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RR 2, SECTION 49.

Improvements by lessees.
When buildings are erected or improvements made by
a lessee in pursuance of an agreement with the lessor,
and such buildings or improvements are not subject to
removal by the lessee, the lessor may at his option
report the income therefrom upon either of the
following bases;

(a)
The lessor may report as income at the time
when such buildings or improvements are completed
the fair market value of such buildings or
improvements subject to the lease.

(b)
The lessor may spread over the life of the
lease the estimated depreciated value of such
buildings or improvements at the termination of the
lease and report as income for each year of the lease
an aliquot part thereof.

If for any other reason than a bona fide purchase from


the lessee by the lessor the lease is terminated, so
that the lessor comes into possession or control of the
property prior to the time originally fixed for the
termination of the lease, the lessor receives additional
income for the year in which the lease is so terminated
to the extent that the value of such buildings or
improvements when he became entitled to such

possession exceeds the amount already reported as


income on account of the erection of such buildings or
improvements. No appreciation in value due to causes
other than the premature termination of the lease shall
be included. Conversely, if the building or
improvements are destroyed prior to the expiration of
the lease, the lessor is entitled to deduct as a loss for
the year when such destruction takes place the
amount previously reported as income because of the
erection of such buildings or improvements, less any
salvage value subject to the lease to the extent that
such loss was not compensated for by insurance. If the
buildings or improvements destroyed were acquired
prior to March 1, 1913, the deduction shall be based
on the cost or the value subject to the lease to the
extent that such loss was not compensated for by
insurance.

by an individual, are subject to tax in his hands in the


same manner another income.

RR 2, SECTION 250.
Dividends. Dividends, for the
purpose of the law, comprise any distribution whether
in cash or other property, in the ordinary course of
business, even though extraordinary in amount, made
by a domestic or resident foreign corporation, jointstock company, partnership, joint account (cuentas en
participacion), association, or insurance company to
the shareholders or members out of its earnings or
profits accumulated since March 1, 1913.

Although interest on certain Government bonds and


other similar obligations is not taxable when received
by a corporation, upon amalgamation with the other
funds of the corporation, such income loses its identity
and when distributed to shareholders, is taxable to the
same extent as other dividend.

A taxable distribution made by a corporation to


individual stockholders or members shall be included
is the gross income of the distributees when the cash
of other property is unqualifiedly made subject to their
demand. Dividends, in cash or other property received

Dividends, whether in cash or other property, received


by a domestic or resident foreign corporation from a
domestic corporation are taxable only to the extent of
25 per cent thereof in accordance with Section 24 of
the Code. Dividends received by a domestic
corporation from a foreign corporation, whether
resident or nonresident, are taxable to the extent that
they constitute income from sources within the
Philippines, as provided in Section 37 (a) (2) (b) of the
Code. Dividends paid by the domestic corporation to a
nonresident foreign corporation are taxable in full. (For
definition of the different classes of corporations, see
Section 84 of the Code).

SECTION 251.
Dividends paid in property.
Dividends paid in securities or other property (other
than its own stock), in which the earnings of a
corporation have been invested, are income to the
recipients to the amount of the full market value of
such property when receivable by individual
stockholders. When receivable by corporations, the
amount of such dividends includible for purposes of
the tax on corporations are specified in Section 24 of
the Code. (See also Section 250 of these regulations).
A dividend paid in stock of another corporation is not a
stock dividend, even though the stock distributed was
acquired through the transfer by the corporation

declaring the dividends of property to the corporation


the stock of which is distributed as a dividend. Where a
corporation declares a dividend payable in a stock of
another corporation, setting aside the stock to be so
distributed and notifying the stockholders of its action,
the income arising to the recipients of such stock is its
market value at the time the dividend becomes
payable. Scrip dividends are subject to tax in the year
in which the warrants are issued.

