to administer the supervisory and police powers conferred
to it by the
Code and other laws.
2) POWERS of the Commissioner of the Internal Revenue.
1) to interpret tax laws and to decide tax cases (Sec. 4);
2) to obtain information and to summon, examine, and take testimony of
persons (Sec. 5);
3) to make assessments and prescribe additional requirements for tax
administration and
enforcement (Sec. 6);
4) to delegate powers (Sec. 7);
5) to administer oaths and take testimony (Sec. 14);
6) to make arrests and seizures (Sec. 15);
7) to assign or re-assign internal revenue officers (Sec. 16 & 17).
REQUISITES OF A VALID TAX REGULATION (LIMITATION OF THE POWER
TO
INTERPRET TAX LAWS)
1) It must be consistent with the provision of the Tax Code
2) Reasonable

3) Useful and necessary

4) It must be published in the official gazette or in the newspapers of general
circulation.
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SOURCES OF REVENUES
The following taxes, fees and charges are deemed to be national
internal revenue taxes:
(Code:IEVPEDO or EVE-PIDO)
1) Income tax;
2) Estate and donors taxes;
3) Value-added tax;
4) Other percentage taxes;
5) Excise taxes;
6) Documentary stamp taxes; and
7) Such other taxes as are or hereafter may be imposed and collected by the
Bureau of
Internal Revenue
INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION
Q. What are the features of our present income taxation in the light of R.A
8424?
A. We adopted the so-called COMPREHENSIVE TAX SITUS
Comprehensive in the sense
that we practically apply all possible rules of tax situs.
Criteria used: (Code: R. P. N.)
a) Residency of taxpayer ;
Situations where we utilized residency as basis:
1) We tax the income of a resident alien derived from sources within the
Philippines.
2) We also tax the income from sources within of resident foreign corporation
in the
Philippines.
b) Place/Source
Used as a basis in taxing the income of a non-resident alien individual. We
can only tax his
income derived from sources within and in taxing the same, we consider the
place where the
income is derived.
c) Nationality or Citizenship in the case of individual taxpayer
We used that as a basis in imposing tax on the income of a resident citizen.
Resident citizen
may be taxed from his sources within and without. The source of income
here is immaterial what
we consider is the nationality or citizenship of the taxpayer.
Domestic corporation we can tax its income derived from sources within
and without.

On Non-resident citizen, they can only be taxed on their income derived from
the sources
within tax situs is the place /source of income.
Taxpayer Sources
1. RC I/O (Sec. 23 [A])
2. NRC I (Sec. 23 [B])
3. OCW I (Sec. 23 [C])
4. ALIEN I (Sec. 23 [D])
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4.1 NRA-ETB
4.2 NRA-NETB
4.3 ALIEN ERA-MNC
4.4 ALIEN OBUs
4.5 ALIEN PSCS
5. Domestic Corp. I (Sec. 23 [E])
6. Foreign Corp-RFC/NRFC I (Sec. 23 [F])
1) A resident citizen is taxable on all income derived from sources within
and without the
Philippines.
2) A non-resident citizen is taxable only on income derived from sources
within the
Philippines.
3) An overseas contract worker is taxable only on income from sources
within the
Philippines; 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 the international trade shall be treated as an overseas contract
worker.
4) An alien individual, whether a resident or not of the Philippines, is
taxable only on
income derived from sources within the Philippines.
5) A domestic corporation is taxable on all income derived from sources
within and
without the Philippines; and
6] 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.
Income Taxation may be grouped into:
1) individual income taxation
2) corporate income taxation
Q. What are the basic features of individual taxation? (S.P. F. E. M.)
A.
1) Individual income taxation adopted the Schedular system of taxation

Schedular System of Taxation is a system employed where the income

tax treatment
varies and made to depend on the kind or category of the taxpayers taxable
income (Tan vs. Del
Rosario).
Characteristics of schedular system of taxation:
a) It gives or accords different tax treatment on the income of individual
taxpayer.
b) It classifies income.
Manifestations: (that under the individual taxation we adopted the schedular
system of
taxation)
[C, B, P, Dp, I, R, R, D, A, Pw, P, P]
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Under Sec. 32(a), income may be categorized as follows:
1) compensation income,
2) business income,
3) professional income,
4) income derived from dealings in property,
5) interest income,
6) rent income,
7) royalties,
8) dividends,
9) annuities,
10) prizes,
11) winnings,
12) pensions, and
13) partners distributive share from the net income of the general
professional partnership.
This is the manifestation that as far as individual income taxation, the
income is
categorized.
2] The tax rates are progressive in character. This is clear under Sec. 24
(a). You will notice
there that the tax base increases as the tax rate increases.
3] Modified gross income as regards compensation earner. Modified
because in determining
the taxable compensation income, the only allowable deductions are
personal and additional
exemption. You cannot deduct the allowable deductions under Sec. 34 from
gross compensation
income.
But as regards those individual taxpayers that derived business, trade or
professional
income, we adopted the net income system. This is so because under Sec.
34, allowable

deductions may be claimed by individual taxpayers who derived business

trade and professional
income.
4] We employ this Pay as you File system.
5] Under certain cases, we employ the pay as you earn system. This
applies to income
subject to withholding tax.
Q. What are the basic features of corporate income taxation?
A.
1] Global Concept has been adopted. >>> Global system where the tax
treatment views
indifferently the tax base and treats in common all categories of taxable
income of taxpayer (Tan
vs. Del Rosario).
Characteristics of Global system of Taxation:
a) Uniform tax treatment this is subject to diminishing corporate tax rates
of 34% (Jan. 1,
1998), 33% (Jan. 1, 1999), 32% (Jan. 1, 2000). See Chapter IV, Sec. 27).
b) Does not categorize income.
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2] Corporate taxpayer, particularly domestic corporations are
entitled to deductions. So,
insofar as domestic corporation and resident foreign corporation is
concerned, we adopted here
the net income tax system.
New provisions under R.A. 8424: 10% tax on improperly accumulated
earnings
of a corporate taxpayer.
3] Pay as you file system has also been employed.
Corporate taxpayer is allowed to adopt calendar or fiscal year period.
Corporate
taxpayer files corporate income tax return quarterly. And it also files the socalled
FINAL ADJUSTED RETURN.
In the case of individual taxpayer, the payment should not be later than
April 15
of every taxable year. Individual taxpayers are not allowed to adopt the socalled
FISCAL YEAR PERIOD.
* Individual taxpayers are allowed to adopt only the calendar year period
while corporate
taxpayers have the option either the calendar year period of the fiscal year
period.
Calendar year period this covers the period of 12-month commencing
from Jan. 1 and ending
Dec. 31.

Fiscal year period this is also a 12-month period commencing on any

month or ending on any
month other than Dec. 31.
DEFINITION OF CERTAIN TERMS
GROSS INCOME TAXATION is a system of taxation, where the income is
taxed at gross.
The taxpayers under this system are not entitled to any deductions.
In general, we adopted the net income taxation because under Sec. 34,
taxpayers are allowed to
claim the so-called ALLOWABLE DEDUCTIONS.
GROSS INCOME means all income derived whatever source, including but
not limited to the
following: [STP-IRR-DAP-PS]
1. Compensation for services;
2. Gross income from 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
11. Partners distributive share from the net income of the general
professional partnership.
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NET INCOME TAXATION income is taxed at net. The taxpayer may claim
allowable
deductions.
INCOME all wealth which flows in the taxpayer other than a mere return of
capital. It
includes all income specifically described as gain or profit including gain
derived from the sale
or disposition of capital asset.
JUDICIAL DEFINITION: It also means gains derived from (1) capital, (2) labor,
or (3) both
labor and capital including gains derived from the sale or exchange of capital
asset.
FOUR (4) Sources of INCOME; [ClaBS]
a. Capital
b. Labor
c. Both labor and capital
d. Sale of property
Example of income derived from capital >>> Interest Income
Example of income derived from labor >>> Compensation Income

Example of income derived from both capital and labor >>> Income of an
independent
contractor. The independent contractor provides work force, provides capital
and derives income
from such capital.
* In determining the profit from the sale of property, you should always be
guided by this
formula:
Amount Received Or Realized LESS Cost of Property = PROFIT
TAXABLE INCOME (the old term is Net Income) means all pertinent
items of gross
income specified in the Tax Code less the deductions and/or personal and
additional exemptions,
if any, authorized for such types of income by this Code or other special
laws. (Sec. 31 of the
TRA of 1997).
Shoter Version: All pertinent items of gross income less allowable deductions.
Q. What are the advantages/disadvantages of gross income taxation and net
income taxation?
Advantages of gross income taxation:
1. It simplifies our income taxation. This is so because since no deductions
are allowed, it is very
easy to tax the income. You dont have to find out whether deductions or
expenses are legitimate
or not because they are not deductible.
2. This will generate more revenue to the government.
3. It minimizes cost.
Disadvantages of gross income taxation:
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1. As far as the taxpayer is concerned, this is inequitable because they
cannot claim the expenses,
which are incurred in connection with his trade or business or exercise of his
profession.
2. And if this is the system, in all likelihood the taxpayers will lose interest to
earn more. It will
in effect reduce the purchasing capacity of the taxpayer.
3. Since taxpayers cannot claim those legitimate expenses as deductions,
they may resort to
fraudulent scheme that will minimize their tax ability and this may be done
through the
understatement of income. So, in effect, this will encourage tax evasion.
Advantages of net income taxation:
1. As far as the taxpayer is concerned, they will consider this as equitable
and just system.
2. This will minimize tax evasion because examiners will be employed to
check whether

expenses are correct or not.

3. The consequence of no. 2 is that this will generate more revenues.
Disadvantages of net income taxation:
1. vulnerable to graft and corruption
2. vulnerable to tax evasion
3. will give rise to loss of revenues.
SOURCES/SITUS OF INCOME
An income may be an income from within or without the Philippines. The
other term for
income within is Local Income while income without is sometimes called
Global Income or
Universal Income.
In determining whether an income is an income within or without, you have
to consider
the classification or kind of income.
CLASSIFICATION OF INCOME: [C, B, P, I, R, R, D, A, P, P, P]
1. Compensation income from services
2. Income derived from business, trade or profession in this regard, the
common forms of
business are merchandising business, farming business, mining business and
manufacturing
business.
3. Income from sale or exchange of property (either real or personal
property)
4. Interest Income
5. Rent Income
6. Royalties
7. Dividends, which may be received from domestic or foreign corporation
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners distributive share in the net income of general professional
partnership
(Professional income of a partner)
* COMPENSATION INCOME
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Tax Situs: Place where services are rendered. So, if services are rendered
within the Phils., that is
a Local Income. If it is a payment for services rendered outside the Phils.,
that is an income
without.
RC income from within and without are taxable.
NRC only compensation income from sources within is taxable.
RA same as NRC.
* BUSINESS INCOME [M3 F]
a) Merchandising Business

b) Farming Business Tax Situs: Place where these

c) Mining Business business are undertaken.
d) Manufacturing Business
Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within the phils. This
is considered as
income derived purely within.
(2) Goods manufactured outside the Phils. and sold outside income
derived purely without.
(3) Goods manufactured within the Phils. and sold outside the Phils.
income partly within
and partly without.
(4) Goods manufactured outside the Phils. and sold within the Phils.
income partly within
and partly without.
* INCOME FROM SALE OR EXCHANGE OF PROPERTY
If it involves personal property, in determining the tax situs, we have to
consider
the place of sale.
In the case of sale of transport documents, tax situs is the place where
the
transport document is sold (BOAC Case).
If it involves real property, the tax situs is the place or location of the real
property. So, if the property sold is situated within the Phils., the income
derived
from such sale is considered as income within.
* INTEREST INCOME
Tax Situs: RESIDENCE of the DEBTOR
Case: There was this contract regarding the construction of ocean-going
vessels. There was this
issuance of letter of credit and the payment of downpayment. All the
elements of the transactions
took place in Japan. The payment was made in Japan. The letter of credit was
executed in Japan.
The delivery was made in Japan. The debtor is a domestic corp.
Is the interest income on this loan evidenced by the letter of credit taxable to
the Japanese
corp.?
8
HELD: NO, because the tax situs of interest income is not the activity but the
residence of the
debtor. The place where the contract of loan is executed is immaterial.
* RENT INCOME
Tax Situs: the PLACE of property subject of the contract of lease.
* ROYALTIES
Tax Situs: the PLACE where the intangible property is USED

* DIVIDEND
a. Received from domestic corp. this is an income purely within.
b. Received from foreign corp. consider the income of the foreign corp. in
the Phils. during the
last preceding three (3) taxable years;
rules:
(1) The income is purely within if the income derived from the Phil. sources is
more than 85%
(2) It is purely without if the proportion of its Phil. income to the total income
is less than 60%
(3) There should be an allocation if it is more than 50% but not exceeding
85%
* ANNUITIES
Tax Situs: the PLACE where the contract was made
* PRIZES AND WINNINGS
Prizes may be given on account of services rendered in which case, the
tax situs
is the place where the services were rendered.
If these prizes are not given on account of services, the tax situs is the
place
where the same was given.
Tax situs of winnings is the place where the same was given.
*PENSION
Tax Situs: PLACE where this may be given on account of services rendered
*PROFESSIONAL INCOME OF PROFESISONAL PARTNERS
Tax Situs: PLACE where the exercise of profession is undertaken
GROSS INCOME
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GROSS INCOME means all income derived from whatever source,
including but not limited
to the following:
INCLUSION: [code: STP-IRR-DAP-PS]
1. compensation for services
2. gross income from 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
11. Partners distributive share from the net income of the general
professional partnership (Sec.
32 of TRA of 1997)
EXCLUSIONS [code: LAGCIRM]

1. proceeds of life insurance policy

2. amount received by the insured as return of premium
3. gifts, bequests, devises or descent
4. compensation for injuries or sickness
5. income exempt under treaty
6. retirement benefits, pensions, gratuities
and others: (F, V, R, S, S, G)
a. retirement benefits received from foreign institution whether public or
private
b. veterans benefits
c. retirement benefits received from private firms whether individual or
corporate
d. separation pay
e. SSS
f. GSIS
7. miscellaneous items:
a. prizes and awards given in recognition of religious, charitable, scientific,
educational,
artistic, literary, or civic achievements
CONDITIONS:
1. the recipient was selected without any action on his part to enter the
contest or
proceeding
2. the recipient is not required to render substantial future services as a
condition to
receiving the prize or award
b. income derived by the government or its political subdivisions from the
exercise of any
essential governmental function or from any public utility
c. income derived from investment in the Philippines by foreign government
or financing
institutions
d. prizes and awards in sports competitions
e. gain derived from the redemption of shares of stock issued by the mutual
fund company
f. contributions to GSIS, SSS, PAG-IBIG, and union dues
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g. benefits in the from of 13th month pay and other benefits
h. gain derived from the sale, exchange, retirement of bonds debentures or
other certificate of
indebtedness with a maturity of more than five (5) years. (Sec. 32 (b), TRA of
1997)
*ALLOWABLE DEDUCTIONS
1. Optional Standard Deduction of ten percent (10%) of the Gross Income
available only to

individual other than a non-resident alien provided he signifies in his return

his intention to elect
OSD, otherwise, itemized deductions apply. Election made shall be
irrevocable for the taxable
year (Sec. 34 L)
2. Itemized Deductions under Sec. 34 A-K, and M
3. Personal and Additional Deductions/Exemptions under Sec. 35
* ITEMIZED DEDUCTIONS [code: ELIT-BDD-CRC]
1. expenses
2. loses
3. interest
4. taxes
5. bad debts
6. depreciation
7. depletion of oil, gas wells and mines
8. charitable and other contributions
9. research and development
10. contribution to pension trust
* NON-DEDUCTIBLE ITEMS
(Sec. 36 A)
1. Personal living or family expenses;
2. Amount paid for new buildings or permanent improvements, or betterment
to increase the
value of any property or estate;
3. Any amount expended in restoring property or in making good the
exhaustion thereof for
which an allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the life of any officer
or employee, or of
any person financially interested in any trade or business carried on by the
taxpayer , individual
or corporate, when the taxpayer is directly or indirectly a beneficiary under
such policy.
(Sec. 36 B) Losses from sales or exchanges of property directly or indirectly

1. Between members of a family (brother, sister of half or full blood, spouse,

ascendant, lineal
descendants);
2. Except in case of distributions in liquidation, between an individual and a
corporation more
than 50% in value of the outstanding stock of which is owned directly, by or
for such an
individual; or
3. Except in case of distributions in liquidation, between two corporations
more than 50% in

value of the outstanding stock of each of which is owned, directly or

indirectly, by or for same
individual, if either one of such corporation is a personal holding company or
a foreign personal
holding company; or
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4. Between the grantor and a fiduciary of any trust; or
5. Between 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 a beneficiary of such trust.
TAXABLE INDIVIDUALS
RESIDENT CITIZENS (RC)
Income from within and without taxable
NON-RESIDENT CITIZENS (NRC)
Income from within
When an NRC returns to the Phils., his income may also be taxed as
Resident
Citizen or Non-Resident Citizen.
Illustration: A, an OCW, arrived in the Phils. sometime in June 1998. He will
be taxed as a NonResident Citizen (NRC) as regards the income that he earned which covers
the period of January
to June. Now as regards the income that he will derive upon his arrival from
June to December,
he will be taxed as Resident Citizen (RC).
But if he is not in the Phils. from the period of January to December 1998, he
will be taxed as
NRC for the said period.
If he will return to the Phils. and stay there from January t December 1999,
he will be taxed as
RC for the same period.
* NRC must prove to the satisfaction of the BIR Commissioner the fact of
physical presence
abroad with the intention to reside therein.
* When an NRC decides to return to the Phils., he must prove his intention to
reside here
permanently.
* Now NRC includes OVERSEAS CONTACT WORKERS (OCW), IMMIGRANTS,
and those
who STAY OUTSIDE the Phils. by virtue of an employment.
RESIDENT ALIEN (RA)
1. An individual who is not a citizen of the Phils. but a resident of the Phils.
* Includes those who consider the Phils. as a second home.
*** Transient tourist who just sojourn, their stay is merely temporary, thus
may not be

considered as RA.
* If an alien stays in the Phils. for a period of more than one (1) year, he is
considered as RA.
SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
(NRA-NETB)
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* He must be an alien individual who is not residing in the Phils. and not
engaged in trade or
business in the Phils.
* He is one whose stay in the Phis.is not more than 180 days
SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR BUSINESS
(SNRA-NETB)
* Those employed by: (ROP)
1. Regional or Area Headquarters of Multinational corporations;
2. Offshore Banking Units;
3. Petroleum Service Contractors
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB)
> considered as engaged in trade or business if his stay is more than 180
days
> We can no longer tax his income from sources without. We can only tax his
income from
sources within.
ENTITLEMENT OF DEDUCTIONS
RC entitled to deductions because the tax base is taxable income.
Gross Income
Less: Allowable deductions
=======================
Taxable Income
NRC entitled to deductions because the tax base is taxable income.
RA entitled to deductions because the tax base is taxable income.
NRA-TB entitled to deductions because the tax base is gross income. Their
income is subject
to 25% tax rate.
SNRA-NETB subject to 15% tax rate on their income in the from of:
S - Salaries
H - Honoraria
O - Other
W - Wages
E - Emoluments
R - Remuneration
EXCLUSION FROM GROSS INCOME
PROCEEDS OF LIFE INSURANCE
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Subject to tax if :
1. the insurer and insured agreed that the amount of the proceeds shall be
withheld by the insurer

with the obligation to pay interest in the same, the interest is the one subject
to tax;
2. there is transfer of the insurance policy;
Example:
A transferred to B his life insurance policy. The value of the policy is P1 M. B
paid a
consideration amounting to P300,000. B continued paying the premiums
after the transfer such
that the premiums amounted to P200,000. Upon the death of the insured,
the P1 M may be
received by the heirs.
Q. Is the full amount of P1 M exempt?
A. NO, only the consideration given and the total premiums paid may be
excluded. That is, P1
M less P500,000.
Problem:A obtained a life insurance policy for B. B is the president of As
corporation. Corp. has
an insurable interest in the life of its officers, so premiums may be paid by
the employer A. Upon
the death of B, his designated beneficiaries will receive the proceeds.
a. Is the amount representing the proceeds of the life insurance policy
taxable?
b. What about the premium paid by the employer A? Does this amount form
part of the
gross compensation income?
c. Does the amount representing the proceeds of life insurance policy from
part of the estate
of the decedent?
Answers:
a. Let us first make two (2) assumptions. Let us assume that:
1. the beneficiary designated is the employer;
2. the beneficiary designated is the heir of the family of the insured.
The Tax Code however, makes no distinction. Regardless of the designated
beneficiary is
the employer or the heirs, or the family of the insured proceeds of life
insurance policy should
always be excluded.
b. Premiums of life insurance policy paid by the employer may form part of
compensation
income; hence, taxable if the beneficiary designated are the heirs or the
family or the
employees.
It is not taxable compensation income if the designated beneficiary is the
employer because that
is just a mere return of capital.
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c. Proceeds of life insurance policy may be excluded from the gross estate of
the decedent
under the following cases:
1. if the beneficiary designated is a 3rd person and the designation is
irrevocable;
2. it is a proceed of a group insurance policy.
However, it is included in the gross estate of the decedent:
1. if the beneficiary designated in the estate, executor or administrator of the
estate
or the family of heirs of the decedent;
2. if the beneficiary designated is a 3rd person and the designation is
revocable [see
Section 85 (e)]
As far as Sec. 85 (e) is concerned, an employer may be considered a 3rd
person.
AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM
Reason for Exclusion: It represents a mere return of capital.
The sources of this return of premium: (L.E.A.)
1. Life Insurance Policy
2. Endowment contracts
3. Annuity contracts
---Whether the premiums are returned during or at the maturity of the term
mentioned in the
contract or upon surrender of thee contract
Problem:A took out an endowment policy amounting to P1 M. He paid
premiums amounting to
P800,000. Upon the maturity of the policy, A received that P1M.
How much is the taxable amount?
Answer:
That is P1,000,000. value of endowment policy
LESS: P 800,000. representing amount of premium
==============================================
=
P 200,000. taxable amount
*GIFTS, BEQUESTS and DEVISES
Rationale: What is contemplated here are donations which are purely
gratuitous in character in
order that it may be excluded.
Gifts are excluded because these are subject to donors tax.
Bequests and devises are excluded because these may be subject to
estate tax.
What about remuneratory donations? Remuneratory donations are subject
to
income tax.
EXCEPTIONS to the Rule:>>> the income or fruit of such money given by
donation, bequests

or devise, including the income of this gift, bequest or devise in cases of

transfer of divided
interest.
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*COMPENSATION FOR INJURIES OR SICKNESS
Reason for Exclusion: This is just an indemnification for the injuries or
damages suffered. This is
compensatory in nature.
The sources are:
1. The compensation may be paid by virtue of a suit;
2. It may be paid by virtue of health insurance, accident insurance or
Workmens Compensation
Act
But as regards damages representing loss of anticipated income, this is the
one that is taxable.
If damages are in the nature of moral, exemplary, nominal, temperate, actual
and liquidated
damages, as a rule, these may not be subject to tax.
Example:
If a person suffered injury as a result of a vehicular accident, and an action is
filed in
court, the Court awards the following:
Moral - P100,000.
Exemplary - P100,000.
Actual - P 60,000. (hospitalization expenses)
P 20,000. (repair of car)
P 60,000. (loss of income)
*** All damages awarded are tax-exempt except damages of representing
loss of income.
Question: Are damages awarded by the Court on account of breach of
contract taxable?
Answer: Qualify your answer. With regards to damages awarded on account
of loss of earnings
of the contracting party, it is taxable.
INCOME EXEMPT UNDER TREATY
Reason for the Exclusion: Treaty has obligatory force of contract.
Exception: As may be provided for in the treaty.
*RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHERS
- VETERANS BENEFIT
* This may be given by the US Administration.
* The recipient must be a resident veteran.
- BENEFITS GIVEN BY FOREIGN AGENCIES OR INSTITUTIONS
WHETHER
PUBLIC OR PRIVATE
16
Giver: Foreign government agencies or institutions whether public or private.

Recipient: Resident citizen, non-resident citizen or resident alien.

