Revenue Regulations 02-40 Page 1 of

REVENUE REGULATIONS NO. 02-40 100,000 120,000 20,000 52% 10,400 47,480
February 10, 1940 120,000 140,000 20,000 53% 10,600 58,080
140,000 160,000 20,000 54% 10,800 68,880
INCOME TAX REGULATIONS 160,000 200,000 40,000 55% 22,000 90,880
200,000 250,000 50,000 56% 28,000 118,880
250,000 300,000 50,000 57% 28,500 147,380
SECTION 1. Scope. — In accordance with the provisions of Sections 4 (I) and 338 of
300,000 400,000 100,000 58% 58,000 205,380
Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, the following
400,000 500,000 100,000 59% 59,000 264,380
regulations affecting Sections 19 to 84 of the same Code relating to the income tax are hereby
500,000 - - 60% - -
promulgated to supersede all circulars, precedents, rulings, and regulations heretofore published on
the same subject, and they shall be known as Revenue Regulations No. 2, or the Income Tax Note: Taxable income is arrived at after deducting personal and additional exemptions to which
Regulations: taxpayer is entitled.
(Section 22 of the Code)
(Only the section numbers of the Code are given below as their texts will be found in the same Code.
They serve as captions of the pertinent provisions of the Regulations.) SECTION 5. Definition. — A "non-resident alien individual" means an individual —
(Section 20 of the Code) (a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
SECTION 2. Application of title. — Section 20 provides that the provisions of Title II of the National
Internal Revenue Code shall apply only to income received from January 1, 1939. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the
(Section 21 of the Code) Philippines for purposes of the income tax. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to
SECTION 3. Persons considered citizens of the Philippines. — The following shall be considered time, to return to another country is not sufficient to constitute him a transient. If he lives in the
citizens of the Philippines: Philippines and has no definite intention as to his stay, he is a resident. One who comes to the
Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But
(1) Those who were citizens of the Philippines at the time of the adoption of the Constitution of the
if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and
Philippines.
to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it
(2) Those born in the Philippines of foreign parents who, before the adoption of the Constitution, had
may be his intention at all times to return to his domicile abroad when the purpose for which he came
been elected to public office in the Philippines.
has been consummated or abandoned.
(3) Those whose fathers are citizens of the Philippines.
(4) Those whose mothers are citizens of the Philippines and, upon reaching the age of
SECTION 6. Loss of residence by alien. — An alien who has acquired residence in the Philippines
majority, elect Philippine citizenship.
retains his status as a resident until he abandons the same and actually departs from the Philippines.
(5) Those who are naturalized in accordance with law. (Sec. 1, Article IV, Constitution of the
An intention to change his residence does not change his status as a resident alien to that of a
Philippines.)
nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a
Philippine citizenship may be lost or reacquired in the manner provided by law. A foreigner who has
resident for the remainder of his stay in the Philippines.
come to reside in the Philippines and has filed his petition to acquire Philippine citizenship but has not
yet received the requisite naturalization certificate still remains an alien.
SECTION 7. Taxation of aliens in general. — For purposes of income tax, alien individuals are
divided generally into two classes, namely, resident aliens and non-resident aliens. Resident aliens
SECTION 4. Tax on citizens and residents. — Section 21 imposes progressive rates of income
are taxable in the same manner as citizens of the Philippines, that is, a resident alien is taxable on
taxes on citizens and residents, starting from 3 per cent upon the amount by which the net income
income derived from all sources including sources without the Philippines. Non-resident aliens are
does not exceed P2,000 and rising gradually to 60 per cent upon the amount by which the net income
taxable only on income from sources within the Philippines.
exceeds P500,000. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The following is a table, showing the rates of income tax under Section 21, as amended by Section 1
SECTION 8. Taxation of non-resident aliens; classification. — Non-resident alien individuals are
of R.A. No. 2343, applicable to income received from Jan. 1, 1959 and for fiscal periods ending after
divided into two classes: (1) Those engaged in trade or business within the Philippines, and (2) those
June 30, 1959:
not engaged in trade or business within the Philippines. Non-resident aliens falling within the first
1 2 3 4 5 6 class are subject to the graduated rates established in Section 21 with respect to their net income
from sources within the Philippines. Non-resident aliens falling within the second class are subject to
Exceeding Not Bracket Rate Tax on Each Cumulative
a flat rate of 20 per cent on their total income from sources within the Philippines, if such total income
Exceeding of Tax Bracket Amount of Tax
does not exceed P23,800, otherwise, the graduated rates established in Section 21 will apply to the
P- P2,000 2,000 3% P60 P60
total income if it exceeds P23,800. (Conforms with amendments by R.A. 2343, effective June 20,
2,000 4,000 2,000 6% 120 180
1959.)
4,000 6,000 2,000 9% 180 360
6,000 8,000 2,000 16% 320 680
The phrase "engaged in trade or business within the Philippines" includes the performance of
8,000 10,000 2,000 20% 400 1,080
personal services within the Philippines. Whether a non-resident alien has an "office or place of
10,000 20,000 10,000 24% 2,400 3,480
business," however, implies a place for the regular transaction of business and does not include a
20,000 30,000 10,000 30% 3,000 6,480
place where casual or incidental transactions might be, or are, effected. Neither the beneficiary nor
30,000 40,000 10,000 36% 3,600 10,080
the grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in trade or business
40,000 50,000 10,000 40% 4,000 14,080 in the Philippines or to have an office or place of business therein, merely because the trustee is
50,000 60,000 10,000 42% 4,200 18,280 engaged in trade or business in the Philippines or has an office or place of business therein. (Test of
60,000 70,000 10,000 44% 4,400 22,680 "office or place of business" was deleted by R.A. 2343.)
70,000 80,000 10,000 46% 4,600 27,280 (Section 23 of the Code)
80,000 90,000 10,000 48% 4,800 32,080
SECTION
90,000 9. Personal exemption. —10,000
100,000 Personal exemption
50% is 5,000
an arbitrary amount allowed for
37,080 after giving effect to the exemptions allowable is set forth in Section 4 of these regulations. EHcaDT
personal, living, or family expenses of the taxpayer. It is allowed to citizens of the Philippines, to
resident aliens, and to non-resident aliens in certain cases. The procedure of arriving at the tax due
Revenue Regulations 02-40 Page 2 of
SECTION 10. Personal exemption of single individuals. — A single individual is entitled to a personal
cent on the excess. The term "corporation" includes partnership no matter how created or organized,
exemption of P1,800.
joint-stock companies, joint-account (cuentas en participacion), association, or insurance companies
but does not include duly registered general co-partnership (companias colectivas). The tax is upon
SECTION 11. Personal exemption of married persons and heads of family. — A married person is net income, which is undetermined by subtracting from the gross income, as defined in the law, the
entitled to a personal exemption of P3,000. Only one exemption of P3,000 is allowed with respect to allowable deductions. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
the aggregate income of both husband and wife. (Conforms with amendments by R.A. 2343, effective
June 20, 1959.)
SECTION 16. Corporations liable to tax. — Every corporation, domestic or foreign, not otherwise
exempt from tax under Title II or any other law, is liable to tax. A domestic corporation is taxed on its
A head of family is an individual who actually supports and maintains in one household one or more
income from sources within and without the Philippines, but a foreign corporation is taxed only on its
individuals, who are closely connected with him by blood relationship, relationship by marriage, or by income form sources within the Philippines.
adoption, and whose right to exercise family control and provide for these dependent individuals is
based upon some moral or legal obligation. In the absence of continuous actual residence together,
The tax imposed by law on corporations is not imposed only upon such corporations as are organized
whether or not a person with dependent relatives is a head of a family within the meaning of the
and operated for profit. Any corporation, firm or association, no matter how created or organized, or
statute must depend on the character of the separation. If a father is absent on business, or a child or
what the purpose of its organization may be, is subject to the tax, except as provided in Section 27,
other dependent is away at school or on a visit, the common home being still maintained, the
relative to exemptions from tax on corporations. A corporation is not exempt simply and only because
additional exemption applies. If, moreover, through force of circumstances a parent is obliged to
it is primarily not organized and operated for profit.
maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the
additional exemption may still apply. If, however, without necessity, the dependent continuously
SECTION 17. Dividends received by a corporation from a domestic corporation. — Dividends
makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of
received by a domestic or resident foreign corporation from a domestic corporation subject to tax are
support. A resident alien with children abroad is not thereby entitled to credit as the head of a family.
taxable only to the extent of 25 per cent thereof. All other classes of income (except net capital gains,
Chief support means principal or main support. Partial support not amounting to chief support will not
Section 34) of corporations are taxable in full. Likewise dividends from a foreign corporation, whether
entitle the taxpayer to claim exemption as a head of a family.
resident or non-resident, are taxable in full. (See Sections 250 to 256 of these regulations relative to
taxation of dividends and other distributions.)
Under the law the following persons are entitled to P3,000 exemption: (a) a married man; (b) a
married woman; and (c) an unmarried man or woman with one or both parents, or one or more
SECTION 17-A. Tax on life insurance companies. — Every life insurance company organized in or
brothers or sisters, or one or more legitimate, recognized natural, or adopted children living with and
existing under the laws of the Philippines, or foreign life insurance company authorized to carry on
dependent upon him or her for their chief support, where such brothers, sisters, or children are not
business in the Philippines are taxable on their total net investment income derived from interest,
more than 23 years of age, unmarried and not gainfully employed or where such children are
dividends and rents from all sources whether within or without the Philippines, to the flat rate of 6-
incapable of self-support because mentally or physically defective. (Conforms with amendments by
1/2%. However, purely cooperative insurance companies or associations which are conducted by the
R.A. 2343, effv. June 20, 1959.)
members thereof with the money collected from among themselves and solely for their own protection
and not for profit are exempt from income tax.
SECTION 12. Additional exemption for dependents. — The taxpayer is entitled to an additional
exemption of P1,000 for each legitimate, recognized natural, or adopted child wholly dependent upon
The total net investment income of domestic life insurance companies means the gross investment
and living with such person, if such dependent is not more than 23 years of age, unmarried and not
income received during the taxable year from rents, dividends and interest less deductions for real
gainfully employed or incapable of self-support because mentally or physically defective, provided that
estate expenses, depreciation, interest paid within the taxable year on its indebtedness except on
the person claiming additional exemption is a head of family. The children with respect to whom
indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from
additional exemption is claimed must be wholly dependent upon the taxpayer for support. (Conforms
taxation under existing laws, and such investment expenses paid during the taxable year as are
with amendments by R A. 2343, effv. June 20, 1959.)
ordinary and necessary in the conduct of its investment. The total net investment income of foreign
life insurance companies doing business here is that portion of their gross world investment income
SECTION 13. Change of status. — If the status of the taxpayer, insofar as it affects the personal and
which bears the same ratio to such income as their total Philippines reserve (whether kept in the
additional exemptions, changes during the taxable year by reason of his death, the amount of the Philippines or abroad) bears to their total world reserve less that portion of their total world investment
personal and additional exemptions shall be apportioned, in accordance with the number of months expenses which bears the same ratio to such expenses as their total Philippine investment income
before and after such change. For the purpose of such apportionment, a fractional part of a month bears to their total world investment income. The following equation simplifies this formula:
shall be disregarded unless it amounts to more than half a month in which case it shall be considered
as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22, 1950.)
PGI = PR/WR x WGI
PIE = PGI/WGI x WIE
SECTION 14. Personal exemption of non-resident aliens. — A non-resident alien is entitled to a
PGI - PIE = PNI
personal exemption in an amount equal to the exemptions allowed by the income tax law in the
country of which he is a citizen or subject to citizens of the Philippines. The exemption allowed to non-
Legend:
resident aliens is a reciprocal one; that is, it is only allowed if the country of said non-resident aliens
PGI is Philippine Gross Investment Income
allows similar exemptions to Filipinos not residing in such country but deriving income from sources
PNI is Philippine Net Investment Income
therein. If the country of which the non-resident alien is a citizen or subject does not have any income
PR is Total Philippine Reserve
tax law, such non-resident alien will not be entitled to personal exemption.
WR is Total World Reserve
(Section 24 of the Code)
WGI is World Gross Investment Income
SECTION 15. Income tax on corporations. — The law imposes an annual income tax of 22 per
PGI is Philippine Gross Investment Income
centum upon that portion of the net income of every corporation not in excess of P100,000 and 30 per WIE is Total World Investment Expenses
PIE is Philippine Investment Expense

In both cases, the deductible expenses must be connected with the investment income subjected to
tax. For the proper determination of the income tax liability of resident foreign life insurance
companies, they should submit the necessary financial statement reflecting the nature of the
investment income and corresponding expenses. These financial statements must be duly certified by an independent certified public accountant and authenticated by a Philippine consular official.
Revenue Regulations 02-40 Page 3 of
profits. However, if the corporation is a mere holding or investment company, then the law gives
Foreign life insurance companies not doing business in the Philippines are subject to the normal
further weight to the presumption of correctness already arising from the Commissioner of Internal
income tax on their income received from sources within the Philippines. They are subject to tax at
Revenue's determination by expressly providing an additional presumption of the existence of a
the rate of 30% like any other foreign corporation.
purpose to avoid the tax upon shareholders, while if earnings or profits are permitted to accumulate
Domestic life insurance companies and foreign life insurance companies doing business in the
beyond the reasonable needs of the business then the law adds still more weight to the
Philippines are not allowed to deduct from their gross income the net additions, if any, required by law
Commissioner of Internal Revenue's determination by providing that irrespective of whether or not the
to be made within the year to reserve funds and the sums other than dividends paid within the year on
corporation is a mere holding or investment company, the existence of such an accumulation is
policy and annuity contracts. (Proposed by the BIR. If adopted, this will supersede Sec. 124 of
determinative of the purpose to avoid the tax upon shareholders unless the taxpayer proves the
existing regulations.)
contrary by such a clear preponderance of all the evidence that the absence of such a purpose is
(Section 25 of the Code)
unmistakable.
SECTION 18. Taxation of corporation formed or utilized for avoidance of tax. — Section 25 imposes
SECTION 20. Holding and investment companies. — A corporation having practically no activities
for each year, in addition to the tax imposed by Section 24 a tax of 25 per cent on the undistributed
except holding property, and collecting the income therefrom or investing therein, shall be considered
portion of the profits or surplus of a corporation which is formed or availed of for the purpose of
a holding company within the meaning of Section 25. If the activities further include, or consist
preventing the imposition of the tax upon its shareholders or members or the shareholders or
substantially of, buying and selling stocks, securities, real estate, or other investment property
members of any other corporation through the medium of permitting gains or profits to accumulate
(whether upon an outright or a marginal basis) so that the income is derived not only from the
instead of dividing or distributing them. However, banks, insurance companies, personal holding
investment yield but also from profits upon market fluctuations, the corporation shall be considered an
companies and foreign personal holding companies as defined in Chapter VIII, are excepted from
investment company within the meaning of Section 25.
taxation under Section 25. The tax imposed by Section 25 applies whether the avoidance was
accomplished through the formation or use of only one corporation or a chain of corporations. For
SECTION 21. Unreasonable accumulation of profits. — An accumulation of earnings or profits
example, if the capital stock of the M Corporation is held by the N Corporation so that the dividend
(including the undistributed earnings or profits of prior years) is unreasonable if it is not required for
distributions of the M Corporation would not be returned as income subject to the tax on individuals
the purposes of the business, considering all the circumstances of the case. It is not intended,
until distributed in turn by the N Corporation to its individual shareholders, nevertheless the tax
however, to prevent accumulations of surplus for the reasonable needs of the business if the purpose
imposed by Section 25 applies to the M Corporation, if that corporation is formed or availed of for the
is not to prevent the imposition of the tax upon shareholders. No attempt is here made to enumerate
purpose of preventing the imposition of the tax upon the individual shareholders of the N Corporation.
all the ways in which earnings or profits of a corporation may be accumulated for the reasonable
A foreign corporation, whether resident or non-resident, is subject to the tax provided for under
needs of the business. Undistributed income is properly accumulated if retained for working capital
Section 25 in the same manner and under the same circumstances as a domestic corporation.
needed by the business; or if invested in additions to plant reasonably required by the business; or if
in accordance with contract obligations placed to the credit of a sinking fund for the purpose of retiring
SECTION 19. Purpose to avoid tax; evidence; burden of proof; definitions of holding or investment
bonds issued by the corporation. The nature of the investment of earnings or profits is immaterial if
company. — The Collector of Internal Revenue's determination that a corporation was formed or
they are not in fact needed in the business. Among other things, the nature of the business, the
availed of for the purpose of avoiding the tax on its shareholders or members is subject to disproof by
financial condition of the corporation at the close of the taxable year, and the use of the undistributed
competent evidence. The existence or non-existence of the purpose may be indicated by
earnings or profits will be considered in determining the reasonableness of the accumulations.
circumstances other than the evidence specified in Section 25(b), and whether or not such purpose
was present depends upon the particular circumstances of each case. In other words, a corporation is
The business of a corporation is not merely that which it has previously carried on, but includes in
subject to taxation under Section 25 if it is formed or availed of for the purpose of preventing the
general any line of business which it may undertake. However, a radical change of business when a
imposition of the progressive rates of tax upon shareholders through the medium of permitting
considerable surplus has been accumulated may afford evidence of a purpose to avoid the tax. If one
earnings or profits to accumulate, even though the corporation is not a mere holding or investment
corporation owns the stock of another corporation in the same or a related line of business and in
company 50 per cent or more of the outstanding stock of which is owned directly or indirectly by one
effect operates the other corporation, the business of the latter may be considered in substance
person, and does not have an unreasonable accumulation of earnings or profits; and on the other
although not in legal form the business of the first corporation. Earnings or profits of the first
hand, the fact that a corporation is such a company or has an accumulation is not absolutely
corporation put into the second through the purchase of stock or otherwise may, therefore, if a
conclusive against it if, by clear and convincing evidence, the taxpayer satisfies the Commissioner of
subsidiary relationship is established, constitute employment of the income in its own business.
Internal Revenue that the corporation was neither formed nor availed of for the purpose of avoiding
Investment by a corporation of its income in stock and securities of another corporation is not of itself
the tax on individuals. All the other circumstances which might be construed as evidence of the
purpose to avoid the tax on shareholders cannot be outlined, but among other things the following will to be regarded as employment of the income in its business. The business of one corporation may not
be considered: (1) Dealings between the corporation and its shareholders, such as withdrawal by the be regarded as including the business of another unless the other corporation is a mere
shareholders as personal loans or the expenditure of funds by corporation for the personal benefit of instrumentality of the first; to establish this it is ordinarily essential that the first corporation own all or
the shareholders, and (2) the investment by the corporation of undistributed earnings in assets having substantially all of the stock of the second.
no reasonable connection with the business. The mere fact that the corporation distributed a large
part of its earnings for the year in question does not necessarily prove that earnings were not The Commissioner of Internal Revenue may require any corporation to furnish a statement of its
permitted to accumulate beyond reasonable needs or that the corporation was not formed or availed accumulated earnings and profits, the name and address of, and number of share held by each of its
of to avoid the tax upon shareholders. shareholders or members, and the amounts that would be payable to each, if the income of the
corporation were distributed.
(Section 26 of the Code)
If the Commissioner of Internal Revenue determined that the corporation was formed or availed of for
the purpose of avoiding the progressive rates of tax on individuals through the medium of permitting
SECTION 22. General co-partnerships. — General co-partnerships, when duly registered, are not
earnings or profits to accumulate, and the taxpayer contests such determination of fact by litigation,
the burden of proving the determination wrong by a preponderance of evidence, together with the subject to income tax, but are required to file returns of their income on B.I.R. Form No. 17.04 for the
corresponding burden of first going forward with evidence, is on the taxpayer under principles purpose of furnishing information as to the share in the gains or profits which each partner shall
applicable to income tax cases generally, and this is so even though the corporation is not a mere include in his individual return. Individuals carrying on business in general co-partnership are,
holding or investment company and does not have an unreasonable accumulation of earnings or however, taxable upon their distributive shares of the net income of such partnership, whether
distributed or not, and are required to include such distributive shares in their individual returns. The
returns of duly registered general co-partnerships should be rendered on or before April 15 of each
year or within sixty days after the end of their fiscal year depending on whether their books are kept
on the calendar or on the fiscal year basis. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
Revenue Regulations 02-40
SECTION 23. Distributive shares of partners. — The distributive share of the net profit of a general
co-partnership must be included in the individual returns of the partners. But where the result of
partnership operation is a loss, the loss will be divisible by the partners in the same proportion as the
net income would have been divisible (or, if the partnership agreement provides for the division of a
loss in a manner different from the division of a gain, in the manner so provided) and may be taken by
the individual partners in their respective returns of income.
(Section 27 of the Code)
SECTION 24. Proof of exemption. — In order to establish its exemption, and thus be relieved of the
duty of filing returns of income and paying the tax, it is necessary that every organization claiming
exemption file an affidavit with the Commissioner of Internal Revenue, showing the character of the
organization, the purpose for which it was organized, its actual activities, the sources of its income
and its disposition, whether or not any of its income is credited to surplus or inures or may inure to the
benefit of any private shareholder or individual, and in general, all facts relating to its operations which
affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of
incorporation, the by-laws of the organization, and the latest financial statement showing the assets,
liabilities, receipts, and disbursement of the organization.
Upon receipt of the affidavit and other papers by the Commissioner of Internal Revenue, the
organization will be informed whether or not it is exempt. When an organization has established its
right to exemption, it need not thereafter make and file a return of income as required under Section
46 of the Tax Code. However, the organization should file on or before April 15 of each year, an
annual information return under oath, stating its gross income and expenses incurred during the
preceding year, and a certificate showing that there has not been any substantial change in its By-
Laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition
of income. (As amended by Revenue Regulations No. 7-64, approved November 25, 1964.)
SECTION 25. Agricultural and horticultural organizations. — The organizations contemplated by
subsection (a) of Section 27 of the Code as entitled to exemption from income taxation are those
which (1) have no net income inuring to the benefit of any member; (2) are educational or instructive
in character; and (3) have as their objects the betterment of the conditions of those engaged in such
pursuits, the improvement of the grade of their products, and the development of a higher degree of
efficiency in their respective occupations. Organizations such as provincial fairs and like associations
of a quasi-public character, which are designed to encourage the development of better agricultural
and horticultural products through a system of awards, prizes, or premiums, and whose income
derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary
expenses of upkeep and operation, are thus exempt. On the other hand, associations which have for
their purpose, for example, the holding of periodical race meets, the profits from which may inure to
the benefit of their shareholders, are not exempt. Similarly, corporations engaged in growing
agricultural or horticultural products or raising live stock or similar products for profits are not exempt
from tax under this paragraph.
SECTION 26. Mutual savings bank. — In order that a corporation may be entitled to exemption as a
mutual savings bank, it must appear that it is an organization (1) which has no capital stock
represented by shares, and (2) whose earnings less only the expenses of operation, are distributable
wholly among the depositors. If it appears that the organization has shareholders who participate in
the profits, the organization will not be exempt from income tax.
SECTION 27. Fraternal beneficiary societies. — A fraternal beneficiary society is exempt from tax
only if operated under the "lodge system", or for the exclusive benefit of the members of a society so
operating. "Operating under the lodge system" means carrying on its activities under a form of
organization that comprises local branches, chartered by a parent organization and largely self-
governing, called lodges, chapters, or the like. In order to be exempt, it is also necessary that the
society should have an established system for payment to its members or their dependents of life,
sick, accident, or other benefits.
SECTION 28. Building and loan associations. — (Now subject to tax, as amended by Sec. 4, R.A.
82.)
engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to
Page 4 of
SECTION 29. Cemetery companies. — A cemetery company may be entitled to exemption, (1) if it is
owned by and operated exclusively for the benefit of its lot owners, or (2) if it is not operated for profit.
Any cemetery corporation chartered solely for burial purposes and not permitted by its charter to
engage in any business not necessarily incident to that purpose, is exempt from income tax, provided
that no part of its net earnings inures to the benefit of any private shareholder or individual. A
cemetery company which fulfills the other requirement of the statute may be exempt, even though it
issues preferred stock entitling the holders to dividend at a fixed rate, provided that its articles of
incorporation require (a) that the preferred stock shall be retired at par as soon as sufficient funds are
realized from sales, and (b) that all funds not required for the payment of dividends upon or for the
retirement of preferred stock shall be used by the company for the care and improvement of the
cemetery property.
A cemetery company having a capital stock represented by shares, or which is operated for profit or
for the benefit of persons other than its members, does not come within the exempted class.
SECTION 30. Religious, charitable, scientific, athletic, cultural, and educational corporations. — A
corporation falling among those enumerated in subsection (e) of Section 27 is exempt from tax on its
income (other than income of whatever kind and character from its properties, real or personal) if such
corporation meets two tests: (a) It must be organized and operated for one or more of the specified
purposes; and (b) no part of its net income must inure to the benefit of private stockholders or
individuals.
The income of such corporation which is considered as income from their properties, real or personal,
generally consists of income from corporate dividends, rentals received from their properties, interests
received from such capital loaned to other persons, income from agricultural lands owned by such
corporations, profits from the sale of property, real or personal, and other similar income. ASIETa
Income not derived from their properties, real or personal, are exempt. For example, in the case of a
religious corporation, income from the conduct of strictly religious activities, such as fees received for
administering baptismals, solemnizing marriages, attending burials, holding masses, and other like
income, is exempt. In the case of an educational corporation, income from the holding of an
educational fair or exhibit is exempt. However, if such exempt income is invested by the corporation,
the income from such investment, as interests from the capital where the capital has been loaned or
dividends on stock where the capital has been invested in shares of stock, will constitute taxable
income. Donations and other similar contributions received by such corporation from other persons
are exempt.
The clause "except income expressly exempt by this Title" appearing in subsection (e) of Section 27
refers to those classes of income which, in accordance with subsection (b) of Section 29, are exempt
from taxation under Title II.
Charitable corporations include an association for the relief of the families of clergymen, even though
the latter make a contribution to the fund established for this purpose; or for furnishing the services of
trained nurses to persons unable to pay for them; or for aiding the general body of litigants by
improving the efficient administration of justice. Educational corporations may include associations
whose sole purpose is the instruction of the public. But associations formed to disseminate
controversial or partisan propaganda are not educational within the meaning of the law. Scientific
corporations include an association for the scientific study of law with a view to improving its
administration.
It does not prevent exemption that private individuals, for whose benefit a charity is organized, receive
the income of the corporation or association. The law refers to individuals having a personal and
private interest in the activities of the corporation, such as stockholders. If, however, a corporation
issues "voting shares", which entitle the holders upon the dissolution of the corporation to receive the
proceeds of its property, including accumulated income, the right to exemption ceases to exist, even
though the by-laws provide that the shareholders shall not receive any dividend or other return upon
their shares.
SECTION 31. Business leagues. — A business league is an association of persons having some
common business interest, which limits its activities to work for such common interest and does not
that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily
Revenue Regulations 02-40 Page 5 of
carried on for profit, the fact that the business is conducted on a cooperative basis or produces only
sufficient income to be self-sustaining, is not ground for exemption. An association engaged in
SECTION 36. Meaning of net income. — The tax imposed by law is upon income. In the computation
furnishing information to prospective investors, to enable them to make sound investments, is not
of the tax, various classes of income must be considered: (a) Income, in the broad sense, meaning all
exempt, since its members have no common business interest, even though all of its income is
wealth which flows into the tax-payer other than as a mere return of capital. It includes the forms of
devoted to the purpose stated. A clearing house association, not organized for profit, no part of the
income specifically described as gains and profits, including gains derived from the sale or other
net income of which inures to any private shareholder or individual, is exempt provided its activities
disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the
are limited to the exchange of checks, and similar work for the common benefit of its members. An
statute recognizes as income determining factor other items, among which are inventories, accounts
association of persons who are engaged in the transportation business, whether by land or water,
receivable, property exhaustion, and accounts payable for expenses incurred. (b) Gross income,
which is designed to promote the legitimate objects of such business, and all of the income of which is
meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt
derived from membership dues and is expended for office expenses is exempt from tax.
from the tax imposed by law. (c) Net income, meaning gross income less statutory deductions. The
statutory deductions are, in general, though not exclusively, expenditures other than capital
SECTION 32. Civic leagues. — Civic leagues entitled to exemption comprise those not organized for
expenditures, connected with production of income. (d) In the case of a taxpayer other than a
profit but operated exclusively for purposes beneficial to the community as a whole. In general,
corporation as defined in Section 84 (b) of the Code, net income means gross income less
organizations engaged in promoting the welfare of mankind are exempt from tax.
exemptions. Ordinarily the net income is to be computed in accordance with the method of accounting
regularly employed in keeping the books of the taxpayer.
SECTION 33. Social clubs. — The exemption applies to practically all social and recreation clubs
which are supported by membership fees, dues, and assessments. If a club, by reason of the
SECTION 37. Computation of net income. — Net income must be computed with respect to a fixed
comprehensive powers granted in the charter, engages in business or in agriculture or horticulture,
period. That period is twelve months ending December 31st of every year except in the case of a
for profit, such club is not organized and operated exclusively for pleasure, recreation, or social
corporation filing returns on a fiscal year basis in which case net income will be computed on the
purposes, and any profit realized from such activities is subject to tax.
basis of such fiscal year. Items of income and of expenditures, which as gross income and
deductions, are elements in the computation of net income, need not be in the form of cash. It is
SECTION 34. Mutual insurance companies and like organizations. — It is necessary to exemption
sufficient that such items may be appraised in terms of money. The time as of which any item of
that the income of the company be derived solely from assessments, dues, and fees collected from
gross income or any deduction is to be accounted for must be determined in the light of the
members. If income is received from other sources, the corporation is not exempt. Income, however,
fundamental rule that the computation shall be made in such a manner as would clearly reflect the
from sources other than those specified does not prevent exemption where its receipt is a mere
taxpayer's income. If the method of accounting regularly employed by him in keeping his books
incident of the business of the company. Thus the receipt of interest upon a working bank balance, or
clearly reflects his income, it is to be followed with respect to the time as of which items of gross
of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the exemption.
income and deductions are to be accounted for, otherwise the computation of net income shall be
The same is true of the receipt of interest upon Government bonds, where they were purchased and
made in such manner as in the opinion of the Commissioner of Internal Revenue would clearly reflect
were afterwards sold. Where, however, such bonds are bought as a permanent investment, the it.
receipt of the interest destroys the exemption. The receipt of what is, in substance, an entrance fee,
charged by a mutual fire insurance company as a condition of membership, does not render the
SECTION 38. Bases of computation. — Approved standard methods of accounting will be ordinarily
company taxable, although this fee is called a premium. If an organization issues policies for
regarded as clearly reflecting income. A method of accounting will not, however, be regarded as
stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and
clearly reflecting income unless all items of gross income and all deductions are treated with
maintains investments from which income is derived, it is not entitled to exemption. On the other
reasonable consistency. All items of gross income shall be included in the gross income for the
hand, an organization may be entitled to exemption, although it makes advance assessment for the
taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in
sole purpose of meeting future losses and expenses, provided that the balance of such assessments
order clearly to reflect income such amounts are to be properly accounted for as of a different period.
remaining on hand at the end of the year is retained to meet losses and expenses or is returned to
For instance, in any case in which it is necessary to use an inventory, no accounting in regard to
members. An organization of a purely local character is one whose business activities are confined to
purchases and sales will correctly reflect income except an accrual method. A taxpayer is deemed to
a particular community, place, or district, irrespective, however, of political subdivisions.
have received items of gross income which have been credited to or set apart for him without
restriction. On the other hand, appreciation in value of property is not even an accrual of income to a
SECTION 35. Farmers' cooperative marketing and purchasing association. — Cooperative taxpayer prior to the realization of such appreciation through sale or conversion of the property. (For
associations, acting as sales agents for farmers or others, in order to come within the exemption must methods of accounting and determination of accounting period, see Sections 166 to 169 of these
establish that for their own account they have no net income. Cooperative dairy companies, which are regulations.)
engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds,
(Section 29(a) of the Code)
less necessary operating expenses, among their members upon the basis of the quantity of milk or of
butter fat in the milk furnished by such members are exempt from the tax. If the proceeds of the
SECTION 39. What gross income includes. — Gross income includes, in general, compensation for
business are distributed in any other way than on such a proportionate basis, the company will be
personal and professional services, business income, profits from sales of and dealings in property,
subject to tax. A farmers' association is not exempt from taxation where in accounting to farmers
interests, rents, dividends, and gains, profits, and income derived from any source whatever, unless
furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses
exempt from tax by law. In general, income is the gain derived from capital, from labor, or from both
incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax,
combined, provided it be understood to include profit gained through a sale or conversion of capital
but rebates made to purchasers, whether or not members of the association, in proportion to their
assets. Profit of citizens, resident aliens, or domestic corporations derived from sales in foreign
purchases may be excluded from gross income in computing the net income subject to tax. Any
commerce must be included in their gross income. Income may be in the form of cash or of property.
profits made from non-members and distributed to members in the guise of rebates are, of course,
subject to tax.
