CEU SCHOOL OF LAW AND JURISPRUDENCE

COURSE OUTLINE1
for

Taxation 1
2 Semester School year 2016-2017
nd

LECTURER

Atty. Rosabel Socorro Teston-Balan

Phone No. 6323878
rstbalan25@gmail.com

SCHEDULE
Saturday
2-5 pm

GRADING SYSTEM
Attendance/Recitation 30%
Midterm Examination 30%
Final Examination 40%

COURSE DESCRIPTION

This course introduces the general principles of taxation and statutory provisions
on income taxation including pertinent revenue regulations. The main topics that
will be covered include: the general principles of taxation, sources of income,
determining income from employment, income from business, and income from
property, deductions from business and property income, capital gains and
losses, other income and deductions, computation of taxable income and tax
administration.

COURSE OBJECTIVES:

1
Based on the course outline of Atty. Carlos G. Baniqued in Tax II, Ateneo de Manila University School of Law, as revised
and updated by Atty. Terence Conrad H. Bello.
2

After successfully completing this course, the students are able to:

Explain the nature and purpose of taxation

Apply the basic principles and policies of Philippine Income Tax Law
Describe the general structure of the Philippine Income Taxation system
Explain and contrast the manner in which different entities are taxed

METHOD OF TEACHING

Socratic method; case method

Suggested References:

Benjamin B. Aban, Law of Basic Taxation in the Philippines

Ignatius Michael D. Ingles, Tax Made Less Taxing

COURSE OUTLINE

I. GENERAL PRINCIPLES OF TAXATION

Aban, pp. 1-29

Ingles, pp 1-22

A. Nature and Characteristics of Taxation and Taxes

I. Definition of Taxation
51 Am Jur 34

II. Nature of Internal Revenue Laws

Hilado v CIR 100 Phil 28

III. Purpose and Objectives of Taxation

Cases:
1. Caltex Philippines , Inc. v Commission on Audit,et al, G.R. No.
92585, May 8, 1992
2. Lutz v. Araneta, 98 Phil 48
3. PAL v. Edu, 164 SCRA 320
4. Tolentino v. Secretary of Finance, 235 SCRA630; 249SCRA628
3

5. Tio v. Videogram Regulatory Board 151 SCRA 208

IV. Theory and Basis of Taxation

Cases:
1. CIR v. Algue, 158 SCRA9
2. NPC v. Cabanatuan, G.R.No. 149110, April 19,2003
3. Lorenzo v. Posadas,64 Phil 353

V. Nature of Taxing Power

Cases:
1. Phil. Guaranty v CIR, G.R. No. L-22074, April 30, 1965
2. Commissioner v. Algue, ibid
3. Mactan Cebu International Airport Authority v. Marcos, et al. G.R.
No. 120082, September 11, 1996
4. Roxas v. CTA, 23 SCRA 276, G.R. No. L-25043, April 26, 1968

VI. Principles of Sound Tax System

Cases:
1. Chavez v Ongpin, G.R. No. 76778 June 6, 1990
2. Taganito Mining v. CIR, CTA Case 4702, April 28,1995 at p.12

VII. Power of Taxation Compared With Other Powers

Cases:
1.Tanada v. Angara, G.R. 118295, May 2,1997
2. LTO v. City of Butuan, GR 131512, Jan. 20,2000
3. Phil Match Co. v. Cebu, 81 SCRA 99
4. Matalin v Mun. Council of Malabang, 143 SCRA 404
5. Lutz v. Araneta, 98 Phil 148
6. NTC v.CA, 311 SCRA 508

VIII. TAXES
1. Definition
71 Amjur 2nd 343-346

2. Essential Characteristics of Taxes

Cases:
1. Tan v. Del Rosario, 237 SCRA 324
2. CIR v. Santos, GR119252, Aug. 18, 1997
4

