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TAX ON INCOME 1. The Tax Code has included under the term “corporation” partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997] 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. 3. Certain business organizations do not fall under the category of “corporations” under the Tax Code, and therefore not subject to tax as corporations, include: a. General professional partnerships; b. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement under a service contract st with the Government. [1 sentence, Sec. 22 (B), BIRC of 1997]  4. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436) b. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forebears. (Ibid.) c. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself from which the proceeds were derived. nd (Elements of the Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 5. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 6. The income from the rental of the house, bought from the earnings of co-owned properties, shall be treated as the income of an

unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. 7. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999) 8. The term taxable income means the 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 the Tax Code or other special laws. (Sec. 31, NIRC of 1997) 9. The cancellation and forgiveness of indebtedness may amount to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances. 10. If an individual performs services for a creditor who, in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services. 11. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA th 10 ) 12. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289) 13. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latter’s income. 14. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2) 15. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. No less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

331) 18. Regs. Gifts given during Christmas and major anniversary celebrations not exceeding P5.00 per annum.. Cruz: “The power of taxation. the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30. if the employer pays more than the ceiling prescribed by these regulations.00 per annum. 331) 17. 237 SCRA 324. Regs. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. that any amount given by the employer as benefits to its employees. SUGGESTED ANSWER: a.g. Actual yearly medical benefits not exceeding P10.000. An example of an exclusion from gross income are life insurance proceeds. fruits. and an example of a deduction are losses.. c. What are excluded from gross income ? SUGGESTED ANSWER: a. 21. d. 586 (2005).00. c. Medical cash allowance to dependents of employees not exceeding P750. although taxes are the lifeblood of the government. e.1 (A) (3).00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees. Distinguish exclusions from deductions. A non-resident alien.000. 2. Jr.  25. for length of service or safety achievement. e.. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: a. which must be in the form of a tangible persona property other than cash or gift certificate.00 or one (1) sack of 50-kg. Consequently. Payment for services. Employees achievement awards. American Express International. shall be considered as a non-resident alien doing business in the Philippines. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Income subject to “final tax” refers to an income collected through the withholding tax system. 2-98 as amended by Rev. To borrow the words of Justice Isagani A. Rice subsidy of P1. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. h. books. 237 SCRA 324. cooperatives. f. Uniforms and clothing allowance not exceeding P3. including their members.000.78. [Sec. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30.00 ceiling.000 ceiling of “other benefits” provided under Section 32 (B)(7)(e) of the Code.. further. 8-2000] 23. However. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise. deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus.000. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. Rev. marriage. the State‟s power to tax must give way to foster the creation and growth of cooperatives.000. 25 (A) (1). other than compensation income. etc.00 per employee per semester or P125 per month. b.  22. and j.000. del Rosario. Rev. with an annual monetary value not exceeding P10. e. rice per month amounting to not more than P1. and (3) It does not come within the definition of income (Sec. 61. is not absolute and may be subordinated to the demands of social justice. while indispensable.P a g e |2 In closing. No. whether classified as de minimis benefits or fringe benefits. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. (Philippine Branch) . (Tan v. 19. del Rosario. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayer‟s taxable income. on account of illness. Inc. Jr. is considered as having been earned at the place where the activity or service was performed. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. Laundry allowance not exceeding P300 per month. who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year. birth of a baby. [Sec.g. Flowers. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.000 per employee per annum. or similar items given to employees under special circumstances.  24. 16. (2) It is exempted by statute. No. b. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. i. citing Commissioner of Internal Revenue v. . Regs.” (Ibid. provided. (Tan v. 500 Phil. g. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals. shall constitute as deductible expense upon such employer. he shall be subject to income tax on his income derived from sources from within the Philippines. due to the following reasons: (1) It is exempted by the fundamental law. 20.

