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COVERAGE OF TAXATION LAW REVIEW  Overseas Contract Workers Sec.

23 (C), 24
(A) (b)
I. Basic Principles of Constitutional  Resident Aliens Rev. Reg. sec 5, 23 (D), 24
Limitations (A) (c)
a) Due process clause which could be either  Non-Resident Aliens Engaged in trade or
substantive due process and procedural due business sections 25 (A) (1)
process clause  Non-Resident Aliens Not Engaged in trade
b) Equal protection clause or business sec. 25 (B)
Read:  Aliens Employed in Multi-National
 Ormoc Sugar Central Corporations sec. 25 (C) and Rev. Reg. 12-
vs. City Treasurer 22 SCRA 603 2001
 Tiu vs. CA 301 SCRA 178  Aliens Employed in Offshore Banking
c) Article III sec. 1 of the 1987 Constitution – Units sec 25 (D)
non-impairment clause  Aliens Employed in petroleum Service
d) Article III sec. 5 – freedom of religion Contractors & Subcontractors sec. 25 (E)
e) Article III sec. 20 – non-payment of poll tax -Corporate Income Taxpayers
f) Article VI sec. 28 par. 2 – flexible tariff  Domestic Corporations sec. 23 (E), and sec 27 of
clause NIRC
g) Article VI sec. 28 par. 3 – exemption from  Resident Foreign Corporations sec. 22 (H) and
real property tax Read: (28)A
 Herrera vs. Quezon City 3 SCRA 186  Non-Resident Foreign Corporations sec. 22 (1)
 Abra vs. Hernando 107 SCRA 104 and 28 (B)
 Abra Valley vs. Aquino 52 SCRA 106 -Estates and Trusts sec. 60-66 of NIRC
 Philippine Lung Center vs. Quezon
City 433 SCRA 119 Different Kinds of Income Tax
h) Article VI sec. 28 par. 4 – qualified majority 1. Net Income Tax secs. 24 (A), 25 (A) (1), 26,
in tax exemption 27 (A) (B) (C), 28 (A) up to 3rd par. 31 and
i) International double taxation 32 (A)
 CIR vs. Johnson 309 SCRA 87 2. Gross Income Tax secs. 25 (B) first part and
j) Doctrine of equitable recoupment 28 (B) (1)
k) Doctrine of Set-off or compensation in 3. Final Income Taxes sec. 57 (A)
taxation 4. Minimum Corporate Income Tax of 2% of
 Republic vs. Mambulao 4 SCRA 622 the Gross Income secs. 27 (E), 28 (A) (2)
 Domingo vs. Garlitos 8 SCRA 443 5. Improperly Accumulated Earnings Tax of
 Francia vs. IAC 162 SCRA 753 10% of its taxable income sec. 29 NIRC
 Caltex vs. COA 208 SCRA 726 Rev. Reg. 2-2001
 Philex vs. CIR 294 SCRA 687  Optional Corporate Income Tax of 15% of
its gross income sections 27 (A) 4th to 10th
II. Income Tax Law par. And 28 A(1) but only up to the 4th
Section 22-26 of the National Internal Revenue paragraph
a) Read in the commentaries or magic notes the -Proceed to section 42 and 23 of the NIRC
different kinds of:  NDC vs. Comm 151 SCRA 472
1. Income Taxpayers  Comm. Vs. IAC 127 SCRA 9
2. Income Taxes -Then go to sec. 39 of NIRC
3. Sources of Income sec. 42 of NIRC  Calazans vs. Comm. 144 SCRA 664 RR 7-
- Income Taxpayers 2003
a) Individuals -Then proceed to sec. 24 (A), 25 (A) (1), 25
b) Corporation B,C,D,E, 27 A,B,C; 28 (A) (1), 28 (A) (6) and
c) Estates and Trusts – sec 51 (D)
-Individuals are classified -Then continue to sec 24 B 1, 25 B,C,D,E; 27
 Resident Citizens sec. 23 (A), sec 24 (A) (D) (1)
(a) -Then go to se. 24 (B) (2) sec. 73
 Non-Resident Citizens sec 23 (B), 24 (A)  Comm. Vs. Manning 66 SCRA 14
(b) 22 (E)  Anscor vs. Comm. 301 SCRA 152

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-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D) (4); 28 (A) -Upon reading sec. 60-66, read Ona vs. Bautista 45
(7) (D); 32 B (7) (a) SCRA 74

- Then you go to sec. 24 C, 25A (3); 25 B, C, D, III. Estate Tax

E, 27 D (2); 28 (A) (7) (C); 28 B (5) (C) RA 7717 -Sections 84-97 see sec. 104
sec. 127 NIRC -Upon reading sec. 85 (B) read Vidal de Roces vs.
- Then you go to sec. 24 D (1); 25 (A) (3); 25 (B) Posadas 58 Phil. 108
last par. 27 (D) (5) Dizon vs. Posadas 57 Phil 465
 China Bank vs. Court of Appeals 336 SCRA ___; -Sec. 85 (G) compare with sec. 100
RR 7-2003 -sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 24 (D) (2) read RR 13-1999 -Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
-Upon reading sec. 27 (A) go to sec. 22 (B) Sandiganbayan 273 SCRA 47
 Batangas vs. Collector 102 Phil. 822
 Evangelista vs. Collector 102 Phil 140 IV. Donors Tax Law
 Reyes vs. Comm. 24 SCRA 198 - Sections 98-104
 Ona vs. Bautista 45 SCRA 74 - G and Cumulative methods of filing donor’s tax
 Obillos vs. Comm 139 SCRA 436 returns sections 99 (A), 103 (A) (1) and RR 2-2003
 Pascua vs. Comm. 166 SCRA 560 - Sections 100 and 85 (9)
 Afisco vs. Comm. 302 SCRA 1
V. Value Added Tax
- Sections 105-115
-Upon reading sec. 27 (C) of NIRC see RA 9337 then go
-Read RA 9337
to sec. 32 (B) (7) (b) of NIRC, sec. 133 par (o) of LGC,
-Read ABAKADA vs Comm.
sec. 154 of the LGC.
GR 168056, Sept. 1, 2005
 Pagcor vs. Basco 197 SCRA 52
 Mactan vs. Cebu 261 SCRA 667 VI. Remedies Under the Internal Revenue Code
 LRT vs. City of Manila 342 SCRA 692 -Sections 202-229
-RR 12-99
-Proceed to sections 27 (D) (1), 27 (D) (2), 27 (D) (5)  Phoenix vs Comm 14 SCRA 52
read RA 9337, 28 (A) (7) (b), 28 (B) (5) (C), 27 (D) (4),
 Basilan vs. Comm. 21 SCRA 17
(28) (A) (7) (d), 28 (B) (5) (b)
 Yabut vs. Flojo 115 SCRA 278
 Marubeni vs. CIR 177 SCRA 500
 Union Shipping vs. Comm 185 SCRA 547
 Proctor & Gamble vs. Comm 160 SCRA 560
 Comm. vs. TMX 205 SCRA 184
 Same case Proctor and Gamble on the Motion for
 Comm. vs. Philamlife 244 SCRA
Reconsideration 204 SCRA 377
 Comm. vs. CA & BPI 301 SCRA 435
 Wonder vs. Comm 160 SCRA 573
 BPI vs. Comm. 363 SCRA 840
-Proceed to sec. 27(D) (5) -Prescription sections 203 and 222 of NIRC, sec.
then sections 27 (E) and 28 (A) (2) 194 of the LGC, sec. 270 of the LGC, sec. 1603 of
-Go to sec. 28 (A) (3) read RR 15-2002 Tariff and Customs Code
-Go to sec. 28 (A) (4) see RA 9337 -Protest sec. 228 of NIRC and RR 12-99 sec. 195 of
-Then see sec 28 (A) (5) see Marubeni vs. Comm 177 LGC, 252 LGC, sec. 2313 of Tariff & Customs
SCRA 500 Code and RA 7651
-Proceed to sec. 28(B) (5) (a) and sec 32 (B) (7) (a)
VII. Local Taxation
 Read Mitsubishi vs. Comm 181 SCRA 214
- Sections 128-196 of LGC
-Then go to sec. 29 and Rev. Reg. 2-2001
-Proceed 1st to sec. 186 read Bulacan vs. CA 299
-Upon reading sec. 32 (B) 1 and 2, read sec. 85 par (e),
SCRA 442
sec. 108A and sec. 123 of the NIRC
-Then proceed to 187
-Proceed to sec. 33 read Rev. Reg. 3-98
-Then to 151
-then go to sec. 34 (A) (1) (a) see Aguinaldo vs. Comm.
112 SCRA 136, RR 10-2002
-Under sec. 133 (e) read Palma vs. Malangas 413
-Under Sec. 34 (B) read RR 13-2000
SCRA 572
-Upon reading sec. 49 read Banas vs. CA 325 SCRA 259
-Under 133 (h) read Pililia vs. Petron 198 SCRA
and Filipina vs. Comm. 316 SCRA 480

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-Under 133 (i) read First Holdings Co. vs. 1. Basic Principles including Constitutional Provisions
batangas City 300 SCRA 661 2. Income Tax
-Under 133 (l) read Butuan vs. LTO 322 SCRA 3. Estate Tax
805 4. Donor’s Tax
-Under 137 read sec. 193 of LGC 5. Remedies
 Misamis vs. Cagayan de Oro 181 SCRA 38 6. Local Tax
 Reyes vs. San Pablo City 305 SCRA 353 7. Real Property Tax
 Meralco vs. Laguna 306 SCRA 750 8. Tariff and Customs Code
 PLDT vs. Davao City 363 SCRA 522 9. Court of Tax Appeals
10. VAT (although not part of the coverage of the Bar
- Co-relate sec. 139 and 147 of LGC Exams, questions have been asked since 1999)
- Under sec. 140 of the LGC see sec. 125 of the
Internal Revenue Code  Title 5,6 and 7 are always included in the coverage
- Under sec. 150 of the LGC read the following:  No computations in the bar
 Phil. Match vs. Cebu 81 SCRA 99  There are only 1 or 2 questions in the Bar about Basic
 Allied Thread vs. Manila 133 SCRA 338 Principles
 Sipocat vs. Shell 105 Phil. 1263  What are the favorite topics in the Bar?
→ 12 questions on Income Tax
 Iloilo Bottles vs. Iloilo City 164 SCRA 607
→ 8-10 questions on remedies
→ 8-10 questions allocated to the 7 topics
VIII. Real Property Tax
- Sections 197-294
- Sec. 235
 LRT vs. Manila 342
► Taxation is an inherent power of the State.
SCRA 692
 Cebu City vs. Mactan Q: What do you mean by INHERENT?
261 SCRA 667 A: The power to tax is not provided for in the law,
statute or constitution; it depends on the existence of the
IX. Tariff & Customs Code state. No law or legislation for the exercise of the power
- Special Customs Duty sec. 301-304 of TCC to tax by the national government.
- Regukar Customs Duty sec. 104 of TCC
- RA 7631 Q: Do local governments exercise this inherent power?
A: No. Only the National Government exercises the
inherent power to impose taxes.
X. Court of Tax Appeals
- RA 1125 as amended by RA 9282 Q: The taxing power of local governments is a
DELAGATED power. Delegated by whom?
Rules in the Classroom: A: Delegated by Congress through law in case of
1. do not be absent autonomous regions, and delegated by the constitution in
 if you are absent, you have to transcribe what case of LGUs not considered an autonomous region.
happened in class when you were out.
 The next meeting you attend class, consider ► Cities, provinces and municipalities → power granted
yourself a resident of balic-balic, babalikbalikan ka under Art. X Sec. 5&6 of the Constitution
sa recit.
 Exception: if you get married. ► Autonomous Regions → power conferred by
2. read the assignment. Wag zapote ang aral. Congress through law. Art. X Sec. 20 #2 of the
3. holiday – make up class probably on a Sunday Constitution is a non-self-executing provision. Thus the
4. allowed to glance at your notes, wag lang power is granted by Congress because said provision
pahalata/garapal requires an enabling law.
5. materials:
 codal ► Article X, Section 5 is self-executing thus the power
 commentaries (any author will do) is granted by the constitution.
 magic notes (Sababan Lecture and Q&A)
Coverage of Taxation Law Review: Due Process Clause

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form one another; and taxpayers belonging different
Q: why is it a limitation to the power to tax? classifications are treated alike.
A: The due process clause as a limitation to the power to
tax refers both to substantive and procedural due process. Requirements of Reasonable Classification:
Substantive due process requires that a tax statute must be 1) There must be substantial distinctions that make
within the constitutional authority of Congress to pass and a real difference.
that it be reasonable, fair and just. 2) It must be germane or relevant to the purpose of
Procedural due process, on the other hand, requires the law.
notice and hearing or at least the opportunity to be heard. 3) The distinction or classification must apply not
Ex: On Substantive Due Process- when the Congress only to the present but also to future situations.
passes a law exempting the 13th month pay from tax but 4) The distinction must apply to persons, things and
with the concurrence only of the majority of the quorum – transactions belonging to the same class.
law would be invalid because the Constitution provides
that any grant of tax exemption shall be passed with the Ex: In one case, a tax ordinance was assailed on the
concurrence of the majority of all the members of the ground that the ordinance failed to distinguish a worker
Congress. form casual, permanent or temporary. The SC said that
the ordinance was invalid because of the failure to state
Q: Does it follow that the adverse party must always be the said classification.
A: No. As a rule, notice and hearing or the opportunity In PEOPLE v. CAYAT the Supreme Court mandated the
to be heard is necessary only when expressly required by requisites for a valid classification.
law. Where there is no such requirement, notice and the
opportunity to be heard are dispensable. TIU v. COURT OF APPEALS (301 SCRA 278)
Ex. Before Oct. 1, 1995, you can secure a TRO Q: what happened in the city of Olonggapo?
without notifying the adverse party. If you are a suspect A: The Congress, with the approval of the President,
in a criminal case, you have the right to have an passed RA 7227, an act creating the conversion of the
opportunity to be heard (if there is a law). military bases into other productive uses.
Before July 1, 1998, no notice need be given to a Q: Who was the President at that time?
party declared in default. After the amendment, the party A: President Ramos
declared in default has to be notified of subsequent Q: What were signed?
proceedings albeit without the right to participate therein. A: RA 7227, EO 97 and EO 97-A
In the case of a search warrant, the person to be → The first led to the creation of the Subic Special
searched was not notified. The person searched cannot Economic Zone (SSEZ). The latter set the limitations
claim that there was a violation of due process because and boundaries of the application of the incentives
there is no law requiring that the person to be searched (no taxes, local and national, shall be imposed within
should be notified. SSEZ. In lieu thereof, 3% of the Gross Income shall
Regarding delinquent tax payers, before levy, be remitted to the national gov’t) to those operating
there must be notice. their businesses within the said area.
Q: Who are the petitioners and what was their
REASON: contention?
No provision of law requires notice to the adverse A: The petitioners are Filipino businessmen who are
party. If the adverse party is notified, he may abscond. operating their business outside the secured area. The
Thus, in adversarial proceedings, in connection with petitioners contended that the law in question was
procedural due process, the adverse party need not be violative of their right to equal protection of laws
notified all the time. since they are also Filipino businessmen.
H: The Supreme Court ruled that there was no
Equal Protection Clause violation since the classification was based on a
substantial distinction.
► As a rule, taxpayers of the same footing are treated The element invoked here is element #1 that
alike, both as to privileges conferred and liabilities there must be substantial distinction in the
imposed. Difference in treatment is allowed only when classification of taxpayers on whom the tax will be
based on substantial distinction. Difference in treatment imposed.
not based on substantial distinction is frowned upon as The Court observed that those foreign
“class legislation.” This is violated when taxpayers businessmen operating within the secured area have
belonging to the same classification are treated differently to give a larger capital to operate in the secured area

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(to spur economic growth and guarantee 1. If the law merely provides for the fulfillment of
employment). the obligation then the law is not the source of the
ORMOC SUGAR CENTRAL vs. CIR 2. When the law merely recognizes or
Q: What did the municipality of Ormoc do? acknowledges the existence of an obligation created by an
A: The City Council of Ormoc passed a Municipal act which may constitute a contract, quasi-contract, delict,
Ordinance No.4 imposing upon any and all and quasi-delict, and its only purpose is to regulate such
centrifugal sugar milled at the Ormoc Sugar Central a obligation, then the act itself is the source of the
municipal tax on the net sale of the same to the obligation, not the law.
United States and other foreign countries. When the law establishes the obligation and also
Q: Did the owner accept this imposition? provides for its fulfillment, then the law itself is the
A: No. the tax due was paid under protest, then filed a source of the obligation
complaint against the City of Ormoc.
H: The Supreme Court said there was a violation of Q: So, in what instance does the non-impairment of
the equal protection clause. The element invoked here contracts clause becomes a limitation to the power to tax?
was element #3, that it must be applicable to both A: it is when the taxpayer enters into a compromise
present and future circumstances. The Supreme Court agreement with the government. In this instance, the
said that one must go to the provision itself, in the obligation to pay the tax is now based on the contract
case at bar, there was a violation of element #3 between the taxpayer and the government pursuant to
because the law was worded in such a way that it their compromise agreement.
only applies to Ormoc Sugar Central alone and to the
exclusion of all other sugar centrals to be established Take Note: the requirement for its application: the parties
in the future. are the government and private individual.
TAKE NOTE: People vs. Cayat
Poll Tax
Freedom of Religion
Q: What is a poll tax?
It Involves 3 Things: A: It is a tax of a fixed amount on individuals residing
1. freedom to choose religion within a particular territory, whether citizens or not,
2. freedom to exercise one’s religion without regard to their property or to the occupation in
3. prohibition upon the national government to which they may be engaged.
establish a national religion It is a tax imposed on persons without any
qualifications. persons may be allowed to pay even if they
Q: Which one limits the power to tax? are not qualified as to age or property ownership.
A: Prohibition upon the national government to establish
a national religion because this will require a special Example of Poll Tax: Community Tax Certificate under
appropriation of money coming from the national treasury Section 162 of the Local Government Code.
which is funded by the taxes paid by the people.
Q: Why is it a limitation to the power to tax?
Non-impairment Clause A: It is a limitation to the power to tax because Congress
is prohibited from passing a law penalizing with
Q: What are the sources of obligation in the Civil Code? imprisonment a person who does not pay poll tax. (funds
A: Law, Contracts, Quasi-Contracts, Delict, Quasi- for sending a person to jail is taken from the national
Delict. treasury which is funded by the taxes paid by the people)

Q: What is the obligation contemplated in this Exemption from payment of Real Estate Tax
A: Those obligations arising from contracts. Q: What is the requirement for exemption from payment
of real property tax under the 1935, 1973 and 1987
General Rule: The power to tax is pursuant to law, Constitution?
therefore, the obligation to pay taxes is imposed by law, A: Art. 6, Sec 22 (3), 1935 Constitution – Cemeteries,
thus the non-impairment clause does not apply. churches and parsonages or convents appurtenant thereto,
and all lands, buildings and improvements used
► You have to determine first the source of obligation: EXCLUSIVELY for RELIGIOUS, CHARITABLE or
EDUCATIONAL purposes shall be exempt for taxation.

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Art. 8, Sec. 17 (3), 1973 Constitution – charitable against the taxpayer and liberally construed in favor of the
institutions, churches, parsonages or convents appurtenant government.
thereto, mosque, and non-profit cemeteries, and all lands,
and EXCLUSIVELY used for RELIGIOUS and Q: What is involved in this case?
CHARITABLE purposes shall be exempt from taxation. A: An educational institution is involved in this
Art. 6, Sec. 28 (3), 1987 Constitution – charitable case. The ground floor of the school was leased to
institutions, churches, and parsonages or convents Northern Marketing Corp., a domestic corporation.
appurtenant thereto, mosque, non-profit cemeteries, and The 2nd floor thereof was used as the residence of the
all lands, buildings, and improvements ACTUALLY, school director and his family.
DIRECTLY and EXCLUSIVELY used for RELIGIOUS, The Province of Abra now contends that since
EDUCATIONAL and CHARITABLE purposes shall be the school is not exclusively used for educational
exempt from taxation. purposes, the school is now liable to pay real estate
HERRERA v. QC-BOARD OF ASSESSMENT H: The Court held that the school is PARTIALLY
(1935 Constitution) liable for real estate tax.
Q: What is involved in this case? 1. Residence – exempt by virtue of incidental
A: A charitable institution, St. Catherine’s Hospital. purpose; justified because it is necessary.
The hospital was previously exempt from taxation 2. Commercial – not exempt because it is not
until it was reclassified and subsequently assessed for pursuant to the primary purpose; not for
the payment of real property tax. educational purposes.
The contention of the respondent is that the
hospital was no longer a charitable institution Q: is the doctrine in the case of Herrera the same with this
because it accepts pay-patients, it also operates a case?
school for midwifery and nursing, and a dormitory. A: NO. in the Herrera case, the exemption was granted to
Since it is not exclusively used for charitable all the real property (hospital, school and dorm). But in
purposes it is not exempt from taxation. this case, the Supreme Court made a qualification. The
H: The Court ruled that petitioner is not liable for Supreme Court said it depends.
the payment of real estate taxes. It is a charitable
institution, thus exempt from the payment of such NOTE: both cases arose under the 1935 Constitution
tax. despite having been decided in 1988.
The hospital, schools and dormitory are all
exempt fro taxation because they are incidental to the Q: At present, do we still apply the exemption from tax
primary purpose of the hospital. by virtue of the Doctrine of Incidental Purpose?
NOTE: this arose during the 1935 Constitution. A: Not anymore. The cause of action in said case arose
“Exempted by virtue of incidental purpose” was under the 1935 Constitution and it does not apply to the
merely coined by the Supreme Court. Thus, it does not provisions of the 1987 Constitution.
apply to other taxes except Real Estate Tax.
PROVINCE OF ABRA v. HERNANDO Q: What is involved in this case?
Q: What is involved in this case? A: A charitable institution, a hospital. It is provided
A A religious institution was involved in this case, in the charter of the Lung Center of the Philippines is
the Roman Catholic Bishop of Bangued, Inc. (bishop a charitable institution. However, part of its building
filed declaratory relief after assessed for payment of was leased to private individuals and the vacant
tax). The respondent judge granted the exemption portion of its lot was rented out to Elliptical Orchids.
from taxes of said church based only on the Respondent contends that since the hospital is not
allegations of the complaint without conducting a used actually, directly, an d exclusively for charitable
hearing/trial. The assistant prosecutor filed a purposes, it is liable to pay real estate taxes.
complaint contending that petitioner was deprived of H: The Supreme Court held that the petitioner is
its right to due process. liable to pay tax for those parts leased to private
individuals for commercial purposes. For the part of
SC: the Court ordered that the case be remanded to the the hospital used for charitable purposes (whether for
lower court for further proceedings. The Court observed pay or non-pay patients), petitioner is exempt from
that the cause action arose under the 1973 Constitution, payment of real estate tax.
not under the 1935 Constitution (note the difference). Tax
exemption is not presumed. It must be strictly construed

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NOTE: petitioner contended that the profits derived from nationals are imposed on income derived from
the lease of its premises were used for the operation of the sources coming from within and without.
hospital. The Court held that the use of the profits does Q: Is there an instance where international double
not determine exemption, rather it is the use of the taxation does not apply?
property that determines exemption. A: Yes. If it involves nationals of countries wherein
The case of Herrera does not apply because said case the tax liability is imposed only from income derive
arose under the 1935 Constitution and the present case from sources within and not including those derived
arose under the 1987 Constitution. The requirements for from sources without.
exemption are different. In the 1935 Constitution, the (Ex: Switzerland)
property must be EXCLUSIVELY used for religious, → The controversy in the case at bar involves the
educational or charitable purposes. Under the 1987 income tax paid in the Philippines.
Constitution, the property must be used ACTUALLY, After paying 25%, the US firm discovered that
DIRECTLY, and EXCLUSIVELY for religious, they are entitled to 10% under the most favored
educational and charitable purposes. nation clause. The question is: was the tax paid under
similar circumstances with that of the RP-West
Q: Was the doctrine laid down in Abra Valley affirmed Germany Treaty?
in the Lung Center case? The CTA and Court of Appeals ruled that it was
A: Yes. The Supreme Court unconsciously applied a paid under similar circumstances. The phrase referred
doctrine laid down by the 1935 Constitution. The to the royalties in payment of income tax. The
Supreme Court reiterated the ruling in the Abra Valley Supreme Court ruled that the lower courts’
case which arose under the 1935 Constitution. The interpretation of the phrase was erroneous. Rather,
Supreme Court made a qualification, it held that it the phrase applies to the application of matching
depends on whether or not the use is incidental to the credit.
primary purpose of the institution. Q: What is matching tax credit?
A: RP-Germany Treaty provides for that 20% of the
NOTE: at present, “exemption from tax by virtue of tax paid in the Philippines shall be credited to their
incidental purpose” is not applicable to all taxes including tax due to be paid in Germany.
real estate tax. The 10% does not apply because there is no
matching credit. Thus, there is no similarity in the
COMM v. SC JOHNSON and SONS, INC. circumstances.
Important :
1. international double taxation EQUITABLE RECOUPMENT AND DOCTRINE OF
2. importance of international tax treaty SET-OFF
3. implication of most favored nation clause
Q: What is the corporation involved in this case? Equitable Recoupment
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered into a license This doctrine provides that a claim for refund barred
agreement with SC Johnson and Sons U.S.A (Non- by prescription may be allowed to offset unsettled tax
Resident Foreign Corp, NRFC) whereby the former liabilities. This is not allowed in this jurisdiction, because
was allowed to use the latter’s trademark and of common law origin. If allowed, both the collecting
facilities to manufacture its products. In return, the agency and the taxpayer might be tempted to delay and
DC will pay the NRFC royalties as well as payment neglect the pursuit of their respective claims within the
of withholding tax. period prescribed by law.
A case for refund of overpaid withholding tax
was filed. Apparently, the DC should have paid only Q: What is the doctrine of Equitable Recoupment?
10% under the most favored nation clause. A: When the claim for refund is barred by prescription,
H: The Supreme Court coined the term International the same is allowed to be credited to unsettled tax
Double Taxation or International Juridical Double liabilities.
Q: What prompted the SC to coin such term? (Sir gives an illustration found in page 3 of magic notes)
A: Because a single income (tax royalties paid by a
DC) was subjected to tax by two countries, the Q: Is the rule absolute? Reason
Philippines income tax and the U.S. tax. A: Yes, the rule is absolute. The rationale behind this is
International Juridical Double Taxation applies to prevent the taxpayer and government official from
only to countries where the tax liabilities of its being negligent in the payment and collection of taxes.