3. Tax as distinguished from other forms of exactions

a. Debts
Cases:
1. Caltex v. COA 208 SCRA 726
2. Philex Mining v CIR, GR 1225704, Aug. 28, 1998
3 .Republic v. Mambulao Lumber Co. 4 SCRA 622

b. License Fees
Case:
PAL v. Edu, supra
c. Special assessment/Levies
Case:
Apostolic Prefect v Treasurer of Baguio, 71 Phil. 547
d. Tolls
e. Penalties
Case:
NDC v. CIR 151 SCRA 472

B. Limitations on Taxing Power

I. Inherent Limitations
A. Public Purpose of Taxes
Cases
1. Lutz v. Araneta, supra
2. Pascual v. Sec. of Public Works 110 Phil. 331

B. Inherently Legislative/Non-Delegability of Taxing Power

a. General Rule
b. Exceptions:
1. Delegation to local governments
2. Delegation to the President
3. Delegation to administrative agencies
Sec. 5, Art. X 1987 Constitution
Sec. 28(2). Article VI, 1987 Constitution
Cases:
1. Philcomsat v. Alcuaz 180 SCRA 218
5

2. Meralco v. Province of Laguna, 306 SCRA 750

3. Pepsi-Cola v. City of Butuan City 24 SCRA 789

C. Territoriality or the Situs of Taxation

Cases:
1. Manila Gas v. Collector, 62 Phil 895
2. Iloilo Bottlers v. Iloilo City 164 SCRA 607
3. Collector v. Lara 102 Phil 813
4. CIR v. BOAC, 149 SCRA 607

D. International Comity
Sec. 2 Art. 11, 1987 Constitution
Case:
Tanada v. Angara, GR 118295, May 2, 1997

E. Exemption of Government Entities, Agencies and Instrumentalities

Secs. 27(c) and (30(I), NIRC
Executive Order No. 93
PD 1931
Cases:
1.Maceda v. Macaraig, G.R. No. 88291 June 8, 1993
2.Mactan Cebu Airport v. Marcos, GR 120082, Sept. 11, 1996

II. Constitutional Limitations

A. Due process
Sec. 1, Art. III, 1987 Constitution
Cases:
1. Phil. Bank of Commerce v. CIR 302 SCRA 241
2. Sison v. Ancheta, supra
3. Com. Of Customs v CTA & Campos Rueda Co., 152 SCRA 641

B. Equal protection
Sec. 1, Art. III, 1987 Constitution
Cases:
1. Ormoc Sugar Co. v. Treasurer of Ormoc City, 22 SCRA 603
2. Villegas v. Hsui Chiong Tsai Pao, 86 SCRA 270
6

3. Tan v. Del Rosario, 237 SCRA 324

4. Tiu V Court of Appeals, G.R. No. 177410, January 20, 1999

C. Religious freedom
Sec. 5, Art. III, 1987 Constitution
Case:
American Bible Society v. Manila 101 Phil. 386

D. Non-impairment of contracts
Sec. 10, Art. III and Sec.11, Art. XII, 1987 Constitution
Cases:
1. CIR v. Lingayen Gul Electric Co., 164 SCRA 67
2. Misamis Oriental v. CEPALCO, 181 SCRA 38
3. Cagayan Electric Power & light Co., Inc. v CIR G.R. NO. L-60126
September 25, 1985
4.Manila Electric Co. v Province of Laguna G.R. No.131359, May 5
1999,

E. Non-imprisonment for non-payment of poll tax

Sec. 20, Art. III, 1987 Constitution

F. Uniformity and equality of taxation and progressive system of

taxation
Sec. 28(1), Art. VI, 1987 Constitution
Cases:
1. Pepsi-Cola v. City of Butuan City, supra
2. Sison v. Ancheta 130 SCRA 654
3. Tolentino v. Sec of Finance, 249 SCRA 628
4. City of Baguio v de Leon G.R. No. L-24756, October 31, 1968