SSS benefits and GSIS benefits. whether individual or corporate. retirement gratuities. 2-98]  27. Resident citizens. Value of property acquired by gift. [Sec. g. As a consequence of separation of such official or employee from the service of the employer because of 1) Death. c. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Domestic corporations. d. [1 par. or 2) For any cause beyond the control of said official or employee [Sec. Resident citizens. endowment or annuity contracts either during the term. 32 (B) (6) (b). Rev. Taxes paid or incurred within the taxable year in connection with the taxpayer‟s profession. Resident citizens. trade or business.P a g e |3 b. Regs. No. on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Retirement received from reasonable private benefit plan after compliance with certain conditions. estates and trusts may also deduct this expense. st redundancy and cessation of business. resident alien individuals and nonresident alien individuals who are engaged in trade and business.  d. actually ascertained to be worthless and charged off within the taxable year. Retiring official or employee 1) In the service of the same employer for at least ten (10) years. Sec. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. estates and trusts may also deduct this expense. not sustained between related parties. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Domestic corporations. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. on their gross incomes other from compensation income are allowed to deduct these expenses.78 (B). What are the Itemized deductions from gross income and who may avail of them ? a. and net operating losses. 2-98] 28.78 (B) (1). Ordinary and necessary trade. plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. Amounts received. usually a natural resource. e. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. f.. on their gross incomes other from compensation income are allowed to deduct these expenses. No. hence tax-exempt ? SUGGESTED ANSWER: a. such as retrenchment. estates and trusts may also deduct this expense. or at maturity of the term mentioned in the contract. through accident or health insurance or Workmen‟s Compensation Acts as compensation for personal injuries or sickness. trade or business.. Amounts received for beyond control separation. estates and trusts may also deduct this expense. Domestic corporations. . Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. f. Domestic corporations. 3) Availed of the benefit of exclusion only once. on their gross incomes other from compensation income are allowed to deduct these expenses. What kind of separation (retirement) pay is excluded from gross income. 2. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. [1 par. pensions. sickness or other physical disability. Sec. etc. or descent. resident alien individuals and nonresident alien individuals who are engaged in trade and business. estates and trusts may also deduct this expense. 2. on their gross incomes other from compensation income are allowed to deduct these expenses. Rev. (1) (b). Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 2) Not less than fifty (50) years of age at time of retirement. NIRC of 1997]. Domestic corporations. c. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. 7641. Depletion or deduction arising from the exhaustion of a nonreplaceable asset. business or professional expenses. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another st employer. b. Bad debts due to the taxpayer. What are the conditions for excluding retirement benefits from gross income. Ordinary losses. Any amount received by an official. estates and trusts may also deduct this expense. Regs. theft or embezzlement.  e. Depreciation or a reasonable allowance for the exhaustion. hence tax-exempt ? SUGGESTED ANSWER: a. b. on their gross incomes other from compensation income are allowed to deduct these expenses. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer‟s profession. Resident citizens. wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. resident alien individuals and nonresident alien individuals who are engaged in trade and business. 32 (B) (6) (a). Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business. bequest. or upon surrender of the contract. Foreign social security. USVA benefits. Resident citizens. losses from casualty.  26. Amounts received by the insured as a return of premiums paid by him under life insurance. Retirement benefits received under Republic Act No. Retirement benefits received under Republic Act No. in accordance with the employer‟s reasonable private benefit plan approved by the BIR. 7641 and those received by officials and employees of private firms. resident alien individuals and nonresident alien individuals who are engaged in trade and business. From the employer c. employee or by his heirs. Resident citizens. connected with profession. devise. b.