For the treatment of dividends for purposes of the tax, see Sections 250 to 256 of these regulations.
For the treatment of capital gains, see Sections 132 to 135 of these regulations.
Cooperative marketing associations duly incorporated under Act No. 3425, known as the Cooperative
Marketing Law are exempt from income tax. (See also R.A. 702 exempting cooperative marketing
SECTION 40. Compensation for personal services. — Where no determination of compensation is
associations.)
had until the completion of the services, the amount received is ordinarily income for the taxable year
(Section 28 of the Code)
of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which
received, if the return is rendered on a receipts and disbursements basis. Commissions paid
salesman, compensation for services on the basis of a percentage of profits, commissions on
insurance premiums, tips, and pensions or retiring allowances paid by private persons or by the
Revenue Regulations 02-40
Government of the United States or of the Philippines (except pensions exempt by law from tax) are
income to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses
for the dead, and other contributions received by a clergyman, evangelists, or religious worker for
services rendered. However, so-called pensions awarded by one to whom no services have been
rendered are mere gifts or gratuities and are not taxable.
SECTION 41. Compensation paid other than in cash. — Where services are paid for with something
other than money, the fair market value of the thing taken in payment is the amount to be included as
income. If the services were rendered at a stipulated price, in the absence of evidence to the
contrary, such price will be presumed to be the fair value of the compensation received.
Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold
the stock for its market value and paid the employee in cash. When living quarters are furnished in
addition to cash salary, the rental value of such quarters should be reported as income.
SECTION 42. Compensation paid in promissory notes. — Promissory notes or other evidence of
indebtedness received in payment for services, and not merely as security for such payment,
constitute income to the amount of their fair market value. A taxpayer receiving as compensation a
note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as
of the time of receipt the fair discounted value of the note at that time. Thus, if it appears that such a
note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross
income to the amount of its face value less discount computed at the prevailing rate for such
transactions.
If the payment due on a note so accounted for are met as they become due, there should be included
as income in respect of each such payment so much thereof as represents recovery for the discount
originally deducted.
SECTION 43. Gross income from business. — In the case of a manufacturing, merchandising, or
mining business, "gross income" means the total sales, less the cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In determining the gross
income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or
for items not ordinarily used in computing the cost of goods sold.
SECTION 44. Long term contracts. — Income from long-term contracts is taxable for the period in
which the income is determined, such determination depending upon the nature and terms of the
particular contract. As used herein the term "long-term" contracts means building, installation, or
construction contracts covering a period in excess of one year. Persons whose income is derived in
whole or in par from such contracts may, as to such income, prepare their returns upon the following
bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of
completion. In such case there should accompany the return certificate of architects, or engineers
showing the percentage of completion during the taxable year of the entire work performed under
contract. There should be deducted from such gross income all expenditures made during the taxable
year on account of the contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the work under the contract but not
yet so applied. If upon completion of a contract, it is found that the taxable net income arising
thereunder has not been clearly reflected for any year or years, the Commissioner of Internal
Revenue may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally completed and
accepted if the taxpayer elects as a consistent practice to so treat such income, provided such
method clearly reflects the net income. If this method is adopted there should be deducted from gross
income all expenditures during the life of the contract which are properly allocated thereto, taking into
consideration any material and supplies charged to the work under the contract but remaining on
hand at the time of the completion.
Where a taxpayer has filed his return in accordance with the method of accounting regularly
employed by him in keeping his books and such method clearly reflects the income, he will not be
required to change to either of the methods above set forth. If a taxpayer desires to change his
method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the
have been carried on the books as an asset but the burden of proof is on the taxpayer to establish the
Page 6 of
composition of all items appearing upon his balance sheet and used in connection with the method of
accounting formerly employed by him, should accompany his return.
SECTION 45. Gross income of farmers. — A farmer reporting on the basis of receipts and
disbursements (in which no inventory to determine profits is used) shall include in his gross income
for the taxable year (1) the amount of cash or the value of merchandise or other property received
from the sale of live stock and produce which were raised during the taxable year or prior years, (2)
the profit from the sale of any live stock or other items which were purchased, and (3) gross income
from all other sources. The profit from the sale of live stock or other items which were purchased is to
be ascertained by deducting the cost from the sales price in the year in which the sale occurs, except
that in the case of the sale of animals purchased as draft or work animals, or solely for breeding or
dairy purposes and not for resale, the profit shall be the amount of any excess of the sales prices over
the amount representing the difference between the cost and the depreciation theretofore sustained
and allowed as a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine
profits), his gross profits are ascertained by adding to the inventory value of live stock and products
on hand at the end of the year the amount received from the sale of live stock products, and
miscellaneous receipts for hire of teams, machinery, and the like, during the year, and deducting from
this sum the inventory value of live stock and products on hand at the beginning of the year and the
cost of live stock and products purchased during the year. In such cases all live stock raised or
purchased for sale shall be included in the inventory at their proper valuation determined in
accordance with the method authorized and adopted for the purpose. Also, live stock acquired for
drafts, breeding, or dairy purposes and not for sale may be included in the inventory, instead of being
treated as capital assets subject to depreciation, provided such practice is followed consistently by the
taxpayer. In case of the sale of any live stock included in an inventory their cost must not be taken as
an additional deduction in the return of income, as such deduction will be reflected in the inventory.
In every case of the sale of machinery, farm equipment, or other capital assets (which are not to be
included in an inventory if one is used to determine profits) any excess over the cost thereof less the
amount of depreciation theretofore sustained and allowed as a deduction in computing net income,
shall be included as gross income. Where farm produce is exchanged for merchandise, groceries, or
the like, the market value of the article received in exchange is to be included in gross income. Rents
received in crop shares shall be returned as of the year in which the crop shares are reduced to
money or a money equivalent. Proceeds of insurance, such as fire and typhoon insurance on growing
crops, should be included in gross income to the amount received in cash or its equivalent for the
crop injured or destroyed. If a farmer is engaged in producing crops which take more than a year from
the time of planting to the time of gathering and disposing, the income therefrom may be computed
upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a
deduction in the year in which the gross income from the crop is realized. EaICAD
As herein used the term "farm" embrace the farm in the ordinarily accepted sense, and includes
stock, dairy, poultry, fruit, and truck farms, also plantations, ranches, and all land used for farming
operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for
gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a
farm for recreation or pleasure, the result of which is a continual loss from year to year, is not
regarded as a farmer.
SECTION 46. Sale of patents and copyrights. — A taxpayer disposing of patents or copyrights by
sale should determine the profit or loss arising therefrom by computing the difference between the
selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to
March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these
regulations. The profit or loss thus ascertained should be increased or decreased, as the case may
be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1,
1913, or since the date of acquisition if subsequent thereto.
SECTION 47. Sale of goodwill. — Gain or loss from a sale of goodwill results only when the
business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be
determined by comparing the sale price with the cost or other basis of the assets, including goodwill.
If specific payment was not made for goodwill acquired after March 1, 1913, there can be no
deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up
through expenditures which have been currently deducted. It is immaterial that goodwill may never
cost or fair market value on March 1, 1913, of the goodwill sold.
Revenue Regulations 02-40 Page 7 of
SECTION 52. Income constructively received. — Income which is credited to the account of or set
SECTION 48. Annuities and insurance policies. — Annuities paid by religious, charitable, and
apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year
educational corporations under an annuity contract are subject to tax to the extent that the aggregate
during which so credited or set apart, although not then actually reduced to possession. To constitute
amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the
receipt in such a case the income must be credited to the taxpayer without any substantial limitation
contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the
or restriction as to the time or manner of payment or condition upon which payment is to be made. A
devisee out of the rents of the land or from other sources. The devisee is not required to return as
book entry, if made, should indicate an absolute transfer from one account to another. If the income is
gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross
not credited, but is set apart, such income must be unqualifiedly subject to the demand of the
income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid
taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is
by him under life insurance, endowment, or annuity contracts, such as the so-called "dividends" of a
not available to such employees until some future date, the mere crediting on the books of the
mutual insurance company, which may be credited against the current premium, are not subject to
corporation does not constitute receipt.
tax. Distributions on paid-up policies which are made out of earnings of the insurance company
subject to tax are in the nature of corporate dividends and should be included in the taxable income of
the individual, without any credit for the amount of tax paid by the corporation at source. SECTION 53. Examples of constructive receipt. — When interest coupons have matured and are
payable, but have not been cashed, such interest payment though not collected when due and
payable, is nevertheless available to the taxpayer and should therefore be included in his gross
SECTION 49. Improvements by lessees. — When buildings are erected or improvements made by a
income for the year during which the coupons matured. This is true if the coupons are exchanged for
lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not
other property instead of eventually being cashed. Defaulted coupons are income for the year in
subject to removal by the lessee, the lessor may at his option report the income therefrom upon either
which paid. The distributive share of the profits of a partner in a general co-partnership duly registered
of the following bases;
is regarded as received by him, although not distributed. Interest credited on savings bank deposits,
even though the bank nominally has a rule, seldom or never enforced, that it may require so many
(a) The lessor may report as income at the time when such buildings or improvements are
days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An
completed the fair market value of such buildings or improvements subject to the lease. amount credited to shareholders of a building and loan association, when such credit passes without
(b) The lessor may spread over the life of the lease the estimated depreciated value of such restriction to the shareholder, has taxable status as income for the year of the credit. When the
buildings or improvements at the termination of the lease and report as income for each year of amount of such accumulations has not become available to the shareholder until the maturity of a
the lease an aliquot part thereof. share, the amount of any share in excess of the aggregate amount paid in by the shareholder is
income for the year of maturity of the share.
If for any other reason than a bona fide purchase from the lessee by the lessor the lease is
terminated, so that the lessor comes into possession or control of the property prior to the time
SECTION 54. Creation of corporate sinking fund. — If a corporation in order solely to secure
originally fixed for the termination of the lease, the lessor receives additional income for the year in
payment of its bonds or other indebtedness, places property in trust, or sets aside certain amounts in
which the lease is so terminated to the extent that the value of such buildings or improvements when
a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums
he became entitled to such possession exceeds the amount already reported as income on account
from time to time, the property or fund thus set aside by the corporation and held by the trustee is an
of the erection of such buildings or improvements. No appreciation in value due to causes other than
asset of the corporation, and any gain arising therefrom is income of the corporation and shall be
the premature termination of the lease shall be included. Conversely, if the building or improvements
included as such in its annual return.
are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year
when such destruction takes place the amount previously reported as income because of the erection
SECTION 55. Acquisition or disposition by a corporation of its own capital stock. — Whether the
of such buildings or improvements, less any salvage value subject to the lease to the extent that such
acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or
loss was not compensated for by insurance. If the buildings or improvements destroyed were
deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its
acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the
facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital
lease to the extent that such loss was not compensated for by insurance. HSaCcE
stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the
subscription or issue price be in excess of, or less than, the par or stated value of such stock.
SECTION 50. Forgiveness of indebtedness. — The cancellation and forgiveness of indebtedness
may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the
But if a corporation deals in its own shares as it might in the shares of another corporation, the
circumstances. If, for example, an individual performs services for a creditor, who, in consideration
resulting gain or loss is to be computed in the same manner as though the corporation were dealing in
thereof cancels the debt, income to that amount is realized by the debtor as compensation for his
the shares of another. So also if the corporation receives its own stock as consideration upon the sale
services. If, however, a creditor merely desires to benefit a debtor and without any consideration
of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in
therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not
the same manner as though the payment had been made in any other property. Any gain derived
be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives
from such transaction is subject to tax, and any loss sustained is allowable as deduction where
the debt, the transaction has the effect of the payment of a dividend.
permitted by the provisions of Title II.
SECTION 51. When income is to be reported. — Gains, profits, and income are to be included in the
SECTION 56. Contributions by shareholders. — Where a corporation requires additional funds for
gross income for the taxable year in which they are received by the taxpayer, unless they are
conducting its business and obtains such needed money through voluntary pro rata payments by its
included when they accrue to him in accordance with the approved method of accounting followed by
shareholders, the amounts so received being credited to its surplus account or to a special capital
him. If a person sues in one year on a pecuniary claim or for property, and money or property is
account, will not be considered income, although there is no increase in the outstanding shares of
recovered on a judgment therefore in a later year, income is realized in that year, assuming that the
stock of the corporation. The payments in such circumstances are in the nature of voluntary
money or property would have been income in the earlier year if then received. This is true of a
assessments upon, and represent an additional price paid for, in shares of stock held by the individual
recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913,
shareholders, and will be treated as an addition to and as a part of the operating capital of the
because of the fact that they were determined to be worthless, which are subsequently recovered,
company.
whether or not by suit, constitute income for the year in which recovered, regardless of the date when
amounts were charged off.
SECTION 57. Sale and retirement of corporate bonds. — (1) (a) If bonds are issued by a corporation
at their face value, the corporation realizes no gain or loss. (b) If thereafter the corporation purchases
and retires any of such bonds at a price in excess of the issuing price or face value, the excess of the
purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If,
however, the corporation purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or
Revenue Regulations 02-40 Page 8 of
income for the taxable year.
SECTION 62. Proceeds of insurance. — The proceeds of life-insurance policies, paid by reason of
(2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is gain or
the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but
income which should be prorated or amortized over the life of the bond. (b) If thereafter the
not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income
corporation purchases and retires any of such bonds at a price in excess of the issuing price minus
of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in
any amount of premium already returned as income, the excess of the purchase price over the
installments. If, however, such proceeds are held by the insurer under an agreement to pay interest
issuing price minus any amount of premium already returned as income (or over the face value plus
thereon, the interest payments must be included in gross income. Amounts received (other than
any amount of premiums not yet returned as income) is a deductible expenses for the taxable year.
amounts paid by reason of the death of the insured and interest payments on such amounts) under a
(c) If, however, the corporation purchases and retires any of such bonds at a price less than the
life insurance, endowment, or annuity contract are excluded from gross income but, if such amounts
issuing price minus any amount of premium already returned as income, the excess of the issuing
(when added to amounts received before the taxable year under such contract) exceed the aggregate
price minus any amount of premium already returned as income (or of the face value plus any amount
premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be
of premium not yet returned as income) over the purchase price is gain or income for the taxable year.
included in gross income. However, in the case of a transfer for a valuable consideration, by
assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein,
(3) (a) If bonds are issued by a corporation at a discount, the net amount of such discount is only the actual value of such consideration and the amount of the premiums and other sums
deductible and should be prorated or amortized over the life of the bonds. (b) If thereafter the subsequently paid by the transferee are exempt from taxation.
corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any
amount of discount already deducted, the excess of the purchase price over the issuing price plus any
SECTION 63. Amounts received as compensation for injuries or sickness. — The amounts received
amount of discount already deducted (or over the face value minus any amount of discount not yet
by an insured or his estate or beneficiaries through accident or health insurance or under workmen's
deducted), is a deductible expense for the taxable year. (c) If, however, the corporation purchases
compensation acts as compensation for personal injuries or sickness are excluded from the gross
and retires any of such bonds at a price less than the issuing price plus any amount of discount
income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or
already deducted, the excess of the issuing price plus any amount of discount already deducted (or of
agreement on account of such injuries or sickness are similarly excluded from the gross income of the
the face value minus any amount of discount not yet deducted) over the purchase price is gain or
individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such
income for the taxable year.
damages, if dead.
SECTION 58. Income of corporation from leased property. — Where a corporation has leased its
SECTION 64. Gifts and bequests. — Property received as a gift or received under a will or testament
property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a
or through legal succession, is exempt from the income tax, although the income therefrom or income
certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding
derived from its investment, sale, or otherwise is not. An amount of principal paid under a marriage
indebtedness, together with taxes, insurance or other fixed charges, such payments shall be
settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable
considered rental payments and shall be returned by the lessor corporation as income,
income.
notwithstanding the fact that the dividends and interest are paid by the lessee directly to the
(Section 30(a) of the Code)
shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its
property and has parted with its management and control, or has ceased to engage in the business
SECTION 65. Business expenses. — Business expenses deductible from gross income include the
for which it was originally organized, will not relieve it from liability to the tax. While the payments
ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or
made by the lessee directly to the bondholders or shareholders of the lessor are rentals as to both the
business. The cost of goods purchased for resale, with proper adjustment for opening and closing
lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and
inventories, is deducted from gross sales is computing gross income. Among the items included in
the shareholders, such amounts are interest and dividend payments received as from the lessor and
business expenses are management expenses, commissions, labor, supplies, incidental repairs,
as such shall be accounted for in their returns.
operating expenses of transportation, equipment used in the trade or business, traveling expenses
while away from home solely in the pursuit of a trade or business, advertising and other selling
SECTION 59. Gross income of a corporation in liquidation. — When a corporation is dissolved, its
expenses, together with insurance premiums against fire, storm, theft, accident, or other similar
affairs are usually wound up by a receiver or trustee in dissolution. The corporate existence is
losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to
continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustee
deduct the necessary expenses paid in carrying on his business from his gross income from whatever
stands in the stead of the corporation for such purposes. Any sales of property by them are to be
source.
treated as if made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 66. Traveling expenses. — Traveling expenses as ordinarily understood, include
SECTION 60. Gross income of foreign corporations. — The gross income of a foreign corporation
transportation expenses and meals and lodging. If the trip is undertaken for other than business
subject to tax consists of its gross income from sources within the Philippines. Gross income from
purposes, the transportation expenses are personal expenses, and the meals and lodging are living
sources within the Philippines, as applied to foreign corporations, shall include interest received on
expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and
bonds, notes, or other interest-bearing obligations issued by residents, corporate or otherwise, as well
necessary traveling expenses, including transportation expenses, meals and lodging, become
as income derived from dividends on the capital stock or from the net earnings of domestic or resident
business instead of personal expenses.
foreign corporations, joint stock companies, associations, or insurance companies, dividends from
other foreign corporations to the extent provided in Section 37 of the Code, and likewise income from
(a) If, then, an individual, whose business requires him to travel receives a salary as full
rentals and royalties from all sources within the Philippines.
compensation for his services, without reimbursement for traveling expenses, or is employed on
(Section 29(b) of the Code)
a commission basis with no expense allowance, his traveling expenses, including the entire
amount expended far meals and lodging, are deductible from gross income.
SECTION 61. Exclusions from gross income. — The term "gross income" as used in the Act does not
(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall
include those items of income exempted by statute or by fundamental law. Such tax-free income
include in gross income, the amount so repaid and may deduct such expenses. aDcHIC
should not be included in the income tax return unless information regarding it is specifically called for.
(c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a
The exclusion of such income should not be confused with the reduction of gross income by the
per diem allowance in lieu of subsistence, the amount of the allowance should be included in
application of allowable deductions.
gross income and the cost of such meals and lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a business to herein must attach to his return a statement showing (1) the nature of the business in which he is
expense. Only such expenses as are reasonable and necessary in the conduct of the business and engaged; (2) the number of days away from home during the taxable year on account of business; (3)
directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred the total amount of expenses incident to meals and lodging while absent from home and business
Revenue Regulations 02-40
during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a
deduction.
Claim for the deductions referred to herein must be substantiated, when required by the
Commissioner of Internal Revenue by record showing in detail the amount and nature of the
expenses incurred.
SECTION 67. Cost of materials. — Taxpayers carrying materials and supplies on hand should
include in expenses the charges for materials and supplies only to the amount that they are actually
consumed and used in operation during the year for which the return is made, provided that the cost
of such materials and supplies has not been deducted in determining the net income for any previous
year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption
is kept or of which physical inventories at the beginning and end of the year are not taken, it will be
permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of
such supplies and materials as were purchased during the year for which the return is made, provided
the net income is clearly reflected by this method.
SECTION 68. Repairs. — The cost of incidental repairs which neither materially add to the value of
the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition,
may be deducted as expense, provided the plant or property account is not increased by the amount
of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration
and appreciably prolong the life of the property should be charged against the depreciation reserves if
such account is kept.
SECTION 69. Professional expenses. — A professional may claim as deductions the cost of supplies
used by him in the practice of his profession, expenses paid in the operation and repair of
transportation equipment used in making professional calls, dues to professional societies and
subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light,
water, telephone, etc.; used in such offices, and the hire of office assistants. Amounts currently
expended for books, furnitures, and professional instruments and equipment, the useful life of which
is short, may be deducted. But amounts expended for books, furniture, and professional instruments
and equipment of a permanent character are not allowable as deductions. SEHTIc
SECTION 70. Compensation for personal services. — Among the ordinary and necessary expenses
paid or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in the
case of compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and its practical application may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of dividend on stock. This is likely to occur in the case of a corporation having
few shareholders, practically all of whom draw salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar services, and the excessive payment correspond
or bear a close relationship to the stockholdings of the officers or employees, it would seem
likely that the salaries are not paid wholly for services rendered, but that the excessive
payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in
part payment for property. This may occur, for example, where a partnership sells out to a
corporation, the former partners agreeing to continue in the service of the corporation. In
such a case it may be found that the salaries of the former partners are not merely for
services, but in part constitute payment for the transfers of their business.
(2)(2)
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of
contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise,
it does not follow that payments on a contingent basis are to be treated fundamentally on any
Page 9 of
basis different from that applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the individual made
before the services are rendered, not influenced by any consideration on the part of the
employer other than that of securing on fair and advantageous terms the services of the
individual, it should be allowed as a deduction even though in the actual working out of the
contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is reasonable in all the
circumstances. It is in general just to assume that reasonable and true compensation is only
such amount as would ordinarily be paid for like services by like enterprises in like
circumstances. The circumstances to be taken into consideration are those existing at the date
when the contract for services was made, not those existing at the date when the contract is
questioned.
SECTION 71. Treatment of excessive compensation. — The income tax liability of the recipient in
respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such
by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive
payments by corporations, if such payments correspond or bear a close relationship to stockholdings,
and are found to be distribution of earnings or profits, the excessive payments will be treated as
dividend. If such payments constitute payment for property, they should be treated by the payer as a
capital expenditure and by the recipient as part of the purchase price. HSCcTD
SECTION 72. Bonuses to employees. — Bonuses to employees will constitute allowable deductions
from gross income when such payments are made in good faith and as additional compensation for
the services actually rendered by the employees, provided such payment, when added to the
stipulated salaries, do not exceed a reasonable compensation for the service rendered. It is
immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind.
Donations made to employees and others, which do not have in them the element of compensation or
are in excess of reasonable compensation for services, are not deductible from gross income.
SECTION 73. Pensions, compensation for injuries. — Amounts paid for pensions to retired
employees or to their families or others dependent upon them, or on account of injuries received by
employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper
deductions as ordinary and necessary expenses. Such deductions are limited to the amount not
compensated for by insurance or otherwise. When the amount of the salary of an officer or employee
is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered
by the individual, such payments may be deducted. Salaries paid by employers to employees who are
absent in the military, naval or other service of the Government, but who intend to return at the
conclusion of such service, are allowable deductions. (See Section 118 of these regulations, relative
to pension trust.)
SECTION 74. Rentals. — Where a leasehold is acquired for business purposes for a specified sum,
the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on
the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business
property are additional rent and constitute a deductible item to the tenant and taxable income to the
landlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting
buildings or making permanent improvements on ground of which he is lessee is held to be a capital
investment and not deductible as a business expense. In order to return to such taxpayer his
investment of capital, an annual deduction may be made from gross income of an amount equal to
the cost of such improvements divided by the number of years remaining of the term of lease, and
such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is
greater than the probable life of the buildings erected, or of the improvements made, this deduction
shall take the form of an allowance for depreciation.
SECTION 75. Expenses of farmers. — A farmer who operates a farm for profit is entitled to deduct
from gross income as necessary expenses all amounts actually expended in the carrying on of the
business of farming. The cost of ordinary tools of short life or small cost, such as hand tools, including
shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an
expense deduction, in so far as such cost represents actual outlay, but not including the value of farm
produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing
crops which take more than a year from the time of planting to the process of gathering and disposal,
expenses deducted may be determined upon the crop basis, and such deductions must be taken in
Revenue Regulations 02-40
the year in which the gross income from the crop has been realized. The cost of farm machinery,
equipment, and farm buildings represents a capital investment and is not an allowable deduction as
an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to
the time when the productive state is reached may be regarded as investments of capital. Amounts
expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and
may be depreciated unless such animals are included in an inventory in accordance with Section 149
of these regulations. The purchase price of transportation equipment even when wholly used in
carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of
gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of
farming is deductible as an expense; if used partly for business purposes and partly for the pleasure
or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of
the use for purposes of business and pleasure or convenience, and only the proportion of such cost
justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for
recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with
the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be
ignored in rendering a return of income, and the expenses incurred, being regarded as personal
expenses, will not constitute allowable deduction.
SECTION 76. When charges are deductible. — Each year's return, so far as practicable, both as to
gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to
make every reasonable effort to ascertain the facts necessary to make a correct return. The
expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year.
A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within
any year deduct certain of his expenses, losses, interests, taxes, or other charges, he can not deduct
them from the income of the next or any succeeding year. If it is recognized, however, that particularly
in a going business of any magnitude there are certain overlapping items both of income and
deduction, and so long as these overlapping items do not materially distort the income, they may be
included in the year in which the taxpayer, pursuant to a consistent policy, takes them into his
accounts. Judgments or other binding judicial adjudication, on account of damages for patent
infringement, personal injuries, or other cause, are deductible from gross income when the claim is so
adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct
deduction, less any amount of such damages as may have been compensated for by insurance or
otherwise: If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss
sustained during a prior taxable year which has not been deducted from gross income, he may render
an amended return for such preceding taxable year including such amount of loss in the deduction
from gross income and may in proper cases file a claim for refund of the excess tax paid by reason of
the failure to deduct such loss in the original return. A loss from theft or embezzlement occurring in
one year and discovered in another is ordinarily deductible for the year in which sustained.
SECTION 77. Expenses allowable to non-resident aliens and foreign corporations. — The expenses
allowable to a non-resident alien or a foreign corporation consist of only such expenses as are
incurred in carrying on any business or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78. Interest. — Interest paid or accrued within the taxable year on indebtedness may be
deducted from gross income, except that interest on indebtedness incurred or continued to purchase
bonds and other securities, the interest upon which is exempt from tax, is not deductible. Interest paid
by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even
though the taxpayer is not directly liable upon the bond or not secured by such mortgage, may be
deducted as interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, the allowable deduction will be the
proportion of such interest which the amount of gross income from sources within the Philippines
bears to the amount of gross income from all sources within and without this country; however, to
avail of this deduction, such non-resident alien individual or foreign corporation shall include in the
return all the information necessary for its calculation.
Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on
preferred stock, which is in reality a dividend thereon, can not be deducted in computing net income.
In the case of banks and loan or trust companies, interest paid within the year on deposits or on
Page 10 of
moneys received for investment and secured by interest-bearing certificates of indebted issued by
such hank or loan or trust company may be deducted from gross income.
SECTION 79. Interest on capital. — Interest calculated for cost-keeping or other purposes on
account of capital or surplus invested in the business, which does not represent a charge arising
under an interest-bearing obligation, is not allowable deduction from gross income.
(Section 30(c) of the Code)
SECTION 80. Taxes in general. — As a general rule, taxes are deductible with the exception of those
with respect to which the law does not permit deduction. However, in the case of a non-resident alien
individual and a foreign corporation, deduction is allowed only if and to the extent that the taxes for
which deduction is claimed are connected with income from sources within the Philippines.
Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise
and stamp taxes and any other taxes of every name or nature paid directly to the Government of the
Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes
proper and no deductions should be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered
taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the
merchants' sales tax imposed by law upon sales is not deductible by the individual purchaser even
though the tax may be billed to him as a separate item.
In computing the net income of an individual no deduction is allowed for the taxes imposed upon his
interest as shareholder of a bank or other corporation, which are paid by the corporation without
reimbursement from the taxpayer. The amount so paid should not be included in the income of the
shareholder.
In the case of corporate bonds or other obligations containing a tax-free covenant clause the
corporation paying a tax or any part of it, for someone else pursuant to its agreement is not entitled to
deduct such payment from gross income on any ground.
SECTION 81. Income tax imposed by the Government of the Philippines. — The law does not permit
the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and
in no case may the taxpayer avail of such deduction.
SECTION 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign
country. — Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country
(including the United States and possessions thereof) are allowed as deductions only if the taxpayer
does not signify in his return his desire to have to any extent the benefits of the provisions of law
allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign
country residing in the Philippines whose income from sources within such foreign country is not
subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to
his net income subject to the Philippine income tax shall be allowed as deduction.
SECTION 83. Estate, inheritance, and gift taxes: taxes assessed against local benefits. — Estate,
inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and
other like improvements, imposed because of and measured by some benefit inuring directly to the
property against which the assessment is levied, do not constitute an allowable deduction from gross
income. A tax is considered assessed against local benefits when the property subject to the tax is
limited to the property benefited. Special assessments are not deductible, even though an incidental
benefit may inure to the public welfare. The taxes deductible are those levied for the general public
welfare, by the proper taxing authorities at a like rate against all property in the territory over which
such authorities have jurisdiction. When assessments are made for the purpose of maintenance or
repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in
business, if the payment of such assessments is necessary to the conduct of his business. When the
assessments are made for the purpose of constructing local benefits, the payments by the taxpayer
are in the nature of capital expenditures and are not deductible. Where assessments are made for the
purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the
allocation of the amounts assessed to the made, none of the amounts so paid is
different purposes. If the allocation can not be deductible.
Revenue Regulations 02-40
SECTION 84. Analysis of credit for taxes: — If
the taxpayer signifies in his return his desire to
claim a credit for taxes, the basis of such
credit, in the case of a citizen of the
Philippines, whether resident or non-resident,
and in the case of a domestic corporation, is
as follows: (a) The amount of any income,
war-profits, and excess-profits taxes paid or
accrued during the taxable year to any foreign
country; and (b) an individual's proportionate
share of any such taxes of which he is a
partner or of an estate or trust of which he is a
beneficiary paid or accrued during the taxable
year to a foreign country if his distributive
share of the income of such partnership or
trust is reported for taxation under Title II of
the Code.
In the case of an alien resident of the
Philippines who signifies in his return his
desire to claim a credit for such taxes the
basis of the credit is as follows: (a) The
amount of any such taxes paid or accrued
during the taxable year to any foreign country
if the foreign country of which such alien
resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens of
the Philippines residing in such country; and
(b) his proportionate share of any such taxes
of a partnership of which he is a partner or an
estate or trust of which he is a beneficiary paid
or accrued during the taxable year to any
foreign country if his distributive share of the
net income of such partnership or trust is
reported for taxation under Title II of the Code,
and if the foreign country of which such alien
resident is a citizen or subject, in imposing
such taxes, allows a similar credit to citizens of
the Philippines residing in such country.
If a taxpayer signifies in his return his desire to
claim credit for taxes, such action will be
considered to apply to income, war-profits,
and excess-profits taxes paid to all foreign
countries (including the United States and
possessions thereof), and no portion of any
such taxes shall be allowed as a deduction
from gross income.
SECTION 85. Meaning of terms. — The
"amount of any income, war-profits, and
excess-profits taxes paid or accrued during the
taxable year" means taxes proper (no credit
being given for amounts representing interest
or penalties) paid or accrued during the
taxable year on behalf of the taxpayer claiming
credit. "Foreign country" means any foreign
state or political subdivision thereof, or any
foreign political entity, which levies and
collects income, war-profits, or excess-profits
taxes, and includes the United States or any
political subdivision thereof.
SECTION 86. Conditions of allowance of
credits. — If the taxpayer signifies in his return
his desire to claim credit for income, war-
profits, or excess-profits taxes paid other than
to the Philippines, the income tax return must
be accompanied by the appropriate form
prescribed by the Commissioner of Internal
Revenue. The form must be carefully filled in
with all the information there called for and with
the calculations of credits there indicated, and
must be duly signed and sworn to or affirmed.