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(furthermore, you have to be honest for this to work, making and enforcing of which, the consent of the
hence, the government is preventing corruption) individual is not required.
There is no exception at all otherwise, the BIR would Taxes cannot be the subject matter of compensation.
be flooded with so many claims.
Set-off Q: What is being collected in this case?
A: Estate and inheritance taxes.
Presupposes mutual obligation between the parties. NOTE: we do not have inheritance taxes anymore
In taxation, the concept of set-off arises where a taxpayer because the same was abolished by Lolo Macoy.
is liable to pay tax but the government, for one reason or Q: Who is the administratrix?
another, is indebted to the said taxpayer. A: The surviving spouse.
Q: What did the surviving spouse do?
Q: What do you mean by SET-OFF? A: The surviving spouse suggested that the
A: This presupposes mutual obligations between the compensation to which the decedent was entitled to
parties, and that they are mutual creditors and debtors of as an employee of the Bureau of Lands be set-off
each other. In taxation, the concept of taxation arises from the estate and inheritance taxes imposed upon
where a taxpayer is liable to pay taxes but the the estate of the deceased.
government, for one reason or another, is INDEBTED to H: Both the claim of the government for estate and
said taxpayer. inheritance taxes and the claim of the (intestate) for
the services rendered have already become overdue
REPUBLIC v. MAMBULAO LUMBER CO. hence demandable as well as fully liquidated,
Q: What is the liability of Mambulao? compensation therefore takes place by operation of
A: They are liable to pay forest charges (under the law, in accordance with Art. 1279 and 1290 of the
old tax code). Civil Code and both debts are extinguished to the
NOTE: under our present tax code, the NIRC, we do not concurrent amount.
have forest charges as the same was abolished by Compelling Reason: Congress has enacted RA
President Aquino. 2700, allocating a certain sum of money to the estate
Q: What did the lumber company do? of the deceased.
A: The lumber company claimed that since the
government did not use the reforestation charges it
paid for reforestation of the denuded land covered by FRANCIA v. IAC
its license, the amount paid should be reimbursed to Q: This happened in what city?
them or at least compensated or applied to their A: Pasay City
liability to pay forest charges. Q: What is the tax being collected? Who is collecting the
H: The Court ruled that the reforestation charges same?
paid is in the nature of taxes. A: Payment for real estate taxes for the property of
The principle of compensation does not apply in Francia. It appears that petitioner was delinquent in
this case because the parties are not mutually the payment of his real estate tax liability. The same
creditors and debtors of each other. A claim for taxes is being collected by the Treasurer of Pasay.
is not a debt, demand, contract or judgment as is Q: What is the suggestion of petitioner?
allowed to be set-off under the statute of set-off A: Suggested that the just compensation for the
which is construed uniformly, in the light of public payment of his expropriated property be set-off from
policy, to exclude the remedy in connection or any his unpaid real estate taxes. (the other part of his
indebtedness of the State or any municipality to one property was sold at a public auction)
who is liable for taxes. Neither are they a proper H: The factual milieu of the case does not justify
subject for recoupment since they do not arise out of legal compensation.
contract or the same transaction sued on. The Court has consistently ruled that there can
be no off-setting of taxes against the claims that the
General Rule: no set-off is admissible against demands taxpayer may have against the government. A
for taxes levied in general or local governmental taxpayer cannot refuse to pay a tax on the ground that
purposes. the government owes him an amount.
Internal Revenue taxes cannot be the subject of
Reason: Taxes are not in the nature of contracts or debts compensation because the government and the
between the taxpayer and the government, but arises out taxpayer are not mutually creditors and debtors of
of a duty to, and are positive acts of the government to the each other, and a claim for taxes is not a debt,

Page 8 of 79
demand, contract or judgment as is allowed to be Obnoxious double taxation is the synonym of double
compensated or set-off. taxation.
Furthermore, the payment of just compensation
was already deposited with PNB Pasay, and the taxes Elements of Double Taxation:
were collected by a local government, the property 1) Levied by the same taxing authority
was expropriated by the national government. (diff 2) For the same subject matter
parties, not mutual creditors and debtors of each 3) For the same taxing period and
other.) 4) For the same purpose

CALTEX PHIL v. COA There is no double taxation if the tax is levied by the
Q: What is being collected? LGU and another by the national government. The two
A: Caltex’s contribution to the Oil Price (2) are different taxing authorities.
Stabilization Fund (OPSF).
COA sent a letter to Caltex asking the latter to LGUs are expressly prohibited by the provisions of
settle its unremitted collection stating that until the RA 7160 or the LGC of 1991 from levying tax upon: (1)
same is paid, its claim for reimbursement from the the National Government; (2) its agencies and
OPSF will be held in abeyance. instrumentalities; (3) LGUs (sec.113(o)).
Q: Why is Caltex entitled to reimbursement? The National Government, pursuant to the provisions
A: Because of the fluctuation of the oil prices in the of RA 8424 of the Tax Reform Act of 1997, can levy tax
Middle East and Europe. Caltex wanted to off-set its upon GOCCs, agencies and instrumentalities (Section 27
unremitted collection from its reimbursements. c)), although income received by the Government form:
H: The Court did not allow the set-off, and 1) any public utility or
reiterated its ruling in the case of Mambulao and 2) the exercise of any essential governmental
Francia. Furthermore, RA 6952 expressly prohibits function
set-off from the collection of contributions to the is exempt from tax.
OPSF. The Court likewise stated that Caltex merely
acted as agent of the government in collecting KINDS OF INCOME TAXPAYERS
contributions for the OPSF because such is being
shouldered by the consumers when they purchase Q: Generally, how many kinds of income taxpayers are
petroleum products of oil companies, such as Caltex. there?
Taxation is no longer envisioned as a measure A: Under section 22A of NIRC, there are three (3),
merely to raise revenues to support the existence of namely:
the government. Taxes may be levied for regulatory 1. individual;
purposes such as to provide means for the 2. corporate;
rehabilitation and stabilization of a threatened 3. estate and trust.
industry which is vested with public interest, a
concern which is within the police power of the State I. INDIVIDUAL TAXPAYER
to address.
Q: How many kinds of individual taxpayers are there?
PHILEX MINING CORP v. COMM A: There are seven (7). Namely:
The petitioner is liable for the payment of excise 1. Resident Citizen (§23A and 24A);
taxes, which it wanted to be set-off from its pending claim 2. Nonresident Citizen (§23B and 24A);
for a VAT Input credit/refund. 3. OCW and Seaman (§23C and 24A);
The Court did not allow set-off. Taxes cannot be the 4. Resident Alien (§22F, 23D and 24A);
subject of compensation for the simple reason that the 5. Nonresident Alien Engaged in Trade or Business
government and taxpayer are not mutual creditors and (§22G, 23D and 25A)
debtors of each other. Taxes are not debts. 6. Nonresident Alien NOT Engaged in Trade or
Furthermore, in the instant case, the claim for VAT Business (§22G, 23D and 25B)
refund is still pending. The collection of a tax cannot 7. Aliens Engaged in Multinational Companies,
await the results of a lawsuit against the government. Offshore Banking Units, Petroleum Service
Contractors (§25C,D and E)
Resident Citizen (RC)
Double taxation is allowed because there is no
prohibition in the Constitution or statute. Q: How many types of RC?
A: There are two (2), namely:

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1. RC residing in the Philippines; and
2. Filipino living abroad with no intention to reside Resident Alien (RA)
permanently therein.
An individual whose residence is within the
Q: If you are abroad, and you have the intention to Philippines and who is not a citizen thereof.
permanently reside therein, can you still be considered a
RC? Intention to reside permanently in the Philippines is
A: Yes. If such intention to permanently reside therein not a requirement on the part of the alien.
was not manifested to the Commissioner and the fact of
your physical presence therein, you may still be The requirement under RR#2 is that he is actually
considered a RC. present in the Philippines, neither a sojourner, a traveler,
not a tourist.
OCW and Seamen Whether he’s a transient or not is determined by his
intent as to the nature and length of his stay.
OCW was used and not OFW in the CTRP, because
the classification shall cover only those Filipino citizens Q: Is the intention to permanently reside in the
working abroad with a contract. TNTs are not covered. Philippines necessary?
A: No, so long as he is not a sojourner, tourist or a
A Filipino seaman is deemed to be an OCW for traveler.
purposes of taxation if he receives compensation for
services rendered abroad as a member of the complement Non-Resident Alien Engaged in Trade or Business
of a vessel engaged exclusively in international trade. (NRAETB)
Consequently, if he is not a member of the
complement or even if he is but the vessel where he A foreigner not residing in the Philippines but who is
works is not exclusively engaged in international trade, engaged in trade or business here.
said seaman is not deemed to be an OCW. He is either a
RC or a NRC depending on where he stays most of the RR 2-98 has expanded the coverage of the term,
time during the taxable year. “engaged in trade or business” to include the exercise of a
If he stays in the Philippines most of the time during profession. Furthermore, by the express provision of the
the taxable year, he is considered a RC, otherwise, a NCR. law, a NRA who is neither a businessman nor a
professional but who come to and stays in the Philippines
If you are a seaman in the US Navy, you are not the for an aggregate period of more than 180 days during any
one being referred to. calendar year is deemed to a NRAETB in the Philippines.

The importance of ascertaining whether or not a Q: How many types?

seaman is a RC or a NRC, is that if he is a RCm he is A: There are three (3) types, namely:
taxable on ALL income derived from all sources within 1. NRA engaged in trade or business (25a1);
and without. If he is a NRC, he is taxable only on income 2. NRA who practices a profession (Revenue
derived form sources within the Philippines. Regulation 2-98);
3. foreigner who comes and stays in the Philippines
Q: What is the significance of using OCW? for an aggregate period of MORE THAN 180
A: It only covers Filipinos who works abroad with a days during any calendar year.
contract. It does not cover TNTs.
Q: What is the status of a Chinese who stays here for
200 days in 2001?
Q: What is the status of a TNT? A: NRAETB
A: Since they are not covered by this classification, they
are considered RC because they work abroad without a Q: Suppose he stayed here for 100 days in 2000 and
contract and they have not manifested their intention to another 100 days in 2001?
permanently reside abroad. (distinguish from an A: He is not a NRAETB. To be considered as such, he
immigrant) must stay for an aggregate period of more than 180 days
during a calendar year.
Requirements for a seaman to be considered an OCW:
1. must be a member of the compliment of a vessel; Q: What is the income tax applicable to said taxpayer?
2. the vessel must be exclusively engaged in A: Net Income Tax (NIT) on all its income derived form
international trade or commerce. sources within the Philippines.

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3. Nonresident Foreign Corporation (NRFC) –
Non-Resident Alien Not Engaged in Trade or created under foreign law, and NOT engaged in
Business trade or business.

Q: How many kinds? Q: What are deemed corporations under the NIRC?
A: Only one. A: The term corporation shall include partnerships, no
matter how created or organized, joint stock companies,
The reason why the NRANETB are included in any joint accounts, associations, or insurance companies, but
income tax law is because they may be deriving income DOES NOT includes general professional partnerships
form sources within the Philippines. and a joint venture or consortium formed of the purpose
They are subject to tax based on their GROSS of undertaking construction projects or operations
INCOME received form all sources within the pursuant to or engaging in petroleum, coal, geothermal or
Philippines. consortium agreement under a service contract with the
Aliens Employed by Regional or Area Headquarters 1. Partnerships and others no matter how created
& Regional Operating Headquarters of 2. Joint Stock Companies
Multinational Companies/ Aliens Employed by 3. Joint Accounts
Offshore Banking Units (Aliens Employed by MOP) 4. Associations
5. Insurance Companies
► Status: either a RA or NRA depending on their stay
here in the Philippines.
► Their status may either be RA or NRA because The phrase no “matter how created or organized” was
Section 25 C and D does not distinguish. interpreted.
Even if the partnership was pursuant to law or not,
► Liable to pay 15% from Gross Income received from whether nonstick, nonprofit, it is still deemed a
their employer corporation.
Reason: because of the possibility of earning profits
► Income earned from all OTHER sources shall be form sources within the Philippines.
subject to the pertinent income tax, as the case may be.
Q: Are partnerships always considered corporations? Is
Aliens Employed in Multinational and Offshore there no exception?
Banking Units A: General Rule: a partnership is a corporation.

Q: How are they classified? Exception: General Professional Partnerships (GPP)

A: If they derived income from other sources aside from
their employer, you may classify them either as RA, Q: What is a GPP?
NRAETB, or NRANETB. A: It is a partnership formed by persons for the sole
purpose of exercising their profession, no part of the
Aliens Employed in Petroleum Service Contractors income of which in derived from any trade or business.
and Subcontractors (what if a partner has other businesses not related to the
GPP? > read section 26 quoted hereunder)
► Status: ALWAYS NRA. If they derive income from
other sources, such income shall be subject to the Two (2) Kinds of GPP formed for:
pertinent income tax, as the case may be. 1) Exercise of a profession – not a corporation;
exempt from Corporate Income Tax (CIT)
► Income derived or coming from their employer shall 2) Exercise of a profession and engaged in trade or
be subject to a tax of 15% of the gross. business – a corporation; subject to CIT


general rule: a partnership is a corporation
1. Domestic Corporation (DC) – created or exception: GPP
organized under Philippine laws. exception to the exception: if the GPP derives income
2. Resident Foreign Corporation (RFC) – from other sources, it is considered a corporation, thus
corporation created under foreign law, and liable to pay corporate income tax.
engaged in trade or business.

Page 11 of 79
1. if the income is derived from other sources and Resident Foreign Corporation
such income is subject to NET INCOME TAX, it is not
exempt and it is considered a corporation. Foreign corporations engaged in trade or business in
2. if the income is derived from other sources and the Philippines.
such income is subject to FINAL INCOME TAX, it is still
EXEMPT and it is not deemed a corporation. ( separate Taxable for income derived within the Philippines.
return for this. It will not reflect in the GPP’s ITR)
» This is pursuant to the fact that FIT will not reflect in Non-Resident Foreign Corporation
the ITR of the GPP since the withholding agent is liable
for the payment of the FIT. Foreign corporations not engaged in trade or business
in the Philippines.
Q: What is the importance of knowing whether the
corporation is exempt or not? Taxable for income derived within the Philippines.
A: To determine their tax liability. This is important to
determine the tax liability of the individual partners of the Both DC and RFC are liable for the payment of the
GPP. following:
1) NIT – Net Income Tax
► Section 26 (1st paragraph) provides: “a GPP as such 2) FIT – Final Income Tax
shall not be subject to the Net Income Tax…” however, 3) 10% income tax on corporations with properly
“…persons engaging in business as partners in a GPP accumulated earnings.
shall be liable for income tax only in their separate and 4) MCIT (Minimum Corporate Income Tax) of 2%
individual capacities.” of the Gross Income
In short, each partner will be paying NIT, and the 5) Optional Corporate Income Tax of 15% of the
distributive shares they will be receiving from the net Gross Income
income of the GPP will be included in the gross income of
the partner. A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
Q: If the GPP is deemed a corporation, will the partners 2) FIT – Final Income Tax
have to pay for the income tax?
A: No. as far as the share of the GPP is concerned, it is III. TRUST AND ESTATE
considered a taxable dividend which is subject to FIT.
Q: How many for each?
Q: Is a joint venture a corporation? A: Seven (7) kinds for each because the trust or estate
A: Generally, yes, it is a corporation. will be determined by the status of the trustor, grantor, or
creator, or of the decedent.
Q: Corporation X and Corporation Y joined together.
How many corporations do we have? The status of the estate is determined by the status of
A: Three, namely Corporation X, Y, and X+Y. the joint the decedent at the time of his death; so an estate, as an
venture has a separate and distinct personality from the income taxpayer can be a citizen or an alien.
two corporations.
When a person who owns property dies, the
Q: When is a joint venture not considered a corporation? following taxes are payable under the provision of income
A: It is not deemed a corporation when it is formed for tax law:
the purpose of undertaking a (“construction?) project or 1) Income Tax for Individuals – to cover the period
engaging in petroleum, gas, and other energy operations beginning January to the time of death.
pursuant to “?” or consortium agreement under a service 2) Estate Income Tax – if the property is transferred
contract with the government. to the heirs.
3) If no partition is made, Individual or Corporate
Domestic Corporation Income Tax, depending on whether there is
or there is no settlement of the estate. If
Is one created or organized in the Philippines or there is, depending on whether the
under its laws. settlement is judicial or extrajudicial.

Taxable on all income derived from sources within or Judicial Settlement

without the Philippines.

Page 12 of 79
1) During the pendency of the settlement, the estate 3. Final Income Tax (FIT);
through the executor, administrator, or heirs is 4. Minimum Corporate Income Tax of 2% of the
liable for the payment of ESTATE INCOME Gross Income (MCIT)
TAX (Sex, 60 (3)). 5. Income Tax on Improperly Accumulated
2) If upon the termination of the judicial settlement, Earnings subject to 10% of the Taxable Income;
when the decision of the court shall have become 6. Optional Corporate Income Tax of 15% on the
final and executory, the heirs still do not divide Gross Income
the property, the following possibilities may
a) If the heirs contribute to the estate money,
property or industry with the intention to Q: what is the formula?
divide the profits between and among A: Gross Income – Deductions and Personal Exemptions
themselves, an UNREGISTERED = Taxable Income
PARTNERSHIP is created and the estate
becomes liable for payment of CIT Taxable Income x Tax Rate = Net Income
(Evangelista vs. Collector (102 Phil 140))
b) If the heirs without contributing money, Taxable Net Income – Tax Credit = Taxable Net
property or industry to improve the estate, Income Due
simply divide the fruits thereof between and
among themselves, a CO-OWNERSHIP is Net Income means Gross Income less deductions and
created and Individual Income Tax (IIC) is Formula:
imposed on the income derived by each of GI
the heirs, payable in their separate and - deductions
individual capacity (Pascual vs. COMM Net Income
(165 scra 560) and Obillos vs. COMM (139 x Tax Rate
SCRA 436)) Income Tax Due

Extrajudicial Settlement and if NO Settlement Q: What is the rate?

A: Individual: 32%
Some possibilities may arise. The income tax Corporation: 35%
liability depends on whether or not the unregistered
partnership or co-ownership is created. NOTE: the formula allows for deduction, personal
exemptions and tax credit.
Q: What are the other terms for NIT?
Trusts can be created by will, by contract or by A: NIRC:
agreement. The status of a trust depends upon the status a. taxable income
of the grantor or trustor or creator of the trust. Hence, a b. gross income (wlang kasunod)
trust can also be a citizen or an alien. → only income tax from improperly accumulated
earnings does not use this term.
Q: Where the trust earns income and such income is not
passive, who among the parties mentioned is liable for 1. CFA: “to be included in the gross income”
payment of income tax thereon? 2. Revenue Regulations and Statutes:
A: The TRUST itself, through the trustee or fiduciary a. ordinary way of paying income tax;
but only if the trust is irrevocable. b. normal way of paying income tax .
If it is revocable, or for the benefit of the grantor, the
liability for the payment of income tax devolves upon the Characteristics:
trustor himself in his capacity as individual taxpayer.
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
3. With certain modifications, AEMOP, if they
Q: How many kinds of income tax? derive income from other sources;
A: There are Six (6), namely:
1. Net Income Tax (NIT); Q: Is the taxable net income subject to withholding tax?
2. Gross Income Tax (GIT); A: It is subject to withholding tax if the law says so.

Page 13 of 79
Q: What if the law is silent? NOTE: like GIT, the formula does not allow deductions,
A: If the law is silent, it is not subject to withholding tax. personal exemptions, and tax credit.

Q: What is another term for withholding tax? Characteristics:

A: It is also known as the creditable withholding tax
system under the income tax law. Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT provided the
Q: Do we have to determine if there is an actual gain or requisites for its application are present.
A: Yes because the formula for deductions, etc. Q: Do you still have to pay NIT?
A: No. if you are liable for FIT, no need to pay NIT or
Q: If you fail to pay, will you be held liable? else there will be double taxation.
A: Yes, you will be held liable.
NOTE: as time passed by, the number of FIT increased.
► before 1979 – proceeds from the sale of real property
Q: What is the formula? not exempt, it is subject to NIT or GIT, as the case may
A: Gross Income x Rate be.
after 1979 – capital gains tax. Proceeds from the sale
Q: How many taxpayers pay by way of the gross? of real property is exempt.
A: There are two (2)
individual - NRANETB Q: If you fail to pay, will you be liable?
corporation - NRFC A: No. the withholding agent is liable to pay FIT.

NOTE: the formula does not allow any deduction, ► Case of Juday, Richard and Regine
personal exemptions and tax credit.
► For one to be liable for the payment of NIT, the
Characteristics: income must be derived on the basis of an employer –
employee relationship.
► NRANETB and NRFC, though not engaged in trade
or business, are liable to pay by way of the gross for any Employer – Employee Relationship
income derived in the Philippines. While not engaged in (3 Cs):
trade or business, there is a possibility that they may earn 1. contract;
income in the Philippines. 2. control;
3. compensation;
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax because the ► However, in the case of celebrities, there is no
persons liable are foreigners. This rule is ABSOLUTE employer – employee relationship, they are merely
receiving royalties. Royalties are subject to final
NOTE: there are two (2) ways of paying taxes depending withholding tax, thus the agent is liable to pay. (so,
on which side of the bench you are. distinguish nature of income, whether royalty or
Q: What is the formula? 1. for NIT, whether or not subject to Creditable
A: (Each Income) x (Particular Rate) Withholding Tax (CWT), the taxpayer is always
Unlike in the gross income tax where you add all the liable if he fails to pay.
income from all the sources and multiply the sum thereof 2. for GIT and FIT, absolute liability to pay is upon
by the rate of 25% or 35%, as the case may be, in final the withholding agent.
income tax, you cannot join all the income in one group
because each income has a particular rate. Q: Why is it that the rate of withholding is always lower,
and why is it that the rate of GIT and FIT is always equal?
Q: What is the rate? 1. NIT allows deductions;
A: 35% as the case may be. 2. GIT and FIT do not allow deductions.

Page 14 of 79
A: Only four (4) kinds will apply out of the six (6)
Q: Do you have to determine whether there is an actual 1. NIT
loss or gain? 2. FIT
A: No need to determine because the formula does not 3. MCIT
allow deductions. Gain is presumed. No liability for final 4. Improperly Accumulated Earnings
withholding tax except for the sale of shares of stock. (?)
Q: May all of these be applied simultaneously?
IV. MINIMUM CORPORATE INCOME TAX A: No. only the NIT, FIT and Improperly Accumulated
(MCIT) Earnings be applied simultaneously. NIT and MCIT
cannot be applied simultaneously. Only one will apply,
Q: What is the formula? whichever is higher between the two.
A: Gross Income x 2%
Q: What kind of tax will apply to NRFC?
Q: Who pays this tax?
A: DC and RFC only. A: Out of the six (6) kinds, only two (2) will apply:
1. GIT
Q: May it be applied simultaneous with NIT? 2. FIT
A: No. there must be a computation of the NIT first then
apply which ever is higher. The MCIT is paid in lieu of Q: What is the significance of knowing the classification
the NIT. of these taxpayers?
Reason: to discourage corporations from claiming too 1. to determine the kind of income tax applicable to
many deductions. them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for income within
Q: Under what section is this found? and income without?
A: Section 27A 4th paragraph and Section 28 A(1) 4th A: Only
paragraph. 1. RC
2. DC
Q: Is this applicable now?
A: No. this is not yet implemented. ► The rest of the taxpayers will be liable for income
coming from sources within.
Q: To what kind of taxpayer does this apply?
A: To DC and RFC. ► Income from sources without, no liability, therefore
Q: What kind of taxes are applicable or imposed upon
the 1st five individual taxpayers? NOTE: The income taxpayer is not a RC or a DC.
A: Only two (2) kinds are applicable out of the six (6) Determine if the income came from sources within or
kinds of income taxes. without to know the taxpayer’s liability.
1. NIT;
2. FIT; ► If the facts are specific, do not qualify your answer.
Answers must be responsive to the question.
Q: What kind of income tax will apply to AEMOP?
A: Generally, only one kind, 15% FIT with respect to Q: Is section 42 relevant to all the taxpayers?
income derived from their employer. A: NO. SECTION 42 IS NOT MATERIAL TO ALL
taxpayers, particularly the RC and DC because these two
Income from other sources: are liable for both income within and without.
1. Determine the status of the AEMOP;
a. NIT ► Section 42 is applicable only to taxpayers who are
b. FIT liable for income within, the rest of the taxpayers are
2. NRANETB otherwise exempt.
a. GIT
b. FIT Q: Section 42(A)(1) provides for how many kinds of
Q: What kind of income tax applies to DC? A: It establishes two (2) kinds of interests, namely:

Page 15 of 79
1. interest derived from sources within the Q: Suppose a NRFC, an Indonesian firm, becomes a
Philippines. stockholder of two corporations, a DC and a RFC, and
2. interest on bonds, notes or other interest bearing both corporations declared dividends, what is the liability
obligations of residents, corporate or otherwise. of the Indonesian firm if the same received the dividends?
Q: What is the determining factor in order to know if the 1. Dividends received from DC: the Indonesian
income is from within? firm is liable to pay taxes. NRFC, under the law,
is liable if the income is derived from sources
A: within. (Sec 42a)
1. location if the bank is from within the 2. Dividends received from RFC: the Indonesian
Philippines (pursuant to a Revenue Reg.) firm’s liability will depend on amount of gross
2. residence of the obligor (whether an individual income from sources within the Philippines.
or a corp.) – contract of loan with respect to the
interest earned thereon. The NRFC will be liable to pay income tax if the
following requisites are present:
► For example the borrower is a NRAETB, he 1. at least 50% is income from sources within;
borrowed money from a RA. The interest earned by the 2. the 1st requisite is for the three (3) preceding
loan will be considered as an income without. RA is not taxable years from the time of declaration of the
liable to pay tax since RA is liable only for income within, dividends.
therefore exempt from paying the tax.
► In the absence of any or both requisites, the
NATIONAL DEVELOPMENT CO. v. CIR income will be considered from sources without, thus
F: The National Development Company (NDC) exempting the Indonesian firm from payment of income
entered into a contract with several Japanese tax.
shipbuilding companies for the construction of 12
ocean-going vessels. The contract was made and Q: Same scenario, but this time the shares of stock of the
executed in Tokyo. two corporations were being disposed off. What is the tax
The payments were initially in cash and liability of the Indonesian firm?
irrevocable letters of credit. Subsequently, four A:
promissory notes were signed by NDC guaranteed by 1. sale of shares of stock of DC: the Indonesian
the Government. firm will be liable for the payment of taxes
Later on, since no tax was withheld from the because the income is from sources within.
interest on the amount due, the BIR was collecting 2. sale of shares of stock of RFC: the liability will
the amount from NDC. depend on where the shares of stock were sold.
The NDC contended that the income was not (mejo Malabo sa notes, please be guided
derived from sources within the Philippines, and thus accordingly)
they are not liable to withhold anything. NDC said
that since the contract was entered into and was Q: Filipino Executive, assigned to Hong Kong, receiving
executed in Japan, it is an income without. two salaries, one from the Philippines, the other from HK.
H: The government’s right to levy and collect The performance of the job was in HK. Is he liable for
income tax on interest received by a foreign both salaries?
corporation not engaged in trade or business within A: No, he is not liable for the two incomes.
the Philippines is not planted upon the condition that His status is an OCW (note facts: working in HK under
the activity or labor and the sale from which the contract). The compensation he received is not subject to
income flowed had its situs in the Philippines. tax pursuant to Section 42(c). Compensation for labor or
Nothing in the law (Section 42(1)) speaks of the act personal services performed in the Philippines is
or activity of nonresident corporations in the considered an income within. When it comes to services,
Philippines, or place where the contract is signed. it is the place where the same is rendered which is
The residence of the obligor who pays the interest controlling. In the case at bar, the services were rendered
rather than the physical location of the securities, abroad, thus it is an income derived from sources without,
bonds or notes or the place of payment is the irrespective of the place of payment.
determining factor of the source of the income.
Accordingly, if the obligor is a resident of the Q: Suppose a DC hired a NRFC to advertise its products
Philippines, the interest paid by him can have no abroad. What is the liability of the NRFC? Will there be a
other source than within the Philippines. withholding tax imposed?

Page 16 of 79
A: The income is derived from sources without since the
services in this case were performed abroad. As such, the COMMISSIONER v. IAC
NRFC is not liable and therefore exempt from the Q: What is the issue here?
payment of tax. If the NRFC is not subject to NIT, then it A: They cannot determine if the business expense was
is not also subject to withholding tax. incurred in the Philippines.
Q: if you are the BIR, and the taxpayer is not sure, will
Q: What is the controlling factor? you disallow the deduction?
A: The controlling factor is the place where the services A: No. determine it pro rata.
were performed and not where the compensation Formula: GI from within
therefore was received. GI from without


►income from sources within 1,000,000
Q: Granted by who? = 10%
A: NRFC ► Hence, 10% is the ratable share in the deduction. If
the deduction being asked is 100,000 not all of it will
Q: Suppose you are the franchise holder, how much is the be allowed. Only 10,000 or 10% of 100,000 will be
withholding? allowed as deduction.
A: 35% (GIT)
Q: if the franchise is granted by RFC, how much is the Section 39
A: 10% (NIT) and in some cases 15% Q: What is capital asset?
A: Capital asset is an asset held by a taxpayer which is
Section 42(4) MEMORIZE FOR RECIT not an ordinary asset.
The following are ordinary assets:
a. right of, or the right to use copyright, 1. stock in trade of the taxpayer or other property of
patents, etc a kind which would properly be included in the
b. industrial, commercial, scientific inventory of the taxpayer if on hand at the close
equipment of the taxable year;
c. supply of knowledge 2. property held by the taxpayer primarily for sale
d. supply of services by nonresident to customers in the ordinary course of trade or
e. supply of technical assistance business;
f. supply of technical advice 3. property used in trade or business of a character
g. right to use: motion picture films, etc. which is subject to the allowance for
depreciation provided in subsection 1.
Q: What is the rule as regards the sale of real property? 4. real property used in trade or business of the
A: Gains, profits, and income from the sale of real taxpayer.
property located within the Philippines considered income
within. All other property not mentioned in the foregoing are
considered capital assets.
Q: What about the sale of personal property, what is the
rule? Q: What is a capital gain? What is a capital loss?
A: Determine first if the property is produced or merely A: Capital gains are gains incurred or received from
purchased. transactions involving property which are capital assets.
Capital losses are losses incurred from transactions
1. it the property is manufactured in the Philippines involving capital assets.
and sold abroad, or vice-versa, it is an income
partly within and partly without. Q: What is ordinary gain? Ordinary loss?
2. if the property is purchased, considered derived A: Ordinary gains are those received from transactions
entirely from the sources within the country involving ordinary assets. Capital losses are losses
where it is sold. incurred in transactions involving ordinary assets.

EXCEPTION: shares of stock of domestic corporation, it Q: What is the relevance of making a distinction?
is an income within wherever it is sold.

Page 17 of 79
A: It is relevant because Section 39B,C, and D apply to
capital assets only. Q: In connection with 34 D, Losses in Allowable
1. time when property was held (39B) (holding Deduction, what is the rationale behind this rule?
period applies only to individuals); A: If it is otherwise, it will run counter with the rule that
2. limitations on capital losses (39C); the loss should always be connected with the trade or
3. Net Capital Carry-Over (39D) business, capital losses are losses not connected to the
trade or business, thus it is not deductible
Q: what is your remedy?
Q: What is the holding period? A: 39 D, net capital loss carry-over
A: If capital asset is sold or exchanged by an individual
taxpayer, only a certain percentage of the gain is subject Q: What is the rationale in allowing ordinary loss to be
to income tax. deducted from either the capital gains or ordinary
It is the length of time or the duration of the period gains?
by which the taxpayer held the asset. A: It is already included in ITR, the gross income less
deductions hence it already carries with it the
Q: What is the requirement?
A: TAKE NOTE: Normally if the loss is an ordinary loss
1. the taxpayer must be an individual. Section 39B there is no carry over.
states “in case of a taxpayer, other than a Except: a. 34D3
corporation..” b. if the loss is more than GI
2. property is capital in nature.
A: 100% if the capital asset has been held for not more
than 12 months; (short term) Q: What are the requirements?
50% if the capital asset has been held for more than A:
12 months. (long term) 1. taxpayer is an individual;
2. paid in the immediately succeeding year;
NOTE: the holding period applies to both gains and 3. applies only to short term capital gain;
losses. 4. capital loss should not exceed net income in the
year that it was incurred.
Q: Do you include capital gains in your ITR?
A: General rule: yes, include in ITR. Q: How does net capital loss carry-over differ from net
operating loss carry-over under Section 34 D (3)?
EXCEPT: A: Under the net capital loss carry-over rule, the capital
1. gains in sales of shares of stock not traded in loss can be carried over in the immediate succeeding year.
stock exchange(section 24); In net operating loss carry-over rule, capital loss can be
2. capital gains from sale of real property(section carried over to the next three (3) succeeding calendar year
24). following the year when the loss was incurred.

Q: When will the holding period not apply? NOTE: only 15% of the loss will be carried over, if the
A: loss is greater than the gains.
1. property is an ordinary asset
2. taxpayer is a corporation ► In net operating loss carry-over there is an exception
3. sale of real property considered as ordinary asset to the 3 year carry-over period. In case of mines other
than oil and gas wells, the period is up to 5 years.
►synonymous to 34D & loss capital rule Q: What is a short sale?
► this applies to individual and corporate taxpayer A: Sale of property by which the taxpayer cannot come
Q: What is the loss limitation rule? into the possession of the property. EX: shares
A: Pursuant to Section 39 C, losses from sales or
exchange of capital assets may be deducted only from CALAZANS v. CIR
capital gains, but losses from the sale or exchange of F: The taxpayer inherited the property fro her father
ordinary assets may be deducted from capital or ordinary and at the tie of the inheritance it was considered a
gains. (applies to individual and corporation) capital asset. In order to liquidate the inheritance, the

Page 18 of 79
taxpayer decided to develop the land to facilitate the 3. OCW
sale of the lots. 4. RA
I: Was the property converted to ordinary asset?
H: The conversion from capital asset to ordinary ► Additionally, under Section 25, NRAETB
asset is allowed because Section 39 is silent.
Q: What is the tax liability of NRAETB?
Q: Are you allowed to convert ordinary asset to capital A: Section 25(1) NRAETB is subject to income tax
asset? in the same manner as those individuals mentioned in
A: General rule: it is not allowed. Read Revenue Section 24.
Regulation 7-2003
The case at bar still applies despite of the issuance of Q: What about Domestic Corporations?
said Revenue Regulation. A:
1. Sec. 27 A,B, and C
Q: What is the conversion prohibited in the Revenue 2. Sec. 26- GPP is not subject to income tax.
A: Conversion of real estate property. Q: What about Resident Foreign Corporations?
A: Sec 28(l) it is subject to 35% Net Income Tax
Q: What is the rationale?
A: Section 24 D – final income tax of 6% if the real Q: What about Non Resident foreign Corporation and
estate is capital asset. If it is an ordinary asset, it will be Non Resident Alien not engaged in Trade or Business?
subject to income tax of 32% for individual taxpayer, and A: Not Subject to Net Income Tax but they are liable for
35% if the taxpayer is a corporation. Gross Income tax.