Observation:
Non-resident citizen should not be included in the enumeration since it is
already understood that
we cannot tax his income from without. We can only tax the income of non=resident citizen
derived from sources within.
The same is true with resident alien because we can only tax his income
from sources within.
The inclusion of NRC and RA in the enumeration are mere surplusage.
-RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM WHETHER
INDIVIDUAL OR CORPORATE
Recipient: Private employees or official of such private firm.
REQUISITES:
1. The private employee or official must be at least 50 years of age at the
time of his
requirement;
2. He must have rendered at least 10 years of service to the employer at the
time of the
retirement;
3. There must be reasonable private benefit plan established by the
employer;
4. The reasonable private benefit plan must be approved by the BIR.
5. Reasonable private benefit plan may be in the nature of pension plan,
profit sharing plan, stock
bonus plan, or gratuity;
6. The employer must give contribution and no amount shall inure to the
benefit of a particular
employee or official. This must be established for the common benefit of the
employees or
officials;
7. This can be availed of ONCE.
* The subsequent retirement benefits received from another private
employer is no longer
exempt but subject to tax.
* If the second employer is a government entity or institution, in which case,
that is exempt
because the giver here is not a private firm. The limitation applies only when
the giver of the
subsequent retirement benefits is another private employer.
-PHYSICAL DISABILITY BENEFITS
* These include death benefit, sickness benefit and other disability benefit.
Sometimes, the term
used is separation pay.
Giver: may either be public or private employer
*Sources of Separation Pay:

1. Death of an employee;
2. Physical disability of an employee;
3. Any other cause beyond the control of the employee or official.
17
Example of no.3
a. Retrenchment of employees;
b. Installation of labor saving devises;
c. Dissolution of law firm.
>Resignation of an employee is a cause within his control.
>But, involuntary resignation is beyond the control of the employee.
>The most important thing here is that the separation pay was given on
account of the abovementioned
sources.
>There is no requirement as to age of the employee or official; there is also
no requirement as to
the length of service of the employee or official.
>No requirement also as to the number of availment of benefits.
-AMOUNT OF THE ACCUMULATED SICK LEAVE AND VACATION LEAVE
CREDITS
The monetized value of these benefits may be subject to tax if these will
not form
part of the terminal leave pay.
The monetized value of sick leave credit is always tax exempt, if it forms
part of
the terminal leave pay.
As regards UNUSED VACATION LEAVE CREDIT, this is exempt only if the
number of days is 10 days or less in excess of 10 days, it is already subject
to tax.
If the unused sick leave benefit is monetized, if the employer allow such
practice,
and the same is given at the end of this year, it is subject to withholding tax
because in this case, it does not form part of the terminal leave pay.
Reason for exemption of terminal leave pay:
The accumulated value of unused sick leave and vacation leave credits
included in
the terminal leave pay is exempt from income tax because it is one received
on
account of a cause beyond the control of the employee. This terminal leave
pay is
usually given under a compulsory retirement. Compulsory retirement is a
cause
beyond the control ofte employee.
*MISCELLANEOUS ITEMS
a. Prizes and Awards in Awards Competitions
REQUISITES:

1. Competition and tournament must be sanctioned or approved by the

National
Sports Association;
2. The competition and tournament must also be approved by the Philippine
Olympic Committee, whether local or international; whether held in the Phils
or
outside.(if not accredited- 20% tax)
b. Prizes and Awards made primarily in recognition of: (RCS-SALE)
Religious, Charitable, Civic Achievement, Scientific, Athletic, Literary,
Educational
Example: P1 M reward given to Mr. Advincula for his exemplary honesty. This
may be
excluded from his gross income because it is given in recognition of civic
achievement. He
18
was (1) selected without any action on his part to enter a contest or
proceeding; and (2) he is
not required to render substantial future services as a condition to receiving
the award.
c. Income derived from public utility or from the exercise of
essential government
function by the Government or political subdivisions of the Phils.
Recipient: Government or its Political Subdivision
* Government of the Republic of the Phils or Government of the Phils vs.
National Government
Government of the Republic of the Phils. is synonymous with Government of
the Phils.
Government of the Phils. or government of the Phils. refers to the
government corporate
entity through which the functions of the government are exercised
throughout the Phils.,
including save as the contrary appears from the context, the various arms
through which political
authority is made effective in the Phils., whether pertaining to the
autonomous regions, cities,
provinces, municipalities, barangays or other forms of local government.
These autonomous
regions, provincial, city, municipal or barangay subdivisions are the political
subdivisions.
National government - refers to the entire machinery of the central
government. This includes
the three (3) major departments of the government: the Executive, the
Legislative and the
Judiciary (Mactan Cebu International Airport Authority vs. Marcos, Sept. 11,
1996).

 It is clear that government-owned and controlled corporations is within

the
contemplation of the term national government.
We need this distinctions because the particular item of exclusion
emphasizes the
fact that political subdivisions of the State form part of the Government of
the
Phils.
You must have noticed that there is no provision regarding governmentowned
and controlled corporations. Also, there are no provisions on agencies or
instrumentalities of the government. The item or income here is exempt if
the
recipient is either the Government of the Republic of the Phils. or the
provincial
subdivisions of the State such as provinces, cities, etc.
* Income derived by a government-owned and controlled corporation,
agency or instrumentality
of the government may be subject to tax.
*Government-owned and controlled corporations are now subject to
corporate income tax,
except:
a. SSS
b. GSIS
c. Phil. Health Insurance Corp.
d. PCSO
e. PAGCOR
Situation: A municipality derived income from holding a fiesta.
19
Rule: The rule is settled that holding a town fiesta is considered a
proprietary function.
Therefore, said income is subject to tax.
Situation: A municipality derived income from the operation of public market,
electric power
plant and other public utilities.
Rule: That income is tax exempt.
d. Income derived from investment in the Phils. (1) by foreign
government or (2)
financing institutions, owned, controlled or financed by foreign
government,
regional or (3) international financing institutions established by
foreign
government
REQUISITES:
1. Recipient must be:
a. foreign government;

b. financing institution owned, financed or controlled by foreign government;

c. regional financing institution, international financing institution established
by
foreign government;
2. It must be an income derived from investment in the Phils.
Sources of such income:
--- It may be in the nature of bonds. So, foreign government here may be
considered the creditor
possible income here is the interest of bonds. Now, loans may be
extended possible income
here is interest on loans.
--- If a foreign government or financing institution made a deposit in a bank,
Phil. currency
deposit the income here is the nature of interest income.
--- If a foreign government made an investment in a domestic corporation. It
may be considered
a stockholder. And a stockhlder is entitled to dividend. Hence, the dividend
income received
from domestic corporation is tax exempt.
** If the recipient of such dividend is a resident foreign corporation that
is also tax exempt. It
is only subject to tax if the recipient of such dividend is a non-resident
foreign corporation.
Case: EXIMBANK, which is a consortium of Japanese banks, extended a loan
in the amount of
S20M to Mitsubishi Metal Corp., a Japanese corporation. The same amount
was extended by
Mitsubishi as a loan to Atlas Corp., a domestic corporation.
The contract entered into between Mitsubishi Metal Corp. is denominated as
contract of
loan and sale. It is a contract of loan because Mitsubishi would lend Atlas
S20M. It is a contract
of sale because under the contract Atlas bound itself to sell the concentrates
(this is a mining
corp.) that may be produced by the concentrator machine/equipment
purchased through the use
of the S20M for a period of 15 years.
This being a contract of loan, Mitsubishi is entitled to interest on loan.
20
ISSUE: Whether or not such interest on loan is subject to Phil. income tax
ARGUMENTS: Mitsubishi contended that this is not taxable because:
1. The source of S20M is a tax exempt entity (EXIMBANK is a financing
institution controlled
and financed by a foreign government); and
2. Mitsubishi is an agent of EXIMBANK, a tax exempt entity.

HELD: There was no evidence to the effect that Mitsubishi is an agent of

EXIMBANK. It is a
mere allegation that has not been proven.
In a contract of loan, once the loan is consummated, the amount becomes
exclusive
property of the borrower. It is no longer considered the money of EXIMBANK.
Hence, the
interest of such loan should be subject to tax.
The lender is not a tax exempt entity. The creditor here is Mitsubishi and it is
not a tax
exempt entity. Such being the case, tax exemption must be strictly construed
against the taxpayer
and liberally in favor of the government. When you claim exemption, you
should prove it clear
and categorical terms.
* The problem may be modified by the examiner. The examiner may clearly
state the Mitsubishi
is an agent of EXIMBANK. The answer is, the interest on loan is tax exempt.
Mitsubishi then is
considered as an extension of EXIMBANK. It is as if the lender is EXIMBANK.
e. 13th month Pay and Benefits
* This applies both to private and public employees.
* Total exclusion should not exceed P30,000 subject to increase by the
Secretary of Finance
upon the recommendation of the BIR Commissioner.
f. Contributions to GSIS, SSS, MEDICARE, PAG-IBIG, and union dues
* This is a surplusage. Even if this is not mentioned, we cannot tax that.
g. Sale, exchange, retirement of bonds, debentures and other
certificates of
indebtedness with a maturity of more than FIVE (5) YEARS
- If maturity is less than 5 years, taxable.
Rule: Interest on bonds
1. issued by C.B - exempt
2. if issued by corp.- not exempt
Rule: Redemptions of share in mutual funds:
- only those gains derived from redemption of shares issued by a mutual
fund company are
exempt
- it must emanate from a mutual fund
21
- If the term is not more than 5 years (5 years or less), the gain derived from
the sale, exchange
and retirement of the same, may be subject to tax.
Illustration:
If you are a creditor, you may sell these bonds, debentures or certificates of
indebtedness

to another. Hindi mo na mahintay ang maturity kasi long term. If there is a

gain on the sale of the
same, it would be a tax exempt provided that the bonds, etc., have a
maturity or term of more
than 5 years.
Retirement of bonds, debenture, etc. --- Nagbayad na yung debtor. There
may be gain
derived from the same, such as interest. This time, since the gain is in the
nature of interest, it is
subject to tax. But, the gain derived from the sale, exchange or retirement
with a term of more
than 5 years, is tax exempt. This is because exemptions are strictly
construed against the taxpayer
and liberally in favor of the government. Interests on bonds, debentures, etc.
are taxable, the
provision is clear. It only covers sale/exchange/retirement of bonds,
debentures and other
certificate of indebtedness with a maturity of five years. Strict interpretation
of tax exemption.
TYPES/ CLASSIFICATION OF INCOME
1. COMPENSATION INCOME an income derived under an
employeeemployer
relationship.
This may include the following: (WEBB-DROP)
Wages, Emoluments, Bonuses, Benefits, Directors fee, Taxable Retirement
Benefits, Other
items of income of similar nature, Taxable Pensions
* Retirement benefits may be subject to tax, if it does not comply with
the provision of Sec.
32 (b) par. 6 sub.par a.
* Pensions may be subject to tax, if it is given not in accordance with the
conditions laid down
under that exclusion provision.
* Other items of income of similar nature may include: (CHAMP)
Clothing allowance, Hospitalization allowance, Allowances for Food, Medical
allowance, Share
from the Profit sharing plan of the employee
* TESTS TO DETERMINE WHETHER AN INCOME IS COMPENSATION or
NOT:
Find out whether it is received under an employer-employee relationship.
Any payment received under an employer-employee relationship is
compensation
income.
*TESTS TO DETERMINE THERE EXISTS AN EMPLOYER-EMPLOYEE
RELATIONSHIP: (AC-DC)
1. Appointment (selection and hiring)

2. Compensation
3. Dismissal power
22
4. Control test
N.B. : The name or designation of income is immaterial. The basis of the
income is immaterial
and the manner by which it is paid, is also not important. As long as it is
given under an
employer-employee relationship, then that is compensation income.
CANCELLATION OF INDEBTEDNESS Considered as compensation income
is the
indebtedness had been cancelled in consideration of the services rendered.
*** Share of the employee from the PROFIT SHARING PLAN of the employerCompensation
income received in consideration of services rendered.
TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER
Compensation
income if paid under an employer-employee relationship in consideration of
services rendered.
PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF
THE
EMPLOYEE Compensation income if the beneficiary designated is the
family of heirs of the
employee.
*** The basis of the income is immaterial. Even if it is paid in piece work,
fixed rate or
percentage basis as long as it is paid under an employer-employee
relationship.
REQUISITES FOR TAXABILITY OF COMPENSATION INCOME ARE: (SPR)
1. There must be services, rendered under an employer-employee
relationship.
2. If payment must be for that services rendered.
3. It must be reasonable. The compensation for services rendered must be
reasonable.
Purpose why only a reasonable amount may be taxed as
compensation income:
Take note on the part of the employer, he can claim such compensation for
services as
deduction. Now, only the amount that is reasonable under the circumstances
can be claimed as
deduction. So, if the amount or the value of the services rendered is P10,000
but the employee
received P15,000. As far as the employer is concerned, he can only claim the
reasonable amount
of P10,000. In the case of an employee, he can consider P10,000 as
compensation income. The

excess of P5,000 may be treated as other income.

*** Not all payments for services rendered are considered compensation
income. Only those
paid under the employer-employee relationship.
THE FOLLOWING ARE NOT COMPENSATION INCOME: (P I)
1. Compensation for services rendered by independent service contractor.
This may be treated as
trade or business income.
2. Income derived by professionals from the practice of profession under
professional
partnership. This is treated as professional income.
23
*** Fringe benefit is considered as compensation income. This is
governed by Sec. 33, TRA
1997. This is compensation income in the sense that this is received under
an employeremployee
relatioship.
DOCTRINE OF CASH EQUIVALENT
- you may be paid in cash or in property/kind
- equivalent value of property is taxable
* DIFFERENT FORMS OF COMPENSATION INCOME:
1. Property/Kind Fair Market Value (FMV) of the property. If there is a
price stipulated, it is
the price stipulated that will be followed in the absence of contrary evidence.
2. Promissory Note or other evidence of Indebtedness a. If it is not discounted, it is the face value of the promissory note.
b. If it is discounted, it is the fair discounted value of the promissory note.
3. Stock FMV of that shares of stock
4. Cancellation of Indebtedness Cancellation of indebtedness has the
following tax
consequences:
a. It may amount to taxable compensation income if the indebtedness has
been
cancelled in consideration of the services rendered.
b. It may amount to taxable gift or donation if the indebtedness has been
cancelled
without any consideration at all. This is not subject to income tax but may
amount to
taxable gift or donation.
c. It may amount to capital transaction if the creditor is a corporation and the
debtor is a
stockholder. If creditor corporation condoned the indebtedness of the debtor
stockholder, that may amount to taxable capital transaction. This is the form
of direct
dividend. Now, property dividend is subject to tax rates of 6%, 8% and 10%.
Dividend received from domestic corporation is now subject to tax.

5. Tax liability of the Employee paid by the employer in

consideration of services rendered
amount of tax liability
6. Premiums paid by the employer on the life insurance policy of the
employee.
a. It is a taxable compensation income if the beneficiary designated are the
heirs of the
employee or his family.
b. It is not a taxable compensation income if the beneficiary designated is
the employer
because it is just a mere return of capital.
If the designation of the employer as beneficiary is indirect (e.g.: It is the
creditor of the
employer that is designated as beneficiary), that is still not taxable
compensation income.
24
Example of Indirect designation of the employer as a beneficiary:
a. Beneficiary is the wife of the President of a close corporation.
b. If the employer may secure a loan from he insurance policy.
Premiums will be taxed under Sec. 33 par.b no.10. it is stated there: Life or
health insurance and
other non-life insurance premiums or similar amounts in excess of what the
law allows.
* If the payment was received by the employee when he was no longer
connected with his
employer, it is still considered compensation income. What is important here
is that it must be
received during the existence of the employer-employee relationship.
Employees may be
dismissed by the employer, and they may file complaint for illegal dismissal
against the
employer. Judgment was rendered by the arbiter in favor of the employee. All
the wages
supposed to be paid (e.g. backwages) can be taxed as compensation
income. What about
attorneys fees? That is exempt.
FRINGE BENEFITS: code (HEV-HIM-EHEL)
FRINGE BENEFIT 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 employee)
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, others;

5. Interest on loan at less than market rate to the extent of the difference
between
the market rate and the 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.(if contribution-exempt)
* Housing allowance may be exempt from tax if the living quarters
are:
a. Provided with the premises of the employer.
b. It must be made as a condition of employment.
If said requisites are not present, housing allowance may be taxed as
fringe
benefits.
* Meal allowance may be exempt from tax if it is provided within the
premises of the
employer.
25
* Privilege or purchase discount are tax exempt if it does not exceed
of the basic monthly
salary of the employee. If it is more than , the excess may be as fringe
bene
* Medical or hospital allowance, clothing allowance, rice allowance
may be exempt from
tax if the following requisites are present:
1. It must be of relatively small value (reasonable amount). (RSV)
2. It must be given for the following purposes: (CHEG)
a. To promote Contentment
b. To promote Health
c. To promote Efficiency
d. To promote Goodwill
* Tax Exempt fringe benefits: (RF, DM, C, Ex, ECR)
1. Benefits given to the rank and file employees, whether granted under a
collective
bargaining agreement or not.
2. De minimis benefits means of small amount. These are benefits
relatively of
small amount.
3. Contributions of the employer for the benefit of the employee to
retirement,
insurance and hospitalization benefits plans.
4. Fringe benefits which are authorized or exempted from tax under special
laws.

5. Those given for the convenience of the employer, including those which
are required
by the nature of the trade, business or profession of the employer
(Employers
Convenience Rule)
De minimis benefits (of relatively small value) limited to facilities or
privileges furnished or
offered by employer to his employees merely as a means of promoting
health, goodwill,
contentment, or efficiency of employees, such as:
a. Monetized unused vacation leave credits not exceeding ten (10) days
during the
year;
b. Medical cash allowance to dependents of employees not exceeding P750
per
semester of P125 per month;
c. Rice subsidy of P350 per month;
d. Uniforms;
e. Medical benefits
f. Laundry allowance of P150 per month;
g. Employee achievement awards, for length of service of safety
achievement in the
form of tangible personal property other than cash gift certificate, with an
annual
monetary value not exceeding month of the basic salary of employee
receiving
the award under an established written plan which does not discriminate in
favor
of highly paid employees;
26
h. Christmas and major anniversary celebrations for employees and their
guests;
i. Company picnics and sports tournaments in the Philippines and are
participated in
exclusively by employees; and
j. Flowers, fruits, books or similar items given to employees under special
circumstances on account of illness, marriage, birth of a baby, etc.
*Principle of Employers Convenience Rule:
- fringe benefits may be exempt/not subject to tax if these are given for the
benefit
or advantage of the employer.
The following are the possible fringe benefits, which may be exempt
under the Employers
Convenience Rule: (H V H M T)
a. Housing benefit
b. Vehicle

c. Household personnel
d. Membership in a social or athletic club or similar organization
e. Traveling expense benefit
* Housing benefit in determining whether the same is exempt under the
employers
convenience rule, you have to consider the peculiar nature of the special
needs of the employer.
Requisites for exemption:
1. It must be made as a condition for employment;
2. It must be provided within the premises of the employer
*** This may apply to a supervisor of a plant or a company.
* If the housing or living quarters are provided outside the premises of the
employer, even if that
is for the convenience of the employer, this is only exempt up to 50% of the
amount. So, 50%
taxable, 50% exempt.
* Vehicle Exempt but depends upon the peculiar nature of the special
needs of the business of
the employer.
Example: LBC or DHL business
* Household personnel such as maid, driver and others Exempt, but
depends upon the
peculiar nature of the business of the employer.
* Membership in a social club, etc. Peculiar nature requirement.
* Traveling expense benefit Peculiar nature requirement. Example:
Employer sent his
employees abroad to attend a particular seminar to improve their technical
know-how.
BAR QUESTION: A is a driver of Congressman Magtanggol and he received a
monthly salary
of P5,000 and living quarter allowance of P2,500.
a. Whether the P2,500 living quarter allowance is excluded or subject to tax?
b. Assuming the employer is an obstetrician would your answer be the same?
27
ANSWER:
a. That should be subject to tax.
b. It should be excluded. Reason: Convenience of the employers rule.
2. GROSS INCOME FROM BUSINESS, TRADE OR PROFESSION
BUSINESS Any activity that entails time, attention, effort for purposes of
livelihood or profit.
As regards construction business, the taxpayer here must be an
independent
contractor. He may report his income under the percentage of completion
method
or under the so-called completed contract method.

PROFESSIONAL INCOME The recipient of the same must be

professionals.
How about those who claim that they are professionals but are not
registered in
the P. R. C., can they still be tax as such?
Yes, irrespective of whether they are licensed or not because of the rule
that gross
income derived from whatever source.
3. PASSIVE INCOME
PASSIVE INCOME This is the income that is subject to final tax.
Income subject to final tax are the following: (code:RPD-WIDS)
1. Royalties
2. Prizes
3. Winnings
4. Interests on bank deposit, deposit substitutes, trust funds and
other similar arrangements.
5. Dividend received from domestic corporation, mutual fund insurance
company, regional headquarters of multi-national corporation and other
corporation.
6. Share a partner in the net income after tax of a taxable partnership, joint
account, joint venture or concessions.
*** Do not include passive income in the income of your business or
profession, or in your
compensation income. This is so because when you receive this income,
the tax had already
been imposed and deducted.
28
RC, NRC, RA NRA-ETB NRANETB
ROYALTIES 20% except in the case of
literary works, books and
musical compositions
which are subject to 10%
final tax
Same as
RC, NRC,
RA
25%
PRIZES exceeding P10,000.00
If it is P10,000.00 or less, it is NOT
subject to final tax but the same must
be included in other income (e.g.
compensation, business, professional)
20%
20% 2
5%
WINNINGS except PCSO & Lotto

20% 20% 25
%
INTERESTS ON BANK DEPOSITS,
etc. 20% 20%
25
%
DIVIDENDS RECEIVED from
domestic corp., etc.
Subject to increasing rates
of 6% if received in 1998;
8% in 1999; and 10% in
2000.
20% 25
%
SHARE OF A PARTNER in the net
income after a tax of a taxable
partnership, etc.
- do6, 8 & 10
20% 25
%
Question: How do you treat that share of a professional partner from the net
income of a generalprofessional
partnership?
Answer: This should be taxed at the rate provided under Sec.24, that is, 5%
to 34%.
But as regards the share of a partner in the net income after tax of
a taxable or
business partnership, that is one which is subject to final tax.
PRIZES may be exempt if given in sports competition and if given primary
in recognition of
scientific, artistic, literary, educational, religious, charitable, or civic
achievement.
INTEREST
29
Rules
1. If it is an interest on foreign currency deposit system, it is exempt.
If the recipient is non-resident individual (NRC, NRA-ETB, NRA-NETB).
2. If the recipient is a resident individual (RC, RA), that is subject to 7.5 %.
3. Interest income is also exempt if it is an interest income on a long- term
deposit or
long-term investment (this must have a term of not less than 5 years).
If the term is less than 5 years it is subject to the following rates:
1. 4 years to less than 5 years 5%
2. 3 years to less than 4 years 12%
3. Less than 3 years 20%

DIVIDEND RECEIVED FROM DOMESTIC CORPORATION

1. This is exempt from tax if the recipient is a foreign government, financing
institution, regional financing institution, international financing institution
established by foreign government [see Sec.32 (B) (7) (a)].
2. It is also exempt if the recipient of such dividend is another domestic
corporation
or resident foreign corporation [see Sec. 28(A)(7)(d)]
CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK
Listed and traded through local stock exchange this is not subject
to income
tax but subject to percentage tax of of 1% of the gross selling price.
Not listed and traded through local stock exchange this is the one
subject to
income tax.
Not over P100,000.00 5%
Amount Over P100,000.00 10%
If the share of stock is not listed and traded through local stock exchange,
the
basis of the tax is net capital gain. So, you should first deduct the capital
loss.
If listed and traded through local exchange, there is no deduction allowed
because
the basis of the tax rate of of 1% of the gross selling price.
The above-mentioned tax rates apply to all individual taxpayers.
* CAPITAL GAIN DERIVED FROM THE SALE OF REAL PROPERTY
- The real property involved must be considered CAPITAL ASSET.
- The tax on capital gain derived from the sale of real property is 6% of the
gross selling price or
zonal value which ever is higher.
30
* CAPITAL ASSET property held by the taxpayer whether or not connected
in his trade or
business except: (code: SOUR)
1. Stock in trade or other property of any kind which would be included in the
inventory of the taxpayer if on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the Ordinary course of
trade or
business.
3. Property Used in trade or business subject to depreciation
4. Real property used in trade or business.
The definition of capital asset says real property held by the taxpayer
whether or not
connected with his trade or business except real property used in trade or
business. So, in
order to be a capital asset, the real property must be one not used in trade
or business.

