- Conwi v.

CTA, 213 SCRA 83

PART B: INCOME TAXATION - CIR v. BOAC, 149 SCRA 395

I. Overview and General Principles - Madrigal v. Rafferty, 38 Phil 414

A. Income - International Freighting v. CIR, 1354 F 2d 310

- Sec. 36, Revenue Regulations No. 2 - Anderson v. Posadas, 66 Phil 205

SECTION 36. Meaning of net income. — The tax B. Income Tax
imposed by law is upon income. In the computation of the tax,
C. When is Income Taxable?
various classes of income must be considered:
- Secs. 43-44, NIRC
(a) Income, in the broad sense, meaning all wealth which
flows into the tax-payer other than as a mere return of SEC. 43. General Rule. - The taxable income shall be
capital. It includes the forms of income specifically described computed upon the basis of the taxpayer's annual
as gains and profits, including gains derived from the sale or accounting period (fiscal year or calendar year, as the
other disposition of capital assets. Income cannot be case may be) in accordance with the method of
determined merely by reckoning cash receipts, for the statute accounting regularly employed in keeping the books of
recognizes as income determining factor other items, among such taxpayer, but if no such method of accounting has been
which are inventories, accounts receivable, property so employed, or if the method employed does not clearly reflect
exhaustion, and accounts payable for expenses incurred. the income, the computation shall be made in accordance with
(b) Gross income, meaning income (in the broad sense) less such method as in the opinion of the Commissioner clearly
income which is by statutory provision or otherwise exempt reflects the income. If the taxpayer's annual accounting period
from the tax imposed by law. is other than a fiscal year, as defined in Section 22(Q), or if the
taxpayer has no annual accounting period, or does not keep
(c) Net income, meaning gross income less statutory books, or if the taxpayer is an individual, the taxable income
deductions. The statutory deductions are, in general, though shall be computed on the basis of the calendar year.
not exclusively, expenditures other than capital expenditures,
connected with production of income. SEC. 44. Period in which Items of Gross Income
Included.- The amount of all items of gross income shall
(d) In the case of a taxpayer other than a corporation as be included in the gross income for the taxable year in
defined in Section 84 (b) of the Code, net income means gross which received by the taxpayer, unless, under methods of
income less exemptions. Ordinarily the net income is to be accounting permitted under Section 43, any such amounts are
computed in accordance with the method of accounting to be properly accounted for as of a different period. In the case
regularly employed in keeping the books of the taxpayer. of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls
the date of his death, amounts accrued up to the date of his taxpayer. Where a corporation contingently credits its
death if not otherwise properly includible in respect of such employees with bonus stock, but the stock is not available to
period or a prior period. such employees until some future date, the mere crediting on
the books of the corporation does not constitute receipt.