Q: What are the properties involve in the RR 7-2003? Q: Do legally married husband and wife need to file
A: 1. those property for sale by the realtors separately or jointly?
2. real property use in trade or business not necessary A: It depends if:
realtors 1. Pure compensation income- separate
2. Not Pure compensation income- joint
Q: That is the conversion allowed by the Revenue
Regulation? Is there an instance when an ordinary asset Passive Income
may be converted to capital asset? Interest, Royalties, prizes and Other winnings
A: Yes, provided that the property is an asset other the
real property, and it has been idle for two (2) years. Interest

SECTION 24 Q: Bank Interest, what is the requirement?

TAX ON INDIVIDUALS A: The bank must be located in the Phils. because the
income must be derived from sources w/in.
Q: What is the tax mentioned in section 24?
A: NIT Q: Do you include this in your ITR?
A: No! because it is subject already to FIT. The bank is
Q: What is taxable income? the one liable for the payment of this.
A: (memorize section 31) it is the pertinent items of
gross income specified in the NIRC, less the deductions NOTE: Liability for NIT, GIT, and MCIT will depend on
and/or personal and additional exemptions, if any, the elements present.
authorized for such types of income by the NIRC or other
laws. It refers to NIT because it allows deductions. Q: Who are liable for bank interest?
Q: What do you mean by the phrase “other than B, C, 1. RC }
and D”? 2. NRC} Sec. 24 B1
A: It means that if the elements of passive income are 3. RA }
present, the taxpayer has to pay FIT. 4. NRAETB
5. NRANETB Sec. 25 (25%)
Q: Who are the taxpayers mentioned in section 24? 6. AEMOP
A: 7. DC
1. RC 8. RFC
2. NRC 9. NRFC

Page 19 of 79
Q: What is the rate of interest? Not Liable
A: FIT of 20% 1. NRANETB- liable for GIT at 25 %
Q: Is there a lower rate? 3. DC- NIT 27 D is silent
A: 7 ½ % if under EFCDS 4. RFC NIT law is silent 28A7a
5. NRFC subject to GIT
Q: What if the depositor is non resident alien?
A: Q: When can we apply NIT in Prizes?
-W/in – FIT A: 1. When the taxpayer is RC, RFC and DC
- W/out- exempt 2. For DC and RC it must be derived from income
abroad RFC it must be derived from income w/in
Q: What is the rule on pre- termination? 3. amount is more than P10,000
A: If it is pre terminated before 5th year a FIT shall be
imposed on the entire income and shall be deducted and NOTE: If the prize is derived from sources w/in but it is
withheld by the depositary bank from the proceeds of the below P 10,000 it is not subject to tax. If derived from
long term deposit based on the remaining maturity thereof sources abroad, most of them are exempt except for RC
a. 4 yrs to less than 5 yrs – 5% and DC who are liable w/in and w/out.
b. 3 yrs to less than 4 yrs- 12%
c. Less than 3 yrs- 20% Q; Is it possible for RC and DC to pay MCIT?
A: Yes if MCIT is higher than NIT.
Q: Does it apply to all individuals?
A: No! It does not apply to 10 NRFC and NRA and Winnings
NRAETB because they are liable to GIT.
Q: Do we apply the P10, 000 req.?
NOTE: if the depositary is a Non resident it is exempt A: No, we do not apply it only applies to prizes. It must
not pertain to illegal gambling.
► Resident citizen is liable to pay tax for bank interest
earned abroad (NIT) ► Thus, the only requirement is it must be derived from
income w/in.
Q: If the money earns interest in abroad who is liable?
A: RC and DC only by NIT, the rest are exempt. No FIT Q: Who are liable? (FIT)
abroad because we do not have withholding agent abroad. A:
1. RC
Q: MCIT applies to DC and RFC in relation to bank 2. NRC
interest? 3. OCW
A: If the bank interest is derived abroad, RFC is exempt 4. RA
but DC is liable. 5. NRAETB
Impose NIT if it is higher than the MCIT, otherwise 6. AEMOP (RA, NRAETB)
apply MCIT if it’s higher than the NIT
Not liable to FIT?
Requirements: 3 DC- law is silent NIT
1. Prizes must be derived from sources w/in the 4 RFC- law is silent
Phils. 5 NRFC- GIT
2. it must be more than P 10,000
Q: When does NIT apply to winnings?
Q: Who are liable? (FIT) A:
A: 1. If Taxpayer is DC or RC
1. RC 2. Income is derived abroad
2. NRC 3. Taxpayer is RFC and income w/in.
3. OCW
4. RA NOTE: If income abroad, most TP are exempt except DC
5. NRAETB and RC

Page 20 of 79
Q: MCIT applies when? A: shares come from another shareholder
A: It is higher than the NIT Q: What are the dividends included?
A: Sec. 24 refers to cash or property dividend
Royalties H: For stock Dividends to be exempt it must come from
the profit of the corporation.
► The income is from w/in Stock Dividends → it is the transfer of the surplus profit
from the authorized capital stocks.
► Rate? 20%. Lower rate? 10% on books, literary
works and musical compositions. Q: Assuming that there are 5 Incorporators, the
Corporation has a P5 M Authorized Capital stock. It
Q: You are a writer for Snoop Dogg are you liable for distributed 1 M stock dividends, is it taxable?
FIT? What if for April Boy? A: NO, the dividends did not go to the Stock holder but
A: Liable for NIT if Income abroad like a writer for to the Auth Capital Stock. Only cash and Prop Stock go to
Snoop. While FIT if for April Boy. the Stock holder.

Q: Who are liable (FIT)? ► Sec 24 B does not mention stock dividends because it
A: is not subject to FIT but it is subject to NIT under Section
1. RC 73.
2. NRC
3. OCW Q: Is there an exception when stock dividends are not
4. RA taxable?
5. NRAETB A: YES, if the shares of stocks are cancelled and
6. AEMOP (RC, NRAETB) redeemed meaning it was reacquired by the corp.


1. NRANETB →the stockholders cannot escape the payment of taxes
3. DC Requirement:
4. RFC Gen Rule- the dividends must be distributed by a DC.
5. NRFC Except- Regular operating- always a foreign corp.

NOTE: Lower rate of 10% applies to all except ► What rate: 10% FIT
Q: Who are liable?
Q: When do we apply NIT to Royalties? A:
A: 1. RC
1. TP is RC or DC 2. NRC
2. Income is from w/out 3. OCW
3. TP is RF and income is w/in 4. RA
► If income is from sources abroad all are exempt 6. AEMOP (RC, NRAETB)
except RC and DC
Not liable?
Dividends 1. NRANETB
► Confined with cash and/or property dividends. 3. DC
4. RFC
Q: What are dividends? 5. NRFC
A: Any distribution made by Corporation to its
stockholders outside of its earnings or profits and payable ► Shares of association and partnership is taxable
to its stockholders whether in money or in property (Sec.
73) Q: Determine the tax liability of the following?
COMM. vs. MANNING 1. DC a Stockholder of DC= Exempt
Q: Where did it come from? 2. RFC stockholder of DC= Exempt also

Page 21 of 79
3. DC stockholder of RF= Liable for NIT.
Q: Shares of Foreign Corporation sold abroad?
Capital Gains From Sale of Shares of Stock Not Traded A: It will be considered an income w/out.
(§24C) Thus:
most of them will be exempt
1. Subj to FIT except RC and DC liable to pay NIT
2. Determine whether there is a loss or a gain
because the tax is impose upon the net capital ELEMENT # 2 NOT TRADED OR SOLD IN THE
gains realized from the sale, barter, or exchange STOCK MARKET
or other disposition of the shares of stock in a
domestic corp. ► if sold in the stock market- it is not subj to FIT
3. It is uniformly imposed on all taxpayer
4. not subj to w/holding tax. ► if sold in the stock market, it will be subj to
percentage tax, in lieu of NIT.
1. Shares of stock of a DC ELEMENT # 3 It must be a capital asset.
2. It must be capital asset
3. must not be traded in the stock market Q: When is it considered an ordinary asset?
A: 1. When the broker or dealer
► 25 R last part: Capital Gains realized by NRANETB a. used it in trade or business
in the Phils. from the sale of shares of stock in any DC b. held for sale in the ordinary course of
and real prop shall be subj. to the income tax prescribed trade or business
under Sub sec (c) and (d) of Sec. 24. 2. to all other assets, it will be considered a capital
► SEC. 24 B 1&2: If the elements are present
NRANETB and NRFC are liable to pay GIT. NOTE: if all elements are present it will be subj to FIT

Except: under 24 C for NRANETB. What do you mean If the shares are ordinary asset
by the phrase “ the provisions of 39 notwithstanding”?
1. Ordinary shares in DC- income w/in
► It refers to the holding period. When it comes to a. Most of the taxpayer will pay NIT except
capital gains from sale of shares of stock not traded and NRFC and NRANETB
capital gains from the sale of real prop. The holding 2. Ordinary assets of foreign corporations
period does not apply because the basis will be those a. Income within if sold in the Phils: most will
provided in 24 C & D and not under 39B (GSP or FMV) pay except NRANETB and NRFC
b. Income w/out if sold abroad: most will be
ELEMENT #1 The share is a share in DC exempt except RC and DC

Q: What if the share is from foreign corp? MCIT

A: Determine the income considered. If income w/in Q: When is a RFC subj to NIT?
read Sec. 42 (E) A:
1. Sale of shares of stock of a Foreign corp in the
► If the shares sold are that of a foreign corp it is subj Phil.
to the ff rules: 2. sale of shares of stock of DC which are ordinary
a. sold in the Phils= its income w/in asset
b. sold in abroad= w/out
c. Shares of stock in a Dc is always considered an ► DC and RFC are subj to MCIT which may be
income w/in regardless where it was sold. imposed if the NIT is lower than the MCIT2% MCIT will
be imposed if MCIT is higher than NIT.
Q: Shares of Foreign Corp sold in Phils. Who’s liable?
What tax? Capital Gains From Sale of Real Property (§24D)
A: Not subj to FIT because one of the elements is not
present . Shares not being that of a DC. ► In 39 B the holding period does not apply because the
Hence: a) RC, NRC, OCW, NRAETB, AEMOP (RA, basis of income tax is the gross selling price (GSP) or the
NRAETB) will pay NIT. DC and RFC Fair market value (FMV) whichever is higher- 6% FIT
b) NRANETB and NRFC will pay GIT

Page 22 of 79
Requirements: w/in 1 yr period FIT will not apply because there’s no
1. The real prop must be sold w/in the Phils and change of ownership.
located in the Phils. If the mortgagee is an individual the FIT is imposed
2. It must be a capital asset whether or not there is a transfer of ownership.
3. The seller must be an individual, estate or trust
or a DC Exceptions (§24(D2))

► RFC not liable for FIT but liable to pay NIT if all the Q: What if the prop being sold was a movie house, can
elements are present. he claim for the exception?
A: the prop covered by the exemption is a residential lot
► NRFC liable to pay GIT and not FIT
Q: Who can claim the exemption?
► NRANETB liable to pay FIT are all elements are A: Only the taxpayer mentioned in Sec. 24
ELEMENT # 3 The real prop must be a capital asset 1. The purpose of the seller is to acquire new
residential real prop
Q: When considered a capital asset? 2. the privilege must be availed of w/in 18 mos.
A: Read R.R. 7- 2003 From the sale
3. Comm. must be informed w/in 30 days from the
Q: Ordinary asset- shall refer to all real property date of sale with the intention to avail of the
specifically excluded from the definition of capital asset exemption
under Sec. 39 4. the adjusted basis or historical cost of the
A: Other property not mentioned are capital asset. residence sold shall be carried over to the new
Q: What if all the elements are not present? 5. the privilege must be availed only once every 10
A: yrs
most will be liable to pay NIT 6. Certification of the brgy. Capt where the
Except NRANETB and NRFC liable for GIT taxpayer resides that indeed the prop sold is the
principal residence of the tax payer (RR 13- 99)
Q: May a RC be liable to pay NIT even if all the
elements are present? Q: What if the property is worth 10 M and it was sold
A: YES, disposition made to the Govt. Thus, the only for 2M, what will happen to the unused portion or
taxpayer has the option of paying 32% NIT or 6% FIT profit?
A: If the proceeds are not fully utilized, the portions of
Q: Which is more advantageous? the gain is subj to FIT
A: It depends determine first if there’s a loss or a gain.
If there’s a gain choose to be taxed at 6% FIT. In this SEC. 27A RATES OF INCOME TAX
case the gain is always presumed.
If there’s a loss choose to be taxed at 32% because Q: How many income taxes are paid by a DC?
losses may be considered an allowable deduction . A:
1. NIT
Other transactions are covered: 2. MCIT
1. sale 3. FIT
2. barter 4. 10%Improperly Accumulated Earnings
3. exchange 5. Optional corporate income tax of 15% of the
4. other disposition gross

NOTE: If the prop is under mortgage contract and the ► DC liable for five, but the optional is not yet
mortgagee is a bank or financial inst, the FIT does not applicable so only 4.
apply because the property is not yet transferred because
there’s a period of redemption Q: How many can be applied simultaneously? A:
If after a year the mortgagor failed to redeem the ONLY 3
property that is the only time that the FIT will apply 1. NIT, FIT and 10% IAE
because there’s now a change of ownership. If redeemed 2. MCIT, FIT, 10% IAE

Page 23 of 79
SEC. 27 (B) PROPRIETARY EDUCATIONAL INST. Q: You donated a property to a school will you be liable
& HOSP. for donor’s tax?
A: not liable if it falls under Sec. 101 (3) of the NIRC
Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst and REQ. FOR EXEMPTION TO DONORS TAX:
2. Non Profit Proprietary Hospital 1. it must be non-stock, non-profit educational inst.
2. not more than 30% of the prop donated shall be used
Q: What if the school or hospital is non profit only, is it by such donee for admin purposes.
exempt? 3. paying no dividends
A: No, subject to 10% on their taxable income except 4. governed by trustees who don’t receive any
those covered by subsection (D) compensation
PROVIDED that gross income from unrelated 5. devoting all its income to the accomplishment and
business, trade or activity must not exceed 50% of its total promotion of the purposes stated in its Articles of
gross income derived by such educational inst or hospital Incorporation
from all sources
Q: What about exemption from VAT?
Requirements: A: Sec. 109 (m) of R-VAT
1. It is a private school or hospital
2. it is stock corp Q: What about exemption fro Loc Gov Code?
3. it is non profit A: If its non-stock, non-profit educational inst. It may be
4. that gross income from unrelated business, trade exempted from local taxation.
or activity must not exceed50% of its total gross
income derived by such educational inst or Q: Is Art 14 Sec. 4 of the Consti obsolete?
hospital from all sources A: NO, if the law is silent apply the Consti.
5. has permit to operate from DECS, TESDA, or
Q: What do you mean by unrelated trade business or
activity? GEN RULE: Subj to tax.
A: It means any trade, Business, or activity which is not
substantially related to the exercise or performance by EXCEPTIONS:
such entity of its primary purpose or performance 1. GSIS
2. SSS
Q: May a school or hospital be exempt from paying tax? 3. PHIC
What are the req? 4. PCSO
1. It must be non- stock and non- profit ► PAGCOR no longer included.
2. the assets property and revenues must be used
actually, directly, and exclusively fro the primary Q: If the GOCC is not one of those enumerated does it
purpose follow all of its income is automatically subject to tax?
A: NO. Under Sec 32. B (7) income derived from any
Q: Under what law? Is it the constitution or the NIRC public utility or from the exercise of essential government
which provides fro the exemption? function accruing to the Govt of the Phils or to any
A: It is under Sec. 30 of NIRC and not under Sec.4 political subd. Are therefore exempt from income tax.
Art. 14 of the Constitution. The provision of the NIRC is Therefore, even if the GOCC is one of those
the specific law which prevails over the Constitution enumerated under Sec. 27 it may still be exempt under
which is the general law. Sec. 32 b7b if its performing governmental function
→ exempt from all taxes and custom duties
NOTE: Pagcor vs. Basco case
Q: What about exemption from real property tax?
A: Art. 6 Sec. 28 of the Constitution: charitable Q: What is the difference between Sec. 27 C and 32
institution churches, ….and all lands buildings, actually b7b?
directly and exclusively used for religious, charitable, and A:
educational purposes shall be exempt from taxation. 1. Sec 27 C exempts those enumerated without any
→ Not Sec. 4 of Art. 14 of the Constitution. qualification.

Page 24 of 79
2. Sec. 32b7b qualification must concur before it Q: What is the expanded foreign currency?
may be exempted. A: It is a bank authorized by the BSP to transact
business in the Philippine Currency as well as acceptable
Q: Can the government impose tax on itself? foreign currency or both.
A: It depends on who the taxing authority is. If the
taxing authority is the National Govt. as a rule, YES. Q: What is the tax to be paid?
Exceptions A: Normally it is NIT because it is subj under Sec 27 D3
1. those entities enumerated under §27 C and 28 A
2. those GOCC falling under §32b7b
Q: Who is the income earner?
If the taxing authority is the local government units, A: Depositary banks
as a rule NO. LGU’s are expressly prohibited from
levying tax against: (Sec 133(o) Q: Exempt from what kind of transaction?
1. National Govt. A: From foreign currency transaction. If it involves
2. Its agencies and instrumentalities foreign currency transaction it is not exempt but subject to
3. local government units 35 % NIT
Exception: Sec 154 of LGC says that LGU’s may fix
rate for the operation of public utilities owned and Q: Who are the other parties?
maintained by the within their jurisdiction. A:
1. Off shore banking units
PAL CASE July 20 2006 2. branches of foreign banks
H: The SC used 133 (o)an exception to pay tax, real 3. local commercial bank
estate tax, imposed by City of PAranaque on NAIA. 4. Other depositary banks under EFCDS
The SC said that the airport is not an agency or 5. Non- residents
GOCC but mere instrumentality of the Govt.
This is Gross ignorance of the law Sec. 133 (o) is ► if the above enumeration are the parties, then
for local taxation not real property taxation which is depositary bank will be exempt from paying the NIT
the one involved in the present case.
Foreign Currency Loan
NOTE: Mactan- Cebu Airport case
Q: Who is the lender? Borrower?
SEC. 27 D(1) A: Lender- EFCDS
Borrower- RC
Q: How many possible incomes were mentioned?
A: Two (2): bank interest and royalties EXEMPT
Offshore banking units
REQ: Other depositary banks under EFCDS
1. Bank interest must be received by a Domestic Corp
2. Royalties derived from sources within ► exemption of NR from EFCDS:

Q: When it comes to bank interest, what is the difference Q: Who is the income earner?
if the taxpayer is an individual or corporation? A: Non Residents whether individual or Corporations
A: If individual, they may be exempt from the payment
of interest in case of long term deposit except NRANETB Q: Derived from whom?
If DC, they are not exempt from long tem deposit. A: Depositary Bank under EFCDS

Q: What about royalties? NOTE: Sec. 24 B Nonresident exempt from bank interest
A: If individual, have a lower rate of 10%on books, under EFCDS
other literary and musical compositions. DC have no
lower preferential rate. Q: What is the difference between 24 b1 from 27 D3
A: In 24 B1, NR is exempt only from bank interst
SEC 27 D2: CAPITAL GAINS FROM SALE OF derived from EFCDS while 27D3 exempts NR from any
SHARES NOT TRADED income from transactions with depositary bank under
SEC. 27 D(4)- Inter-corporate dividends- exempt

Page 25 of 79
A: It is the general rule because it is under 28 A3
27 D5 Capital Gains from sale of Real Prop.
► GPB is in the nature of FIT, applies only if all the
Q: What is the tax? requirements are present.
A: 6% FIT
► RFC will be liable for NIT, hence a RFC engaged in
Q: What is the difference if the seller is an individual common carriage does not pay GPB but NIT
and a DC?
A: Individual can sell all kinds of real property ► Income without: EXEMPT
DC can only dispose land and/or buildings.
International Carrier:
► GPB refers to the amount of revenue derived from:
Q: Applicable to whom? carriage of persons, excess baggage, cargo and mail
A: DC and RFC originating from the Phils in a continuous and
uninterrupted flight, irrespective of the place of sale or
Q: Can it be applied simultaneously with NIT? issue and the place of payment of the tickets or passage
A: NO, imposed in lieu of the NIT, whichever is higher. document.

Q: What is the Rationale? REQ:

A: to prevent corporations from claiming too many 1. Originating from the Phils.
deductions 2. Continuous and uninterrupted flight;
3. Irrespective of the place of sale or issue and the
Q: When will it be imposed? place of the payment of tickets or passage
A: document.
1. On the 4th year immediately ff the year in
which such corp commenced its business. Q: Do you consider landing rights to determine liability?
2. When the MCIT is higher than the NIT (RR 15-2002)
Q: What is the carry over rule? 1. If originates from the Phils and has landing rights-
A: Sec 27 E2 states the carry over rule. ONLINE- RFC
2. No landing rights- OFFLINE- NRFC
► In order to avail: only in the year where the MCIT is
greater than the NIT. Q: If there are stopovers, is it still uninterrupted?
A: YES, provided that the stopover does not exceed 48
Sec 28 A1 hrs.

Q: What Kinds of taxes are paid by the RFC? Q: When will the place of sale of tickets matter as to the
A: NIT taxpayers liability?
MCIT A: The place of tickets is material only if the two other
elements are not present to be able to know if its subj to
NIT or exempt.
Sec. 28 B2 MCIT on RFC
Revalidated, exchanged or indorsed tickets
► same with Sec. 27
Sec. 28 A3- INTL CARRIER 1. The passenger boards a plane in a port or point in
the Phils.
Kind: 2. The tickets must be revalidated, exchanged, or
1. Air carrier indorsed to another airline.
2. ships
Q: What if it’s the same airline but different plane?
► An intl. carrier doing business in the Phils. shall pay A: GPB does not apply, it must be to another airline
2 ½ % on its Gross Phil Billings (GPB)
Q: What if it did not originate from the Phils.?
Q: Is 28 A3 the Gen. rule or the Exception? A: Determine if its income within or without.

Page 26 of 79
if ticket was purchased in the Phils. it is income 3. Exempt if income derived by DC or RFC from
within hence apply NIT EFCDS
if purchased outside, it is income without, hence 4. Parties:
exempt a) local commercial banks
b) Foreign bank branch
Transshipment c) Non Residents
d) OBU in the Phils
REQ: e) Other banks under EFCDS
flight originates from the Phils
transshipment of passenger takes place at any port FOREIGN CURRENCY LOAN
outside the Phils.
the passenger transferred on another airline ► 10% FIT
If: Lender- OBU
Q: How do you apply GPB? Borrower- Resident Citizen
A: Only the aliquot portion of the cost of the ticket EXCEPT:
corresponding to the leg flown from the Phils to the point 1. OBU
of transshipment shall from part of the GPB. 2. Local Commercial Banks

Q: Is it liable for the whole flight? Transactions of Non Residents:

A: 1. Income earner: Non- Residents
From the Phils to the point of transshipment, it is 2. Lender: OBU’s
income w/in
From transshipment to final destination, its income NOTE: Non resident exempt from transactions with
w/out- EXEMPT OBU’s and EFCDS

International Shipping SEC. 28 A5 TAX ON BRANCH PROFITS,

► GPB means gross revenue whether from passenger, ► profits based on the total profits applied or earmarked
cargo, mail fro remittance remitted by a branch to its head office
► Subj to 15% tax

REQ: Except: those activities which are registered with PEZA

it must originate from the Phils.
up to final destination NOTE: Interests, Dividends, Rents, Royalties including
- regardless of the place of sale or payments of remuneration for technical sevices, salaries, wages,
passenger or freight documents premiums, annuities, emoluments, or casual gains,
profits, income and capital gains received by a
Sec28 A(4) OFF SHORE BANKING UNITS foreign corporation during each taxable year from all
sources within shall not be treated as branch profits
OBU’s UNLESS the same are effectively connected with the
1. only acceptable foreign currencies conduct of its trade or business.
2. always a foreign corporation (subj to NIT)
except #3 Branch Profit Remittance
3. Exempt if income is derived by the OBU from
EFCDS Two ways to receive income (FC)
4. Parties: 1. Branch
a) local commercial banks 2. Subsidiaries
b) Foreign bank branch
c) Non Residents NOTE:
d) OBU in the Phils. 1. When a FC establishes branch, it is always a FC
2. When a FC establishes DC, it is a RFC
Difference with EFCDS:
EFCDS Q; It is in addition to NIT- Why?
1. Acceptable foreign currency, Phil. Currency or A: NIT because it is RFC
2. Can be a domestic or foreign corporation

Page 27 of 79
Q; What kind of tax is imposed under 28 A5? A: ► Regional Operating HQ is a branch established in the
15% FIT Phils by a multinational company engaged in any of the
Q: How do you apply the rate? 1. Gen. Administration and Planning
A: multiplied to the total profit applied or earmarked for 2. Business Planning and Coordination
remittance w/o deductions 3. Sourcing and procurement of Raw materials and
It applies for branches that are: 4. Corporate Finance and Advisory Services
1. the profit remitted is effectively connected with 5. Marketing Control and sales promotion
the conduct of its trade or business in the Phils. 6. Training and personal management
2. One not registered with PEZA 7. logistic services
8. research and development services and product
MARUBENI CASE development
F: A branch was established with AG&P, there was 9. technical support and maintenance
investment with AG&P 10. data processing and communication and business
Q: Did the petitioner participate with the negotiation? development
Q: What did the petitioner pay? Rationale: Why liable? Because the claim for exemption
A: 15% Branch Profit Remittance Tax (BPRT) of resident airlines shall be minimized
10% Intercorporate Dividends
Q: What’s the issue? SEC. 28A7a Interests and Royalties:
A: Petitioner maintains that there was overpayment of
taxes, thus the same was asking for a refund of tax ► 20%FIT
erroneously paid.
► Interests under EFCDS= 7 ½ %
Q: Is is subj to FIT?
A: NO, exempt if petitioner is RFC Sec. 28A7b Income derived under EFCDS
H: -not correct to pay 15%
1. Income derived from foreign currency transactions
To be liable for BPRT with:
1. It is a RFC a) Non Residents
2. Branch did not participate in negotiations b) OBU
c) Local commercial bank
d) Foreign bank branches
e) Other depository bank under the EFCDS

SEC. 28 A6a ► As a Gen Rule: the above transaction is Exempt

► Regional or area headquarters (Sec. 22 DD) shall not
be subject to tax exempt from income tax if the requisites EXCEPTION: Income from such transaction as may be
are present. specified by the secretary of Finance, upon
recommendation by the Monetary Board to be subject to
Q: What are the requisites? regular income tax payable by any banks.
1. the HQ do not earn or derive income from the 2. Interest income from foreign currency loans
2. Acts only as supervisory, communications, ► granted by depository bank under said EFCDS to
coordinating centre for their affiliates, subsidiary others shall be subject to 10% FIT
or branches in the Asia- Pacific Region and other
foreign markets. Exempt if granted to:
1. Other OBU in the Phils, and
SEC. 28 A6b 2. Other depository bank under the EFCDS
» SEC. 28 A7c: Capital Gains from Shares of
► Regional Operating HQ are taxable and liable to pay Stocks not Traded in the Stock exchange
10% taxable income. » 5% or 10% as the case maybe


Page 28 of 79
F: Atlas Mining entered into a Loan and Sales Contract
► DC- RFC= EXEMPT, not subj to tax with Mitsubishi Metal Corp. ( A Japanese Corp.) for
the purposes of projected expansion of the
SEC 28 B1 productivity capacity of the former’s mines in Cebu.
The contract provides that Mitsibushi will extend a
Q: What kind of tax? loan to Atlas in the amount 20 M dollar, so that Atlas
A: 35% GIT on the ff income will be able install a new concentrator for copper
1. Interest production.
2. Dividends -Mitsubishi to comply with its obligation,
3. Rents applied for a loan from Export- Import Bank of Japan
4. Royalties (Exim Bank) and from consortium of Japanese banks.
5. Salaries Pursuant to the contract Atlas paid interst to
6. Premiums( except reinsurance premiums) Mitsubishi where the corresponding 15% tax thereon
7. annuities was withheld and only remitted to the Govt.
8. emoluments Subsequently Mitsubishi filed a claim for tax
9. Other fixed and determinable Gains, profits and credit requesting that the same be used as payment
income. for its existing liabilities despite having executed a
waiver and disclaimer of its interest in favor of Atlas
SEC 28 B2 Non Resident Cinematographic film owner, earlier on. It is the contention of Mitsubishi that it
lessor or distributor was the mere agent of Exim Bank which is a
financing inst owned and controlled by the Japanese
► liable for 25% GIT Govt.
The status of Eximbank as a government
SEC 28 B3 Non Resident owner or lessor of Vessels controlled inst became the basis of the claim fro
chartered by Philippine Nationals. exemption by Mitsubishi for the payment of interest
on loans.
► liable for 4 ½ GIT I: WON Mitsubishi is a mere agent of Eximbank
H: NO. The contract between the parties does not contain
Elements: any direct reference to Exim Bank, it is strictly
1. Chartered to Filipino Citizens or Corporations between Mitsubishi as creditor and Atlas as the seller
2. Approved by MARINA of copper. The bank has nothing to do with the sale of
copper to Mitsubishi. Atlas and Mitsubishi had
SEC. B(4) Non Resident Owner or Lessor of Aircraft, reciprocal obligations- Mitsubishi in order to fulfill
Machiniries, and other Equipments. its obligations had to obtain a loan, in its independent
capacity with Exim bank. Laws granting exemption
► liable for 7 1/2 % GIT from tax are construed strictly against the taxpayer
and liberally in favor of the taxing authority.
SEC 28 b5a Interest on Foreign Loans
► Must be read with Sec. 32 B7a
► FIT 15% imposed on the amount of cash and or prop
Interest on Foreign Loans, if the lender is dividends received from a domestic corporation.
1. NRFC liable to 20% FIT
2. Foreign Govt. Exempt because it is an exclusion SUBJ TO THE CONDITION: the country where the
(Sec 32 b7a: income derived by a foreign gov’t NRFC is domiciled allows a credit against the tax due
from investments in the Phils on loans, stocks, from the NRFC taxes deemed paid or deemed to have
bond, and other domestic securities or from been paid in the Phils.
interest on deposits in banks by:
a) Foreign govt. Gen rule: 35 % FIT
b) Financing inst owned controlled or enjoying, Exception: 15% under the “tax deemed paid rule/
refinancing from foreign govt; and reciprocity rule/ tax sparring rule”
c) Inter nation or Regional financial inst
established by foreign govt. JHONSONS CASE
2 Kinds of Categories:
COMMISIONER OF INTERNAL REV. vs. MITSUBISHI 1st : Japan, US, Germany, Phils liable for income within
METAL CORP. (180 SCRA 214) and income without

Page 29 of 79
3. law is silent because there is no law- 15%
2nd : countries liable only for income within. 4. law is silent because there’s no law because the
subj matter is not taxable- 15%
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct? SEC. 29 IAET
- No because it was a branch and RFC but still Marubeni
was NRFC under the old law which is liable to pay 35%, Q: What is the rate?
but SC said liable only to 25% because of the tax treaty A: 10% of the gross income (taxable income)

► You cannot refund right away → 15% BPRT and ► It is imposed upon the improperly accumulated
10% Inter-corporate Dividends tax has different basis taxable income of the corporation

In P&G who are involved Q: Applies to what Corp?