 That is why, the sale of residential house and lot is subject to 6% of capital
gains because it
is a real property not used in trade or business.
But, sale of real property by a real estate dealer is not a capital
transaction because the
property involved is one primarily held for sale to customer in the ordinary
course of trade
or business. That is not a capital asset but an ordinary asset.
This covers not only sale of property; it also covers conditional sale of
real property
including the so-called pacto de retro sale under Art. 1602 of the NCC, or
disposition of
property located in the Phils.
If the buyer is the government or any of its political sub-divisions or
political agencies,
including government owned and controlled corporations, the seller have the
option to
avail the 6% or under Sec. 24(A), wherein the basis under said section is
taxable income so
deductions may be allowed. The cost of the property may be deducted but
when you avail
of the 6%, the basis is gross selling price or zonal value whichever is higher.
Is this a tax on the buyer or the seller?
It is a tax on the seller. But sometimes, through an agreement, pwede nilang
I-transfer sa
buyer, and theres nothing that can prevent the seller from transferring the
tax to the buyer
in the contract of sale.
OTHER INCOME
* OTHER INCOME includes [code: R.I.D.O.]
a. Rent income other than royalties
b. Interest income other than interest income on bank deposit
c. Dividend income
d. Income from Other sources and this may include: (BIT-CDC)
d.1. Bad debts recovered
d.2. Illegal gains derived from gambling
d.3. Tax funds
d.4. Compensation for private property expropriated
31
by the government for public use.
d.5. Damages
d.6. Cancellation of indebtedness
1. RENT - Compensation for the use of ones property.
- The payment may be in cash or in kind. The property involved is either
personal or real property.
- In the case of personal intangible property, subject to final tax if it involves

intellectual property, copyright, trademarks etc.

THE FOLLOWING CONSTITUTES TAXABLE RENT INCOME:
1. The regular rent may be monthly, semi-annually or annually
2. Additional rent income which includes:
a. Obligation of the lessor assumed by the lessee The following are
obligations which
may be assumed by the lessee: [R.I.D.I.O.]
a.1. Real property taxed on leased premises
a.2. Obligation to pay insurance premium on the insured leased premises
a.3. If the lessor is a corp., the obligation to distribute Dividends to its
stockholders
a.4. Obligation to pay interest on the bonds issued by the lessor.
a.5 Other obligations of the lessor which may be assumed by the lessee.
b. Value of permanent improvements on leased premises. This may
be reported
through:
b.1. Outright method at the time of permanent is completed, he may report
that as
additional rent income FMV of the building or permanent improvement.
b.2. Spread out method by allocating the depreciation among throughout the
remaining term of the leased.
c. Advance rentals
c.1. If in the nature of the prepaid rentals without restriction on the use of
the
amount, it is taxable.
c.2. If it is in the nature of security deposit, it is taxable rent income if there
is a
violation of the term of the lease.
c.3. If it is in the nature of a loan to the lessor, it is not taxable.
2. INTEREST INCOME compensation for the use of money.
- Whether it is an interest on loan pursuant to the business of a taxpayer or
personal
transaction, interest income, except if it is tax exempt, is always taxable.
This is so
because the source of income is immaterial, even if it is from an illegal
source.
- Interest income on bank deposits is subject to final tax.
3. DIVIDEND INCOME amount declared, set aside and distributed by the
Board of Directors
to stockholders, on demand or a fixed period.
32
Classes of Dividend: [C.L.I.P.S.S.]
Cash dividend
Liquidating dividend- this is given upon liquidation of corporate affairs
Indirect dividend - it is given in other form and this includes cancellation of
indebtedness by the corp. of the obligation of stockholder

Property dividend - it may be in the form of stock other than the stock of the
corp.
Stock dividend - stock issued by the giver corp.
Script dividend - It is given in the form of promissory note or other evidence
of
indebtedness.
STOCK DIVIDEND as a rule not taxable. This is so because there is no
income here. It
merely represents the transfer of surplus account to the capital account.
EXCEPTIONS to the Rule:
Stock dividend may be subject to tax under the following
exceptional cases: [C OR D]
1. If there is a Change in the stockholders interest in the net assets of the
corp;
2. If it is one issued by Other corp. We call that dividend stock
Stock dividend vs. dividend stock Stock dividend as a rule is not
taxable whereas
dividend in stock is taxable.
3. Redemption of stock dividend;
4. If the corp. issues Different shares of stock. If the corp. issues two different
classes of
shares of stock, the dividend that may be declared thereafter is taxable.
Example:
Outstanding stock Stock dividend Taxable
1. Preferred Common NT
2. Common Preferred NT
3. Preferred Preferred NT
4. Common Common NT
5. Preferred/Common Preferred T
6. Preferred/Common Common T
Disguised dividend treasury stock dividend declared out of the
outstanding capital stock, the
purpose of which is to avoid the effect of taxation (Commissioner vs.
Manning).
It is one which is made to appear as stock dividend when the truth of the
matter is that it is a
dividend which is illegally declared, such a case, since the purpose is to
evade taxation, it is
taxable.
Remember, treasury shares of stock are not entitled to dividends.
ALLOWABLE DEDUCTIONS (SEC. 34)
As regards individual taxpayers, the following may claim allowable
deductions:
33
1. RC

2. NRC, only those expenses incurred in the Phils. because here, we cannot
tax his
income derived from sources without.
3. RA, only those expenses incurred in the Phils.
4. NRA-ETB, but only those expenses incurred in the Phils.
5. PP (Professional Partners under Sec. 26)
Exceptions:
1. IT earning CI EE, ER REL
2. NRA-NTB
3. Aliens employed
A. RMC
B. OBU
C. PSC
4. NRFC
As regards corporate taxpayers, the following are entitled to claim
allowable
deductions:
1. DC, which includes private educational institutions, non-profit hospital,
government-owned
and controlled corps.
2. RFC
ITEMIZED DEDUCTIONS: [E,I.T,L,B,D,D,C,R,C]
1. Expenses 6. Depreciation
2. Interests 7. Depletion of oil, gas, wells and mines
3. Taxes 8. Charitable contributions
4. Losses 9. Research & Development
5. Bad debts 10. Contribution to Pension Trust
* In the case of individual taxpayers, they may avail of the optional standard
deduction of 10%
of gross income
* Corporate taxpayers are not allowed to claim 10% optional standard
deductions.
* All individual taxpayers except the NRA individual may claim this optional
standard
deductions.
* Itemized deduction may apply to corporate taxpayers as well as
individual taxpayers.
* FUNDAMENTAL PRINCIPLE IN DEDUCTIONS
1. The taxpayer must prove that there is law authorizing deductions.
2. The taxpayer must prove that he is entitled to deductions.
*** NRFC are not entitled to claim deductions.
1. EXPENSES
34
ORDINARY & NECESSARY EXPENSES
When we speak of ORDINARY, this simply refers to the expenses which are
normal, usual or

common to the business, trade or profession of the taxpayer. This may not
be recurring.
Example: if an action is filed in court, it is but normal to hire the services of a
lawyer. So, the
taxpayer has to pay attorneys fees. It is an ordinary expense under this
circumstances.
NECESSARY- It is one which is useful and appropriate in the conduct of the
taxpayers trade or
profession.
ORDINARY & NECESSARY EXPENSES
-are those which are incurred or paid in the development, operation
management of the business,
trade or profession of the taxpayer.
EXTRA-ORDINARY EXPENSES Not Deductible. These are amortized or in
lieu of the
same, you may claim that so-called allowance for depreciation. And if it
involves intangible
asset, the word used is AMORTIZATION.
There is no hard and fast rule. An expense may be ordinary insofar as a
particular taxpayer is concerned and it may not be an ordinary as regards
another taxpayer.
Example:
If you have business here in Manila and you also have business in Tawi-tawi,
what is the
expense that you may incur in Tawi-tawi which you may not possibly incur in
Manila?
In Tawi-tawi, you may need people to guard your business. But here in
Manila, you may
need not because of our new President-elect.
KINDS OF ORDINARY & NECESSARY EXPENSES [C.A.R.T.E.R.S.]
1. Compensation for services rendered
2. Advertising & promotional expenses
3. Rent expenses
4. Travelling expenses
5. Entertainment expenses
6. Repairs & maintenance expenses
7. Supplies and materials
COMMON REQUISITES FOR DEDUCTIBILITY of these ordinary &
necessary
expenses: [D.I.R.]
a. Must be paid or incurred DURING the taxable year.
If you incur expenses in 1997, you cannot carry this over to 1998. expenses
incurred during a particular year must be claimed as deductions during this
year
when the same were incurred.
35

PAID to signify the fact that the taxpayer uses the CASH
BASIS. Under the CASH BASIS, an expense is recognized
when it is PAID.
INCURRED implies that the taxpayer employs the ACCRUAL
BASIS. Under the ACCRUAL BASIS, income is recognized
when earned regardless of the receipt of the same and
the expense is recognized when incurred.
b. Must be paid or incurred in connection with the trade, business or
profession of
the taxpayer.
c. Must be proven by RECEIPTS.
SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE ORDINARY &
NECESSARY EXPENSES:
1. COMPENSATION FOR SERVICES RENDERED
This must be reasonable, meaning, this must not be ostensible.
Case 1: Partnership was sold to a corp. and it was agreed that the partners
will serve the
corp. and make it appear that they render services. So, compensation for
services was ostensibly
made by the corp.
Held: These is a mere ostensible salary or payment for services not actually
rendered
because that amount really forms part of the properties purchased by the
corp.
Case 2: Corporate officers succeeded in selling the property of the corp. So,
profit was
derived therefrom. Bonuses were given to these corporate officers.
Held: The rule is settled. Bonuses must be given in good faith. There must
be services
rendered because bonuses are additional compensation. In this particular
case, there was really
no services rendered because that sale was made through a broker. The
corp. made it appear that
it was through the efforts of these corporate officers that brought about a
successful sale of
property.
Bonuses must be given in good faith and in determining whether bonuses
will form part
of the compensation for services rendered, you have to consider the (1)
nature of the business,
(2) the financial capacity of the taxpayer and (3) the extent of the services
rendered.
2. ADVERTISING AND PROMOTIONAL EXPENSES
- It must be reasonable.
Case: Sugar Devt. Corp paid P125,000.00 to Algue Corp. representing
promotional expenses.

36
Held: This is reasonable under the circumstances because the particular
budget subject for
promotion involves million of pesos. And under that circumstances, the
P125,000.00 is
reasonable as this may coincide with the efforts exerted considering that the
taxpayer has no
venture in that experimental project to establish that vegetables of
investment company and this
involves millions of pesos.
3. RENT EXPENSE
a. The taxpayer must NOT be the owner of the property or he has no
equitable title
over the property.
b. This is subject to withholding tax. You cannot claim that the taxes
supposed to
be withheld have not been paid or remitted to BIR.
4. TRAVELLING EXPENSES
- This must be incurred or paid while away from home.
- Home does not refer to your residence but to the station assignment or
post.
Example: From home office to branch office, the traveling expenses incurred
are deductible.
And this includes not only the transporatiotion expenses but also meal
allowance and hotel
accommodations.
5. ENTERTAINMENT EXPENSES
- This must not be contrary to law, morals, good customs, public policy or
public order.
- Hence, bribes, kickbacks, and similar payments are not deductible.
-Also, the expenses incurred by the taxpayer in entertaining govt officials in
5-star hotel to gain
political influence are not deductible.
6. REPAIRS AND MAINTENANCE EXPENSES
- Only ordinary or minor repairs are deductible.
- Extra-ordinary repairs cannot be claimed as deduction and in lieu of that,
the taxpayer may not
be allowed to claim depreciation.
- If the cost of the repair increases the life of an asset for a period of more
than one (1) year, that
amount is considered extra-ordinary repair. Otherwise, it is considered
ordinary repair.
7. SUPPLIES AND MATERIALS
-This must be actually consumed during the taxable year.
- RULE ON SUBSTANTIATION simply requires that ordinary and necessary
expenses must

be proven. The proofs required include:

[N.O.R.E.D.]
a. Official receipts
b. Adequate Recourse
c. Amount of Expense
37
d. Date and place where such expense is paid or incurred
e. Nature of expense
2. INTEREST
REQUISITES FOR DEDUCTIBILITY
1. This must be paid or incurred DURING the taxable year.
2. This must be paid or incurred in connection with the trade, business or
profession
of the taxpayer
3. There must be an obligation which is valid and subsisting.
4. There must be an agreement in writing to pay interest.
Question 1:
What about that interest on unclaimed salaries of the employees, is that
interest
deductions?
Answer/Held:
NO, because there is no obligation or indebtedness. It is the fault of the
employees in case
they failed to claim their salaries.
Question 2:
What about that interest charged to the capital of the taxpayer, is that
deductible?
Answer:
Interest on cost-keeping purposes is not deductible. This does not arise
under an interestbearing
obligation.
THEORETICAL INTEREST an interest which is computed or calculated, not
paid or
incurred, for the purposes of determining the opportunity cost of investing in
a business. This
does not arise from legally demandable interest-bearing obligation. This is
not a deductible
interest.
Question 3:
What about interest on preferred stock, is this deductible?
Answer:
As a rule, interest on preferred stock is not deductible, because there
is no obligation
to speak of. It is in effect an interest on dividend. The reason why it is not
deductible is that the

payment is dependent upon the profits of the corp. It will only be paid if the
corp. earn profits.
And would not be paid of the corp. incurs losses.
BUT if it is not dependent upon corporate profits or earnings, that is
deductible. If is
payable on a particular on a particular date or maturity without regard to the
corporate profits, it
is deductible.
38
The Supreme Court mentions TWO (2) FACTORS:
1. not dependent upon corporate profits; and
2. agreement as to the date or term within which payment will be made.
INTEREST ON GOVT SECURITIES is now taxable.
So, if the taxpayer obtained a loan from PNB and used the proceeds in
purchasing govt
securities, the interest is now taxable. Likewise, the interest expense paid on
that loan, the
proceeds of the same, had been use to purchase govt securities is now
deductible.
Q. What about an interest on a loan paid in advance, is this deductible? Let
us say that the
taxpayer obtained a loan from a bank and it is payable within 5 years. The
loan obtained is
P50,000.00. Now, it was deducted in advance, can that be claimed as
deductions?
A. NO. You can only deduct the same when the installment is due a particular
year.
INTEREST EXPENSES WHICH ARE NON-DEDUCTIBLE [PARCAPU]
1. Interest expense on PREFERRED STOCK;
2. When there is NO AGREEMENT in writing to pay interest;
3. Interest expense on loan entered into between RELATED TAXPAYERS.
4. Interest paid or calculated for COST-KEEPING PURPOSES
5. Interest paid in ADVANCE
6. Interest on obligation to finance PETROLEUM EXPLORATION
7. Interest on UNCLAIMED SALARIES of the employees
Related taxpayers:
a. members of the same family which includes:
a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
b. between two (2) corporations owned or controlled by one individual. He
must have a
controlling interest over these two corporations. OR, if one corp. is
considered as
personal holding company of another corp.

c. between a corp. and an individual; that individual owns or controls more

than 50% of
the outstanding capital stock of the such corp.
d. parties to a trust;
d.1. grant or fiduciary
d.2. fiduciary of one trust and fiduciary of another trust but there is only one
grantor
d.3. beneficiary and fiduciary
39
*Your knowledge of related taxpayers is also important in determining
whether
losses are deductible or not. If losses were incurred or paid in connections
with
the transactions between these related taxpayers, these are not deductible.
Question: How much interest expense is deductible?
Answer: The interest that may be claimed as deductions shall be reduced
by:
a. 41% - Beginning January 1, 1998
b. 39% - Beginning January 1, 1999
c. 38% - Beginning January 1, 2000 of the income subject to
final tax.
EXAMPLE OF INCOME SUBJECT TO FINAL TAX:
1. interest on bank deposit
2. interest on deposit maintained under the foreign currency deposit system
So, if the interest income on bank deposit amounted to P100,000.00. And the
total interest
expense incurred or paid by the taxpayer is P200,000.00. If this is incurred in
1998, 41% of
P100,000.00 is P41,000.00. That P200,000.00 interest expense incurred or
paid, should be
reduced to P41% of that P100,000.00 to arrive at P159,000.00 which is the
interest that may be
claimed as deduction.
P200,000.00
- 41,000.00
----------------------P159,000.00
The rule has been established that TAXES are NOT ORDINARY OBLIGATIONS.
But
the Supreme Court in two (2) cases relaxed the distinction between taxes
and ordinary
obligations.
1. The interest on deficiency donors tax is deductible. The SC
explained that taxes
here are considered obligations or indebtedness. And it ruled that we have to
relax

the distinction between tax and ordinary obligation in this respect.

2. Interest on deficiency income tax can also be claimed as
deductible interest
expense because taxes here are considered ordinary obligations.
3. TAXES
REQUISITES FOR DEDUCTIBILITY:
1. This must be paid or incurred during the taxable year.
2. This must be taxes paid or incurred in connection with the trade, business
or profession of the
taxpayer.
40
*** Taxes that may be claimed as deductions may be national or local taxes.
THE FOLLOWING ARE NON-DEDUCTIBLE TAXES [S.I.N.E]
1. SPECIAL ASSESSMENT tax imposed on the improvement of a parcel of
land
2. INCOME TAX This includes foreign income tax. In this regard, the socalled
foreign income tax may be claimed as a deduction from gross income or this
may
be claimed as tax credit against Phil. income tax. In the event that he claims
that as
tax credit, he can no longer claim the same as deduction.
3. Taxes which are NOT CONNECTED WITH THE TRADE, BUSINESS OR
PROFESSION OF THE TAXPAYER
4. ESTATE TAX, DONORS TAX (see also discussion on tax benefit rule)
TAX AS DEDUCTIONS vs. TAX CREDIT
Taxes as deductions may be claimed as deductions from gross income.
Tax credit is a deduction from Phil. income tax.
Tax as deduction includes those taxes which are paid or incurred in
connection with
the trade, business or profession of the taxpayer. However, the sources of a
tax
credit is foreign income tax paid, war profit tax, excess profit tax paid to the
foreign
country.
The foreign income tax paid to the foreign country is not always the
amount that
may be claimed as tax credit because under the limitation provided under
the Tax
Code, it must not be more than the ratio of foreign income to the total
income
multiplied by the Phil. income tax.
Taxes are deductible only by the person upon whom the tax is imposed
Except:
1. Share holder
2. corporate bonds - tax free Covenant clause

The following are entitled to claim tax credit:

1.RC 2. DC
4. LOSSES
CLASSIFICATION OF LOSSES [O. C. W. C. S.]
1. ORDINARY LOSSES losses sustained in the course of trade,
business or profession of the taxpayer.
2. CAPITAL LOSSES the assets that must be involved there must be
capital assets
Capital Losses include the following:
41
a. Loss arising from failure to exercise privilege to sell or buy property
b. Worthless securities
c. Abandonment losses in the case of natural resources
d. Loss from wash sale
3. WAGERING OR GAMBLING LOSSES the amount that is deductible
must not exceed the gains.
Example:
The winnings amounted to P1,000.00 Loss is P500. This loss is deductible.
If the winning is P500 and if the loss is P1,000. The amount deductible is only
P500
because the amount must not exceed the gains.
If there is no winnings and loss is P500. Deduction losses here is ZERO.
4. CASUALTY LOSSES this must be reported to the BIR earlier than 30
days but not later than 45 days following the date of the loss.
Casualty losses include:
a. Fire
b. Storm
c. Shipwreck
d. Other casualty losses
e. Robbery
f. Embezzlement
g. Theft
5. SPECIAL LOSSES include the following:
a. loss arising from voluntary removal of buildings as an incident to renewal
or replacement
Problem:
Supposed the taxpayer had a building constructed on a parcel of land. He
owned this as well as the building erected thereon. He had business and his
business was conducted within the premises. Then, he decided to remove
such
building as to construct a new building for new business.
Is the cost of demolition to give way to a new building deductible loss? YES.
Suppose A purchased that parcel of land of B and included in that sale was
that
of the building. A demolish this building in order to construct a new building.
Is the cost of demolition deductible insofar as A is concerned?

NO. That can only be claimed as deductions if the one demolishing the same
is
the taxpayer. The moment that is sold to another claim that as deductible
loss.
The treatment here is, the cost of demolition should be capitalized in the
selling price.
Exception:A may claim that as deductible loss if this was demolished by
value
of a court order because the govt considered this as a fire hazard, loss of
42
useful value of property or capital asset.
THE COMMON REQUISITES for DEDUCTIBILITY OF LOSSES are:
1. Losses must be actually/sustained and not mere anticipated losses;
2. Must not be compensated by insurance;
--- If it is partly compensated, only the amount not compensated by
insurance is
deductible.
3. Must be evidenced by a completed transaction.
Completed Transaction this means that the loss must be fixed by
identifiable
event.
Example: If it is a loss sustained from sale, the event that may identify or
complete the transaction is the consummation of the contract of sale.
Suppose it is in the nature of casualty losses like fire?
The fire destroyed your property in 1995, no payment has been made
because the
insurer and the insured were still under negotiation. It was only in 1997 that
they
agreed on the amount. The amount agrees upon is P100,000. The taxpayer
may
claim that casualty losses only in 1997 when payment was actually made.
This is the
event that will complete the transaction.
5. BAD DEBTS
REQUISITES FOR DEDUCTIBLITY: [CU, W, TBP, VS, U]
1. Must be charged off and uncollectible within the taxable year;
2. Must be ascertained to be worthless
3. Must arise from trade, business or profession of the taxpayer;
4. Must be valid and subsisting indebtedness;
5. Must be uncollectible in the near future.
HOW TO PROVE THE WORTHLESSNESS OF OBLIGATION:
According to the Supreme Court, the following STEPS must be complied:
1. There must be a statement of account sent to the debtor;
2. A collection letter;
3. If he failed to pay, refer the case to a lawyer;
4. If lawyer may send a demand letter to the debtor;

5. If the debtor still fails to pay the same, file an action in court for collection.
In proving that the debtor is insolvent of bankrupt, mere allegation of the
same is not
enough. You should prove that the debtor is indeed bankrupt or insolvent. So,
you
may secure a copy of that decision by the SEC or other agency as the case
may be,
declaring the debtor as bankrupt or insolvent. And then there must be a
demand
letter sent to him. In case the debtor was robbed, there must be a police
report to that
43
effect.
The debtor may be a NRFC, so you may argue that he may not be sued here.
According to the Supreme Court, as a rule that is not an excuse. You should
still
send a demand letter to that NRFC. In other words, there must be diligent
efforts to
collect the indebtedness and to prove that in the near future such obligation
is no
longer collectible.
*** If the recovery of bad debts, resulted in a tax benefit to the taxpayer,
that is taxable.
If it did not result in any tax benefit to the taxpayer, that is not taxable. (TAX
BENEFIT RULE)
N.B. Read the case of Phil. Refining Company vs. Commissioner, a 1989 case.
6. DEPRECIATION
The idea here is not to recover profit, but to recover the cost of property
invested in
business. When the properties are used in trade, business or profession of
the taxpayer, the law
considers or recognizes the gradual loss or sale of property.
DEPRECIATION refers to the gradual diminution of the useful value of the
property used in trade, business or profession of the taxpayer, arising from
wear
and tear or natural obsolence.
REQUISITES FOR DEDUCTIBILITY: [U P R A C ]
1. The property must be used in trade, business or profession of the
taxpayer;
2. There must be depreciable properties.
The non-depreciable properties are
a. Personal property not used in trade, business or profession of the
taxpayer;
b. Inventoriable stock and securities
c. Land
d. Mining and other natural resources