If credit is sought for taxes already paid the
form must have attached to it the receipt for
each such tax payment. If credit is sought for
taxes accrued, the form must have attached to
it the return on which each such accrued tax
was based. This receipt or return so attached
must be either the original, a duplicate original,
a duly certified or authenticated copy, or a
sworn copy. In case only a sworn copy of a
receipt or return is attached, there must be
kept readily available for comparison on
request the original, a duplicate original, or a
duly certified or authenticated copy. If the
receipt of the return is in a foreign language, a
certified translation thereof must be furnished
by the taxpayer. Any additional information
necessary for the determination of the amount
of income derived from sources without the
Philippines and from each foreign country
shall, upon the request of the Commissioner of
Internal Revenue, be furnished by the
taxpayer.
In the case of a credit sought for a tax accrued
but not paid, the Commissioner of Internal
Revenue may in addition require as a condition
precedent to the allowance of credit a bond
from the taxpayer. It shall be in such sum as
the Commissioner of Internal Revenue may
prescribe, and shall be conditioned for the
payment by the taxpayer of any amount of tax
found due upon any redetermination of the tax
made necessary by such credit proving
incorrect, with such further conditions as the
Commissioner of Internal Revenue may
require. This bond shall be executed by the
taxpayer, or the agent or representative of the
taxpayer, as principal, and by sureties
satisfactory to and approved by the
Commissioner of Internal Revenue.
If it is the desire of the taxpayer to claim as a
credit and not as a deduction accrued
income, war- profits, and excess profits
taxes imposed by the authority of any foreign
country or possession of the United States
but at the time the return is made it is
impossible to estimate the amount of such
taxes that may have accrued for the period
for which the return is made, the form
required under this section may be filed at a
later date but a credit cannot be allowed for
such taxes unless the taxpayer signifies in
his return his desire to have to any extent
the benefits of Section 30(c) (3) to (9).
SECTION 87. Redetermination of tax when
credit proves incorrect. — In case credit has
been given for taxes accrued, or a
proportionate share thereof, and the amount
that is actually paid on account of such taxes,
or a proportionate share thereof, is not the
same as the amount of such credit, or in case
any tax payment credited is refunded in whole
or in part, the taxpayer shall immediately
notify the Commissioner of Internal Revenue.
The Commissioner of Internal Revenue will
thereupon redetermine the amount of the tax
of such taxpayer for the year or years for
which such incorrect credit was granted. The
amount of tax, if any, due upon such
redetermination shall be paid by the taxpayer
upon notice and demand by the
Commissioner of Internal Revenue. The
amount of tax, if any, shown by such
redetermination to have been overpaid shall
be credited or refunded to the taxpayer in
accordance with the provisions of Section 309
of the Code.
SECTION 88. Countries which do or do not
satisfy the similar credit requirements. — A
country satisfies the similar credit requirement
of Section 30(c)(3)(B), as to income tax paid
to such country, either by allowing to citizens
of the Philippines residing in such country a
credit for the amount of income taxes paid to
the Philippines. A country does not satisfy the
similar credit requirement of Section (30)(c)(3)
(B) if it does not allow any credit to citizens of
the Philippines residing in such country for the
amount of income taxes paid to the
Philippines, or if such country does not
impose any income taxes. If the country of
which a resident alien is a citizen or subject
does not allow to a Filipino citizen residing in
such country a credit for taxes paid by such
citizen to another foreign country, no credit is
allowed to such resident alien for taxes paid
by him to such foreign country.
SECTION 89. When credit for taxes may be
taken. — The credit for taxes provided by
Section (30) (c)(3) to (9) may ordinarily be
Page 11 of
taken either in the return for the year in which
the taxes accrued or in which the taxes were
paid, dependent upon whether the accounts of
the taxpayer are kept and his returns filed
upon the accrual basis or upon the cash
receipts and disbursements basis. Section
30(c)
(6) allows the taxpayer, at his option and
irrespective of the method of accounting
employed in keeping his books, to take such
credit for taxes as may be allowable in the
return for the year in which the taxes accrued.
An election thus made must be followed in
returns for all subsequent years, and no
portion of any such taxes will be allowed as a
deduction from gross income.
SECTION 90. Domestic corporation owning a
majority of the stock of foreign corporation. —
In the case of a domestic corporation which
owns a majority of the voting stock of a foreign
corporation from which it receives dividends in
any taxable rear, the credit for foreign taxes
includes not only the income, war profits and
excess-profits taxes paid or accrued during
the taxable year to any foreign country by
such domestic corporation, but also income,
war-profits and excess-profits taxes deemed
to have been paid determined by taking the
same proportion of any income, war-profits,
and excess- profits taxes paid or accrued by
such controlled foreign corporation to any
foreign country upon or with respect to the
accumulated profits of such foreign
corporation from which such dividends were
paid, which the amount of any such dividends
received bears to the amount of such
accumulated profits. The amount of taxes
deemed to have been paid is limited,
however, to an amount of the tax against
which the credit for foreign taxes is taken,
which the amount of such dividends bears to
the amount of the entire net income of the
domestic corporation in which such dividends
are included. If dividends are received from
more than one controlled foreign corporation,
the limitation is to be computed separately for
the dividends received from each controlled
foreign corporation. If the credit for foreign
taxes includes taxes deemed to have been
paid, the taxpayer must furnish the same
information with respect to the taxes deemed
to have been paid as it is required to furnish
with respect to the taxes actually paid or
accrued by it. Taxes paid or accrued by a
controlled foreign corporation are deemed to
have been paid by the domestic corporation
for purposes of credit only. cSTHAC
SECTION 91. Non-resident aliens and
foreign corporations not allowed credits
against the tax. — Non-resident aliens and
foreign corporations may not claim credits
Revenue Regulations 02-40
against the tax from taxes of foreign
SECTION 92. Limitation on credit for foreign
taxes. — The amount of credit for foreign taxes
shall be subject to the following limitations:
(a) The amount of the credit in respect to the
tax paid or accrued to any country shall
not exceed the same proportion of the
tax against which such credit is taken,
which the taxpayer's net income from
sources within such country taxable
under Title II bears to his entire net
income for the same taxable year; and
(b) The total amount of the credit shall not
exceed the same proportion of the tax against
which such credit is taken, which the
taxpayer's net income from sources without
the Philippines taxable under Title II bears to
his entire net income for the same taxable
year.
(Section 30(d) of the Code)
SECTION 93. Losses by individuals. —
Losses sustained by individuals during
the year not compensated for by
insurance or otherwise are fully deductible
(except by non-resident aliens) —
(a) If incurred in a taxpayer's trade; or
(b) If incurred in any transaction entered into
for profits; or
(c) Of property not connected with the trade
or business if arising from fires, storm,
shipwreck, or other casualty, or from
robbery, theft or embezzlement. No loss
shall, however, be allowed as a
deduction if at the time of filing of the
return, such loss has been claimed as
deduction for estate or inheritance tax
purposes in the estate or inheritance tax
return.
SECTION 94. Losses by corporations.
— Domestic corporations may deduct
losses actually sustained and charged
off within the year and not
compensated for by insurance or
otherwise.
SECTION 95. Losses by non-resident
alien and foreign corporation. — Non-
resident aliens and foreign corporations
are allowed only losses sustained in
business or trade conducted within the
Philippines, losses of property within the
Philippines arising from fires, storms,
shipwreck, or other casualty and from
robbery, theft, or embezzlement, and
losses actually sustained in transactions
entered into for profit in the Philippines,
although not connected with their trade or
business, not compensated by insurance
or otherwise.
SECTION 96. Losses generally. — Losses
countries.
must usually be evidenced by closed and
completed transactions. Proper adjustment
must be made in each case for expenditures or
items of loss properly chargeable to capital
account, and for depreciation, obsolescence,
amortization, or depletion.
Moreover, the amount of the loss must be
reduced by the amount of any insurance or
other compensation received, and by the
salvage value, if any, of the property. A loss on
the sale of residential property is not
deductible unless the property was purchased
or constructed by the taxpayer with a view to
its subsequent sale for pecuniary profit. No
loss is sustained by the transfer of property by
gift or death. Losses sustained in illegal
transactions are not deductible. EAISDH
SECTION 97. Voluntary removal of buildings.
— Loss due to the voluntary removal or
demolition of old buildings, the scrapping of old
machinery, equipment, etc., incident to
renewals and replacements will be deductible
from gross income. When a taxpayer buys real
estate upon which is located a building, which
he proceeds to raze with a view to erecting
thereon another building, it will be considered
that the taxpayer has sustained no deductible
expense on account of the cost of such
removal, the value of the real estate, exclusive
of old improvements, being presumably equal
to the purchase price of the land and building
plus the cost of removing the useless building.
SECTION 98. Loss of useful value. — When
through some change in business conditions,
the usefulness in the business of some or all
of the capital assets is suddenly terminated,
so that the taxpayer discontinues the business
or discards such assets permanently from use
of such business, he may claim as deduction
the actual loss sustained. In determinating the
amount of the loss, adjustment must be made,
however, for improvements, depreciation and
the salvage value of the property. This
exception to the rule requiring a sale or other
disposition of property in order to establish a
loss requires proof of some unforeseen cause
by reason of which the property has been
prematurely discarded, as, for example, where
an increase in the cost or change in the
manufacture of any product makes it
necessary to abandon such manufacture, to
which special machinery is exclusively
devoted, or where new legislation directly or
indirectly makes the continued profitable use
of the property impossible. This exception
does not extend to a case where the useful
life of property terminates solely as a result of
those gradual processes for which
depreciation allowance are authorized. It does
not apply to inventories or to other than capital
Page 12 of
assets. The exception applies to buildings
use, and to machinery only when its use
only when they are permanently abandoned
as such is permanently abandoned. Any
or permanently devoted to a radically different
loss to be deductible under this exception
must be charged off in the books and
fully explained in returns of income.
SECTION 99. Shrinkage in value of stocks.
— A person possessing stock of a
corporation can not deduct from gross
income any amount claimed as a loss merely
on account of shrinkage in value of such
stock through fluctuation of the market or
otherwise. The loss allowable in such case is
that actually suffered when the stock is
disposed of. If stock of a corporation
becomes worthless, its cost or other basis
determined in accordance with these
regulations may be deducted by the owner in
the taxable year in which the stock became
worthless, provided a satisfactory showing of
its worthlessness be made, as in the case of
bad debts.
SECTION 100.Losses of farmers. — Losses
incurred in the operation of farms as
business enterprises are deductible from
gross income. If farm products are held for
favorable markets, no deduction on account
of shrinkage in weight or physical value or by
deterioration in storage shall be allowed,
except as such shrinkage may be reflected in
an inventory if used to determine profits. The
total loss by storm, flood, or fire of a
prospective crop is not a deductible loss in
computing net income. A farmer engaged in
raising and selling stock, cattle, sheep,
horses, etc., is not entitled to claim as a loss
the value of animals that perish from among
those animals that were raised on the farm,
except as such loss is reflected in an
inventory if used. If livestock has been
purchased after March 1, 1913, for any
purpose, and afterwards dies from disease,
exposure, or injury, or is killed by order of the
authorities, the actual purchase price of such
stock, less any depreciation allowable as a
deduction in computing net income, with
respect to such perished, livestock, and also
any insurance or indemnity recovered, may
be deducted as a loss. The actual cost of
other property (with proper adjustment for
depreciation), which is destroyed by order of
the authorities, may in like manner be
claimed as a loss; but if reimbursement is
made in whole or in part on account of stock
killed or property destroyed, the amount
received shall be reported as income for the
year in which reimbursement is made. The
cost of any feed, pasturage, or care which
has been deducted as an expense of
operation shall not be included as part of the
cost of the stock for the purpose of
ascertaining the amount of a deductible loss.
Revenue Regulations 02-40
If gross income is ascertained by
inventories, no deduction can be made for
livestock or products lost during the year,
whether purchased for resale, produced on
the farm, as such losses will be reflected in
the inventory by reducing the amount of
livestock or products on hand at the close of
the year. If an individual owns and operates
a farm, in addition to being engaged in
another trade, business or calling, and
sustains a loss from such operation of the
farm, then the amount of loss sustained may
be deducted from gross income received
from all sources, provided the farm is not
operated for recreation or pleasure. IEaCDH
SECTION 101.Capital losses; losses on
wash sales of stock or securities. —
Losses on sales or exchanges of capital
assets are allowed to the extent provided
in section 34 of the Code. If any securities
which are capital assets become worthless
during the taxable year, the loss resulting
therefrom shall be considered as a loss
from the sale or exchange, on the last day
of such taxable year, of capital assets.
Losses on "wash sales" of stock or
securities are treated in section 33 of the
Code.
(Section 30 (e) of the Code)
SECTION 102.Bad debts. — Where all the
surrounding circumstances indicate that a
sometimes possible before and at other
times only when a settlement in bankruptcy
shall have been had. Where a taxpayer
ascertained a debt to be worthless and
charged it off in one year, the mere fact that
bankruptcy proceedings instituted against
the debtor are terminated in a later year,
confirming the conclusion that the debt is
worthless, will not authorize shifting the
deduction to such later year. If a taxpayer
computes his income upon the basis of
valuing his notes or accounts receivable at
their fair market value when received, which
may be less than their face value, the
amount deductible for bad debts in any case
is limited to such original valuation.
SECTION 103.Examples of bad debts. —
Worthless debts arising from unpaid wages,
salaries, rents, and similar items of taxable
income will not be allowed as a deduction
unless the income such items represent has
been included in the return of income for the
year in which the deduction as a bad debt is
sought to be made or in a previous year. Only
the difference between the amount received in
distribution of the assets of a bankrupt and the
amount of the claim may be deducted as a
bad debt. The difference between the amount
received by a creditor of a decedent in
debt is worthless, and the debt is charged off
on the books of the taxpayer within the year,
the same may be allowed as a deduction in
computing net income. There should
accompany the return a statement showing
the propriety of any deduction claimed for bad
debts. Before a taxpayer may charge off and
deduct a debt, he must ascertain and be able
to demonstrate, with a reasonable degree of
certainty, the uncollectibility of the debt. Any
amount subsequently received on account of
a bad debt previously charged off and allowed
as a deduction for income tax purposes, must
he included in gross income for the taxable
year in which received. In determining
whether a debt is worthless the
Commissioner of Internal Revenue will
consider all pertinent evidence, including the
value of the collateral, if any, securing the
debt and the financial condition of the debtor.
Where the surrounding circumstances indicate
that a debt is worthless and uncollectible and
that legal action to enforce payment would in
all pro-ability not result in the satisfaction of
execution on a judgment, a showing of those
facts will be sufficient evidence of the
worthlessness of the debt for the purpose of
deduction. Bankruptcy is generally an
indication of the worthlessness of at least a
part of an unsecured and unpreferred debt.
Actual determination of worthlessness in
bankruptcy is
distribution of the assets of the decedent's
estate and the amount of his claim may be
considered a worthless debt. A purchaser of
accounts receivable which can not be
collected and are consequently charged off the
hooks as bad debt is entitled to deduct them,
the amount of deduction to be based upon the
price he paid for them and not upon their face
value.
Where under foreclosure of a mortgage, the
mortgagee buys the mortgaged property and
credits the indebtedness with the purchase
price, the difference between the purchase
price and the indebtedness will not be
allowable as a deduction for a bad debt, for the
property which was security for the debt stands
in the place of the debt. The determination of
loss in such case is deferred until the disposal
of the property.
SECTION 104.Securities becoming worthless.
— If any securities which are capital assets are
ascertained to be worthless and charged off
within the taxable year, the loss resulting
therefrom shall, except in the case of a bank or
trust company incorporated under the laws of
the Philippines or of the United States a
substantial part of whose business is the
receipt of deposits, be considered as a loss
Page 13 of
from the sale or exchange, on the last day of the business or trade is not so
such taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105.Depreciation. — A reasonable
allowance for the exhaustion, wear and tear,
and obsolescence of property used in the trade
or business may be deducted from gross
income. For convenience such an allowance
will usually be referred to as depreciation,
excluding from the term any idea of a mere
reduction in market value not resulting from
exhaustion, wear and tear, or obsolescence.
The proper allowance for such depreciation of
any property used in the trade or business is
that amount which should be set aside for the
taxable year in accordance with a reasonable
consistent plan whereby the aggregate of the
amount so set aside, plus the salvage value,
will, at the end of the useful life of the property
in business, equal the basis of the property.
Due regard must also be given to expenditures
for current upkeep.
SECTION 106.Depreciable property. — The
necessity for a depreciation allowance arises
from the fact that certain property used in the
business gradually approaches a point where
its usefulness is exhausted. The allowances
should be confined to property of this nature. In
the case of tangible property, it applies to that
which is subject to wear and tear, to decay or
decline from natural causes, to exhaustion and
to obsolescence due to the normal progress of
the art, as where machinery or other property
must be replaced by a new invention, or due to
the inadequacy of the property to the growing
needs of the business. It does not apply to
inventories or to stock in trade, nor to land
apart from the improvements or physical
development added to it. It does not apply to
bodies of minerals which through the process
of removal suffer depletion. Property kept in
repair may, nevertheless, be the subject of a
depreciation allowance. The deduction of an
allowance for depreciation is limited to property
used in the taxpayer's trade or business. No
such allowance may be made in respect to
automobiles or other transportation equipment
used solely for the pleasure, a building used by
the taxpayer solely as his residence, nor in
respect of furniture or furnishings therein,
personal effects, or clothing; but properties and
costumes used exclusively in a business, such
as theatrical business, may be the subject of a
depreciation allowance.
SECTION 107.Depreciation of intangible
property. — Intangibles, the use of which in the
trade or business is definitely limited in
duration, may be the subject of a depreciation
allowance. Examples are patents, copyrights,
and franchises. Intangibles, the use of which in
Revenue Regulations 02-40
limited, will not usually be a proper subject
of such an allowance. If however, an
intangible asset acquired through capital
outlay is known from experience to be of
value in the business for only a limited
period, the length of which can be estimated
from experience with reasonable certainty,
such intangible asset may be the subject of
a depreciation allowance, provided the facts
are fully shown in the return or prior thereto
to the satisfaction of the Commissioner of
Internal Revenue.
SECTION 108.Capital sum recoverable
through depreciation allowances. — The
capital sum to be replaced by depreciation
allowances is the cost or other basis of the
property in respect of which the allowance is
made. To this amount should be added from
time to time the cost of improvements,
additions, and betterment and from it should
be deducted from time to time the amount of
any definite loss or damage sustained by the
property through casualty, as distinguished
from the gradual exhaustion of its utility which
is the basis of the depreciation allowance.
Where the lessee of real property erects
buildings, or makes permanent
improvements which become part of the
realty and income has been returned by the
lessor as a result thereof, as provided in
Section 49 of these regulations, the capital
sum to be replaced by depreciation
allowance is the same as though no such
buildings had been erected or such
improvements made. No depreciation
deduction will be allowed in the case of
property which has been amortized to its
scrap value and is no longer in use. AaSCTD
SECTION 109.Method of computing
depreciation allowance. — The capital sum to
be replaced should be charged off over the
useful life of the property, either in equal
annual installments or in accordance with any
other recognized trade practice, such as an
apportionment of the capital sum over units of
production. Whatever plan or method of
apportionment is adopted must be
reasonable and must have due regard to
operating conditions during the taxable
period. While the burden of proof must rest
upon the taxpayer to sustain the deductions
taken by him, such deductions must not be
disallowed unless shown by clear and
convincing evidence to be unreasonable. The
reasonableness of any claim for depreciation
shall be determined upon the conditions
known to exist at the end of the period for
which the return is made. If it develops that
the useful life of the property will be longer or
shorter than the useful life as originally
estimated under all the then known facts, the
Page 14 of
portion of the cost or other basis of the secured from the Commissioner of Internal patent became obsolete in the year for which
property not already provided for through Revenue. Owing to the difficulty of allocating the return is made is submitted to the
depreciation allowances should be spread to a particular year the obsolescence of a Commissioner of Internal Revenue. The fact
over the remaining useful life of the property patent, such permission will be granted only if that
as reestimated in the light of the subsequent affirmative and satisfactory evidence that the
facts, and depreciation deductions taken
depreciation has not been taken in prior accordance with these regulations. Such
accordingly.
years does not entitle the taxpayer to deduct depreciation should be based on the cost or
in any taxable year a greater amount for other basis and the estimated life of the live
SECTION 110. Obsolescence. — With
depreciation than would otherwise be stock. If such live stock be included in an
respect to physical property the whole or any allowable. AcDHCS inventory no depreciation thereof will be
portion of which is clearly shown by the allowed, as the corresponding reduction in
taxpayer as being affected by economic
SECTION 112. Depreciation of drawings and their value will be reflected in the inventory.
conditions that will result in its being
models. — Where a taxpayer has incurred
abandoned at a future date prior to the end
expenditures in his business for designs, SECTION 115. Statement to be attached to
of its normal useful life, so that depreciation
drawings, patterns, models, or work of an return. — To each return in which depreciation
deductions alone are insufficient to return
experimental nature calculated to result in charges are claimed, there should be attached
the cost (or other basis) at the end of its
improvement of his facilities or his product, if a statement showing the item, unit, or group of
economic term of usefulness, a reasonable
the period of usefulness of any such asset may depreciable property, the cost price or its
deduction for obsolescence, in addition to
be estimated from experience with reasonable market value as of March 1, 1913, if acquired
depreciation, may be allowed in accordance
accuracy, it may be the subject of depreciation prior to that date, the rate of charge, amount
with the facts obtaining with respect to each
allowances spread over such estimated period previously deducted, and the amount claimed in
item of property concerning which a claim for
of usefulness. The facts must be fully shown in the return. These data must agree with those
obsolescence is made. No deductions for
the return or prior thereto to the satisfaction of appearing in the books of the taxpayer.
obsolescence will be permitted merely
the Commissioner of Internal Revenue. Except (Section 30(g) of the Code)
because, in the opinion of a taxpayer, the
for such depreciation allowances no deduction
property may become obsolete at some later
shall be made by the taxpayer against any sum SECTION 115-A-1. General Circular V-332,
date. This allowance will be confined to such
so set up as an asset except on the sale or January 6, 1961 — Who is entitled to deduct
portion of the property on which
other disposition of such asset at a loss or on depletion.
obsolescence is definitely shown to be
proof of a total loss thereof. — In order to be entitled to percentage
sustained and can not be held applicable to
an entire property unless all portions thereof depletion allowance, the taxpayer must have an
SECTION 113. Charging off depreciation. — A economic interest in the property. To acquire
are affected by the conditions to which
depreciation allowance, in order to constitute an economic interest, the taxpayer must have a
obsolescence is found to be due.
an allowable deduction from gross income, capital investment in the property and not a
must be charged off. The particular manner in mere economic advantage. The taxpayer must
SECTION 111. Depreciation of patent or
which it shall be charged off is not material, have acquired at least, by investment, any
copyright. — In computing depreciation
except that the amount measuring a interest in oil or gas or mineral in place, and
allowance in the case of a patent or
reasonable allowance for depreciation must secures, by any form of legal relationship,
copyright, the capital sum to be replaced is
be either deducted directly from the book income derived from the extraction of the oil,
the cost or other basis of the patent or
value of the assets or preferably credited to a gas or mineral, to which he must look for a
copyright. The allowance should be
depreciation reserve account, which must be return of his capital. Thus the parties entitled to
computed by an apportionment of the cost or
reflected in the annual balance sheet. The share in oil or mineral extracted, or the gross
other basis of the patent or copyright over the
allowances should be computed and charged proceeds therefrom (including the parties to a
life of the patent or copyright since its grant,
off with express reference to specific items, lease providing for royalty payments of stated
or since its acquisition by the taxpayer, or
units, or groups of property, each item or unit amounts per unit mined) have economic
since March 1, 1913, as the case may be. If
being considered separately or specifically interests in the oil or minerals in place. That is,
the patent or copyright was acquired from the
included in a group with others to which the they, as owners of the rights in oil or other
Government, its cost consists of the various
same factors apply. The taxpayer should keep mineral in place, share the income from
Government fees, cost of drawings,
such records to each item or unit of production, and the depletion allowances
experimental models, attorney's fees,
depreciable property as will permit the ready thereon are regarded as designed to permit
development or experimental expenses, etc.,
verification of the factors used in computing tax-free recovery of at least their capital
actually paid. Depreciation of a patent can be
the allowance for each year for each item, investments in such property rights.
taken on the basis of the fair market value as
unit, or group.
of March 1, 1913, only when affirmative and
satisfactory evidence of such value is offered. SECTION 115-A-2. Basis for depletion. — On
SECTION 114. Depreciation in the case of oil or gas wells the percentage depletion
Such evidence should whenever practicable
farmers. — A reasonable allowance for allowance is fixed at 27 1/2% of gross income
be submitted with the return. If the patent
depreciation may be claimed on farm while on mines, the percentage depletion
becomes obsolete prior to its expiration, such
buildings (other than a dwelling occupied by allowance varies in accordance with the class
proportion of the amount on which its
the owner), farm machinery, and other of minerals. The gross income basis is the
depreciation may be based as the number of
physical property. A reasonable allowance for amount remaining after deducting therefrom
years of its remaining life bears to the whole
depreciation may also be claimed on live rents or royalties paid or incurred by the
number of years intervening between the
stock acquired for work, breeding, or dairy taxpayer in respect to the property. In both
basic date when it legally expires may be
purposes, unless they are included in an cases, the total percentage depletion
deducted, if permission to do so is specifically
inventory used to determine profits in allowance shall in no case exceed 50% of the
Revenue Regulations 02-40
net income or profit.
Gross income after deducting
rents and royalties P100.00 P100.00
Illustration
27 1/2% thereof 27.50 27.50
Subject: Oil and gas wells (1)
Net income or net profit 50.00
(2)
70.00
50°/ of net income or net profit 25.00
35.00
Allowance depletion 25.00
27.50
Under column (1) P25.00 is the
allowance depletion because the
allowable percentage cannot exceed
50% of the net profit or net income.
Under column (2), the allowable
depletion is P27.50 because it does not
exceed 50% of either the net income or
net profit.
SECTION 115-A-3. Definition of terms. —
For purposes of the depletion allowance for
oil and gas wells and mines, the following
terms and phrases shall have the meaning
indicated:
(a) Gross income. — Gross income means
the "gross income from the property". The
gross income in the case of gas and oil wells
is the amount for which the taxpayer sells the
oil and gas in the immediate vicinity of the
well. If the oil and gas are not sold on the
property but are manufactured or converted
into a refined product prior to sale, the gross
income from the property shall be assumed
to be equivalent to the representative market
or field price (as of the date of sale) of the oil
and gas before conversion or transportation.
"Gross income from the property" means, in
the case of mines, the gross income from
mining. The gross income from mining
consists of the proceeds from the sales of
ores or minerals extracted from the mining
property. Where ores are sent abroad where
the ordinary treatment processes are applied
or where they are refined and where they are
sold, the actual cost of ocean freight as well
as insurance, should be deducted from the
actual selling price for gross income
purposes. Also where minerals or mineral
products are sold or consigned abroad by the
lessee or owner of the mine under
C.I.F. terms, the actual cost of ocean freight
and insurance should be deducted. ECDHIc
(b) Mining. — The term "mining" includes
not merely the extraction of the ores or
minerals from the ground but also the
ordinary treatment process normally applied
by mine owners or operators in order to
obtain the commercially marketable mineral
product or products, and so much of the
transportation of ores or minerals (whether or
not by common carrier) from the point of
extraction from the ground to the plants or
mills in which the ordinary treatment
processes are applied thereto as is not in
excess of 50 miles unless the Commissioner
of Internal Revenue finds that the physical
and other requirements are such that the ore
or mineral must be transported a greater
distance to such plants or mills.
(c) Extraction of the ores or minerals from
the ground. — The term "extraction of the
ores or minerals from the ground" includes
the extraction by mine owners or operators of
ores or minerals from the waste or residue of
prior mining. Thus income derived from the
working over of tailings, piles or culm banks
is included in determining "gross income
from the property". The length of time
between the prior mining and extraction of
ores or minerals from the waste or residue of
such mining is immaterial. Whether the
waste or residue results from the application
of ordinary treatment processes or from the
process of removal from the ground, income
derived therefrom is within the term "gross
income from the property". To be included in
"gross income from the property", income
derived from the extraction of ores or
minerals from the waste or residue of prior
mining must come from such extraction by
the mine owner or operator himself.
(d) Ordinary treatment processes.
— The term "ordinary treatment
(5) The pulverization of talc, the
burning of magnesite, and the
sintering and modulizing of
phosphate rock.
(e) Net income or net profit. — "Net
income" or "net profit" means the taxpayer's
taxable income from the property. Net
income or net profit (computed without
allowance for depletion) means the "gross
income from the property" less the allowable
deductions attributable to the mineral
property upon which the depletion is claimed
and the allowable deductions attributable to
the treatment processes insofar as they
relate to the product of such property,
including overhead and operating expenses,
development costs properly charged to
expense, depreciation, taxes, losses
sustained, etc. Deductions not directly
attributable to particular properties or
processes shall be fairly allocated.
(f) Property. — For the purpose of
computing the depletion allowance in the
case of mines and wells, the term
"property" means each separate interest
owned by the taxpayer in each mineral
deposit in each separate tract or parcel of
land.
Page 15 of
processes" includes the following:
(1) In the case of coal-cleaning,
breaking, sizing, dust-allaying,
treating to prevent freezing, and
loading for shipment;
(2) In the case of sulfur recovered by the
Frasch process — pumping to vats,
cooling, breaking, and loading for
shipment;
(3) In the case of iron ore, bauxite, ball
and sagger clay, rock asphalt, and
minerals which are customarily sold in
the form of a crude mineral product —
sorting, concentrating; and sintering to
bring to shipping grade and form, and
loading for shipment;
(4) In the case of lead, zinc, copper, gold,
silver, or fluorspar ores, potash, and ores
which are not customarily sold in the
form of the crude mineral product-
crushing, grinding, and beneficiation by
concentration (gravity, flotation,
amalgamation, electrostatic, or
magnetic) cyanidation, leaching,
crystallization, precipitation (but not
including as an ordinary treatment
process electrolytic deposition, roasting,
thermal or electric smelting, or refining),
or by substantially equivalent processes,
or extraction of the product or products
from the ore, including the furnacing of
quicksilver ores; and
If a taxpayer owns two or more separate
operating mineral interests which constitute
part or all of an operating unit, he may elect to
form (a) one aggregation of, and to treat as one
property, any two or more of such interests and
(b) to treat as a separate property each such
interest which he does not elect to include
within the aggregation referred to in (a).
Separate operating mineral interests which
constitute part or all of an operating unit may be
aggregated whether or not they are included in
contiguous tracts or parcels. A taxpayer may
not elect to form more than one aggregation of
operating mineral interests within any one
operating unit. Such election may be made by
the taxpayer by the giving of notice of such
election to the Commissioner of Internal
Revenue not later than the time prescribed for
filing of the return and any such election so
made shall be binding upon the taxpayer for all
subsequent taxable years, except that the
Commissioner of Internal Revenue may
consent to a different treatment of the interest
with respect to which the election has been
made.
SECTION 115-A-4. Depletion deductible by
non-resident aliens or foreign corporations. —
A non- resident alien individual or a foreign
Revenue Regulations 02-40
corporation is entitled to an allowance for
depletion of oil and gas wells or mines located
in the Philippines. (Gen. Cir. V-332
implements Sec. 30(g), Tax Code, as
amended by R.A. 2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts
may be deducted. — Contributions or gifts
within the taxable year are deductible to an
aggregate amount not in excess of 6 per
centum, in the case of an individual, and 3
per centum, in the case of a corporation, of
the taxpayer's taxable net income, if actually
paid or made to or for the use of the
Government of the Philippines or any political
subdivision thereof for exclusively public
purposes or to domestic corporations or
associations organized and operated
exclusively for religious, charitable, scientific,
athletic, cultural or educational purposes, or
to societies for the prevention of cruelty to
children or animals, provided that no part of
the net income of which inures to the benefit
of any private stockholders or individual.
In connection with claims for deductions, there
shall be stated on returns of income the name
and address of each organization to which a
gift was made and the approximate date and
the amount of the gift in each case. Where the
gift is other than money, the basis for
calculation of the amount thereof shall be the
fair market value of the property at the time of
the gift. Contributions or gifts paid or made to
corporations or associations specified in the
law will only be allowed as deduction when the
taxpayer attaches to his return the receipt duly
signed by the responsible officer of the
corporations or associations to which the
contributions or gifts has been paid or made. If
desired, said receipt will be returned to the
taxpayer after they have served their purpose.