- DC (P&G Phil) and NRFC (P&G US) A: to DC only under RR 2- 2001( classified as closely
- DC declares dividends to NRFC held corporations)
- 35% was withheld and remitted to the BIR
Q: Is it in the nature of sanction?
What did they discover? (after paying) A: Yes, it is imposed to compel the corporation to
- they discovered that they are liable only for 15% so declare dividends.
they have a refund of 20%
Q: Why?
Q: In the 1st case did the SC allowed the refund? A: because if profits are distributed to the shareholders,
A: NO, denial anchored on 2 grounds: they will be liable for the payment of Dividends tax. Now,
1. One claiming for refund was not the proper party if the profits are undistributed the shareholders will not
2. There was a showing or proof as to the existence incur liability on taxes with respect to the undistributed
of the “tax deemed paid” rule profits of the Corp.
- In a way it is in the form of deterrent to the avoidance
Q: In 2nd case was there a refund? of tax upon shareholders who are supposed to pay
A: YES, the SC reversed itself dividends tax on the earnings distributed to them.

1. Income tax is FIT: the withholding agent is the Q: What is taxable income?
proper party because he is liable to pay said A: SEC. 31 defines taxable income as the pertinent items
taxes of gross income specified in this Code, less the deductions
2. actual proof of payment not necessary, what is and/or personal and additional exemptions, if any,
necessary is the law of the domicile of the authorized for such types of income by this Code or other
country providing fro tax credit equal to 20% of special law
the tax deemed paid.
Q: When not liable to pay IAET?
Q: What is the rate if the law is silent? A: There are 2 groups of DC exempt from payment of
A: 35% FIT IAET (RR2-2001)

► The rate will only be 15% if there’s a law recognizing A) Corporations failure to declare dividends because of
the same but this refers to the case of those belonging to reasonable needs of business
the first category.
► reasonable needs means are construed to mean
immediate needs of the business including reasonable
WANDER CASE anticipated needs
Q: Who are the parties?
A: DC(Wander) and FC (Glaxo)- they belong to Q: What constitutes reasonable accumulation of the
different categories corporation’s earnings? Examples?
The BIR tried to collect 35% because the law is A:
totally silent about the tax credit 1. allowance for the increase in the accumulation of
H: The SC said that the tax should be 15% which applies earnings up to 100% of the paid- up capital of
2 instances: the corporation.
1. Foreign law do not provide for tax credit- 35%
2. law provides but the law is silent- 15%

Page 30 of 79
2. earnings reserved for the definite corporate ► Determine the Corporations’ exemptions under Sec.
expansion projects or programs approved by the 30 27 C and 22B.
Board 1. Sec 30, the corporations shall not be taxed under
3. Earnings reserved fro buildings, plants, or this title (tax on income) in respect to income
equipment, acquisition approved by the Board receive by them as such.
4. Earnings reserved for compliance with any loan 2. Sec 27, the corporations enumerated are always
agreement or pre- existing obligations exempt. Thus exemption is unconditional
5. Earnings required by law or other applicable 3. Sec 22B GPP, as a general rule is not a
statutes to be retained. corporation
6. In case of subsidiaries of foreign corporation, all 4. except if it earns income from other business
undistributed earnings or profits intended or
reserved for investments ► Joint Venture w/ service contract w/ government not a
corporation, otherwise, it is liable.
NOTE: the corporations belonging in the 1st group are
normally liable but they can show that the accumulation Assignment: Sec. 35
of earnings is justified for reasonable needs of business,
they incur no liability and exempt from payments of the August 21, 2006 – Midterms
August 14, 2006
B) Corporations which are exempt whether or not it is for
reasonable needs of the business: Q: What is the reason for not including the corporations
1. Banks, and other non- bank financial exempt under section 27C and Section 22B under Section
intermediaries. 30?
2. Insurance companies A: Because there is an exemption which does not apply
3. Publicly- held corporations to all exempt corporation.
4. Taxable partnerships The exemption under Section 30 is not absolute while
5. General Professional Partnerships the exemption under Section 27 C is absolute and without
6. Non- taxable joint- ventures any conditions. In addition, Section 22B provides that a
7. Enterprises registered with joint venture is generally taxable unless it has a service
a) PEZA contract with the government, a generally taxable
b) Bases Conversion Devt Act of 1992 (RA 9227) corporation cannot be joined with the group as generally
c) Special Economic Zone declared by law not taxable corporation. General Professional Partnership
is exempt but the exemption is not the same as provided
Q: What is a closely- held corporations? by Section 30.
A: Those corporation at least 50% in value of the
outstanding capital stock or at least 50% of the total TAKE NOTE: Las Paragraph of Section 30.
combined voting power all classes of stock entitled to
vote is owned directly, or indirectly by or for not more ► exemption to the exemption: income of whatever
than 20 individuals kind and character of the foregoing organizations from:
1. any of their properties, real or personal;
NOTE: Publicly held Corp. has more than 20 2. any activities conducted for profit
► regardless of the disposition of said income, shall be
Q: What is the time for paying this tax? subject to tax.
A: Calendar Year: Jan 25, 2005- Dec 31, 2005. Today is
2006. You have 1 year to declare after the close of the Q: Enumerate the exempt corporations under Section 30;
taxable year. 2006 is the grace period. You will pay on What is the requirement?
January 2007. A:
1. Labor, agricultural or horticultural organization not
Q: If you’re not mentioned to be exempted, will you still organized principally for profit;
be liable? 2. Mutual savings bank not having a capital stock
A: No, if you invoke adjustments represented by shares, and cooperative bank
without capital stock organized and operated for
SEC 30. EXEEMPTIONS FROM TAX ON mutual purpose and without profit;
CORPORATIONS 3. a beneficiary society, order or association,
operating for the exclusive benefit of the

Page 31 of 79
members such as fraternal organization members and turning back to them the proceeds
operating under lodge system. (lodge system: of sales, less the necessary selling expenses on
operating world wide) or a mutual old the basis of the quantity of produce finished by
association or a non-stock corporation: them.
a. organized by employees;
b. providing for the payment of life, sickness, TAKE NOTE: income of sales agent is exempt.
accident or other exclusive benefits to its
employees and their dependents; Section 31: TAXABLE INCOME
4. Cemetery (a) company owned and (b) operated
exclusively for the benefit of its members;
5. Non-stock corporation or association organized
and operated exclusively for Religious,
Charitable, Scientific, Artistic or Cultural CHAPTER VI: COMPUTATION OF GROSS
purposes, or for the Rehabilitation of Veterans INCOME
(RCSACR), no part of its net income or asset
shall belong ot or inure to the benefit of any SECTION 32: GROSS INCOME
member, organizer, officer, or any specific
person; Q: What is the tax treatment? Are these taxable income?
6. Business league, chamber of commerce, or Are these included in the gross income? Is it included in
Board of trade, (a) not organized for profit and the ITR? Is it subject to NIT?
(b) no part of the net income of which inures to A: Sec. 32 A answers the questions.
the benefit of any stock holder or individual;
7. Civil league or organization not organized for Q: What is the income tax referred to here?
profit but operated exclusively for the promotion A: NIT. The section refers only to the payment of NIT.
of social welfare. It speaks of the NIT.

CIR vs. YMCA Q: If the is mentioned under Section 32 A, does it follow

Q: What is the basis of Manila BIR for the imposition of that it is automatically included in the GIT?
the tax? A: No, Section 32 A states “Except when otherwise
A: last paragraph of Section 30, because YMCA was provided in this title”
conducting an activity for profit.
F: the CTA and the CA invoked the doctrine laid down Q: What are the income that are not included, not
in Herrera and Abra Valley case which involves an subject to NIT?
exemption from the payment of Real property Tax. A:
H: The SC revised the ruling. YMCVA is liable to pay 1. Income that are subject to FIT.
income tax applying the last paragraph of Section 30. 2. Income that are considered an exclusion; and
YMCA Is exempt from the payment of property 3. Income that are exempt.
tax, but not to income tax on rentals from its property.
The tax code specifically mandates that the Q: When do you not apply Sec. 32 A?
income of exempt organizations (under section 30) A: it applies to all except:
from any of their properties, real or personal, shall be 1. NRANETB
subject to tax, including the rent income of the 2. NRFC
YMCA from its real prop. » they do not pay NIT, they pay by way of GIT.

8. a non-stock and non profit educational institution; Q: What are included in the Gross income?
9. gov’t educational institution; A:
10. Farmer’s or other mutual typhoon or fire 1. Compensation for services in whatever form paid
insurance company, mutual ditch or irrigation including but nor limited to fees, salaries, wages,
company, or like organization of a purely local commissions, and similar items. [Sec. 32 A (1)]
character, the income of which consists solely of
assessment, dues and fees, collected from Q: What is compensation?
members for the sole purpose of meeting its A: all remuneration for services performed by an
expenses; employee for his employer under an employer-employee
11. Farmer’s, fruit grower’s or like association relationship.
organized and operated as a sales agent for the
purpose of marketing the products of its

Page 32 of 79
TAKE NOTE: compensation is included in the ITR if the A: interest which is included in the computation of gross
taxpayer is not liable for NIT. Thus, if subject to NIT, income is interest earned from lending money and interest
included in the ITR. from bank deposit which does not constitute passive
Q: Is there an instance where the salaries of a RC is not Bank interest from sources, without or abroad.
included in the ITR?
A: Yes, if the salary is subject to FIT, like when the RC Q: Bank interest from Solid Bank, is it included in the
is employed in Multinational, offshore banking, and ITR?
petroleum companies. A: No, because it is included or considered an income
within, thus subject to FIT. Thus, not included in the ITR.
2. Gross Income derived from the conduct of trade
or business or the exercise of a profession; [Sec. 32 A 5. Rents. [Sec. 32 A (5)]
► subject to NIT, included in the ITR.
Q: What is the income tax here?
A: NIT, included in the ITR. 6. Royalties; [Sec. 32 A (6)]

3. Gains derived from dealings in property. [Sec. 32 Q: What is being referred to here?
A (3)] A: royalties which does not constitute passive income.
Royalties derived from income without. – subject to NIT.
Q: Did the law distinguished? Thus not included in the ITR.
A: No, the law did not distinguished between real and
personal property. Q: Who are the taxpayers?
A: Liable from income w/in and w/out and the rest are
TAKE NOTE: exempt.
1. Sale of real property 1. RC
2. Sale of shares of stock (personal prop.) 2. DC

► if the elements are present, subject to FIT. Thus, it is 7. Dividends. [Sec. 32 A (7)]
not included in the ITR, the withholding agent will be
responsible for this. Q: What kind of dividends?
A: one that does not constitute a passive income.
Q: Income form the sale of property, do you include this
in the ITR? TAKE NOTE:
A: it depends 1. DC individual taxpayer = FIT
a. if subject to FIT, not included. Withholding agent 2. DC – DC & RFC = EXEMPT
accomplish the forms 3. DC – NRFC = FWT
→ subject to FIT if the following elements are
present: ► only dividends issued by a FC to an individual
1. it is a capital asset; taxpayer (RC OR RA) is included in the computation of
2. located in the Phil.: and the gross income. Thus, included in the ITR.
3. sold by individual, trust, estate, DC.
b. if subject to NIT, included in the ITR. 8. Annuities. [Sec. 32 A (8)]
→ Elements are not present, like when the real
prop. is an ordinary asset or when it is capital asset if the Q: What kind of annuities?
taxpayer is RFC. A: annuities which are not exempt from tax are included
in the computation of the gross income. (included in the
TAKE NOTE: R-R 17-2003 ITR)

► Real property sale subject to FWT, the buyer

accomplishes the ITR. 9. Prizes and Winnings [Sec. 32 A (9)]

4. interest; [Sec. 32 A (4)] Q: What kind of prizes and winnings?

Q: What interest is being referred to here? a. those that does not constitute passive income;

Page 33 of 79
b. those that are not considered as an exclusion. A: these are not included in the gross income, THUS,
Thus, exempt. exempt.

Passive Income TAKE NOTE: Exemptions, exclusions, deductions, have

the same characteristics → all tax do not apply.
1. Prizes – derived from sources within and over
10,000.00 1. Life insurance [Sec. 31 B (1)]
2. Winnings – derived from sources within.
Q: What is the requirement?
Exempt: A: only one requirement for exemption: that the
a. winnings: PCSO and Lotto winnings. proceeds of the life insurance be payable upon the death
b. prizes: of the insured.

► those primarily for recognition of (1)religious, Q: Does it matter who the beneficiary is or paid in a
(2)charitable, (3)scientific, (4)educational, (5)artistic, lump sun or single sum?
(6)literary, (7)civic achievement are exempt PROVIDED: A: No. it does not matter.
1. the recipient was selected without any action on
his part to enter the contest or proceedings; and Exception: amounts held by the insurer under an
2. the recipient is not required to render substantial agreement to pay interest thereon, the interest payment
future services as a condition to receiving the shall be included in the gross income.
prize or award.
2. Amount received by insured as return of
► prizes and awards granted to athletes are also premium [Sec. 32 B (2)]
exempted provided:
1. local or international sports competition or Q: if the insurance is payable within a certain time, say
tournament; 10 years and thereafter the insured did not die, how much
2. held in the Philippines or abroad; and will be excluded?
3. sanctioned by the national sports association. A: only the amount received by the insured as a return of
the premiums.
Q: When is a prize subject to NIT?
A: 1. when derived from income without; Ex. 1 M – 100 thousand = capital
2. when less than 10,000.00; It is exempt (100K)
3. when the income earner is a DC or RC.
900K is taxable.
Q: When is winning subject to NIT?
A: 1. When derived from income without; Q: Why is it excluded?
2. when the income earner is a DC or RC. A: because the amount received merely represents a
return of capital.
10. Pensions [Sec. 32 A (10)]
Q: is this subject to Estate Tax under Sec. 85 E? do we
Q: What kind of pension? have the same requirement?
A: Included in the gross income if not exempt A: no, the requirement for exemption is not the same
» never subject to fit (?) under Section 85 E.
11. Partner’s distributive share from the net income
of the general professional partnership (GPP). 3. Proceeds of life insurance: decedent insured
himself, inclusion or exclusion will depend on who
Q: What is being referred to? the beneficiary is.
A: GPP exempt from payment of corporate income tax
a. the beneficiary is the estate.
► shares of partners subject to NIT – Sec. 26 » subject to Estate tax, included in the gross estate
regardless of whether or not the designation of the
SEC 32 B EXCLUSIONS FROM GROSS INCOME beneficiary is revocable or irrevocable.
b. the beneficiary is a third person other than the estate.
Q: What do you mean by exclusions? Are these exempt b.1 Revocable Designation → subject to estate tax,
from income tax? included in the gross estate.

Page 34 of 79
Reason: because of the insured’s power to modify or 6. Income exempt under a treaty [Sec. 32 B (5)]
change the beneficiary.
b.2 Irrevocable Designation → not subject to Estate Q: What is excluded?
tax, not included in the gross estate. A: income of any kind required by treaty binding upon
Reason: the insured loses the power to control, the Phil. Government.
modify and change the beneficiary.
7. Retirement benefits, pensions, gratuities [Sec. 32
Q: Is it subject to VAT? B (6)]
A: 1. Non-life insurance – yes, subject to VAT under 108
(A). Q: Why do we need to distinguish retirement pay,
2. Life insurance – NO, subject to percentage tax separation pay and terminal leave pay?
under Sec. 123 of the Tax Code. A: because they have different requirements for
4. Gifts, Bequest and Devises [Sec. 32 B (3)]
Q: What is retirement pay?
Q: Why is the donee exempt from income tax? A: the sum of money received upon reaching the
A: Because the law classify it as an exclusion, not maximum age of employment.
important to know whether property is real or personal.
What is exempted is the “value of property acquired a. Under RA4917 (with Retirement Plan)
by gift, bequest or devise” 1. the private benefit plan is approved by the BIR
TAKE NOTE: 2. the retiring official or employee has been in the
A. GIFTS are excluded because they are subject to service of the same employer for the last 10
donor’s tax. years;
B. BEQUEST and DEVISE are excluded because 3. he is at least 50 years old at the time of retirement;
they are subject to ESTATE tax. and
4. the official or employee avails himself/herself of
Q: what is included in the gross income? the benefit only once.
A: income from such property.
b. Under RA7641 (without retirement plan)
► gift, bequest, devise or descent of income from any 1. the retiring official employee is at least 60 years
property in case of transfers of divided interest. old but not more than 65 years old;
2. the employee or official must have served the
5. Compensation for injuries or sickness [Sec. 32 company for at least 5 years;
B (4)] » entitled to 15 days salary and ½ of the 13th month
pay for every year of service.
Q: is this the same as those provided under the
workmen’s compensation act (wca)? TAKE NOTE: the retirement benefits under RA4917 and
A: YES. There are 3 groups: RA7641 are exempt from income tax provided the
a. Health or accident insurance or those under requirements are present.
workmen’s compensation.
b. personal injuries and sickness; and SEC. 32 B(6)(c)
c. Damages to prevent injuries and sickness.
► retirement benefits given by foreign government,
Q: What does injury include? foreign corporation, public as well as private to RC, NRC,
A: The term injury includes death, even if not injured, if RA residing permanently in the Philippines - exempt
the person dies this will be available. without further qualifications – automatic exclusions.

Q: when will the damages recovered be exempt? SEC. 32 B(6)(d,e,f)

A: General Rule: all damages awarded are tax exempt.
Exception: damages representing loss of income. ► retirement benefits given by the Philippine Gov’t
through the GSIS, SSS and PVAO are exempt without
Q: Why is it considered an exclusion? further qualifications = automatic exclusions.
A: because this is just an indemnification for the injuries
or damages suffered. August 21, 2006.
- midterms 6-8 pm until sec 32 B(6) NIRC.

Page 35 of 79
b. Accumulated vacation leave: if more than 10
August 28, 2006. days (meaning 11 pataas) – subject to
income tax;
ANSWERS = MIDTERMS »If 10 days or less – exempt.
2. Gov’t Employee:
► Gross Income include both capital and ordinary » governing law: EO 291 of Pres. Estrada, RMC 16-
gains, Sec. 31 says gross income-deductions, that which is 2000.
ordinary loss.
- may be deducted from capital gains and ordinary gains. Rule: Gov’t workers (both officers or non-officers)
granted TLP on a yearly basis → exempt from income
Q: What is separation pay? tax.
A: on given when one is terminated from the service → there is no qualification as to vacation or sick leave.
because of (1) illness, (2)death, (3) physical incapacity or
injury, or (4) causes beyond the control of the employee. ► Take Note of 3 cases.
» be reminded of EO 291, Sec. 2. 78.2 par. 97,
Q: Are there any requirement for separation pay granted RR2-98, RR16-200 (3).
by foreign gov’t or corp?
A: None, the separation pay granted by the Case of Zialcita
aforementioned institutions are exempt without further ► retired from DOJ, contention: TLP should be exempt
qualifications (“other similar benefits”). from income tax pursuant to the old law.
SC: on a different ground – TLP is exempt because it is
Q: is separation pay an exclusion, therefore, exempt? similar to Retirement pay, thus exempt but the ruling’s
A: No. application is limited only to DOJ employees.
GENERAL RULE: Separation pay not exempt (?)
Exception: Borromeo case:
1. Automatic exclusions, thus exempt if due to: ► Same as the Zialcita case
a. illness Issues: WON the TLP is subject to income tax and WON
b. death COLA and RATA are included?
c. physical incapacity or injury. SC: RULED TLP is Exempt!
Modified: the rule applies not only to DOJ officers but
2. Conditional exclusion also to CSC commissioners.
a. causes beyond the control of the employee-
b. within employee’s control – included. - Castañeda –DFA officer in Phil. Embassy in England.
1. TLP is exempt.
Examples: 2. Ruling applies to DFA officers.
1. registration – CBA provides separation pay,
within the control = included. Q: Does the rule or decision applies to Gov’t officials
2. installation of labor saving devises or bankruptcy only?
– beyond the control = excluded. A: No. PD220: Exemption applies to both private and
public sectors(?)
Q: What is terminal leave pay? it does not matter if TLP is vacation or sick leave.
A: the accumulated vacation leave and sick leave
benefits converted to cash or money to be given either RR2-98, Sec. 2.78.1 par. (a)(7)
every year or upon retirement or separation. » JAN, 1998 – the rule applies to both private and
public sectors.
Terminal Leave Pay granted upon retirement or
separation: EO291 (SEPT., 2000)
» uder PD220, TLP in the Gov’t or in the Private » Officer in gov’t receiving TLP is always exempt
Sector shall be exempt from income tax if given or whether or not vacation or sick leave is granted.
granted upon retirement or separation.
TLP granted on a yearly basis: Modified RR2-98:
1. employee in the private sector: » TLP will only apply to private sectors
a. accumulated sick leave – subject to income » if granted on a yearly basis – may be subject to tax:

Page 36 of 79
2. LESS THAN 10 DAYS = EXEMPT Q: Who can increase the 30,000 limit?
A: The Sec. of Finance.
8. Miscellaneous items (Sec. 32 B (7)
(a) income derived by foreign Gov’t [Sec. 32 B (7) Q: Applicable to whom?
(a)] A:
1. gov’t; and
Q: What kind of income? 2. Private institutions.
1. investments in: F. GSIS, SSS, Medicare and other contributions (Sec. 32
a. loans B 7 f)
b. stocks ► must be deducted from the GI not NIT because it is an
c. bonds exclusion.
d. other domestic securities -creditable withholding tax is an exclusion- must be
2. interest from deposits in Banks in the Philippines. deducted first from the GI before you compute the NIT.
Otherwise, you are including in the GI something that is
Q: Who are income earners? excluded from the same.
1. foreign government G. Gains from the Sale of bonds, debentures, or other
2. financing institutions owned, controlled or Certificate of indebtedness. (Sec. 32 B 7 g)
enjoying re-financing from foreign gov’ts; and
3. int’l or regional financial institutions established Q: Why 5 years?
by foreign gov’ts (established in the Philippines) A: certificate of indebtedness is similar to Bank Interest
in a long term deposit.
TAKE NOTE: if plain foreign corp., subject to FIT 20%.
- Sec. 32 B 7 g is similar or the same as 24 B in long term
EXAMPLES of exclusions: deposit.
a. Brunei Gov’t earns interest by depositing money in
Makati Bank – Exclusion. H. Gains from redemption of shares in mutual fund (Sec.
b. SMC- Stock dividends to 3. Brunei Gov’t. exclusion 32 B 7 h)
c. Income derived by the Gov’t or its political
subdivisions (Sec. 32 B (7) (b) 1. Fiscal Year – means an accounting period of 12 months
a. exercise of public utility ending on the last day of any month other than December.
b. exercise of any essential gov’t function.
» accruing to the gov’t. 2. Calendar year – a period of 12 months beginning on
d prizes and awards (Sec. 32 B 7 c) January and ending on December.
» primarily for religious, charitable, scientific,
educational, artistic, literary or civic achievements: Q: Business expense incurred in February 2006, is it
1. recipient was selected without any action on his possible to include it for April 2006?
part to enter the contest or proceedings; A: yes, it is possible or it is possible if fiscal year is
2. the recipient was not required to render substantial employed, if it falls under the fiscal year and all the
future services as a condition to receive the prize elements are present.
or award.
- related to trade or business.
D. prizes and awards in sports (Sec. 32B 7 d) REASON: Capital loss has no connection to the trade or
1. granted to athletes; business.
2. local or int’l competitions;
3. held here or abroad;
4. sanctioned by the nat’l sports associations. TAKE NOTE:
► for taxpayers liable for income within and without
E. 13th month pay and other benefits (Sec. 32B 7 e) (RC & DC)), they can claim deduction for expenses
incurred within and without.
Q: Do you include Christmas bonus in your ITR? ► for taxpayers who are liable only for income within,
A: No, because the law says 13 th month pay and “other they can claim a deduction for expenses incurred
benefits”/”similar benefits” – xmas bonus is included in within the Philippines.
the category.

Page 37 of 79
1. required as a condition for the continued
1. For those business expenses not enumerated under A. use or possession, for the purpose of the trade, business
You need to prove that it is an ordinary and necessary or possession of the property.
expense. 2. taxpayer has not taken any title or no equity other
than a lessor.
2. For those enumerated under A, all you have to prove is
that it is incurred during the taxable year. Q: Reasonable allowance for entertainment, amusement
and recreation expenses, what is the requirement?
Feb. 12, 2007 (Sec. 34 A, Expenses) A:
1. connected with the development, management,
Q: Did the law define what is reasonable? and operation of the trade (DOM);
A: No. for salaries and wages all that is required by law is 2. Does not exceed the limits or ceiling set by the
for it to be reasonable. Secretary of Finance; and
3. Not contrary to law, morals, good customs,
- for other forms of compensation, there must be services public policy or public order.
actually rendered.
Q: How about bribe, kickbacks, and other similar
AGUINLDO Case payments
A: even without this provisions, kickbacks will not pass
F: involves a corporation engaged in selling fish nets, and the requirement of (i) ordinary and (ii) necessary hence
the corporation have a land sold through a broker. not deductible
►there was substantial profits gained from the sale of a
land which was sold by a broker. The profit was in turn EXPENSES ALLOWABLE TO PRIVATE
given to the workers as special bonus. EDUCATIONAL INSTITUTION
►the corporation claimed the bonus as a deduction.
Q: Why only private educational institution is mentioned
ISSUE: Should the deduction be allowed? and no other taxpayers?
A: it refers to section 27 for Private Educational
H: The SC did not allow the deduction, for other forms of Institution given to the educational institution.
compensation, it must be made or given for services
actually rendered. GENERAL RULE: 36 A (2) and 36 A (3) expenditures for
capital outlays not deductible as business expense
►in this case, it was proven that the sale was not made by
the employees, no effort or services actually rendered by EXCEPTION: Private Educ. Institution can claim it under
them because the sale was made through a broker. Sec. 34 A (2)

Q: Reasonable Travel Expenses, What is the requirement? DEPRECIATION
1. Travel must be in pursuit of business, BUSINESS EXPENSE
trade or profession. 1. No carry-over
2. Travel expense while away from home. 2. can be claimed for one year only.
3. if the amount of capital outlay is substantial, it cannot
Q: Is there a travel expense which was not in pursuit of accommodate all of the expenses incurred.
A: yes, those which are considered as fringe benefits ALLOWANCE FOR DEPRECIATION
(FB), expenses for foreign travel is considered a FB only 1. There is carry over
if it is not in pursuit of the trade or business. 2. you can claim it for a longer period depending on the
life span of the property.
Q: can you claim it under Sec. 34 A (1)(a)(ii)? 3. it can accommodate all of the expenses incurred.
A: No, you can claim it under Sec. 34 A (1)(a)(i) last
paragraph.  taxpayer’s allowable deduction for interest expense
shall be deducted by an amount equal to 42% (RR 10-
Q: Reasonable Allowances for rentals for meralco bills, 2000) of the interest income subject to FIT.
A: Q: Who claims this deduction?

Page 38 of 79
A: the debtor claims this deduction. f. bet. a fiduciary of trust and a beneficiary of such trust.

Q: What kind of interest is this? Q: Who are not allowed to claim interest under sec 36 B?
A: interest on loan. A: interest incurred between related parties.

►interest on debt - when one borrows money to finance Q: What if half-brother?

his business interest in connection with the taxpayer’s A: not allowed to claim deduction for interest.
profession trade or business.
TAKE NOTE: interest incurred from the exploration of
REDISCOUNTING OF PAPERS : (Sec. 34 B 2 a) petroleum refers not just in interest incurred on loan of
money but also interest incurred for installment payments.
►a borrower or taxpayer can claim the interest paid in
advance as itemized deduction when he filed his income Q: Who are related parties?
tax return (ITR) depending on whether or not the A: individuals and corporations.
principal obligation has been paid.

1. if the entire amount or entire principal obligation has OPTIONAL TREATMENT OF INTEREST EXPENSE:
been paid – the entire amount of interest can be claimed 1. interest incurred to acquire property used in trade,
as itemized deduction. business or exercise of profession can be claimed a an
itemize deduction…
2. if only ½ of the obligation had been paid, then the a. on interest; or
entire amount of ½ of that interest can be claimed as a b. depreciation (as capital expenditure?)
Q: What is this interest income?
3. if no payment had been paid on the principal A: the money borrowed was deposited in a bank so that it
obligation, the advance interest paid cannot be claimed as will warn interest. (RR13-2000)
a deduction on the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF 1. loan of 1M from a bank with an interest of 20%
PAPERS: 2. 20% of 1M is Php200,000 but you cannot claim this
whole amount as a deduction.
1. incurred within the taxable year. 3. when you deposited the 1M in the bank, it earned a
2. individual taxpayer reporting income on a cash basis. bank interest subject to FIT worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
 No deduction shall be allowed in respect to the 5. Php200K-4,200= Php195,800/ this is the amount you
following interest: can claim as a deduction.