SECTION 252.
Stock dividends. A stock dividend
which represents the transfer of surplus to capital
account is not subject to income tax. However a
dividend in stock may constitute taxable income to the
recipients thereof notwithstanding the fact that the
officers or directors of the corporation (as defined in
Section 84) choose to call such distribution as a stock
dividend. The distinction between a stock dividend
which does not, and one which does, constitute
income taxable to the shareholder is the distinction
between a stock dividend which works no change in
the corporate entity, the same interest in the same
corporation being represented after the distribution by
more shares of precisely the same character, and a
stock dividend where there either has been a change
of corporate identity or a change in the nature of the
shares issued as dividends whereby the proportional
interest of the shareholders after the distribution is
essentially different from his former interests. A stock
dividend constitutes income if it gives the shareholder

an interest different from that which his former stock


holdings represented. A stock dividend does not
constitute income if the new shares confer no different
rights or interests than did the old the new
certificates plus the old representing the same
proportionate interest in the net assets of the
corporation as did the old.

SECTION 253.
Sale of stock received as dividends.
Stock issued by a corporation, as a dividend, does not
constitute taxable income to a stockholder in such
corporation, but gain may be derived or loss sustained
by the stockholder, whether individual or corporate,
from the sale of such stock, which gain or loss will be
treated as arising from the sale or exchange of a
capital asset. (See Section 34 of the Code.) The
amount of gain derived or loss sustained from the sale
of such stock, or from the sale of the stock with
respect to which it is issued, shall be determined in
accordance with the following rules:

(a)
Where the stock issued as dividend is all or
substantially the same character or preference as the
stock upon which the stock dividend is paid, the cost
of each share (or when acquired prior to March 1,
1913, the fair market value as of such date) will be the
quotient of the cost (or such fair market value) of the
old shares of stock divided by the total number of the
old and new shares.

(b)
Where the stock issued as a dividend is in
whole or in part of a character or preference materially
different from the stock upon which the stock dividend
is paid, the cost (and when acquired prior to March 1,
1913, the fair market value as of such date) of the old
shares of stock shall be divided between such old
stock and the new stock, in proportion, as nearly as
may be, to the respective value of each class of stock,
old and new, at the time the new shares of stock are
issued, and the cost (or when acquired prior to March
1, 1913, the fair market value as of such date) of each
share of stock will be the quotient of the cost (or such
fair market value as of March 1, 1913) of the class to
which such share belongs divided by the number of
shares in that class.
(c)
Where the stock with respect to which a
stock dividend is issued was purchased at different
times and at different prices and the identity of the
lots can. not be determined, any sale of the original
stock, will be charged to the earliest purchases of such
stock, and any sale of dividend stock issued with
respect to such stock will be presumed to have been
made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend
chargeable to such stock.
(d)
Where the stock with respect to which a stock
dividend is declared was purchased at different times
and at different prices, and the dividend stock issued
with respect to such stock can not be identified as
having been issued with respect to any particular lot of

such stock, then any sale of such dividend stock will be


presumed to have been made from the stock issued
with respect to the earliest purchased stock, to the
amount of the stock dividend chargeable to such
stock.

SECTION 254.
Declaration and subsequent
redemption of a stock dividend. A true stock
dividend is not subject to tax on its receipt in the
hands of the recipient. Nevertheless, if a corporation,
after the distribution of a stock dividend, proceeds to
cancel or redeem its stock at such time and in such
manner as to make the distribution and cancellation or
redemption essentially equivalent to the distribution of
a taxable dividend, the amount received in redemption
or cancellation of the stocks shall be treated as a
taxable dividend to the extent of the earnings or
profits accumulated by such corporation since March
1, 1913.

SECTION 255.
Sources of distribution. For the
purpose of income taxation every distribution made by
a corporation is made out of earnings or profits to the
extent thereof and from the most recently
accumulated earnings or profits. In determining the
source of a distribution, consideration should be given
first, to the earnings or profits of the taxable year;
second, to the earnings or profits accumulated since
February 28, 1913, only in the case where, and to the

extent that, the distribution made during the taxable


year are not regarded as out of the earnings or profits
of the taxable year and all the earnings or profits
accumulated since February 28, 1913, have been
distributed; and, fourth, to sources other than earnings
or profits only after the earnings or profits have been
distributed.