(Section 30(i) of the Code)
SECTION 117. Allowance of deductions and
credits. — Unless a non-resident alien
individual shall file or cause to be filed with the
Commissioner of Internal Revenue, a true and
accurate return of income from all sources,
corporate, or otherwise, within the Philippines,
regardless of amount, the tax shall be
collected on the basis of the gross income (not
the net income) from sources within the
Philippines. In case of failure to file such
return, the Commissioner of Internal Revenue
will cause a return of income to be made and
include therein the income of such non-
resident alien from all source concerning which
he has information, and he will assess the tax
and collect it from one or more of the sources
of income of such non-resident alien within the
Philippines, without allowance for deductions
or credit. (Cf. effect of Sec. 22(b) as amended
(Section 30(j) of the Code)
by R.A. 2343.)
SECTION 118. Payments to employees'
pension trusts. — An employer who adopts or
has adopted a reasonable pension plan,
actuarially sound, and who establishes, or
has established, and maintains a pension
trust for the payment of reasonable pensions
to his employees shall be allowed to deduct
from gross income reasonable amounts paid
to such trust, in accordance with the pension
plan (including any reasonable amendment
thereof), as follows:
(a) If the plan contemplates the payment to
the trust, in advance of the time when
pensions are granted, of amounts to provide
for future pensions payments, then (1)
reasonable amounts paid to the trust during
the taxable year representing the pension
liability applicable to such year, determined in
accordance with the plan, shall be allowed as
a deduction for such year as an ordinary and
necessary business expense, and in addition
(2) one-tenth of a reasonable amount
transferred or paid to the trust during the
taxable year to cover in whole or in part the
pension liability applicable to the years prior
to the taxable year, or so transferred or paid
to place the trust on a sound financial basis,
shall be allowed as a deduction for the
taxable year and for each of the nine
succeeding taxable years.
(b) If the plan does not contemplate the
payment to the trust, in advance of the time
when pensions are granted, of amounts to
provide for future pension payments, then (1)
reasonable amounts paid to the trust during
the taxable year representing the present
value of the expected future payments in
respect of pensions granted to employees
retired during the taxable year shall be
allowed as deduction for such year as an
ordinary and necessary business expense,
and in addition (2) one tenth of a reasonable
amount transferred or paid to the trust during
the taxable year to cover in whole or in part
the present value of the expected future
payments in respect of pensions granted to
employees retired prior to the taxable year, or
so transferred or paid to place the trust on a
sound financial basis, shall be allowed as a
deduction for the taxable year and for each of
the nine succeeding taxable years.
(Section 30(k) of the Code)
SECTION 118-A. Optional standard
deduction. — In lieu of the deductions
allowed under this section an individual,
other than a non-resident alien, may elect a
standard deduction. Such optional standard
Page 16 of
deduction shall be in the amount of one
thousand pesos or in an amount equal to ten
per centum of his gross income, whichever is
the lesser. Unless the taxpayer signifies in
his return his intention to elect the optional
standard deduction he shall be considered
as having availed himself of the deductions
allowed in the preceding subsection. The
Secretary of Finance shall prescribe the
manner of the election. Such election when
made in the return shall be irrevocable for
the taxable year for which the return is made.
(Section 31 of the Code)
SECTION 119. Personal, living, and family
expenses. — Personal, living, and family
expenses are not deductible. Insurance paid
on a dwelling owned and occupied by a
taxpayer is a personal expense and not
deductible. Premiums paid for life insurance
by the insured are not deductible. In the case
of a professional man who rents a property for
residential purposes, but incidentally receives
his clients, patients, or callers in connection
with his professional work (his place of
business being elsewhere), no part of the rent
is deductible as a business expense. If
however, he uses part of the house for his
office, such portion of the rent as is properly
attributable to such office is deductible. Where
the father is legally entitled to the services of
his minor children, any allowances which he
gives them, whether said to be in
consideration of services or otherwise, are not
allowable deductions in his return of income.
Alimony, and an allowance paid under a
separation agreement are not deductible from
gross income.
SECTION 120.Capital expenditures. — No
deduction from gross income may be made for
any amounts paid out for new buildings or for
permanent improvements or betterments
made to increase the value of the taxpayer's
property, or for any amount expended in
restoring property or in making good the
exhaustion thereof for which an allowance for
depreciation or depletion or other allowance is
or has been made. Amounts expended for
securing a copyright and plates, which remain
the property of the person making the
payments, are investments of capital. The cost
of defending or perfecting title to property
constitutes a part of the cost of the property
and is not a deductible expense. The amount
expended for architect's services is part of the
cost of the building. Commissions paid in
purchasing securities are a part of the cost of
such securities. Commissions paid in selling
securities are an offset against the selling
price. Expenses of the administration of an
estate, such as court
Revenue Regulations 02-40
costs, attorney's fees, and executor's
commissions, are chargeable against the
"corpus" of the estate and are not allowable
deductions. Amounts to be assessed and
paid under an agreement between
bondholders or shareholders of a corporation,
to be used in a reorganization of the
corporation, are investments of capital and
not deductible for any purpose in return of
income. DaACIH
In the case of a corporation, expenses for
organization, such as incorporation fees,
attorney's fees and accountants' charges, are
ordinarily capital expenditures; but where such
expenditures are limited to purely incidental
expenses, a taxpayer may charge such items
against income in the year in which they are
incurred. A holding company which
guarantees dividends at a specified rate on the
stock of a subsidiary corporation for the
purpose of securing new capital for the
subsidiary and increasing the value of its
stockholdings in the subsidiary may not deduct
amounts paid in carrying out this guaranty in
computing its net income, but such payments
may be added to the cost of its stock in the
subsidiary.
SECTION 121.Premiums on life insurance of
employees. — Any amounts paid for
premiums on any life insurance policy
covering the life of an officer or employee or
of any person financially interested in the
business of the taxpayer when the taxpayer
is directly or indirectly a beneficiary under
such policy are not deductible.
SECTION 122.Losses from sales or
exchanges of property. — No deduction is
allowed in respect of losses from sales or
exchanges of property, directly or indirectly
— established.
(a) Between members of a family. As
used in Section 31, the family of an
individual shall include only his brothers
and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal
descendants;
(b) Except in the case of distributions in
liquidation, between an individual and a
corporation more than fifty per centum in value
of the outstanding stock of which is owned,
directly or indirectly, by or for such individual;
(c) Except in the case of distributions in
liquidation, between two corporations more
than 50 per cent in value of the outstanding
stock of each of which is owned, directly or
indirectly, by or for the same individual, if
either one of such corporations with respect to
the taxable year of the corporation preceding
the date of the sale or exchange was, under
Page 17 of
the law applicable to such taxable year, a enforceable right in them and can not at the
deferred dividend period, the amount so
personal holding company or a foreign time of the ascertainment, apportionment, or
ascertained, apportioned, or credited lapses.
personal holding company; credit, not until the maturity of the policy, avail
(c) "Treated as an abatement of premium"
(d) Between a grantor and a fiduciary of any himself of such dividends; and in the event of
means of the premium for the taxable year.
trust; the death of the assured prior to the expiration
Where the dividend paid back is in excess of
(e) Between the fiduciary of a trust and the of the
the premium received from the policyholder
fiduciary of another trust, if the same person is within the taxable year there may be
a grantor with respect to each trust; or excluded from gross income only the amount
(f) Betw
of such premium received, and where no
een a premium is received from the policyholder
fiduciary of within the taxable year the company is not
a trust and entitled to exclude from its premiums
a received from other policyholders an amount
beneficiary in respect to such dividend payment. (See
of such changes in Sec. 24(b), Tax Code.)
trust.
(Section
SECTION 125.Gross income of mutual
32 of the
insurance companies. — The gross income of
Code)
mutual insurance companies (other than life)
consists of their total revenue from the
SECTION 123.Gross income of insurance
operation of the business and of their income
companies. — In general, the gross income of
from all other sources within the taxable year,
insurance companies consists of their total
except as otherwise provided by the statute.
revenue from the operation of the business
Premiums received by mutual marine
and of their income from all other sources
insurance companies which are paid out for
within the taxable year, except as otherwise
reinsurance should be eliminated from gross
provided by the statute. Gross income
income and the payments for reinsurance,
includes net premiums (that is, gross premium
from disbursement. Deposit premiums on
less returned premiums on policies not taken),
perpetual risks received and returned by
investment income, profits from the sale of
mutual fire insurance companies should be
assets, and all gains, profits, and income
treated in the same manner, as no reserve will
reported to the Insurance Commissioner,
be recognized covering liability for such
except income specifically exempt from tax. A
deposits. The earnings on such deposits,
net decrease in reserve funds required by law
including such portion, if any, of the premium
within the taxable year must be included in the
deposits as are not returned to the
gross income to the extent that such funds are
policyholders upon cancellation of the policies,
released to the general uses of the company
must be included in the gross income.
and increase its free assets. Any net decrease
in reserves shall be added to the gross
SECTION 126.Deductions allowed insurance
income, unless the company shall show that
companies. — Insurance companies are
such decrease resulted from the application of
entitled to the same deductions from gross
reserves to the purposes for which they were
income as other corporations, and also to the
deduction of the net addition required by law
to be made within the taxable year to reserve
SECTION 124.Gross income of life insurance
funds and of the sums other than dividends
companies. — A life insurance company shall
paid with the taxable year on policy and
not include in gross income such portion of any
annuity contracts. "Paid" includes "accrued" or
actual premiums received from any individual
"incurred" (construed according to the method
policyholder as is paid back or credited to or
of accounting upon the basis of which the net
treated as an abatement of premium of such
income is computed) during the taxable year,
policyholder within the taxable year. (a) "Paid
but does not include any estimate for losses
back" means paid in cash. (b) "Credited to"
incurred but not reported during the taxable
means held to the credit of, including dividends
year. As payments on policies there should be
applied to pay renewal premiums, to purchase
reported all death, disability and other policy
additional paid-up insurance or annuities, or to
claims (other than dividends as above
shorten the endowment or premium-paying
specified) paid within the year, including fire,
period. It does not include dividends
accident and liability losses, matured
provisionally ascertained and apportioned upon
endowments, annuities, payments on
deferred dividends policies. Dividends
installment policies and surrender values
provisionally ascertained, apportioned, or
actually paid.
credited on deferred dividends policies can not
be excluded or deducted from gross income for
SECTION 127.Special deductions allowed
the reason that the assured has no vested or
mutual insurance companies. — Mutual
Revenue Regulations 02-40
insurance companies (other than mutual life
and mutual marine insurance companies),
which require their members to make
premium deposits to provide for losses and
expenses, are allowed to deduct from gross
income the aggregate amount of premium
deposits returned to their policyholders or
retained for the payment of losses,
expenses, and reinsurance reserves. In
determining the amount of premium deposits
retained by a mutual fire or mutual casualty
insurance company for the payment of
losses, expenses, and reinsurance reserves,
it will be presumed that losses and expenses
have been paid out of earnings and profits
other than premiums to the extent of such
earnings and profits. If, however, any portion
of such amount is applied during. the taxable
year to the payment of losses, expenses, or
reinsurance reserves, or which a separate
allowance is taken, then such portion is not
deductible; and if any portion of such amount
for which an allowance is taken is
subsequently applied to the payment of
expenses, losses, or reinsurance reserves,
then such payment can not be separately
deducted. The amount of premium deposits
retained for the payment of expenses and
losses and the amount of such expenses and
losses, may not both be deducted. A
company which invests part of the premium
deposits so retained by it in interest-bearing
securities may, nevertheless, deduct such
part, but not the interest received on such
the net addition required by law to be made
within the taxable year to reserve funds. When
the reserve at the end of the year is less than
at the beginning of the year there is a
"released reserve", and the amount so
released must be included in gross income. In
the case of assessment insurance companies,
whether domestic or foreign, the actual
deposit of sums with the officers of the
Government of the Philippines, pursuant to
law, as addition to guaranty or reserve funds
shall be treated as being payments required
by law to reserve funds. In the case of life
insurance companies, the net addition to the
"reinsurance reserve" and the "reserve for
supplementary contracts", and in the case of
fire, marine, accident, liability, and other
insurance companies, the net addition to the
"unearned premium reserves", and only such
other reserves as are specifically required by
the statute will be allowed as deductions.
ADEacC
SECTION 130.Copy of report to Insurance
Commissioner to be furnished the
Commissioner of Internal Revenue. — To
facilitate the auditing of income tax returns,
insurance companies shall submit to the
Commissioner of Internal Revenue together
securities. A mutual fire insurance company
which has a guaranty capital is taxed like
other mutual fire insurance companies. A
stock fire insurance company operated on the
mutual plan to the extent of paying dividends
to certain classes of policyholders, may make
a return on the same basis as a mutual fire
insurance company with respect to its
business conducted on the mutual plan.
SECTION 128.Special deductions allowed
mutual marine insurance companies. —
Mutual marine insurance companies should
include in gross income the gross premiums
collected and received by them less amounts
paid for reinsurance. They may deduct from
gross income amounts repaid to
policyholders on account of premiums
previously paid by them together with the
interest actually paid upon such amounts
between the date of ascertainment and the
date of payment thereof. The remainder of
the premiums accordingly forms part of the
net income of the company, except to the
extent that it is subject to then deductions
allowed such insurance companies and other
corporations.
SECTION 129.Net addition to reserve funds.
— All policy premiums on which net addition
to reserve is computed, must be included in
gross income. Insurance companies may
deduct from gross income
with returns of income, wherever possible a
copy of their annual report to the Insurance
Commissioner.
(Section 33 of the Code)
SECTION 131.Losses from wash sales of
stock or securities. — (a) A taxpayer cannot
deduct any loss claimed to have been
sustained from the sale or other disposition of
stock or securities, if, within a period beginning
thirty days before the date of such sale or
disposition and ending thirty days after such
date (referred to in this section as the sixty-
one-day period), he has acquired (by
purchase or by an exchange upon which the
entire amount of gain or loss was recognized
by law), or has entered into a contract or
option so to acquire, substantially identical
stock or securities. However, this prohibition
does not apply in the case of a dealer in stock
or securities if the sale or other disposition of
stock or securities is made in the ordinary
course of its business as such dealer.
(b) Where more than one loss is claimed to
have been sustained within the taxable year
from the sale or other disposition of stock or
securities, the provisions of this section shall
be applied to the losses in the order in which
the stock or securities the disposition of which
resulted in the respective losses were
disposed of (beginning with the earliest
disposition). If the order of disposition of stock
or securities disposed of at a loss on the
same day cannot be determined, the stock or
securities will be considered to have been
disposed of in the order in which they were
originally acquired (beginning with earliest
acquisition).
(c) Where the amount of stock or securities
acquired within the sixty-one day period is
less than the amount of stock or securities
sold or otherwise disposed of, then the
particular shares of stock or securities the loss
from the sale or other disposition of which is
not deductible shall be those with which the
stock or securities acquired are matched in
accordance with the following rule:
The stock or securities acquired will be
matched in accordance with the order of their
acquisition (beginning with the earliest
acquisition) with an equal number of the
shares of stock or securities sold or otherwise
disposed of.
(d) Where the amount of stock or securities
acquired within the sixty- one-day period is not
less than the amount of stock or securities sold
or otherwise disposed of, then the particular
shares of stock or securities the acquisition of
which resulted in the nondeductibility of the
loss shall be those with which the stock or
securities disposed of are matched in
accordance with the following rule:
The stock or securities sold or otherwise
disposed of will be matched with an equal
number of the shares of stock or securities
acquired in accordance with the order of
acquisition (beginning with the earliest
acquisition) of the stock or securities
acquired.
(e) The acquisition of any security
which results in the non-deductibility of
a loss under the provisions of this
section shall be disregarded in
determining the deductibility of any
other loss.
(f) The word "acquired" as used in this
section means acquired by purchase or by an
exchange upon which the entire amount of
gain or loss was recognized by law, and
comprehends cases where the taxpayer has
entered into a contract or option within the
sixty-one-day period to acquire by purchase
or by such an exchange.
Page 18 of
EXAMPLE (1): A, whose taxable year is the
calendar year, on December 1, 1939,
purchased 100 shares of common stock in the
M Company for P10,000 and on December
15, 1939, purchased 100 additional shares for
P9,000. On January 2, 1940, he sold the 100
shares purchased on December 1, 1939, for
P9,000. Because of the provisions of Section
33 no loss from the sale is allowable as a
deduction.
EXAMPLE (2): A, whose taxable year is the
calendar year, on September 21, 1939,
purchased 100 shares of the common stock of
the M Company for P5,000. On December 21,
1939, he purchased 50 shares of substantially
identical stock for P2,750, and on December
26, 1939, he purchased 25 additional shares
of such stock for P1,125. On January 2, 1940,
he sold for P4,000 the 100 shares purchased
on September 21, 1939. There is an indicated
loss of P1,000 on the sale of the 100 shares.
Since within the sixty-one-day period A
purchased 75 shares of substantially identical
stock, the loss on the sale of 75 of the shares
(P3,750 less P3,000, or P750) is not allowable
as a deduction because of the provisions of
Section 33. The loss on the sale of the
remaining 25 shares (P1,250 less P1,000, or
P250) is deductible subject to the limitations
provided in Sections 31(b) and 34. The basis
of the 50 shares purchased December 21,
1939, the acquisition of which resulted in the
non- deductibility of the loss (P500) sustained
on 50 of the 100 shares sold on January 2,
1940, is P2,500 (the cost of 50 of the shares
sold on January 2, 1940), plus P750 [the
difference between the purchase price of the
50 shares acquired on December 21, 1939,
(P2,750) and the selling price of 50 of the
shares sold on January 2, 1940 (P2,000)], or
P3,250. Similarly the basis of the 25 shares
purchased on December 26, 1939, the
acquisition of which resulted in the
nondeductibility of the loss (P250) sustained
on 25 of the shares sold on January 2, 1940,
is P1,250 plus P125, or P1,375. (See Section
143 of these regulations.)
EXAMPLE (3): A, whose taxable year is the
calendar year, on September 15, 1938,
purchased 100 shares of the stock of the M
Company for P5,000. He sold these shares on
February 1, 1940, for P4,000. On each of the
four days from February 15, 1940, to February
18, 1940, he purchased 50 shares of
substantially identical stock for P2,000. There
is an indicated loss of P1,000 from the sale of
the 100 shares on February 1, 1940, but since
within the sixty-one-day period A purchased
not less than 100 shares of substantially
identical stock, the loss is not deductible. The
particular shares of stock the purchase of
Revenue Regulations 02-40 Page 19 of
which resulted in the nondeductibility of the business at the time of the sale or exchange. urit held for 8 months
loss are the first 100 shares purchased within It has no application to gains or losses arising ies on capital assets
such period, that is, the 50 shares purchased from the sale of real property used in the trade ) held for 9 months
on February 15, 1940, and the 50 shares or business to the extent that such gain or 50 1947
purchased on February 16, 1940. loss is allocable to the land, as distinguished % —
(Section 34 of the Code) from depreciable improvements upon the of N
land. To such gain or loss allocable to the suc et
SECTION 132.Definition of "capital assets." land, the limitations of Section 34(b) and (c) h in
— The law provides that the term "capital apply (such limitation may be inapplicable to a los co
assets" shall be held to mean property held dealer in real estate, but, if so, it is because ses m
by the taxpayer (whether or not connected he holds the land primarily for sale to Gains from sales of capital assets e
with his trade or business), but does not customers in the ordinary course of his trade 50% of such gains fr
include stock in trade of the taxpayer or other or business, not because land is subject to a ——— o
property of a kind which would properly be depreciation allowance). Gains or losses from Net capital losses m
included in the inventory of the taxpayer if on the sale or exchange of property used in the Taxable net income bu
hand at the close of the taxable year, or trade or business of the taxpayer of a ====== si
property held by the taxpayer primarily for character which is subject to the allowance for (The net capital loss of P2,500 is not ne
sale to customers in the ordinary course of depreciation provided in Section 30(f) of the deductible in arriving at the taxable net ss 2,0
his trade or business, or property, used in the Code, will not be subject to the percentage income inasmuch as capital losses are Int
trade or business, of a character which is provisions of Section 34(b) and losses from allowed only to the extent of capital gains.) er
subject to the allowance for depreciation such transactions will not be subject to the
es
provided in subsection (f) of Section 30 of the limitation of losses provided in Section 30(c). SECTION 134-A. Capital loss carry-over- t
Code. The term "capital asset" includes all (Real property used in taxpayer's trade or Illustration. — A, an individual has the ea
classes of property not specifically excluded business is no longer capital asset per Am. following incomes and losses: rn
by Section 30(a). R.A. 82.) 1946 ed
— 20
The exclusion from the term "capital assets" SECTION 133.Percentage taken into
0
of property used in the trade or business of a account. — In computing net income, only 50 N Capital gains —
taxpayer of a character which is subject to the per cent of the gain or loss recognized upon et
allowance for depreciation provided in on capital assets held
the sale or exchange for a capital asset shall in
Section 30(f) of the Code is limited to for 15 months
be taken into account. c
property used by the taxpayer in the trade or is computed as
o follows:
Thus, in the case of a merchandising or m Income from business,
concern which has an "ordinary net income" sec e dividends and interest
(net income exclusive of net gains from the urit fr Capital gains and
sale or exchange of capital assets) of ies o losses:
P10,000 and a net capital gain of P5,000, ) m C
the net income subject to tax will be P10,000 50 b a
plus P2,500 (50 % of P5,000), of P12,500. % u p
of si
i
SECTION 134.Limitation on capital losses. — suc n
t
Losses from sales or exchanges of capital h e
a
assets are allowed only to the extent of the gai s
l
gains from such sales or exchanges. If the s
ns
dealings of the taxpayer in capital assets Losses from sales of capital assets D
iv g
during the year result in a net capital loss, 50% of such losses a
such loss cannot be deducted from his id
Net taxable capital gains i
ordinary income, inasmuch as capital losses e
———— n
are allowable only to the extent of capital n
Taxable net income s
gains. In the case, for example, of a taxpayer, d
=======
engaged in buying and selling goods, having s
If such taxpayer had an ordinary net income of P
an ordinary net income of P20,000, capital re
P20,000, capital gains of P2,000 and capital c 5
gains of P5,000 and capital losses of P3,000 losses of P7,000, the taxable net income
the taxable net income is computed as follows: ei ,
would be computed as follows: v 0
Ordinary net income e 0
Ordinary net income Losses from sales of capital assets d 0
( 7
Gains from sales of capital assets as
( 5 L
sto 0 e
as cks
st Interest earned500 s
or Capital gains — s
oc sec
ks on capital assets -
Revenue Regulations 02-40 Page 20 of
C a broker and the broker borrows property be deemed to be true depreciation sustained
—
a to make delivery, the short sale is not unless shown by clear and convincing
—
p deemed to be consummated until the evidence to be incorrect. What the fair market
— obligation of the seller created by the short value of property was as of March 1, 1913, is
i
O sale is finally discharged by delivery of a question of fact to be established by
t
n property to the brokers to replace the evidence which will reasonably and
a
e property borrowed by such broker. (Section adequately make it appear. The nature and
l
- 35 of the Code) extent of the sales and the circumstances
h under which they were made should be
l a SECTION 136.Basis for determining gain or considered. Prices received at forced sales or
o l loss from sale of property. — For the purpose for small lots of property may be and often are
s f
s of ascertaining the gain or loss from the sale no real indication of the value of the amount of
e or exchange of property, the basis is the cost property in question. For instance, sales from
P of such property, or in the case of property time to time of a small number of shares of
s 2 which should be included in the inventory, its stock is little indication of the value of a large
, latest inventory value. But in the case of or controlling interest in the corporation. If the
1 5
0 property acquired before March 1, 1913, taxpayer can not determine the cost of
0 when its fair market value as of that date is in securities purchased prior to March 1, 1913,
, 0
0 excess of its cost, the gain to be included in because of the loss, destruction, or failure to
— gross income is the excess of the amount keep records, the value of the securities at the
0 — realized therefor over such fair market value. date of approximate date of acquisition may
0 — (See illustration I, Section 137 of these be used in determining the cost basis for
——— Less-Capital regulations). purposes of computing the gain or loss from
Net loss carried over to 1947 loss carried Also in the case of property acquired before the sale of the securities. When the date or
——— over (#) 2,250 March 1, 1913, when its fair market value as approximate date of acquisition is unknown,
Net income subject to tax Net capital gain of that date is lower than its cost the no general rule can be stated for determining
In 1947, his taxable income is computed as — deductible loss is the excess of such fair the cost value of such securities. Each case
follows: — must be considered separately upon its own
market value over the amount realized
Income from — facts.
therefor. (See Illustration II, Id.). No gain or
business and interest Net income subject to tax loss is recognized in the case of property sold
Capital gains and = or exchanged (a) at more than cost but less SECTION 137.Illustrations of the computation
losses:
= than its fair market value as of March 1, 1913 of gain or loss from the sale or exchange of
Capital gains
= (See Illustration III, Id.), or (b) at less than property acquired prior to March 1, 1913. —
= cost but at more than its fair market value as To avoid complexity no adjustment has been
= of March 1, 1913. (See Illustration IV, Id., Id., made in these examples for depreciation or
= Id.) In any case proper adjustment must be depletion.
# The net capital loss of P5,000 sustained made in computing gain or loss from the
in 1946 and carried over in 1947 is reduced exchange or sale of property for any In the case of property acquired before March
to P2,250 for the reason that the net income depreciation or depletion sustained and 1, 1913, when its fair market value as of that
from business and other sources (not allowable as deduction in computing net date is in excess of its cost, the taxable gain is
including capital gain), for the year 1946 is income; the amount of depreciation the excess of the amount realized therefor
only P2,250. previously charged off by the taxpayer shall over such fair market value.
Taxable
If a bank or trust company incorporated g
ILLUSTRATION I
under the laws of the Philippines or of the a
Fair Market
United States, a substantial part of whose i
Cost
business is the receipt of deposits, sells any n
V
bond, debenture, note, or certificate or other
evidence of indebtedness issued by any a
l M
corporation (including one issued by a a
government or political subdivision thereof), u
e r
with interest coupons or in registered form, .
any loss resulting from such sale shall not
be subject to the limitation contained in S
a 1
Section 34(c) and shall not be included in ,
determining the applicability of such l
limitation to other losses. e
1
P 9
SECTION 135.Gains and losses from short 1
sales. — For income tax purposes, a short r
i 3
sale is not deemed to be consummated P20,000 P30,000
until the delivery of property to cover the c
short sale. If the short sale is made through e
P40,000
Revenue Regulations 02-40 Page 21 of
1 o v
P10,000 , t e
E r
x 1 t
c 9 a a
e 1 x m
s 3 a o
s . b u
l n
o G e t
f a .
i In the case of property acquired before r
a n March 1, 1913, when its fair market value e
m as of that date is lower than its cost, the a
o a deductible loss is the excess of such fair l
u t market value over the amount realized i
n t therefor. z
t r e
i ILLUSTRATION II d
r b Fair Market .
e u Cost
a t Val L
l e ue o
i d Sal s
z e s
e t Pric
d o e a
gain t
o t Mar t
v h . 1, r
e e 191 i
r 3 b
p P20,000 P10,000 u
f e P4,000 t
a r E a
i i x b
r o c l
d e e
m s
a p s t
r r o
k i o
e o f t
t r h
f e
v t a
a o i p
l r e
u M r
e a m i
r a o
a c r d
s h k
e p
o 1 t r
f , i
v o
M 1 a r
a 9 l
r 1 u t
c 3 e o
h
n o M
Revenue Regulations 02-40 Page 22 of
a p w
r g r h
c a i o
h i o l
n r e
1
, o t t
n o r
1 a
9 w M n
1 h a s
3 o r a
, l c c
e h t
n i
o t 1 o
t r , n
a 1 ,
d n 9
e s 1 w
d a 3 h
u c . i
c t No gain or loss is recognized in the case c
t i of property acquired before March 1, h
i o 1913, and sold or disposed of at less
b n than cost but at more than its fair market l
l , value as of that date. o
e s
. w ILLUSTRATION IV s
No gain or loss is recognized in the case h Fair Market
of property acquired before March 1, i Cost i
1913, and sold or disposed of at more c Val s
than cost but at less than its fair market h ue
value as of that date. Sal a
g e t
ILLUSTRATION III a Pric t
Fair Market i e r
Cost n gain i
Val Mar b
ue i . 1, u
Sal s 191 t
e 3 a
Pri a P20,000 P6,000 b
ce t No taxable gain or deductible l
gai t loss. e
n r R
Ma i e t
r. b a o
1, u s
191 t o p
3 e n e
P20,000 P60,000 d : r
i
loss. t A o
R o d
e l
a p o p
s e s r
o r s i
n i o
: o o r
d n
A t
Revenue Regulations 02-40 Page 23 of
o r o
Where the fair market value as of March 1,
a
1913, is equal to or greater than the cost
M n M
and the selling price is less than the cost,
a s a
the deductible loss is the amount by which
r a r
the cost exceeds the selling price.
c c c
h t h
ILLUSTRATION VI
i
Fair Market
1 o 1
, n , Cost
, Va
1 1 lue
9 a 9 Sa
1 l 1 le
3 l 3 Pri
. . ce Ta
Where the cost is equal to or greater than the o gai
fair market value as of March 1, 1913, and f n
the selling price exceeds the cost, the gain to Ma
be included in gross income is the excess of w r.
the selling price over the cost. h 1,
i 19
ILLUSTRATION V c 13
h P20,000 P30,000 P1
Fair Market
P10,000
Cost
i R
Val
s e
ue
a
Sal
a s
e o
Pri t
t n
ce :
gai r
n i
b L
Ma o
r. u
t s
1, s
191 a
3 b
l o
P20,000 P10,000 n
e
R w
e t
o h
a o
s l
o p
e e
n
: r
i t
o r
G a
a d
n
i s
n s
u a
b c
o t
n s
e i
q o
w n
h u
e ,
o
l n
t a
e l
t l
t
Revenue Regulations 02-40 Page 24 of
o decedent. The term "property acquired by exchanges his stock certificate for a voting
f O bequest, devise, or inheritance" as used trust certificate, no income is realized. The
n herein includes (a) such property interests as term "market value" means the fair value of
w l the taxpayer has received as the result of a the property in money as between one who
h y transfer, or creation of a trust, in wishes to purchase and one who wishes to
i contemplation of or intended to take effect in sell. It is not, however, what can be obtained
c a possession or enjoyment at or after death, for the property when the owner is under
h c and (b) such property interest as the peculiar compulsion to sell or the purchaser to
t taxpayer has received as the result of the buy; nor is it a purely speculative value which
i u exercise by a person of a general power of an owner could not reasonably expect to
s a appointment (1) by will, or (2) by deed obtain for the property although he might
l executed in contemplation of or intended to possibly be fortunate enough to do so.
a take effect in possession or enjoyment at or "Market value" is the price at which a seller
t l after death. In the case of property acquired willing to sell at a fair price and a buyer willing
t o by gift, bequest, devise, or inheritance, prior to buy at a fair price, both having reasonable
r s to March 1, 1913, the taxable gain or knowledge of the facts, will trade. Evidence
i s deductible loss from the sale or other as to the assets and liabilities of a corporation
b disposition thereof shall be computed in and as to its earnings may furnish definite
u s accordance with sections 136 and 137 of indications of the market value of its stock.
t u these regulations. In the case of property
a s acquired by bequest, devise or inheritance, SECTION 141.Determination of gain or loss
b t its value as appraised for the purpose of the from the exchange of property. — The
l a inheritance tax shall be deemed to be its fair amount of income derived or loss sustained
e i market value when acquired. from an exchange of property is the difference
n between the market value at the time of the
t e SECTION 140.Exchange of property. — exchange of the property received in
o d Gain or loss arising from the acquisition and exchange and the original cost, or other
subsequent disposition of property is basis, of the property exchange. If the
p d realized only when as the result of a property exchanged was acquired prior to
e e transaction between the owner and another March 1, 1913, see Sections 136 and 137 of
r d person the property is converted into other these regulations.
i u property (a) that is essentially different from
o c the property disposed of, and (b) that has a SECTION 142.Readjustment of interest in a
d t market value. The requirement that the registered copartnership. — When a partner
i property received in exchange must be retires from a duly registered copartnership,
s b "essentially different from the property or the partnership is dissolved, he realizes a
u l disposed of" implies that there must be a gain or loss measured by the difference
b e change in substance and not merely a between the price received for his interest
s . change in form. By way of illustration, if a and the cost to him of his interest in the
e taxpayer owning ten shares of stock
q SECTION 138.Sale of property acquired by
u partnership including in such cost the amount order that the Commissioner of Internal
gift. — In computing the gain or loss from
e of his share in any undistributed partnership Revenue may determine whether any gain or
the sale or other disposition of property
n net income earned since he became a partner loss has been realized by any partner.
acquired by gift, the basis shall be the selling
t on which the income tax has been paid.
price and the fair market value of the
However, if such interest in the partnership SECTION 143.Basis of stock or securities
property at the time the gift was made, or its
t was acquired prior to March 1, 1913, both the acquired in "wash sales". — In the sale or other
fair market value as of March 1, 1913, if
o cost as hereinbefore provided and the amount disposition of stocks or securities the acquisition
acquired prior thereto, determined in
of such interest as of date, plus the amount of of which (or the contract or option to acquire
accordance with the next two preceding
M the shares in any undistributed partnership net which) resulted in the non deductibility of the
sections. In the case of gifts made on or
a income earned since March 1, 1913, on which loss from the sale or other disposition of
after July 1, 1939, the value taken as a basis
r the income tax has been paid, shall be substantially identical stock or securities the
for gift tax purposes shall be considered as
c ascertained and the taxable gain derived or basis shall be the basis of the substantially
the fair market value in computing gain or
h the deductible loss sustained shall be identical stock so sold or disposed of, increased
loss from the sale or other disposition of the
computed as provided in Sections 136 and or decreased, as the case may be, by the
property.