1. if within the taxable year an individual taxpayer 34 C TAXES:

reporting income on the cash basis incurs an indebtedness
on which an interest is paid in advance or through REQUISITES:
discount or otherwise. 1. taxes must paid or incurred within the taxable year
2. it must be incurred in connection with trade or
2. if both taxpayer and the person to whom the payments business.
has been made or is to be made are persons specified 3. can be claimed as:
under Sec. 36 (B): a. a deduction; or 34 C 1&2
a. member of a family b. tax credit 34 C 3&7
b. bet. an individual and a corp., more than 50% in
advance of the outstanding stock of which is owned Q: Where should it be deducted?
directly or indirectly by or for such individual; A:
c. Bet. 2 corp., more than 50% in value of the outstanding 1. if claimed as a deduction, it should be
stock of each of which is owned, directly or indirectly, by deducted from the gross income;
or for the same individual. 2. if claimed as a tax credit, it should be
d. bet. the grantor and a fiduciary of any trust; deducted from the Net Income Tax due (bottom of
e. bet. the fiduciary of a trust and the fiduciary of another the formula)
trust if the same person is a grantor with respect to each

Page 39 of 79
- Discount of senior citizens TAKE NOTE: deduct at the bottom of the formula ( sa
SC: discount claimed by senior citizens shall create a tax computation ng GI)
credit and must be deducted at the bottom of the formula.
Q: Suppose you are a RC, you pay NIT to US, will you be
Q: What is a tax deduction? Example? able to claim it as a tax deduction?
A: example is business tax.
►tax deduction is allowed if the taxes were paid or A: 1. generally, you can claim it as tax credit.
incurred within the taxable year and it must be connected 2. you can claim under Sec. 34 C (1) b
to the trade, business or profession of the tax payer.
►if the taxpayer did not signify in his return his intention
Q: Who are entitled to claim it? to avail himself of the benefit of tax credit for taxes paid
A: those liable to pay NIT. (Tax credit only for NIT) to foreign country.
►taxes incurred not related to the trade or business, you
Q: What is a tax credit? have the option to:
A: refers to the taxpayer’s right to deduct from the a. claim it as tax credit; or
income tax due the amount of tax the taxpayer paid b. claim it as a deduction
to foreign country, subject to limitations. ►law gives you this privilege.

Q: What is the tax credit being referred to under 34 C (3)? Q: When is taxes not allowed as a deduction?
A: credit against taxes for taxes of foreign country. A: Sec. 34 C (1)
1. Income tax;
Q: What are the other tax credit under the code? 2. Income tax imposed by authority of any foreign
A: country;
1. RA 6452 – selling goods and commodities to senior 3. Estate and Donor’ tax; and
citizens, the discount claimed is treated as a tax credit. 4. taxes assessed against local benefits of a
2. income tax paid to foreign country. kind tending to increase the value of the property.
3. Input tax on Vat
4. Creditable w/holding tax system under NIT
5. Tax credit certificate.
Q: Who are not allowed to claim deductions?
Q: Who are allowed to claim it? A: Under 34 C (3) - NRC, NRA; and N/RFC
A: RC and DC only.
Q: suppose you paid the 100K NIT to US, can you claim 1. NRAE and NFC – allowed deduction only if and to the
as a deduction the whole 100K? what is the formula? extent that they are connected with income from sources
within the Phils.
►same procedure for (1) income tax paid to foreign 2. Taxes that had been allowed as deduction but are later
country; (2) estate tax paid to foreign country; and (3) in refunded should be treated as part of the gross income
Donor’s tax paid to foreign country. during the year that it is received (34 1 last paragraph)

A: Formula: Q: Which would you choose? Tax credit or deduction?

STEP 1 A: tax credit because it is deducted from the taxable
income while deductions are deducted from the GI.
GI from sources w/in
NIT: _____________________ FORMULA: GI-DEDUCTION = NET INCOME x RATE
GI from entire world = TAXABLE NET INCOME – TAX CREDIT)


Quotient x RATE = amount w/c can be claimed as a Q: Is always a requirement that it is incurred in pursuit of
deduction trade, bus. or profession?
A: No. Sec. 34 D(1) provides for 2 kinds of losses:
A: you cannot claim the whole 100K, you can only claim a. incurred in pursuit of trade, bus. or profession;
the product of the quotient times the rate b. property connected with t,b,p, if the loss arises
from fire, storms, shipwrecks or other casualties or

Page 40 of 79
from robbery, theft or embezzlement (arising from 1. taxpayers is an 1. taxpayer may be an
natural calamity). individual only not individual or corp;
2. losses incurred or
Q: What is the requirement? 2. involves net capital connected with T or B;
A: loss
1. Loss actually sustained during the taxable year 3. Business losses not
2. Not compensated for by insurance or other forms previously off-set as a
of indemnity. 3. carry-over as loss from deduction from the GI
3. Not claimed as a deduction for estate tax purposes. sale of capital asset in the carried over as such for
next succeeding year the next 3 consecutive
Q: This is your itemized deduction which can be years;
claimed as a deduction from? 4. can be deducted from
A: Gross income capital gains and/or
4. can only be deducted ordinary gains.
TAKE NOTE: from capital gains.
► The itemized deduction of losses, however, is not
confined to section 34B. it is also found under section
86A (1) (e) which also pertains to deductions available
under the estate tax law.
►Losses within six (6) months after the death of the
decedent can be claimed as itemized deduction of losses
under Section 34B. However, may be claimed as NET OPERATING LOSS CARRY REQUIREMENTS:
deduction under estate tax return provided that the same 1.Net operating loss of the business or enterprise incurred
are not claimed as itemized deduction of losses under w/in the taxable year
Section 34B. 2. not previously off-set as a deduction from the GI
3. carried over as a deduction from the GI for the next 3
Q: How many carry-overs do we have under the Code? consecutive taxable years immediately following the year
A: 3. Namely: of such loss.
1. Section 27 E (32) Carry forward of excess
minimum Tax Q: Can the period be extended?
2. Section 39 D Net Capital Loss Carry- over A: yes, for mines other than oil and gas well.
3. Section 39 D 3 Net Operating Loss Carry-Over. 1. net operating loss w/out the benefit incentives
provided by law;
KINDS OF LOSSES AND THEIR CARRY-OVERS: 2. incurred in any of the first 10 years of
A. ORDINARY LOSS – NOLCO ( #3 above) 3. carried over as a deduction from the GI for
the next 5 years following such loss.
Q: Why is there a need for a carry over under Sec. 34 D # 4. no substantial change in the ownership of
when you can claim the loss from both capital and the business or enterprise.
ordinary loss?
A: if the loss exceeds the income for the taxable year, you Q: What is the limit?
cannot deduct the entire amount of loss from your income A: 75% of the nominal value of outstanding shares is
for that year so the excess may be deducted for the held by or on behalf of the same persons/ corporation
taxable year following the loss.
► individual no problem, problem lies with corporations
OVER ( # 2 above)

CARRY-OVER LOSS CARRY-OVER 1. contract area where petroleum operations are
undertaken is partially or wholly abandoned;
► all (1) accumulated exploration and (2) development
expenditures pertaining thereto shall be allowed as a

Page 41 of 79
c) between two (2) corporations more that 50% of
2. a producing well is subsequently abandoned: the outstanding capital stock of which is
►unamortized cost and undepreciated cost of equipment owned by or for the same individual
directly used therein shall be allowed as a deduction in the d) between a grantor and fiduciary of any trust
years it was abandoned. e) between two (2) fiduciaries of two (2)
trusts who has the same grantor
TAKE NOTE: f) between a fiduciary of a trust and above
1. if abandoned well is reentered and production is fiduciary of such trust
resumed; or
2. if equipment or facilities are restored into service in the SECURITIES BECOMING WORTHLESS
year of resumption or restoration and shall amortized or 1. ascertained to be worthless and charged off
depreciated. within the taxable year
2. capital asset
Q: What is the Tax benefit rule? 3. taxpayer, other than a Bank or trust company
A: Last Par. of Sec. 34 E (1): recovery of bad debts incorporated under Phil. Laws
previously allowed as deduction in the preceding year 4. substantial part of business is the receipt of
shall be included as part of the gross income in the year of deposit
recovery to the extent of the income tax benefits of said 5. considered as a loss from the sale of capital
deduction. assets on the last day of such taxable year

Q: What is a Bad Debt? 34 F DEPRECIATION

A: Bad debts shall refer to those debts resulting from the
worthlessness or incollectibility in whole or in part of Q: What is depreciation?
amounts due the taxpayer by others, arising from money A: It is the gradual dimension in the service or useful
lent or from uncollectible amounts of income from goods value of tangible property due from exhaustion, wear and
sold and services rendered. tear and normal obsolescence.


► bad debts can only be claimed if pursuant to a contract Q: What kind of property is involved?
of loan A: 1. Real property except parcel of land
- no bad debts for loss of instruments. 2. Personal Property

Q: Who claims it? REQUISITES:

A: a. creditor 1. depreciation deduction must be reasonable
c. money lender 2. for the exhaustion, wear and tear, including
reasonable allowance for obsolescence
Q: What year can it be claimed? 3. property used in the trade of business
A: can be claimed in the year it was actually sit
ascertained to be worthless and charged off, meaning Q: What do you mean by “reasonable allowance”?
cancelled in the books of account. A: it shall include, but not limited to, an allowance
computed in accordance with rules and regulations
Q: Do you need to file an action before you can claim? prescribed by the Secretary of Finance, upon
A: No, all you have to do is prove that you did exert effort recommendation of the Commissioner, under any of the
to claim or recover the same. following methods:
1.Straight-line method
Q: What cannot be deducted as bad debts? 2.Declining balance method
A: 3.Sum-of-the-year-digital method; and
1. debts not incurred in connection with the trade, 4.any other method which may be prescribed by the
business and profession of taxpayer. Secretary of Finance upon recommendation of the
2. transactions, mered into between parties Commissioner
mentioned under Section 36 (B) namely.
a) between members of the family DEPRECIATION OF PROPERTIES USED IN
b) between an individual who owns more than PETROLEUM OPERATIONS
30% of outstanding capital stock of a corporation
and that corporation 1. properties directly related to production of

Page 42 of 79
2. allowed under (1) straight line or (2) ►Equipment used in mining operation is deductible in
declining balance method depreciation
3. useful life of properties used or related to
production of petroleum shall be ten (10) Q: Method for computing depletion?
years or such shorter life as may be permitted by A: cost depletion method
the Commissioner.
4. for property not used directly in the production Q: to whom allowed?
of petroleum (1) depreciated under the straight line A: only mining entities owning economic interest in
method, and useful life is only five (5) years mineral deposits
►Economic interest: capital investments in mineral


1.all properties used in mining operations other than
petroleum operations shall be computed as follows: TAKE NOTE:
a. if the expected life is ten (10) years or less – normal 1.unique because deducted from the taxable net income
rate of depreciation and not from the gross income
►second step of the formula deduction

b. if the expected life is more than ten (10) years – Q: Who is claiming the deduction?
depreciated over any number of years between five (5) A: the donor
years and the expected life.
Q: Who are the Donees?
REQUIREMENTS: A: 1.Government of the Philippines or any of its
1. depreciation is allowed as a deduction from 61; and agencies or any political subdivision thereof
2. contractor notifies the Commissioner at the exclusively for public purpose
beginning of the depreciation period which 2. Accredited Domestic corporation or association
depreciation rate shall be used. organized and operated exclusively for religions, lion,
charitable, scientific, youth and sports
DEPRECIATION DEDUCTIBLE BY NRAETB OR RFC development, cultural or educational purposes or for
► reasonable allowance for the deterioration of property the rehabilitation of veterans, or to social
welfare institution, or to non government
1. arising out of its use or employment organization and no part of its net income inures
2. or non-use in the business, trade or to the benefit of any private stock holder or individual
3. property is located in the Philippines Q: How many kinds of deduction?
A: Two (2) kinds:
34 G DEPLETION OF OIL and GAS WELLS and 1.partial deduction
MINES ►10% of taxable income in case of an
► only deduction which is a not self executing deduction individual
►5% of taxable income in case of
Q: What is depletion? corporations
A: the exhaustion wear and tear of natural resources as in 2. full /total deduction
mines, oil, and gas wells
►the natural resources called “wasting assets” Q: Which of the two kinds is the General Rule?
A: General Rule: Partial deduction
DEPRECIATION vs DEPLETION Exception: Total /Full deduction

1.involves property 1. involves natural Q: Suppose Mr. A made a cash donation of P1M. How
resources much can he claim as a deduction?
2. ordinary wear and 2. ordinary wear and A: First determine the taxable income of Mr A since he is
tear of equipments tear of natural an individual, he can only deduct 10% of his taxable
resources income.


Page 43 of 79
Q: What if the Donee is not one of those mentioned under
the law, can he claim a deduction? 4. annual administrative expense does not exceed 30%
A: No. of the total expenses and
5. in case of dissolution, the assets of which would be
TAKE NOTE: Donee is never an individual. distributed to:
a) another non profit domestic corporation organized
for similar purpose or purposes
Q: If the Donor is a pure compensation income earner and b) to the state for public purpose
he donates P100,000 to the church, can he claim it as a c) distributed by the court to another organization to
deduction? be used in such a manner which would accomplish
A: No. pure compensation income earner can only claim a the general purpose for within the dissolve
deduction under Sec 34 M organization was organized

Q: If Donee is the Philippine Government, what is the 34I RESEARCH AND DEVELOPMENT
A: it must be made exclusively for public purposes ►In the old law, this is not allowed as a deduction. To
remedy this, they felt that those should be a separate
Q: What if the Donee is a province? deduction for research and development.
A: there must be a qualification that it is for public
►tax payer may treat research and development
Q: If the Donee is a Domestic Corporation, what is the expenditures as ordinary and necessary expenses
requirement? provided:
A: no part of its income inures to the benefit of any 1. it is paid or incurred during the taxable year
private shareholder or individual 2. incurred in connection with trade, business or
profession; and
Q: What are those contributions which can be 3. not chargeable to capital account.
deductible in full?
A: 1.Donations to the Government – no conflict with Q: Treated as such when?
partial (different requirement) A: during the taxable year it is paid or incurred
►Partial donated for exclusively public
►Full, used in undertaking priority activities of DEVELOPMENT EXPENDITURES
►at the election of the taxpayer, the following shall or
2.Donations to certain Foreign Institutions or may be treated as deferred expenses:
International Organizations a. paid or incurred by the taxpayer in connection with
►in compliance with agreement, treaties or his trade, business or profession;
commitment entered into by the Philippine b. not treated as expenses under par 1 and
Government and such donees c. chargeable to capital account but not chargeable to
property of a character which is subject to depreciation
3.Donations to Accredited Non government or depletion
organizations Non government organization, non
profit domestic corporation Q: How to compute taxable income:
A: deferred expenses shall be allowed as deduction
REQUIREMENTS: ratably distributed over a period of not less than 10
1. organized and operated exclusively for scientific, months as may be elected by the taxpayer (beginning with
research, educational, character building and youth and the month the
sport development, health, social welfare, cultural or
charitable purposes or a combination thereof taxpayer first realizes benefits from expenditures.)
2. no part of the net income of which inures to the benefit
of any private individual ►the election or option may be exercised for any taxable
3. uses the contributions directly for the active conduct of year after the effectivity of the code but not later than the
the activities constituting the purpose or function for time prescribed by law for filing the return for such
which it is organized and operated taxable year.

Page 44 of 79
LIMITATION ON DEDUCTION ►can be availed of by an individual who may elect a
Q: When not deductible? standard deduction in an amount not exceeding 10% of
A: 1.Any expenditure for the his gross income
(1) acquisition or improvement of land or (2) ► may apply in lieu of the other deductions under
for the improvement of property to be used in Section 34
connection with research and development of a ►the taxpayer must signify in his return his intention to
character which is subject to depreciation and elect the optional standard deduction, otherwise, he shall
depletion and office site be considered as having availed of the itemized
2. Any expenditure paid or incurred for the purpose
of undermining the existence, location, extent or Q: Who can claim this deduction?
quality of any deposit of one or other mineral A: all individual taxpayers except non resident alien not
including oil or gas. engaged in trade or business (NRANETB)
► not for mineral exploration Reason: he is not liable to pay by way of the NIT, thus,
follows he cannot claim this deduction because he is
34 J PENSION TRUST liable to pay by way of GIT.

Q: Claimed by Whom? TAKE NOTE:

A: the employer ►can co-exist with personal and / or additional
Q; What is a Pension Trust contribution?
A: a deduction applicable only to employer on account of 34 M PREMIUM PAYMENTS ON HEALTH AND
its contribution to a private pension plan for the benefit of /OR HOSPITALIZATION INSURANCE OF AN
its employee deduction is purely business in character. INDIVIDUAL TAXPAYER
► for (1) Health and /insurance
Q: Requisites? (2) Hospitalization
1.the employer must have established a pension or REQUIREMENTS:
retirement plan to provide for the payment or reasonable 1. amount of premiums, paid by taxpayer for himself
pension of his employees and members of his family,
2. pension plan must be reasonable and actually sound; 2. amount of premiums should not exceed (1) P2,400
3. it must be funded by the employer per family or (2) P200 a month
4. the amount contributed must no longer be subject to his 3. gross income of the family for the taxable year
control or disposition is not more than P250,000
5. the amount has not yet been allowed as a deduction and
6. the amount has or is apportioned in equal parts over a
period of 10 consecutive years beginning with the year in
which the transfer or payment is made. Q: Who can avail of this deduction?
A: 1.individual taxpayer earning purely compensation
34 K ADDITIONAL REQUIREMENTS FOR income during the year;
DEDUCTIBILITY OF CERTAIN PAYMENTS 2. individual taxpayer availing itemized or optional
standard deduction; and
►allowed as a deduction only if shown that the tax 3. individual taxpayer earning both compensation
required to be deducted and withheld there from has been income and income from business
paid to the BIR in accordance with Section 58 and Section
Q: When do we apply this?
KINDS OF DEDUCTIONS: A: apply if individual taxpayer is paying by way of NIT
1.Itemized deduction
2.Optional Standard Deduction Q; Who are taxpayer?
3.Personal /Additional Deduction A: those mentioned under Section 24 (A)
1. RC
3. OCW

Page 45 of 79
4. RA ►R.A. 7432 and RR 2-98: a senior citizen can also be a
►all can claim both personal and additional exemption dependent.

Q: Why not include NRAETB? Can the latter claim Q: Can a widower claim exemptions?
any exemption? A: exemptions must be strictly construed, widower not
A: NRAETB is not included because Section 35 A refers included in the list under Section 35 A – but can claim
to Section 24 A under sec 35B
►NRAETB can claim personal deductions but not ►widower, married or used to be married
additional exemptions pursuant to Sec 35 D
REQUIREMENTS: ►each legally married individual can claim the personal
1.NRAETB should file a true and accurate return exemption. Husband and wife = P64,000
2. the amount to be claimed as personal exemptions
should not exceed the amount provided for under Q: Who are allowed to claim?
Philippine Laws A: Normally , it is the husband who claims unless he
executes a waiver that the wife will claim the same
AEMOP: can be a RA or NRAETB
Additional Exemptions: (35B)
-additional exemption of P8,000 for each dependent not
1. Single individual; or individual judicially decreed as execeeding four (4)
legally separated with no qualified dependents.
► 20, 000 Q: Who can claim the same?
A: 1.Married couples: only one of the spouses can
2. For head of the family – can be single or legally claim it;
separated with qualified dependents. 2.legally separated individuals: can be claimed by the
► 25, 000 spouse who has custody of the child or children
►the additional exemption claimed by both shall not
3. For each married individual – if only one of the exceed the maximum additional exemption herein
spouse, earns or derives gross income, only such spouse allowed.
can claim the personal exemption.
►32, 000 Q: Define “dependents”
A: legitimate, illegitimate or legally adopted child chiefly
Q: Who is the “head of the family”? dependent upon and living with the taxpayer if such
A: 1.unmarried or legally separated man or woman dependent is (1) not more than 21 years of age, (2)
2. With (1) one or both parties or unmarried, and (3) not gainfully employed or (4) if such
(2) With one or more brothers and sisters dependent, regardless of age is incapable of self support
(3) with one or more legitimate, recognized, because of mental or physical defect.
natural or legally adopted children
3. living with and dependents upon him for their Q: What if widower has illegitimate children, can claim
chief support additional exemption?
4. whose such brother or sisters or children are A: can claim, can be considered as head of the
(1) not more than 11 years old and family w/ dependent
(2) not gainfully employed,
(3) unmarried Q: What if the children are temporarily away
5. OR, regardless of age, the same are incapable of from the parents?
self support because of mental or physical defect. A: still considered living with parents, can claim
Q: Why do we have to determine who the head of the
family is? CHANGE OF STATUS: (SEC 35 C)
A: only legally separated individuals can claim Q: Reckoning Period?
additional exemptions if they have qualified dependents. A: end of the year or close of such year when such
change of status occurred.

Page 46 of 79
►always choose the higher amount of exemption if you ►Amount paid for new buildings, can be deducted if it
are filing a return covering the period within which the involves intangible drilling and development cost incurred
change of status occurred in petroleum operations (Sec 34 6 (A)

1. if the taxpayer should (1) marry or (2) have additional PREMIUMS PAID ON LIFE INSURANCE
dependents during the taxable year, he may claim the POLICY :
corresponding exemption in full for the year.
1. covering the life of any officer or employee or
Illustration: any person financially invested in any trade of
1.Single Jan 1, 2005 business carried on by the taxpayer.
2.Married June 1, 2005 – on April 15, 2006 – status: 2. taxpayer is directly or indirectly the beneficiary
legally married can claim P 32,000 under such policy.

2. if the taxpayer should die during the taxable year, estate LOSSES FROM SALES OR EXCHANGES OF
can claim personal exemption. PROPERTY (between related parties)

Illustration 1) between family members

1.Jan. 25, 2005 taxpayer married w/ one child
can claim on April 15, 2006 Q: Who is considered the “family of the taxpayer?”
P32,000+ A: a. brothers and sister (whole is ½ blood)
P8,000 } P40,000 b. spouses
c. ancestors
► In this case, as if the change of status occurred at the d. lineal descendants
close of taxable year. If taxpayer’s spouse or child dies Q: are uncles or nieces included?
within the taxable year or the dependent’s became (1) A: no
gainfully employed (2) got married or (3) became 21 as if
the change as status occurred at the close of taxable year.
1. Taxpayer’s tragic story wife died Jan. 25, 2005 and IN DONOR’S TAX
child died the next day then another child eloped and get ►Relatives includes relatives by consanguinity within the
married. 4th civil code. Nephew is a stranger and relative ang
2. Taxpayer despite the tragedy can claim ton of money nephew.
on April 15, 2006.
P 32,000 2) individual and corporations
P 16,000 (8,000 per child) Gen. Rule: NO DEDUCTION
48,000 Except: distribution in liquidation or less than
50% of the outstanding capital stock
Section 36. Items not Deductible
3) Two corporations
36 A. General Rule: In computing net income, no 4) Grantor or Fiduciary
deduction shall be allowed: 5) Two fiduciaries of two trust
(1) Personal, living or family expenses – not related to 6) Fiduciary and beneficiary of trust
trade or business
(2) Section 36 A (2) and Section 36 A (3) General Rule: Sec. 37 Special provisions regarding deductions of
No deductions allowed for insurance companies.
1. Any amount paid out for new buildings or for
permanent improvements, or betterments, made to Codal Provisions
increase the value of any property or estate Section 38: Losses From Wash Sales of Stock or
2. Any amount expanded in restoring property or in Securities
making good the exhaustion thereof for which an
allowance is or has been made. Q: What is a wash sale?
Exceptions: A: It is a sales or other disposition of stock securities
1. Option granted to Private Educational Institution where substantially identical securities are purchased
to deduct the same as capital outlays. within 61 days, beginning 30 days before the sale and
TAKE NOTE: ending 30 days after the sale.

Page 47 of 79
Q: What period? ►ordinary asset: apply the cost
A: 61 day period beginning 30 days before and ending 30 ►capital asset: 6% FMV or selling price which ever
days after the sale is higher
Q: Jan 20 you purchased share of stock, and disposed of
the same on Feb 5, 2005. Is this a wash sale? Q: Do we apply the holding period?
A: No A: No, holding period does not apply to the sale of real
property. This is an absolute rule:
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2) ►If realty is ordinary – holding period does not
gains from wash sale are taxable but apply.
losses are non-deductible ►If realty is capital asset – 6% FMV or selling price
Exception: applies.
►unless claim is made by a dealer in stock or securities
and with respect to a transaction made in the ordinary ►Holding period applies only to sale of personal property
course of the business of such dealer which is a capital asset except sale of shares of stocks.

Q: Reason why losses in wash sale cannot be deducted?

A: 1. to avoid too much speculation in ►Holding period also do not apply to corporations.
the market
2. taxpayer not telling the truth, because he Q: If the property is acquired through inheritance,
may say he incurred a loss instead of a gain what is the basis?
A: Sec 40 B (2) fair market value or price as of the date
Section 40. Determination of Amount and Recognition of acquisition.
of Gain or Loss
Q: Suppose it was a sale of personal property, do we
GENERAL RULE: This is totally irrelevant if the apply the same principles?
income is subject to fit. In fit gain is presumed. A: No.
Q: What if it involves a sale of real property?
EXCEPT: sale of shares of stock where you have to A: Apply the same principles
determine actual gain or loss
Suppose it was a result of swindling, theft, robbery or
Q: When is there a gain? estafa, do we apply the same principles?
A: excess of the amount realized over the basis or A: Law is silent, take note of the old CIA ruling on this
adjusted basis for determining gain. (amount realized one
from the sale or other disposition of property)
Q: Feb 14, 2006, your GG gave you a jewelry in Sept
Q: When is there a loss? your GG breaks up with you. GG request the jewelry
A: the amount realized is not in excess of B or AB be returned but you already sold it for P200,000.
Illustration: 1987 Bar (Juan dela Cruz sold jewelry Will the entire P200,000 be included in gross
for 300,000 ) contract of sale income?
►amount realized is 300,000
A: Basis: (1) same as if it would be in the hands of the
Q: What will be the basis of the gain? Donor (FMV as of date of acquisition); or (2) last
A: Sec. 40 B (1), property was acquired by purchase owner who did not acquire the same by gift (cost)
►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain subject to income Q: If it involves a parcel of land?
tax? A: apply the same rules Section 40 B (4) what is the
A: it depends basis?
►if ordinary asset = 100% is subject to income tax 1. Property was acquired for less than an
►if capital assets adequate consideration in money or moneys
a. short term(less than 12 months) : 100% taxable worth: the basis would be the amount paid
b. long term (more than 12 months): 50% taxable by the transferee for the property.

Q: suppose property sold is a parcel of land will the rule Q: Section 40 B (5) what is the basis? A: 40 C (5)
be the same?
A: No, and it depends

Page 48 of 79
► if the property was acquired in a transaction where
gain or loss is not recognized (pursuant to a merger or (40 C (3) (b) TRANSFEROR
consolidation plan)
a. corporation, party to a merger or consolidation, 1.Transferor corporation receives money and / or
exchanges property solely for stocks in another property, distributes it pursuant to the merger or
corporation, also a party to the merger or consolidation plan
consolidation ►no gain to the corporation shall be recognized
b. is a party to the merger or consolidation, solely 2. Transferor corporation receives money and / or
for the stocks of another corporation also a property, does not distribute it pursuant to the merger or
party to the merger or consolidation, or consolidation plan
c. Security holder of a corporation, party to a ►the gain shall be recognized but in an amount not in
merger or consolidation, exchanges his excess of the sum of such money and the FMV of such
securities solely for stock or security in another other property so received.
corporation, also a party to the merger or
consolidation. – person transfers property to Q: What is the rule?
corporation to gain control A: 40 C (3) (a)
1. gain taxable
40 C EXCHANGE OF PROPERTY 2. loss not deductible
►40 C (3) (b)
GENERAL RULE: In sale or exchange of property, the It depends on how distributed:
control amount of gain or loss shall be recognized. 1. pursuant to the merger or consolidation plan:
1. gain is taxable ►gain exempt
2. losses are deductible ►loss not deductible
Exception: If permanent to a merger or consolidation 2. not pursuant to merger or consolidation plan:
plan, no gain or loss shall be recognized ►gain taxable
1. gain is exempt ►loss not deductible.
2. losses are not deductible
REQUISITES: Sec 40 C (1) (b)
1. the transaction involves a contract of exchange ►a shareholder exchanges stock in a corporation
2. the parties are members of the merger or which is a party to a merger or consolidation, solely
consolidation for the stock of another corporation which is a party
to the merger or consolidation
3. the subject matter is only limited or confined
with the one provided for by law Sec 40 C (2) (c)
► a security holder of a corporation which is a party
►Merger and Consolidation in corporation code and tax to the merger or consolidation, exchanges his
code are not the same. securities in such corporation, solely for stock
►Sec 40 (2) (a) securities in another corporation.
►a corporation which is a party to a merger or
consolidation, exchanges property solely for stock in ►The rule is similar in 40 C (3), (a), (b) and (c) although
a corporation which is a party to the merger or different property are involve, that is why the last
consolidation paragraph of 40 C is a separate paragraph.