3. The allowance for depreciation must be reasonable

4. The method in computing the allowance for depreciation must be in
accordance
with the method prescribed by the Sec. of Finance upon the recommendation
of
the BIR Commissioner.
This prescribed method includes:
a. Declining balance method
b. Sum of the years digit method
c. Straight line method
44
d. Any other method as may be prescribed by the Sec. of Finance upon the
recommendation of the BIR Commissioner
5. This must be charged off during the taxable year.
7. DEPLETION natural resources
This involves natural resources such as oil, gas wells and mines. These are
nonreplaceable
assets.
The requisites for deductibility are the same as that of depreciation except
that the
properties involved are natural resources
The idea here is not for profit but to recover the cost of investment through
this
allowance for depletion.
8. CHARITABLE AND OTHER CONTRIBUTIONS
* These are fully deductible if the contributions are given to the
following: [F. A. G.]
1. Government or its political subdivisions, agencies or instrumentalities, for
the
purpose of undertaking priority projects of the government;
These priority projects include: [S.H.E.]
a. Sports development, science and invention
b. Health and human settlement
c. Educational and economic development
2. Foreign government or institution and international civic organizations;
3. Accredited NGO
N.G.O. means non-profit domestic corporation which are formed and
organized for
any of the following purposes: [C.H.E.R.S.]
a. Research
b. Health
c. Education
d. Charitable, cultural, character building
e. Sports development and social welfare
The amount of charitable contribution that may be claimed as
deduction may be:

1. In the case of individual taxpayer:

- Not more than 10% of the net income before charitable contribution
2. In the case of corporate taxpayer:
- Not more than 5% of the net income before the charitable contribution
45
IF the recipient of such contribution is any of the following DC
formed or organized for:
[R.E.C.S.]
1. Religious purpose and rehabilitation of veterans
2. Educational purpose like educational corporations which are not qualified
as NGO
3. Charitable, cultural purpose
4. Scientific, sports development an social welfare purpose
10% or 5% of the net income before charitable contribution
Example:
If an individual taxpayer has a gross income of P100,000 and the allowable
deduction,
except charitable contribution, is P50,000. The Charitable contribution is
P5,000.
Deduction first P50,000 from P100,000 and the result is P50,000.
This P50,000 is the basis of that 10% or 5% of net income before charitable
contribution. So, 10% of the P50,000 is P5,000. Hence, the actual
contribution of P5,000 may
be fully claimed as deduction.
But let us say, the amount of charitable contribution is P10,000. So, he can
only deduct
P5,000 as charitable contribution, and not the actual amount of P10,000
because the law imposes
a limitation that the amount that may be claimed as deduction must not be
more than 10% of net
income before charitable contribution.
9. RESEARCH & DEVELOPMENT PROGRAM
This may not be claimed as deduction if the amount is:
1. Spent for the acquisition or improvements of land or for the improvement
or
development of natural resources.
2. Paid or incurred for the purpose of ascertaining the existence, location,
extent
or quality of any natural resources like deposits of ore or other minerals
including
oil or gas.
10. CONTRIBUTION TO PENSION TRUSTS
REQUISITES OF DEDUCTIBILITY:
1. There must be a pension plan established by the employer;
2. The pension must be reasonable or sound;
3. Contribution must be given by the employer to that pension plan;

4. This must be for the benefit of the employees;

5. The plan must not be subject to the control of the employer.
Contribution to pension trust may refer to the current year or past years.
CURRENT YEAR- this is considered as ordinary & necessary expenses
46
Employer may also make a contribution to the pension plan in regard to the
services
rendered for the past 10 years.
PERSONAL EXEMPTIONS
PERSONAL EXEMPTIONS
1. Personal and additional exemptions. (Note: Wala na yung S.A.P.E.)
2. Premiums on health and hospital insurance
Limitations:
a. It must not be more than P2,400.00 a year. In other words, P200.00 a
month.
The P2,400.00 is the maximum amount that may be claimed as deductions.
b. The family must have an income of not more than P250,000.00 a year.
c. The claimant must be the spouse claiming the additional exemption.
Premiums on life insurance policy is also included here because it is included
under the
health insurance policy.
PERSONAL EXEMPTION
This is an arbitrary amount in the nature of deductions from gross
compensation income.
If the taxpayer has no compensation income, this can be claimed as
deduction from gross
income from business, trade or profession.
Personal exemption is given to approximate the needs of the taxpayer. It is a
substitute
for the disallowance of family, personal and living expenses.
KINDS OF PERSONAL EXEMPTION:
1. Basic personal exemption:
a. single or legally separated without dependent; Php20,000.00
b. head of the family; Php25,000.00
47
c. each married individual if both of them are earning
Compensation income Php32,000.00
(in case only one of the spouses is deriving gross income,
only such spouse shall be allowed the personal exemptions)
2. Additional exemption
- This only applies to qualified dependent child and
children such as legitimate and illegitimate children.
Php8,000.00 for every qualified
dependent child but not to exceed
4

 Personal Exemption only individual taxpayers, including estate and

trust, are entitled.
In case of estate and trust Php20,000.00
R.C. N.R.C. R.A. NRA-NTB NRANETB
Personal
Exemption
//
within
/
within
/subject to the rule on reciprocity.
But it must not exceed the
maximum allowable personal
exemption.
X
Additional
Exemption /
/
within
/
within
X
Rule on reciprocity does not apply.
X
Legend: / - available; X not available
Head of the family unmarried man or woman legally separated man or
woman who has the
following qualified dependents:
1. Parents - One or both parents. Must be living with the taxpayer and
dependent
upon the taxpayer for chief support.
- Parents must be natural parents.
2. Brothers or sister - To be qualified they must be:
a. Living with the taxpayer;
b. Dependent upon the taxpayer for chief support;
c. Unmarried;
d. Not gainfully employed.
e. No more than 21 years old except if physically or mentally incapacitated;
must be brothers or sisters by blood
one is enough
48
3. Children- Must be legitimate , illegitimate, legally adopted or stepchildren
Conditions:
a. Living with the taxpayer;
b. Dependent upon the taxpayer for chief support;
c. Unmarried;

d. Not gainfully employed;

e. Not more than 21 years old except if physically or mentally incapacitated.
Dependent is considered living with the taxpayer even if the former
or the latter are not
physically together if that is brought about by force of circumstances.
Example if one of the
parents will have to undergo by-pass operation in the U.S.
Chief Support means more than 50% of the needs of the dependents
are provided by the
taxpayer.
Problem: If the child or the brother/sister got married and then he has found
to be physically or
mentally incapacitated, so bumalik si tatay at dependent sa tatay for chief
support, can he qualify
as dependent?
Answer: No, physical or mental defect applies only to age requirement.
Once the child or
brother/sister got married, he is automatically disqualified as dependent.
CHANGE OF STATUS:
1. Death of spouse during the taxable year;
2. Death of dependent during the taxable year;
3. Death of the taxpayer during the taxable year; estate of the taxpayer may
claim the basic
personal exemption;
4. Additional dependent during the taxable year;
5. Taxpayer got married during the taxable year;
6. Gainful employment of the dependent during the taxable year
7. Dependent became more than 21 years old during the taxable year.
Even if the above-mentioned change of status happened during the
taxable year, the taxpayer
may still claim the basic personal exemption because it is as if the change of
status happened at
the end of the taxable year.
There is a provision in the Tax Code, which is not so clear. For purposes of
head of the
family, in the case of natural children or child, there is that word
acknowledged or
recognized.
For purposes of the definition of head of the family, it is clear that to
qualify as dependent, the
natural child or legitimate child must be acknowledged or recognized by the
taxpayer.
49
But in the definition of the dependent, dependent means legitimate,
illegitimate or legally
adopted child or children. There is no word acknowledged or recognized.

 Was this deliberately omitted by our Congressmen? Does this imply that
since they have so
may illegitimate children, they may not be required to acknowledge or
recognize them and they
can claim this illegitimate child as their dependent? This is not clear. If we
will try to interpret
the law literally, there is no need of any recognition on the part of the
taxpayer.
Is this really the intention of law?
No. The intention of the law has always been to recognize this illegitimate
child and this is
one way of compelling the taxpayers to recognize this child.
The President of the Republic of the Phils. cannot issue an
executive order to increase
the basic personal exemption because the provision under the Old Tax
Code authorizing the
President to increase the personal and additional exemption upon the
recommendation of the Sec.
of Finance has been removed or deleted by RA 8424.
Now, you can only increase the amount of personal and additional
exemption by legislative
enactment.
NON-DEDUCTIBLE ITEMS
1. Personal, living or family expenses
2. Those which are considered capital expenses. Capital expenditures may
be one that may
increase the value of an asset.
3. Extra-ordinary repair expended to restore the property, or making good its
exhaustion. Extraordinary
repair is one that may prolong the life of an asset for more than one (1) year.
You
cannot claim the same as deduction. Instead, you may claim it as allowance
for depreciation.
4. Premiums paid on the life insurance policy of the officer or employee of
the employer, when
the employer is directly or indirectly designated as beneficiary.
5. Losses from sales or exchanges of property between related taxpayers
RULES:
Premiums paid on the insurance policy of the officer or employee may be
claimed as
deduction by the employer, If the beneficiary is the family or the heirs of the
officer or the
employee.
It is not deductible on the part of the employer, If the beneficiary
designated directly or

indirectly is the employer. If the beneficiary designated is the creditor or the

heirs of the
employer, the designation is indirect; hence, that premium is not deductible.
50
On the other hand, on the part of the employees, these premiums may be
a taxable
compensation income. It is taxable compensation income on the part of the
employee if the
beneficiary designated is the family of heirs of the employee.
Therefore, if these premiums are deductible on the part of the employer,
that is taxable on the
part of the employee. If these premiums are not deductible on the part of the
employer, that is not
taxable on the part of the employee.
N.B. Personal, living and family expenses are deductible for the simple
reason that these are not
connected with the business, trade or profession of the taxpayer. In lieu of
the same, the taxpayer
may claim the so-called Personal and Additional Exemption in the case of
individual
taxpayers.
CORPORATE INCOME TAXATION
CORPORATE TAXPAYER corporation, includes partnership no matter how
created or
organized, joint account companies, insurance companies and other
associations.
It excludes: [Gpp, JV-c, JC- PGE-G]
1. General professional partnership;
2. Joint venture for the purpose of undertaking construction projects;
3. Joint consortium for the purpose of engaging in petroleum, geothermal
and other
energy operations pursuant to a consortium agreement with the government
TAX EXEMPT CORPORATIONS:
The following organizations shall not be taxed in respect to income
received by them as
such:
1. General professional partnership devoted to a common profession, must
not
engage in a business;
2. Joint venture for the purpose of undertaking construction projects;
3. Joint consortium for the purpose of engaging in petroleum, geothermal
and other
energy operation pursuant to a consortium agreement under service
contract with
the government there must be a consortium agreement with the
government

4. Labor, agricultural or horticultural organization not organized principally

for
profit.
So, it may derive income from such business as long as it is merely
incidental, the
organization is still exempt. What is important here is that in the articles of
incorporation of this tax-exempt organization, it must be clearly provided
that
these organizations are not formed or organized for profit.
Example: In the course of promoting agricultural products, the agricultural
organization may sponsor exhibits and income may be derived from the
same.
51
That will not make this corporation taxable because that is merely incidental.
The
activity has connection with the purpose for which the corporation was
organized.
5. Mutual savings bank not having s capital stock represented by shares and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit.
- must form and organize for mutual purposes
- Mutual savings bank and cooperative bank must not be organized
for profit. So, it must not issue shares of stock.
6. A beneficiary society, order or association, operating for the exclusive
benefits of
the members such as a fraternal organization operating under the lodge
system, or
a payment of life, sickness, accident, or other benefits exclusively to the
members
of such society, order or association, or non-stock corp. or their dependents.
Lodge system one which must operate under a parent and subsidiary
associations
7. Cemetery company owned and operated exclusively for the benefit of its
members.
- This must be non-profit cemetery.
Example: Libingan ng mga Bayani
8. Non-stock 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 income or asset shall belong to inure
to the
benefit of any member, organizer, officer, or any specific person.
9. 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

stockholder or individual.
- Makati stock exchange and Manila stock exchange are not covered
by the exception. They are subject to tax.
Requisites:
a. This must be established for common business interest.
b. No part of the income shall inure to the benefit of a particular individual.
Example: A clearing house corp. established by member not for profit and
such
corp. is tax exempt.
If an association is organized by businessmen for the purpose of encouraging
prospective investors to invest in the Phils. that association is not tax exempt
because the members of such organization have different business interests.
52
10. Civic league or organization not organized for profit but operated
exclusively for
the promotion of social welfare.
Example: Piso for Pasig Foundation is not for profit. This is a civic
organization.
Homeowners Association is subject to tax because that is not organized for
profit.
11. Farmers associations or like associations, 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.
Quantity of poduce means proportionate. This must not be for profit.
12 Farmers cooperative or other mutual typhoon or fire insurance company,
mutual
ditch or irrigation 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.
13. Government educational institution. These are U.P.M.S.U.
14. A non-stock and non-profit educational institution.
Take note that the last paragraph of Sec. 30; it provides, Not withstanding
the
provisions in the preceding paragraphs. This means that even though they
are
exempt, as regards certain income, they may be subject to tax.
** So, 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.

** The implication is that if these tax exempt corps mentioned under nos. 4
to 14,
made an investment, the income derived from such investment may be
subject to
tax.
So, if they have real property and lease it to another, the rent income is
subject
to tax.
If they have deposit in a bank, the interest income on the same is subject
to tax.
If they sell property for profit, that is subject to tax
53
So, the exemption does not cover this income derived form such investment.
Thus, it must be an income derived from their activities which may be the
purpose
for which they are organized.
*** The insertion of non-stock, non-profit educational institution, to my mind,
is not in accordance with the provision of Art.14 Sec. 3 par. 3, because the
Constitution provides for a particular test for exemption and that is use of
the
property. So, if a non-stock, non-profit educational institution has interest
income
derived from bank deposit, in view of this provision (Sec. 30, NIRC), the BIR
may impose a tax on the same, regardless of the use or disposition. So, even
if the
interest on such deposit is used to achieve educational purposes, that will
not
exempt it from taxation. The Constitution says actually, directly and
exclusively
used for educational purposes, the meaning of this is, as the proceeds or
income
is actually directly and exclusively used for educational purposes, that may
be
exempt. But under Sec. 30, no. That must be connected with the purposes or
purposes for which such institution has been formed or organized. Since this
runs
counter to Art. 14 Sec. 4 par. 3 of the Constitution, this Sec. 30 should be
declared
unconstitutional. The Constitution says use but here (Sec. 30) it is
regardless of
the use or disposition. This must yield to that Constitutional provision.
15.
(Sec. 27 par C, TRA 1997)
GSIS (Government Service Insurance System)
16. SSS (Social Security System)

17. PHIC (Phil. Health Insurance Corp.)

18. PCSO (Phil. Charity Sweepstakes Office)
19. PAGCOR (Phil. Amusement & Gaming Corp.)
20. NAPOCOR special law
N.B.: The rule now is settled, Govt owned and controlled corps. Are subject
to corporate
income tax except those mentioned under Sec. 27 par C.
PARTNERSHIP - This is an association of two or more persons and they may
contribute money, property, or industry to a common fund with
the intention of dividing the profits among themselves.
Tests that will determine whether a partnership exists or not:
1. There must be a contribution to a common fund.
2. There must be an intention to divide the profits among themselves.
54
Co-ownership is not a partnership. Co-ownership, as a rule is a tax exempt
because a
co-ownership is formed and organized not for profit but for common
enjoyment of
the property or for the preservation of the property.
Partnership is considered a corporate taxpayer. Take note that this
excludes general
professional partnership. Only partnership formed or organized for profit is
excluded.
If it is formed and organized for the practice of common profession, it is a
taxexempt
partnership.
For purposes of taxation, this business partnership is taxable irrespective
of whether
it is orally constituted or in writing and whether or not it is registered in the
SEC.
Case: The heirs of the decent inherited the property. There was distribution
of share. But such
shares are held under single management. In fact the income of such
property after distribution
was managed by one of the co-heirs.
Held: The fact that they agreed that the shares shall be held by the co-heir
under the
single management for profit, this according to the SC convert the coownership in to a taxable
unregistered partnership. (Una vs. Commissioner Una doctrine)
Case: The heirs inherited the properties from their deceased mother. The
property was
under the administration of an administrator. This administrator of the
property was authorized to
sell these properties for profit, or leased properties for profit and engaged in
an income

producing activities.
Held: When these heirs inherited the property from their deceased mother,
co-ownership exists.
At the particular stage, it is exempt from tax when the heirs decided to
invest such property in an
income producing activity that co-ownership is converted in to a taxable
unregistered ownership
(Sea vs. Commissioner Sea doctrine)
Case: There was two sisters who form a common fund for the purpose of
engaging in a series of
transaction for profit.
Held: There is a taxable unregistered partnership here.
**Test that will determine whether co-ownership is taxable
unregistered partnership Find
out whether the heirs made a substantial improvements on the inherited
property. The heirs made
a substantial improvement on the inherited property, the implication is that
they will engage in a
business for profit, (Evangelista vs. Commissioner Evangelista
doctrine). If that happens,
that co-ownership will be taxed as unregistered.
55
Case: Obelio Sr. entered into a contract with Ortigas limited company. Under
that contract,
Ortigas limited company will distribute parcels of land to the Children of
Obelio Sr. for their
residential houses. After the subdivision of such parcel of land to the children
of Obelio Sr., these
children decided to sell this parcel of land to Wide City Corp. Was there a
taxable partnership
formed by the children of Obelio Sr.?
Held: There was no partnership formed because there was no intention to
divide the profits
among themselves. This was a mere isolated transaction. Isolated
transaction will negate any
intention to divide the profits among themselves. Thus, there was no taxable
partnership formed.
Case: Pascual and Dragon purchased 3 parcels of land from Bernardino and
2 parcels of land
form Mr. Roque. Thereafter, the three parcels of land which were purchased
from Bernardino,
were sold to Marimer Corp. with a profit of P165,222.70 while the parcel of
land purchased from
Mr. Roque were sold at a profit of P60,000 to Reyes.
Held: there was no partnership organized because this is just a mere sharing
of gross return.

And as you have learned in partnership, the law says, the partners share in
the net profits of a
taxable partnership. So, mere sharing of gross return does not of itself
establish a partnership.
Joint account When two persons form or create a common fund and such
persons engaged in a
business for profit, this may result in a taxable unregistered association or
partnership.
Registration is not a requisite for purposes of taxation. What is important
here is they must
engage in a business or activity for profit.
Joint stock companies This is the midway between corporation and
partnership. This has what
you call hybrid personality. It is somewhat a partnership because it is an
association, and
persons or members of the same contribute fund, money to a common fund.
And this us managed
by Board of Directors; this means: it has that feature of a corporation. And
these persons may
transfer their share without the consent of others.
Emergency operation These may be formed by two corporations. This
two corporations have
separate personalities. If they form that emergency operation (it is really a
special activity) to
engage in a joint venture, corporation 1 may be taxed only from the income
derived from such
business. The income derived from such emergency operation should also be
included in that
taxable income subject to corporate income tax. In the same way, that
corporation 2, has a
separate and distinct personality; if it a part of that emergency operation,
the income derived
from such special activity should also be included in the income of that
corporation 2, subject to
corporate income tax, even if it is not registered with the SEC (Securities and
Exchange
Commission).
But if two corporations are managed by one manager, and this 2
corporations leased services,
managed by one person and it has 2 separate accounts, it is not an
association formed which is
subject to tax.
Domestic Corporation (DC) corp. formed or organized under Phil. Laws
56
Resident Foreign Corporation (RFC) foreign corporation engaged in
trade or business within

the Phils.
Non-Resident Foreign Corporation (NRFC) foreign corp. not engaged in
trade or business
within the Phil.
There is no fix criterion as to what constitute engaged in trade or business.
Each case
shall be judged in the light of peculiar environmental circumstances. But
engaged in business
implies continuity of commercial transaction or dealings continuity of
business; there must be
continuity of intention to conduct continuous business.
Case: BOAC is an offline international airline. Offline because it does not
render any services
and no landing rights in the Phils.
BOAC claimed that it is not subject to tax with respect to the sale of transport
documents
or airline tickets in the Phils because it is an offline international airline. It
does not render any
service and it has no lending rights.
Held: The contention of BOAC is not tenable. The income derived from the
sale of that
transport documents in the Phil. is subject to tax. The subject of income may
be property, activity
or service that produce the same. For an income to be considered as an
income derived from
sources within the income must be derived from activity conducted or
undertaken in the Phil.
It is true that BOAC had no property in the Phil. from which its income may
be derived.
It is true that BOAC did not render any service in the Phil. from which its
income may be
derived. But there was that activity that was undertaken in the Phil. from
which income was
derived and that refers to the sale of transport document. According to the
Supreme Court, the
sale was made in the Phil. and the payment was made in the Phil. This
particular activity enjoys
protection of the Phil. government. So, it should share the burden of tax.
BOAC was considered
doing business in the Phil. under this particular situation because there were
series of
transactions made in the Phil. and BOAC was appointed a permanent agent
in the Phil. This
implies that the Phil. and the BOAC had no intention to establish continuous
business here in the

Phil. Continuity of conduct is the peculiar circumstance referred to in the

case.
**If these were mere isolated transaction (lets modify the facts of the case)
and BOAC has no
permanent agent in the Phil., such airline is not considered doing business in
the Philippines.
Remember, international carrier is taxed on gross Philippine billings.
Case: A foreign vessel unloaded cargoes in the Phil. twice.
Held: We cannot consider that as resident foreign corp. These are mere
isolated transactions.
Case: If a corporation made an investment in another corp., the Supreme
Court held that, it will
not make the corp. as doing business in the Phil. because it has no intention
to establish
continuous business.
57
Case: Marubeni corp. is a foreign corp. it invested in a domestic corp. This
foreign corp. has a
branch office in the Phil. it made a direct investment in that domestic corp.
So, it received
dividend from that domestic corp.
Held: That will not make such foreign corp. a resident foreign corp. because
of that absence of
intention to establish continues business. It would be different if it was
coursed through the
branch office of such foreign corp.
GENERAL RULES
Classification Sources Tax Base Entitled
Deduction
Tax Rate
DC I / O Taxable Income
/
34%- 1998
33%- 1999
32% - 2000
RFC I Taxable Income
/
34% - 1998
33% - 1999
32% - 2000
NRFC I Gross Income X
Question: Can Congress pass a law imposing tax on the income of a RFC
derived from sources
without?
Answer: No, because this will violate the principle of territoriality in
taxation. We cannot

extend protection to that particular subject of taxation. The fundamental

basis of the power to tax
is the capacity of the taxing authority to extend protection to the subject of
taxation.
The 34%, 33% 32% tax rates mentioned may not be applied except if it is
lower than the 2%
of gross income of such corporate taxpayer. This is called minimum
corporate income tax
rate of 2% of gross income.
Example: If a corporate taxpayer has a gross income of P20M. 2% of that is
P400,000. In
this case, the tax to be paid must not be lower than P400,000. If the net
income is P20M and the
deduction is P19M, we only have P1M . You multiply that by 34% because
now is 1998, so that
will give you P340,000. This is the corporate income tax applying that tax
rate (34%) is lower
than 2% which is P400,000 (this is the amount supposed to be paid).
Applying the minimum
corporate income tax rate of 2% if the gross income, the amount to be paid
as tax is P400,000.
So, the minimum corporate income tax rate of 2% of gross
income means that the
corporate taxpayer must pay corporate income tax not lower than 2% of its
gross income. If the
actual corporate income tax is lower than the 2% tax that is supposed to be
paid, it is the 2%
minimum. But, if the actual corporate income tax applying that 34% is
P600,000, this is the tax
that should be paid.
SPECIAL RULES
58
A. SPECIAL DC SOURCES Tax Base Tax Rate
1. PRIVATE
EDUCATIONAL
INSTITUTION
I/O Taxable Income
1998:10%or34%
1999: 33%
2000: 32%
Notes:
Tax rate is 10% if its income derived from unrelated trade, business or
activity does NOT
exceed 50% of its gross total income.
But its income is subject to 34% tax rate if its income from unrelated, trade
or business or

activity exceeds 50% of its gross income.