1 137 of these regulations. If the partnership difference, if any, between the price at which the
, distributes its assets in kind and not in cash, stock or securities was acquired and the price at
SECTION 139.Sale of property acquired by
the partner realizes gain or suffers loss which such substantially identical stock or
devise, bequests, or inheritance. — In
1 according to the market value of the property securities were sold or otherwise disposed of.
computing the gain or loss from the sale or
9 received in liquidation. Whenever a new The application of this rule may be illustrated by
other disposition of property acquired by
1 partner is admitted, to a partnership, or any the following examples:
devise, bequest, or inheritance, the basis
3 existing partnership is reorganized, the facts
shall be the fair market price or value of such
. as to such change or reorganization should be EXAMPLE (1): A purchased a share of
property at the time of the death of the
fully set forth in the next return of income, in common stock of the X Corporation for P100 in
Revenue Regulations 02-40 Page 25 of
1936, which he sold January 15, 1940, for (a) By a corporation: If a corporation, a party
(b) By a shareholder: A shareholder who gain to the said corporation will be
P80.00. On February 1, 1940, he purchased a to a merger or consolidation, in pursuance of
exchanges his stock in a corporation which is recognized. If the other property and/or
share of common stock of the same such plan of merger or consolidation,
a party to the merger or consolidation solely money received by the corporation is not
corporation for P90.00. No loss from the sale exchanges property solely for stock in another
for stock of another corporation, also a party distributed by it pursuant to the plan of merger
is recognized under Section 33 of the Code. corporation, a party to the merger or
to the merger or consolidation. and consolidation, the gain, if any, to the
The basis of the new share is P110; that is, the consolidation.
(c) By a security holder: A security corporation from the exchange will be
basis of the old share (P100) increased by
holder of a corporation which is a party recognized in an amount not in excess of the
P10, excess of the price at which the new
to the merger or consolidation, who sum of money and the fair market value of the
share was acquired (P90) over the price at
exchanges his securities in such other property so received which is not
which the old share was sold (P80).
corporation solely for stock or distributed. In either case no loss from the
securities in another corporation, a exchange will be recognized.
EXAMPLE (2): A purchased a share of
party to the merger or consolidation.
common stock of the X corporation for P100 in
4. Assumption of liability. — Where upon
1936, which he sold January 15, 1940, for
3. Recognition of gain in part but not loss, an exchange described in the foregoing
P80. On January 1, 1940, he purchased a
where exchanges are not solely in kind. exceptions, a taxpayer receives stock or
share of common stock of the same
(a) By a shareholder or security holder. — If securities which would be permitted to be
corporation for P70. No loss from the sale is
in connection with an exchange made by a received without the recognition of gain if it
recognized under Section 33 of the Code. The
shareholder or security holder described in were the sole consideration, and as part of
basis of the new share is P90; that is, the
the above exceptions, he receives not only the consideration, another party to the
basis of the old share (P100) decreased by
stock or securities, permitted to be received exchange assumes a liability of the taxpayer,
P10, the excess of the price at which the old
without recognition of loss or gain, but also or acquires from the taxpayer property
share was sold (P80) over the price at which
money and/or other property, then the gain, if subject to a liability, such assumption or
the new share was acquired (P70). (See
any, to the recipient shall be recognized, but acquisition shall not be considered as money
Section 131 of these regulations).
in an amount not in excess of the sum of and/or other property, and shall not prevent
money and the fair market value of such other the exchange from being within the
SECTION 143-A. Excerpts from B.I.R.
property. The loss, if any, to the shareholder exceptions. Accordingly, the assumption of
General Circular No. V-253 publishing
or security holder from such an exchange is the aforesaid liabilities is not to be treated as
Republic Act No. 1921 amending Section 35
not to be recognized to any extent. However, other property or money for the purpose of
of the Code, particularly subsection (c)
if the distribution of such other property determining the amount of realized gain.
thereof:
and/or money to a shareholder in the course
of a merger or consolidation has the effect of 5. Basis of stock or securities for the purpose
Features of the Amendment
the distribution of a taxable dividend, there of determining gain or loss upon
1. Before and after the amendment. —
shall be taxed to the distributee as a taxable subsequent sale.
Under the provisions of subsection (c) of
dividend such an amount of the gain
Section 35 of the National Internal
recognized on the exchange as is not in (a) By the transferor corporation, or its
Revenue Code, before its amendment
excess of the distributee's ratable share of the shareholder or security holder. — The basis
by Republic Act No. 1921, when
undistributed earnings and profits of the of the stock or securities received by the
property is exchanged for another
corporation, and as a capital gain, the transferor corporation or its shareholder or
property, the property received in
remainder, if any, of the gain so recognized. security holder upon the exchange specified
exchange shall, for the purpose of
Example: A, in connection with a in the above exceptions shall be the same
determining gain or loss, be treated as
merger or consolidation in 1957 exchanges a as the basis of the property, stock or
the equivalent of cash to the amount of
share of stock in the X Corporation (a party securities exchanged decreased by the
its fair market value.
to the merger or consolidation) purchased in money received and the fair market value of
1939 at a cost of P100 for a share of stock of the other property received, and increased
Paragraph 1 of subsection (c) of section 35 of
the Y Corporation (also a party to the merger by the amount treated as dividend of the
the Tax Code after the amendment states the
or consolidation), which has a fair market shareholder and the amount of any gain
general rule that upon the sale or exchange of
value of P90, plus P20 in cash. The gain that was recognized on the exchange. The
property, the entire amount of gain or loss as
from the transaction is P10 and is recognized other property or "boot" received in
the case may be, is recognized, while
and taxed as a gain from the exchange of exchange shall have as basis its fair market
paragraphs 2 and 3 give the exceptions where
property. However, if the share of stock value.
gain or loss is not recognized, or gain is
received had a fair market value of P70, the
recognized only in part.
loss from the transaction of P10 would not be Examples:
recognized. 1. A purchased a share of stock in the X
2. Exceptions to the rule recognizing gain or
loss in exchanges of property solely in Corporation in 1939 for P100. Pursuant to a
(b) By a corporation. — If, in pursuance of a plan of merger or consolidation, A in 1957
kind. — Under paragraph 2 of subsection
plan of merger or consolidation above exchanged his share for one share in the Y
(c) of Section 35 of the Tax Code after its
described, the transferor corporation receives Corporation, worth P90 and P30 in cash. A
amendment by Republic Act No. 1921,
not only stock permitted to be received realized a gain of P20 upon the exchange.
no gain or loss shall be recognized in the
without the recognition of gain or loss, but The basis of the share of stock in the Y
following cases of exchanges made in
also money and/or other property, then, if Corporation is P90, that is, the basis of the
pursuance of a plan of merger or
such money and/or other property received share in the X Corporation (P100) less the
consolidation:
by the corporation is distributed by it pursuant amount of money received by A (P30) plus
to the plan of merger or consolidation, no the amount of the gain recognized on the
Revenue Regulations 02-40
exchange (P20).
2. A purchased a share of stock in the X
Corporation in 1939 for P100. Upon a merger
or consolidation of the X Corporation in 1957,
A received in place of his stock in the X
Corporation a share of stock in the Y
Corporation worth P60, a Treasury Bond
worth P50, and in addition P20 in cash. A
realized a gain of P30 upon the exchange.
The basis of the property received in
exchange is the basis of the old stock
decreased in the amount of money received
(P20) and increased in the amount of gain
that was recognized (P30), which results in a
basis for the property received of P110. This
basis of P110 is apportioned between the
Treasury Bond and the share of stock, the
basis of the Treasury Bond being its fair
market value at the date of the exchange,
P50, and of the share of stock, the remainder,
P60.
(b) By the transferee. — The basis of the
property transferred in the hands of the
transferee shall be the same as it would be in
the hands of the transferor, increased by the
amount of the gain recognized to the
transferor on the transfer.
(c) If corporation shareholder or security
holder received several kinds of stock or
securities. — When securities of a single
class were exchanged for new securities of
different classes where no gain or loss was
recognized, the proper method of
apportionment is to allocate to each class of
new securities that proportion of the original
basis which the market value of the particular
class bears to the market value of all
securities received on the date of the
exchange, for purposes of determining the
gain or loss on the subsequent sale of any of
the new securities. For example, if 100 shares
of common stock par value P100, are
exchanged for 50 shares of preferred and 50
shares of common each of P100 par value,
and the cost of the old stock was P250 per
share, or P25,000, but the market value of the
preferred stock on the date of the exchange
was P110 per share, or P5,500 for the 50
shares, and the market value of the common
was P440 per share or P22,000 for the 50
shares of common, one-fifth of the original
cost, or P5,000, would be regarded as the
cost of the preferred and four-fifths, or
P20,000 as the cost of the common.
As previously shown cash "boot" operates in
the first instance to reduce basis. Then to this
result must be added the gain recognized.
The remainder is to be allocated between the
several types of stock and securities
permitted to be received without the
Page 26 of
passed to him although such merchandise is
possession, but should not include goods
in transit or for other reasons has not been
recognition of gain or loss. To illustrate: The ordered for future delivery transfer of title to
reduced to physical
taxpayer in a nontaxable exchange trades A which has not yet been effected.
stock which cost P100 for one share of
common stock and one share of preferred SECTION 145.Valuation of inventories. —
stock of B corporation, together worth P100 The law provides two tests to which each
(P100 each), and P50 cash. The basis for the inventory must conform. — (1) It must
share of B common stock will therefore be conform as nearly as possible to the best
P50 (1/2 of P100) and the B preferred stock accounting practice in the trade or business,
will likewise take a P50 basis. and (2) it must clearly reflect the income. It
follows, therefore, that inventory rules can not
6. Definitions: be uniform but must give effect to trade
(a) The term "securities" means bonds and customs which come within the scope of the
debentures but not "notes" of whatever best accounting practice in the particular
class or duration. trade or business. In order to clearly reflect
(b) The term "merger" or "consolidation" shall income, the inventory practice of a taxpayer
be understood to mean the ordinary merger or should be consistent from year to year, and
consolidation, or the acquisition by one greater weight is to be given to consistency
corporation of all or substantially all the than to any particular method of inventory or
properties of another corporation solely for basis of valuation, as long as the method or
stock. In order that a transaction may be basis used is substantially in accord with
regarded as a merger or consolidation within these regulations. An inventory that can be
the purview of the amendment, it must be used under the best accounting practice in a
undertaken for a bona fide business purpose balance sheet showing the financial position
and not solely for the purpose of escaping the of the taxpayer is, as a general rule, regarded
burden on taxation. In determining whether a as clearly reflecting his income.
bona fide business purpose exists, each and
every step of the transaction shall be The bases of valuation most commonly used
considered and the whole transaction or series by business concerns and which meet the
of transactions shall be treated as a single requirements of the Income Tax Law are (a)
unit. The term "property" shall be taken to cost price or (b) cost or market price,
include the cash assets of the transferor for whichever is the lower. Any goods in an
purpose of determining whether the property inventory which are unsalable at normal prices
transferred constitutes a substantial portion of or unusable in the normal way because of
the property of the transferor. "Substantially damage, imperfections, shop wear, changes of
all" as used under this amendment means the style, odd or broken lots, or other similar
acquisition by one corporation of at least 80% causes, including second hand goods taken in
of the assets, including cash, of another exchange, should be valued at "bona fide"
corporation, which has the element of selling prices whether basis (a) or (b) is used,
permanence and not merely momentary or if such goods consist of raw materials or
holding. partly finished goods held for use or
(Section 36 of the Code) consumption, they should be valued upon a
reasonable basis, taking into consideration the
SECTION 144.Need of inventories. — In order usability and the condition of the goods, but in
to reflect the net income correctly, inventories no case shall such value be less than the
at the beginning and end of each year are scrap value. "Bona fide" selling price means
necessary in every case in which the actual offerings of goods during a period
production, purchase or sale of merchandise is ending not later than thirty days after inventory
an income producing factor. The inventory date. The burden of proof will rest upon the
should include raw materials and supplies on taxpayer to show that such exceptional goods
hand that have been acquired for sale, as are valued upon such selling bases come
consumption, or use in productive processes within the classifications indicated above, and
together with all finished or partly finished he shall maintain such records of the
goods. Only merchandise title to which is disposition of the goods as will enable a
vested in the taxpayer should be included in verification of the inventory to be made.
his inventory. Accordingly the seller should
include in his inventory goods under contract In respect to normal goods, whichever basis
for sale but not yet segregated and applied to (a) or (b) is adopted must be applied with
the contract and goods out upon consignment, reasonable consistency to the entire inventory.
but should exclude from inventory goods sold, Taxpayers were given the option to adopt
title to which has passed to the purchaser. A either basis (a) or (b) for their 1921 inventories,
purchaser should include in inventory and the basis adopted for that year is
merchandise purchased, title to which has controlling and a change can now be made
Revenue Regulations 02-40
after permission is secured from the
Commissioner of Internal Revenue. Goods
taken in the inventory which have been so
intermingled that they can not be identified
with specific invoices will be deemed to be
either (a) the goods most recently purchased
or produced and the cost thereof will be the
actual cost of the goods purchased or
produced during the period in which the
quantity of goods in the inventory has been
acquired, or (b) where the taxpayer maintains
book inventories in accordance with a sound
accounting system in which the respective
inventory accounts are charged with the
actual cost of the goods purchased or
produced and credited with the value of the
goods used, transferred, or sold, calculated
upon the basis of the actual cost of the goods
acquired during the taxable year (including
the inventory at the beginning of the year) the
net value as shown by such inventory
accounts will be deemed to be the cost of the
goods on hand. The balances shown by such
inventories should be verified by physical
inventories at reasonable intervals and
adjusted to conform therewith.
Inventories should be recorded in a legible
manner, properly computed and
SECTION 146.Inventories at cost price. —
Cost means:
(1) In the case of merchandise on hand at
the beginning of the taxable year, the
inventory price of such goods.
(2) In the case of merchandise purchased
since the beginning of the taxable year, the
invoice price less trade or other discounts,
except strictly cash discounts, approximating
a fair interest rate, which may be deducted or
not at the option of the taxpayer, provided a
consistent course is followed. To this net
invoice price should be added transportation
or other necessary charges incurred in
acquiring possession of the goods.
(3) In the case of merchandise produced by
the taxpayer since the beginning of the
taxable year, (a) the cost of raw materials and
supplies entering into or consumed in
connection with the products; (b) expenditures
for direct labor; (c) indirect expenses incident
to and necessary for the production of the
particular article, including therein a
reasonable proportion of management
expenses, but not including any cost of selling
or return on capital whether by way of interest
or profit.
(4) In any industry in which the usual rules
for computation of cost of production are
inapplicable, costs may be approximated upon
such basis as may be reasonable and in
conformity with established trade practice in
the particular industry. Among such cases are:
summarized, and should be preserved as a
part of the accounting record of the taxpayer.
The inventories of taxpayers on whatever
basis taken will be subject to investigation by
the Commissioner of Internal Revenue and
the taxpayer must satisfy the Commissioner
of Internal Revenue of the correctness of the
price adopted.
The following methods, among others, that
are sometimes used in taking or valuing
inventories, are not in accord with these
regulations and therefore their use for income
tax purposes is prohibited, viz.:
(1) Deducting from the inventory a
reserve for price changes, or an
estimated depreciation in the value
thereof.
(2) Taking work in process, or other
parts of the inventory, at a nominal
price or at less than its proper
value.
(3) Omitting portions of the stock on hand.
(4) Using a constant price or nominal
value for a so called normal quantity of
materials or goods in stock.
(5) Including stock in transit, either shipped
to or from the taxpayer, the title to which
is not vested in the taxpayer.
(a) Farmers and raisers of 1ivestock; (b)
miners and manufacturers who by a single
process or uniform series of processes derive
a product of two or more kinds, size or grade,
the unit cost of which is substantially alike; and
(c) retail merchants who use what is known
as the "retail method" in ascertaining
approximate cost. cCaSHA
SECTION 147.Inventories at market price. —
Under ordinary circumstances, and for normal
goods in an inventory "market price" means the
current bid price prevailing at the date of the
inventory for the particular merchandise in the
volume in which usually purchased by the
taxpayer and is applicable in the cases (a) of
goods purchased and on hand, and (b) of
basic elements of cost (materials, labor, and
burden) in goods in process of manufacture
and in finished goods on hand; exclusive,
however, of goods on hand or in process of
manufacture for delivery upon firm sales
contracts (i.e., those not legally subject to
cancellation by either party) at fixed prices
entered into before the date of the inventory,
which goods must be inventoried at cost.
Where no open market exists or where
quotations are nominal due to stagnant market
condition, the taxpayer must use such
evidence of a fair market price at the date or
dates nearest the inventory as may be
available, such as specific purchase or sales
by the taxpayer or others in reasonable volume
and made in good faith, or compensation paid
Page 27 of
for cancellation of contracts for purchase
their individual capacities buy and sell
commitments. Where the taxpayer in the
securities, are not dealers in securities
regular course of business has offered for sale
within the meaning of this rule.
such merchandise at prices lower than the
current price as above defined, the inventory
SECTION 149.Inventories of livestock raisers
may be value at such prices and the
correctness of prices will be determined by and other farmers. —
reference to the actual sales of the taxpayer for
a reasonable period before and after the date (1) Farmers may change the basis of their
of the inventory. Prices which vary materially returns from that of receipts and
from the actual prices so ascertained will not disbursements to that of an inventory basis,
be accepted as reflecting the market price. which necessitates the use of opening and
closing inventories for the year in which the
change is made. There should be included
SECTION 148.Inventories by dealers in
in the opening inventory all farm products
securities. — A dealer in securities who
(including livestock) purchased or raised
in his books of account regularly
which were on hand at the date of the
inventories unsold securities on hand
inventory, but inventories must not include
either —
real estate, buildings, permanent
(a) At cost;
improvements, or any other fixed assets.
(b) At, cost or market, whichever is lower; or
(c) At market value.
(2) Because of the difficulty of ascertaining
may make his return upon the basis upon
actual cost of livestock and other farm
which his accounts are kept; provided that a
products, farmers who render their returns
description of the method employed shall be
upon an inventory basis may at their option
included in or attached to the return, that all the
value their inventories for the current taxable
securities must be inventoried by the same
year according to the "farm-price method"
method, and that such method must be
which provides for the valuation of inventories
adhered to in subsequent years, unless
at market price less cost of marketing. If the
another method be authorized by the
use of the "farm-price method" of valuing
Commissioner of Internal Revenue. A dealer in
inventories for any taxable year involves a
securities in whose books of accounts separate
change in method of pricing inventories from
computations of the gain or loss from the sale
that employed in prior years, the opening
of the various lots of securities sold are made
inventory for the taxable year in which the
on the basis of the cost of each lot shall be
change is made should be brought in at the
regarded, for the purposes of this section, as
same value as the closing inventory for the
regularly inventorying his securities at cost. For
preceding taxable year. If such valuation of the
the purposes of this rule a dealer in securities
opening inventory for the taxable year in which
is a merchant of securities, whether an
the change is made results in an abnormally
individual, partnership; or corporation, with an
large income for that year, there may be
established place of business, regularly
submitted with the return for such taxable year
engaged in the purchase of securities and their
an adjustment statement for the preceding
resale to customers; that is, one who as a
year based on the "farm-price method" of
merchant buys securities and sells them to
valuing inventories; upon the amount of which
customers with a view to the gains and profits
adjustments the tax, if any be due, shall be
that may be derived therefrom. If such
assessed and paid at the rate of tax in effect
business is simply a branch of the activities
for such preceding year.
carried on by such person, the securities
inventoried as here provided may include only
(3) Where returns have been made in
those held for purposes of resale and not for
which the taxable net income has been
investment. Taxpayers who buy and sell or
computed upon incomplete inventories, the
hold securities for investment or speculation,
abnormality should be corrected by
irrespective of whether such buying or selling
submitting with the return for the current
constitutes the carrying on of a trade or
taxable year a statement for the preceding
business, and officers of corporations and
year in which such adjustments shall be
members of partnerships who in
made as are necessary to bring the closing
inventory for the preceding year into
agreement with opening complete inventory
for the current taxable year.
SECTION 150.Inventories of miners and
manufacturers. — A taxpayer engaged in
mining or manufacturing who by a single
process or uniform series of processes
Revenue Regulations 02-40
derives a product of two or more kinds, sizes
or grades, the unit cost of which is
substantially alike, and who in conformity to
a recognized trade practice allocates an
amount of cost to each kind, size, or grade
of product which in the aggregate will absorb
the total cost of production, may use such
allocated cost a the basis for pricing
inventories, provided such allocation bears a
reasonable relation to the respective selling
values of the different kinds of products.
SECTION 151.Inventories of retail
merchants. — Retail merchants who employ
what is known as the "retail method" of
pricing inventories may make their returns
upon that basis, provided that the use of
such method, is designated upon the returns,
that accurate accounts are kept and that
such method is consistently adhered to
unless a change is authorized by the
Commissioner of Internal Revenue. Under
this method the goods in the inventory are
ordinarily priced at the selling prices and the
total retail value of the goods in each
department or of each class of goods is
reduced to approximate cost by deducting
the percentage which represents the
difference between the retail selling value
and the purchase price. This percentage is
(3) Income which is derived partly
from sources within and partly from
sources without the Philippines.
Non-resident alien individuals and foreign
corporations are taxable only upon income
from sources within the Philippines. Citizens
and residents of the Philippines and domestic
corporations are taxable upon income derived
from sources both within and without the
Philippines. EAcTDH
The taxable income from sources within the
Philippines includes that derived in full from
sources within the Philippines and that
portion of the income which is derived partly
from sources within and partly from sources
without the Philippines which is allocated or
apportioned to sources within the
Philippines.
SECTION 153.Interest. — Interest on
bonds or notes or other interest bearing
obligations of residents, corporate or
otherwise, constitutes income from
sources within the Philippines.
SECTION 154.Dividends. — Gross income
from sources within the Philippines includes
dividends, as defined by Section 83 of the
Code:
(a) From a domestic corporation; and
(b) From a foreign corporation unless less
than 50 per cent of its gross income for the
determined by departments of a store or by
classes of goods, and should represent as
accurately as may be the amounts added to
the cost prices of the goods to cover selling
and other expenses of doing business and for
the margin of profit. In computing the
percentage above mentioned, proper
adjustment should be made for all mark-ups
and mark-downs.
A taxpayer maintaining more than one
department in his store or dealing in classes
of goods carrying different percentages of
gross profit should not use a percentage of
profit based upon an average of his entire
business but should compute and use in
valuing his inventory the proper percentages
for the respective departments or classes of
goods.
(Section 37 of the Code)
SECTION 152.Income from sources
within the Philippines. — The law
divides the income of taxpayers into
three classes:
(1) Income which is derived in full from
sources within the Philippines;
(2) Income which is derived in full from
sources without the Philippines; and
three-year period ending with the close of its
taxable year preceding the declaration of such
dividends, or for such part of such period as it
has been in existence, was derived from
sources within the Philippines; but only in an
amount which bears the same ratio to such
dividends as the gross income of the
corporation for such period derived from
sources within the Philippines bears to its
gross income from all sources.
Dividends will be treated as an income from
sources within the Philippines unless the
taxpayer submits sufficient data to establish
to the satisfaction of the Commissioner of
Internal Revenue that they should be
excluded from gross income under Section
37(a)(2)(B).
SECTION 155.Compensation for labor or
personal services. — Gross income from
sources within the Philippines includes
compensation for labor or personal services
performed within the Philippines regardless of
the residence of the payor, of the place in
which the contract for service was made, or of
the place of payment. If a specific amount is
paid for labor or personal services performed in
the Philippines, such amount shall be included
in the gross income. If no accurate allocation or
segregation of compensation for labor or
personal services performed in the Philippines
can be made, or when such labor or service is
performed partly within and partly without the
Philippines, the amount to be included in the
gross income shall be determined by an
apportionment of the time basis, i.e., there shall
be included in the gross income an amount
which bears the same relation to the total
compensation as the number of days of
performance of the labor or services within the
Philippines bears to the total number of days
performance of labor or services for which the
payment is made.
Wages received for services rendered
inside the territorial limits of the Philippines
and wages of an alien seaman earned on a
coastwise vessel are to be regarded as from
sources within the Philippines.
SECTION 156.Rentals and royalties. — Gross
income from sources within the Philippines
includes rentals or royalties from property
located within the Philippines or from any
interest in such property, including rentals or
royalties for the use of or the privilege of using
in the Philippines, patents, copyrights, secret
processes and formulas, goodwill,
trademarks, trade brands, franchises, and
other like property. The income arising from
the rental of property whether tangible or
intangible located within the Philippines, or
from the use of property, whether tangible or
intangible, located within the Philippines, is
from sources within the Philippines.
SECTION 157.Sale of real property. — Gross
income from sources within the Philippines
includes gain, computed under the provisions
of Section 35, derived from the sale or other
disposition of real property located in the
Philippines. For the treatment of capital gains
and losses, see Sections 132 to 135 of these
regulations.
SECTION 158.Income from sources without
the Philippines. — Gross income from sources
without the Philippines includes:
(1) Interest other than that specified in
Section 37(a)(1), as being derived
from sources within the Philippines;
Page 28 of
(2) Dividends other than those derived
from sources within the Philippines as
provided in Section 37(a)(2);
(3) Compensation for labor or personal
services performed without the Philippines;
(4) Rentals or royalties derived from
property without the Philippines or
from any interest in such property,
including rentals or royalties for the
use of or for the privilege of using
without the Philippines, patents,
copyrights, secret processes and
formulas, goodwill, trade-marks,
trade brands, franchises, and other
like property; and
(5) Gain derived from the sale of real property
located without the Philippines. AEIDTc
SECTION 159.Sale of personal property. —
Income derived from the purchase and sale
of personal property shall be treated as
derived entirely from the country in which
sold. The world "sold" includes "exchanged".
The "country in which sold" ordinarily means
the place where the property is marketed.
This section does not apply to income from
the sale of personal property produced (in
whole or in part) by the taxpayer within and
sold without the Philippines or produced (in
whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162
of these regulations.)
SECTION 160.Apportionment of deductions.
— From the items specified in Section 37(a) as
being derived specifically from sources within
the Philippines there shall be deducted the
expenses, losses, and other deductions
properly apportioned or allocated thereto and a
ratable part of any other expenses, losses or
deductions which can not definitely be
allocated to some item or class of gross
income. The remainder shall be included in full
as net income from sources within the
Philippines. The ratable part is based upon the
ratio of gross income from sources within the
Philippines to the total gross income.
EXAMPLE: A non-resident alien individual
whose taxable year is the calendar year,
derived gross income from all sources for 1939
of P180,000, including therein:
Interest on bonds of a domestic corporation
Dividends on stock of domestic corporation
Royalty for the use of
patents within the
Philippines
property located within
the Philippines
————
Total P36,000
Revenue Regulations 02-40
that is, one-fifth of the total gross income
was from sources within the Philippines.
The remainder of the gross income was
from sources without the Philippines,
determined under Section 37(c).
The expenses of the taxpayer for the year
amounted to P78,000. Of these expenses the
amount of P8,000 is properly allocated to
income from sources within the Philippines
and the amount of P40,000 is properly
allocated to income from sources without the
Philippines.
The remainder of the expense, P30,000,
cannot be definitely allocated to any class of
income. A ratable part thereof, based upon
the relation of gross income from sources
within the Philippines to the total gross
income, shall be deducted in computing net
income from sources within the Philippines.
Thus, there are deducted from the P36,000
of gross income from sources within the
Philippines expenses amounting to P14,000
(representing P8,000 properly apportioned to
the income from sources within the
Philippines and P6,000, a ratable part (one-
Where items of gross income are separately
allocated to sources within the Philippines,
there shall be deducted therefrom, in
computing net income, the expenses, losses,
and other deductions properly apportioned or
allocated thereto and a ratable part of other
expenses, losses, or other deductions which
cannot definitely be allocated to some item or
class of gross income.
SECTION 162.Income from the sale of
personal property derived from sources partly
within and partly without the Philippines. —
Items of gross income not allocated by
Sections 152 to 159 or 161 of these
regulations to sources from within or without
the Philippines shall (unless unmistakably
from a source within or a source without the
Philippines) be treated as derived from
sources partly within and partly without the
Philippines.
The portion of such income derived from
sources partly within the Philippines and partly
within a foreign country which is attributable to
sources within the Philippines shall be
determined according to the following rules
and cases:
PERSONAL PROPERTY PRODUCED AND
SOLD: — Gross income derived from the sale
of personal property produced (in whole or in
part) by the taxpayer within the Philippines
and sold within a foreign country, or produced
fifth) of the expenses which could not be
allocated to any item or class of gross
income). The remainder, P22,000, is the net
income from sources within the Philippines.
SECTION 161.Other income from sources
within the Philippines. — Items of gross
income other than those specified in Section
37(a) and (c) shall be allocated or apportioned
to sources within or without the Philippines, as
provided in Section (37)(e).
The income derived from the ownership or
operation of any farm, mine, oil or gas well,
other natural deposit, or timber, located
within the Philippines, and from the sale by
the producer of the products thereof within
or without the Philippines, shall ordinarily be
included in gross income from sources
within the Philippines. If, however, it is
shown to the satisfaction of the
Commissioner of Internal Revenue that due
to the peculiar conditions of productions
and sale in a specific case or for other
reasons all of such gross income should not
be allocated to sources within the
Philippines and to sources without the
Philippines shall be made as provided in
Section 162 of these regulations.
(in whole or in part) by the taxpayer within a
foreign country and sold within the Philippines
shall be treated as derived partly from sources
within the Philippines and partly from sources
within a foreign country under one of the
cases below. As used herein the word
"produced" includes created, fabricated,
manufactured, extracted, processed, cured, or
aged.
CASE 1. Where the manufacturer or producer
regularly sells a part of his output to wholly
independent distributors or other selling
concerns in such a way as to establish fairly an
independent factory or production price — or
shows to the satisfaction of the Commissioner
of Internal Revenue that such an independent
factory or production price has been otherwise
established — unaffected by considerations of
tax liability, and the selling or distributing
branch or department of the business is
located in a different country from that in which
the factory is located or the production carried
on, the net income attributable to sources
within the Philippines shall be computed by an
accounting which treats the products as sold
by the factory or productive department of the
business to the distributing or selling
department at the independent factory price as
established. In all such cases the basis of the
accounting shall be fully explained in a
statement attached to the return.