G. Grant by Congress of authority to the President to impose tariff

rates
Sec. 28(2), Art. VI, 1987 Constitution

H. Tax Exemption of real properties of charitable institutions, churches,

parsonages, or convents, mosques and non-profit cemeteries and
real properties actually, directly and exclusively used for religious,
7

charitable or educational purposes

Sec. 28(3), Art. VI, 1987 Constitution
Cases:
1. Lladoc v. CIR, G.R. No. L-19201 June 16, 1965
2. Abra Valley College v. Aquino, 162 SCRA 106
3. Abra v. Hernando G.R. No. L-49336, August 31, 1981
4. Lung Center v. Quezon City, G.R. No. 144104, June 29, 2004

I. Tax Exemption of non-stock, non-profit educational institutions

Sec. 4(3), Art. XIV, 1987 Constitution
Revenue Memorandum Circular 76-2003
Case:
CIR v. CA & YMCA 298 SCRA 83

J. Majority vote of Congress for grant of tax exemption

Sec. 28(4), Art. VI, 1987 Constitution
Case: John Hay Peoples Alternative Coalition v Lim G.R. No.
119775, October 24, 2003

K. Prohibition on use of tax levied for special purpose

Sec. 29(3) Article VI, 1987 Constitution

L. Presidents veto power on appropriation, revenue, tariff bills

Sec. 27 (2), Art. VI, 1987 Constitution

M. Judicial power to review legality of tax

Sec. 5 (2) (b), Art. VIII, 1987 Constitution

N. Taxation by LGUs
Sec. 5, Article X, 1987 Constitution

O. Delegation of Legislative Authority to fix Tariff Rtaes, Import and

Export Quotas, etc.
Sec. 28(2), Article VI, 1987 Constitution

P. Origin of Revenue, Appropriation and Tariff Bills

Sec. 24, Art. VI, 1987 Constitution
8

C. Double Taxation and Tax Exemptions

I. Double taxation
a. Direct Double Taxation
Case: Villanueva v City of Iloilo G.R. No. L-26251, December 28, 1968
b. Indirect Double Taxation
c. Constitutionality of double taxation
d. Modes of eliminating double taxation

Cases:
1. CIR v. SC Johnson & Sons, Inc. 309 SCRA 87
2. Procter & Gamble Co. v. Mun of Jagna, 94 SCRA 894
3. Sanchez v. CIR 97 Phil. 867

II. Forms of escape from taxation

a. Shifting of tax burden
1) Ways of shifting the tax burden
2) Taxes that can be shifted
3) Meaning of impact and incidence of taxation
b. Tax avoidance
c. Tax evasion
Sec. 254, NIRC
Cases:
1.Republic v. Gonzales, 13 SCRA 633
2.Delpher v. Traders v. IAC, 157 SCRA 349
3.CIR v. Lincoln Philippine Life, GR 119176, March 19, 2002
III. Exemption from taxation
a. Meaning of exemption from taxation
b. Nature of tax exemption
c. Kinds of tax exemption
d. Rationale/grounds for exemption
e. Revocation of tax exemption
Cases:
1. Coconut Oil Refiners v. Torres, GR 132527, July 29, 2005
2. Floro Cement v. Hen. Gorospe, 200 SCRA 480
9

3. Luzon Stevedoring v. CTA, 163 SCRA 647

4. Republic Flour Mills v. CIR, 31 SCRA 148

D. Other doctrines in Taxation

I. A. Prospectivity of Tax Laws

Case: Pansacola v CIR G.R. No. 159991, November 16, 2006

B. Construction and Interpretation of Tax Laws

Cases:
1. Stevedoring v. Trinidad, 43 Phil. 803
2. Umali v. Estanislao, 209 SCRA 446
3. Collector v. La Tondena 5 SCRA 665

II. Non-retroactivity of rulings

Cases:
1. CIR v. CA GR 119761, August 29, 1996
2. CIR v. Michel Lhuiller GR 150947, July 25, 2003
3. CIR v. Benguet Corp., GR 134587, July 28, 2005
4. CIR v. CA G.R. No. 117982, Feb 6. 1997
5. PBCom v. CIR, G.R. No. 112024, Jnauary 28, 1999