and the (b) cash method. Domestic corporations.P a g e |4 Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 2007) . and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. Resident citizens. k. Since the bills for legal and auditing services were received only in 2006 and paid in the same year. R. on their gross incomes other from compensation income are allowed to deduct these expenses. Resident citizens. (Commissioner of Internal Revenue v. Isabela cultural Corporation. 2007) The two (2) principal accounting methods for recognition of income are the (a) accrual method. Resident citizens. No. The BIR disallowed the deduction ? Who is correct. No. (Commissioner of Internal Revenue v. or professional expenses. estates and trusts may also deduct this expense. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. 4) Must not be bribes. R. 2007)  32. Personal and additional exemptions. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. R. are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment. No. (Commissioner of Internal Revenue v. Domestic corporations. not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Compliance with the business test: 1) Must be ordinary and necessary. 172231. on their gross incomes other from compensation income are allowed to deduct these expenses.  31. G. Necessary expenses are those which are appropriate or helpful to the business. it must be supported by receipts. Isabela cultural Corporation. 3) Must be paid or incurred in carrying on a trade or business. estates and trusts may also deduct this expense. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. like expenses paid for legal and auditing services ? SUGGESTED ANSWER: a. on their gross incomes other from compensation income are allowed to deduct these expenses. G. Amounts of income accrue where the right to receive them becomes fixed. b. estates and trusts may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Contributions to pension trusts. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. business or profession. b. February 12. Compliance with the substantiation test. on their gross incomes other from compensation income are allowed to deduct these expenses. Proof by evidence or records of the deductions allowed by law including compliance with the business test. February 12. j. G. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. No. Resident citizens. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005. 2) Must be paid or incurred within the taxable year. Resident citizens. l. Isabela Cultural Corporation. Charitable and other contributions. TMG Corporation is issuing the accrual method of accounting. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Liabilities.  30. 172231. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. records or other pertinent papers. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. business. 2007) NOTES AND COMMENTS: a. Insurance premiums for health and hospitalization. where there is created an enforceable liability. Distinguish ordinary expenses from capital expenditures. What are the requisites for the deductibility of ordinary and necessary trade. R. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. TMG deducted the same from its 2006 gross income. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. i. there was already an obligation to pay them. Nonresident citizens on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. February 12. resident alien individuals and nonresident alien individuals who are engaged in trade and business. 172231. 172231. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade. Domestic corporations. February 12. Isabela cultural Corporation. the expense must be ordinary and necessary. SUGGESTED ANSWER: The BIR is correct. c. resident alien individuals and nonresident alien individuals who are engaged in trade and business. Recognition of income and expenses under the accrual method of accounting. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. resident alien individuals and nonresident alien individuals who are engaged in trade and business..  29.  h. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. G. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. (Commissioner of Internal Revenue v. Ordinary expenses are usually incurred during a taxable year and benefits such taxable year. kickbacks or other illegal expenditures b. TMG or BIR ? Explain.