CASE 2. Where an independent factory or
production price has not been established as
provided under Case 1, the net income shall
first be computed by deducting from the gross
income derived from the sale of personal
property produced (in whole or in part) by the
taxpayer within the Philippines and sold within
a foreign country or produced (in whole or in
part) by the taxpayer within a foreign country
and sold within the Philippines, the expenses,
losses, or other deductions properly
apportioned or allocated thereto and a ratable
part of any expenses, losses, or other
deductions which can not definitely be
allocated to some item or class of gross
income. Of the amount of net income so
determined, one-half shall be apportioned in
accordance with the value of the taxpayer's
property within the Philippines and within the
foreign country, the portion attributable to
sources within the Philippines being
determined by multiplying such one half by a
fraction the numerator of which consists of the
value of the taxpayer's property within the
Philippines, and the denominator of which
consists of the value of the taxpayer's property
both within the Philippines and within the
foreign country. The remaining one-half of
such net income shall be apportioned in
accordance with the gross sales of the
taxpayer within the Philippines and within the
foreign country, the portion attributable to
sources within the Philippines being
determined by multiplying such one-half by a
fraction the numerator of which consists of the
taxpayer's gross sales for the taxable year or
period within the Philippines, and the
denominator of which consists of the
taxpayer's gross sales for the taxable year, or
period both within the Philippines and within
the foreign country. The "gross sales of the
taxpayer within the Philippines" means the
gross sales made during the taxable year
which were principally secured, negotiated, or
effected by employees, agents, offices, or
branches of the taxpayer's business resident
or located in the Philippines. The term "gross
sales" as used in this paragraph refers only to
the sales of personal property produced (in
whole or in part) by the taxpayer within the
Philippines and sold within a foreign country or
produced (in whole or in part) by the taxpayer
within a foreign country and sold within the
Philippines, and the term "property" includes
only the property held or used to produce
income which is derived from such sales. Such
property should be taken at its actual value,
which in the case of property valued or
appraised for purposes of inventory,
depreciation, depletion, or other purposes of
taxation shall be the highest amount at which
so valued or appraised, and which in other
cases shall be deemed to be its book value in
the absence of
Page 29 of
affirmative evidence showing such value to
be greater or less than the actual value. The
average value during the taxable year or
period shall be employed. The average value
of property as above prescribed at the
beginning and end of the taxable year or
period ordinarily may be used, unless by
reason of material changes during the
taxable year or period such average does not
fairly represent the average for such year or
period, in which event the average shall be
determined upon a monthly or daily basis.
Bills and accounts receivable shall (unless
satisfactory reason for a different treatment is
shown) be assigned or allocated to the
Philippines when the debtor resides in the
Philippines.
HCIaDT
CASE 3. Applications for permission to base
the return upon the taxpayer's books of
account will be considered by the
Commissioner of Internal Revenue in the case
of any taxpayer who, in good faith and
unaffected by considerations of tax liability,
regularly employs in his books of account a
detailed allocation of receipts and
expenditures which reflects more clearly than
the processes or formulas herein prescribed,
the income derived from sources within the
Philippines.
SECTION 163.Foreign steamship companies.
— The returns of foreign steamship
companies whose vessels touch ports of the
Philippines should include as gross income,
the total receipts of all out- going business
whether freight or passengers. With the gross
income thus ascertained, the ratio existing
between it and the gross income from all
parts, both within and without the Philippines
of all vessels, whether touching ports of the
Philippines or not, should be determined as
the basis upon which allowable deductions
may be computed, the principle being that
allowable deductions shall be computed upon
a basis which recognizes that the income
arising and accruing from business done if any
from this country shall bear its share, and no
more, of expense, incident to the earning or
creation of such income, in the ratio that the
gross income arising in and from this country
bears to the entire gross income arising from
business done both within and without this
country. In other words, the net income of a
foreign steamship company doing business in
or from this country is ascertained for the
purpose of the income tax, by deducting from
the gross receipts from outgoing business
such a portion of the aggregate expenses,
losses, etc., as such receipts bear to the
aggregate receipts from all ports of all vessels,
including in each case incoming of a
Revenue Regulations 02-40 Page 30 of
nonshipping character but incidental, to the en s 0
shipping business such as dividends from ger 0
investments, interests on deposits, etc. For s a (g) P.I. expenses:
example — fro n P.I. gross income
m d —
Given all —
(a) por p —
Gr ts a —
os oth s —
s er s —
re tha e —
ce n n —
ipt tho g —
s se e —
fro of r
m P. I 200,000 s x
ou (c) Interests and other nonshipping income P World's expe
tg recei 2 o
oi ved 0 r
ng by , W
fre P.I. 0 o
ig offic 0 r
ht e 5,000 0 l
s (d) Inter d
an ests, I '
d dividends n s
pa , and t
ss other e g
en nonshippi r r
ge ng e o
rs income s s
fro received t s
m by all
P.I offices a i
. other n n
po than d c
rts those in o
P P.I. o m
20 t e
,0 h 20,000 plus 5,000
50,000
00 (e) Tot e —————————————————— x
(b) r 150,000, or
al
Gr expense 200,000 plus 20,000 plus 50,000 plus
os i 5,000
s and
s n 25,000
deductio
re c —————x 150,000 = 13,636
ns of the
ce o 275,000
compan
ipt m (h) P.I. net income:
y as a
s e P
whole,
fro 5,000 .
includin
m — I
g those
ou incurred — .
tg by P.I. —
oi office 150,000 T g
ng Computation of P.I. Net Income o r
fre (f) P.I. Gross Income: t o
ig F a s
ht r l s
s e
an i 2 i
d g 5 n
pa h , c
ss t 0 o
Revenue Regulations 02-40 Page 31 of
m 5 respect to the time as of which items of gross
changed, the taxpayer shall attach to his
e , income and deductions are to be accounted
return a separate statement setting forth for
0 for. If the taxpayer does not regularly employ a
the taxable year and for the preceding year the
l 0 method of accounting which clearly reflects his
classes of items differently treated under the
e 0 income, the computation shall be made in
two systems, specifying in particular all
s such manner as in the opinion of the
amounts duplicated or entirely omitted as the
s l Commissioner of Internal Revenue clearly
result of such change.
e reflects it. (See Section 137 of these
P s regulations for computation of net income, and
A taxpayer who changes the method of
. s Section 38 for bases of computation. For the
accounting employed in keeping his book
I use of inventories, see Sections 144 to 151 of
shall, before computing his income upon such
. P these regulations.)
new method for purposes of taxation, secure
1 the consent of the Commissioner of Internal
e 3 SECTION 167.Methods of accounting. — It
Revenue. For the purposes of this action, a
x , is recognized that no uniform method of
change in the method of accounting employed
p 6 accounting can be prescribed for all
in keeping books means any change in the
e 3 taxpayers, and the law contemplates that
accounting treatment of items of income or
n 6 each taxpayer shall adopt such forms and
deductions, such as a change from cash
s systems of accounting as are in his judgment
receipts and disbursements method to the
e = best suited to his purpose. Each taxpayer is
accrual method, or vice versa; a change
s required by law to make a return of his true
involving the basis of valuation employed in
income. He must, therefore, maintain such
, P the computation of inventories (see Sections
accounting records as will enable him to do
1 144 to 151 of these regulations); a change
so. Any approved standard method of
o 1 from the cash or accrual method to the long-
accounting which reflects taxpayer's income
r , term contract method, or vice versa; a change
may be adopted. Among the essentials are
3 in the long-term contract method from the
the following:
P 6 percentage of completion basis to the
(1) In all cases in which the production,
2 4 completed contract basis or vice versa (see
purchase, or sale of merchandise of any kind
transmission of messages originating in the Section 44 of these regulations); or a change
is an income producing factor, inventories of
Philippines (not including any general involving the adoption of, or a change in the
SECTION 164.Telegraph and cable service. the merchandise on hand (including finished
overhead expenses or maintenance, repairs, use of, any other specialized basis of
— A foreign corporation carrying on the goods, work in process, raw materials, and
and depreciation of cable and not including any computing net income such as the crop basis.
business of transmission of telegraph or cable supplies) should be taken at the beginning
amount already deducted in computing gross Application for permission to change the
messages between points in the Philippines and end of the year and used in computing
income); (c) depreciation of property (other method of accounting employed and the basis
and points outside the Philippines derives the net income of the year in accordance with
than cables) located in the Philippines and upon which the return is made shall be filed
income partly from sources within and partly Sections 144 to 151 of these regulations;
used in the trade or business therein; and (d) a within 90 days after the beginning of the
from sources without the Philippines. (2) Expenditures made during the year
proportionate part of the general overhead taxable year to be covered by the return. The
should be properly classified as between
expenses [not including any items incurred application shall be accompanied by a
(1) GROSS INCOME. — The gross capital and income; that is to say, expenditures
abroad corresponding to those enumerated in statement specifying all amounts which would
income from sources within the Philippines for items of plant, equipment, etc., which have
(a), (b), and (c)], and of maintenance, repairs, be duplicated or entirely omitted as a result of
derived from such services shall be a useful life extending substantially beyond the
and depreciation of cables of the entire cable the proposed change. Permission to change
determined by adding (a) its gross year should be charged to a capital account
system of the enterprise based on the ratio the method of accounting will not be granted
revenues derived from messages and not to an expense account; and
which the number of words originating in the unless the taxpayer and the Commissioner of
originating in the Philippines and (b) (3) In any case in which the cost of capital
Philippines bears to the total words transmitted Internal Revenue agree to the terms and
amounts collected abroad on collect assets is being recovered through deductions
by the enterprise. conditions under which the change will be
messages originating in the Philippines and for wear and tear, depletion, or effected.
deducting from such sum amounts paid or obsolescence, any expenditure (other than
SECTION 165.Computation of income. — If ordinary repairs) made to restore the property
accrued for transmission of messages SECTION 169.Accounting period. — Income
a taxpayer has gross income from sources or prolong its useful life should be added to
beyond the company's own circuit. Amounts tax returns, whether for individuals or for
within or without the Philippines as defined the property account or charged against the
received by the company in the Philippines corporations, associations, or partnerships,
by Section 37 (a) or (c) together with gross appropriate reserve and not to current
with respect to collect messages originating are required to be made and their income
income derived partly from sources within expenses.
without the Philippines shall be excluded computed for each calendar year ending on
and partly from sources without the
from gross income. December 31st of every year. However,
Philippines, the amounts thereof, together SECTION 168.Changes in accounting
with the expenses and investment applicable corporations, associations, or partnerships
(2) NET INCOME. — In computing net methods. — The true income, computed
thereto, shall be segregated, and the net may with the approval of the Commissioner
income from sources within the Philippines under the law shall in all cases be entered in of Internal Revenue first secured, file their
income from sources within the Philippines
there shall be allowed as deductions from the return. If for any reason the basis of returns and compute their income on the
shall be separately computed therefrom.
gross income determined in accordance with reporting income subject to tax is basis of a fiscal year which means an
(Section 38 of the Code)
paragraph (1): (a) all expenses incurred in the accounting period of twelve months ending
Philippines (not including any general on the last day of any month other than
SECTION 166.General rule. — The method of
overhead expenses), incident to the carrying December. But in no instance shall individual
accounting regularly employed by the taxpayer
on of the business in the Philippines; (b) all taxpayers be authorized to establish a fiscal
in keeping his books, if such method clearly
direct expenses incurred abroad in the year as basis for filing their returns and
reflects his income is to be followed with
Revenue Regulations 02-40
computing their income. (For authority to file
on fiscal year basis see Section 172 of
these regulations.)
(Section 39 of the Code)
SECTION 170.When included in gross
income. — Except as otherwise provided in
Section 39 in the case of the death of a
taxpayer, gains, profits, and income are to
be included in the gross income for the
taxable year in which they are received by
the taxpayer, unless they are included as of
a different period in accordance with the
approved method of accounting followed by
him. If a taxpayer has died there shall also
be included in computing net income for the
taxable period in which he died amounts
accrued up to the date of his death if not
otherwise properly includible in respect of
such period or a prior period, regardless of
the fact that the decedent may have kept his
books and made his returns on the basis of
cash receipts and disbursements.
(For income not reduced to possession but
considered as constructively received and for
examples of constructive receipt, see
Sections 52 and 53 of these regulations. For
the treatment of income from long-term
contracts, see Section 44 of these
regulations.)
(b) The provisions of paragraph (a) of this
section in general are not applicable with
respect to the taxable period during which the
taxpayer dies. In such case there shall also
be allowed as deductions and credits for such
taxable period amounts accrued up to the
date of his death if not otherwise allowable
with respect to such period or a prior period,
regardless of the fact that the decedent was
required to keep his books and make his
returns on the basis of cash receipts and
disbursements. (See also Section 76 of these
regulations.)
(Section 41 of the Code)
SECTION 172.Change of accounting period.
— If a corporation, including a duly registered
general co-partnership, desires to change its
accounting period from fiscal year to calendar
year or from calendar year to fiscal year, or
from one fiscal year to another, it shall at any
time not less than thirty days prior to the date
fixed in Section 46(b) of the Code for the filing
of its return on the basis of its original
accounting period submit a written application
to the Commissioner of Internal Revenue
designating the proposed date for the closing
of its new taxable year, together with a
statement of the date on which the books of
account were opened and closed each year
for the past three years, the date on which the
(Section 40 of the Code)
SECTION 171."Paid or incurred" and "paid or
accrued". — (a) The terms "paid or incurred"
and "paid or accrued" will be construed
according to the method of accounting upon
the basis of which the net income is computed
by the taxpayer. The deductions and credits
must be taken for the taxable year in which
"paid or accrued" or "paid or incurred", unless
in order clearly to reflect the income such
deductions or credits should be taken as of a
different period. If a taxpayer desires to claim
a deduction or a credit as of a period other
than the period in which it was "paid or
accrued" or "paid or incurred", he shall attach
to his return a statement setting forth his
request for consideration of the case by the
Commissioner of Internal Revenue together
with a complete statement of the facts upon
which he relies. However, in his income tax
return he shall take the deduction or credit
only for the taxable period in which it was
actually "paid or incurred", or "paid or
accrued", as the case may be.
Upon the audit of the return, the
Commissioner of Internal Revenue will
decide whether the case is within the
exception provided by the law, and the
taxpayer will be advised as to the period for
which the deduction or credit is properly
allowable.
taxable year began and ended as shown on
the returns filed for the past three years, and
the reasons why the change in accounting
period is desired. (See also Section 46(d) of
the Code.)
(Section 42 of the Code)
SECTION 173.Returns for periods of less than
twelve months. — No return can be made for a
period of more than twelve months. A separate
return for a fractional part of a year is therefore
required whenever there is a change, with the
approval of the Commissioner of Internal
Revenue, in the basis of computing net income
from one taxable year to another taxable year.
The periods to be covered by such separate
returns in the several cases are stated in
Section 42(a). The requirements with respect
to the filing of a separate return and the
payment of tax for a part of a year are the
same as for the filing of a return and the
payment of tax for a full taxable year closing at
the same time. DAETcC (Section 43 of the
Code)
SECTION 174.Sale of personal property on
installment plan. — Dealers in personal
property ordinarily sell either for cash or on
the personal credit of the purchaser or on
the installment plan. Dealers who sell on the
installment plan usually adopt one of four
ways of protecting themselves in case of
Page 32 of
default —
The income from a casual sale or other casual
(a) By an agreement that title is to
disposition of personal property (other than
remain in the vendor until the
property of a kind which should properly be
purchaser has completely performed
included in inventory) may be reported on the
his part of the transaction;
installment basis only if
(b) By a form of contract in which title is
(1) the sale price exceeds P1,000 and (2) the
conveyed to the purchaser immediately, but
initial payments do not exceed 25 per cent of
subject to a lien for the unpaid portion of the
the selling price.
selling price;
(c) By a present transfer of title to the
If for any reason the purchaser defaults in any
purchaser, who at the same time executes a
of his payments, and the vendor returning
reconveyance in the form of a chattel
income on the installment basis repossesses
mortgage to the vendor; or
the property sold whether title thereto had
(d) By conveyance to a trustee pending
been retained by the vendor or transferred to
performance of the contract and subject to its
the purchaser, gain or loss for the year in
provisions. The general purpose and effect
which the repossession occurs is to be
being the same in all of these cases, the same
computed upon any installment obligations of
rule is uniformly applicable. The general rule
the purchaser which are satisfied or
prescribed is that a person who regularly sells
discharged upon the repossession or are
or otherwise disposes of personal property on
applied by the vendor to the purchase or bid
the installment plan, whether or not title
price of the property. Such gain or loss is to be
remains in the vendor until the property is fully
measured by the difference between the fair
paid for, may return as income therefrom in
market value of the property repossessed and
any taxable year that proportion of the
the basis in the hands of the vendor of the
installment payments actually received in that
obligations of the purchaser which are so
year which the total or gross profit (that is,
satisfied, discharged, or applied, with proper
sales less cost of goods sold) realized or to be
adjustment for any other amounts realized or
realized when the property is paid for, bears to
costs incurred in connection with the
the total contract price. Thus the income of a
repossession. The basis in the hands of the
dealer in personal property on the installment
vendor of the obligations of the purchaser
plan may be ascertained by taking as income
satisfied, discharged, or applied upon the
that proportion of the total payments received
repossession of the property shall be the
in the taxable year from installment sales (such
excess of the face value of such obligations
payments being allocated to the year against
over an amount equal to the income which
the sales of which they apply) which the total
would be returnable were the obligations paid
or gross profit realized or to be realized on the
in full. No deduction for a bad debt shall in any
total installment sales made during each year
case be taken on account of any portion of the
bears to the total contract price of all such
obligations of the purchaser which are treated
sales made during that respective year. No
by the vendor as not having been satisfied,
payments received in the taxable year shall be
discharged, or applied upon the repossession,
excluded in computing the amount of income
unless it is clearly shown that after the
to be returned on the ground that they were
property was repossessed the purchaser
received under a sale the total profit from
remained liable for such portion; and in no
which was returned as income during a taxable
event shall the amount of the deduction
year or years prior to the change by the
exceed the basis in the hands of the vendor of
taxpayer to the installment basis of returning
the portion of the obligations with respect to
income. Deductible items are not to be
which the purchaser remained liable after the
allocated to the years in which the profits from
repossession. If the property repossessed is
the sales of a particular year are to be returned
bid in by the vendor at a lawful public auction
as income, but must be deducted for the
or judicial sale, the fair market value of the
taxable year in which the items are "paid or
property shall be presumed to be the
incurred" or "paid or accrued", as provided by
purchase or bid price thereof in the absence of
Section 40 and 84(q) of the Code. A dealer
clear and convincing proof to the contrary. The
who desires to compute his income on the
property repossessed shall be carried on the
installment basis shall maintain books of
books of the vendor at its fair market value at
account in such a manner as to enable an
the time of the repossession.
accurate computation to be made on such
basis in accordance with the provisions of this If the vendor chooses as a matter of consistent
section. practice to return the income from installment
sales on the straight accrual or cash receipts
and disbursement basis, such a course is
permissible.
SECTION 175.Sale of real property involving
Revenue Regulations 02-40
deferred payments. — Under Section 43
deferred- payment sales of real property
include (a) agreements to purchase and sale
which contemplate that a conveyance is not
to be made at the outset, but only after all or
a substantial portion of the selling price has
been paid, and (b) sales in which there is an
immediate transfer of title, the vendor being
protected by a mortgage or other lien as to
deferred payments. Such sales either under
(a) or (b), fall into two classes when
considered with respect to the terms of sale,
as follows:
(1) Sales of property on the installment
plan, that is, sales in which the payments
received in cash or property other than
evidences of indebtedness of the purchaser
during the taxable year in which the sale is
made do not exceed 25 per cent of the selling
price.
(2) Deferred-payment sales not on the
installment plan, that is sales in which the
payments received in cash or property other
than evidences of indebtedness of the
purchaser during the taxable year in which
the sale is made exceed 25 per cent of the
selling price.
In the sale of mortgaged property the amount
of the mortgage, whether the property is
merely taken subject to the mortgage or
whether the mortgage is assumed by the
purchaser, shall be included as a part of the
"selling price" but the amount of the
mortgage, to the extent that it does not
proportion of the installment payments
actually received in that year which the total
profit realized or to be realized when the
property is paid for bears to the total
contract price.
If the purchaser defaults in any of his
payments, and the vendor returning income on
the installment basis reacquires the property
sold, whether title thereto had been retained
by the vendor or transferred to the purchaser,
gain or loss for the year in which the
reacquisition occurs is to be computed upon
any installment obligations of the purchaser
which are satisfied or discharged upon the
reacquisition or are applied by the vendor to
the purchase or bid price of the property. Such
gain or loss is to be measured by the
difference between the fair market value of the
property acquired (including the fair market
value of any fixed improvements placed on the
property by the purchaser) and the basis in the
hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged,
or applied, with proper adjustment for any
other amounts realized or costs incurred in
connection with the reacquisition. The basis in
the hands of the vendor of the obligations of
exceed the basis to the vendor of the
property sold, shall not be considered as a
part of the "initial payments" or of the "total
contract price", as those terms are used in
Section 43 of the Code, in Sections 174 and
176 of these regulations, and in this section.
The term "initial payments" does not include
amounts received by the vendor in the year of
sale from the disposition to a third person of
notes given by the vendee as part of the
purchase price which are due and payable in
subsequent years. Commissions and other
selling expenses paid or incurred by the
vendor are not to be deducted or taken into
account in determining the amount of the
"initial payments," the "total contract price", or
"the selling price". The term "initial payments"
contemplates at least one other payment in
addition to the initial payment. If the entire
purchase price is to be paid in a lump sum in
a later year, there being no payment during
the first year, the income may not be returned
on the installment basis. Income may not be
returned on the installment basis where no
payment in cash or property, other than
evidences of indebtedness of the purchaser,
is received during the first year, the purchaser
having promised to make two or more
payments, in later years.
SECTION 176.Sale of real property on
installment plan. — In transactions included in
class (1) in the preceding section the vendor
may return as income from such transactions
in any taxable year that
the purchaser satisfied, discharged, or applied
upon the reacquisition of the property will be
the excess of the face value of such
obligations over an amount equal to the
income which would be returnable were the
obligations paid in full. No deduction for a bad
debt shall in any case be taken on account of
any portion of the obligations of the purchaser
which are treated by the vendor as not having
been satisfied, discharged, or applied upon the
reacquisition of the property, unless it is clearly
shown that after the property was reacquired
the purchaser remained liable for such portion;
and in no event shall the amount of the
deduction exceed the basis in the hands of the
vendor of the portion of the obligations with
respect to which the purchaser remained liable
after the acquisition. If the property reacquired
is bid in by the vendor at a foreclosure sale,
the fair market value of the property shall be
presumed to be the purchase or bid price
thereof in the absence of clear and convincing
proof to the contrary. If the property reacquired
is subsequently sold, the basis for determining
gain or loss is the fair market value of the
property at the date of reacquisition (including
the fair market value of any fixed
improvements placed on the property by the
Page 33 of
purchaser). gain or loss is the fair market value of the
If the vendor chooses as a matter of property at the date of reacquisition including
consistent practice to turn the income from the fair market value of the fixed improvements
installment sales on the straight accrual or placed on the property by the purchaser.
cash receipts and disbursements basis, such
a course is permissible, and the sales will be SECTION 178.Sale of real estate in lots. —
treated as deferred-payment sales not on the Where a tract of land is purchased with a view
installment plan. to dividing it into lots or parcels of ground to be
sold as such, the entire fair market value as of
SECTION 177.Deferred-payment sale of real March 1, 1913, or the cost, if acquired
property not on installment plan. — In subsequently to that date, shall be equitably
transactions included in class (2) in Section apportioned to the several lots or
175 of these regulations, the obligations of
the purchaser received by the vendor are to
be considered as the equivalent of cash.
If the vendor has retained title to the property
and the purchaser defaults in any of his
payments, and the vendor repossesses the
property, the difference between (1) the entire
amount of the payments actually received on
the contract and retained by the vendor plus
the fair-market value at the time of
repossession of fixed improvements placed on
the property by the purchaser and (2) the sum
of the profits previously returned as income in
connection therewith and an amount
representing what would have been a proper
adjustment for exhaustion, wear and tear,
obsolescence, amortization, and depletion of
the property during the period the property was
in the hands of the purchaser had the sale not
been made will constitute gain or loss, as the
case may be to the vendor for the year in
which the property is repossessed, and the
basis of the property in the hands of the vendor
will be the original basis at the time of the sale
plus the fair market value at the time of
repossession, of fixed improvements placed on
the property by the purchaser. If the vendor
has previously transferred title to the
purchaser, and the purchaser defaults in any of
his payments and the vendor reacquired the
property, such reacquisition shall be regarded
as a transfer by the vendor, in exchange for
the property for such of the purchaser's
obligations as are applied by the vendor to the
purchase or bid price of the property. Such an
exchange will be regarded as having resulted
in the realization by the vendor of gain or loss,
as the case may be for the year of
reacquisition, measured by the difference
between the fair market value of the property
including fixed improvements placed by the
purchaser on the property, and the amount of
the obligations of the purchaser which were
applied by the vendor to the purchase or bid
price of the property. The fair market value of
the property reacquired shall be presumed to
be the amount for which it is bid in by the
vendor in the absence of clear and convincing
proof to the contrary. If the property reacquired
is subsequently sold the basis for determining
Revenue Regulations 02-40
parcels and made a matter of record on the
books of the taxpayer, to the end that any
gain derived from the sale of any such lots
or parcels may be returned as income for
the year in which the sale was made. This
rule contemplates that there will be a
measure of gain or loss on every lot or
parcel sold, and not that the capital invested
in the entire tract shall be extinguished
before any taxable income shall be
returned. The sale of each lot or parcel will
be treated as a separate transaction and
the gain or loss will be accounted for
accordingly.
SECTION 178(a). In all cases where a
taxpayer sells during the year real or
personal property on the installment basis,
there should be attached to the income tax
return a statement of each sale made
during the year containing the following
information:
(a) Name of buyer
(b) Address of buyer
(c) Date of sale
(d) Selling price
(e) Payments received during the year
corresponding to each sale.
(This new section has been inserted in
Revenue Regulations No. 2 by Revenue
Regulations No. 8-65 dated June 1, 1965.
Took effect upon their promulgation in the
Official Gazette on September 27, 1965).
(Section 44 of the Code)
SECTION 179.Determination of the taxable net
income of a controlled taxpayer. — (A)
DEFINITIONS.
— When used in this section —
(1) The term "organization" includes any
organization of any kind, whether it be a
sole proprietorship, a partnership, a trust,
an estate, or a corporation or association,
irrespective of the place where organized,
where operated, or where its trade or
business is conducted, and regardless of
whether domestic or foreign, whether
exempt or taxable, or whether affiliated or
not.
(2) The terms "trade" or "business"
include any trade or business activity of any
kind, regardless of whether or where
organized, whether owned individually or
otherwise, and regardless of the place
where carried on.
(3) The term "controlled" includes any kind
of control, direct or indirect, whether legally
enforceable, and however exercisable or
exercised. It is the reality of the control
which is decisive, not its form or the mode of
its exercise. A presumption of control arises
if income or deductions have been arbitrarily
shifted.
(4) The term "controlled taxpayer"
means any one of two or more
organizations, trades, or
businesses owned or controlled
directly or indirectly by the same
interests. aCHDST
(5) The terms "group" and "group of
controlled taxpayers" mean the
organizations, trades, or businesses
owned or controlled by the same
interests.
(6) The term "true net income" means, in the
case of a controlled taxpayer, the net income
(or, as the case may be, any item or element
affecting net income) which would have
resulted to the controlled taxpayer, had it in
the conduct of its affairs (or, as the case may
be, in the particular contract, transaction,
arrangement, or other act) dealt with the other
member or members of the group at arm's
length. It does not mean the income, the
deductions, or the item or element of either,
resulting to the controlled taxpayer by reason
of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the
interests controlling it, chose to make (even
though such contract, transaction, or
arrangement be legally binding upon the
parties thereto).
(b) SCOPE AND PURPOSE. — The
purpose of Section 44 is to place a controlled
taxpayer on a tax parity with an uncontrolled
taxpayer, by determining, according to the
standard of an uncontrolled taxpayer, the true
net income from the property and business of
a controlled taxpayer. The interests
controlling a group of controlled taxpayers are
assumed to have complete power to cause
each controlled taxpayer so to conduct its
affairs that its transactions and accounting
record truly reflect the net income from the
property and business of each of the
controlled taxpayers. If, however, this has not
been done, and the taxable net incomes are
thereby understated, the statute contemplates
that the Commissioner of Internal Revenue
shall intervene, and, by making such
distributions, apportionments, or allocations
as he may deem necessary of gross income
or deductions, or of any item or element
affecting net income, between/or among the
controlled taxpayers constituting the group,
shall determine the true net income of each
controlled taxpayer dealing at arm's length
with another uncontrolled taxpayer. The
standard to be applied in every case is that of
an uncontrolled taxpayer. Section 44 grants
no right to a controlled taxpayer to apply its
provisions at will, nor does it grant any right to
compel the Commissioner of Internal
Revenue to apply such provisions.
(c) APPLICATION. — Transactions between
the controlled taxpayer and another will be
subjected to special scrutiny to ascertain
whether the common control is being used to
reduce, avoid, or escape taxes. In determining
the true net income of a controlled taxpayer,
the Commissioner of Internal Revenue is not
restricted to the case of improper accounting,
to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed
to reduce or avoid tax by shifting or distorting
income or deductions. The authority to
determine true net income extends to any case
in which either by inadvertence or design the
taxable net income in whole or in part, of a
controlled taxpayer, is other than it would have
been had the taxpayer in the conduct of his
affairs been an uncontrolled taxpayer dealing
at arm's length with another uncontrolled
taxpayer.
(Section 45 of the Code)
SECTION 180.Individual returns. — Returns, in
duplicate, are required of: (a) Every citizen or
resident alien having a gross income of P1,800
or more for the taxable year; (b) every non-
resident alien having income from sources
within the Philippines irrespective of amount;
and (c) guardians, trustees, executors,
administrators, receivers, conservators, and all
others acting in any fiduciary capacity, when,
for the taxable year, the gross income of the
person, trust, or estate for whom or which they
act reaches P1,800. (See Section 214 of these
regulations.)
For each calendar year, every person whether
married or single, having a gross income from
all sources of P1,800 or over, including
dividends, excepting stock dividends, must
make a return of income although the tax has
been paid at source and the return shows no
tax liability. Whether or not an individual is the
head of a family or has dependents is
immaterial in determining his liability to render
a return. The husband shall include in his
return the income derived not only from his
services, labor, or industry or the income
derived from the conjugal partnership but also
the income of the wife derived from her
industry or labor as well as that derived from
her separate, data, or paraphernal property.
Where, however, the filing of one consolidated
return is impracticable, married persons may
file separate returns but the incomes declared
in such returns will be consolidated and the tax
computed on such consolidated income.
The law requires that the income of unmarried
minors derived from property received from a
living parent shall be included in the return of
the parent, except (1) when the gift tax
imposed under Chapter II of Title III of the
Code has been paid on such property, or (2)
Page 34 of
where the transfer of such property is exempt
from the gift tax.
A signature affixed to a return is presumed to be
genuine.
SECTION 181.When and where to file
individual returns. — The return must be filed
with the Commissioner of Internal Revenue,
provincial revenue agent, or treasurer of the
province, city or municipality in which the
taxpayer has his legal residence or principal
place of business, on or before April 15th of
the year following that for which the return is
filed.
When the last due date for filing return falls on
Sunday or a legal holiday, the last due date will
be held to be the day following such Sunday or
legal holiday, or if placed on the mails, it should
be posted in ample time to reach the
Commissioner of Internal Revenue, provincial
revenue agent or treasurer of the province, city,
or municipality in which the taxpayer has his
legal residence or principal place of business,
under ordinary handling of mail, on or before the
date on which the return is required to be filed.
When question is raised as to whether or not the
return was posted in ample time to reach the
proper official, the envelope in which the return
was transmitted and the return should be
submitted to the Commissioner of Internal
Revenue with such comment and
recommendation as the receiving officer may
consider proper to make.
SECTION 182.Persons under disability. — If
the taxpayer is unable to make his own return,
on account of minority, illness, absence or non-
residence, the return may be made by his duly
authorized agent or representative or by the
guardian or other person charged with the care
of his person or property, the principal and his
representative or guardian assuming the
responsibility of making the return and incurring
penalties provided for erroneous, false, or
fraudulent returns.
SECTION 183.Form of return. — Individual
returns shall be prepared on B.I.R. Form No.
17.01. The forms may be had from the office
of the Commissioner of Internal Revenue in
Manila, or in the office of the provincial
treasurers or their deputies.
A taxpayer will not be excused from making
a return by the fact that no return form has
been furnished him. Taxpayers not supplied
with the proper forms should make
application therefor to the
Revenue Regulations 02-40
Commissioner of Internal Revenue or to the
provincial treasurers, or their deputies in
ample time to have their returns prepared,
verified, and filed with the proper official on
or before the due date. Each taxpayer
should carefully prepare his return so as to
fully and clearly set forth the data therein
called for. Imperfect or incorrect returns will
not be accepted as meeting the
requirements of the statute. (There are now
BIR Provincial Revenue Officers.)