III. Set-off of Taxes

Cases:
1. Francia v. IAC, G.R. No., L67649, June 28, 1998
2. Republic of the Philippines v. Mambulao, supra
3. Philex Mining Corp.v. CIR G.R. No., 125704, August 28, 1998
4. Domingo v. Garlitos, G.R. No. L-18994, June 29, 1963

IV. Taxpayer Suit

Case: Anti-graft League of the Phil. V. San Juan, G.R. No. 97787
August 1, 1996
Abaya v. Ebdane, G.R. No. 167919 February 14, 2007

V. Tax Amnesty:
Case: Republic v IAC; G.R. No. L-69344, April 26, 1991

E. Sources of Tax Laws

10

i. Constitution
ii. Statutes
iii. Issuances by the Secretary of Finance
iv. Administrative Issuances by the BIR
Cases:
1. CIR v. CA and Fortune, GR No. 119761, 29 August 1996
2. PB Com v. CIR, 302 SCRA 241
v. Tax Ordinances
Case:
Tuazon v. CA, 212 SCRA 739
vi. Tax Treaties
Case:
Tanada v. Angara, GR118295, May 2, 1997
vii. Case Laws

F. Taxation as a process
Stages in the Tax process
1. Levy
2. Assessment and Collection
3. Payment
4. Refund

II. INCOME TAXATION2

A. Income
Sec. 36 Revenue Regulations No. 2
Cases:
1. Conwi v. CTA, 213 SCRA 83
2. CIR v. BOAC, 149 SCRA 395
3. Madrigal v. Rafferty, 38 Phil. 414

B. Income Taxation
1. Income Tax Systems
2. Features of the Philippine Income Tax Law

2
11

C. Criteria in Imposing Philippine Income Tax

1. Citizenship Principle
2. Residence Principle
3. Source Principle

D. Tax Treaties

E. Taxable Period

F. Taxpayers
1. Individual Taxpayers
a. Citizens
i. Resident citizens
ii. Non-resident citizens
iii. Overseas Filipino Worker
b. Aliens
i. Resident aliens
ii. Non-resident aliens
a. Engaged in trade or business
b. Not engaged in trade or business
c. Special Class of Individual Employees
i. Minimum wage earner
2. Corporations
a. Domestic corporations
b. Foreign corporations
i. Resident foreign corporations
ii. Non-resident foreign corporations
3. Partnerships
a. General Professional Partnerships

4. Estates and Trusts

5. Co-ownerships

G. Income
a. Definition
12

b. Nature
c. When income is taxable
d. Tests in determining whether income is earned for tax purposes

Secs 43-44, NIRC

Sec. 51-53 Revenue Regulations No. 2
Cases:
1. Limpan v. CIR 17 SCRA 703
2. Republic v. dela Rama, 18 SCRA 861

F. Gross Income
a. Definition
b. Concept of income from whatever source derived
c. Gross Income vis--vis Net Income vis--vis Taxable Income
d. Classification of Income as to Source

G. Sources of income subject to tax

1. Compensation Income
Cases:
1. Henderson v. Collector, 1 SCRA 649
2. CIR v. Castaneda, 203 SCRA 72
3. Polo v. CIR, GR L-78780, July23, 1987
2. Fringe Benefits
3. Professional Income
4. Income from Business
5. Income from Dealings in Property
a. Types of Properties
b. Types of Gains from dealings in property
1. Ordinary income vis--vis Capital gain
Case:
China Banking Corporation v. CA, GR No. 125508 July 19, 2000
2. Installment Sales v. Deferred Sales
Case:
Banas v. CA, G.R. No. 102967. February 10, 2000
3. Wash sale
4. Actual gain vis--vis Presumed gain
5. Long term capital gain vis--vis Short term capital gain
13