Example: Its income derived from unrelated trade, business or activity
amounted to P20M. And
income derived from related trade, business or activity is P10M. So, the total
income is P30M. If
the allowable expenses amounted to P10M, the taxable income now would
be P20M.
66.67% = 20M vs. 10M___ = 33.3%
33
Income derived from Income derived from
Unrelated TBA Related TBA
So, the amount from unrelated TBA (66.67%) is more than 50% of its gross
income
(P30M). Thus, this P20M taxable income is subject to 34% tax rate.
But, if the income from related TBA is P20M and its income derived from
unrelated TBA
is P10M. So:
Related TBA -------------- vs. <----------------- Unrelated TBA
The income from unrelated TBA is not more than 50% of its gross income.
Thus, this P20M is
subject to P10% preferential tax rate.
INCOME DERIVED FROM RELATED TRADE, BUSINESS OR ACTIVITY
This must be an income derived from an activity which is substantially
related to the
performance of educational functions. This may include income from
bookstore, canteen or
dormitory.
Sources Tax Base Tax Rate
2.NON-PROFIT
HOSPITAL I/O Taxable Income
1998-10%or 34%
1999-33%
2000-32%
59
***For purposes of non-profit hospital, this must be income derived from
activities which are
substantially related in achieving the primary purpose of that hospital, which
is to render services
to the public.
The explanation as to when the 10% or 34% tax rate applies is the same as
that of private
educational institution.
B. SPECIAL RFC Sources Tax Base Tax Rate
1.
INTERNATIONAL
AIR CARRIER

2.
INTERNATIONAL
SHIPPING
I
(Income Within)
GROSS
PHILIPPINE
BILLINGS
2.5%
(2. ____ %)
*** For purposes of International Air Carrier, GROSS PHIL. BILLINGS
refer 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.
* Gross Phil. billings for purposes of International Shipping means
gross revenue whether
from passenger, cargo or mail originating from the Phils. up to final
destination, regardless of the
place of sale or payments of the passage or freight documents.
C. SPECIAL NRFC Sources Tax Base Tax Rate
1. LESSOR OF
CINEMATOGRAPHIC
FILMS
I GROSS 25%
2. LESSOR OF
VESSELS
CHARTERED TO
FILIPINO
NATIONALS OR
CORP.; The Charter
Agreement of which is
approved by Maritime
Industry Authority
I GROSS 4.5%
3. LESSOR OF
AIRCRAFT,
MACHINERY &
EQUIPMENT
I GROSS 7.5%
60
*** Lessor of CD and video is not included in no. 1. So, it is subject to 34%
tax rate.

*** Lessor of personal properties is not included in no. 2, so, it is also

subject to 34% tax rate.
OTHER RULES
DC RFC NRFC
1.
INTEREST
INCOME ON
BANK DEPOSIT
20% 20%
This should be included in its gross
income subject to 34% tax. BUT in
the case of interest on loans which
have been made on or after August 1,
1986, the same is subject to 20%
final tax.
2. INTEREST
INCOME ON
BANK DEPOSIT
UNDER THE
EXPANDED
FOREIGN
CURRENCY
DEPOSIT
SYSTEM
7.5% 7.5% Tax-exempt
3. ROYALTIES
DERIVED
WITHIN THE
PHILIPPINES
20% 20% 34%
61
4. CAPITAL
GAINS
DERIVED
FROM ITS
SALE OF
SHARES OF
STOCK
a. If it is
listed and
traded
thru local
stock
exchange:
Of 1% of the
Gross Selling

Price
b. If it is
NOT listed
or traded
thru local
stock
exchange:
Not over
P100,000.: 5%
Over
P100,000: 10%
This rule applies BOTH to corporate and individual taxpayers.
5. CAPITAL
GAINS
DERIVED
FROM THE
SALE OF REAL
PROPERTY
WHICH IS NOT
USED IN TRADE
OR BUSINESS
6% of the
Gross Selling
Prize or Zonal
Value
whichever is
Higher
Should be treated as OTHER INCOME
SUBJECT to 34%
6. *** BRANCH
PROFIT
REMITTED BYA
BRANCH
OFFICE (this
only applies to
RFC)
NOT
APPLICABLE
Subject to
Branch
Profit
Remittance
Tax of 15%
NOW, the
basis of the
tax is the

amount
applied for
or
NOT APPLICABLE
62
earmarked
for
remittance
CASE:
Marubeni Corp. is a foreign corp. it has a branch here. It made a direct
investment in a
Domestic Corp., so it received cash dividends. Do we have to include that in
that profit to be
remitted and subject to 15%?
HELD:
NO. This is not effectively connected with the conduct of trade or business of
their
branch office. That should be excluded from the profits that should be
remitted to that Marubeni
Corp. The condition is, it must be an income or profit effectively connected
with the conduct of
trade or business of such corp. through its branch office.
7. DIVIDENDS
RECEIVED
FROM DC
EXEMPT EXEMPT
* These dividends received from DC
by NRFC is subject to 15% Final
Tax IF: the foreign govt. of that
foreign corp. allows a tax credit at
least 19% of the taxes deemed paid
in the Philippines by NRFC.
* So, the implication is that if that
foreign govt. does not allow a tax
credit of at least 19%, that is
subject to 34% and not 15%.
Note: These incomes must be derived from the Phils. So, this is an interest
income on bank
deposit maintained OUTSIDE the Phils., that is not subject to final tax but
should be included in
the gross income of the DC.
INTRACORPORATE DIVIDENDS EXPLAINED
TAX SPARING CREDIT (Sec. 28.B (5) b) >>> 19%
Purpose: To attract investors in the Phils.
Situation: NRFC received dividend, cash or property dividend from DC. That
dividend

received from DC is subject to 15% FINAL WITHOLDING TAX.

This 15% may be imposed on this dividend received from DC if the foreign
govt. of the
NRFC allows a tax credit at least 19% (1998), 18% (1999), 17% (2000). It
should be
credited from the taxes deemed paid by this NRFC in the Phils.
63
So, if the foreign govt. does not allow a tax credit of at least 19%, the tax
there is not
15% but 34%. Thus, the tax spared or saved is 19% because normally the
tax is 34%. So,
34% less 15% equals 19%, that is the tax saved and that represents the tax
credit allowed
by the foreign govt.
Question: Must the foreign govt. actually grant a tax credit or is it enough
that the
foreign govt. allow such tax credit?
Answer: There is no statutory provision that requires actual grant. Neither is
there a
Revenue Regulation requiring actual grant. It is clear that the provision of the
law says
allows. So, it is enough to prove that the foreign corp. allows a tax credit. It
is not
incumbent upon the foreign corp. to prove the amount actually granted.
Question: Does a withholding agent or a subsidiary corp. have the
personality to file a
written claim or refund?
Answer: The withholding agent has the personality to file a written claim for
refund. A
withholding agent is technically a taxpayer because it is required to deduct
and withhold
the tax, and it has the obligation to remit the same to the govt. So,
withholding agent is
liable for tax. It has therefore the personality to file a written claim for
refund.
Withholding agent is not only an agent of the taxpayer but also an agent of
the
govt. Since it is an agent of the taxpayer, it is ipso facto authorized to file a
written claim
for refund.
CAPITAL TRANSACTIONS EXPLAINED
Capital Transaction Involves Capital Asset.
CAPITAL ASSET means property held by the taxpayer whether or not
connected with his trade
or business EXCEPT: [S.O.U.R.]

1. Stock in trade or property of the taxpayer which may be properly included

in the
inventory at the end of the taxable year [inventoriable property may include
finished goods, raw
materials or work in process.]
2. Property primarily held for sale to customers in the Ordinary course of
trade or
business.
3. Property Used in trade or business subject to depreciation, which means
that this must
be depreciable property.
4. Real property used in trade or business.
These 4 properties enumerated are called ORDINARY ASSETS.
64
ASSETS WHICH ARE CONSIDERED AS CAPITAL ARE:
1. Properties not included in those above enumerated
2. Properties used in trade or business classified as capital assets:
a. accounts receivable
b. property for investment in stock
c. subdivision of lots to tenants at the instance of the government. The sale
of these
subdivided lots at the instance of the govt. to the tenants is considered as
Capital
Transaction.
d. Interest of a partner in a partnership. The partner may transfer that
interest to another
and he may derive gain therefrom, that is considered as Capital Transaction.
N.B. It is therefore safe to say that all properties not used in trade or
business are considered as
Capital Assets.
Capital Asset can be Converted into an Ordinary Asset.
Example: A property was inherited by the heirs from their deceased
parents. That property is
considered as Capital Asset.
In the event that this property (a parcel of land) is improved by the heirs
substantially and
sell the same at a profit, said capital property is now converted into an
Ordinary Asset. The profit
derived from the sale of the land which has been substantially improved by
the heirs is
considered as ordinary gain.
Ordinary Asset can be converted into a Capital Asset.
Example: If the taxpayer is engaged in real estate business, if he dies, these
properties will
be transmitted to his heirs. And if the heirs will discontinue the business of
that deceased parent,

that properties which are ordinarily held for sale to customers maybe
converted into a Capital
Asset.
FACTORS that should be considered in DETERMINING whether it is
CAPITAL or NOT:
1. It may be the vocation of the taxpayer.
In one case, if the taxpayer is engaged in hotel management and he
inherited
jewelry from his parents and hell sell the same, the Court said that it is a
Capital
Transaction.
It would be different if the one selling a parcel of land is a real estate
dealer and
he developed the same before this property may be sold to another, this
time such
taxpayer is engaged in a business, in which case that sale of parcel of land is
considered as Ordinary Transaction.
2. Sometimes the period or the extent of activities may play an
important role.
Case:
65
If a taxpayer is engaged in a lumber business and he has been unsuccessful
for a period of
11 years and he tried again on the 12th year. The sale that may be made on
the 12th year may not
be considered ordinary transaction.
But those sales which, would have been made during that 11th year when
such taxpayer is
engaged in trade or business may be considered Ordinary Asset.
If the taxpayer stop his business and then undertake another business, that
may be
considered Capital Transaction.
SPECIAL CAPITAL TRANSACTIONS these transactions are deemed
capital transactions.
SPECIAL CAPITAL TRANSACTIONS INCLUDE:
1. Failure to exercise option or privilege to buy or sell property.
Example: B offers his land to A. B gives A 5 days within which to make up
his mind to buy
this parcel of land for P500,000.00 Now, A pays B P5,000 for giving him time
to think
whether he will buy that during the 5 day-period. If A fails to buy the same,
he incurred a
loss and we call this Capital Loss. So, the loss of A is considered a gain on the
part of B
because the latter received that P5,000.

So, failure to exercise option to buy may result in a capital loss on the part of
the offeree
or buyer. As regards the seller, the gain is considered Capital Gain.
2. Distribution of assets or shares of stock to stockholder upon
liquidation of a corporation.
Example: After liquidation, the stockholders are entitled to the return of
their capital if there
is still something left. If A made an investment and the value of his shares of
stock is P100,000,
after liquidation of the corporate affairs, the corp. gives A P150,000. The gain
of A which is
P50,000 is considered Capital Gain.
3. Readjustment of partners interest in a partnership.
Example: A partnership is earning a profit, let us say, P100,000. Then it
increases to P1M.
So, the partnership may readjust the partners interest in the partnership. Or
it may also
arise if for example, A made an additional contribution. So, As interest will
change.
Now, in making readjustment of interest, the partner may derive gain
therefrom, and that
is a Capital Gain.
4. Retirement of bonds.
Example: The debtor issues bonds and after one (1) year, he pays the same.
The value of the
bonds is P100,000. Upon redemption, the debtor pays P120,000 to the
creditor. So the P20,000 is
66
a gain to the creditor and we consider that as a Capital Gain. But if there is a
loss, that is
considered as Capital Loss.
5. Wash Sale This has been described as 61 days sale
The seller here is not a dealer in securities.
It is described as 61 days sale because here, 30 days before the sale, the
seller acquired
substantially identical securities OR 30 days before the sale, he acquired
identical or
substantially the same stocks or securities. Sale may also include
exchange or option to sell
securities.
Example: Today is June 10, Now, here is A who is not a dealer in securities or
stocks. He
sells securities.
Can that be classified as wash sale?
You must find out whether 30 days before June 10, he purchased identical
securities. Or he ma

not have purchased identical securities within that 30 day period before the
sale but it is possible
that within 30 days after June 10, he may have purchased identical
securities.
The tax treatment here is, the gain is taxable, meaning that is classified as
Capital Gain because
the seller is not engaged in such business. If there is a loss, since it is
classified as Capital
Transaction, that is considered Capital Loss.
The capital gain is taxable but the capital loss incurred from wash sale
transaction is not
deductible.
6. Short Sale a transaction wherein a person sells securities which he
does not own yet. The
seller here is a mere speculator; he is selling securities which he is yet to
acquire, provided
however, that he has ownership of the securities at the time of delivery he
has the right to
transfer ownership. (See further discussion on p. 77).
RULES THAT GOVERN CAPITAL TRANSACTIONS:
1. Holding Period Rule
Under this rule, if the property has been held by the taxpayer for a period of
not more
than 12 months, the gain or loss is 100% recognized. If it is more than 12
months, the gain or
loss is 50% recognized.
So, the gain or loss may be 100% or 50% taxable deductible as the case may
be.
Example: You sell your personal car. This is a capital transaction because
the asset involved
is a capital asset. Let us say that you sell the car at P200,000 and the cost of
the car is P150,000.
Here, there is a gain of P50,000.
67
You must find out the date of the acquisition and the date of sale or
disposition. If the
date of acquisition and the date of sale fall within the 12 month period, this
P50,000 is P100,000
taxable. But if exceeding 12 months, this P50,000 is only tacable up to
P25,000. This is an
example of tax avoidance.
N.B. This rule is applicable only to individual taxpayers. This is so because
the capital gain
derived from capital transaction of corporate taxpayers is always 100%
recognized respective of

the number of months during which the property was in the possession of
the corp. taxpayer.
2. Capital Loss Limitation Rule
- meaning, capital losses are deductible only to the extent of capital gain
- so, it follows that there is no capital gain, there is no deductible losses.
- Capital loss cannot be deducted from capital gain
- Ordinary loss is deductible from ordinary gain.
N.B. This rule applies to individual and corporate taxpayers EXCEPT on
banks and trust
companies because they are considered as dealer in securities as far as
issuance of bond and
evidence of indebtedness are concerned.
Net Capital Loss Carry-over Rule
-meaning, the capital loss that may be carried over in the succeeding
taxable year must not
exceed the net income during the year that it was incurred.
Example: In 1996, the capital gain is P100,000 and capital loss is P200,000.
SO, there is a
capital loss of P100,000 which may be carried over in 1997 by the taxpayer.
This net capital loss
in 1996 may be claimed as deductions from the capital gain in 1997.
But if in 1996 the net income is P150,000 and the net capital loss is
P100,000, so the net
capital loss does not exceed the net income. Thus, the entire amount of
P100,000 net capital loss
can be carried over in 1997.
Can that P100,000 net capital loss be carried over in 1998?
NO, because the law says during the succeeding taxable year. Tax
exemption must be strictly
construed against the taxpayer and liberally in favor of the govt.
N.B. This rule applies to individual taxpayers.
In this regard, there is such a thing as no operating loss carry over.
OPERATING LOSS
are losses incurred in the course of trade or business of the taxpayer. Net
operating loss may be
carried over by the taxpayer, whether corporate or individual, to the next
three (3) consecutive
years provided that during that year, such taxpayer is not exempt from
taxation and there must be
no substantial change in ownership of the corporation, in the case of the
corporation. Substantial
change may arise if less than 75% of the outstanding capital stock or paid up
capital stock is held
by the same person.
68

Case: The BOI registered industries are allowed to carry over operating
losses. This time, those
losses that were incurred during that period of 16 years operation may be
carried over to
succeeding taxable year.
The rule that we have established is: expenses must be paid or
incurred during the
taxable year. You can claim those expenses as deduction during the year
when the same were
incurred or paid. The exception to this rule are net operating loss carry-over
and net capital loss
carry-over.
Meaning of Terms:
CAPITAL GAIN gain from sale or exchange of capital asset.
CAPITAL LOSS loss incurred from sale or exchange of capital asset.
NET CAPITAL GAIN excess of capital gain over capital loss.
NET CAPITAL LOSS excess of capital loss over capital gain.
Gains derived from dealings in property form part of Gross Income
(Sec. 32 A. no. 3)
- This may include sale or exchange of goods or properties.
- If the property is sold for cash, that is considered as sale.
- If it property for another property, this may be classified as exchange.
There may be a gain in regard to exchange of property if the
following concur:
1. The property received must have a fair market value;
2. The property disposed of must be substantially different from the property
received.
- So, a like kind transactions are not taxable transactions.
- If a land has been substantially improved and then it is exchanged with
another
land, that may not be taxable. However, there is that BIR ruling that this is
no
longer applicable even if these are like kind transactions, it may be taxable.
But
Prof. Geronimo of Ateneo disagreed. He said, you cannot change that by BIR
ruling. So, we can compromise that this will not apply to capital transactions
but
to ordinary transactions.
In determining the gain or loss in the sale or exchange of property, this is the
basic
formula:
Amount received or realized LESS Cost or adjusted basis.
How to determine the cost or adjusted basis?
*** It depends upon the manner of acquisition.
1. If it was acquired through purchase, it is the cost of the property.
69

Example:
I sell a property in the amount of P100,000. It is previously purchased the
same at P60,000, this
P60,000 is the cost of property.
2. If the property sold was previously acquired through inheritance,
it is the fair market
value (FMV) of the property at the time of the acquisition.
At the time of acquisition means at the time of the death of the
decedent or testator.
3. If the property sold was acquired through donation, the basis
shall be the same as if it
would be in the hands of the donor.
Situation:
A, the donor donated property to B, the donee. Subsequently, such donated
property was sold
by the donee for P200,000. What must be the cost?
Answer:
The law says, the same basis in the hands of the donor. So, the donee should
ask the donor the
basis.
It is also that A, the donor acquired the property from another either through
purchase or
donation. So, you should ask A, the last donor, his basis.
Exception to the general rule:
If the basis is greater than the FMV of the property at the time of the
donation/gift then, for the
purpose of determining loss, the basis shall be such FMV.
4. If the property sold was acquired for less than an adequate
consideration in money or
moneys worth, the basis of such property is the amount paid by the
transferee for the
property.
Situation:
The seller acquired the property from A in the amount of P70,000. The FMV
of said property is
P100,000. So, the seller here is the transferee and A is the transferor. The
seller sold the property
at P200,000. What must be the cost?
Answer:
It is the amount paid by the transferee. And the amount paid by the
transferee who subsequently
sold the property is P70,000. So, he will have a gain of P130,000.
*** Remember, it is not the FMV of the property but the amount paid bv the
transferee.
Suppose the property was acquired in a transaction where gain or
loss is not recognized?

(NO GAIN, NO LOSS RECOGNIZED)

Before we answer that, we should know these transactions where the gain is
not recognized
(meaning it is not taxable) and the loss is not recognized (meaning, it is not
deductible).
70
The basic rule is, in the sale or exchange of property if there is a gain, the
gain taxable; If there is
loss, the loss is deductible).
Exception to the basic rule (no gain or loss shall be recognized):
1. Transactions made pursuant to plan of merger or consideration.
Sometimes, we call this
Tax Exempt Transactions or Transactions Solely in Kind.
a. A corporation, party to merger or consolidation exchanges its properties
solely for stock
in corp., which is a party to the merger or consolidation.
Illustration:
Property
Corp. A Corp. B property for Stock
Stock
b. A stockholder of a corp. party to a merger or consolidation exchanges his
stock solely for
stock in another corp. party to that merger or consolidation.
Illustration:
Security or Stock
Stockholder ------------------------ Corp. 1. Stock for Stock
2. Securities for stock
3. Securities for Securities
Security or Stock
** Sometimes, we call the above-mentioned transactions as Transactions
solely in kind or
Tax Exempt Transactions.
2. If a person alone or together with others or not exceeding four (4) (so, the
total number should
be five (5) exchanges his property for stock in a corp. and this person or
persons, after this
exchange, acquired controlling interest over that corp. This means that they
acquired at least 15%
of the shares of stock of such corp.
- This is also a transaction solely in kind.
Question: Suppose these persons, at the time of transaction, already
acquired controlling
interest over such corp., is the transaction or exchange taxable?
71
Answer: Even if these persons acquired controlling interest at the time of
the transaction,

the rule is still applicable in which case that is still tax exempt.
Question: So, if these properties acquired under this tax exempt
transactions are
subsequently disposed of, how will you determine the basis?
Answer: The basis of the stock or properties acquired under this no gain, no
loss
recognized shall be the same basis in the hands if the transferor.
Suppose the property was acquired under transactions where gain
is recognized and loss is
not recognized? (GAIN RECOGNIZED, LOSS NOT RECOGNIZED)
Transaction solely in kind this means that there are other consideration
given other than those
mentioned under transactions solely in kind (nos. 1 and 2 above, but cash is
added).
Example: Corp. A party merger or consolidation transfers its cash and
property to Corp. B,
also a party to such merger or consolidation.
Corp. B, in exchange, transfers its stocks to Corp. A.
Illustration:
Property and Cash
Property: P50,000
Cash: P50,000
Corp. A Corp. B P100,000
Stock FMV Stock: P100,000
Let us say that FMV of stock given by Corp. B is P100,000. The value of the
property transferred
by Corp. A is P50,000 while cash is also P50,000.
So if you add all of these, the amount received or realized is P200,000.
Now, you deduct the cost of the stock disposed of. Let us say that the cost of
stock is P80,000.
So, Corp. B derived gain of P120,000. Is this taxable?
Answer:
YES, but only P100,000 is the amount that is taxable. This is so because of
the limitation that it
must not exceed the total cash and the FMV of the property. And if you add
the FMV of the
property and the total cash given, the total is P100,000.
Under the law, there is that limitation in transactions which involves not only
the property but
also cash. The gain is recognized or taxable but the taxable gain must not
exceed the cash given
and the FMV of the property which forms part of the consideration.
72
On the other hand, supposed the cost of stock disposed of or transferred to
Corp. A is P250,000.
So, there is a loss of P50,000, is this recognized or deductible? NO.