- Secs. 51-53, Revenue Regulations No. 2
SECTION 53. Examples of constructive receipt. —
SECTION 51. When income is to be reported. —
Gains, profits, and income are to be included in the gross When interest coupons have matured and are payable, but
income for the taxable year in which they are received by have not been cashed, such interest payment though not
the taxpayer, unless they are included when they accrue to collected when due and payable, is nevertheless available to
him in accordance with the approved method of accounting the taxpayer and should therefore be included in his gross
followed by him. If a person sues in one year on a pecuniary income for the year during which the coupons matured. This is
claim or for property, and money or property is recovered on a true if the coupons are exchanged for other property instead of
judgment therefore in a later year, income is realized in that eventually being cashed. Defaulted coupons are income for
year, assuming that the money or property would have been the year in which paid. The distributive share of the profits
income in the earlier year if then received. This is true of a of a partner in a general co-partnership duly registered is
recovery for patent infringement. Bad debts or accounts regarded as received by him, although not distributed.
charged off subsequent to March 1, 1913, because of the fact Interest credited on savings bank deposits, even though the
that they were determined to be worthless, which are bank nominally has a rule, seldom or never enforced, that it
subsequently recovered, whether or not by suit, constitute may require so many days' notice in advance of cashing
income for the year in which recovered, regardless of the depositors' checks, is income to the depositor when credited.
date when amounts were charged off. An amount credited to shareholders of a building and loan
association, when such credit passes without restriction to
SECTION 52. Income constructively received. — the shareholder, has taxable status as income for the year of
Income which is credited to the account of or set apart for the credit. When the amount of such accumulations has not
a taxpayer and which may be drawn upon by him at any become available to the shareholder until the maturity of a
time is subject to tax for the year during which so share, the amount of any share in excess of the aggregate
credited or set apart, although not then actually reduced to amount paid in by the shareholder is income for the year
possession. To constitute receipt in such a case the income of maturity of the share.
must be credited to the taxpayer without any substantial
limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made. A book entry, if
- Limpan v. CIR, 17 SCRA 703
made, should indicate an absolute transfer from one account
to another. If the income is not credited, but is set apart, such - Republic v. Dela Rama, 18 SCRA 861
income must be unqualifiedly subject to the demand of the
- Eisner v. Macomber, 252 US 89 deeds of sale and conveyances of real property imposed under
Section 196 shall not apply. However, since the transaction is
- Raytheon Production v. CIR, 144 F2d 110 in the nature of an equitable mortgage and made
- BIR Ruling 91-99, July 8, 1999 primarily as a security for the payment of a pre-existing
loan, the same is subject instead to the rate of
CAPITAL GAINS TAX; Pacto de retro - The terms of the documentary stamp tax imposed under Section 195. (BIR
agreement between CB-BOL and TMBC calling for the transfer Ruling No. 091-99 dated July 8, 1999)
of its assets, although denominated as Deed of Assignment
with Right to Repurchase, is in reality an equitable mortgage - CIR v. Tours Specialist, 183 SCRA 402
created over the said properties. Instruments covering a sale - RMC 39-07
with right to repurchase may be captioned or labeled as such.
However, when any or more of the circumstances enumerated - CIR v. Javier, 199 SCRA 824
under Article 1602, Civil Code, obtain in the agreement, the
contract shall be presumed as an equitable mortgage. (BIR - BIR Ruling No. 123-97, Nov. 10, 1997
Ruling No. 217-81 dated November 6, 1981). This is relevant in - BIR Ruling No. 029-98, Mar. 19, 1998
determining whether or not the transaction had is subject to
the corresponding taxes, i.e. capital gains tax documentary INCOME TAX; Income tax paid or accrued (now incurred)
stamp tax. Insofar as corporations are concerned, its by a company within a taxable year not allowed as
liability to the capital gains tax imposed on the presumed deduction
gains realized from the sale, exchange or disposition of
lands and/or buildings is governed by Section 27(D)(5) of (a) BIR is prohibited from issuing further comments on
the Tax Code of 1997. Thus, for a corporation to be liable Questions Nos. 1, 2, 3, 7and 8 issued by the Energy Regulatory
to the tax, a true sale, exchange or disposition of capital Board in relation to ERB Case No. 93-118 entitled "Meralco vs.
assets must have transpired. Unlike in transactions made Energy Regulatory Board, et. al." in so far as the rate fixing
by individuals under Section 24(D)(1) of the Code, where all issue is concerned considering that the issues are all subjudice
sales of real property classified as capital assets, including pending before the Court of Appeals. With regard to the
pacto de retro or other forms of conditional sales are question of whether the appraisal increase of property, plant
subject to the capital gains tax, no similar qualifications and equipment of electric utilities is taxable, the general
exist for capital asset transaction of a corporation. Hence, rule is that, mere increase in the value of property without
the latter is subject to such tax only upon a close and actual realization, either through sale or other disposition,
completed transaction in which income is realized. Accordingly, is not taxable. However, if by reason of appraisal, the cost
this Office holds that only upon the executing of the final or basis of property is increased and the resulting basis is used