6. Net capital gain, Net capital loss

7. Computation of the amount of gain or loss
General rule
Where no gain or loss shall be recognized
Exceptions
a. Meaning of merger, consolidation, control
b. Transfer of a controlled corporation
8. Income tax treatment of capital loss
a. Capital loss limitation rule
b. Net loss carry-over rule
9. Dealings in real property situated in the Philippines
10. Dealings in shares of stock of Philippine corporations
11. Sale of principal residence
6. Passive Investment Income
a. Interest Income
b. Dividend Income
Cases:
1. Republic v. dela Rama, 18 SCRA 861
2. CIR v. CA and ANSCOR, G.R. No. 108576, January 20, 1999
c. Royalty Income
Case:
Phil. American Life v. CIR, GR SP. No. 31283, April 25, 1995
d. Rental Income
7. Annuities, Proceeds from life insurance or other types of insurance
8. Prizes and awards
9. Pensions, retirement benefit, or separation pay
Case:
CIR v. GCT Retirement, 0307 SCRA 487
10. Income from any source whatever

F. Source rules in determining income from within and without

G. Situs of Income Taxation

Cases:
1. CIR v. Japan Airlines, 202 SCRA 450
2. Manila Electric Co. v. Yatco, 69 Phil. 89
3. NDC v. CIR, 151 SCRA 472
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H. Exclusions from Gross Income

1. Rationale for the exclusions
2. Taxpayers who may avail of the exclusions
3. Exclusions distinguished from deductions and tax credit
4. Under the Constitution
5. Under the Tax Code
6. Under a Tax Treaty
7. Under Special Laws

I. Deductions from Gross Income

1. General rules
Cases:
1. Commissioner v. Phil. Acetylene, 39 SCRA 70
2. BPI v. Trinidad, 45 Phil. 384
3. CIR v. Central Luzon Drug Corp., GR No. 159647, 15 April 2005
2. Return of capital (cost of sales or services)
3. Itemized deductions
a. Expenses
1. Requisites for deductibility
a. Nature: Ordinary and necessary
b. Paid and incurred during taxable year
Cases:
1. CIR v. Isabela Cultural Corporation, 2007
2. CIR v. General Foods, GR 143672, April 24, 2003
3. Gancayco v. Collector, 1 SCRA 980

2. Salaries, wages and other forms of compensation for personal

services actually rendered
3. Traveling/Transportation expenses
4. Cost of materials
5. Rentals and/or other payments for use or possession of property
6. Repairs and maintenance
7. Expenses under lease agreements
8. Expenses for professionals
9. Entertainment expenses
10. Political campaign expenses
15

11. Training expenses

b. Interest
1.Requisites for deductibility
2. Non-deductible interest expense
3. Interest subject to special rules
Cases:
1. CIR v. Itogon-Suyoc Mines, GR 25399, July 29, 1969
2. Paper Industries v. CA, 250 SCRA434
4. Tax Arbitrage Scheme

c. Taxes
d. Losses
1. Requisites for deductibility
Cases:
1. Fernandez Hermanos v. CIR, 29 SCRA 552
2. Plaridel Security v. CIR, 21 SCRA 1187
2. Other types of losses
a. Capital losses
b. Securities becoming worthless
c. Losses on wash sales of stocks or securities
d. Wagering losses
e. NOLCO
Rev. Regs. 14-2001
75% interest retention rule
Case:
PICOP v. CIR, GR No. L-106949, 1 December 1995
e. Bad debts
Requisites for deductibility
Case:
Phil. Refining v. CA, 256 SCRA 667
f. Depreciation
1. Requisites for deductibility
2. Methods of computing depreciation allowance
a. Straight-line method
b. Declining-balance method
c. Sum-of-the-years-digit method
Case:
16

Basilan Estates v. CIR, 21 SCRA 17

g. Charitable and other contributions
1. Requisites for deductibility
2. Amount that may be deducted
Case:
Roxas v. CTA, 23 SCRA 276
h. Contributions to pension trusts
Requisites for deductibility