If this property received under this transactions which is not solely

in kind is subsequently
disposed of, how do you determine the basis of that?
Answer: The basis of the property in the hands of the transferor less the
FMV of the
property, less cash received plus the gain recognized, if any, plus the
dividend that may be treated
as such, if there is any.
Basis in the hands of the transferor
Less: FMV of the property
Cash received
Plus: Gain recognized, if any
Dividend recognized, if any
Transactions were gain is recognized and loss is not recognized
(meaning, if there is a gain,
the gain is taxable and if the loss is not deductible) are: [W.I.R.N.]
1. Wash Sale
2. Illegal transactions
3. Those transactions involving Related taxpayers
4. Transactions Not solely in kind.
SHORT SALE
- this is also considered as Capital Transaction.
- Short sale is really an obligation payable not in cash but in goods. The
seller of
securities or stock will decline. And if it declines, he earns profit. However, if
the
price of securities increases, he incurs loss.
- Example: I borrow your securities on June 10 and Ill pay it on June 15. The
price of securities on June 10 is P50 and you speculate that said price will
decline
on June 15. On June 15, the price has been lowered to P40. So, you earn a
profit
of P10 because I will pay my obligation at P50 on June 15 and not P40.
- Tax consequence of short sale:
** If there is a gain, the gain is taxable. We call this Capital Gain.
** If there is a loss, the loss is deductible
WASH SALE vs. SHORT SALE
* BOTH may be classified as Capital Transactions.
* The basic distinction is in wash sale, the loss that may be incurred is not
deductible, whereas in
short sale, the loss is deductible.
TRANSFER TAXES
73
ESTATE & TRUSTS
ESTATE refers to the mass of properties left by decedent or testator to his
heirs or

beneficiaries.
TRUST is the right to the property, real or personal, exercised by one
person for the benefit of
another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust
b. Trustee or fiduciary one who may hold the property for the benefit of
other person
known as beneficiary. Sometimes, the fiduciary is also the nbeneficiary.
c. Beneficiary
Estate may be the subject to tax, if it is under your administration. It may
only be
under administration or settlement if the properties of the decedent are
settled
under judicial settlement.
If the estate is under extra-judicial settlement, it is not subject to tax
because that
will not earn income considering that the heirs agreed to settle the estate
extrajudicially.
When we speak of judicial settlement, this may include estate or intestate
proceedings.
Trust may be subject to tax if the trust is irrevocable.
Non-taxable trust are:
1. Revocable Trust. The income here will be taxed in so far as the recipient
of the same is
concerned.
2. Employees Trust. If an employer establishes a pension trust for the
benefit of the employees,
that pension trust is not taxable.
The trust is revocable if the power to revest the title to the property
of the trust is vested:
1. in the grantor or in conjunction with other person who does not have the
substantial adverse
interest in the disposition of the property
2. in any person who does not have substantial adverse interest in the
disposition of the property.
In irrevocable trust, you cannot transfer or revest the title of the property.
No substantial interest in the disposition of the property he must not
be the
beneficiary.
If the properties of the estate is not invested in a business, so ten heirs
are just coowners
of the property, that is not taxable because co-ownership as a rule is not
taxable.
74

 If the heirs decide to continue the business, such that the administrator
may
manage the same, that will become an unregistered taxable partnership.
Estate and trust may be taxed on the same manner and on the same
basis as in the
case of individual taxpayers. So, they may claim the deductions under
Section 34
as long as these deductions were paid or incurred in connection with the
business
of that estate or trust.
Estate and trust are entitled to personal exemptions P20,000.
SPECIAL DEDUCTIONS (this can be availed of only by estate and
trust):
1. In the case of intestate, the executor, or administrator may deduct the
income distributed to the
heirs during the particular year when such estate is still under settlement.
2. In the case of a trust, the income may be distributed to the beneficiaries
during that year may
also be deducted. The trustee or fiduciary may distribute the income or
accumulate the income.
The trustee has the discretion whether to distribute the income to the
beneficiaries during the
taxable year or to accumulate the same and distribute such income after the
lapse of certain
period of time or year. In the event that income of the trust is distributed to
the beneficiary, this
particular amount may also be claimed as deductions.
Questions: If there are two (2) trust created by one trustor or grantor, how
do we tax the
income of that trust?
Answer: Under the law, the taxable income of these two (2) trust must be
consolidated.
That trust should be taxed as if they constitute one trust.
Situation:
Grantor X created 2 trust. One is A trust created and the other is B trust.
There is only one
beneficiary named Y.
Let us assume that the taxable income of trust A is P10,000. The taxable
income of B
trust is P20,000. The total taxable income is P30,000. We will tax these 2
trust separately but
through consolidation.
In paying the tax after applying the applicable tax rate to the taxable income
of P30,000,
the tax due should be apportioned to trust A and B.
So, for purposes of income tax, the taxable income of these 2 trust should be

consolidated, but for purposes of paying the tax, the tax due should be
apportioned.
TRANSFER TAXES
Taxes may be imposed on onerous transmission of properties or on the
gratuitous
transmission of properties.
Transfer taxes that are imposed on the onerous transmission of
properties:
75
1. VAT (value-added tax)
2. Percentage Tax (excluded this 1998 Bar)
3. Excise Tax (also excluded)
CONTENTS OF THE BACK PAGES
DIVISION OF GROSS ESTATE:
1. INDIVIDUAL WHO DIED SINGLE
- G. E. includes all that he owns at the time of death
2. MARRIED DECEDENT
- his estate includes his exclusive properties and his shares in the conjugal
properties BUT NOT
the exclusive properties of the surviving spouse
PROPERTY OWNERSHIP bet. SPOUSES
- NCC before Aug. 3, 1988
> CPG
- EXCLUSIVE PROPERTY under N.C.C.
1. brought into the marriage as his/her own
2. acquired during the marriage by LUCRATIVE TITLE
3. acquired by RIGHT of REDEMPTION or EXCHANGE with other exclusive
properties
4. purchased with exclusive money
- CPG under N.C.C.
1. acquired by ONEROUS TITLE
- common fund
2. acquired by INDUSTRY/WORK, SALARY or either
3. FRUITS< RENTS or INTERESTS [conjugal/exclusive]
4. all properties not determined to be exclusive shall be presumed to be
conjugal
FAMILY CODE - after Aug. 3, 1988
- ACP
- EXCLUSIVE PROPERTY under the F.C.
1. gift, donation, contribution exclusively given to one of the spouses only
- gift and fruits/income considered exclusive
2. INHERITANCE given exclusively to one spouse
- gift or fruits/income considered exclusive
3. acquired of personal and exclusive use
- except JEWELRY

4. exclusively owned before marriage including fruits /income IF spouse has

children from the
former marriage
5. purchased from exclusive fund.
EXEMPTIONS FROM ESTATE TAX
- special laws
1. Benefits received [GSIS, SSS]
2. proceeds of GSIS life insurance
3. Benefits received U. S. Veterans
76
4. REPARATIONS WW II Veterans
5. RETIREMENT BENEFITS
- if included in gross estate
6. proceeds of group insurance
DECEDENTS INTEREST
assets that are still owned by decedent at the time of death to the extent
of his
equity or interest in any property whether as exclusive owner, conjugal
owner, or
common owner.
COMPOSITION OF GROSS ESTATE
[DI, T-GPA, RT, T-IC, P-LI, T-CD]
1. DECEDENTS INTEREST
2. TRANSFER by VIRTUE OF GENERAL POWER OF APPOINTMENT
3. REVOCABLE TRANSFER
4. TRANSFER for INSUFFICIENT CONSIDERATION
5. PROCEEDS from LIFE INSURANCE
6. TRANSFER in CONTEMPLATION of DEATH
FUNERAL EXPENSES INCLUDE:
1. expenses for interment
2. mourning clothing [widow, children]
3. expenses for wake before burial
4. charges for rites and ceremonies incident to interment
5. cost of burial plot
6. tombstone or monument
7. obituary or death notices
JUDICIAL EXPENSES
1. accountants fee
2. appraisers fee
3. administrators fee
4. attorneys fee
5. docket fee
6. stenographers fee
7. other expenses of court hearings
CLAIMS AGAINST THE ESTATE

- obligations of the decedent contracted in good faith while still alive but
remains unpaid at the
time of death
UNPAID MORTGAGES OR INDEBTEDNESS RULES: (claimed as deductions)
1. the said mortgage/indebtedness must have been contracted during the
decedents
lifetime in good faith for an adequate and full consideration in money or
moneys worth
2. the value of the decedents interest in the property mortgaged is included
in the value of
the gross estate
77
- must be undiminished by said mortgage/indebtedness
3. must not include:
A. any income tax upon income received after the death of decedent
B. property taxes not accrued before his death
C. any estate tax
LOSSES fire, storm, shipwreck or other casualty, robbery, theft,
embezzlement
RULES:
1. must not be compensated by insurance
2. must have been incurred during the settlement of the estate BUT NOT
LATER than the last
day for the payment of the estate tax (6 mos.)
3. not claimed as deduction in an income tax return of the taxable estate
TAXES which are not DEDUCTIBLE
1. income tax or income received after death
2. property taxes not accrued before death
3. estate tax
COMPUTATION of VANISHING DEDUCTION FORMULA:
INITIAL BASIS
GROSS ESTATE X E. L. I. T. and transfers for public purposes
SHARE OF SURVIVING SPOUSE
RULES:
1. the gross conjugal estate shall be diminished by expenses and charges
EXCEPT those
chargeable to the exclusive properties
2. the NET amount shall be divided into two (2)
3. goes to the surviving spouse and deducted from the estate of the
decedent
ALLOWABLE DEDUCTIONS
- NON-RESIDENT DECEDENT [ELIT-TVS]
1. ELIT (expenses, losses, indebtedness, taxes)
FORMULA:
PHIL. GROSS ESTATE
WORLD GROSS ESTATE x E L I T

2. transfer for public purposes

3. vanishing deductions
4. share of the surviving spouse
NOTICE OF DEATH
- if value exceeds Php20,000
- FILE notice with BIR within two mos. Of decedents death or within two mos.
After election of
qualified executor or administrator
78
ESTATE TAX RETURN
- if gross value of estate exceeds P200,000 or if gross estate consists of
registered
property, FILE in duplicate and under OATH
- if value of gross estate exceeds P2,000,000, return must be supported by a
certificate of C.P.A.
TIME FOR FILING RETURN
- within 6 mos. From decedents death
- EXTENSION: not exceed 30 days
PAYMENT OF ESTATE TAX
- upon filing of the estate tax return and before delivery to any beneficiary of
his
distributions share of the estate
- EXTENSION: not to exceed 5 years
- If extra-judicially settled, 2 years
- It must file bond not to exceed double the value to be paid
SURCHARGE
- 25% for late filing, for late payment
- 50% for filing of false or fraudulent return
INTEREST 20% per annum
PARTIES TO A DONATION
1. DONOR gratuitously disposes
2. DONEE receives and accepts
KINDS OF DONATION
1. PERSONAL PROPERTY may be orally or in writing
EXCEPT: exceeds P5,000 donation and acceptance must be in writing
2. REAL PROPERTY PUBLIC DOCUMENT
ACCEPTANCE - same deed of donation or separate instrument; done during
the lifetime of the
donor
RULE: HUSBAND AND WIFE
G.R.: Every donation between Husband and Wife during the marriage is VOID
EXCEPTION:
1. donation mortis causa
2. moderate gifts - family affair
*** gifts coming from the conjugal property made by both spouses are
taxable, to each spouse

RULE on INADEQUATE CONSIDERATION

* if the property transferred is real property classified as capital asset, the
transfer is subject to
capital gains tax of 6% and not to donors tax
79
* where the consideration is fictitious, the entire value of the property
transfer shall be subject to
donors tax
* the amount by which the value of the property exceed the amount of
consideration shall be
deemed a gift for purposes of the donors tax
VALUATION OF GROSS GIFTS
- FMV at time of donation
1. Real Property
- BIR zonal value or FMV fixed by city/provincial assessor whichever is higher
2. Shares of Stock
A. If listed average value at the date of donation
B. If not listed book value at the date of donation
3. Personal Properties FMV at the time of donation
* FMV = pawn value x 3
EXEMPTIONS/ALLOWABLE DEDUCTIONS
1. DOWRIES
RULES:
A. Exempt up to 1st P10,000;
B. Legitimate recognized or legally adopted children;
C. Made before marriage or within one year thereof.
2. GIFTS TO NATIONAL GOVT. or POL. SUB.
- not conducted for profit
3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs.
- not more than 30% used for administrative purposes
- may be a school or non-stock entity
DEDUCTIONS ALLOWABLE
1. ENCUMBRANCES or donated property, if assumed by the donee
2. DIMINUTION of the donated property as specified by the DONOR
RULE (non-resident donor)
1. Same allowable deductions as resident donors except that the same must
be connected with
donated property situated in the Phils.
2. NO deductions for dowries
RULE if Donee is a Stranger
1. TAX PAYABLE 30% of net gift
STRANGER one who is not a brother, sister (whole or half-blood), spouse,
ancestor, lineal
descendant or relative by CONSANGUINITY in the COLLATERAL LINE within
the 4th degree.
RULE ON POLITICAL CONTRIBUTIONS

- considered TAXABLE GIFTS

- donee in this case is deemed to receive a financial advantage gratuitously
80
ADMINISTRATIVE PROVISIONS
- donors tax return must be filed under oath and in duplicate
- filed within 30 days from date of donation
EXTENSION: not exceeding 30 days
- WHEN PAID
- time the return is filed
EXTENSION: not exceeding 6 mos.
PROVIDED BOND- double the amount of TAX
TAX CREDIT for donors tax paid to a foreign country
- donor was a Filipino citizen or resident alien at the time of foreign donation
- donors taxes of any character or description are imposed and paid by the
authority of a foreign
country
LIMITATIONS:
1. The amount of credit in respect to the tax paid to any country shall NOT
EXCEED the same
proportions of the tax against which such credit was taken
2. The total amount of credit shall not exceed the same portion of the tax
against which such
credit is taken
Transfer taxes imposed on gratuitous transmission of properties
are:
1. Estate tax
2. Donors Tax
ESTATE TAX tax imposed on the right or privilege to transmit properties
upon death of a
decedent or testator
DONORS TAX tax imposed on the right or privilege to transmit properties
gratuitously in
favor of another who accepts the same. This transmission of properties
occurs during the lifetime
of the donor and the donee.
ESTATE TAX
NATURE OF ESTATE TAX It is an excise tax since the subject of the tax is
the right or
privilege to transmit properties and not the property itself.
PURPOSES OF ESTATE TAX to avoid the undue accumulation or
concentration of wealth
1. The primary purpose is to raise revenue in order to support the
government;
2. To supplement income tax;
3. To reduce successive inequalities in wealth, meaning, to achieve social
equality.

KINDS OF ESTATE TAXPAYER:

1. Resident estate taxpayer includes citizen of the Phils., resident alien
who died in the Phils.,
and such alien, at the time of his death, is a resident of the Phils;
2. Non-resident estate taxpayer is limited to non-resident alien
individual.
81
Real properties, personal tangible properties and personal intangible
properties of
resident decedent (RD) are taxed wherever situated.
Real and personal tangible properties of non-resident decedent (NRD) are
taxable
only if they are located in the Phils.
Real and personal tangible properties of NRD are taxable only if they
acquire tax
situs in the Phils.
Personal intangible properties that are deemed to have acquired
Phil. situs are: [F, SOB
(DC, FC-85%, FC-SP), SR P]
1. Franchise which is exercised in the Phils.
2. Shares of stock, obligation or bonds issued by domestic corporation or
sociedad anonima
3. Shares of stock, obligation or bonds issued by foreign corp., 85% of the
business of which is
conducted in the Phils
4. Shares, obligations or bonds acquire business suits in the Phils.
> Such shares, obligations or bonds acquire business situs in the Phils. of
they are used
by foreign corp. in furtherance of its trade or business.
5. Shares or rights in any partnership, business or in any partnership,
business or industry,
established in the Phils.
If the personal intangible properties of a NRD does not belong to the
above-mentioned
enumeration, they may not form part of his gross income or we may also
apply the doctrine of
mobilia sequntur personam.
Mobilia sequntum personam, according to the Supreme Court, is a
mere fiction of law. So,
it must yield to the provision of law which provides tax situs.
Question:
Suppose the personal intangible properties of NRD acquired tax situs in the
Phils., can
this be exempt from real estate tax?
Answer:YES, by applying the rule on reciprocity.

RULE ON RECIPROCITY the foreign country of that NRD does not impose
or allows
exemption on tax on the properties of the citizens of the Phils. who died in
that foreign country.
The phrase does not impose and allows exemption are different from
each other.
When we say does not impose, this means totally exempt. Allows
exemption means
this may not cover all properties but only certain properties.
Case:
82
Country of Morocco has no international personality. If it grants exemptions
to the
intangible personal properties if Filipino citizens who died in that country, will
you apply also
that rule on reciprocity?
Held: YES. It does not matter whether the country has international
personality or not. What is
important is it allows or grants exemption from estate tax.
Sec. 85, Gross Estate The value (FMV) of the gross estate of the
decedent shall be
determined by including the value, at the time of his death, of all property,
real or personal,
tangible or intangible, wherever situated: Provided, however, That in the
case of a non-resident
decedent who at the time of his death was not a citizen of the Philippines,
only that part of the
entire gross estate which is situated in the Philippines shall be included in his
taxable estate.
The composition of the gross estate may include:
1. Decedents Interest. (includes yields, fruits and interest)
- The gross estate may include the fruits and income of the properties and
that may
constitute the decedents interest.
- In the case of parcel of land, it may produce income in the form of harvest
which
harvest may form part of the gross estate.
- In the case of apartment, the rental of such apartment should also be
included, not
only the value of the property.
- Dividends
- Partnership profits
- Rights of usufruct
2. Transfer by virtue of general power of appointment
- It implies that if the transfer is made under special power of appointment
that

should be excluded from gross estate.

- In general power of appointment, the power is exercisable or in favor of the
estate, executor, administrator or a creditor of the estate. If the power is
exercisable other than these (estate, administrator, administrator or creditor
of the
estate), that may be considered as special power of appointment.
3. Revocable Transfer Any transfer made by the decedent during his
lifetime where the
decedent has reserved the right to ALTER, AMEND, TERMINATE, or REVOKE.
such transfer;
it is sufficient that the decedent had the power to REVOKE, though he did not
exercise such
power.
- Irrevocable transfers should be excluded from gross estate.
- Revocable transfers are transfers which are subject to alteration,
termination,
amendment or modification by the decedent.
4. Transfers for Insufficient Consideration
- The amount that may form part of the gross estate is the difference
between the
FMV of the property and the consideration given.
83
Example: If the property has a FMV of P100,000 and the consideration given
is only
P50,000, the difference of P50,000 represents insufficient consideration.
5. Proceeds of Life Insurance Policy
- Proceeds of life insurance policy may be included if:
a. the beneficiary designated is the estate executor, administrator or heirs of
the
decedent whether revocable or not revocable
b. the beneficiary designated is a 3rd person who is revocably designated as
beneficiary
- Proceeds of life insurance policy is excluded from the gross estate
in the
following cases:
a. 3rd person is irrevocably designated as beneficiary
b. proceeds of group insurance policy taken out by the co. for its employees
c. proceeds of accident insurance policy except accident insurance policy as
characteristic
d. proceeds of GSIS Life Insurance Policy (govt. employees)
e. proceeds of life insurance payable to the heirs of deceased U. S. and Phil.
Army
Note: As regards the estate executor, administrator or heirs as beneficiary,
it is
immaterial whether the designation is irrevocable or revocable.
6. Transfer in Contemplation of Death

- If such transfer was induced by the thought of death principally,

REGARDLESS
of whether the death is impending forthcoming or not
- TRANSFER may be done before, at the time of or even after the decedents
death
- 3-YEAR PRESUMPTION [deleted by P.D. 1705. Aug. 1, 1986)
[MU-NT, F, T-1ST-B, B-SCC]
EXCEPTINS/EXCLUSIONS from GROSS ESTATE
1) merger of USUFRUCT in the MAKED TITLE
2) FIDEICOMISSARY
3) transmission from 1st heir to another beneficiary
- will of the testator
4) BEQUEST, DEVISEES, LEGACIES or TRANSFER
- SOCIAL WELFARE, CULTURAL and CHARITABLE institutions
- no part of net income inures to any individual
- not more than 30% for admin. purposes
DEDUCTIONS FROM GROSS ESTATE
DEDUCTIONS FROM GROSS ESTATE THAT MAY BE:
1. Conjugal deductions [FH, JE, FE, ME, CAE, L, U(M/I),T, SD, SP, C-IP]
2. Absolute deductions
3. Exclusive deductions [VD, T-PU, UM, E-EP] (share of SS)
OTHERS: [M-U, F, T-1ST-B, G-CI]
84
I. CONJUGAL AND ABSOLUTE DEDUCTIONS include:
1. Family home
2. Judicial of funeral expenses
3. Casualty losses
4. Indebtedness/unpaid claim against the estate
5. Accrued taxes (before the death of the decedent)
6. Standard Deduction
7. Separation pay given to the heirs of the decedent on account of death
Discussion:
1. Family home (even unmarried person may have a family home) subject
to the following
conditions:
a. there must be only one (1) family home;
b. there must be certification issued by the Barangay Captain that the
decedent is a resident
of and own that family home in that particular locality;
c. the amount that is deductible or the FMV of the family home should not be
more than
P1M; excess shall be subject to tax
d. the FMV must be included in the gross estate of the decedent.
If the FMV of the family home is P5M, this should be included in the gross
estate of the
decedent. But when you claim deductions, you can only claim up to P1M.

2. Expenses which may be in the nature of judicial expenses or funeral

expenses.
Medical expenses are also deductible subject to the following conditions:
a. the amount deductible, is limited only to P500,000;
b. it must be incurred within one (1) year before the death of the decedent;
c. this must be substantiated by receipts
In the case of funeral expenses, the amount deductible is the actual
funeral expenses on the
amount which is not more than 5% of the gross estate whichever is lower,
but in no case to
exceed P200,000.
There is no limitation as to amount with regard to judicial expenses. As
long as it is paid or
incurred in connection with the preservation, administration or settlement of
the estate, it may be
claimed as deductions. Judicial expenses also include extra-judicial expenses.
3. Losses that may arise from casualty or casualty losses such as fire,
storm, shipwreck, robbery,
embezzlement, theft and other casualty losses.
These losses must be sustained not later than six (6) months after the
death of the decedent.
not compensated by insurance
85
4. Indebtedness which partake of the nature of the unpaid claims
against the estate.
These must be supported by notarized documents. These obligations must
be incurred within
three (3) years prior to death of the decedent.
Another indebtedness which may be claimed as deduction is claim against
insolvent persons.
Here, the claimant is the decedent. In order to be deductible, this claim must
be included in the
gross estate.
deduction from the gross estate shall be the collectible portion
5. Taxes which must accrue before the death of the decedent.
6. Standard deduction
The amount is P1M. So, this may only be applied if the gross estate of the
decedent is
more than P1M.
7. Separation pay given to the heirs of the decedent on account of death.
The procedure is to include the amount in the gross estate and then claim
this thereafter
deductions.
II. EXCLUSIVE DEDUCTIONS
These are deductions against exclusive properties.
These may include: (VP-CE)

1. Vanishing deductions whether inherited or acquired by Donation

2. Transfer for public use
3. Other charges against the exclusive property
4. Encumbrance on exclusive property
Discussion:
1. VANISHING DEDUCTION [5, IP, I-GE, PD, PT, N-P-VD]
- is an allowable deduction against the exclusive property of the decedent
- may be claimed as deduction under the following conditions:
a. Death of a decedent which must take place within FIVE YEARS from the
death of the
prior incident or before gift was given.
Situation:
A died. B is the heir. Now, you may recall that properties acquired through
gratuitous title
during the marriage is classified as exclusive property.
One of the properties of A which forms part of his gross estate had already
been taxed.
This property will be transmitted to B by way of succession. If B died, take
note that one of
his properties was acquired through inheritance from A and that is an
exclusive property. This
property had already been taxed because that forms part of the gross estate
of A. Again, this
86
same property may be subject to estate tax because this exclusive property
forms part of the
gross estate of B. There seems to be double taxation. That is why, the
purpose of vanishing
deduction is to mitigate the harshness of double taxation. So, B may be
entitled to that
vanishing deduction which may reduce his estate tax.
The condition set by law is that B must have died within the 5-year period. If
B died 6
years after the death of A, B can no longer claim such vanishing deductions.
b. Identity of Property located in the Phils.
So, there must be evidence to that effect that this is the same property
which forms part of
the gross estate of A.
c. Inclusion of the tax property in the gross estate of the prior
decedent.
d. Previous taxation
The estate of A which included the property subject of vanishing deduction
had
been taxed; meaning, that estate tax had been paid by prior estate.
e. No previous vanishing deductions.
Question:

So, if B died and the property is transmitted to C, his heir, that property is
also considered
as exclusive property of C because it was acquired through inheritance.
Can C claim vanishing deductions?
Answer:
NO, because this had already been claimed by B. You can only claim
vanishing deduction
once.
It is impossible that B acquired the property not through inheritance but
through
donation. Donors tax had already been paid. This is an exclusive property of
B because
under the law, property acquired during the marriage by gratuitous title is an
exclusive
property and forms part of his gross estate.
Can we apply this vanishing deduction?
YES. Here, B must have died within the 5-year period from the date of
donation.
Acquisition and transmission exempt from estate tax are:
a. The merger of usufruct in the owner of the naked title
b. Transmission or delivery of the inheritance or legacy by the fiduciary heir
or legatee of
the fideicommisssary.
c. Transmission of the property from the first heir, legatee or donee in favor
of another
beneficiary, in accordance with the desire of the predecessor.
d. Bequests, devises, legacies or transfers to social welfare, cultural and
charitable
institutions, no part of the net income of which inures to the benefit of any
individual and
87
not more than 30% of said bequests, devises, legacies or transfers be used
by such
institutions for administrative purposes.
So, transfers to non-stock, non-profit educational institution is not exempt
from estate tax
because this is not included from the enumeration BUT exempt from donors
tax.
2. Transfer For Public Use
The donee must be the government or any political subdivision. It must be
used
exclusively for public use.
The transfer must be done orally but testamentary disposition and must be
at its present
value.
3. Other Charges Against The Exclusive Property