(Section 46 of the Code)
SECTION 184.Corporation returns. —
Corporations are required to make returns of
income in duplicate, regardless of the amount
of their net income.
A corporation claiming exemption from tax
and from the filing of returns must establish
its right to exemption in accordance with the
procedure set forth in Section 24 of these
regulations, otherwise it will be amenable to
the penalties for failure to file returns.
In the case of ordinary corporations,
partnerships, and joint accounts (cuentas en
participacion), the return shall be on the
form prescribed for corporations (B.I.R Form
No. 17.02), and the returns of insurance
companies, on the prescribed form (B.I.R.
Form No. 17.03). A corporation having an
existence during any portion of a taxable
year is required to make a return. A
corporation which has received a charter,
but has never perfected its organization, and
which has transacted no business and had
no income from any source, may upon
presentation of the facts to the
Commissioner of Internal Revenue be
relieved from the necessity of making a
return so long as it remains in an
unorganized condition. In the absence of a
proper showing to the Commissioner of
Internal Revenue such corporation must file
the necessary return.
A corporation desiring to change its
accounting period from calendar year to
fiscal year must comply with the procedure
set forth in Section 172 of these regulations
relative to the change in accounting period
of corporations.
SECTION 185.Returns of insurance
companies. — Insurance companies
transacting business in the Philippines or
deriving income from sources therein are
required to file returns of income. The return
shall be made on the prescribed form (B.I.R.
Form No. 17.03).
corporation are suspended and that the
SECTION 186.Returns of foreign
corporations. — Every foreign corporation
having income from sources within the
Philippines must make a return of income
on the form prescribed for corporation
(B.I.R. Form No. 17.02). If such a
corporation has no office or place of
business in this country, but has a resident
agent therein, the latter shall make the
return. Although the foreign corporation is
not engaged in business in this country and
has no office, branch, or agency in the
Philippines, it is required to make a return if
it has received income from sources within
the Philippines.
SECTION 187.Time and place for filing
corporate returns. — Returns of corporations,
associations, or partnerships must be filed on
or before the fifteenth day of April in each
year or on or before the 15th day of the fourth
month following the close of a duly
designated fiscal year. The return, if placed in
the mails, should be posted in ample time to
reach the Commissioner of Internal Revenue,
provincial, revenue agent, or treasurer of the
province, city or municipality in which is
located the principal office of the corporation
where its books of account and other data are
kept, on or before the last due date for the
filing of the return. When the last due date
falls on Sunday or a legal holiday, the returns
may be filed without penalty on the next
succeeding business day. (Conforms with
Am. by R.A. 2343.) (Section 47 of the Code)
SECTION 188.Extension of time for filing
returns. — The Commissioner of Internal
Revenue may, in meritorious cases, grant a
reasonable extension of time for filing returns
of income. Requests for such extension of
time must be submitted before the last day of
the period for filing returns. Absence or
sickness is considered as reasonable cause,
whereas, inability to close the books or to
gather information required due to various
circumstances will be subject to careful
investigations before the request for extension
is favorably considered.
(Section 48 of the Code)
SECTION 189.Returns by receiver. —
Receivers, trustees in dissolution, trustees in
bankruptcy, and assignees, operating the
property or business of corporations,
partnerships, or associations must make
returns of income for such corporations,
partnerships or associations covering each
year or part of the year during which they are
in control. Notwithstanding that the powers
and functions of a
property and business are for the time being in
the custody of the receiver, trustee, or
assignee, subject to the order of the court,
such receiver, trustee, or assignee stands in
the place of the corporate officers and is
required to perform all the duties and assume
all the liabilities which would devolve upon the
officers of the corporation were they in control.
A receiver in charge of only part of the property
of a corporation, however, as a receiver in
mortgage foreclosure proceedings involving
merely a small portion of its property, need not
make a return of income. (Section 49 of the
Code)
SECTION 190.Returns of duly registered
general co-partnerships. — Duly
registered general copartnerships are
required to render, in duplicate, a return
of their earnings, profits and income,
setting forth the items of the gross income
and the deductions allowable, and the
names and addresses of the individuals
who would be entitled to the net earnings,
profits, and income, if distributed. (See
sections 22 and 23 of these regulations.)
(Section 50 of the Code)
SECTION 191.Verification of returns. — All
income tax returns must be verified by the
oath or affirmation of the person rendering
them. Oath may be taken before any officer
authorized to administer oaths or if desired,
before the Commissioner of Internal
Revenue or any internal-revenue officer
especially deputized by him or authorized by
law to administer oaths, free of charge.
SECTION 192.Discovery of understatement
of income. — If the amount of income
declared in a return has been found to be
understated, the Commissioner of Internal
Revenue or any internal- revenue officer shall
notify the taxpayer of such fact, and the
taxpayer may, if he so desires, under a sworn
statement, present testimony to the contrary
and disprove the findings made.
(Section 51 of the Code)
SECTION 193.Assessment of tax. — All
income tax returns filed with the provincial
revenue agents or with the treasurers of
provinces, cities, or municipalities must be
stamped with the date of their receipt and
immediately forwarded to the Commissioner of
Internal Revenue. All assessments of income
tax shall be made by the Commissioner of
Internal Revenue and all taxpayers shall be
notified of the amount for which they are
respectively liable on or before the first day of
May of each successive year. In the case of a
corporation filing returns on the basis of a fiscal
year, it shall be notified of the amount for which
it is liable on or before the first day of the fifth
Page 35 of
month following the close of its fiscal year. (See
changes made by R.A. 2343, effv. June 20,
1959, introducing here self assessment.)
SECTION 194.Payment of tax. — The total
amount of tax assessed shall be paid on or
before the fifteenth day of April following the
close of the calendar year by the person subject
to tax, and in the case of a corporation, by the
president, vice-president, or other responsible
officer thereof. In the case of corporations filing
returns on the basis of a fiscal year, the total
amount of tax shall be paid on or before the
fifteenth day of the fourth month following the
close of the fiscal year. (Conforms with
amendments by R.A. 2343, effv. June 20,
1959.)
Where the tax assessed against the taxpayer
is in excess of P500, the taxpayer may elect to
pay the tax in two equal installments. The first
installment shall be paid on or before the date
prescribed in section 51 (a) and the second
installment on or before the fifteenth day of
July following the close of the calendar year or
on or before the fifteenth day of the seventh
month following the close of the fiscal year, as
the case may be. Upon failure to pay any
installment on the date fixed for its payment,
the whole amount of the tax unpaid becomes
due and payable, together with the
delinquency penalties. (Conforms with
amendments by R.A. 2343, effv. June 20,
1959.)
SECTION 195.Commissioner's authority to
make returns. — In cases wherein taxpayers
have neglected or refused to make return, and
in cases wherein returns are found, upon
examination or otherwise, to be erroneous,
false, or fraudulent, the Commissioner of
Internal Revenue shall upon discovery
thereof, make a return upon the best evidence
obtainable, and the tax so discovered to be
due, together with the penalties prescribed,
shall be assessed and the amount thereof
shall be paid immediately upon notice and
demand.
SECTION 196.Surcharge and interest in case
of delinquency. — Upon failure to pay any tax
or installment thereof, of any deficiency tax,
when the same is due, a penalty of 5 per cent
of the amount of tax unpaid, and interest at the
rate of 1 per cent per month upon the said tax
from the time the
Revenue Regulations 02-40
same became due until paid, shall be
added to the amount of such tax. (See
Sec. 51(b) to (e) as amended by R.A.
2343, effv. June 20, 1959.)
(Section 52 of the Code)
SECTION 197.Receipts for income tax
payments. — It shall be the duty of the
collecting officer to acknowledge the
receipt of the payment of income tax due
from each taxpayer by issuing the
requisite Revenue Official Receipt (B.I.R.
Form No. 25.24).
(Section 53 of the Code)
SECTION 198.Withholding tax at source. —
Withholding is required (a) of a tax of 20 per
centum in the case of fixed or determinable
annual or periodical income, including
dividends or net gains or net profits received
from corporations, partnerships or
associations, payable to non-resident alien
individuals not engaged in trade or business
and not having an office or place of business
in the Philippines; and (b) of a tax of 20 per
centum in the case of interest upon bonds,
obligations or securities issued by domestic
or resident foreign corporations, containing a
so-called tax-free covenant clause, payable
either to citizens or aliens, residents or non-
residents, where the owner of such interest
income does not file with the withholding
agent a signed notice on B.I.R. Form No.
17.13 claiming the benefit of personal
exemption. Subject to the exception just
mentioned, withholding taxes takes place in
all cases of payments of interest upon tax-
free covenant bonds or other securities
regardless of the place where such bonds or
securities are issued or marketed and the
interest thereupon paid. Bonds issued under
a trust deed containing a tax-free covenant
are treated as if they contain such a
covenant.
SECTION 199.Fixed or determinable annual
or periodical income. — Only fixed or
determinable annual or periodical income is
subject to withholding. The statute
specifically includes in such income,
interests, dividends, rents, salaries, wages,
premiums, annuities, compensations,
remunerations, and emoluments, but other
kinds of income may be included, as for
instance, royalties.
Income is fixed when it is to be paid in
amounts definitely pre-determined. On
the other hand, it is determinable
whenever there is a basis of calculation
by which the amount to be paid may be
ascertained.
The income need not be paid annually if it is
paid periodically; that is to say, from time to
time, whether or not at regular intervals. That
the length of time during which the payments
are to be made may be increased or
diminished in accordance with some one's
will or with the happening of an event does
not make the payments any the less
determinable or periodical. A salesman
working by the month for a commission on
sales which is paid or credited monthly
receives determinable periodical income. The
income derived from the sale in the
Philippines of property whether real or
personal, is not fixed or determinable annual
or periodical income.
Dividends from every domestic corporation
are subject to the withholding provisions of
the law. Dividends from a foreign corporation
are subject to withholding if (1) such foreign
corporation is engaged in trade or business
within the Philippines or has an office or
place of business therein, and
(2) more than 85 per cent of its gross income
for the three-year period ending with the close
of its taxable year preceding the declaration of
such dividends (or for such part of such
period as the corporation has been in
existence) was derived from sources within
the Philippines. In case the owners of any
securities are not known to the withholding
agent, the latter should deduct and withhold a
tax of 20 per cent on the interest on such
securities.
SECTION 200.Payments to non-resident
alien individuals. — The law requires
withholding of the tax on income payable to a
non-resident alien individual not engaged in
trade or business in the Philippines and not
having an office or place of business therein.
A non-resident alien individual is presumed
not to be engaged in trade or business in the
Philippines and not to have an office or place
of business therein, unless the withholding
agent has definite knowledge that such
resident is engaged in trade or business in
the Philippines and of the name and address
of his resident agent in this country, or unless
the withholding agent definitely knows that
such non-resident has an office or place of
business in the Philippines and of the location
of such office or place of business. An
individual whose address is without the
Philippines is presumed to be a non-resident
alien, unless the withholding agent has
definite knowledge that such person is either
a citizen or a resident of the Philippines. An
individual whose address is within the
Philippines, may be presumed to be a
resident of the Philippines, unless the
withholding agent has reason to believe that
such individual, not being a citizen of the
Page 36 of
Philippines, has not established residence in this country.
municipality, must deduct and withhold such
taxes as would have been required to be
In case of doubt, a withholding agent may
withheld by the assignor had not such sales and
always protect himself by withholding the tax
transfer been made.
due, and promptly causing a query to be
addressed to the Commissioner of Internal
SECTION 203.Return and payment of tax
Revenue for the determination of whether or
withheld. — (a) Every withholding agent shall
not the income paid to an individual is not
make an annual return in duplicate, on B.I.R.
subject to withholding. In case the
Form No. 17.43 of the tax withheld from
Commissioner of Internal Revenue decides
interest on corporate bonds or other obligations
that the income paid to an individual is not
on or before the 15th day of April of each year
subject to withholding the withholding agent
for the preceding calendar year. (b) Every
may thereupon remit the amount of tax
person required to deduct and withhold any tax
withheld.
from income other than such bond interest
shall make an annual return thereon, in
SECTION 201.Exception from withholding. —
duplicate, on B.I.R. Form No. 17.43 on or
Withholding of a tax on interests upon bonds
before April 15 of each year for each non-
or other obligations containing a tax-free
resident alien individual not engaged in trade or
covenant clause shall not be required in the
business within the Philippines and not having
case of a citizen or resident alien individual if
any office or place of business therein, to
he files with the withholding agent when
whom income other than bond interest was
presenting interest coupons for payment, not
paid during the previous taxable year. The
later than February 1 following the taxable
entire amount of the income from which the tax
year, an ownership and exemption certificate
was withheld shall be included in gross income
on the requisite form (B.I.R. Form No. 17.13)
without deduction for such payment of the tax.
claiming a personal exemption or credits for
(Conforms with amendments by R.A. 2343,
dependents. The withholding agent shall
effv. June 20, 1959.)
forward such certificate to the Commissioner
of Internal Revenue with a letter of transmittal.
The tax due on withholding income tax returns
The income of domestic and resident foreign
are payable at the same time and in the same
corporations is free from withholding.
manner as taxes due on individual returns.
SECTION 202.Ownership certificates for
SECTION 204.Income of recipient. — Income
interest coupons. — The owners, except
upon which the tax is required to be withheld at
domestic and resident foreign corporations, of
source shall nevertheless be included in the
bonds or other obligations containing a tax-
return of the recipient of such income. However,
free covenants clause, issued by a domestic
the amount of tax withheld shall be credited
or resident foreign corporation, when
against the amount of income tax due on such
presenting interest coupons for payment, shall
return, and the amount, if any, by which the tax
file a certificate of ownership on B.I.R. Form
withheld at source exceeds the tax due on the
No. 17.13, for each issue of bonds, showing
return shall be refunded in accordance with the
the name and address of the debtor
provisions of Section 309 of the Code.
corporation, the name and address of the
(Section 54 of the Code)
owner of the bonds, the nature of the
obligations, the amount of interest and its due
SECTION 205.Withholding of tax on income of
date, and the amount of any tax withheld. In
nonresident foreign corporations, firms, etc. —
the case of corporate bonds or similar
All persons, corporations, partnerships, and
obligations not containing a tax-free covenant
associations, having the control, receipt,
clause, no ownership certificates are required.
custody, disposal, or payment of interest,
But ownership certificates are required in the
dividends, rents, salaries, wages, premiums,
case of such bonds if the owner is unknown to
annuities, compensations, remunerations,
the withholding agent. Ownership certificates
emoluments, or other fixed or determinable
need not be filed in the case of interest
annual or periodical gains, profits, and income
payments on bond or similar obligations of the
received or obtained from sources within the
United States or of the Government of the
Philippines by a non-resident alien firm,
Philippines or of any political subdivision
copartnership, corporation, association, trust
thereof.
company, trustee, and insurance company, not
engaged in business or trade within the
Where in connection with the sale of its
Philippines and not having an office or place of
property payment of the bonds or other
business therein, are
obligations of a corporation is assumed by the
assignee, such assignee, whether an individual,
partnership, corporation, province, city or
Revenue Regulations 02-40
required to withhold a tax of 30 per cent
thereon, file the requisite withholding return
on the prescribed form (B.I.R. Form No.
17.43), and pay the tax withheld, in
accordance with the provisions of sections
198 to 204 of these regulations. The
withholding provisions of the law are likewise
applicable to the income derived from interest
upon bonds, mortgages, or deeds of trust, or
other interest-bearing obligations of a
domestic or resident foreign corporation, firm
or association, whether or not the bonds and
other such obligations, or securities contain
the so-called tax-free covenant clause, and
regardless of the place where such bonds,
obligations, or securities are issued,
negotiated, or marketed and the interest
thereon paid, in case where such interest-
income is received or obtained by, or paid to,
a non-resident alien firm, corporation,
association, trust company, or trustee, not
engaged in business or trade within the
Philippines and not having an office or place
of business therein. (Conforms with
amendments by R.A. 2343, effv. June 20,
1959.)
A foreign corporation is presumed not to be
engaged in trade or business within the
Philippines and not to have office or place
of business therein, unless the withholding
agent has definite knowledge that such
foreign corporation is in fact engaged in
trade or business in the Philippines and of
the name and address of its resident agent,
or unless the withholding agent has definite
knowledge that such foreign corporation
has a branch office or business in this
country and of the location of such branch
office or place of business.
(Section 55 of the Code)
SECTION 206.Income tax not otherwise
collectible from taxpayer chargeable to his
representative. — It is the intent and purpose
of the law to charge and collect income tax
imposed under Title II of the Code on all
gains, profits, and income of a taxable class,
and the tax is required to be paid by the
owner of such gains, profits. and income or
by the proper representative having the
receipt, custody, control, or disposal of the
same. Thus, where a non-resident has
charged a resident, under a power of
attorney, to sell in his behalf property, real or
personal in the Philippines, the proper tax
due may be collected from the owner of the
gains or profits or from the representative
who had the receipt, custody, control or
disposal of such gains, profits, or income, as
the personal liability of such representative.
(Sections 56 to 60 of the Code)
SECTION 207.Estates and trusts. —
"Fiduciary" is a term which applies to all
persons or corporations that occupy positions
of peculiar confidence towards others, such
as trustees, executors, or administrators; and
a fiduciary, for income tax purposes, is any
person or corporation that holds in trust an
estate of another person or persons. In order
that a fiduciary relationship may exist, it is
necessary that a legal trust be created.
In general, the income of a trust for the
taxable year which is to be distributed to the
beneficiaries must be returned by and will be
taxed to the respective beneficiaries, but the
income of a trust which is to be accumulated
or held for future distribution, whether
consisting of ordinary income or gain from the
sale of assets included in the corpus of the
trust, must be returned by and will be taxed to
the trustee. Three exceptions to this general
rule are found in the law: (1) in the case of
revocable trust (Section 59); (2) in the case of
a trust the income of which, in whole or in
part, may be held or distributed for the benefit
of the grantor (Section 60); and (3) in the
case of a trust administered in a foreign
country [Section 57(c)]. In the first case, the
income from such part of the trust estate title
to which may be revested in the grantor
should be included in the grantor's return. In
the second case, part of the income of the
trust, which may be held or distributed for the
benefit of the grantor, should be included in
the grantor's return. In the third case, the
trustee is not entitled to the deductions
mentioned in subsections (a) and (b) of
Section 57 and the net income of the trust
undiminished by any amounts distributed,
paid or credited to beneficiaries will be taxed
to the trustees; however, the income included
in the return of the trustees is not to be
included in computing the income of the
beneficiaries.
SECTION 208.Consolidation of incomes of
two or more trusts. — Section 56(b)(2)
expressly requires the consolidation of the
income of two or more trusts where the
creator of the trust in each instance is the
same person and the beneficiary in each
instance is the same. The tax due on the
consolidated income will be collected from
the trustees in proportion to the net income of
the of the respective trusts. (See Section 215
of these regulations.)
SECTION 209.Estates and trusts taxed to
fiduciary. — In the case of a decedent's estate
the settlement of which is the object of
testamentary or intestate proceedings, the
fiduciary, executor, or
administrator is required to file an annual
return for the estate up to the final settlement
thereof. In the same manner, the fiduciary is
required to file a yearly return covering the
income of a trust, whether created by will or
deed, for accumulation of income, whether for
unascertained persons or persons with
contingent interests or otherwise. In both
cases the income of the estate or trust is taxed
to the fiduciary. Where under the terms of a
will or deed, the trustee, may in his discretion,
distribute the income or accumulate it, the
income is taxed to the trustee, irrespective of
the exercise of his discretion. The imposition
of the tax is not affected by the fact that an
ultimate beneficiary may be a person exempt
from tax.
SECTION 210.Estate and trust taxed to
beneficiaries. — In the case of (a) a trust the
income of which is to be distributed annually or
regularly; (b) an estate of a decedent the
settlement of which is not the object of judicial
testamentary or intestate proceedings; and (c)
properties held under a co-ownership or
tenancy in common, the income is taxable
directly to the beneficiary or beneficiaries. Each
beneficiary must include in his return his
distributive share of the net income of the trust,
estate, or co- ownership. In the case of trusts
which are in whole or in part subject to
revocation by the grantor, or which are for the
benefit of the grantor, the income of the trust is
to be included in computing the net income of
the grantor.
SECTION 211. Decedent's estate
administration. — The "period of
administration or settlement of the estate" is
the period required by the executor or
administrator to perform the ordinary duties
pertaining to administration, in particular, the
collection of assets and the payment of debts
and legacies. Estates during the period of
administration have but one beneficiary and
that beneficiary is the estate.
No taxable income is realized from the
passage of property to the executor or
administrator on the death of the decedent,
even though it may have appreciated in value
since the decedent acquired it. In the event of
delivery of property in kind to a legatee or
distributee, no income is realized. Where,
however, prior to the settlement of the estate,
the executor or administrator sells property of a
decedent's estate for more than the appraised
value placed upon it at the death of the
decedent, the excess is income, taxable to the
estate. Where property is sold after the
settlement of the estate by the devisee,
legatee or heir at a price greater than the
appraised value placed upon it at the time he
Page 37 of
inherited the property from the decedent, he is
taxable individually on any profit derived. An
allowance paid a widow or heir out of the
corpus of the estate is not deductible from
gross income.
SECTION 212.Liability for tax on estate or
trusts. — Liability for payment of the tax
attaches to the person of an executor or
administrator up to and after his discharge,
where prior to distribution and discharge he had
notice of his tax obligations or failed to exercise
due diligence in determining whether or not
such obligations existed. Liability for the tax
also follows the estate itself, and when the
estate has been distributed, the heirs, devisees,
legatees, and distributors may be required to
discharge the amount of the tax due and
unpaid, to the extent of and in proportion to any
share received. The same consideration apply
to other trusts. Where the tax has been paid on
the net income of an estate or trust by the
fiduciary, the net income on which the tax is
paid is free from tax when distributed to the
beneficiaries.
SECTION 213.Exemption allowed to estate or
trusts. — An estate or a trust is allowed a
personal exemption of P1,800. Each
beneficiary is entitled to but one personal
exemption, no matter from how many trusts he
may receive income.
(Section 61 of the Code)
SECTION 214.Fiduciary returns. — Fiduciaries
are required to make returns of income on
B.I.R. Form No. 17.01, in duplicate, when the
gross income of the person, trust, or estate for
whom or which they act amounts to P1,800 or
more and will be subject to all the provisions of
law which apply to individuals. A fiduciary
making return shall make oath that he has
sufficient knowledge of the affairs of the person
trust, or estate for whom or which he acts to
enable him to make such return, and that the
same is, to the best of his knowledge and
belief, true and correct. A return by one of two
or more joint fiduciaries in the form prescribed
filed in the municipality or city in which such
fiduciary resides shall be sufficient compliance
with the requirement for fiduciary returns.
A fiduciary acting as the guardian of a
minor or other incapacitated person must
make a return for such minor or
incapacitated person and pay the tax,
unless such minor or incapacitated person
Revenue Regulations 02-40
himself makes a return or cause it to be
made. The parent is held to be the
natural guardian of a minor child.
SECTION 215.Returns in case of two or
more trusts. — Where, in the case of more
than one trust, the creator of the trust in each
instance is the same person and the trustee
in each instance is the same but the
beneficiaries are different, the trustee should
make a separate return for each of the trusts
in his hands. When a trustee holds trust
created by different persons for the benefit of
the same beneficiary, he should also make a
return for each trust separately. But where a
person creates two or more trusts in favor of
the same beneficiary [Section 56(b) (2)]
appointing two or more trustees, the latter
should each make a separate return for each
trust but in such case the Commissioner of
Internal Revenue will consolidate the net
incomes of the different trusts and compute
the tax on such consolidated income,
allowing only one absolute exemption of
1,800.
SECTION 216.Return by receiver. — A
receiver who stands in the place of an
individual or corporation must render a return
of income and pay the tax for his trust, but a
receiver of only part of the property of an
individual or corporation need not. If the
receiver acts for an individual the return shall
be on B.I.R. Form No. 17.01. When acting
for a corporation a receiver is not treated as
a fiduciary, and in such case the return shall
be made, as if by the corporation itself, on
B.I.R. Form No. 17.02.
(Section 62 of the Code)
SECTION 217.Fiduciaries indemnified
against claims for taxes paid. — Fiduciaries
are indemnified against the claims or
demands of every beneficiary for all
payments of taxes which they shall be
required to make and they shall have credit
for such payments in any accounting which
they make as such fiduciaries.
(Section 63 of the Code)
SECTION 218.Tax on personal holding
companies. — Section 63 imposes for such
taxable year beginning after December 31,
1938 (in addition to the tax imposed by
Section 24 of the Code), a tax upon
corporations classified as personal holding
companies. Corporations so classified are
exempt from the additional tax on corporation
improperly accumulating surplus imposed by
(1) A taxable year has intervened since
the last taxable year for which it
was so classified, during no part of
the last half of which the stock
Section 25, but are not exempt from the other
taxes imposed by Title II of the Code. Unlike
the tax imposed by Section 25, the tax
imposed by Section 63 applies to all personal
holding companies defined as such in Section
64, regardless of whether or not they were
formed or availed of to accumulate earnings
or profits for the purpose of avoiding the tax
upon shareholders. The tax imposed by
Section 63 is 45 per cent of the amount of the
undistributed net income.
A foreign corporation, whether resident or
non-resident, which is classified as a
personal holding company under Section
64 (not including a foreign personal holding
company as defined in Section
67) is subject to the tax imposed by Section
63 with respect to its income from sources
within the Philippines. The term "personal
holding company" as used in Chapter VIII of
Title II of the Code does not include a foreign
corporation if (1) its gross income from
sources within the Philippines for the period
specified in Section 37(a) (2) (B) is less than
50 per cent of its total gross income from all
sources and (2) all of its stock outstanding
during the last half of the taxable year is
owned by nonresident alien individuals,
whether directly or indirectly through other
foreign corporations. (Section 64 of the
Code)
SECTION 219.Definition of personal
holding company. — A personal holding
company is any corporation (other than a
corporation specified in section 64(b) which
for the taxable year meets (a) the gross
income requirement specified in Section
220 of these regulations, and (b) the stock
ownership requirement specified in Section
221 of these regulations. Both
requirements must be satisfied and both
must be met with respect to each taxable
year.
SECTION 220.Gross income requirement. —
To meet the gross income requirement, it is
necessary that either of the following
percentages of gross income of the
corporation for the taxable year be personal
holding company income as defined in
Section 65:
(a) Eighty per cent or more; or
(b) Seventy per cent or more if the
corporation has been classified as a
personal holding company for any
taxable year beginning after December
31, 1938, unless —
ownership requirement specified in
Section 64(a) (2) exists; or
(2) Three consecutive years have
intervened since the last taxable
year for which it was so classified,
during each of which its personal
holding company income was less
than 70 per cent of its gross
income.
In determining whether the personal holding
company income is equal to the required
percentage of the total gross income, the
determination must not be made upon the
basis of gross receipts, since gross income is
not synonymous with gross receipts. For a
further discussion of what constitutes "gross
income", see Section 29 of the Code and the
regulations prescribed under that section.
SECTION 221.Stock ownership requirements.
— To meet the stock ownership requirement,
it is necessary that at some time during the
last half of the taxable year more than 50 per
cent it value of the outstanding stock of the
corporation be owned, directly or indirectly, by
or for not more than five individuals: For such
purpose, the ownership of the stock must be
determined as provided in Section 66.
In the event of any change in the stock
outstanding during the last half of the taxable
year, whether in the number of shares or
classes of stock, or whether in the ownership
thereof, the conditions existing immediately
prior .and subsequent to each change must
be taken into consideration.
In determining whether the statutory
conditions with respect to stock ownership
are present at any time during the last half of
the taxable year, the phrase "in value" shall,
in the light of all the circumstances, be
deemed the value of the corporate stock
outstanding at such time (not including
treasury stock). This value may be
determined upon the basis of the company's
net worth, earning and dividend paying
capacity, appreciation of assets, together with
such other factors as have a bearing upon
the value of the stock. If the value of the stock
is greatly at variance with that reflected by the
corporate books the evidence of such value
should be filed with the return. In any case
where there are two or more classes of stock
outstanding, the total value of the stock
should be allocated among the different
classes according to the relative value of
each class therein.
The rules stated in the last two preceding
paragraphs are equally applicable in
determining the stock ownership requirement
specified in Section 65(e); relating to personal
service contracts and Section 65(f), relating to
the use of corporation property by a
shareholder. The stock ownership
Page 38 of
requirement specified in these sections
relates, however, to the stock outstanding at
anytime during the entire taxable year and not
merely during the last half thereof.
(Section 65 of the Code)
SECTION 222.Personal holding company
income. — The term "personal holding
company income" means the portion of the
gross income which consists of the following:
(1) DIVIDENDS. — The term "dividends"
includes dividends as defined in Section 83
(a), and amounts required to be included in
gross income under Section 69 (b) of this
Code. It does not include stock dividends (to
the extent that they do not constitute income
to the shareholders with the meaning of
Section 83(b) of the Code) and liquidating
dividends.
(2) INTEREST (other than interest
constituting rent). — The term "interest"
means any amount, includible in gross
income, received for the use of money
loaned except that it does not include
interest constituting rent [see
subparagraph (1)].
(3) ROYALTIES (other than mineral, oil, or
gas royalties). — The term "royalties" include
amounts received for the privilege of using
patents, copyrights, secret processes and
formulas, good will, trade marks, trade brands,
franchises, and other like property. It does not
include rents, or overriding royalties received
by an operating company. As used in this
paragraph the term "overriding royalties"
means amounts received from the sublease by
the operating company which originally leased
and developed the natural resources property
in respect of which such overriding royalties
are paid.
(4) ANNUITIES. — The term
"annuities" includes annuities only to the
extent includible in the computation of
gross income. [See Section 29(b) (2)].
(5) GAINS FROM THE SALE OR
EXCHANGE OF STOCK OR SECURITIES. —
The term "gains from the sale or exchange of
stock or securities" as used in Section 65(b)
applies to all gains (including gains from
liquidation dividends and other distributions
from capital) from the sale or exchange of stock
or securities includible in gross income. The
term "stock or securities" as used in Section
65(b) includes shares or certificates of stock, or
interest in any corporation (including any joint
Revenue Regulations 02-40
stock company, insurance, company
association, or other organization classified as
a corporation under Title II) certificates of
interest or participation in mineral royalty, or
leave, collateral trust certificates, voting trust
certificates, stock rights or warrants, bonds,
debentures, certificates of indebtedness,
notes, car trusts certificates, bills of exchange,
obligations issued by or on behalf of a
Government, State, Territory, or political
subdivision thereof. In the case of "regular
dealers in stock or securities" the term does
not include gains derived from the sale or
exchange of stock or securities made in the
normal course of business. The term "regular
dealer in stock or securities" means
corporations with an established place of
business regularly engaged in the purchases
of stock or securities and their resale to
customers, but such corporations are not
dealers with respect to stock or securities held
for speculation or investment.
(6) GAINS FROM FUTURES
TRANSACTIONS IN COMMODITIES. —
Gains from futures transactions in
commodities include gains from futures
transactions in any commodity on or subject
to the rules of a board of trade or commodity
exchange, but do not include gains from cash
transactions or gains by a producer,
processor, merchant, or handler of the
commodity, which arise out of bonafide
hedging transactions reasonably necessary
to the conduct of its business in the manner
in which such business is customarily and
usually conducted by others. In general,
personal holding company income includes
gains on futures contracts which are
speculative. Futures contracts representing
true hedges against price fluctuations in spot
goods are not speculative transactions,
though not concurrent with spot transactions.
Futures contracts which are not hedges
against spot transactions are speculative
unless they are hedges against concurrent
futures or forward sales or purchases.
(7) INCOME FROM ESTATES AND
TRUSTS. — The income from estates and
trusts which is to be included in personal
holding company income consists of the
income from estates and trusts which is
required to be included in the gross income
of the corporation under Section 29 in
relation to Section 56 of the Code, together
with the gains derived by the corporation
from the sale or other disposition of any
interest in an estate or trust.