4. Optional standard deduction

5. Personal and additional exemption

a. Basic personal exemptions
b. Additional exemptions for taxpayer with dependents
c. Status-at-the-end-of-the-year rule
6. Items not deductible
a. General rules
b. Personal, living or family expenses
c. Amount paid for new buildings or for permanent improvements
d. Amount expended in restoring property
e. Premiums paid on life insurance policy covering life or any other officer
or employee financially interested
f. Interest expense, bad debts, and losses from sales of property between
related parties
g. Losses from sales or exchange or property
h. Non-deductible interest
i. Non deductible taxes
j. Non-deductible losses
k. Losses from wash sales of stock or securities

J. Exempt Corporations

K. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

a. General rule
b. Taxation on Compensation Income
1. Inclusions
2. Exclusions
17

3. Deductions
c. Taxation of compensation income of a minimum wage earner
d. Taxation of Business Income/Income from Practice of Profession
e. Taxation of Passive Income
f. Taxation of capital gains

L. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General rules
b. Cash and/or property dividends
c. Capital gains

M. Exclude Non-resident Aliens Not Engaged in Trade or Business

N. Individual Taxpayers Exempt from Income Tax

a. Senior citizens
b. Exemptions granted under international agreements

O. Taxation of Domestic Corporations

Case:
CIR v. Batangas Tayabas Bus Co. 102 Ohil 822

a. Tax payable
1.Regular tax
2. Minimum corporate income tax (MCIT)
b. Allowable deductions
1. Itemized deductions
2. Optional standard deduction
c. Taxation of Passive Income
d. Taxation of Capital Gains
e. Tax on proprietary educational institutions and hospitals
f. Tax on government-owned or controlled corporations, agencies or
instrumentalities
g. Large Taxpayers
Revenue Regulations No. 1-98

P. Taxation of Resident Foreign Corporations

a. General rule
18

b. With respect to their income from sources within the Philippines

c. Minimum corporate income tax
d. Tax on certain income
e. Exclusions
Cases:
1. Winship v. Philippine trust Co., 90 Phil 744
2. Marubeni v. CIR 177 SCRA 500

Q. Taxation of Non-resident Foreign Corporations

a. General rule
b. Tax on certain income
c. Exclusions
Cases:
1. CIR v. Boac, 149 SCRA 395
2. Marubeni v. CIR, supra

R. Improperly Accumulated Earnings of Corporations

Case:
Cyanamid Phils. v. CA, G.R. No. 108067, January 20, 2000

S. Exemption from tax on corporations

T. Taxation of Partnerships, Co-ownership and General Professional

Partnerships
Cases:
1. Ona v. CIR 45 SCRA78
2. Obillos v. CIR, 139 SCRA 436
3. Pascual and Dragon v. CIR 166 SCRA 560

U. Taxation on Estates and Trusts

a. Application
b. Exception
c. Determination of tax
Cases:
1. CIR v. Visayas Electric, 23 SCRA 715
2. CIR v. CA, 207 SCRA 487
19

V. Withholding tax
a. Concept
b. Kinds
1.Withholding of final tax o certain incomes
2. Withholding of creditable tax at source
c. Withholding on wages
1. Requirement for withholding
2. Tax paid by recipient
3. Refunds or credits
4. Year-end adjustment
5. Liability for tax
d. Withholding of VAT
e. Filing of return and payment of taxes withheld
f. Final withholding tax at source
g. Creditable withholding tax
h. Fringe benefit tax

W. Tax returns
I. Income Tax Returns
1. Individual Tax Returns
a. Filing of individual tax returns
i. Who are required to file
a. Return of husband and wife
b. Return of parent to include income of children
c. Return of persons under disability
ii. Who are not required to file
iii. Where to file
iv. When to file

2. Corporate Returns
a. Requirement for filing returns
1. Declaration of quarterly corporate income tax
2. Final adjustment return
3. Taxable year of corporations
4. Extension of time to file return
b. Return of corporation contemplating dissolution or reorganization
c. Return on capital gains realized from sale of shares of stock not
20

traded in the local stock exchange

Case:
Paseo Realty and Development Corp. v. CA, G.R. No. 119286,
October 13, 2004