Illustration: ►Therefore, Sec 40 C (3) (a,b,c) the rule is

Transferor gives 1M 1. gain exempt
Transferee gives 700,000 = not taxble gain 2. loss not deductible

►If other property received by transferee (40 C (3) (a) 40c last paragraph
TRANSFEREE ► the transferee becomes a stockholder, parties are
►if the party receives not just the subject matter not members of the merger
permitted to be received: lie if the party receives
money and /or property, the gain, if any, but not the ►the individual wants to be a shareholder but does
loss, shall be recognized (meaning taxable) but in an not want to purchase shares but willing to give up
amount not in excess of the sum of the money and the property as a result of the exchange , the person gains
FMV of such other property received. control of the corporation

Page 49 of 79
►The rule is: 1. once every 3 years
a. gain is exempt 2. approval of the secretary of finance
b. loss not deductible
Requisites: Section 43 Accounting Periods
1. There is A contract of exchange where 1. Fiscal year
property was transferred by the person in 2. use of calendar year
exchange of stock or unit of participation in a. no annual accounting
a corporation. b. does not keep books of account
2. As a result, the person alone or together c. individuals
with others (not exceeding of 4 persons)
gains control of the corporation. ►Use of method as in the opinion of the commissioner
clearly reflects the income:
Q: What is control? 1. no accounting method has been employed
A: ownership of stocks in a corporation possessing at 2. the method does not clearly reflect the income
least 51% of total voting power.
Sec 44 Period in which items of Gross Income included
Sec 40 B (5) and Sec 45 Period for which Deductions and Credit
►non applicability of income tax is only temporary Taken
►Under Sec 44 amount of all items of gross income
Reason : Basis will be 40 C (5) shall be included in the gross income for the taxable
1. 40 C (5) (a) Transferor year in which they are received by the taxpayer
►basis of stock or securities received by the ►Under Sec 45 deductions shall be taken for the
transferor: same as the basis of the property, stock or taxable year in which “paid or accrued” or “paid or
securities exchanged: incurred.”
►decreased by the (1) money and (2) FMV of the
property received; and ►Sec 44 and Sec 45 are mentioned in the code because
►increased by (a) amount treated as dividend and (b) of the death of the person.
amount of gain recognized
2. 40 C (5) (b) Transferee Facts: taxpayer dies in the middle of the year
►as it would be in the hands of transferor increased January 1, 2006 – June 15, 2006
by the amount of gain recognized. ►June 26, 2006 to Dec 31, 2006 the estate is the
Sec 40 (c) (4) Assumption of Liability ►So the income and deductions from Jan 1 to June
1. Taxpayer, in connection with the exchanges 25,, included in the computation
described – receives securities or stocks
permitted (no gains recognized) – it is sole Section 46 Change of Accounting Period
consideration of the same – the other party Q: Who is the taxpayer?
assumes liability of the same – the acquisition of A: corporation (taxpayer other than individual)
liability not treated as money and / or other
property – the exchange still falls within the Q: What kinds of accounting period?
exceptions. A: 1.fiscal year
2. If amount of liabilities assumed + amount of 2. calendar year
liabilities to which property is subjected to
exceeds - adjusted basis of the property Q: Changes contemplated?
transferred – the excess shall be considered a
gain from the sale of a capital asset or of A: 1. fiscal to calendar
property which is not a capital asset, as the case 2. calendar to fiscal
may be. 3. fiscal to another fiscal

SECTION 41 INVENTORIES ►with the approval of the Commissioner, net income

shall be computed on the basis of the new accounting
Purpose: Change of inventory to determine clearly the period.
income of any taxpayer/ to reflect the true income.
Q: Calendar to calendar, correct?

Page 50 of 79
A: not correct statement Requirement: The initial payments do not exceed 25% of
the selling price.
Section 47 (A)
Taxpayer: Corporation Q: If the initial payment exceeds 25% what do you call
1. Fiscal to calendar it?
► separate final or adjusted return shall be made for A: called deferred sale
the period between the so close of the last fiscal year
for which the return was made and (2) the following Q: Consequence?
Dec 31. A: you must pay the whole amount of the tax

2. Calendar to Fiscal Q: Sale of Personal Property, is it important to know if it

►separate final or adjusted return shall be made for is a casual or regular sale?
the period between the close of the last calendar year A: Yes
and the date designated as the close of the fiscal year.
Casual Sale has Requirements:
3. Fiscal to fiscal 1. selling price exceeds P1,000
►separate final or adjusted return shall be made for 2. initial payment not exceeding 25%
the period between the close of the former fiscal year selling price
and the date designated as the close of the new fiscal
year. ►Regular sale no requirements
►File return indicating the change in accounting Case of Bañas
method 1. subject matter
2. sold by way
Section 48 Accounting for Long Term Contracts 3. agreement
4. cash deposit
Q: Who are the professionals involved? 5. post dated promissory notes (installments)
A: applies to architects and engineers 3. 1st installment promissory note was disconnected
4. 2nd installment exchanged with cash - these two
Q: What is a long term contract? exceeds the selling price
A: it means building, installation or construction contracts 5. you only compute cash
covering a period in excess of one (1) year.
H: Initial payment exceeds 25% installment basis is not
Q: Basis of income? applicable
A: a. persons whose gross income is derived in whole or
in part from such contract shall report such income RR 2; Section 175: In payment by way of installment
upon the basis of percentage of consumption. promissory note, bills of exchange and checks will not be
considered in computing the 25% initial downpayment.
b. the return shall be accompanied by a certificate of
architects or engineers showing the percentage of
completion Section 50 Allocation of Income and Deductions
►tremendous power of the Commissioner to allocate
c. deduction of expenditures made during the taxable the income and deduction of several corporations
year, on account of the contract is allowed having the same interest.
Q: Same interest?
Section 49 Installment Basis A: stockholders substantially the same
►contemplates a seller of the property
Q: Limitations?
Q: Is it important to know if the property is personal or A: None
real? ►That is why it is a great source of corruption
A: Yes
Section 51 Individual Returns
Q: Sale of Real Property is it important to know if it is a Who are required to file? (ITR)
casual sale or regular sale? 1. RC
A: No 2. NRC
3. RA
4. NRAETB – sources within

Page 51 of 79
Fiscal year: 15th day of the 4th month following the close
Q: Who is not mentioned in Sec 51 but liable to pay by of the fiscal year.
way of NIT?
A: OCW/ seaman 51 C (2) individuals subject to tax on capital gains
Exception: General Rules Sec 58
Exception: 1. Sale of shares of stocks
RC OR ALIENS: engaged in trade or practice of ►return filed within 30 days after each transaction and
profession in Phil. Shall file ITR regardless of the amount ►Final consolidated return on or before April 15
of gross income. 2.Sale of Real Property
►return filed within 30 days following each sale
Q: If OFW is exempt from filing a return, what is he
required to file? 51 D Husband and Wife
A: Information Return 1. Pure compensation income earner – separate return RR
3-2000 – pure compensation income earner regardless of
Q: who are not required to file a return? amount of income not file ITR.
A: 2. Not pure compensation: joint return
a. an individual whose gross income does not
exceed his total personal and additional 51 E. Return of Parent to Include Income of Children
exemptions for dependents
b. worker (compensation income earners) ► unmarried minor receives income from property
regardless of the amount of compensation shall received from living parent – included in the parent’s ITR.
not required to file ITR because the management Exception:
files it. (RR 3-2002) 1.Donor’s tax has been paid
c. individuals whose sole income is subject to FIT 2.Property exempt from donor’s tax
d. individuals who are exempt from income tax
51 F. Persons Under Disability
Exception: IT
1. the management files an incorrect return Q: Who makes the return?
2. the employee has two or more employer A:
1.duly authorized agent
51 A (3) 2. duly authorized representatives
3. guardians
A: not required to file ITR may be required to file 4.other persons charged with the care of his person
information return or property
►both incapacitated taxpayer and agent will be liable
51 B - Where to file? for:
1. authorized agent bank 1.erroneous return
2. revenue district officer 2. false or fraudulent return
3. collection agent
4. duly authorized treasurer of the city or 51 G Signature Presumed Correct
municipality where taxpayer resides or has principal ► prima facie evidence the return was actually signed by
place of business the taxpayer
5. office of commissioner – if no legal residence or
place of business in Phil Section 52 Corporation Return
►go back to Sec 51 A (2)
51 C
Q: When to file? General Rule: Sec 58 Final Income
A: filed on or before the 15th day of April each year Tax
►return and creditable withholding tax return is filed
51 C (1) – NIT Payers using CY monthly
►two days provided (calendar)
1. on April 15; or Exception: Sale of Shares of Stocks
2. before April 15 (January, Feb or March) (Sec 51 A (2)) Sale of Real Property
► not December because the calendar year is not yet over ►RR -17-2003: Sale of Real Property subject to final
withholding tax, the buyer is deemed the agent.

Page 52 of 79
Sale of Shares of Stocks C. Return of Corporation Contemplatory Dissolution or
Q: Reasons for filing Final Income tax or Final Recognition
Consolidated Return? 1.Within 30 days after:
A: Reasons: a. the adoption by the corporation of a resolution or
1. FIT whose actual determination of gain or loss plan for its dissolution; or
2. in connection with Sec 24 C the basis of the b. liquidation of the whole or any part of its capital
tax is not the gross income but the net capital stock, including a corporation which has been
gains realized. notified of possible involuntary dissolution by the
SEC; or
In connection with Sec 40: c. for its reorganization
►actual determination of loss or gain
►file a return within 30 days from date of transaction 2.Render a correct return verified under oath setting form:
a. forms of the resolution or plan;
TAKE NOTE: In all other income subject to FIT, the b. such other information prescribed
gains are presumed
3.Secure a tax clearance from the BIR and file it with the
Q: Minor below 18: Will it be included in the Minor’s
A: it depends 4.Thereafter, SEC issued a Certificate of Dissolution or
1. income from property received from parents ► Reorganization.
included in parent’s ITR
Except: D. Sale of Stocks – ITR
a.Donor’s tax paid look at the previous notes about it
b.Property exempt from donor’s tax
Section 53 Extension of Time to File Returns
2. income from minor’s own industry
►Minor’s ITR accomplished by guardian or parents Q: To whom granted?
A: Corporations
Q: if the individual is exempt from income tax, can be Grounds: Meritorious case
required to file a return? ►subject to the provisions of Sec 56 Time Extension
A: General Rule: No
Exceptions: Section 54 Returns or Receivers, Trustees in
1.engaged in trade or business; or Bankruptcy or Assignees
2.exercise of profession – Sec 51 A (2) ►the aforementioned persons shall make returns of
net income as and for such corporation in the same
SEC 52 CORPORATION RETURNS manner and form as such organization is required to
A.Requirements make.
Taxpayer: DC or RFC (except NRFC)
ITR Filed: 1. TRUE AND ACCURATE Section 55 Returns of General Professional
a. quarterly income tax return Partnership
b. final or adjusted income tax return ► file a return of its income setting forth
1. items of gross income and of deductions allowed
Filed by: by this title (Title II – Tax on Income)
1.President; 2. Names of partners
2.Vice President 3. Taxpayer identification number (TIN)
3. Other principal officer 4. address of partners
►ITR must be sworn by such officer and the treasurer or 5. shares of each partners
assistant treasurer
►GPP is exempt from corporate income tax
B. Taxable Year
1. fiscal; or 2. calendar Q: Why is the GPP obliged to file a return?
► corporation cannot change accounting method A: to determine the shares of each partners
employed without the approval or prior approval of the
commissioner (Sec 47) Section 56 Payment and Assessment of Income Tax for
Individuals and Corporations

Page 53 of 79
► Return is filed, the commissioner examiner and assess
A. Payment of Tax the correct amount of tax
►tax deficiency discovered shall be paid upon notice and
Q: Who pays the tax of tramp vessels? demand from the commissioner.
A: 1.the shipping agents and or the husbanding agent their absence, the captains thereof 3 INSTANCES CONTEMPLATED
►those people are required to file a return and pay the tax 1. file the return and pay the tax
due before departure 2. file the return but not pay the tax
3. not file the return and not pay the tax
Q: What is the effect of failure to file the return and pay
the tax due? Section 57 Withholding of Tax at Source
A: 1.Bureau of Customs may hold the vessel and prevent
its departure until: A. Withholding of Taxes
a. proof of payment of tax is presented; or ►subject to the Rules and Regulations the Section of
b. a sufficient bond is filed to answer for the tax Finance may promulgate, upon recommendation of
due. commissioner: Require the filing up of certain income
tax return by certain income payees.
Installment Payments
Tax due: more than P2,000 Q: Enumeration is all about what?
Taxpayer: individuals only (other than corporation) A; Enumer ation about Final Income Tax
Elect to pay the tax in two (2) equal installments Except: Gross Income Tax
1. 25 B (NRANETB)
a. 1st installment: paid at the time the return is filed 2. 28 B (NRFC)
b. 2nd installment on or before July 15 following the
close of the calendar year B. Withholding of Creditable Tax at Source
►The Sec. of Finance, upon recommendation of
Q: What is the effect of non payment on the date fixed? the commissioner require the withholding of a tax
A: The whole amount of tax unpaid becomes due and on the items of income payable to natural or
demandable together with the delinquency penalties. juridical persons, residing in the Phil, by payor-
corporation/ person… the same shall be credited
Payment of capital gains tax : against the income tax liability of the taxpayer for
Q: Paid when? the taxable year. At the rate of not less than 1% but
A: on the date the return is filed not more than 32% thereof.
Avail exemption for capital gains:
a. no payments shall be required; Q: What is the maximum?
b. if you fail to qualify for exemption – tax due shall A: Maximum: now 35% pursuant to RA 9337
immediately become due and payable and Q: When will you allow withholding beyond 15%?
subject to penalties A:
c. seller pays tax – submit intention or proof of intent For NIT 15% is the maximum
within six (6) months from the registration of 1. FIT – the amount of withholding is totally
document transferring 2. GIT - equal to the amount of tax
Q: when is the real property entitled to refund?
A: upon verification of compliance with the Tax Free Covenant Bond
requirements for exemption. ►the bonds, mortgages, deeds of trust or other similar
obligations of
►Report gains on installments under Sec 49 – tax
due from each installment payment shall be paid DC or RFC
within 30 days from the receipt of such payments. ►contains a contract or provision where the obligor
►No registration of document transferring real (debtor) agrees to pay the tax imposed herein
property ►normally between the creditor and debtor
1. without a certification from commissioner or his
duly authorize representative that Q: Who pays the tax?
a. transfer has been reported A: Creditor pays the tax by virtue of an agreement the
b. tax has been paid debtor assumes the liability and the creditor is now free
from payment of tax before it can transfer the property to
B. Assessment and Payment of Deficiency Tax the buyer.

Page 54 of 79
►Withholding agent shall submit to the commissioner an
Section 58 Returns and Payment of Taxes Withheld at annual information return containing :
Source 1. the list of payees and income required
2. amount of taxes withheld from each payees
A. Quarterly Returns and Payment of Taxes Withheld at 3. other pertinent information required
1. covered by a return and paid to: Final Withholding Tax: AIR
a. authorized agent bank
b. revenue district officer
c. collection agent ►filed on or before January 31 of the succeeding
d. duly authorized treasurer of city or municipality year
where withholding agent has:
1. his legal residence; or Creditable withholding tax: AIR
2. principal place of business; or ►not later than March 1 of the year following the year
3. if corporation , where principal office is for which the annual report is being submitted
located ►Commissioner may grant WHA reasonable extension of
time to furnish and submit the return required herein.
2.Tax deducted and withheld
►held as a special fund in trust for the government until D. Income of Recipient
paid to the collecting officers. 1. Income upon which any creditable tax is
required to be withheld at source shall be
3.Return for final withholding tax included in the return of its recipient.
►filed and paid within 25 days from the close of each 2. the excess of the amount of tax so withheld over
calendar quarter the tax due on his return shall be refunded
3. income tax collected at source is less than the tax
4.Return for Creditable withholding taxes due on his return – difference shall be paid
►filed and paid not later than last day of the month 4. all taxes withheld
following the close of the quarter during which 1. considered trust fund
withholding was made 2. maintained in separate account
3. not commingled with other funds of WHA
5. Commissioner, with approval of Sec Finance
► require withholding agents to pay or deposit taxes at E. Registration with Register of Deeds
more frequent intervals where necessary to protect the ►No registration of any document transferring real
interest of the government property shall be effected by the Register of Deeds
unless the commissioner or his duly authorize
B. Statement of Income Payments Made and Taxes representative has certified that the transfer (1) has
Withheld been reported and (2) tax due has been paid
►Withholding agent shall furnish payee a written ►Register of Deeds requires payment of tax before
statement showing: transfer of property
1. income or other payments made by WHA during
such quarter or year and Section 59 Tax on Profits Collectible from Owner of
2. amount of tax deducted and withheld other Persons
► statement given simultaneously upon payment at the
request of the payee. ►Tax imposed under this title upon gains, profits and
income not falling under the foregoing and not returned
Creditable withholding taxes and paid by virtue of the foregoing
1. corporate payee – not later than the 20 th day shall be assessed by personal return
following the close of the quarter
2. individuals payee – not later than March 1 of the Intent and Purpose of this Title
following year 1. All gains, profits and income of a taxable class
shall be charged and assessed with the
Final Withholding taxes corresponding tax.
►the statement should be given to the payee on or 2. Said tax be paid by the owner of the gains, profit
before January 31 of the succeeding year. or income or the person having the receipt,
custody, control or disposal of the same
C. Annual Information Return

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Determination of Ownership: Section 62: Applies during Pendency of Extra Judicial
►determined as of the year for which a return is Settlement
required to be filed Personal Exemption (P20,000)
Individual ► it will depend whether he/she is
CHAPTER X: ESTATES AND TRUSTS classified as single, head of the family or married
Estate ►regardless
Section 60: Imposition of Tax
1. Estate ► property of the decedent created by an Special deductions:Income distributed to the heirs
agreement, trust or by last will and testament ►if you distribute nothing you cannot claim this
2. Trust ►agreement, contract or last will and special deductions
testament ►if there is a distribution, the heir shall be liable to
pay whether individual capacity
Status: ►if there is no distribution, heirs are not liable to pay
1. Estate: same status as decedent anything
2. Trust: same status as the grantor
►Special deduction not apply if individual tax is paid by
Income taxpayer is the Estate: the Estate itself.
►income of the estate pending partition or no
partition at all: Payment: made by executor, administrator, to creditor to
preserve the estate
Three kinds of partition:
1. judicial Sec. 61 and Sec 62
2. extra judicial partition ►does not apply if estate is subject to income or
3. or no partition at all corporate income tax
During partition Estate earns income: ►it applies if the estate pays itself during the
1. individual – income tax pendency of the judicial settlement
2. corporation – corporate income
tax Basis: Sec 60 C
3. estate (Taxpayer = TP) “during the period of administration or settlement of the
a.Impose Income as if TP is individual estate.”
b.Impose income as if TP is corporation
c.Impose income as if estate itself Taxpayer is a Trust:
►depends whether there is a (1) judicial (2)extra judicial Q; When liable to pay income tax?
partition or (3) no partition at all A: If the trust is revocable (if revocable, Sec 61 and 62
also apply)
When there is a judicial settlement which is final and
executory but no partition: Parties:
Two possibilities: 1.Grantor /creator /trustor
1.Creation of unregistered partnership 2.fiduciary / trustee
►Income of the Estate: corporate income tax 3.beneficiary / Les Qui trust

2.Creation of Co-ownership Q: Who is liable to pay tax:

►Income of the Estate: Income tax on individual A: If trust revocable:
-co-owner liable in their individual company ► obligation of the trustee
►liability of trust itself and not personal
Ponce Case:
H: After finality heirs did not divide the property, the Liability of trustee:
applicable income tax is corporate income tax because If trust irrevocable
they contributed money to engage in real estate. ►obligation of the grantor
►personal liability of the grantor as an individual
“Taxable income of the estate or trust shall be computed TWO WAYS OF REPORTING INCOME:
in the same manner and on the same basis as ill the use of PURSUANT TO RR2 – (1949)
an individual.” 1. report only once
(building paid once)
2. after the span of 25 years

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(payment of building divided per year) 1. NRA and Estate
2. NRA and FC Donors = property outside Phil
ESTATE TAX: exempt
1.Sec 60 3. all, other than these 3 – taxable w in and w/out
2.Real Estate Tax Q: Is Section 104 relevant to all taxpayers?
3. Estate Tax A: No, material only to NRA and FC
►transfer tax impose on the Net Estate for the Section 104 speaks of intangible personal property
transfer of property to the heirs or beneficiary located in the Philippines.
whether real, personal, tangible or intangible 1.Franchise which must be exercised in the
3 KINDS OF TRANSFER TAX: 2.S.O.B. issued by a Domestic corporation;
1.Estate Tax 3.S.O.B. issued by foreign corporation at least 85%
2. Donor’s Tax of the business of which is located in the Philippines.
3. Sec 135 of LGU Transfer of Real Property – do not confuse with 42 (2nd par)
4.S.O.B. of foreign corporation which acquired a
Q: We don’t have inheritance tax and donees tax, why? business situs in Phil
A: 1973 Marcos issued P.D. 69 5.S.R. in business, partnership or industry established
Explain: Sec 84, rate is max of 20% of net before the rate in the Phils
is 60% plus additional amount.
►resulted to many gimiks through tax avoidance scheme, Q: NRA, German donates SOS of FG to Filipina gf, is it
like creating a family corporation (only taxable is the subject to donor’s tax?
stockholders which is exempt) A: it depends (you must qualify)
►Congress enacted RA 7449 decreased 60% to 35% and 1.Subject to donor’s tax if:
then RA 8424 – 35% to 20% 1.S.O.B. FG at least 85% of business located in the
Q: Now is it safe to create a family corporation? Phil
A: No more. 2.S.O.B. FG which acquired a business situs in Phil
Q: Now: Iba na ang scheme – which is better sale or 1.personal property outside of Phil; or
donation? 2.intangible personal property net taxable if following
A: requisites concern:
1.Sale of RP considered capital assets
►6% to 1.5% doc. Tax 7.5 % better A decedent at the time of his death or the donor at the
2.Sale of RP considered ordinary asset time of donation was a citizen and resident.
►5% to 52% as per use may be 1.of a foreign country which at the time of his death or
3.Donation if given to all compulsory heir donation did not impose a transfer tax of any manner, in
► relative lower than 20% which is 15% respect of intangible personal property of citizens of
► stranger: 30% so go with 20% Philippines not residing in that foreign country; or

Q: Who are the taxpayers? 2. the laws of the foreign country allows a similar
A: Sec 104 Estate and Donors exemption from transfer or death taxes of every
1.Estate character or description in respect of intangible
a. RC personal property owned by citizens of the
b.NRC Philippines not residing in that foreign country.
c. RA
d. NRA Q: What if citizen of one country and resident of another
2. Donor’s Tax country will the exemption apply?
a. RC A: No, law requires that he must be a citizen and resident
b.NRC of the foreign country.
c. RA
d. NRA Campos Rueda Case:
e. DC F: NRA died – married to Moroccan man, so she was a
f. FC Moroccan resident.

►A corporation cannot die of a natural death. Donated SS in DC – administrator claims exemption,

Q: What is the reason for classifying the taxpayers? ground: In Morocco, intangible personal property of

Page 57 of 79
Filipinos not residing therein is exempt from transfer Q: Why definition of gross estate is longer than definition
tax. of gross gift?
BIR contends: Morocco is not a country but a colony A: transfer occurring after death. estate tax absolute
of Spain.
H: claim granted – even if it is not a full pledged state, or Transfer during the life time
it’s a mere colony, what matter is that the foreign law ►Normally Donor’s tax
provides for an exception. However there are exceptions:
1.transfer in contemplation of death (85B)
SECTION 84 RATES OF ESTATE TAX 2.revocable transfer (85 C)
3.transfer for insufficient consideration
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85) B. Transfer in contemplation of death
- Deductions (Sec 86) Roces case:
-------------- F: during lifetime, the following document were
Net Estate instituted or executed simultaneously
x Rate 1.will and 2. donation
------------- The heirs insisted to pay Donor’s tax, Posados the
Taxable net income collector tried to collect inheritance tax.
- Tax credit unique thing: Donees were also the heirs in the last will
--------------------- and testament
Tax due Donees wanted to pay donor’s tax because it is always
Gross estate (define) – Sec 104 lower than the estate tax except when the donee is a
►gross estate include real and personal property, stranger
whether tangible or intangible, or mixed, wherever H: this is a transfer in contemplation of death
NRA: Decedent / Donor – property situated outside Dizon Case:
of Philippines not included on the gross estate F: Deed of Donation was executed
Dizon died several days thereafter
Section 85 Gross Estate (inclusion) son claims Donor’s tax
A.Decedent’s interest H:Transfers in contemplation of death

►includes property (1) owned at the time of death and (2) Q: What are transfers deemed in contemplation of death?
property not owned at the time of death A: 1.Property was transferred during the lifetime but the
Classic example: Usufruct decedent:
a. retains possession or receive income or fruits of
Q: if terminated by the death of usufructuary, is it subject property; or
to estate tax? b.retains the right to designate persons who will
A: Not subject to estate tax possess the property or the right to receive fruits or
Reason: Exempt Transmission under Sec 87 (a) c.Revocable Transfers
►merger of the usufruct in the owner of the naked title 1.revocable transfers are included in the gross estate
Reason: the decedent retains tremendous power and
Q: is there a conflict between Sec 88 a and Sec 87 a? control over the property
How do you reconcile? 2.Irrevocable transfers are not included in the gross
A: No conflict estate: exempt
1.Section 87 a contemplates a situation where the Reason: the decedent losses control over the property
usufruct is terminated.
2.Section 88a contemplates a usufruct for a fixed Notice Not Required because the person has the control
period. Ex contract of lease over the property

Q: How do you determine the value of usufruct? D. Property passing under general power of appointment
A: Sec. 88 a provides to determine the value of the right ► same with fidel commissary substitution
of usufruct, take into account the probable life of the 3 parties:
beneficiary. 1.testator / decedent
2.1st heir
3.2nd heir

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2. under Section 85 G, it is a defense
TAKE NOTE: To determine whether included in Estate or
not, know who has the choice to designate the 2nd heir: H. Capital of Surviving Spouse
►if decedent instructs the 1st heir that he can transfer the ►correlate with Sec 86 C
property to whomever he wants included in gross estate ►both speak of legally married individual
►1st heir choice – included in gross estate ►pertains to the separate property of spouse who
E. Proceed of Life Insurance ►capital used in its generic sense
1.Beneficiary is the estate ►surviving spouse may be man or woman
►included in gross estate whether designation is
revocable or not Section 86 (c)
►to determine the limitations of
2.Beneficiary is 3rd person 1. Funeral Expense
► revocable included 2. Whether written notice is required
►irrevocable not included 3. to determine whether gross value is at least
P200,000 (Sec 90)
F. Prior Interest determine if gross value is at least 42 M
►important only due to the codification of the tax code
B,C,E, included whether before or after the effectivity Q: Who are the taxpayers under 86 A?
of the code A: 1.RC
G. Transfer for insufficient consideration 3.RA

Q: Similar provision in Sec 100 (Donor’s tax) can you Q: Who is the taxpayer under 86 B?
apply the two (2) provisions simultaneously? A: NRA
A: No, alternative application, one or the other but not
both. Q: Why do we need to know this?
The application will depend on the time of transfer or A: NRA cannot avail of the following deductions:
motive: income
1.If transferred because of impending death 2.standard deduction
► estate tax 3.hospitalization
2.If transfer because of generosity 4.retirement pay under RA 4917
►Donor’s tax
A. Deductions Allowed to the Estate of a Citizen or
Q: Parcel of land was sold for less than adequate Resident
consideration (adequate) to relative for P600,000
when FMV is 1 million pesos. Is this subject to 1.ELIT (expenses, losses, indebtedness and taxes)
transfer tax? Is it subject to Donor’s tax? a) 1.Actual Funeral Expenses; or
A: No, Sec 100 provides the property should be other 2.amount equal to 5% of gross estate
than real property referred to in Section 24 (D) ►apply whichever is lower
►Not subject to Donor’s tax, the applicable tax is 6% Limitation:
FIT a)amount equal to 5% of gross estate should not
exceed P200,000 (basis is the gross value)
Q: Will your answer be the same if SOS are sold? b) Judicial Expenses
A: No, answer not the same, SOS not property ►no limitation
contemplated in Sec 24 D (1)
►in this case, the amount by which the FMV of prop
exceeds the value of the consideration shall be
deemed a gift and included in the computation of the Pajonar vs Commissioner
gross gift: subject to Donor’s Tax I: Whether or not extra-judicial expenses may be
allowed as a deduction
Q: What is the subject matter in 85 G? H: This law has been copied from U.S. In US, expenses
A: paragraphs 85 B, 85 C, 85 D to be claimed as a deduction both judicial and extra
Sale in good faith as a defense: judicial expenses.
1.under Section 100 is not a defense
Claims against the estate

Page 59 of 79
►Estate is the debtor 1.5years – 20%
2.4years – 40%
Requirements: 3.3 years -60% the time the indebtedness was incurred the debt 4. 2years – 80%
instrument was duly notarized; 5. 1 year -100% contracted within 3 days before death;
3.the administrator or executor shall submit a Q: Suppose the person died within 1 year and it was
statement showing the disposition of the proceeds of inherited by son, suppose the son also died within 1
the loan year or may be 2 years, should we apply the
vanishing deductions?
Claims of the deceased against insolvent person A: No more (last par Sec 86 A2)
►Estate is the creditor
Transfer for Public Use
Requirement: ►amount of all bequest, legacies, devises or transfers
►the only requirement is that the (only) amount of loan Recipient:government or any political subdivision
is included in the gross estate ►exclusively for public purpose
►notarization and certification not required Take Note: 30% of which not used for administrative
purpose is not a requirement
Unpaid Mortgage, taxes and losses
Q: In unpaid mortgage who is the mortgagor?
►decedent mortgagor FAMILY HOME
1. Unpaid mortgage ►amount equivalent to the current FMV of the Family
1.value of the decedent’s interest in the property is Home of decedent.
undiminished by such mortgage; Limit: FMV should not exceeds 1 million otherwise the
2.included in the value of the gross estate; excess will be subject to estate tax.
Illustration: Requirements: (RR 2-2003)
1 million FMV but mortgage is only 600,000 you 1.Person is legally married
include 1 million GR: if single not allowed to claim
2.Estate tax Except: if head of the family
3.Losses 2.Family Home actual residence of the decedent
3.Certification of Barangay Captain of locality
1.losses incurred during the settlement of the estate; STANDARD DEDUCTIONS
2.arising from fire, storms, shipwreck or other ►automatic: RR 2-2003 no requirement provided the
casualties, or from robbery, theft or unbezzlement decedent is the one in 86 (A) (RC, NRC, RA)
3.losses not compensated by insurance
4.losses not been claimed as a deduction for income MEDICAL EXPENSES
as purpose Requirements:
5. losses incurred not better than the last day for the 1.amount not exceeding P500,000
payment of the estate tax 2.medical expenses incurred by the decedent within
one (1) year prior to his death.
Property Previously Taxed ►must be duly substantiated with receipt
►Vanishing Deduction Return
1.person acquires the property by virtue of donation or (RETIREMENT PAY WITH PRIVATE PLAN)
inheritance Requirements:
Q: What if acquired through purchase? 1.plan duly approved by the BIR
A: Not apply, the property must be acquired by 2.person at least 50 years old
inheritance or donation 3. 10 years in service
2.Estate tax or Donor’s tax already paid by the Estate of 4. avail only once
the Decedent (1st par)
3.Any person who died within five (5) years prior to the TAKE NOTE: This is a deduction in the nature of
death of the decedent exemption, all other retirement plan is excluded