De minimis benefits are facilities and privileges (such as entertainment. 8-2000]  37.1 (A) (3). [Sec. Rev. i. Regs. or b. Regs. Life or health insurance and other non-life insurance premiums or st similar amounts in excess of what the law allows. contentment. Fringe benefits that are not subject to the fringe benefits tax: a.33 (A). Members of the same family. Sec. Benefits given to the rank and file employees. February 12. NIRC of 1997. h. 2. d. it must be determined with “reasonable accuracy” implies something less than an exact or completely accurate amount. Bad debts are those which result from the worthlessness or uncollectibility. What is meant by “fringe benefit” for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation.All-events test. The family of an individual shall include only his brothers and sisters (whether by the whole or half-blood). furnished or offered by an employer to his employees. arising from money lent or from uncollectible amounts of income from goods sold or services rendered. [1 par. within the taxable year. e. if its basis is unchangeable. directly or indirectly. Who are related parties ? SUGGESTED ANSWER: The following are related parties: a. or e. spouse. Expense account. [1 par. 2. No. or necessary to the trade. 32(A). The test does not demand that the amount of such income or liability be known absolutely. R. Contributions of the employer for the benefit of the employee to retirement. or f. No. Sec. Regs. at the closing of its books for the taxable year. medical services. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or “interests” paid thereon are not allowed as deductions from the gross income of corporations. income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash. d. No.. The fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned. (Sec. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted.. granted or paid by the employer to the st employee. g. [Sec. 3-98] c. NIRC of 1997] . Vehicle of any kind. 36 (B). This test requires: 1) fixing of a right to income or liability to pay. Household personnel. Thus. 398]  34. They are not considered as compensation subject to income tax and consequently to withholding tax. 33 (B). by or for the same individual. and lineal descendants. Holiday and vacation expenses. dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations. Rev. [Sec. 1 par. 2007) d. such as but not limited to: a. 172231. Regs. and j. b. and f.33 (A). Membership fees. 3-98] 35. driver and others. 398] 36. It is also referred to as the “cash receipts and disbursements method” because both the receipt and disbursements are considered. Regs.. insurance and hospitalization benefit plans. 32 (C). 17-71)  38.P a g e |5 The accrual of income and expense is permitted when the all-events test has been met. only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. G.33 (C). When the fringe benefit is for the convenience or advantage of the st employer. No. When the fringe benefit is required by the nature of. Accrual method of accounting presents largely a question of fact. Educational assistance to the employee or his dependents. 5-99)  39. c. fringe benefit means any good. The fringe benefits tax is a final withholding tax imposed on the grossedup monetary value of fringe benefits furnished. Rev. if such facilities are offered or furnished by the employer merely as a means of promoting the health. (Ibid. A fiduciary of a trust and a beneficiary of such. Regs. by or for such individual. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of st Internal Revenue. in whole or in part. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned. such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. No. 2. or could reasonably be expected to have known. Sec. NIRC of 1997. f. Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment. directly or indirectly.78. The all-events test is satisfied where computation remains uncertain. 2. or efficiency of his employees. Housing.. NIRC of 1997. 2. Rev. 2. but is not as much as unknowable. b. 2-98 as amended by Rev.a.. The propriety of an accrual must be judged by the fact that a taxpayer knew. the test is satisfied where a computation may be unknown. e. d. goodwill.) c. Rev. c. 1 par. business or profession of the employer. or so-called “courtesy discounts” on purchases). (Commissioner of Internal Revenue v. ancestors. Sec. (Revenue Memorandum Circular No. except rank and file employees. such as maid. The amount of liability does not have to be determined exactly. or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees). and 2) the availability of the reasonable accurate determination of such income or liability. No. whether granted under a collective bargaining agreement or not. Isabela cultural Corporation. [Sec. Sec. Rev. 33. A grantor and a fiduciary of any trust. of amounts due the taxpayer by others. Regs. service. Expenses for foreign travel.33 (B).

and e. 256 SCRA 667] g. 2-98 as amended by Rev. Rev. What are the amounts of additional exemptions ? SUGGESTED ANSWER: “An individual. 44. It is clear that under the amendment. b. only such spouse shall be allowed the personal exemption. a legitimate. (Sec. Sec. NOTES AND COMMENTS: a. Act No. d. 2006 citing Madrigal and Paterno v. 2) Hours of productive use. (Sec. provided that the total number of dependents for which additional exemptions may be claimed st 1) shall not exceed four (4) dependents. [Pansacola v. the total familial basic personal exemption for spouses is P100. and d. then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital. 4. What are the requisites for valid deduction of bad debts from gross income ? SUGGESTED ANSWER: a. The debt must be actually ascertained to be worthless and uncollectible during the taxable year. business or practice of profession. 35 (B). 