SECTION 256.
Distribution in liquidation. In all
cases where a corporation (as defined in Section 84)
distributes all of its property or assets in complete
liquidation or dissolution, the gain realized from the
transaction by the stockholder, whether individual or
corporate, is taxable to the extent recognized in
Section 34(b) of the Code. For this purpose, the term
"complete liquidation" includes any one of a series of
distributions made by a corporation in complete
cancellation or redemption of all of its stock in
accordance with a bona fide plan of liquidation under
which the transfer of all the assets under liquidation is
to be complete within a reasonable time from the date
of the first distribution, usually not to exceed one year
from the time of such first distribution. If the amount
received by the stockholder in liquidation is less than
the cost or other basis of the stock, the loss in the
transaction is deductible to the extent allowed in
Section 34(c) of the Code.
(Section 84 of the Code)

RR, SECTION 50.


Forgiveness of indebtedness.
The cancellation and forgiveness of indebtedness may
amount to a payment of income, to a gift, or to a
capital
transaction,
dependent
upon
the
circumstances. If, for example, an individual performs
services for a creditor, who, in consideration thereof
cancels the debt, income to that amount is realized by
the debtor as compensation for his services. If,
however, a creditor merely desires to benefit a debtor
and without any consideration therefor cancels the
debt, the amount of the debt is a gift from the creditor
to the debtor and need not be included in the latter's
gross income. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has the
effect of the payment of a dividend.

MEMORANDUM
REVENUE
80
CIRCULAR
April
10, 1980NO. 13SUBJECT
:Officers
Treatment
Refunds
and
of Tax
Tax
Credits
Received.
When
TO
Revenue
:
All
Internal
and
Concerned.
Others
1.
Credits
Refunds/Tax
under
Section
Tax
Code.
295

Taxes
of
the
previously
and
allowed
claimed
as
deductions,
but
subsequently
refunded
as
tax
credit
or
granted
pursuant
295
of
the
to
Tax
Section
Code,
declared
should
as
part
be
of
gross
taxpayer
income
in
the
of
year
the
refund
of
receipt
or
tax
of
credit.
following
However,
taxes,
the
when
refunded
or
credited,
declarable
are
for
not
income
purposes
tax
inasmuch
as
allowable
they
are
as
not
deductions:
a.
Income
tax
imposed
of
the
Tax
in
Code;
Title
III
b.
profit
Income,
and
excess
warprofits
imposed
taxes
by
authority
foreign
country;
of
a
but
this
deduction
shall
be
allowed
in
the
case
who
does
of
a
taxpayer
not
signify
his
desire
in
his
to
have
return
to
any
extent
benefits
of
paragraph
this
subsection
of dc
(relating
for
taxes
to
of(3)
credit
foreign
countries);
aisa
c.
Estate
and
gift
taxes;
d.
Taxes
assessed
against
benefits
local
of
a the
kind
tending
the
value
to
of
increase
property
assessed;
e.
Stock
transaction
tax;
f.
Energy
tax;
and
g.
not
Taxes
allowable
which
as
are
deductions
the
law.
under
2.
Credits
Special
granted
Tax
under
R.A.
6135
R.A.
and
5186;
P.D.
535.
credits

and
These
their
tax
tax
consequences
as
follows:
are
a.
compensating
Sales,
and
specific
paid
on
supplies
taxes
and
imported
raw
materials
by
atoare
registered
export
producer.
Said
as
tax
taxes
credit
are
given
be
used
payment
in
the
of
taxes,
duties,
charges
and
fees
due
to
the
government
national
in
connection
operations.
with
(Sec.
its
7(a),
R.A.
No.
6135)
The
tax
credits
granted
form
part
should
of
the
gross
enterprise
income
in
the
to
the
year
tax
of
receipt
of
credit
paid
are
as
considered
said
taxes
deductions
allowable
for
income
purposes.
taxes
b.
registered
In
some
BOI
cases,
anda
tourism
assumes
enterprise
payment
of
and
taxes
due
withheld
from
the
remittee
lenderon
interest
payments
foreign
loans.
on
In
such
enterprise
cases,
is
the
given
a
tax
credit
for
taxes
withheld
certain
conditions.
subject
to
(Sec.
5186;
7(f),
Sec.
R.A.
8(c),No.
P.D.
No.
535)
Said
taxes
assumed
enterprise
registered
represent
and
ordinary
necessary
expenses
by
the
incurred
enterprise;
deductible
from
hence,
its
gross
Therefore,
income.
the
tax
credits
necessarily
granted
constitute
taxable
income
of
the
enterprise.
It is desired
this
given
Circular
as wide
bea
publicity
possible.
as that