Q: What are the amounts? B. Deductions Allowed to Non resident Estates

A: Prior Decedent died within: 1.ELIT

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2.Property Previously taxed 1. after decedent’s death
3.Transfers for public use 2.same period after qualifying as executor or
►give a written notice
C. Shares in the Conjugal Property
Q: If the Net Estate is at least P16,000 will you in form
D. Miscellaneous Provisions the commissioner?
For NRA: No deduction allowed unless include in the A: yes, the gross is at least 3-4 million
return the value at the time of his death that part of his
gross estate not situated in the Philippines. For proper SECTION 90 ESTATES TAX RETURNS
deduction must include E. below Q: When required to file return?
A: 1.all cases of transfer subject to tax
E. Tax Credit for Estate Tax Paid to Foreign Country 2.even though exempt, gross value of the estate
exceeds P200,000
SECTION 87 EXEMPTION OF CERTAIN 3.regardless of gross value of the estate, when the
ACQUISITION AND TRANSMISSIONS same consists of registered or registrable prop such
1. Merger of usufruct in the owner of the naked title; as:
2. transmission or delivery of the inheritance or legacy a.real property
by the fiduciary heir or legatee to the b.motor vehicle
fideicommissary; c. shares of stocks
3. transmission from the first heir, legatee or legacy d. other similar property where clearance from
donee in favor of another beneficiary, in accordance BIR necessary for transfer of ownership in the
with the desire of the predecessor; name of the transferee
4. All bequest, devises, legacies or transfers to (1) social
welfare (2) cultural and (3) charitable institution ►return must set forth the following:
1.value of the gross estate at time of death
Requirements: 2.deductions allowed part of the net income insures to the benefit of any 3.information necessary to establish correct taxes
2.not more than 30% of donation (BDL) shall be used Q: What if Estate is exempt, is it required to file a
by such institutions for administration purposes. return?
A: General Rule: No
OF THE ESTATE a. gross value exceeds P200,000
A.Usufruct contains registrable property
1.Determine value of right of usufruct:
►consider the probable life of the beneficiary based on Q: if the estate or gross estate exceeds 2 million, what is
the latest Basic Standard Mortality Table the requirement?
B.Properties A: return must be duly certified by a CPA
►fair market value of the Estate at the time of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the Provincial or B. Time of Filing
City Assessors
►filed within 6 months from decedent’s death
SECTION 89 NOTICE OF DEATH TO BE FILED ►within 30 days for filing the return
►within 30 days after promulgation of such order
Q: What is the Basis? 1.certified copy of the schedule of partition and
A: the gross estate of the person 2.order of court approving the same

Q:When is the notice required to be filed? C. Extension of Time

A: 1.all cases of transfer subject to tax Time: 30 days
2.although exempt, when gross values of the estate Grounds: meritorious cases
exceeds P200,000 Who grants: Commissioner

Q: When filed? D. Place of filing:

A: within two (2) months ►return shall be filed with:

Page 61 of 79
1.authorized agent bank » In most of these provisions, it always say: one-half if
2.revenue district officer the town or municipality shall collect a tax of not
3. collection officer exceeding 1% of the gross receipt.
4. duly authorized treasurer TAKE NOTE: There is no exact amount; hence, it is the
►city or municipality in which decedent was domiciled tax ordinance which will fix the exact amount.
at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with the office of the
public hearing
Q: Let us say there are 3 compulsory heirs, namely A, B,
and C. A renounces his inheritance coming from the In Congress, the requirement is not absolute (by
parents, but A renounces his inheritance in favor of his 2 discretion only). Under local taxation (last phrase of
siblings, brother and sister B and C. Is this subject to §186), the requirement is ABSOLUTE.
donor’s tax?
A: NO. It is exempt. REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just beside
Q: But if in the given example, A said “I am renouncing Mandaluyong) there was a tax ordinance passed.
my inheritance, but I am giving it to my sister B”, is this Reyes, a resident, claims that there was no public
subject to donor’s tax? hearing conducted, he maintains that under §186 last
A: YES. Renunciation is to the disadvantage of the phrase, there should always be a public hearing.
brother. H: The SC said: “yes, that requirement is an absolute
one, but since the petitioner failed to produce
TAXATION UNDER THE LOCAL GOVERNMENT evidence to support his allegation, if there is no proof
CODE: presented other than his own statement, we hereby
1. Local Tax rule that the ordinance was passed in accordance to
2. Real Property Tax the procedure mandated by law”. While it is true that
a public hearing is an absolute requirement, he who
LOCAL TAXATION (§186, 187, then go to §151, 128 alleges, must prove the same.
Q: If you don’t agree with the validity or the
Q: Mayor Binay of Makati ordered the collection of constitutionality of the tax ordinance, what will be your
elevator tax (for elevator in the city hall). Is the order of remedy?
Mayor Binay legally tenable? A: Within 30 days from the effectivity of the ordinance,
A: NO. There should always be a tax ordinance after the taxpayer should file an appeal with the office of the
conducting a public hearing. (§186) Secretary of the DOJ (§187)

tax ordinance REYES vs. SECRETARY (320 SCRA 486)

F: Reyes asserted the validity and constitutionality of
Q: Can BIR collect the tax even in the absence of a the tax ordinance only after the lapse of thirty (30)
revenue regulation? days (perhaps his lawyer was thinking that an
A: YES. ordinary statute may be contested anytime with the
RTC, CA or SC).
Q: Can a province, city, municipality or barangay collect H: With regard to a tax ordinance, w have a specific
the tax if there is no tax ordinance? rule, failure to assail the validity with the specific
A: NO. period of time, is fatal to the taxpayer. Since it was
filed beyond the 30day period, we do not disturb the
Q: Why is it that there should be a tax ordinance as validity of the ordinance.
required by §186?
A: The rationale is not mentioned in §186, but if you Q: Within what period should the Sec. of Justice decide?
read the other provisions of the LGC, you will come to set A: Within 60 days from the time the appeal was filed.
of conclusions of the reason why there must be a tax Failure to decide within this time, the taxpayer has the
ordinance. remedy to file an action with the regular courts.

» If the decision was made within the 60 day period,

and receives the decision, his remedy is to file an appeal

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within 30days form the receipt of the decision to court of C. Common limitations on the taxing power of the
competent jurisdiction → RTC. LGU’s (§133)

» Beginning April 23, 2004, from the ruling of the » Under the old law this was §5 of the Local Tax Code.
RTC, pursuant to RA 9282 (the law uplifting the standards
of the CTA), the ruling of RTC on local tax cases, is Q: Why common?
appealable to the CTA en banc. A: Because the limitations or prohibitions apply to all
LGUs, the provinces, cities, municipalities and barangays.
1. decisions of RTC involving local tax cases Two Common Crimes (under §133)
2. decision of the Central Board of Assessment 1. absolute prohibition
Appeals. 2. relative prohibition

» From CTA en banc, the appeal must be file with the It shall be unlawful for the LGUs to collect:
SC within 15days. I. Income Tax EXCEPT when levied on banks and other
financing institutions (§133(A))
» Go to §151: » the term “other financing institution shall include
The city could impose the tax already imposed by the money changer, lending investor, pawnshop
province of by the municipality. (§131(E))
» rate of tax: does not mention rate of tax, so
Q: What are the numerous taxes imposable by the long as it is “fair, just and reasonable”
province which a city now allowed to impose? » It cannot be “prohibited taxation, because the
A: Those enumerated in §135 to §141 of the LGC element of “imposed by the same taxing power” is
not present. One is imposed by the national
Reasons why a municipality wanted to be converted into a government and the other is by the LGU.
city: II. Documentary Stamp Tax (§133(B))
1. §151 » absolute prohibition
2. §233 (real estate tax) III. Estate tax, inheritance, donations inter vivos,
» In addition, the law says that the city could increase donations mortis causa EXCEPT in §135 (§133(C))
the rate of the tax by not more than 50% of the maximum » transfer tax on the transfer of realty to be
EXCEPT those enumerated in §139: imposed by provinces and cities (§135)
a) professional tax NOTE: this is not a real estate tax, this is a local
b) amusement tax tax.
IV. Custom duties, charges or fees for the registration of
A. General Principles (§128-130) vessels or ships, wharfages fees and wharage dues
EXCEPT if the wharf had been established, maintained
► reiteration of the constitutional tax provisions and operated by the locality (§133(D))
» wharfage due – is a custom fee imposed on the
► notice that the constitutional limitations on taxation weight of the cargoes.
do not only apply to the national government but also to » wharf – a pier
local government units. » special levy on public works (§240)
» allows provinces cities and municipalities to
B. Definitions (§132) impose a special real estate tax known as “special
levy or public works”
» let us say the municipality established a pier for a
Local Taxing Authority (§132) minimal value of P10M; out of P10M, under §240,
 for a province, it is the provincial board or the 60% of this may be recovered; the other 40% may be
provincial council (sangguniang panlalawigan) recovered by warfage due.
 for a city, we have the city council (sangguniang v. Tax, fee or charge for goods or commodities coming
panlusod) out or passing through the territorial jurisdiction even if
 for the municipality, we have the municipal in the guise of a toll or a fee (§133(E))
council (sangguniang pangbayan) » an absolute prohibition
 for the barangay or barrio, we have the barangay » commodities marketed in a public market, let’s
council. say in the city of Pasig, where the commodities came
from Laguna then to Tanay, Cainta, Taytay; just
imagine if each of the towns will impse 1peso for

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every head of a chicken or 50cents for every bundle higher than the rate provided for by law not more
of vegetable. than 50% of the maximum (50% of the maximum of
PALMA DEV’T CORP v. MALANGAS ZAMBOANGA 2% is 1, therefore, 2+1 is 3%)”
DEL SUR (113 SCRA 572) BULACAN v. CA (299 SCRA 442)
F: Municipal council passed a tax ordinance entitled *first case decide by the SC which interpreted both the
“police surveillance fee” which provide that ALL LGC and the NIRC.
motor vehicle passing through a particular street in F: The then governor, Obet Panganiban together with
the town proper of Malangas which will lead to the his provincial council passed an ordinance imposing
pier or wharf will pay a certain sum of money tax on quarrying under the provision of §138 of the
whether it is camote, copra, palay,or rice. One of the LGC. The problem is that the ordinance applies to
owners of the motor vehicle is Palma Dev’t Corp. ALL entities quarrying in the province. One of the
carrying copra, banana and coconut to be loaded in a taxpayers, Republic Cement obliged to pay the tax,
ship docked at pier of Malangas. The lawyer of argued that under §138 of the LGC, the tax on
petitioner assailed the validity of the ordinance quarrying on which the province may be allowed
stating that it is a clear violation of §133(E). shall only be with regard to quarrying private land,
H: It is not the title of the ordinance which is controlling and not only that but under §133(H), there is a
but it is the essence of the substance of the tax prohibition to impose excise tax and tax on quarrying
ordinance. The tax ordinance clearly violated under the IRC is an excise tax.
§133(E), therefore, the SC had no option but to H: The tax on quarrying allowed to provincial
declare the tax ordinance null and void for being in governments shall only be with regard to lands which
violation of the law. are public lands, and since this is a private tax on
VI. Taxes, fees or charges on agricultural and aquatic quarrying refers to a lot without any distinction.
products when sold by marginal farmers or fishermen Hence, if the LGC made a qualification as to the kind
(§133(F)) of land (where it says it should be public land), by
Q: Don Antonio Florendo, a person coming from implication, it should refer to private land under §151
Pampanga who settled in Davao City, employed (although the law did not distinguish); and since it is
thousands of workers in the different banana a tax by the national government, it should be
plantation. Can the LGU impose tax on the collected by the BIR (not the LGU), and also the SC
agricultural product which is a banana? agreed that it is an excise tax where LGU’s are
A: YES. The LGU can impose because Don prohibited from collecting; thus, the SC declared the
Antonio is not a marginal farmer. It is only prohibited tax ordinance null and void for being contrary to law.
if it is sold by a marginal farmer. » Sir, why is it a problem when the law is clear that
» Marginal Farmer – a farmer or a fisherman for under §138, it shall only apply to public land?
subsistence only, whose immediate members are the Perhaps the provincial council thought that the
immediate members of the family (§131(P)) subject matter of the tax ordinance may be a subject
VII. Tax, fee or charge on pioneer and non-pioneer matter provided in any book including the IRC, or
enterprise duly registered with the board of investments worse, that it may impose a tax on a subject matter
for a period of 6yrs and 4yrs respectively (133(G)) not mentioned in any book.
» relative prohibition because after the period, the Moral lesson: although a tax ordinance may
LGU concerned may now impose the tax. be passed even if the subject matter is not provided
VIII. Excise tax on articles and tax, fees and charges on for in any law, it has to comply with the limitations.
petroleum products (§133(G)) PETRON v. PENILLA (198 SCRA 86)
» relative prohibition since under §143(H), it says * The facts here arose under the old law under §5 (now
there that taxes which are prohibited such as excise §133) of the local tax code (PD 231)
tax, percentage tax and value added tax nonetheless, F: Petron has a factory/plant in Penilla where the raw
the LGU may impose a tax not exceeding 2% of the materials petroleum products are being converted
gross receipt (for cities 3%). into refined petroleum products. The municipal
» My former student an assistant in the city legal council of Penilla imposed a tax by way of a tax
attorney in a city in Metro Manila, received a ordinance saying that they are invoking the old §19
summon from the RTC (on complaint of a (now §143(A)) stating that municipalities are
supermarket in Metro Manila) questioning the authorized to impose tax of the manufacture of any
validity of the tax ordinance under §143(H) since the commodity, hence, since it is manufacture of a
rate imposed was 3% petroleum product, the LGU must e authorized.
I said, “ineng, una file kayo ng motion to However, Petron objected since under §5 (now
dismiss. Nak ng puta, absent ka na naman ata eh, you §133(H)), the prohibition includes the prohibition to
invoke §151 stating that a city can impose a tax impose excise tax and not only that, under this par.,

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the tax on petroleum products is an excise tax. Under H: Under §133(L), the function of the LTO is prohibited,
this par., the law is clear it does not only prohibit the an therefore what may be delegated to the LGU is the
imposition of tax, fee or charge over petroleum function of LTFRB.
products. XIII. Tax, fee or charge on exportation of products
H: The controlling provision here the old §19 (now and is actually exported EXCEPT under §143(C) where
§143(A)) that LGUs are authorized to impose the the LGU is authorized to impose business tax on
business tax for the manufacturing over any kind of exportation (§133(M))
commodity by and petroleum product is “any kind of XIV. Tax, fee or charge on cooperatives duly
commodity”. registered under the cooperative cod (RA 6938) and
Q: What do you think? Business Kalakalan (RA 6810) (§133(N))
A: I don’t agree with this ruling because between » A cooperative is exempt from local tax, provided
§133(H) and §143(A), it is the former which is more it is duly registered with the cooperative code and the
specific. cooperative development authority “or” Business
IX. Value added tax and percentage (§133(I) EXCEPT Kalakalan (not kalkalan)
§143(H) XV. Tax, fee or charge over the national government,
» Relative prohibition. political subdivisions and agencies and instrumentalities
X. Tax, fee or charge on common carriers whether by of the government (§133(O))
land, water or air (§133(J)) » Relative prohibition since it admits of an
FIRST HOLDING CO. v.BATANGAS CITY (300 SCRA exception under §154 of the LGC where it says that a
661) LGU may be authorized to impose a fee or charge for
* 2nd SC ruling discussing both the IRC and LGC. the operation of a public utility provided it is owned,
F: This revealed to the public the existence of 2 very big maintained and operated by such LGU.
oil pipelines coming form Batangas City with a NAIA v. PARANAQUE (JULY 2006)
distance of more than 100km, one going to Pandacan H: SC ruled in favor of the airport. Paranaque being a
Oil Depot and the other one is going to Brgy. LGU can’t impose tax on a government
Bicutan, Taguig. The Batangas City council deemed instrumentality. Airport owned by the government is
it necessary to impose a tax on the gross receipt of not an agency, it being an instrumentality.
the 1st holding company for the operation of the oil Q: May the government tax itself it the taxing
pipeline, but the operator argued that the oil pipeline power is the local government?
is not a common carrier. A: NO. The local government cannot impose tax on
H: The SC reasoned out like in the case of Pajunar v. the national government, and with more reason that it
Comm (328SCRA666), saying that “we have copied cannot impose a tax with equal LGU.
the code of carrier law form the US where the
definition of a common carrier is one habitually D. Taxes that can either be imposed by Provinces or
carrying not only individuals or passengers but also Cities
goods or commodities, and since the oil pipelines is
habitually carrying petroleum products which is a I. tax on transfer of realty (§135)
commodity, we rule this as a common carrier which
is under §133(J), LGU is prohibited from imposing ► Note that this is not a real estate tax, this is a local tax
tax on common carriers, and not only that but under for the simple reason that it is not provide for under the
§170 of the LGC, the law is very explicit, that ALL topic of real estate tax (§198-280)
LGUs are prohibited to impose percentage tax on
common carriers”. With that, the tax ordinance ► Law says “it should not exceed ½ of 1% of the
passed was declared null and void for being contrary consideration” (NOTE: do not use zonal value since this
to law. is used only under the IRC, not the LGC.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition. Q: Since all the provinces and cities must follow the
XII. Tax, fee or charge on registration of motor vehicles limitation of the rate (not exceeding ½ of 1%), is it
and for the issuance of license and permit for driving violative of the equal protection clause?
thereof EXCEPT tricycles. (§133(L)) A: NO, because the sangguninan had to determine the
BATUAN CITY v. LTO (322 SCRA 805) actual rate considering the status of the province.
I: Which function was delegated to the LGU? The LTO
registering motor vehicles “or” the LTFRB granting Q: Why is that Makati fix the rate of 75% or 3/4 of 1%?
franchise and regulation of common carriers? A: Because cities are authorized to increase the rate of
50% of the maximum, that is 50% of ½ is 25% (50+25 is

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not a local tax, hence, why invoke a SC ruling and
NOTE: Do not apply transfer of realty pursuant to RA codal provision which can only be applied to local
6657 (CARP) → this is the Comprehensive Agrarian tax. Therefore, Mactan airport should pay Real
Reform Program → this is exempt. Property Tax.

II. tax on printing an publication (§136) ► Before the codification in 1991 (to take effect
January 1, 1992), local taxation was embodied in a
► Normally, a province cannot impose this because the separate book known as Local Tax Code (PD 231) while
tax on business can only be imposed by a city or real property tax was provided for in a separate book
municipality EXCEPT this one, on printing and known as Real Property Tax Code (PD 464)
publication of magazines and periodicals.
III. franchise tax (§137) F: The Manila city government tried to collect real
property tax but the management of the LRT said “no
► The old national franchise tax under the old tax code you cannot do that to us since it is exclusively for
was already abolished. public use”.
H: NO, you are not exclusively for public use since
► We still have franchise tax other than this one, known every time a person wants to use the LRT he has to
as national franchise tax → provided for in the republic pay.
act granting franchise.
Q: Why not use the defense that it is owned by the
Two kinds of Franchise Tax: government?
1. local franchise tax (under LGC §137) A: Because in real estate tax, the defense that it is owned
2. national franchise tax (provided for in the statute by the government is not a defense.
or republic act authorizing the franchise) The LGC in §199(B) and in §217, both provisions
says that the basis for the imposition of real estate tax is
Q: May LGUs impose local franchise tax? the ACTUAL USE of anybody who is using that (maybe
A: We have to consider here many supreme court in the concept of usufructuary or in the concept of a
decisions and also §193 of the LGC. lessee, or in the concept of an owner); the basis is not
Under §193, it says there “unless especially provided ownership.
for in this code, exemptions granted to natural juridical
persons are hereby withdrawn (abolished) EXCEPT: ► in §134, the taxes here must not only be imposed by
1. local water districts provinces, it may also be imposed by cities in line with
2. cooperatives registered under the cooperative §151 → those enumerated in §135 to 141.
code (RA 6938)
3. non-profit and non-stock educational institution. CAGAYAN DE ORO ELECTRIC CO. v. MISAMIS
BASCO v. PAGCOR (197 SCRA 52) * This was the prevailing rule for more than 10years from
F: The city council passed a tax ordinance imposing tax 1988
on PAGCOR, an agency of the government. H: In the franchise or the republic act, there are only two
PAGCOR objected saying that the local city is (2) kinds of franchise, one is a franchise which
prohibited under the old local authority act to impose provide for a condition that this tax (referring to the
tax on an agency of the government. franchise tax) shall be in lieu of all other taxes, and
H: The SC declared null and void the tax ordinance the other franchise is the one which do not provide
saying Manila cannot do that. for such provision; the province or the city can
impose local franchise tax if the franchise belong to
CEBU v. MACTAN (261 SCRA 667) the second example.
F: Cebu government was trying to collect real estate tax
from the Mactan airport (note: real property tax is a REYES v. SAN PABLO CITY (305 SCRA 353)
territorial tax, meaning it should only be collected * Here the SC uniformly ruled
within its territorial jurisdiction). Lawyers of Mactan H: A provision on exemption under §193 don’t only
airport argued that under §13(O), Cebu, a LGU, refer to exemptions provided for by different statutes,
cannot impose tax on an agency of the government, but it includes those which claim exemptions by
and they also invoked the ruling in BASCO. virtue of the case of Cagayan de Oro (because SC
H: The lawyer of Mactan airport is devoid of any merit decisions are also laws).
at all, it is 100% erroneous since the real estate tax is

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PLDT v. DAVAO (363 SCRA 750) the PBA (in Araneta, Cubao); but PBA and “no, we
F: The franchise holders of Smart and Globe are are already paying amusement tax to the national
claiming exemptions from the local franchise tax government through the BIR because of §125 of the
because they are saying that they are holding a IRC”
franchise which says that it is a franchise enacted by H: QC government can no longer collect on the ground
the house of Congress in 1995 which carries with it that it is already being collected by the national
an exemption form local franchise tax. government and secondly, in the enumerations of
H: By the very explicit provision of §193, the removal amusement under §140, you will never see
of exemptions granted by different statutes and also professional basketball. Most of all, it is the intention
by SC decisions applies only to statutes and decided of the author that it is only the national government.
by the SC on or before Jan. 1, 1992, because §193 *nak ng putang katangahan yan.. the local tax code PD
says “upon effectivity of this law”. For exemptions 231 was enacted in 1974 when we don’t have any
covered by §193 therefore, Smart and Globe are professional basketball.. since professional basketball was
authorized to claim exemptions because the statue born May 1975.
(RA 7082) was enacted on 1995. * ano ba dapt tama diyan? → both the national
government and the QC government can collect. There is
IV. tax on sand, gravel and other quarry resources no violation of the prohibited double taxation, because the
(§138) taxing powers are different, and not only that §140 speaks
of amusement tax on admission fee but under §125, it is
► We are through with that in the case of Bulacan abut gross receipts.

V. professional tax (§139) VII. delivery van (§141)

► this must be correlated with the tax under §147.
Q: What if not a delivery van, but “sako” lang?
► NOTE that this is an exemption to the rule that a city
may increase the rate of the tax → under §151 of the
LGC, the increase is not allowed.
A: The applicable tax is under §143(G) (peddler’s tax,
► both §139 and §147 are taxes imposed on persons one imposed by municipalities and cities.
exercising professional calling. If may dalang sasakyan, yari siya ng province sa tax.

Section 139 Section 147 NOTE: §135-141, these are taxes that can be imposed by
are to be imposed by are to be imposed by PROVINCES and CITIES.
provinces and cities municipalities and §143-150 are taxes to be imposed by
cities MUNICIPALITIES, which can also be imposed by
are applicable to are applicable to CITIES.
workers who must persons who are
pass a government working but are not E. Taxes that can either be imposed by Municipalities
examination (e.g. required to take or Cities
engineers, physicians, government
etc) examinations I. Business Tax (§143(A-H))
there is a maximum It does not provide for a. manufacturing, repacking, processing, including
(P300) any amount, the only the manufacturer of permitted liquor and also its
NOTE: it is not always requirement is that it dealer
300, since the exact must be reasonable b. wholesaling
amt must be fixed by c. exportation
the ordinance. d. retailing
e. contractor’s tax
VI. amusement tax (§140) f. tax on banking institution and financing
► under the IRC, there is also amusement tax under g. peddler’s tax
§125. h. the exemption under §133(i)

PBA v. QUEZON CITY (137 SCRA 358) Q: If you have two branches, how many business taxes
F: The city government enacted a tax ordinance trying do you have to pay?
to collect amusement tax including amusement tax on A: You pay only one business tax (§146)

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ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607) ► Right now there are only two municipalities:
F: Ilo-ilo Bottlers was already paying a business tax on 1. San Juan
manufacturing under §143(A) to the city government 2. Pateros
by virtue of a tax ordinance. Later on, they are
obliged to pay by virtue of another tax ordinance III. Professional Tax (§147)
imposing business tax on wholesaling. Naturally, Ilo-
ilo Bottlers argued, “how could it be, if you ► we are through with that
manufacture, it necessary follows that you sell the
commodity so, with the payment of the business tax IV. Fees for sealing and licensing of weights and
on manufacturing, it carries with it the business of measures (§148)
H: NO, you have to determine the marketing system of V. Fishery rentals, fees and charges (§149)
the company. If wholesaling is also being done in the
place of manufacture, the business tax on F. Situs of Tax (§150)
wholesaling should no longer be paid it should only
be the business tax on manufacturing. But if the ► The tax referred to in here is the business tax on
marketing system of the company provides that wholesaling and retailing.
wholesaling shall be done in a separate place (maybe
several kilometers away), the manufacturer must still Q: RFM is manufacturing commodities, one of them is
pay the business tax on wholesale because now it Swift hotdogs, this is being sold not only in
could be argued that they have the separate business Mandaluyong, Metro Manila, but also to the inter country
of wholesaling. from Batanes to Tawi-tawi. Where should the business tax
of wholesaling or the business tax of retailing be paid?
Q: On the business of retailing, should the business tax Should it be in the principal office (Mandaluyong) “or”
of retailing be imposed by the city or by the municipality the place where the commodities are sold?
“OR” by the barangay in the city or the barrio in the A: It will be paid in the place where it had been sold
municipality? PROVIDED there is a branch office or a sales outlet
A: §143(D) must be correlated with §152, the tax to be (§150(A)).
imposed by the barangay.
It depends: ► If it so happens that the company has a factory
a. city different from the place where the principal office is
» if the gross receipt of the retailer exceeds located → 30% should be pain in the principal office and
P50T in a minimum of one year, it is the 70% in the municipality or city where the branch is
right and privilege of a city to impose the located.
business tax on retailing.
b. barangay PHIL MATCHES v. CEBU (81 SCRA 99)
» if the gross receipt of the retailer did not F: Phil Matches were produced in Nagtahan, Manila. In
exceed P50T, it is the barangay council Cebu city, there was a warehouse where the matches
where the business of retailing is located. were stored. Many of the customers, by way of
c. municipality wholesale in the warehouse in Cebu City, they came
» if the gross receipt of the retailer did not from different towns of the Visayan Region. May the
exceed P30T within a period of one year. business tax ordinance of Cebu be imposed on those
d. barrio transactions even if the buyers did not come from the
» if the gross receipt of the retailer did not territorial jurisdiction of Cebu?
exceed P30T within a period of one year. H: Since in this case the contract booked and paid,
NOTE: These distinctions do not apply in wholesaling. meaning, it was negotiated perfected and
These are only for retailing. consummated in the warehouse where it was located
in Cebu City, the Cebu City government has the right
► Paragraph H:for the imposition of excise tax, to collect business tax.
percentage tax and value added tax, the municipality may
impose a tax not exceeding 2% of the gross receipt (with Q: What if there is an agreement that commodities
regard to a city, it may go as far as 3%) would be delivered and that the buyer would be waiting in
some other town, is the answer still the same?
II. Municipalities in Metro Manila who can increase
their rate (§144)

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A: YES, the answer is still the same because delivery to » for services rendered
the carrier is delivery to the buyer where delivery has 2. public utility charges
been termed within the territorial jurisdiction of Cebu. » provided owned, operate and maintained by
SHELL v. CEBUCOT, CAMARINES SUR (105 PHIL 3. toll fees and charges
1063) » tax or toll for the use of a bridge or a street
F: The petroleum products were purchased at the motor
vehicle traversing the neighboring towns of Cebucot ► Padua filed a civil action in the MakatI RTC
like Bason, Dimalaon, all towns in Camarines Norte. trying to stop the government form collecting a toll free in
The contract of sale was negotiated and perfected in the South Express including the North expressway
different municipalities where the motor vehicle of alleging that he is affected as a taxpayer because he is
Shell was traveling. from Paranaque. He argued that if you use the property of
H: Although the oil depot was located in Cebucot, the the government like a street or a public plaza, you do not
said municipality cannot impose tax on that because pay. He made the analogy, that if you go to Luneta, you
the contract of sale was negotiated and perfected in do not pay the city government of Manila.
the different nearby towns of Camarines. The Makati RTC, the CA and SC had a uniform
ruling that the operator should be prohibited from
Q: Is there a conflict with the case of Shell and Phil collecting further toll fess because if the operator had
Matches? already recovered his investment and earned an income
A: NONE. As a matter of fact, these two decisions already, he should be stopped. As argue by the SC, it
complement each other. copied the argument of the lawyer (re: Luneta).
» NOTE: that Res Judicata do not apply here.
G. Taxing Powers of the Barangay (§152) When the ruling became final an executory in
1993, the North and South Express were totally
► Only a minimal sum (fair and reasonable) dismantled and totally destroyed by the DPWH to give
way to the final and executory ruling of the Court, that It
Power to impose tax: should no longer be collected.
1. On commercial breeding of fighting cocks, After several months, the government announced
cockfights and cockpits in the radio that the party in the case of Padua, mutually
» must be for commercial purposes agreed that the collection shall be resumed in order to
2. On places of recreation which charge administration have money for the maintenance and repair of the
fee highway.
3. On billboards, signboards, neon signs and outdoor
advertisements Exceptions to §155 (collection of toll fees)
» especially for the barrios and barangays along 1. members of AFP
the highway 2. members of the PMP
4. For barangay clearance 3. post office personnel delivering mail
» if you want to engage in the business of retailing 4. physically handicapped
or wholesaling → if barangay captain will not 5. disabled citizens 65 years and older.
approve that → within 7days go to the municipal
hall or city hall for approval I. Community Tax (§156)
5. For the use of barangay property
» for instance the barangay has a plaza. ► In the old days, known as “residence tax certificate.