10-2008] NOTES AND COMMENTS: It is clear from Rep. 103. Philippine Refining Corporation v. The same must not be sustained in a transaction entered into between related parties.” [1 par. Straight line method. The debts are uncollectible despite diligent effort exerted by the taxpayer.000.P a g e |6  40. living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer.000. 418 (1918)] 45.79 (I) (1) (b).000. 5-99) b. No.00) c. What are personal and additional exemptions ? SUGGESTED ANSWER: These are the theoretical persona. d. No. Furthermore. Act No. NIRC of 1997 as amended by Rep. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable. Commissioner of Internal Revenue. 2) :  41. Rev. f. No. What is the amount allowed as basic personal exemption ? SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50. No. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions. 3. Regs. chiefly dependent upon and living with the taxpayer c. November 16. 38 Phil. Rev. Rev. 35 (A).000) for each individual taxpayer. 43.e. Regs. 10-2008. If in the year the taxpayer claimed deduction of bad debts written-off. Furthermore. No. Act No. 159991. b. 25-2002. The methods of depreciation are the following: a. Must have been reported as receivables in the income tax return of the current or prior years. “A dependent means a. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. et al. 5-99 reiterated in Rev. No. the concept of head of a family does not find application anymore. illegitimate or legally adopted child b. Rev. Rafferty and Concepcion. G. In the case of married individuals where only one of the spouse is deriving gross income. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. Regs. Sum of years digits method. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i. NIRC of 1997 as amended by Rep. b.00. 9504. Sec. taking into account the personal status and additional qualified dependents of the taxpayer. [Sec. Sec. (Sec. 2. 4. What is the “tax benefit” rule ? SUGGESTED ANSWER: The “tax benefit rule” posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayer‟s gross income in the year of such recovery to the extent of the income tax benefit of said deduction. Sec. Declining balance method. No. the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. 9504] NOTES AND COMMENTS: a. Court of Appeals. shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25. hence. married and head of the family for purpose of availing of the basic personal exemption has already been eliminated by Rep. 414. Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1) Apportionment to units of production. his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income.79 (I) (1) (a). where the result of his business operation was a net loss even without deduction of the bad debts written-off). arrangement and numbering supplied. single individuals may now claim for the additional exemptions. b. 3) 4) Revaluation method. not treated as receipt of realized taxable income.. Rev. 2. and Sinking fund method. Regs. Regs.if such dependent is . Thus. The same must be connected with the taxpayer‟s trade. Regs.. Regs. 45.00.for each qualified dependent child. 5-99) 42. 9504. [Sec. c. the distinctions between the concepts of single. No. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year. 34 (E) (1). R. he realized a reduction of the income tax due from him on account of the said deduction. 9504 that each of the spouses may claim the P50. Act No. Regs. whether single or married. NIRC of 1997. a. Regs. c. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence. 2-98 as amended by Rev.

No. buildings and/or improvements). or d. and as such. in case of condominium unit. Automobiles not used in trade and business. etc. trailers and trucks of a hauling company.” (last sentence.e. 9504] c.a. parents. 9504. townhouse. Sec. as amended by Rep. Regs. Act No. Rep. “The Expanded Senior Citizens Act of 2003”] 47. Act No. BUT DOES NOT INCLUDE: a. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee.. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 2-98 as amended by Rev. NIRC of 1997. Residential houses and lands owned and used as such. capitalized words. 7432.. 2. No. Act No. of a character which is subject to the allowance for depreciation. Commissioner of Internal Revenue. “Real property. if such dependent. Rev. Rev. and as validated from the existing available records of the Bureau of Internal Revenue. Rev. d. stamp collections. Stock in trade of the taxpayer. Regs. NIRC of 1997. 58 SCRA 170) f. Regs. or d. 39 (A) (1). Court of Tax Appeals. Sec. 2. and therefore considered as rd capital asset. L-25043. and other collateral relatives are not qualified dependents to be claimed as additional exemptions. Act No. drainage and lighting systems converts the property to an ordinary asset.” (last par. townhouse or apartment. as amended by Rep. v. glue. as brothers or sisters. However. Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform. Grandparents. numbering and arrangement supplied. Rev.. 1968) g. Stock and securities held by taxpayers other than dealers in securities. concrete gutters. namely: a. 3. Sec. arrangement and numbering supplied.79 (I) (1) (b).. Jewelry not used for trade and business. Paintings. b. No. not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year. which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable . the employment of an attorneyin-fact for the purpose of developing. 5 (a). [last par. Real property used in trade or business of the taxpayer. 1) regardless of age 2) is incapable of self-support nd 3) because of mental or physical defect. b. The condominium building owned by a realty company the units of which are for rent or for sale. Capital assets shall refer to all real properties held by a taxpayer. shall be treated as capital asset. as amended by Rep. Inherited agricultural property improved by introduction of good roads.b. owned by an individual engaged in business. Inherited parcels of land of substantial areas located in the heart of Metro Manila. April 26. b. or real property used in the trade or business of the taxpayer. whether single detached. 7-2003] 48. e. Real property used in trade or business (i. e. No. This is so. Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code. annual sales income from the sales was considerable. d. Regs. 7-2003) 49. sales made with frequency and continuity. Regs. individual taxpayers caring for them. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules: . Examples of capital assets: a. Property used in the trade or business. 7-2003) h. 144 SCRA at p. No. and the heir was not a stranger to the real estate business. The tractors. as the owner is now engaged in the business of subdividing real estate. f. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. No. 2. shall not be considered used for business purposes. The machinery and equipment of a manufacturing concern subject to depreciation. Sec. sculptures. managing. (Sec.. Act 9257. and which are not included among the real properties considered as ordinary assets. The wood. 9504. hence an ordinary asset. 2.P a g e |7 1) not more than twenty-one (21) years of age. of a character which is subject to the allowance for depreciation. Lingad. (Calasanz v. as amended. Sec. administering and selling the lots. (Tuazon. No. 7-2003)  50. which are the raw materials of a furniture factory. 7-2003) The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business). whether or not connected with his trade or business. c. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year. 3 par. objects of arts which are not used in trade or business. Regs. be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. Sec. nails. paint. 3. if they are senior citizens they may qualify as additional exemptions under the “Senior Citizens Law” but not under the NIRC of 1997. [Sec.b. as well. Examples of ordinary assets hence not capital assets: a. or c.a. Tax treatment of real properties that have been transferred. It is to be noted that under the NIRC of 1997. or condominium unit. or b. or c. then sold to tenants. Regs. as amended by Rep. only qualified dependent children are considered for additional exemptions. Rev. etc. or b. 35 (b). 2) unmarried and 3) not gainfully employed or d.” [2 par. Rev. varnish. 10-2008. c. The property forms part of the stock in trade of the owner. (Roxas v. (Sec. such as a corporation included in the enumeration of Section 30 of the Code. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets. Jr. “Real property used by an exempt corporation in its exempt operations. 672) 51.

classified as a capital asset. Rev. 6 (E). 57.  58. b. both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a “presumed” capital gains tax. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale. 4-99] 55. “ Sale. both of the NIRC of 1997]. numbering and arrangement supplied] d. 24 (D) (1) in relation to Sec. or other disposition” includes taking by the government through condemnation proceedings. 24 (D) (1). The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a. will use in business the property received in the exchange. 3 (1). 6 of Act No. 27 (D) (5). or other disposition of real property located in the Philippines.]. the said tax exemption can only be availed of once every ten (10) years.P a g e |8 a. 121 Phil. 3) Nonresident alien engaged in trade or business in the Philippines [Sec.” [Sec. [Sec. [Sec. c. 24 (D) (1). 25 (B) in relation to Sec. both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. NIRC of 1997]  60. The seller of the real property. [Sec. 2. 24 (D) (1). whether resident or not [Ibid. c. or b. No. an individual [Sec. Regs. the presumed capital gains tax shall be imposed. of individual taxpayers (not corporate). [Sec. exchange. no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. (Gutierrez v. and who does not subsequently use such property in trade or business. if any. or to a taxpayer who. NIRC of 1997. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated. a domestic corporation. 4118. to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined. [Sec. 24 (A) (1). Regs. It is the transaction that is taxed not the gain. Gonzales v. then to the schedular tax [Sec. 1) Citizen. 