So, if the property has been mortgaged with a bank, we consider that as
unpaid mortgage.
4. Encumbrance On Exclusive Property
VALUATION OF THE GROSS ESTATE: valuation as of the time of death
1. Real Property
The FMV equivalent to the value as determined by the BIR or zonal value OR
that of the
value as determined by the provincial or city assessor whichever is higher.
2. Personal Property
a. Tangible Personal Property if not being sold; pawn value x 3; The FMV is
equivalent to
the selling price of the property. (Brand new items)
b. Intangible Property includes interest, shares of stock
- It must be the FMV of the interest or shares of stock.
- If the intangible personal property is account receivable, it should be
Principal
PLUS interest unpaid upon the death of the decedent except if worthless)
- If it is in the nature of usufruct, we must take into consideration the basic
standard
of mortality rate.
- American tropical experience table
- IF LISTED mean or ave. value between the highest and lowest stock
quotation
- IF NOT LISTED BOOK value
DONORS TAX
DONORS TAX is an excise tax because what is being tax here is the right
or privilege to
transmit or dispose of property gratuitously in favor of another.
- Tax imposed on the privilege of transmitting property by and living person
to
another by way of donation
- Prevents avoidance of estate tax
PURPOSE OF DONORS TAX:
1. The primary purpose is to raise revenue;
88
2. To supplement income tax and estate tax.
DONATION the act of liberality whereby a person disposes gratuitously of
a THING or a
RIGHT in favor of another who accepts it.
DONATIONS SUBJECT TO DONORS TAX
- trust or not
- real or personal
- tangible or intangible
1. Indirect donation Example: Cancellation of indebtedness
2. Direct donation
Donors tax applies to both natural and juridical persons

 The law says, donors tax apply whether the transfer is in trust or
otherwise. So,
property held in trust may be the subject of donation. But, this contemplates
of a
transfer where the dominion, the right over such property, use, enjoyment of
the
same other rights, must all be transferred to the donee so that it will
constitute as
taxable donation.
Read Section 104.
CHARACTERISTICS OF VALID DONATION: [F, A, C, I, D]
1. It must be given during the lifetime of the donor.
2. It must be irrevocable.
3. It must comply with the formalities of donation.
4. Acceptance of the donee.
REQUISITES OF VALID DONATION
1. It must comply with the formalities of donation.
- If the amount of personal property is P5,000 or less, the donation may be
made
orally.
- If the amount of personal property is more than P5,000 the acceptance
shall be in
writing.
- Donation of real property must be made in a public instrument irrespective
of the
amount
2. Acceptance by the donee of the donation.
- Acceptance must be made during the lifetime of the donor.
- If the amount of personal property is P5,000 or less, acceptance may be
made
orally.
- If the amount of personal property is more than P5,000, the acceptance
shall be in
writing.
- In the case of donation of real property, acceptance must be made in the
same
deed of donation or in a separate public instrument.
3. Capacity of the donor and the donee:
a. Those made between persons who were guilty of adultery or concubinage
at the time of
the donation.
89
b. Those made between persons found guilty of the same criminal offense, in
consideration
thereof;

c. Those made to a public officer or his wife, descendants and ascendants by

reason of his
office.
Incapacitated donees are: [P, R-P, G, D, NPL]
a. The priest who heard the confession of the donor during his illness, or the
minister of the
gospel who extended spiritual aid to him during the same period.
b. The relatives of such priest or minister of the gospel within the 4th degree,
the church,
order, chapter, community, organization or institution to which such priest or
minister
belongs.
c. A guardian with respect to donation made by a ward in his favor before the
final accounts
of the guardianship have been approved, even if donor should die after the
approval
thereof; nevertheless, any donation made by ward in favor of the guardian
when the latter
is his ascendant, brother and sister, or spouse, shall be valid.
d. Any physician, surgeon, nurse, health officers or druggist who took care of
the donor
during his last illness.
e. Individuals, association & corporations not permitted by the law to receive
donations.
*The following are also incapable of receiving donations by reason
of unworthiness:
[P (AC, ID, AV), C-AL, A-6 yrs., H-KVD, A or C, F-D, F]
a. Parents who have abandoned their children or induced their daughters to
lead a corrupt or
immoral life, or attempted against their virtue.
b. Any person who has been convicted of an attempt against the life of the
donor, his or her
spouse, descendants or ascendants.
c. Any person who has accused the donor of a crime for which the law
prescribes
imprisonment for 6 years or more, if the accusation has been found
groundless.
d. Any heir full of age who, having knowledge of the violent death of the
donor, should fail
to report it to an officer of the law within a month unless the authorities have
already
taken action, this prohibition shall not apply to cases wherein, according to
law, there is
no obligation to make an accusation.
e. Any person convicted of adultery or concubinage with the spouse of the
donor.

f. Any person who by fraud, violation, intimidation, or undue influence should

cause the
donor to make a donation or to change one already made.
g. Any person who by the same means prevents another from making a
donation, or from
revoking one already made, or who supplants, conceals, or alters the latters
donation.
h. Any person who falsifies or forges a supposed donation of the decedent.
Under Art. 87 of the F.C., husband and wife are prohibited from making
donation to each
other.
4. Intention to donate the property of the donee (or DONATIVE INTENT).
Exception: Transfer of insufficient consideration in the case of a contract of
sale.
Example:
90
If the FMV of the property is P100,000 and P50,000 was the consideration
given. The
difference of P50,000 is considered a donation.
* The amount received by a disinherited heir is subject to donors tax
because he has no right to
such property and the same was gratuitously given, so there is no donative
intent.
5. Delivery of the property.
Note: If there is no valid donation, the recipient is subject to income tax
because of the provision
from whatever source derived.
Classification of donor subject to donors tax:
1. Resident donor (RD) - this includes citizen of the Phils. or a resident
alien.
2. Non-resident alien (NRD) he must be a non-resident alien.
RD Real properties, personal tangible properties, and personal intangible
properties of resident
donor are subject to donors tax wherever situated.
NRD Real properties and personal tangible properties of a non-resident
donor are subject to
donors tax only if they are located in the Phils Personal intangible
properties of NRD are
subject to donors tax only if they acquire tax situs in the Phils
Personal Intangible properties that are deemed situated or acquire
situs in the Phils. are:
GROSS GIFTS [F, SOB (DC, FC-85%, FC-SP), SR, P]
1. Franchise which is exercised in the Phils.
2. Shares of stock, obligation or bonds issued by domestic corp. or
sociedad anonima.

3. Shares of stock, obligations or bonds issued by foreign corporation,

85% of the business of
which is conducted in the Phils.
4. Shares, obligations, bonds issued by a foreign corp. which acquires
business situs in the
Phils.
Such shares, obligations or bonds acquires business situs in the Phils. if they
are used by
such foreign corp. in furtherance
5. Shares or rights in any partnership, business or industry established in
the Phils.
6. Real, Intangible and Intangible Personal property or Mixed
Even if the personal intangible properties of the NRD acquired tax situs in the
Phils. it
may still be exempt from donors tax by applying the rule on reciprocity.
Rule on Reciprocity If the foreign country of that NRD does not impose,
or allows
exemption on the donors tax on the properties of citizens of the Phils. who
died in that foreign
country.
Sec. 104 is applicable to both estate tax and donors tax.
91
TARIFF AND CUSTOMS CODE
CUSTOMS LAW does not refer only to the provisions of Tariff and Customs
Code. It also
includes other laws and regulations subject to enforcement by the Bureau of
Customs.
Other laws subject to enforcement by the Bureau of Customs:
1. NIRC Sec. 107. Importation of goods or articles subject to VAT. The VAT
must be paid
before these goods are released from Customs Custody.
2. NIRC Sec. 131. Importation of Articles subject to excise taxes. The
payment of excise tax
must be made before the goods are released from Customs custody.
3. Regulations that may be issued by the CB, the implementation of such
regulation is vested in
the Bureau of Customs.
Customs duties are duties which are charged upon commodities on their
being imported in or
exported out of a country.
Tariff means a book of rates; a table or catalogue drawn usually in
alphabetical order
containing the names of several states that hold commerce together.
Offices charged with enforcement or administration of Customs laws
1. Tariff Commission (TC)
2. Bureau of Customs (BOC)

Powers of TC: (TRACER)

The power of the TC are investigatory in nature: They investigate the
following matters:
1. Matters relative to Tariff relations between the Philippines and the foreign
countries. So, that
includes commercial treaties.
2. Relation between the rate on raw materials and finished products.
3. Matters relative to the Arrangement of schedules of values
4. Matters pertinent to the Classification of articles
5. It shall also investigate the Effects of foreign competition.
6. It shall investigate the operation of the Tariff Laws and submit Report
regarding the same.
After investigation, TC shall submit its report to the Bureau Commissioners or
to
Secretary of Finance.
POWERS OF THE BOC: (PERAS)
1. BOC has the power to Prevent and suppress smuggling and other frauds
upon BOC.
Consistent with this power, the BOC has:
a. Power to control and supervise the clearance, as well as the entrance of
vessels, aircrafts
originating from foreign countries.
b. Police power to exercise over Harbor, Airport, River and Port.
92
c. The right of pursuit against vessel subject to seizure even if it is seized
beyond the
maritime zone. This is called the extra-territorial jurisdiction of the BOC.
Sometimes,
we call this right of pursuit. The BOC may exercise this power when:
c.1. the vessel was subject to seizure or forfeiture
c.2. there was violation of the Customs law committed within the
Phils.
As regards smuggled goods imported not in accordance with the provisions
of the
Customs law, it may be pursued by the BOC even if it is transported through
air, land or water.
Consistent with this power, the BOC may enter in a building, house,
structure, enclosure
and warehouse. No search warrant is required. As long as they reasonably
believed that the place
store smuggled goods, seizure or search may be made. But it must be shown
that the place must
not constitute a dwelling place or unit. This is also because if it is a dwelling
place that is
covered by the Constitutional provision where warrant must be secured.

Situation: Suppose the watchman or security guard and his family live in
that place or
building where smuggled goods are stored can there be seized without
search warrant? Can we
consider that a dwelling place?
Answer: No, that will make the building a dwelling place. Even if it is outside
of its district
such that it came from Zamboanga and was unloaded at Cebu, the collector
of Cebu may still
seize the goods. What is only required is that it came from a port of entry
within the Phils.
2. Enforcement of the Tariff and Customs Law including other laws and
regulation affecting the
administration of Tariff laws.
3. Recommend to the Sec. of Finance needed rules and regulations
necessary for the effective
enforcement of the provisions of the TCC.
4. Assessment and collection of lawful revenues from imported articles. Also,
assessment and
collection of fines, penalties, fees and other charges accruing under the
provisions of the TCC.
5. It has the exclusive and original jurisdiction over Seizure and forfeiture
cases. Meaning, to the
exclusion of regular courts.
Articles subject to Customs duties:
Articles means wares, merchandise, goods and anything which may be made
subject of
importation or exportation. Articles include Philippine money. So, if the
Philippine money is
transmitted or taken out of the Phils. without authority from the Central
Bank, that may be the
subject matter of seizure.
Articles subject to Customs duties:
1. Dutiable articles are articles subject to Custom duties
2. Prohibited articles:
a. Absolutely prohibited articles: (SWING)
93
1. those prohibited by Special Laws
2. Weapons of War
3. Insidious, obscene or immoral articles
4. Narcotic or prohibited drugs
5. Gambling devices
b. Qualifiedly prohibited meaning subject to restrictions or limitations. IF
these
limitations are not complied with. They will be prohibited.

3. Duty free imported articles these are articles not subject to custom
duties.
These are: (MASARAP)
a. Medals, badges used as trophies or awards
b. Animals and plants for experimental purposes
c. Sample articles
d. Aquatic resources
e. Repair materials
f. Articles necessary for the take-off and landing of an airplane or for safe
navigation of vessels
g. Articles for Public exposition. Included here are historical books and
personal
household effects
Customs duties may be classified as:
1. Regular or ordinary custom duties these are the ad valorem tax and
specific tax.
For purposes of determining the ad valorem tax, the basis must be the home
consumption
value. Home consumption value is the price stated in the commercial,
trade or sales invoice. If
there is a reasonable doubt as to this value, recourse may be had to the
commercial and revenue
attach report, the BOC should refer to the available information that may
help the BOC
determine the applicable ad valorem tax.
Case: NCR-Japan has a subsidiary in the Phils. which is NCR-Phil. Ten adding
machines were
imported from NCR-Japan and they used, for purposes for determining ad
valorem, the home
consumption value, the price stated in the sales invoice. Instead, we should
refer to the
commercial revenue attach report to determine the basis of that ad valorem
tax.
2. Special custom duties: (DCMD)
a. Dumping duties
b. Countervailing duties
Note: The purpose of dumping and countervailing duties is to
protect our local products
against unfair foreign competition
c. Marking duties the purpose of this is to prevent possible public
deception.
d. Discriminatory duties duties which are imposed for the purpose of
protecting our
national interest
94

Dumping duty duty levied on imported goods where it appears that a

specific kind or class of
foreign article being imported into or sold is likely to be sold in the Phils. at a
price less than its
fair value.
Imposed on specific kind or class of foreign article which is being imported
into,
or sold or is likely to be sold for exportation to or in the Phils. at a price less
than
its fair value, the importation or sale of which is likely to injure an industry
imposing like goods in the Philippines.
The duty is equal to the difference between the actual purchase price and
the fair
value of the articles in question in the country or exportation as determined
by the
Sec. of Finance.
These are special duties imposed on imported articles. This may be imposed
subject to
the ff. requisites:
1. There must be a deliberate and continuous sale of imported article in the
Philippines as price
lower than the prices in the exporting country.
2. This must prejudice or cause or likely to cause injury to our local industry.
Situation: There are articles of foreign origin the prevailing price of which in
the US is
equivalent to P100. These articles are sold or dumped in the Phils. at lower
than the prevailing
price in the US because they are saleable in the U.S.
So, this will prejudice our local industries. In order to protect our local
product or to
discourage people from buying this imported product, we should be impose
special duties in
addition to the regular duties. Dumping duties should be imposed.
Countervailing duty duty equal to the ascertained or estimated amount
of the subdsidy or
bounty or subvention granted by the foreign country on the production,
manufacture, or
exportation into the Phils. of any article likely to injure an industry in the
Phils. or retard or
considerably retard the establishment of such industry.
Imposed on articles, upon the production, manufacture or export of which
any
bounty or subsidy is directly or indirectly, granted in the country of origin
and/exportation. No need to show proof that the imports cause injuries to
domestic industries producing the same products. The duty is equal to the
ascertained or estimated amount of the bounty or subsidy given.

Situation: Sometimes imported products enjoys certain subsidy from their

government. So,
they have an advantage. Our local products for example, does not enjoy
similar subsidy. We
should counter that advantage by imposing countervailing duties. The
purpose there is to protect
our local products against unfair competition.
This represents the inland excise tax on locally manufactured articles of the
same kind to
off-set this advantage.
As regards dumping duties, the extent of the special duty is the amount that
represents
under-pricing.
95
As regards countervailing duties, the extent is the excise inland tax or the
amount of
advantage enjoyed by that imported article.
Marking duty duty on ad valorem basis imposed for improperly marked
articles. The
requirement that foreign importation must be marked in any official language
of the Phils., the
name of the country of origin of the article.
The purpose is to prevent deception of consumers.
The articles must be properly marked, otherwise a special duty of 5% of
the value
shall be imposed.
Retaliatory or Discriminatory duty duty imposed on imported goods
whenever it is
found as a fact that the country of origin discriminates against the commerce
of the Philippines in
such manner as to place it at a disadvantage compared with the commerce
of any foreign
country.
The amount may be increased in an amount not exceeding 100% ad
valorem
when the President finds the public interest may be served thereby.
This may be imposed by the President of the Philippines when our goods
are
discriminated against.
As regards dumping, countervailing and marking duties, it is the Sec of
Finance,
upon recommendation of the Tariff Commission, who may impose these
duties.
Question: What is the extent of the flexible power of the President of the
Phils. under the
TCC?

Answer: That includes the power to impose discriminatory duties. The

President upon
recommendation of the Tariff Commission may increase the tariff rates by
not more than 5x or
meaning 500x of the tariff rates. He may also decrease the tariff rates by not
less than 50%.
He can only exercise these powers in the interest of the national economy,
national
security and general welfare of the people.
2. Other duties:
a. Storage fee this is charged on the goods or articles stored in a
warehouse under the
control and supervision of the BOC.
Articles owned by the government are exempt from storage fee is these
articles
are stored in a government warehouse.
b. *Wharfage dues
Even if there is no wharf where the goods may be unloaded, wharfage dues
may
still be imposed because it is not a duty or charge on the use of the wharf.
Even if the
goods are unloaded in a private wharf or seashore, wharfage dues still be
imposed
because this is a duty imposed on the cargoes or articles which are
unloaded. These are
96
taxes. These are not really custom duties. The significance of this is that
when tax
exemption is granted from all forms of taxes, this may be included. If the
exemption is
only from custom duties, wharfage dues is not included.
c. Arrastre charges this is a duty imposed on goods or articles for
handling, receiving or
custody of such articles.
d. Tonnage fees this is based on weight or tonnage of vessel.
e. Harbor fees
f. Berthing fees this is imposed on the vessel for mooring berthing at a
particular pier or
port.
Berthing fees may only be imposed if the vessel is wharfed or berthed at
national
port. So, if it is wharfed at privately owned port, that is not subject to
berthing fees.
Steps in the imposition of custom duties:
1. Declaration of goods or articles

2. Assessment by an appraiser. Determine the value applying the schedule of

values stated
in the tariff rates and that is subject to the approval of the Collector of
Customs.
3. Liquidation which may be:
(a) Partial means the value cannot be promptly ascertained.
(b) Final - meaning custom duties had been ascertained or finally
determined.
If these duties are not paid by the taxpayer, the government or the BOC has
the
power to impose the following administrative sanctions:
(1) Surcharges may be imposed under certain situations
(2) Fines may be imposed under certain situations
(3) Seizure or forfeiture
Forfeiture is the penalty , seizure is the remedy.
Situations where goods may be seized or forfeited by the government:
(a) Articles, vessels, aircraft may be the subject matter of seizure if they are
unlawfully used
in the importation of foods into the Philippines or exportation of goods form
the Phils.
Case:
Jose had a vessel, M/V Maria Victoria. It was unlawfully used for the
importation
of cargo. When this was seized by the government, Jose raised the defense
of good faith.
Held:
97
(1) It is an action directed against the articles and in fact, the caption of the
case is
Republic of the Phils. vs. M/V Maria Victoria. It is a proceeding in rem, so
good faith is
not a defense.
(2) Even if the vessel did not carry the contraband, that may be the subject
matter of
seizure if the vessel facilities the importation of that contraband.
It is not also required that the vessel must come from the foreign country.
Case: Cruz was caught carrying a bulk of foreign currencies. These were
seized by the
government because she had no license issued by the CB to carry said sum
of foreign
currency.
Held: Cruz must prove that she had a license otherwise seizure was proper.
The burden of proof lies on the importer.
(b) Excessive sea stores.
Sea stores are the provisions of the vessel necessary for administration and
maintenance.

(c) Excessive sea stores for aircraft.

Sea stores must be in the place where it should be displayed. If these are
kept in the
cabin of the crew, these may be the subject matter of seizure because these
are considered
excessive.
(d) Unlawful transfer of cargoes from one vessel to another before reaching
the point of
destination.
(e) Unmanifested articles
(f) Prohibited articles
(g) Devices, receptacles
(h) Envelopes, boxes, trunks
(i) Beast
(j) Thing of value or money which is intended to influence BIR officers.
Tax Remedies under the Tariff and Customs Code:
Remedies Government Importer
(1) Administrative or
extra-judicial
(a) Enforcement of tax lien
(b) Seizure
(a) Tax refund
(b) Abandonement
(c) Protest
98
(2) Judicial (a) Filing of civil action
(b) Filing of criminal action
if there is fraud and it
must be serious
(a) Appeal to CTA, CA,
SC
(b) Filing of criminal
action against erring
Customs officials
ENFORCEMENT OF TAX LIEN
Requisites:
(1) Articles must neither be prohibited nor irregular
(2) The articles must be in the possession of the BOC
If the articles are prohibited or irregular, the remedy is seizure
Abandonment may be express or implied.
Cases cognizable by the BOC
(1) Seizure cases on the part of the government and
(2) Protest case on the part of the importer
Seizure cases:The issue here pertain to the validity of the importation
because you may raise the
defense that these are not prohibited importation.

Protest: The issue here is the validity of the assessment or collection, or the
validity of the
classification of articles where customs duties are imposed.
PROCEDURE IN PROTEST
Remedy Where to file [Issues which may
be raised]
Prescriptive Period
(1) File a protest Collector of
Customs
(a) Validity if the
assessment or
collection
(b) Validity of
classification of
articles
15 days from the
payment of Customs
duties
(2) If protest is
denied, Appeal
collectors ruling
Customs
Commissioner
(CC)
Questions of fact or
Question of law
Within 15 days
from receipt of the
Collectors ruling
(3) If CC affirm
collectors ruling,
Appeal
CTA
Question of fact or
Question of law
Within 30 days
from receipt of the
decision of the CC.
99
(4) If CTA affirm
collectors ruling,
Appeal
CA
Question of fact or
Question of law
Within 15 days

from receipt of CTA

decision
(5) If CA affirm
CTA, Appeal SC Question of law
Within 15 days
from receipt of CA
decision
TRANSFER TAXES
ESTATES & TRUSTS
ESTATE refers to the mass of properties left by decedent or testator to his
heirs or
beneficiaries.
TRUST is the right to the property, real or personal, exercised by one
person for the benefit of
another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust.
b. Trustee or fiduciary one who may hold the property for the benefit of
other person
known as beneficiary. Sometimes, the fiduciary is also the beneficiary.
c. Beneficiary
Estate may be the subject to tax if it is under administration. It may only
be under
administration or settlement if the properties of the decedent are settled
under judicial settlement.
If the estate is under extra-judicial settlement, it is not subject to tax
because that will not earn
income considering that the heirs agreed to settle the estate extra-judicially.
When we speak of judicial settlement, this may include estate or intestate
proceedings.
Trust may be subject to tax if the trust is irrevocable.
Non-taxable trust are:
1. Revocable Trust. The income here will be taxed insofar as the recipient
of the same is
concerned.
2. Employees Trust. So, if an employer establishes a pension trust for the
benefit of the
employees, that pension trust is not taxable.
The trust is revocable if the power to revest the title to the property
of the trust is vested:
1. In the grantor or in conjunction with other person who does not have
substantial adverse
interest in the disposition of the property.
2. In any person who does not have substantial adverse interest in the
disposition of the property.
In irrevocable trust, you cannot transfer or revest the title of the property.

100
No substantial interest in the disposition of the property he must not
be the beneficiary.
If the properties of the estate is not vested in a business, so the heirs are
just co-owners of the
property, that is not taxable because co-ownership as a rule is not taxable.
If the heirs decide to continue the business, such that the administrator
may manage the same,
that will become an unregistered taxable partnership.
Estate and trust may be taxed on the same manner and on the same
basis as in the case of
individual taxpayers. S, they may claim the deductions under Section 34 as
long as these
deductions were paid or incurred in connection with the business of that
estate or trust.
Estate and trust are entitled to personal exemptions to P20,000.
SPECIAL DEDUCTIONS (this can be valid of only by estate and trust):
3. In the case of estate, the executor or administrator may deduct the
income distributed to the
heirs during the particular year when such estate is still under settlement.
4. In the case of trust, the income may be distributed to the beneficiaries
during that year also be
deducted. The trustee or beneficiary may distribute the income or
accumulate the income. The
trustee has the discretion whether to distribute such income after the lapse
of certain period of
time or year. In the event that income of the trust is distributed to the
beneficiary, this particular
amount may also be claimed as deductions.
Question:
If these are two (2) trust created by one trustor or grantor, how do we tax
the income of
that trust?
Answer:
Under the law, the taxable income of these two (2) trust may be
consolidated. That trust
should be taxed as if they constitute one trust.
Situation:
Grantor X created 2 trust. One is A and the other is B. There is only one
beneficiary
named Y.
Let us assume that the taxable income of trust A is P10,000. The taxable
income of B
trust is P20,000. The total taxable income is P30,000. We will tax these 2
trust separately but
through consolidation.