absolute deed of sale covering the properties of the bank as the new tax base for purposes of computing the allowable
subject of the pacto de retro, will the payment of the 6% depreciation expense, the net difference between the
capital gains tax apply. By the same token, since no actual original cost basis and new basis due to appraisal is taxable
conveyance of real property is to be made, the stamp tax on under the economic benefit principle.
(b) BIR is not following American Laws on taxation because we - Business Income – income derived from business or
have our tax laws, including rules and regulations utilization of capital, including profit or gain
implementing our tax laws. However, under the doctrine of derived from sale or conversion of assets
precedent, a court may apply American Laws or Court
Decisions. - Income from Trade/Practice of Profession – value
derived from the exercise of profession
(c) The amendments introduced by EO No. 37 to then Section
21(c)(2) of the Tax Code of 1997 provides that dividend - Passive Income – an income in which the taxpayer
received by a citizen or resident alien from a domestic merely waits for the amount to come in. This is
corporation is subject to income tax at the rate of 15% in subject to final tax
1986, 10% effective January 1, 1987, 5% effective January - Compensation Income – gain derived from labor,
1, 1988 and 0% effective January 1, 1989. However, Sec. especially employment (earned from ER-EE) such
22 (a) and (b) of the same Code provides that dividends as salaries and commissions and are subject to
received by a non resident alien individual, whether normal tax
engaged or not in trade or business in the Philippines,
from a domestic corporation is subject to final withholding - Presumed Gain
tax of 30% of such dividend income.
- Sec. 24(D), NIRC
(d) For purposes of computing the taxable income of domestic
corporation derived from within and without the Philippines, (D) Capital Gains from Sale of Real Property. -
the allowable deductions are limited to those provided under (1) In General. - The provisions of Section 39(B)
Section 29 of the Tax Code of 1997 for taxable year 1997 and notwithstanding, a final tax of six percent (6%) based on
prior years but for taxable year 1998, Section 34 of the Tax
the gross selling price or current fair market value as
Code of 1997governs. determined in accordance with Section 6(E) of this Code,
(e) Pursuant to then Section 117 of the Tax Code of 1997, as whichever is higher, is hereby imposed upon capital gains
amended by RA 8241, the 2% franchise tax of electric, gas and presumed to have been realized from the sale, exchange,
water utilities is based on gross receipts derived from the or other disposition of real property located in the
business covered by the lawgranting the franchise. Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That
the tax liability, if any, on gains from sales or other
D. Capital Gain; Ordinary Gain; Presumed Gain dispositions of real property to the government or any of its
- Capital Gain – income derived from sale of assets not used in political subdivisions or agencies or to government-owned or
trade or business. controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the
- Ordinary Gain taxpayer;
(2) Exception. - The provisions of paragraph (1) of this F. Criteria in Imposing Philippine Income Tax
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or - Nationality/Citizenship
disposition of their principal residence by natural - Residence
persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence - Source
within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital gains SEC. 23. General Principles of Income Taxation in the
tax imposed under this Subsection: Provided, That the Philippines. - Except when otherwise provided in this Code:
historical cost or adjusted basis of the real property sold or (A) A citizen of the Philippines residing therein is taxable on all
disposed shall be carried over to the new principal residence income derived from sources within and without the
built or acquired: Provided, further, That the Commissioner
Philippines;
shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed (B) A nonresident citizen is taxable only on income derived
return of his intention to avail of the tax exemption herein from sources within the Philippines;
mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided, (C) An individual citizen of the Philippines who is working and
finally, That if there is no full utilization of the proceeds of sale deriving income from abroad as an overseas contract worker is
or disposition, the portion of the gain presumed to have been taxable only on income derived from sources within the
realized from the sale or disposition shall be subject to capital Philippines: Provided, That a seaman who is a citizen of the
gains tax. For this purpose, the gross selling price or fair Philippines and who receives compensation for services
market value at the time of sale, whichever is higher, shall be rendered abroad as a member of the complement of a vessel
multiplied by a fraction which the unutilized amount bears to engaged exclusively in international trade shall be treated as
the gross selling price in order to determine the taxable portion an overseas contract worker;
and the tax prescribed under paragraph (1) of this Subsection
(D) An alien individual, whether a resident or not of the
shall be imposed thereon. Philippines, is taxable only on income derived from sources
E. Income Tax Systems within the Philippines;

- Global Tax System (E) A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
- Schedular Tax System
(F) A foreign corporation, whether engaged or not in trade or
- Sison v. Ancheta, GR L-59431, July 25, 1984 business in the Philippines, is taxable only on income derived
from sources within the Philippines.
- Semi-schedular or Semi-global Tax
System G. Tax Treaties