386. c. No. as amended by Act No. even if not engaged in real estate business. including pacto de retro sales and other forms of conditional sales. Court of Tax Appeals. (Sec. 1987. an estate or trust (Ibid. 4-99]  56. No. NIRC of 1997] Revenue Regulations No. gross selling price. 7-2003 has defined real property as having “the same meaning attributed to that term under Article 415 of Republic Act No. b. by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions. No. the current fair market value as determined below: 1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors. 101 Phil.. Rev. on gains from sales or other dispositions of real property. both of the NIRC of 1997]. et al. Court of Tax Appeals. NIRC of 1997] 61. 2) Resident alien [Ibid. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence a. [Sec. The tax is “imposed upon capital gains presumed to have been realized from the sale. 24 (D) (1) in relation to Sec. exchange. 25 (A) (3) in relation to Sec.]. 3 (2). The tax liability. Regs. 6 (E). 24 (D) (1). otherwise known as the „Civil Code of the Philippines. b. In case of non-redemption of the property sold upon a foreclosure of mortgage sale.. or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. 861) 54. in a foreclosure of mortgage sale of real property. b. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. Rev. at the option of the taxpayer. 4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 24 (D) (2). Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. 24 (D) (1`). within eighteen (18) calendar months from the date of sale or disposition c.f. and d. 24 (D) (1). based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. 3. 713. or other disposition. it ceased operations that year . the proceeds of which is fully utilized in acquiring or constructing a new principal residence. 7-2003)  53. classified as capital assets.. Regs.’ (Sec. NIRC of 1997]. [Sec. 7-2003)  52. both of the NIRC of 1997] 59. in relation to Sec. classified as capital assets. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 3135.). sale.c. et al. exchange. shall be considered as a capital asset in the hands of the heir or donee. On May 22. Transactions covered by the presumed capital gains tax on real property: a. Rev. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business. pays the presumed capital gains tax whether: a.

it falls under the category of an existing corporation recommencing its banking operations. 6. The MCIT and when should be imposed and the four (4) year grace period. NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board. In 2000. No. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. Regs. as defined herein. 2006 did not apply Rev. On June 23. Should the refund be granted ? SUGGESTED ANSWER: Yes. Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1. the BSP authorized MBC to operate as a thrift bank. 1998. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. 27 (E) (1). whichever comes later. MBC filed a petition for review with the CTA. in order to allow new corporations to grow and develop at the initial stages of their operations. 168118. 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. 168118. Thus. “A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year. “(5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT. the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). G. G. the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. As a result of the ruling MBC filed an application for refund of the P33 million. 2006) . Even if placed under receivership. No. 1998 as it did not close its business operations in 1987 but merely suspended the same. R.) c. 1999. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1. R. 27 (E) (1). Rev. It sought the BIR’s ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. Regs. Thus. 495) Clearly then. No.P a g e |9 by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. NIRC of 1997] b. August 26. Period when a corporation becomes subject to the MCIT. August 26. G. Due to the BIR’s inaction. It does not come as a surprise then when many companies reported losses in their initial years of operations. No. Regs. is hereby imposed on a corporation taxable under this Title. 168118. 495 specifically refers to thrift banks. x x x” (Rev. beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. The intent of Congress relative to the MCIT is to grant a four (43) – year suspension of tax payment to newly organized corporations. 9-98 because Rev. August 26. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT.” [Sec. Commissioner of Internal Revenue. 2006) NOTES AND COMMENTS: a. (Sec. R. It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). 9-98) Manila Banking Corporation v. The CTA denied the petition on the ground that MBC is not a newly organized corporation. Regs. (Manila Banking Corporation v. when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year. No. (Manila Banking Corporation v. [Sec. Commissioner of Internal Revenue. Purpose of the four (4) year grace period. No. MBC is entitled to the grace period of four years from June 23. No. Commissioner of Internal Revenue. the corporate existence was never affected.