In paying the tax after applying the applicable tax rate to the taxable income
of P30,000,
the tax due should be apportioned to trust A and B.
So, for purposes of income tax, the taxable income of these 2 trust should be
consolidated, but for purposes of paying the tax, the tax due should be
apportioned.
TRANSFER TAXES
Taxes may be imposed on the onerous transmission of properties or
on the
gratuitous transmissions of properties.
101
Transfer taxes that are imposed on the onerous transmission of
properties:
1. VAT (value-added tax) (excluded this 2000 Bar)
2. Percentage Tax (also excluded)
3. Excise Tax (also excluded)
Transfer taxes imposed on gratuitous transmission of properties
are:
1. Estate Tax
2. Donors Tax
ESTATE TAX tax imposed on the right or privilege to transmit properties
upon death of the
decedent or testator.
DONORS TAX tax imposed on the right or privilege to transmit properties
gratuitously in
favor of another who accepts the same. This transmission of properties
occurs during the lifetime
of the donor and the donee.
ESTATE TAX
NATURE OF ESTATE TAX
It is an excise tax since the subject of the tax is the right or privilege to
transmit
properties and not the property itself.
PURPOSES OF ESTATE TAX:
1. The primary purpose is to raise revenue in order to support the
government;
2. To supplement income tax;
3. To reduce excessive inequalities in wealth; meaning, to achieve social
equality.
KINDS OF ESTATE TAXPAYER:
1. Resident estate taxpayer includes citizen of the Phils., resident alien
who died in the Phils.,
and such alien, at the time of his death, is a resident of the Phils.;
2. Non-resident estate taxpayer is limited to non-resident alien
individual.

 Real properties, personal tangible properties and personal intangible

properties of resident
decedent (RD) are taxed wherever situated.
Real and personal tangible properties of non-resident decedent (NRD) are
taxable only if they
are located in the Phils.
Personal intangible properties of NRD are taxable only if they acquire tax
situs in the Phils.
Personal intangible properties that are deemed situated or
deemed to have acquired
Phil. situs are:
1. Franchise which is exercise in the Phils.
2. Shares of stock, obligation or bonds issued by domestic corporation or
sociedad anonima
3. Shares of stock, obligations or bonds issued by foreign corp. 85% of the
business of which is
conducted in the Phils.
4. Shares, obligations, bonds issued by a foreign corp. which acquired
business situs in the Phils.
102
Such shares, obligations or bonds or in any partnership, business or
industry
established in the Phils. if they are used by such foreign corp. in furtherance
of its
trade or business.
5. Shares or rights in any partnership, business or in any partnership,
business or industry
established in the Phils.
If the personal intangible properties of a NRD does not belong to the
above-mentioned
enumeration, they may not from part of his income or we may also apply the
doctrine of mobilia
sequntur personam.
Mobilia sequntur personam, according to the Supreme Court, is a mere
fiction of law. So, it
must yield to the provision of law which provides tax situs.
Question:
Suppose the personal intangible properties of NRD acquired tax situs in the
Phils., can
this be exempt from estate tax?
Answer:YES, by applying the rule on reciprocity.
RULE ON RECIPROCITY the foreign country of that NRD does not impose
or allows
exemption on estate tax on the properties of citizens of the Phils. who died in
that foreign
country.

The phrase does not impose and allows exemtion are different from each
other.
When we say does not impose, this means totally exempt. Allows
exemption means
this may not cover all properties but only certain properties.
Case:
Country of Morocco has no international personality or not. What is important
is it allows
or grants exemption from estate tax.
Sec. 85. Gross Estate. The value of the gross estate of the decedent
shall be determined by
including the value, at the time of his death, of all property, real or personal,
tangible or
intangible, wherever situated. Provided, however, That in the case of a nonresident decedent
who at the time of his death was not a citizen of the Philippines, only that
part of the entire gross
estate which is situated in the Philippines shall be included in his taxable
estate.
The composition of the gross estate may include:
1. Decedents Interest.
- The gross estate may include the fruits and income of the properties and
that may
constitute the decedents interest.
- In the case of parcel of land, it may produce income in the form of harvest
which
harvest may form part of the gross estate.
103
- In the case of apartment, the rental on such apartment should also be
included, not
only the value of the property.
2. Transfer by virtue of general power of appointment
- It implies that if the transfer is made under special power of appointment
that
should be excluded from gross estate.
- The general power of appointment, the power is exercisable or in favor of
the
estate, executor, administrator or a creditor of the estate. If the power is
exercisable other than these (estate, administrator or creditor of the estate),
that
may be considered as special power of appointment.
3. Revocable Transfer
- Irrevocable transfer should be excluded from gross estate.
- Revocable transfers are transfers which are subject to alteration,
termination,
amendment or modification by the decedent.

4. Transfer for Insufficient Consideration

- The amount that may form part of the gross estate is the difference
between the
FMV of the property and the consideration given.
Example:
If the property has a FMV of P100,000 and the consideration given is only
P50,000,
the difference of P50,000 represents that insufficient consideration.
5. Proceeds of Life insurance policy.
- Proceeds of life insurance policy may be included if:
a. 3rd person is irrevocably designated is the estate executor, administrator or
heirs of
the decedent
b. the beneficiary designated is a 3rd person who is revocably designated as
beneficiary
- Proceeds of life insurance policy is excluded from the gross estate
in the
following cases:
1. 3rd person is irrevocably designated as beneficiary
2. proceeds of group insurance policy
3. proceeds of accident insurance policy except if accident insurance policy
has a
characteristic
4. Proceeds of GSIS Life Insurance Policy
- Note: As regards the estate executor, administrator or heirs as beneficiary,
it is
immaterial whether the designation is irrevocable or revocable.
DEDUCTIONS FROM GROSS ESTATE:
DEDUCTIONS FROM THE GROSS ESTATE MAY BE:
1. Conjugal deductions
104
2. Absolute deductions
3. Exclusive deductions
I. CONJUGAL AND ABSOLUTE DEDUCTIONS include:
1. Family home
2. Judicial or funeral expenses
3. Casualty losses
4. Indebtedness/unpaid claim against the estate
5. Accrued taxes (before the death of the decedent)
6. Standard Deduction
7. Separation pay given to the heirs of decedent on account of death.
Discussion:
1. Family home, subject to the following conditions:
a. there must be only one (1) family home;
b. there must be certification issued by the Barangay Captain that the
decedent is a resident

of and own that family home, in that particular locality;

c. the amount that is deductible or the FMV of the family home should not be
more than
P1M;
d. the FMV of the family home is P5M, this should be included in the gross
estate of the
decedent. But when you claim deductions, you can only claim up to P1M.
2. Expenses which may be in the nature of judicial expenses or funeral
expenses.
In the case of funeral expenses, the amount deductible is the actual
funeral
expenses or the amount deductible is limited only to P500,000;
There is no limitation as to amount with regard to judicial expenses. As
long as it
is paid or incurred in connection with the preservation, administration or
settlement of the estate, it may be claimed as deductions, judicial expenses
also
include extra-judicial expenses.
3. Losses that may arise from casualty or casualty losses such as fire,
storm, shipwreck, robbery,
embezzlement, theft and other casualty losses.
These losses must be sustained not later than six (6) months after the
death of the
decedent.
4. Indebtedness which partake of the nature of unpaid claims against
the estate.
There must be supported by notarized document. These obligations must
be
incurred within three (3) years prior to the death of the decedent.
Another indebtedness which may be claimed as deduction is claim against
insolvent persons. Here, the claimant is the decedent. In order to be
deductible,
this claim must be included in the gross estate.
5. Taxes which must accrue before the death of the decedent.
105
6. Standard Deduction
The amount is P1M. So, this may only be applied if the gross estate and
the
decedent is more than P1M.
7. Separation pay is given to the heirs of the decedent on account of
death.
The procedure is to include the amount in the gross estate and then claim
this
thereafter as deductions.
II. EXCLUSIVE DEDUCTIONS
These are deductions against exclusive properties.

These may include: (VP-CE)

1. * Vanishing deduction
2. Transfer for public use
3. Other charges against exclusive property
4. Encumbrance on exclusive property
Discussion:
1. * VANISHING DEDUCTION
- is an allowable deduction against the exclusive property of the decedent.
- May be claimed as deduction under the following conditions:
a. Death of the decedent which must take place within FIVE (5)
YEARS from the
death of the prior incident.
Situation:
A died. B is the heir. Now, you may recall that properties acquired through
gratuitous title
during the marriage is classified as exclusive property.
One of the properties of A which forms part of his gross estate had already
been taxed.
This property will be transmitted to B by way of succession. If B died, take
note that one of his
properties was acquired through inheritance from A and that is an exclusive
property. This
property had already been taxed because that forms part of the gross estate
of A. again, this same
property may be subject to estate tax because this exclusive property forms
part of the gross
estate of B. There seems to be double taxation. That is why, the purpose of
vanishing deduction
is to mitigate the harshness of double taxation. So, B may be entitled to that
vanishing deduction
which may reduce his estate tax.
The condition set by law is that B must have died within the five-year period.
If B died 6
years after the death of A, B can no longer claim such vanishing deductions.
b. Identity of Property
So, there must be evidence to the effect that this is the same property which
forms part of
he gross estate of A.
c. Inclusion of the property in the gross estate of the prior
decedent.
d. Previous taxation
106
The estate of A which included the property subject of vanishing deduction
had been
taxed; meaning, that estate tax had been paid by prior estate.
e. No previous vanishing deductions.

Question:
So, if B died and the property is transmitted to C, his heir, that property is
also considered
as exclusive property of C because it was acquired through inheritance.
Can C claim vanishing deduction?
Answer:NO, because this had already been claimed by B. You can only claim
vanishing deduction
at once.
If it is impossible that B acquired the property not through inheritance but
through
donation. Donors tax had already been paid. This is an exclusive property of
B because under
the law, property acquired during the marriage by gratuitous title is an
exclusive property and
forms part of his gross estate.
Can we apply this vanishing deduction?
YES. Here, B must have died within 5-year period from the date of donation.
Acquisitions and transmissions exempt from estate tax are:
1. The merger of usufruct in the owner of the naked title
2. Transmission or delivery if the inheritance or legacy by the fiduciary heir or
legatee to the
fideeeicommissary.
3. Transmissions of the property from the first heir, legatee or donee in favor
of another
beneficiary in accordance with the desire of the predecessor.
4. Bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions,
no part of the net income of which inures to the benefit of any individual and
not more than 30%
of said bequests, devises, legacies or transfers shall be used by such
institutions for
administrative purposes.
2. Transfer for Public Use
- The donee must be the government or any political subdivision. It must be
used
exclusively for public use.
3. Other Charges Against the Exclusive Property
- So, if the property has been mortaged with a bank, we consider that as
unpaid mortgage.
4. Encumbrance on Exclusive Property
VALUATION OF THE GROSS ESTATE:
1. Real Property
The FMV equivalent to the value as determined by the BIR or zonal value
and that of the
value as determined by the provincial or city assessor whichever is higher.
107

2. Personal Property
a. Tangible Personal Property The FMV is equivalent to the selling price
of the
property.
b. Intangible Personal Property includes interest, shares of stock.
- it must be the FMV of the interest or shares of stock
- If the intangible personal property is account receivable, it should be
Principal
PLLUS interest unpaid upon the death of the decedent.
- If it is in the nature of usufruct, we must take into consideration the basic
standard
of mortality rate.
TAX REMEDIES
According to the SC, government and taxpayers must stand on reasonably
equal
terms.
Basically, the remedies that may be availed of by the Government or the
taxpayer
may be grouped into:
a. Administrative remedies
b. Judicial remedies
If the tax law is silent on administrative remedies, the government may
still avail
of the usual administrative remedies such as Distraint of personal property,
or
Levy on real property. But that may be resorted to by the government in the
collection of taxes are:
a. Distraint of personal property
b. Enforcement of tax lien
c. Levy on real property.
- Distrain and levy can only be done if notice is given.
If the tax law is silent on administrative remedies, the taxpayer may still
avail of
the usual administrative remedies of protest and refund for purposes of
convenience and expediency.
If the tax law is explicit on administrative remedies, the taxpayer must
observe the
principle of exhaustion of administrative remedies. Under the Tax Code, if an
assessment is made by the BIR, the remedy of the taxpayer is to protest first
the
assessment. It is the decision of the BIR on that disputed assessment that is
being
appealed to the CTA.
In claiming for tax refund, the taxpayer have to file first a written claim for
refund
with the BIR Commissioner.

 Exception to the Principle of Exhaustion of Administrative

Remedies:
a. if it involves judicial questions
b. if it involves disregards of due process
c. if it involves an illegal act.
Judicial Remedies:
108
IF the tax law is silent on judicial remedies, the government can still avail
of the
usual judicial remedy. Example: filing an action for collection with the court.
If the tax is silent on judicial remedies, the taxpayer may file a special civil
action
for declaratory relief. But this does not apply as far as the NLRC or the TCC is
concerned because these particular tax laws are explicit on this judicial
remedies.
If the tax law is explicit on judicial remedies, the government should
observe the
provisions of the law.
Example:
The filing of an action for collection with the Court must be
approved by the BIR Commissioner.
Distinction between the Distraint and Levy
Distraint of personal property
1. The subject matter is personal property, stocks and securities, bank
accounts, debts and
credits.
2. In the event that the taxpayer failed to pay the tax, the BIR will issue
warrant of distraint.
3. The only requirement is posting of notice of sale in 2 public or conspicuous
places
4. If the bid is not equal to the amount of tax liability, the BIR may purchase
the property
distrained for and in behalf of the government.
5. There is no right of redmption
6. There is that remedy of constructive distraint of personal property.
Levy of real property
1. The subject property is real property
2. What is issued is in the nature of an authenticated certificate describing
the property and
stating the name of the taxpayer as well as the amount due
3. Requires not only posting but also publication of the notice of sale in a
newspaper of general
circulation in 3 consecutive weeks.
4. If the bid is not equal to the tax liability of there is no bidder, the BIR may
forfeit such real
property levied by the government.

5. There is right of redemption within 1 year from the date of sale plus 15%
interest.
6. There is no such remedy as constructive levy of property.
Constructive Distraint can only be resorted to under the following
situation: Code:
C.A.R.L.)
1. When a taxpayer cancels or hides his property
2. If he performs any act which will obstruct the collection efforts of the BIR
3. If he is retiring from business subject to tax
4. When he is about to leave the Philippines
Enforcement of the tax lien:
If the taxpayer failed despite receipt of notice to pay the BIR, a lien is
created
against the properties of the taxpayer.
109
It is the discretion of the BIR to avail itself of remedies which may result in
the
expeditious collection of taxes.
Case: Which is preferred, the claim of the government arising from tax lien
or the claim of the
workers predicated on the judgment rendered by the NLRC?
Held: The claim of the government arising from tax lien is superior to the
claim of a private
litigant predicated on a judgment.
Exception: The claim of the laborers may be superior under Art. 110 of the
Labor Code when
the employer was declared bankrupt of judicial liquidation.
*In observing the provisions of the tax code in regard to distraint or levy,
the BIR
cannot apply or invoke the presumption of regularity in administrative
proceedings.
So, if the procedure had been questioned by the taxpayer, it is not for the
taxpayer to prove that the procedures under the NLRC in regard to distraint
on
levy had been complied with.
Revenue taxes are self-assessing taxes.
Requisites of Assessment:
1. Written notice stating that the amount is due as tax.
2. Written notice must contain a demand for the payment of such tax.
Assessment is not a condition sine qua non for purposes of collecting
taxes. This
is so because demand is not required. The rule under Art. 1169 of the NCC
that
demand is required before a person may incur in delay cannot be applied.
Taxpayer incurred in delay if he fails to pay the tax on date fixed by Tax
Code.

 Assessments, made by the BIR Commissioner are presumed correct. The

presumption does not violate the due process under the Constitution
because the
presumption is merely disputable.
Normally, the BIR may require the taxpayer to submit reports, documents,
books
of accounts and other report to establish his tax liability. In the absence of
these
reports, documents, etc., the BIR may determine the tax liability by using
other
methods.
*The BIR can determine the tax liability of the taxpayer on the basis of
that socalled
best evidence obtainable in the absence of said reports etc. In one case,
agents of the BIR used the books of account seized as a result of raid by
means of
search warrant.
110
NET WORTH OR INVENTORY METHOD (also called Net Investigatory
Method)
- This is another method that may be employed by the BIR in determining
the tax
liability of the taxpayer. This is an expansion of that accounting principle,
assets
less liabilities equals net worth.
Assessment is made when it is mailed, released or sent.
Example: If it was received by the taxpayer in a particular date (Dec. 5,
1997), you should
count the prescriptive period for making an assessment from the date it was
mailed, released or
sent by the BIR and not from the receipt of the notice of assessment by the
taxpayer.
The assessment may be subject to revision by the BIR. If revised, the
prescriptive period
will commence to run from the safe when such revised assessment is mailed,
released or sent.
So, it is not from the date the original assessment is mailed etc. but from the
date the revised
assessment has been mailed.
The making of assessment is prescriptible.
The rule is, the BIR may collect taxes with or without prior
assessment.
PRESCRIPTIVE PERIOD FOR MAKING
AN ASSESSMENT & COLLECTION
With prior assessment Without prior assessment
I. Return filed is not false or

fraudulent
a. Return was file but
there exist a
deficiency
b. Return was filed but
no payment has
been made
3 years from the date of
actual filing. If it was filed
earlier than the date fixed
by the Tax Code.
COLLECTION: Within 3
years from the date of
assessment
3 years from the date of
actual filing or from the
last day fixed by law for
filing such return.
II.
Failure/Falsify/Fraudulent
a. Intentional failure to
file a return
b. False return
c. Fraudulent return
10 years from the
discovery of such omission
of failure, falsity or fraud
COLLECTION: 3 years
from the date of assessment.
Taxes may be collected
even without prior
assessment and prescriptive
period is 10 years from the
discovery of failure or
omission, falsity or fraud.
Notes: The rule is if prior assessment has been made, the BIR can avail of
the
administrative and judicial remedy. But if without prior assessment, the BIR
can only avail of the
judicial remedies.
Return must be the one prescribed by the BIR. SO, if you file your Books of
Accounts in lieu of that return, that does not constitute return.
111
PRINCIPLES GOVERNING THE FILING OF AN ACTION FOR COLLECTION
BY THE BIR
Collection is proper under the following situations:

a. BIR assessment is considered final and executory, if no protest or dispute

has been made
by the taxpayer. IF protested by the taxpayer but he did not appeal, the BIR
decision on
such protest, the effect is that the BIR decision shall be considered final and
executory.
b. IF he appeal the decision of the BIR of the Commissioner to the CTA but he
did not
appeal the decision of the CTA to CA, the decision of the CTA shall be final
and
executory.
c. If he appeal to the CA but the CA decision affirming that decision of the
BIR was not
appealed to the SC, CA decision shall be final and executory.
d. If appealed to SC but SC affirm the decision of the CA, SC decision is final
and
executory.
If the decision of the BIR is final and executory, the assessment made
cannot be
questioned. The issue of prescription can no longer be raised except if the
BIR
submitted the particular issue for the resolution of the Court, that is
considered as
waiver on the part of the BIR and such issue of prescription may be subject
to
resolution.
There is no provision in the TAX Code that prohibits the BIR from filing an
action for collection even if the resolution on the motion for reconsideration
on
the assessment made is still pending.
When the case is pending before the CTA, collection may also be made by
filing
of an answer to the petition for review with the CTA. This is tantamount to a
filing of collection of tax. This will also stop the running of the prescriptive
period for collection of taxes.
Collection of taxes is prescriptible.
GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE PERIOD IN THE
COLLECTION OF TAXES: (Code: N.A.P.O.C.A.R.)
1. No property could be allocated;
2. Agreement between the BIR and the taxpayer to the effect that the
prescriptive period shall be
suspended pending the negotiation;
3. If the BIR is Prohibited from a distraint or levy of real property;
4. If the taxpayer is Out of the Philippines;
5. If the address of the taxpayer Cannot be located;

6. The filing of an Answer to the petition for review executed by a taxpayer

with the CTA;
7. When a Request for reinvestigation has been granted by the BIR.
PRINCIPLES IN CRIMINAL ACTION
1. The filing of an action requires the approval of the BIR Commissioner. Also,
the filing of civil
action requires the approval of the BIR Commissioner. BUT this is not
jurisdictional. This is
merely a formal defect which can be cured.
2. The purpose of filing criminal action is to impose statutory penalties.
112
3. The payment of tax liability does not extinguish the criminal liability of the
taxpayer arising
from the violation of the provision of the Tax Code. This is so because the
civil liability arises
from the failure of the taxpayer to pay and this does not arise from felonious
act.
4. The acquittal of the taxpayer from criminal liability does not carry with it
the extinguishments
of civil liability.
5. The penalty of subsidiary imprisonment applies only to the failure of the
taxpayer to pay the
penalties. But, the Tax Law is silent on the failure of the taxpayer to pay his
deficiency or
delinquency tax.
DEFICIENCY VS. DELINQUENCY
In deficiency, the taxpayer filed a return but the same was deficient.
Deficiency is
the difference between the tax due and the tax paid.
In delinquency, the taxpayer did not file a return.
FALSE RETURN vs. FRAUDULENT RETURN
In the case of false return, this is a deviation from the truth. It may be the
result of
mistake, error, or negligence of the taxpayer. It is not always intentional
because it may be the
result of an honest opinion of the CPA.
In fraudulent return, there is always the intent to defraud the government
to evade
taxes. It is always intentional and deliberate.
Criminal action may be suspended if the taxpayer is absent from the
Philippines.
FIVE (5) years the prescriptive period for filing a criminal action for
violations
of the provision of the Tax Code.
In the case of refusal to pay the tax, the 5-year prescriptive period will
commence

to run from the date final notice or demand has been served upon the
taxpayer.
As regards violation of the Tax Code, if the violation is known the 5-year
prescriptive period shall commence to run from the date of the discovery of
the
violation and the institution of judicial proceedings for investigation and
punishment. The law uses the conjunction and. So, it will commence to run
only from the time the BIR referred the case to the Fiscals Office or City
Prosecutor. In effect, it is always in the control of the BIR.
REMEDIES OF THE TAXPAYER
BEFORE PAYMENT, the taxpayer may dispute or protest the assessment. He
ma also invoke the
power of the BIR Commissioner to compromise tax liability.
113
If you RECEIVED AN ASSESSMENT by the BIR, the remedies are:
a. File a request for reconsideration of the assessment or this is a claim for
re-evaluation of
the assessment based on the existing records.
b. File a request for investigation of the assessment --- it is also a claim for a
re-evaluation
of the assessment on the basis of newly discovered evidence, or additional
evidence that
the taxpayer intends to present in the reinvestigation.
WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner
ISSUES which may be raised >>>>> Question of law or fact
or both questions of law and fact
WHEN >>>>>>>>>>>>>>>>>>>>>>> Within 30 days from
receipt of such assessment
IF the request for investigation or reconsideration has been denied
by the BIR:
1. File a motion for reconsideration of the decision with the BIR; OR
2. Appeal the decision with the CTA.
*** Motion for reconsideration must raise new grounds, meaning grounds
which have not been
raised in that request for reconsideration or reinvestigation. Otherwise, it is
just a pro-forma
motion, it will not suspend the period within which to appeal the BIR decision
to the CTA which
is 30 days from receipt of the BIR decision.
ISSUES that may be raised on appeal with the CTA >>> Questions of
Law or fact OR both
If CTA affirms the decision of the BIR:
Appeal the CTA decision to CA.
ISSUES >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Questions of law
WHEN >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Within 15 days
from receipt of the

CA decision
The taxpayer may, instead of filing a protest, file a written claim for refund.
REQUISITES FOR FILING REFUND:
1. This must be filed within the two (2) year period from the date of
payment;
2. The fact of withholding must be proven;
3. This must be included in the income tax return of the taxpayer;
4. It must be shown that the payment or the amount stated in the return was
received by the
government.
WHERE TO FILE REFUND: --- BIR
ISSUES: --- Questions of law or fact OR
--- both OR
--- the taxes are illegally or erroneously collected
114
ILLEGALLY COLLECTED TAX vs. ERRONEOUSLY COLLECTED TAX:
Illegally collected tax means it violates certain provision of the law. It may
not be
authorized by a peculiar Tax Law or statute.
Erroneously collected tax means there may be a law passed but there
was a mistake in
the collection.
WHEN TO FILE: Within 2 years from the date of payment
> Payment must be proven in contemplation of Tax Law, there is payment
when the tax liability
is fully paid. So, if it is payable in installment, there can only be payment
when the final
installment has been paid.
115