Gross Income means all income derived from whatever source, including but not limited to the

following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10)Pensions; and
(11)Partner’s distributive share from the net income of the general professional partnership.

These 11 items are called ‘items of gross income.” An item of gross income is taxable in one of the
following tax schemes:
(1) Final Income Taxation
(2) Capital Gains Taxation
(3) Regular Income Taxation

These tax schemes are mutually exclusive. An item of gross income that is subject to tax in one
scheme will not be taxed by the other schemes. Similarly, items of income that are exempted in one
scheme are not taxable by the other schemes.

I. Compensation
Compensation means all remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless specifically excluded by the Code.

There is employer-employee relationship when the person for whom services were performed
has the right to control and direct the individual who performs the services, not only as to the result to
be accomplished by the work but also as to the details and means by which the result is accomplished. It
is not necessary that the employer actually directs or controls the manner in which the services are
performed. It is sufficient that he has the right to do so.
An employee is subject to the will and control of the employer not only as to what shall be done,
but how it shall be done.
The right to dismiss an employee is also an important factor indicating that the person
possessing that right is an employer. Other factors or characteristics of an employer, which may not be
necessarily present in every case, are furnishing the tools and furnishing of a place to work, to the
individual who performs the services. In general, an individual is not considered an employee if he is
subject to the control or direction of another merely on to the result to be accomplished by the work,
and not on to the means and methods for accomplishing the result.
The measurement, method or designation of compensation is also immaterial if the relationship
of employer and employee in fact exists.

The term employer means any person for whom an individual performs or performed any
service, of whatever nature, under an employer-employee relationship. It is not necessary that the
services be continuing at the time the wages are paid in order that the status of employer may exist.
Thus, for purposes of withholding, a person for whom an individual has performed past services and
from whom he is still receiving compensation is an "employer".
An employer may be an individual, a corporation, a partnership, a trust, an estate, a joint-stock
company, an association, or a syndicate, group, pool, joint venture, or other unincorporated
organization, group or entity. A trust or estate, rather than the fiduciary acting for or on behalf of the
trust or estate, is generally the employer.
The term "employer" embraces not only an individual and an organization engaged in trade or
business, but it also includes an organization exempt from income tax, such as charitable and religious
organizations, clubs, social organizations and societes, as well as the Government of the Philippines,
including its agencies, instrumentalities, and political subdivisions.
For the purposes of determining who is the withholding agent, the term “employer” also
includes:
(a) person having control of the payment of the compensation in cases where the services are
or were performed for a person who does not exercise such control.
(b) person paying compensation on behalf of a non-resident alien individual, foreign
partnership, or foreign corporation, who is not engaged in trade or business within the
Philippines.

The term "employee" is an individual performing services under an employer-employee

relationship. The term covers all employees, including officers and employees, whether elected or
appointed, of the Government of the Philippines, or any political subdivision thereof or any agency or
instrumentality.
No distinction is made between classes or grades of employees. Thus superintendents,
managers, and others belonging to similar levels are employees. An officer of a corporation is an
employee of the corporation. An individual, performing services for a corporation, both as an officer and
director, is an employee subject to withholding on compensation, including director's fees.
However, individuals who follow an independent trade, business, or profession, in which the
offer their services to the public, are not employees.

Note: The rules on compensation income are applicable only to individual taxpayers, except nonresident
alien not engage in trade or business. Corporations, estates, and trusts cannot be considered as
employee.

II. Trade/Business/Practice of Profession

III. Dealings in Property

Dealings in properties can be sales, exchanges, or other dispositions of properties.
Property can be ordinary asset or capital asset.

Ordinary Assets vs. Capital Assets

Ordinary Assets are assets used in the business of the taxpayer such as inventories, supplies,
and property, plant and equipment.
 Capital Assets are assets other than ordinary assets.

Dealings in certain capital assets, i.e., domestic stocks and real properties, are the only subject
to capital gains taxation. All other dealings in property, whether ordinary or capital assets, are subject to
regular income taxation.

Property Tax Scheme

Ordinary Asset Regular Income Taxation
Capital Asset:
(a) Domestic Stocks Capital Gains Taxation
(b) Real Properties Capital Gains Taxation
(c) Other Capital Assets Regular Income Taxation

XII: Other Items of Gross Income

The acquisition by the government of private properties through the exercise of the power of
eminent domain is just compensation and is embraced within the meaning of the term "sale" or
"disposition of property" and is thus taxable. Only the fair market value as of the date of acquisition
should be considered in determining gain or loss when the property was disposed, without taking into
account the purchasing power of the currency used in the transaction (Gutierrez vs. CTA and Collector,
G.R. No. L-9738, May 31, 1957).
An employer transferred its appreciated property to an employee for services rendered. The
employer should report the appreciation as a taxable gain. The employer realized the appreciated value
in the form of future or past services because it could deduct the appreciated value as an expense
(International Freighting Corporation vs. Commissioner, 135 F. 2d 310 [2d Circ. 1943J).
If a taxpayer obtains earnings under a claim of right and without restriction as to its disposition,
he has received income which he is required to include in his tax return, even though it may be claimed
that he is not entitled to retain the money, and even though he may still be adjudged liable to restore
its equivalent. Thus, where a taxpayer sued and was awarded damages by the trial court, and the award
was received pending appeal, the money received is includible in his gross income, notwithstanding the
possibility of repayment in case the judgment would be reversed by the appellate court (North
American Oil Consolidated vs. Burnett, 286 U.S. 417).