EFREN
I. PLANA
Acting
Commissioner
REVENUE
CIRCULAR
MEMORANDUM
80
April 10, 1980NO. 13SUBJECT
Treatment
:Officers
of Tax
Tax
Refunds
Credits
When
and
Received.
TO
:
All
Internal
Revenue
and
Others
Concerned.
1.
Refunds/Tax
Credits
Section
under
295
of
the
Tax
previously
Code.

claimed
Taxes
and
deductions,
allowed
but
as
refunded
subsequently
or
granted
as
pursuant
tax
credit
to
Section
295
Code,
of
should
the
Tax
be
declared
as
part
of
gross
income
of
year
taxpayer
of
receipt
in
of
the
the
credit.
refund
However,
or
tax
the
following
when
taxes,
refunded
credited,
are
or
not
declarable
income
tax
for
purposes
as
they
are
inasmuch
not
allowable
deductions:
as
a.
imposed
Income
in
tax
Title
III
of
the
Tax
Code;
b.
Income,
warprofit
profits
and
taxes
excess
imposed
authority
by
of
a
foreign
this
deduction
country;
shall
but
be
case
allowed
of
a
taxpayer
in
the
who
signify
does
in
his
not
return
his
to
any
desire
extent
to
have
benefits
paragraph
of
of dc
this
(relating
subsection
to
credit
for
countries);
taxes
of(3)
foreign
aisa
c.
taxes;
Estate
and
gift
d.
against
Taxes
local
assessed
benefits
tending
to
of
increase
a the
kind
the
property
value
assessed;
of
e.
tax;
Stock
transaction
f.
Energy
tax;
and
g.
Taxes
which
are
not
deductions
allowable
under
as
the
law.
2.
Special
Tax
Credits
under
R.A.
granted
5186;
R.A.
535.
6135

These
and
tax
P.D.
credits
and
their
tax
consequences
are
as
follows:
a.
Sales,
compensating
specific
taxes
and
paid
and
raw
on
supplies
materials
imported
registered
by
atoare
export
Said
taxes
producer.
are
given
as
used
tax
in
credit
the
be
payment
duties,
charges
of
taxes,
and
fees
national
due
to
the
government
connection
with
in
its
operations.
7(a),
R.A.
No.
(Sec.
6135)
The
granted
tax
credits
should
form
gross
part
income
of
the
to
the
enterprise
year
of
receipt
in
the
of
tax
credit
as
said
taxes
paid
allowable
are
considered
deductions
income
taxes
for
purposes.
b.
In
some
cases,
registered
tourism
enterprise
BOI
anda
assumes
of
taxes
withheld
payment
and
due
from
the
lenderremittee
payments
on
on
interest
foreign
such
cases,
loans.
the
In
enterprise
a
tax
is
given
credit
withheld
for
subject
taxes
to
certain
(Sec.
7(f),
conditions.
R.A.
5186;
No.
535)
Sec.
8(c),No.
P.D.
Said
taxes
registered
assumed
represent
enterprise
necessary
and
expenses
ordinary
incurred
by
the
enterprise;
hence,
deductible
gross
income.
from
its
Therefore,
credits
granted
the
tax
constitute
necessarily
taxable
the
enterprise.
income
of
It
this
is
desired
Circular
that
be
given
publicity
as
wide
as
a
possible.
EFREN
I. PLANA
Commissioner
Acting