H. Common Revenue Raising Powers (§153-155) Q: If the Filipino is a resident of a foreign country
(NRC), is he liable to pay the community tax certificate?
Q: Why common? A: NO, because the basis of imposition of this tax is
A: All the LGU could impose the same. But it does not whether or not you are an inhabitant of the Philippines.
follow that all the provinces, cities, municipalities could Meaning you are a resident of the Philippines.
impose the same. Only the LGU which operate, establish,
maintain the entity Q: What about a foreigner residing in the Philippines
If established by the province, it should only be the (RA)?
province. A: YES. You have to pay unless the foreigner is a trans-
investor for not more than 3months.
These are:
1. service fee and charges ► This is applied to both natural and juridical persons.

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1. Assessment
Requirements: 2. Collection
1. for a natural person → at least 18 years of age
2. for corporations → upon registration with the Under the NIRC, assessment and collection have 2 kinds:
1. Normal/Ordinary assessment and collection –
Q: What if you become 18 in the month of January or Sec. 203, NIRC
November or December? 2. Abnormal/Extraordinary assessment and
A: For those who celebrated their birthday before July 1 collection – Sec. 222, NIRC
(that is up to June 30), they are liable to pay the tax, for
this year. I. Normal/Ordinary assessment and collection
For those who celebrated their birthday on or after ► There was a return filed and it is not
July 1, they are not yet liable to pay this year, but have to fraudulent and not false
wait until next year.
II. Abnormal/Extraordinary assessment and
Q: Is there a difference for those who reached 18 in the collection
months of Jan-Feb-March and those who reached 18 in ► There was:
the months of April-May-June? 1. an omission or failure to file the return;
A: YES. For those who celebrated birthdays in the 2. if there was a return filed, it was
months of Jan-Feb-March, they have a grace period of fraudulent, or;
20days within which to pay. Those who celebrated their 3. the return was false
18th birthday in the month of April-May-June, they do not
have any grace period at all, they have to pay the tax Q: Is a false and fraudulent return presumed?
immediately. A: NO, false and fraudulent return is not presumed. The
burden of proof to prove that the return was false and
Q: If you have a community tax certificate for this year fraudulent lies against the government through the BIR.
(2006), can it be used only until December 31, 2006? The mere fact that the return is erroneous will not
A: NO. It shall be valid up to April 15, 2007. (§163(C)) make the return fraudulent, it must be proven by the BIR.

J. Accrual of the Tax (§166) Q: Why is it important to know whether the assessment
is under normal or abnormal condition?
► January 1 A: It is important to know because the prescriptive
period between normal and abnormal assessment differ.
Q: What if the tax was only approved in the month of
May 2006, do you have to wait until January 2007? Prescriptive Period for Assessment
A: NO. You have the right to collect that in July 1, 1. Normal/Ordinary Assessment – 3 years from the time
because the law is saying that “it should be collected in the return has been filed (not the payment of the tax)
the next succeeding quarter” (§167) (Sec. 203, NIRC)
► 3 Ways of filing the return under Sec. 203, NIRC:
► Mayor Binay had a tax ordinance in May, sabi ng 1. filed before the deadline (for any tax under
mga bata niya: “bosing, collect na tayo ng June”. NIRC)
Binay: “hindi nga pupwede, maghintay pa tayo ng 2. filed on the date of deadline
July 1”. 3. filed after the deadline
► 2 Ways of counting the 3 year period of Assessment:
Q: What if the tax ordinance had been existing for 1. if return is filed before or on the day of the
several years already? deadline, the prescriptive period starts on the
A: The time of accrual will always be January 1. date of the deadline;
2. if return is filed after the deadline, the
REMEDIES UNDER THE INTERNAL REVENUE prescriptive period starts on the date the return
CODE has been filed.
» For the calendar year of 2004, a return must be filed
1. Remedies of the Government and paid for Net Income Tax on or before April 15, 2005.
2. Remedies of the Taxpayer Since he was not able to meet the deadline, the taxpayer is
now being assessed for tax due for 2004. To minimize
Remedies of the government: interest and surcharges, it has been suggested by the BIR
that the taxpayer file a late return. Supposed he filed his

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return covering 2004 on April 1, 2006. In this example, 2. Abnormal/Extraordinary Collection
the reckoning point is the deadline of April 15, 2005. The a. assess and collect – 5 years from the final
starting point of the counting the 3 yr. period is on the assessment
date the return is filed which is April 1, 2006. b. collect without assessment through judicial
» Suppose it is not a late filing of return, the counting action – 10 years from date of discovery of
of the period is on the date of the deadline which is April none filing, or false, or fraudulent return.
Q: How to apply these periods?
A: Annual net income tax return filed by individual
2. Abnormal/Extraordinary Assessment using a calendar year. The return should be filed on or
► the government has 2 options: before April 15, 2000. It was filed on April 15, 2000.
a. Assess and Collect
» the prescriptive period for “assessment” Q Without stating the date of final assessment, can it be
shall be 10 years from the discovery of none collected in 2007?
filing or false or fraudulent return (Sec. 222, par. A: Under normal condition, first determine the date of
o, NIRC) final assessment. If the BIR finally assessed the tax in
» the prescriptive period for “collection” November 2001, then 2007 is way beyond the 5year
shall be 5 years from the date of final assessment period to collect. Count the prescriptive period for
(Sec. 222, par c, NIRC) collection from the date of final assessment.

b. Collect Without Assessment through Judicial Q: (same facts) Supposed it was finally assed on March
Action 2003, can it be collected in 2007?
» since there is “no assessment” there is no A: Yes, because it is within the prescriptive period of
prescriptive period for assessment 5years.
» prescriptive period for “collection” shall be
10 years from the date of discovery of none BASILAN v. COMMISSIONER (21 SCRA 17)
filing of return or false or fraudulent return. F: Supposed the notice of assessment was given within
the period but it was received by the taxpayer outside
► These options are available only if the the period.
Assessment is under the Abnormal/Extraordinary I: Whether or not the assessment is within the period of 3
Conditions. years.
These are not available under Normal/Ordinary H: Yes. It is within the period. If the notice is sent
Assessment through registered mail, the running of the
prescriptive period is “stopped”. What matters is the
Prescriptive Period for Collection sending of the notice is made within the period of
1. Normal/Ordinary Collection – Sec. 203 did not prescription.
provide for the prescriptive period for the collection
- Intention of the author: 5 years from the date ► It is the sending of the notice and not the receipt that
of final assessment tolls the prescriptive period.
Reasons: (Sababan agrees with the 5 year prescriptive
period) Q: What if the return has been amended, how would you
Prescriptive period of collection under 1st option compute the period of assessment?
on Abnormal Assessment is 5 years from final A: NIRC is silent.
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939, 1977, and 1985, PHOENIX v. COMMISIONER (14 SCRA 52)
if the prescriptive period for collection under If the amendment of the return is substantial as
abnormal is 3 years, then the prescriptive distinguished from superficial, the counting of the
period for collection under normal is also 3 prescriptive period is also amended. The prescriptive
years. If now a days, it is 5 years in period shall be reckoned on the date the substantial
abnormal, the prescriptive period for normal amendment was made. If the amendment is superficial,
should also be 5 years. the counting of the prescriptive period is still the original
2. to say that there is a prescriptive period for period.
collection under Abnormal and there is none
under Normal is too abnormal. It should be Procedure for Assessment (Sec. 228, NIRC; RR 12-99)
the other way around.
Steps of assessment

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1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps) ► This is not “payment under protest” because,
payment under protest is the one mentioned in Real
2 Steps under Sec. 228, NIRC Property Tax under Sec. 252, LGC.
1. Pre-assessment notice
2. Final assessment notice Under NIRC, Protest is referred to as:
1. disputing of final assessment or
3 Steps under RR 12-99 2. file a motion for reconsideration or
1. Notice of Informal Conference reinvestigation
2. Preliminary Assessment Notice
3. Formal Letter of Demand and Notice to Pay the Q: What should be done after filing a protest?
Tax A: Count 60days is the period to file the necessary
documents and receipts in support of the protest.
PROCEDURE (Sec. 228, NIRC; RR 12-99)
1. Upon receipt of the notice of informal Q: What is the effect of failure to file the supporting
conference, file a reply within 15 days from documents?
receipt of notice; A: Failure to file the necessary and supporting
2. Failure to file a reply, 2 things may happen: documents within the 60day period, to be counted on the
a. BIR will send again the Notice of Informal day the protest is filed, the final assessment shall become
Conference or final and executory.
b. BIR will send a Preliminary Notice of
Assessment ► On the 51st day you filed the necessary document,
3. Upon receipt of Preliminary Assessment Notice you have to count another period, which is 180 days from
(PAN), file a reply within 15 days from receipt the day you filed the necessary documents.
4. Failure to file a reply will result in either:
a. BIR will repeat PAN Relevance of the 180 Days: 180 days is the
b. Declare the taxpayer in default, and send time given to the BIR to decide the case
you a Final Assessment Notice (FAN)
5. Upon receipt of FAN, taxpayer may file a protest Q: Supposed it did not decide the case within 180days?
within 30 days. A: Do not invoke the Lascano case because it was
rejected by RA 9282
Q: Is FAN the one appealable to the Court of Tax In the Lascano case, before you file an appeal
Appeals (CTA)? although the 180 days have lapsed, you have to wait for
A: NO. This is because §228, NIRC and RR 12-99 the BIR to take positive action.
requires the exhaustion of administrative remedy of The case was ruled only by the CTA, hence it is not a
protest. After the receipt of FAN or formal demand within law. The jurisdiction of the CTA has been amended by RA
30days must file a protest before the office of the 9282.
commissioner of internal revenue. RA 9282 provides that in case of inaction of the
commissioner after the lapse of 180days, remedy is to file
1. Local Tax (Sec. 125, Local Government Code RR 12-99 says that after lapse of 180days but within
(LGC)) 30days after 180days, that is the time to file an appeal.
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec. 2313, RA 7651) Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the decision file an
► In all protest under the different codes, payment appeal to the CTA sitting in division.
under protest is only necessary under the “Real Estate
Tax”. Q: Supposed the CTA decided not in your favor?
A: File a motion for reconsideration within 15days to the
RR 12-99 same division deciding the case.
► If the taxpayer receives 2 final assessments, one
under the Net Income Tax (NIT) and the other in VAT. If Q: Supposed the CTA, in division decided not in you
the taxpayer don’t want to file protest under VAT but want favor?
to file a protest under NIT. The taxpayer in order to be A: File an appeal to the CTA sitting en banc.
allowed to file a protest under the NIT must first pay the
VAT where he does not intend to file a protest.

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Q: Supposed the CTA en banc decided not in your 1. If the decision was made within 180 days,
favor? whether the appeal was made within 30 days
A: File an appeal within 15days from receipt of decision from the receipt of the said decision, or
to Supreme Court. 2. if there was no decision after the lapse of 180
days, whether the appeal was made within 30
Q: During the pendency of the protest in the office of the days upon the expiration or the lapse of the 180-
Commissioner, supposed you receive a notice of day period.
collection, levy and/ or distraint, what is your remedy?
A: Q: Pending appeal with the CTA, can the BIR amend the
1. YABES v. COMMISSIONER (150 SCRA 278) final assessment?
F: The taxpayer receives a notice of collection while 822)
waiting for the decision of his protest. He then filed
an “appeal” with the CTA contending his protest has GUERRERO v. COMMISSIONER (19 SCRA 25)
been denied because he did not receive a decision but H: No. Because it is no longer the disputed assessment.
receive a notice of collection. Simultaneously, the
BIR filed before the CFI an “ordinary civil action” BATANGAS v. COLLECTOR (102 PHIL 822)
for the collection of sum of money. When the judge H: Yes. In order to avoid multiplicity of suits
of the CFI, was about to conduct the hearing of the
case, the taxpayer filed an injunction with the SC to ► ACCORDING TO JUSTICE VITUG:
prohibit the judge of the CFI contending that a single BATANGAS v. COLLECTOR (102 PHIL 822) is the better
cause of action is pending in two courts, one in the ruling
CTA and another in CFI.
H: Injunction was granted prohibiting the Judge of the PROTEST UNDER LOCAL TAX (Sec. 195, LGC)
CFI and requiring the Judge to transfer the records to ► Under NIRC, protest is filed in the Office of the
the CTA saying that the remedy made by the taxpayer Commissioner
was the correct remedy. ► Under LGC, protest is filed with the same City or
Provincial or Municipal Treasurer who issued the
Q: Was the appeal made on time? assessment
A: Yes, when the BIR filed an ordinary action, the
protest is deemed denied. Hence an appeal is a proper Period to file Protest
remedy.  60 days from receipt of assessment

UNION SHIPPING LINES v. COMMISSIONER Q: If the treasurer did not decide within a 60day period,
F: The taxpayer was waiting for the decision of his remedy?
protest. But instead, he received a notice of A: Go to the court of competent jurisdiction (RTC)
collection. Immediately, he filed a Motion for
Reconsideration and Clarification asking whether his Q: If the RTC decided not in you favor?
protest has been denied. The BIR did not reply or A: File an appeal with CTA en banc (beginning April 23,
answer but instead filed an Ordinary Civil Action 2004)
before the CFI. When the taxpayer received
summons, he did not answer but instead filed an Q: If the CTA decided not in your favor?
Appeal before the CTA. A: Appeal to the SC.
I: Whether or not the remedy of Appeal was the correct
remedy and Whether or not it was filed on time. NOTE:
H: Yes. The remedy of appeal is the correct remedy and Pursuant to RA 9282, direct appeal to CTA en banc can be
the appeal was filed on time. The reckoning period made from:
within which to file an appeal is the time the taxpayer 1. Decision of the RTC involving local taxation
received the summons. exercising appellate jurisdiction
2. Decision of the Central Board of Assessment
While an Appeal is pending before the CTA, the CTA will Appeal exercising appellate jurisdiction.

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PROTEST UNDER REAL PROPERTY TAX (Secs. I. In both cases of protest and forfeiture, if the importer
226, 230, and 252) lose the case and the government wins, the remedy is to
 Remedy shall be the same file an appeal within 15 days before the Office of the
Sec. 252, LGC  From the ruling of the Commissioner, the
 If the taxpayer receives a Notice of Assessment importer should file an appeal within 30 days
from municipal, city, or provincial treasurer, the before the CTA, sitting in division.
remedy is to file a protest but there must be first  From the ruling of the CTA in division, the
Payment Under Protest. importer should file an MR within 15 days
- This is the only instance where payment before the same division hearing the case.
under protest is necessary  From the ruling of the CTA in division, deciding
on the MR, the importer should file an appeal
Q: How is payment under protest made? within 15 days before the CTA sitting en banc.
A: At the back of the receipt there will be an annotation  From the CTA en banc, appeal to SC within 15
that there was a payment under protest within 60days days.
from receipt of the notice of assessment within the same
treasurer who issued the assessment. II. If the importer-taxpayer wins the case, the
government lose the case, Sec. 2313 of TCC as amended
Q: If the treasurer rules against the taxpayer, remedy? by RA 7651, there shall be an automatic review within 15
A: The remedy is to file an appeal to the Local Board of days.
Assessment within 30days from the receipt of the
decision. Q: Where should the automatic review be made?
A: It depends. Publish the value of the commodity.
Q: From the decision of the Local Board of Assessment? 1. IF P5 MILLION OR MORE – AUTOMATIC
A: Appeal should be made to the Central Board of REVIEW SHALL BE BEFORE THE
► Beginning April 23, 2004, the ruling of the Central REVIEW SHALL BE BEFORE THE OFFICE
Board of Assessment Appeal is no longer final. It can OF THE COMMISSIONER
now be appealed to the CTA, sitting en banc.
Q: Suppose the commissioner decide or did not decide
PROTEST UNDER THE TARIFF AND CUSTOMS within 30days, what happens?
CODE (TCC) (Sec. 2313, as amended by RA 7651) A: If the commissioner reverses the ruling of the
collector, the ruling is final and executory.
► Formerly, the automatic appeal under the TCC If the commissioner affirms or did not decide within
applied only to protest; but now a days, the automatic 30days, there shall be an automatic appeal before the sec.
appeal applies to both protest and forfeiture. of finance.

For Forfeiture Under the Tariff and Customs Code Q: Between the two which will be appealed to the CTA?
► Refers to the Order of the Collector confiscating the A: The decision of the secretary which passes through
imported goods or commodities the office of the commissioner (RA 9282)
But not all the decision of the secretary which passes
Doctrine of Primary Jurisdiction the office of the commissioner affirms or did not decide
If the Collector ordered the forfeiture of the imported within 30days and appealed before the secretary of
commodities the order of the Collector shall be to the finance will appeal to the CTA be allowed.
exclusion of all government offices and authority.
There are 3 instances when the Secretary of Finance
Importer of Chemical, under the TCC, the custom renders a decision appealable to the CTA:
duties is only P27 but the collector says it should be P52. 1. decision of the Secretary by virtue of automatic
The importer will then file a protest with the Office of the review passing through the Commissioner
Collector. 2. cases of anti-dumping duty, where the anti-
In the old days, there is an automatic appeal from the dumping duty was ordered by the Secretary
decision of the collector under protest. But under RA 3. decision of the Secretary of Finance on
7651, the remedy of automatic appeal is applicable to countervening duty.
both protest and forfeiture.

Page 74 of 79
3. After the lapse of the 180-day period, you did
3 Questions asked in 2004 BAR: not file an appeal within the 30-day period to the
1. May the Government compromise criminal cases CTA
and civil cases? 4. An appeal was filed but made beyond the
2. Supposed the corporation is already dissolved, reglementary period to appeal
can the stockholder be obliged to pay?
3. Suppose the civil case filed by the BIR is final METHODS OF COLLECTION (SEC. 205)
and executor, can it be subject to compromise? 1. Judicial Action
a. Civil
1. CIVIL CASES? 2. Administrative Action
- YES, IN ANY STAGE OF THE a. Distraint
BECAUSE IT WILL BE VIOLATIVE OF Q: Why is it important to know whether the final
THE SEPARATION OF POWERS assessment is under normal or abnormal conditions?
2. CRIMINAL CASES? A: It is important because of the requirement under
- YES, EXCEPT: §222. If the final assessment becomes final and
a. IF ALREADY FILED IN COURT executory, the government (BIR) can exercise the
(RTC) OR; remedies under §205 in any order or simultaneously
b. IF IT INVOLVES FRAUD (§207). But it is not always the case, because the right of
3. IF THE CORPORATION IS ALREADY the government to collect is limited in case of abnormal
DISSOLVED, CAN THE STOCKHOLDER BE assessment/collection under §222. Under the second
HELD LIABLE TO PAY TAX? option, the right of the government is limited to judicial
- GENERAL RULE: NO action either civil or criminal. Administrative remedies
- EXCEPT: such as distraint, levy, or tax lien is not available under
a. IF IT IS PROVEN THAT THE such condition.
TAKEN BY ONE STOCKHOLDER Q: In distraint, levy or tax lien, is the 10 year period of
OR; collection applicable?
b. IF THE STOCKHOLDER DID NOT A: No, only the 5year period should apply.

Minimum Amount to be Compromised (Sec. 204) Kinds:

1. If the ground is financial incapacity of the 1. Constructive (Sec. 206)
taxpayer, the minimum shall not be less than 2. Distraint of Intangible (Sec. 208)
10% of the original assessment. 3. Actual (Sec. 207, par. a, and Sec. 209)
2. If based on other grounds, the minimum amount
shall not be lower than 40% of the original 1. Constructive Distraint
► The distraining officer shall make a list of the
Q: Can it be lower than that prescribed by law? personal property of the property to be distraint in the
A: As a rule, no. EXCEPT, if allowed by the evaluation presence of the owner of the property or the person in
board consisting of the: possession of the property.
a) commissioner; and ► The owner shall be requested to sign the receipt.
b) deputy commissioner.
Q: What if the owner refuses to sign the receipt?
Instances when the Final Assessment becomes final and A: Sec. 206: The distraining officer shall require 2
executor: individuals within the neighborhood with the warning that
1. If the taxpayer did not file the protest on time they should not allow the taxpayer to dispose, transfer, or
2. Failure to submit the supporting documents sell the property subject of distraint.
within the 60-day period
Grounds for Constructive Distraint (Sec. 206):
1. The taxpayer intends to leave the Philippines

Page 75 of 79
2. The taxpayer leaves the Philippines by paying all the proper charges as well as the interest,
3. The taxpayer ceases or retires from business cost and penalties.
4. The taxpayer obstructs the collection of the tax.
During the Scheduled Auction Sale, 2 Things may
QUESTION: WHAT ARE THE TAXABLE PERIOD 1. There is bidder and the bid is enough
LESSER THAN 12 MONTHS? 2. There is no bidder or there is a bidder but the bid
is not enough

2. Distraint of Intangible Property Q: What is the relevance of knowing the difference?

A: 1. If there is a bidder and the bid is enough
Limited to 3 Intangible Properties: » In case of insufficiency, there shall be further
1. Shares of stocks distraint to cover the liability. (§217)
2. Bank accounts » In case of excess, the excess shall be returned to
3. Credits and debits the taxpayer.
2. If there is no bidder or the bid is not enough.
Share of stocks » It will be purchase by the government and the
► Warrant of distraint furnished to the taxpayer or later sold in a public auction again (§212)
the officer of the corporation with the warning that » In case of insufficiency, no further distraint, §217
the property is subject of distraint and it should not applies only if there was a bidder.
dispose of it. » In case of excess, the excess shall not be returned
to the taxpayer but shall be remitted to the national
Bank Accounts treasury.
► Warrant of distraint furnished to the taxpayer or
the officer of the bank with the warning that the Levy
taxpayer should not be allowed to withdraw.
► Other than the delinquent taxpayer, warrant of
Debits and Credits levy is served to the register of deeds having
► Warrant of distraint furnished to the debtor and jurisdiction over the real property (Sec. 213)
creditor ► Within 10 days from the receipt of the warrant, a
report of the levy shall be submitted to the BIR (Sec.
207 (b) last par)
3. Actual Distraint
Notice of Sale in Public Auction:
► Personal property shall be physically taken by 1. Posting in 2 conspicuous places
the distraining officer. 2. Publication in newspaper of general circulation
► Within 10 days from the receipt of the warrant, a once a week for 3 consecutive weeks.
report of the distraint shall be submitted to the BIR
(Sec. 207, par a last par.) Q: Is there a right of pre emption?
► The property subject of distraint shall be sold at A: Yes, §213.
a public auction EXCEPT bank accounts and debits
and credits. Q: Is there a right of redemption?
» Notice of sale shall be by posting in 2 A: Yes.
conspicuous place, stating the date and the place
of the sale (No publication requirement) 2 Things may happen in a Public Auction:
► Sec. 211: after the sale and within 2 days, a 1. There is a bidder and the bid is enough
report shall be made to the BIR 2. There is no bidder or the bid is not enough

Q: If the property sold is a personal property, is there a Q: What if there is no bidder or the bid is not enough?
right of redemption? A: Forfeiture shall be made (§215)
A: NO. The rule is absolute.
3 Definitions of Forfeiture under the Internal Revenue
Q: If the property is a personal property, is there a right Code
of preemption? 1. Violation of Excise Tax Law (Sec. 224)
A: SEC. 210: Before the scheduled sale, the taxpayer is 2. If there is no bidder or the bid is not enough
allowed to recover the property by paying all the property (Sec. 215)

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3. The order of the Collector to confiscate imported ► Non payment of tax, the government has the right to
commodities (Sec. 2313, TCC) claim a lien over the property of the taxpayer
1. NIRC – Sec. 219, NIRC
Relevance of the Choice of Words: 2. Local Tax – Sec. 173, NIRC
► Under sec. 212, the law says “purchase” 3. Real Property Tax – Sec. 257, NIRC
► Under sec. 215, the law says “forfeiture”
» under 215: the real property shall be Q: Supposed a parcel of land is about to be levied by the
automatically registered in the name of the government, but the same is being foreclosed by the
Government (forfeiture) mortgagee, which of the 2 obligee, the government or the
» under 212: the real property is not mortgagee shall be preferred?
automatically registered in the name of the A: §219, last portion: The government is the
Government (purchase) preferred one if the lien is annotated and recorded in the
registry of deed. In the absence of annotation in the
Q: If sold at a private sale, what is the requirement? registry of deeds, the mortgagee is preferred.
A: There must be an approval of the Secretary of
Finance (§216) Q: Do we have the same rule under Local Tax and Real
Property Tax?
Q: After sale, if there was deficiency? A: NO. Both §173 and §257, the government is always
A: There shall be no further levy, because §215 says that the preferred one. The lien can only be removed by
it shall be to the total satisfaction of the taxpayer. payment of tax, interest and penalty.

Q: After sale, if there was an excess? Sec. 220: approving of filing an ordinary civil action for
A: It shall not be returned to the taxpayer but shall be violation of the internal revenue code
remitted to the national treasury.
► The approval must be made by the Commissioner of
Sec. 217: this is only true if there was no bidder or the Internal Revenue
bid was not enough because of the provisions of the Secs.
212, 215, and 216 HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of the tax code
Sec. 218: no court shall issue an injunction to restrain the was filed in the city of San Fernando. But the filing
collection of tax under this code was only approved by the Revenue Regional Director
of Central Luzon. The plaintiff opposed the filing in
Determine what kind of injunction is referred to here: the court on the ground that it should be approved by
1. Prohibitory – referred in Sec. 218 because it the Commissioner and the Revenue RD.
restrains the collection of tax. H: Sec. 220 should be read with Sec. 7 of the NIRC
2. Mandatory » General Rule: powers and functions of the
Commissioner may be delegated but not to a
Q: Is the provision limited to “tax under this code”? position lower than a Division Chief
A: Limited to internal revenue taxes. EXCEPT: CTA » Under Sec. 7, there are powers which can
(Regular Court) → RA 1125 and 9282: CTA is authorized not be delegated
to issue injunction to restrain the collection of taxes or a) Power to recommend to the Secretary of
fees collected under other code. Finance to issue rules and regulation
b) Power to decide a case of fist
Q: Is the rule of distraint or levy the same under local impression
taxation? c) Power to enter into a compromise
A: Yes, local tax. agreement
» §175 for DISTRAINT d) Power to assign BIR officer in the place
» §176 for LEVY of production subject to income tax
» Since the case does not fall under the
Q: How about real property tax? prohibited delegation, the filing of the case is
A: No, distraint is not authorized (§256, LGC), because legal and tenable.
the remedy is only Judicial Action and Levy.
► Decision of the Commissioner of Internal Revenue
Tax Lien (CIR) is appealable to CTA.

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Q: When is a decision of the cir appealable to the 3. assessment without authority.
Secretary of Finance?
A: §4, on matters of interpretation of tax laws. ► The period to claim refund is 2years.

SEC. 223: SUSPENSION OF THE RUNNING OF Doctrine of Equitable Recoupment

PRESCRIPTIVE PERIOD ► If a taxpayer is entitled to a written claim for refund
but the prescriptive period to claim has lapsed, the
Q: A Filipino taxpayer went to Canada, after 15years he taxpayer is allowed to credit his written claim for refund
went back, he is being assessed by the BIR under normal which he failed to recover to his existing tax liability.
assessment. Has the right of the government to asses the
tax already prescribed? Computed from;
A: NO. When he went to Canada, the running of the a. Individual – counted on the day the tax has been
prescribed period is suspended. paid
1. paying by way of withholding tax system,
Q: What if the change of address is within the the reckoning point is the end of the taxable
Philippines, say only from manila to Pasay City, is the year.
running of the prescriptive period suspended? 2. paying by way of installment, reckoning
A: In order that the running of the prescriptive period point is the date the last installment is paid.
will not be suspended, especially if the change is district 3. if sold to public auction through distraint or
office, §223 provides that the taxpayer must send a levy, the date the proceeds is applied to the
written notice of change of address to the BIR. satisfaction of the tax liability.
In the absence of the written notice, the period will be
suspended. b. Corporation
1. Existing
Q: Change of address is from Philippines to abroad? - 1992, *** v. Commissioner (205 SCRA 184)
A: The period will be suspended. - 1995, Commissioner v. Philam life (244
SCRA 446)
- 1998, Commissioner v. CTA (301 SCRA
Other Grounds for Suspension: 2. Non-existing
1. During collection if there is no property found, - 2001, BPI v. Commissioner (363 SCRA
the period is suspended 840)
2. If the BIR is prohibited from making assessment
such when the subject property is under litigation 1. Existing – the counting of the prescriptive period
3. In distraint of levy, the BIR officer can’t locate is 2 years on the day the annual adjusted return is
the property filed, because it is at that day that the tax liability
is known.
CLAIM FOR REFUND (SEC 229) 2. Non-existing – the counting of the prescriptive
period should also be reckoned on the day the
Written claim for refund: annual return is filed. But the corporation is no
1. Sec. 229, NIRC longer required to wait till the taxable period is
2. Sec. 112, VAT over to file the return. Upon receipt of a notice
3. Sec. 136, Local Tax from the SEC to dissolve the corporation, within
4. Sec. 253, Real Property Tax 30 days thereafter, a return should be filed.
5. None except sec. 1603, Tariff and Custom
Q: Suppose there is a supervening event, and the
Written claim for refund under the input tax (Sec. 112) taxpayer was not able to file a written claim of refund
► Period is also 2 years from the close of the taxable within the period?
quarter when the transaction was made A: Regardless of supervening event, a written claim for
refund must be filed within 2years.
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112 is refund Q: Suppose the 2 year period is about to expire and there
under input tax system. is no decision yet as to your refund?
§229 is refund for: A: Remedy is to file an appeal before the CTA (deemed
1. errors in payment or; a denial)
2. collected without authority; or

Page 78 of 79
Q: Suppose the BIR decided within 2 years against the
A: Appeal within 30days from the decision, provided it
is still within the 2 year period.

Q: Suppose there is only 21days remaining after

receiving the decision, when to file an appeal?
A: Within 21days before the end of the 2 year period.

► A written claim for refund should be filed within 2


► Sec 204 (c) last phrase: in case of over payment a

written claim is not necessary because a return constitutes
a written claim for refund.

Q: May the commissioner of internal revenue open the

bank account of a taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the estate; and
2. To enter into a compromise agreement. (under

► The written claim for refund to determine the gross

value of the estate because the taxpayer is already dead
In case of compromise, there must be consent.

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