(8) AMOUNTS RECEIVED UNDER
PERSONAL SERVICE CONTRACTS. —
Amounts includible in personal holding
company income as amount received under
personal service contracts consist of
amounts received pursuant to a contract
Page 39 of
under which the corporation is to furnish for the use of, or the right to use, property of property, whether such right is obtained
personal services, and amounts received the corporation in any case in which, at any directly from the corporation or by means of a
from a sale or other disposition of such a time during the taxable year 25 per cent or sublease or other arrangement. The property
contract, if — more in value of the outstanding stock of the may consist of a yacht, a city residence, a
(a) Some person other than the corporation is owned, directly or indirectly, by country house, or any other kind of property.
corporation has the right to designate (by or for an individual entitled to the use of the
name or by description) the individual who
(10) RENTS (including interest constituting (c) Compensation for the use of property
is to perform the services or if the individual
rent). — The rents which are to be included in constitutes personal holding company income
who is to perform the services is
personal holding company income consist of in so far as such determination is based on
designated (by name or by description) in
compensation, however, designated including the stock owner-ship requirement specified in
the contract; and
charter fees, etc., for the use of, or the right to Section 65(f), stock owned by an individual
(b) At some time during the taxable year 25
use, real property, or any other kind of includes stock constructively owned by him as
per cent or more in value of the outstanding
property and the interest on debts bowed to provided in Section 66. All forms and classes
stock of the corporation is owned, directly or
the corporation, to the extent such debts of stock, however denominated, which
indirectly, by or for the individual who has
represent the price for which real property represent the interests of shareholders,
performed, is to perform, or may be
held primarily for sale to customers in the members, or beneficiaries in the corporation
designated (by name or by description), as
ordinary course of its trade or business was shall be taken into consideration.
the one to perform such services. For this
sold or exchanged by the corporation, but do
purpose the stock ownership must be
not include amounts constituting personal SECTION 224.Stock not owned by individual.
determined as provided in Section 66 of the
holding company income under Section 65(f) — In determining the ownership of stock for
Code.
and paragraph (9) of this section. However, any of the purposes set forth in the preceding
The application of Section 65(e) may be
rents do not constitute personal holding section, stock owned, directly or indirectly, by
illustrated by the following examples: company income if constituting 50 per cent or or for a corporation, partnership, estate, or trust
Example (1): A, whose profession is that of more of the gross income of the corporation. shall be considered as being owned
an actor, owns all of the outstanding capital (II) MINERAL, OIL, OR GAS ROYALTIES. — proportionately by its shareholders, partners, or
stock of the M Corporation. The Corporation
The income from mineral, oil, or gas royalties beneficiaries. For example, if A and B, two
entered into a contract with A under which A
is to be included as personal holding company individuals, are the exclusive and equal
was to perform personal services for the
income, unless (A) the aggregate amount of beneficiaries of a trust or estate, and if such
person or persons whom the M Corporation
such royalties constitutes 50 percent or more trust or estate owns the entire capital stock of
might designate, in consideration of which A
of the gross income of the corporation for the the M Corporation, and if the M Corporation in
was to receive P10,000 a year from the M
taxable year and (B) the aggregate amount of turn owns the entire capital stock of the N
Corporation. The M Corporation entered into
deductions allowable for expenses under Corporation, then the stock of both the M
a contract with the O Corporation in which A
Section 30 (a) of the Code (other than Corporation and the N Corporation shall be
was designated to perform personal services
compensation for personal services rendered considered as being owned equally by A and B
for the O Corporation in consideration of
by the shareholders of the corporation) equals as the individuals owning the beneficial interest
which the O Corporation was to pay the M
15 per cent or more of the gross income of the therein.
Corporation P500,000 a year. The P500,000
corporation for the taxable year.
received by the M Corporation from the O
The term "mineral, oil, or gas royalties" means SECTION 225.Family and partnership
Corporation constitutes a personal holding
all royalties, except "overriding royalties", ownership. — In determining the ownership of
company income.
received from any interest in mineral, oil, or stock for any of the purposes set forth in
Example (2): The N Corporation, the entire
gas royalties. As used in this paragraph the Section 223 of these regulations, an individual
outstanding capital stock of which is owned
term "overriding royalties" means amounts shall be considered as owning the stock owned,
by four individuals, is engaged in
received from the sublease by the operating directly or indirectly, by or for his family or by or
engineering. The N Corporation entered into
company which originally leased and for his partner. For the purposes of such
a contract with the O Corporation to perform
developed the natural resources property in determination the family of an individual
engineering services for the O Corporation,
respect of which such overriding royalties are includes only his brothers and sisters (whether
in consideration of which the O Corporation
bid. by the whole or half blood), spouse, ancestors,
was to pay the N Corporation P50,000. The
(Section 66 of the Code) and lineal descendants.
individual who was to perform the services
was not designated (by name or by
SECTION 223.Stock ownership. — For the The application of the family and
description) in the contract and no one but
purpose of determining whether — partnership rule in determining the
the N Corporation had the right to designate
(a) A corporation is a personal holding ownership of stock for the purpose set
(by name or by description) such individual.
company in so far as such determination forth in (a) of Section 223 of these
The P50,000 received by the N Corporation
is based on the stock ownership regulations is illustrated by the following
from the O Corporation does not constitute
requirement specified in Section 64(a) (2), example:
personal holding company income. HTaIAC
or
(9) COMPENSATION FOR USE OF
(b) Amounts received under a personal Example: The M Corporation at some time
PROPERTY. — The compensation for the
service contract or from the sale of such a during the last half of the taxable year had
use of, or the right to use, the property of the
contract constitute personal holding 1,800 shares of outstanding stock, 450 of which
corporation which is to be included in
company income in so far as such were held by various individuals having no
personal holding company income consists of
determination is based on the stock relationship to one another and none of whom
amounts received as compensation (however
ownership requirement specified in Section were partners, and the remaining 1,350 were
designated and from whomsoever received)
65 (e), or held by 51 shareholders as follows:
 Revenue Regulations 02-40 Page 40 of
former marriage taxation for such taxable year under Section relieve the corporation from liability for the tax
(son's half sister) ASHS 10 BSHS p 25 of the Code but may be subject to imposed generally under Section 24 upon
40 CSHS 40 DSHS40 e taxation under that section for other taxable foreign corporations, since such tax applies
ESHS r years. The fact that a foreign corporation is a regardless of the classification of the foreign
4 foreign personal holding company does not corporation as a-foreign personal
0 c Relationship Shares Shares Shares Shares Shares
His brother's wife ABW 10 BBW e An individual A 100 B 20 C 20 D 20 E 20
10 CBW 10 DBW 160 n His father AF 10 BF 10 CF 10 DF 10 EF 10
EBW t His wife AW 10 BW 40 CW 40 DW 40 EW 40
1 910 His brother AB 10 BB 10 CB 10 DB 10 EB 10
0 His son AS 10 BS 40 CS 40 DS 40 ES 40
His wife's father AWF10 BWF Individual A represents the obvious case His daughter by
10 CWF 110 where the head of the family owns the bulk of
DWF 10 the family stock and naturally is the head of (b) Fifty per cent or more if the foreign any time during the taxable year, the phrase "in
EWF the group. A's partner owns to shares of the corporation has been classified as a value" shall, in the light of all the circumstances,
10 stock. Individual B represents the case where foreign personal holding company for the be deemed the value of the corporate stock
His wife's brother AWB10 BWB he is still head of the group because of the taxable year ending after December 31, outstanding at such time (not including treasury
10 CWB 10 ownership of stock by his immediate family. 1938, unless — stock). This value may be determined upon the
DWB 10 Individuals C and D represent cases where (1) A taxable year has intervened basis of the company's net worth, earning and
EWB the individuals fall in groups headed in C's since the last taxable year for which it dividend paying capacity, appreciation of
10 case by his wife and in D's case by his was so classified, during no part of assets, together with such other factors as have
His wife's brother's brother because of the preponderance of which the stock ownership requirement a bearing upon the value of the stock. If the
wife AWBW 10 BWBW holdings on the part of relatives by marriage. specified in Section 67 (a) (z) exist; or value of the stock which is used is greatly at
10 CWBW 10 DWBW 10 EWBW Individual E represents the case where the (2) Three consecutive years have variance with that reflected by the corporate
1 preponderant holding of others eliminate that intervened since the last taxable year books, the evidence of such value should be
1 individual from the group. for which it was so classified, during filed with the return. In any case where there
0 each of which its foreign personal are two or more classes of stock outstanding,
Individual's partner AP 10 - - - The method of applying the family and holding company income was less than the total value of all the stock should be
- - - partnership rule as illustrated in the 50 per cent of its gross income. allocated among the different classes according
foregoing example also applies in to the relative value of each lass therein.
By applying the statutory rule provided in determining the ownership of stock for the In determining whether the foreign personal DIcSHE
Section 66(a) five individuals own more than purposes stated in (b) and (c) of Section holding company income is equal to the (Section 68 of the Code)
50 per cent of the outstanding stock as 223 of these regulations. required percentage of the total gauss
follows: income, the determination must not be made SECTION 230.Gross income and stock
A (including AF, AW, AB, AS, ASHS, AP) SECTION 226.Options. — In determining the on the basis of gross receipts since gross ownership requirements of foreign personal
B (including BF, BW, BB, BS, BSHS) ownership of stock for any of the purposes income is not synonymous with gross holding companies. — For the purpose of
CW (including C, CS, CWF, CWB) 220 set forth in Section 223 of these regulations if receipts. For a further discussion on what determining whether a foreign corporation
DB (including D, DF, DBW) 200 any person has an option to acquire stock, constitutes "gross income," see Section 29(n) satisfies the gross income requirement
EWB (including EW, EWF, EWBW) 170 such stock may be considered as owned by and the regulations prescribed under that prescribed under Section 67(a)(1), the same
—— person. The term "option" as used in this section. items of income classified under Section 65
T section includes an option to acquire such an as personal holding company income shall,
o option and each one of a series of such SECTION 229.Stock ownership requirement. if received by a foreign corporation, be
t options, so that the person who has an — To meet the stock ownership requirement it considered as foreign personal holding
a option on an option to acquire stock may be is necessary that at some time in the taxable company income. In determining whether a
l considered as the owner of the stock. year more than 50 per cent in value of the foreign corporation satisfies the stock
, (Section 67 of the Code) outstanding stock of the foreign corporation be ownership requirement prescribed under
owned, directly or indirectly, by or for not more Section 67(a) (2) the rules established in
SECTION 227.Definition of foreign personal than five individuals who are citizens or Section 66 shall apply.
o
holding company. — A foreign personal residents of the Philippines. (Section 69 of the Code)
r
holding company is any foreign corporation
(other than a corporation exempt from In the event of any change in the stock SECTION 231.Income of foreign personal
m taxation under Section 27 of the Code) which
o outstanding during the taxable year, whether holding companies taxed to Philippine
for the taxable year meets (a) the gross in the number of shares or classes of stock, or shareholders. — (a) General rule. — Section 69
r income requirements specified in Section 67
e whether in the ownership thereof, the does not impose a tax on. foreign personal
(a) (1), and (b) the stock ownership conditions existing immediately prior and holding companies. The undistributed net
requirement specified in Section 67(a) (2). subsequent to each change must be taken income (from all sources), of such companies,
t Both requirements must be satisfied and both into consideration, since a corporation comes however, must be included in the manner and
h must be met with respect to each taxable within the classification if the statutory to the extent set forth in this section, in the
a year. conditions with respect to stock ownership are gross income of their "Philippine shareholders",
n A foreign corporation which comes within the present at any time during the taxable year. that is, the shareholders who are individual
classification of a foreign personal holding citizens or residents of the Philippines.
3 company for any taxable year beginning after In determining whether the statutory conditions (b) AMOUNT INCLUDIBLE IN GROSS
0 December 31, 1938, is not subject to with respect to stock ownership are present at INCOME. — Each Philippine shareholder, who
Revenue Regulations 02-40
was a shareholder on the day in the taxable
taxable year on which the Philippine groups
year of the, foreign personal holding company
existed with respect to the company. Such
which was the last day on which the
Philippine shareholders, accordingly, are
stockholders satisfying the stock ownership
determined by the stock holdings as of
requirement of Section 67(a)(2), hereinafter
such specified time. This applies to every
referred to as the "Philippines group", existed
Philippine shareholder who was a
with respect to the company, shall include in
shareholder in the company at the specified
his gross income a dividend, for the taxable
time regardless of whether the Philippine
year in which or with which the taxable year of
shareholder is included with the Philippine
the company ends, the amount he would have
group.
received as a dividend if on such last day
there has been distributed by the company
The Philippine shareholders must include in
and received by the shareholders an amount
their gross income their distributive shares of
which bears the same ratio to the net income
that proportion of the undistributed net
of the company for the taxable year as the
income for the taxable-year of the company
portion of such taxable year up to and
which is equal in ratio to that which the
including such last day bears to the entire
portion of the taxable year up to and
taxable year.
including the last day on which the Philippine
group with respect to the company existed
The undistributed net income of the foreign
bears to the entire taxable year. Thus if the
personal holding company is includible only
last day in the taxable year on which the
in the gross income of the Philippine
required Philippine group existed was also
shareholders who were shareholders in the
the end of the taxable year, the portion of the
company on the last day of its
taxable year up to and including such last
day would be equal to 100 per cent and in
such case, the Philippine shareholders would
be required to return their distributive shares
in the entire undistributed net income. But if
the last day on which the required Philippine
group existed was September 30, and the
taxable year was a calendar year, the portion
of the taxable year up to and including such
last day would be equal to nine-twelfths of
the undistributed net income.
The amount which each Philippine
shareholder must return is that amount which
he would have received as a dividend if the
above specified portion of the undistributed
net income had in fact been distributed by
the foreign personal holding company as a
dividend on the last day of its taxable year on
which the required Philippine group existed.
Such amount is determined, therefore, by the
interest of the Philippine shareholder in the
foreign personal holding company, that is, by
the number of shares of stock owned by the
Philippine shareholder and the relative rights
of his class of stock, if there are several
classes of stock outstanding. Thus, if a
foreign personal holding company has both
common and preferred stock outstanding
and the preferred shareholders are entitled
to a specific dividend before any distribution
may be made to the common shareholders,
then the assumed distribution of the stated
portion of the undistributed net income must
first be treated as a payment of the specified
dividend on the preferred stock before any
part may be allocated as a dividend on the
common stock.
The assumed distribution of the required
portion of the undistributed net income must
be returned as dividend income by the
Philippine shareholders for their respective
taxable years in which or with which the
taxable year of the foreign personal holding
company ends. In applying this rule, the
date as of which the Philippine group last
existed with respect to the company is
immaterial. CTDHSE (Section 70 of the
Code)
SECTION 232.Information returns by officers
and directors of certain foreign corporations.
— (a) REQUIREMENT FOR FILING
RETURNS. — (1) General. — Under Section
70 (a), on the 15th day of each month which
begins after July 1, 1939, each individual who
on such 15th day is an officer or, a director of
a foreign corporation which, with respect to
its taxable year preceding the taxable year in
which such month occurs, was a foreign
personal holding company, is required to file
with the Commissioner of Internal Revenue a
monthly information return as provided in
Section 70(a). The Commissioner of Internal
Revenue may authorize the filing of returns
covering periods longer than a month.
(2) RETURNS JOINTLY MADE. — If two or
more officers or directors of a foreign
corporation are required to file information
(6) Number of shares and par value of
preferred stock of the corporation
outstanding as of the beginning and end
of the period, the rate of dividend on such
stock and whether such dividend is
cumulative or noncumulative;
(7) A description of the convertible securities
issued by the corporation, including a
statement of the face value of, and rate of
interest on, such securities:
(8) The name and address of each
shareholder, the class and number of
shares held by each, together with any
changes in stock holdings during such
period;
(9) The name and address of each holder of
securities convertible into stock of the
corporation, the class, number and face value
of the securities held by each, together with
any changes in the holding of such securities
during the period;
(10) A certified copy of any resolution or
plan, and any amendments thereof or
supplements thereto, for or in respect of the
dissolution of the corporation of the
liquidation of the whole or any part of its
capital stock; and
(11) Such other information as may be required
by the return form.
If a person is required to file a return
under Section 70(a) of the Code and this
section with respect to more than one
foreign corporation, a separate return must
Page 41 of
returns for any period under Section 70(a),
any two or more of such officers or directors
may, in lieu of filing separate returns for
such period, jointly execute and file one
return.
(b) FORM OF RETURN. — The return under
Section 70(x). of the Code and this section
shall be made on the form prescribed by the
Commissioner of Internal Revenue. Each
officer or director should carefully prepare his
return so as to set forth fully and clearly the
information called for therein and by the
applicable regulations. Returns which have
not been so prepared will not be considered
as meeting the requirements of the law.
(c) CONTENTS OF RETURN. — The
return shall, in accordance with provisions of
this section and the instructions on the form,
set forth with respect to the preceding period
the following information:
(1) Name and address of corporation;
(2) Kind of business in which the corporation
is engaged;
(3) Date of incorporation;
(4) The country under the laws of which the
corporation is incorporated;
(5) Number of shares and par value
of common stock of the corporation
outstanding as of the beginning and
end of the period;
be filed with respect to each foreign
corporation.
(d) VERIFICATION OF RETURNS. — All
returns required by Section 70(a) and this
section shall be verified under oath or
affirmation of the parties rendering the same.
SECTION 233.Annual information returns by
officers and directors of certain foreign
corporations. —
(a) Requirement for filing returns.
(1) GENERAL. — Under Section 70(b), on
the sixtieth day after the close of the taxable
year of a foreign personal holding company
each individual who on such sixtieth day is an
officer or director of the corporation shall file
with the Commissioner of Internal Revenue an
annual information return as provided in that
section of the Code and this section.
(2) RETURNS JOINTLY MADE. — If two or
more officers or directors of a foreign
corporation are required to file annual
information returns under Section 70(b) for
any taxable year of the corporation any two or
more of such officers or directors may in lieu
of filing separate annual returns for such
taxable year, jointly execute and file one
annual return.
(b) FORM OF RETURN. — The return
under Section 70(b) and this section shall be
made on the form prescribed by the
Commissioner of Internal Revenue. Each
officer or director should carefully prepare his
Revenue Regulations 02-40
returns so as to set forth fully and clearly
the information called for therein and by the
applicable regulations. Returns which have
not been so prepared will not he considered
as meeting the requirements of the law.
(c) CONTENTS OF RETURN. — The
return shall, in accordance with the
provisions of this section and the instructions
on the form, set forth with respect to the
taxable year of the foreign personal holding
company the following information:
(1) The gross income, deductions and
credits, net income, and undistributed
net income of the foreign personal
holding company for such taxable year,
in complete detail;
(2) The same information with respect to
such taxable year which is required by Section
70(a) and paragraph (c) of the preceding
section, except that if all the required returns
with respect to such year have been filed
under Section 70(a) and the preceding
section, no information under Section 70(b) (2)
and this paragraph need be set forth in such
annual return; and
(3) Such other information as may be
required by the return form.
(d) VERIFICATION OF RETURNS. — All
returns required by Section 70(b) and this
section shall be verified under oath or
affirmation of the parties rendering the same.
(Section 71 of the Code)
SECTION 234.Information returns by
shareholders of certain foreign corporations. —
(a) REQUIREMENT FOR FILING RETURNS.
(1) General. — On the 15th day of each
month which begins after July 1, 1939
each Philippine shareholder, by or for
whom 50 per cent or more in value of the
outstanding stock of a foreign
corporation is owned, directly or
indirectly [including, in the case of an
individual, stock owned by members of
his family as defined in Section 66(b)], if
such foreign corporation with respect to
its taxable year preceding the taxable
year in which such month occurs was a
foreign personal holding company, shall
file with the Commissioner of Internal
Revenue an information, return as
provided in Section 71(a). The
Commissioner of Internal Revenue may
authorize the filing of returns covering
period longer than a month.
(2) Duplicate returns. — If a
shareholder in a foreign corporation
files, as an officer or director in such
corporation, the returns required by
Section 70(b), such returns shall be
considered as returns filed under
Section 71(a).
(b) FORM OF RETURN. — The return
under Section 71(a) shall be made on the
form prescribed by the Commissioner of
Internal Revenue. Each shareholder should
carefully prepare his return so as to set forth
fully and clearly the information called for
therein and by the applicable regulations.
Returns which have not been so prepared will
not be considered as meeting the
requirements of the law.
(c) CONTENTS OF RETURN. — The
return shall, in accordance with the
provisions of this section and the
instructions on the form, set forth with
respect to the preceding period the same
information as required, to be shown on that
form by Section 70(a) and paragraph (c) of
Section 232 of these regulations.
If a person is required to file a return under
Section 71(a) of the Code and this section
with respect to more than one foreign
corporation, a separate return must he filed
with respect to each foreign corporation.
(d) VERIFICATION OF RETURNS. —
All returns required by Section 71(a) of
the Code and this section shall be
verified under oath or affirmation of the
parties rendering the same.
SECTION 235.Annual information returns by
shareholders of certain foreign corporations. —
(a) REQUIREMENT FOR FILING RETURNS.
(1) General. — Under Section 71(b) of the
Code, on the sixtieth day after the close of
the taxable year of a foreign personal holding
company, each Philippine shareholder, by or
for whom on such sixtieth day 50 per cent or
more in value of the outstanding stock of the
company is owned, directly or indirectly
[including the case of an individual stock
owned by members of his family as defined in
Section 66(b)], shall file with the
Commissioner of Internal Revenue an
information returns as provided in that section
and this section.
(2) Duplicate returns. — If a shareholder in a
foreign corporation files as an officer or
director in such corporation, the return
required by Section 70(b), such returns shall
be considered as returns filed under Section
71(b).
(b) FORM OF RETURN. — The return
under Section 71(b) shall be made on the
form prescribed by the Commissioner of
Internal Revenue. Each shareholder should
carefully prepare his return so as to set forth
fully and clearly the information called for
therein and by the applicable regulations.
Returns which have not been so prepared will
not be considered as meeting the
requirements of the law.
(c) CONTENTS OF RETURN. — The
return shall, in accordance with the
provisions of this section and the
instructions on the form, set forth with
respect to the taxable year of the foreign
personal holding company the same
information which is required under Section
71(a), paragraph (c) of Section 232 of these
regulations and paragraph (c) of the
preceding section, except that if all the
required returns with respect to such year
have been filed under Section 71(a), no
return under Section 71(b) is required.
If a person is required to file an annual
return under Section 71(b) with respect
to more than one foreign personal
holding company, a separate return
must be filed with respect to each
foreign personal holding company.
(d) VERIFICATION OF RETURNS. — All
returns required by Section 71(b) and this
section shall be verified under oath or
affirmation of the parties rendering the same.
(Section 72 of the Code)
SECTION 236.Ad valorem penalty for failure
to file return. — In case of a failure to make
and file a return or list within the time
paragraph but where the Commissioner of
Internal Revenue is not satisfied as to the
reasonableness of the cause of the
delinquency, a surcharge of 25 per cent will
be added to the amount of tax due on the
return.
In case the failure to make and file a return or
list within the time prescribed by law is due to
willful neglect a surcharge of 50 per cent will
be added to the amount of tax due on the
return. There is willful neglect in the case of a
taxpayer who, being liable to file a return,
knowingly delays the filing of such return.
Where the filing of the return has been
delayed for a considerable length of time, the
delinquency will be presumed to be due to
willful neglect.
The amount of surcharge so added to the tax
due on the return shall be collected at the
same time and in the same manner and as
part of the tax unless the tax has been paid
before the discovery of the cause giving rise
to the imposition of the surcharge, in which
case the amount so added shall be collected
in the same manner as the tax.
SECTION 237.Ad valorem penalty for false or
fraudulent return. — In case a false or
Page 42 of
prescribed by law, not due to willful neglect,
where such return or list is voluntarily filed by
the taxpayer without notice from the
Commissioner of Internal Revenue or other
officer and it is shown that the failure to file it
in due time was due to a reasonable cause,
no surcharge will be added to the amount of
tax due on the return. In such cases, in order
to avoid the imposition of the surcharge, the
taxpayer must make a statement showing all
the facts alleged as a reasonable cause for
failure to file the return on time in the form of
an affidavit which should be attached to the
return. If the Commissioner of Internal
Revenue is satisfied that the delinquency
was due to a reasonable cause, no
surcharge will be added to the tax due on
the return. Whether or not reasonable cause
exists will depend upon the circumstances of
each case. As a general rule, if the taxpayer
exercised ordinary business care and
prudence and was nevertheless unable to
file the return within the prescribed time, the
delay will be considered as being due to a
reasonable cause.
In case of a failure to make and file a return
or list within the time prescribed by law, not
due to willful neglect, where the taxpayer
voluntarily files the return without notice from
the Commissioner of Internal Revenue or
other officer and attaches to such return the
affidavit mentioned in the preceding
fraudulent return or list is made, the
Commissioner of Internal Revenue shall add to
the tax ascertained to be due on the true net
income of the taxpayer a surcharged of 50 per
cent of the amount of such tax. If payment has
been made on the basis of such false or
fraudulent return before the discovery of the
falsity or fraud, the basis of the surcharge of 50
per cent will be the amount of the tax due on
the true net income less the amount so paid.
(Section 73 of the Code)
SECTION 238.Penalty for failure to file return
or to pay tax. — Any person liable to pay the
tax, to make a return or to supply information
required under Title II of the Code, who refuses
or neglects to pay such tax, to make such
return or to supply such information at the time
or times specified in each case shall be
punished by a fine of not more than P2,000 or
by imprisonment for not more than six months,
or both. In case of a corporation failing to file
its, return or pay the tax, the penalty prescribed
under the first paragraph of Section 73 will be
imposed upon the president, vice-resident, or
other responsible officer required to file the
return of the corporation or pay the tax due
from the same, in accordance with the
provisions of Section 46(a) and 51(b) of the
Code. In the case of a duly registered general
Revenue Regulations 02-40
copartnership, failing to file the return required
under Section 49 of the Code, the penalty
prescribed under the first paragraph of Section
73 will be imposed upon the managing partner
or other responsible officer of such
partnership.
SECTION 239.Penalty imposed upon person
causing a false or fraudulent corporate return
to be filed. — If a false or fraudulent return is
filed for a corporation or duly registered
general copartnership, the individual or any
officer thereof causing such return to be filed
shall be punished by a fine not exceeding
P4,000 or by imprisonment for not more than
one year, or both.
(Section 74 of the Code)
SECTION 240.Penalty on corporation refusing
or neglecting to make return. — A corporation
or duly registered general copartnership,
refusing or neglecting to make a return
required under Title II of the Code, or,
rendering a false or fraudulent return, will be
liable to a fine of not exceeding P20,000. The
fine imposed under Section 74 will be paid by
the corporation or duly registered general
copartnership as an entity, and is in addition to
the penalty which may be imposed under
Section 73 of the Code upon the president,
vice-president, or other responsible officer of a
corporation or duly registered general
copartnership.
(Section 75 of the Code)
SECTION 241.Return of information as to
payments of dividends. — Every domestic
resident foreign corporation is hereby required
to render a return, in duplicate, on the form
prescribed for corporations (B.I.R. Form No.
17.02) of its payments of profits or dividends
to stock holders for the taxable year or period
covered by the return, stating the name and
address of each stockholder, the number and
class of shares owned by him, the date and
amount of such dividend paid him, and when
the surplus out of which it was paid was
accumulated. Such return should be verified
by the oath or affirmation of the person
rendering the same.
(Section 76 of the Code)
SECTION 242.Application for and issuance of
license for collecting foreign items. — Every
individual or organization undertaking, for
profit or otherwise, the collection of dividends
or interest on foreign
securities (not payable in the Philippines) by
means of coupons, checks, or bills of
exchange shall, upon application, obtain a
license therefor from the Commissioner of
Internal Revenue. The application shall show
the name, address, occupation, and status
(as to citizenship or nationality and
residence) of the applicant.
(Section 77 of the Code)
SECTION 243.Return of information as to
payments of P1,800 or more. — All persons,
corporations, partnerships, and associations,
making payment to another person of fixed or
determinable income of P1,800 or more in a
taxable year must render a return thereof to
the Commissioner of Internal Revenue within
the time fixed for the filing of the annual
returns of said person, corporations,
partnerships, and associations. The name
and address of the recipient of the income
should be stated, if possible. Although to
make necessary a return of information the
income must be fixed or determinable, it need
not be annual or periodical.
The names of all employees to whom
payments of P1,800 or over a year are
made, whether such total sum is made up
of wages, salaries, commissions, or
compensation in any other form, must be
reported. Compensations in kind, such as
living quarters, meals, and lodging, are
taxable income to the recipient and, as
such, should be reported if the sum total of
the same and the other compensation in
cash received shall amount to P1,500 or
more during the year.
In the case of payments of annual or
periodical income to nonresident alien
individual or to foreign corporations or firm
not engaging in trade or business within the
Philippines and not having any office or place
of business therein, the return by withholding
agents shall constitute and be treated as
return of information.
SECTION 243.Return of information as to
payments of P1,800 or more. — All persons,
corporations, partnerships and associations
making payments to another of fixed or
determinable income of P1,800 or more in a
taxable .year must render a return thereof in
duplicate on the form prescribed therefor (BIR
Form No. 17.01-B). These forms should be
attached to and filed together with the annual
income tax returns of said persons,
corporations, partnerships and associations
as payers, within the time fixed by law for the
filing of income tax returns. The payments
referred to herein do not include the following:
(1) Dividend payments mentioned under
Section 75 of the National Internal
Revenue Code.
(2) Salaries, wages, bonuses, and other
compensations in kind, such as living
quarters, meals, and lodging which are
subject to withholding tax and reported
in W-2 forms as provided for under
Republic Act 590.
(3) Payments subject to withholding tax
at source enumerated under
Section 53 of the National Internal
Revenue Code.
Examples of income covered by these
regulations and to be declared in BIR
Form 17.01-B are interests, rents,
commissions, royalties,
advertisements, professional fees, and
the like, arising generally from
payments between payers and
recipients who have no employer-
employee relationship.
(Revenue Regulations No. 9-65 amending
and superseding section 243 appearing on
page 723. As of October 20, 1965, these
Regulations, dated June 30, 1965, have not
yet been published in the Official Gazette).
(c) In the case of a corporation, the names
end addresses of the shareholders and
the number and par value of the shares
held by each; and in the case of a
partnership, joint-account or association,
the name of the partners or members
and the capital contributed by each;
(d) The value and a description of, the assets
received in liquidation by each
shareholder;
(e) The name and address of each individual
or corporation, other than shareholders,
if any, receiving assets at the time of
dissolution together with a description
and the value of the assets received by
such individuals or corporations; and the
consideration, if any, paid by each of
them for the assets received.
(Section 79 of the Code)
SECTION 245.Return of information by
brokers. — When required by the
Commissioner of Internal Revenue, each
person doing business as a broker shall render
a return or statement showing the names and
addresses of customers to whom or for whom
payments were made or from whom business
was transacted during the calendar year or
other specified period, and giving all other
particulars which may be needed by the
Commissioner of Internal Revenue.
(Section 80 of the Code)
SECTION 246.Information returns as to
formation, etc., of foreign corporation. — (a) IN
Page 43 of
(Section 78 of the Code)
SECTION 244.Return of corporation
contemplating dissolution or retiring from
business. — All corporations, partnership,
joint accounts and associations,
contemplating dissolution or retiring from
business without formal dissolution shall,
within 30 days after the approval of such
resolution authorizing their dissolution, and
within the same period after their retirement
from business, file their income tax returns
covering the profit earned or business done
by them from the beginning of the year up to
the date of such dissolution or retirement and
pay the corresponding income tax due
thereon upon demand by the Commissioner
of Internal Revenue to addition to the income
tax return required to be filed they shall also
submit within the same period the following:
(a) Copy of the resolution authorizing such
dissolution;
(b) Balance sheet at the date of
dissolution or retirement and a profit
and loss statement covering the
period from the beginning of the
taxable year to the date of dissolution
or retirement;
GENERAL.
— Any attorney, accountant, fiduciary, bank,
trust company, financial institution, or other
person, who, after July 5, 1939, aids, assists,
counsels, or advises in, or with respect to, the
formation, organization, or reorganization of
any foreign corporation (including a foreign
association or partnership) shall file with the
Commissioner of Internal Revenue, within
thirty days after giving such aid, assistance,
counsel or advise, an information return; as
provided in Section 80 and this section. The
return must be filed in every such case (1)
regardless of the nature of the counsel or
advice given, whether for or against the
formation, organization, or reorganization of
the foreign corporation, or the nature of the aid
or assistance rendered and (2) regardless of
the action taken upon the advice or counsel,
that is, whether the foreign corporation is
actually formed, organized, or reorganized.
If, in a particular case, the aid, assistance,
counsel or advice given by any person extends
over a period of more than one day and not for
more than thirty days, such persons, to avoid
the multiple filing of returns, may file a single
return for the entire period. In such case, the
return shall be filed within thirty days from the
first day of such period: If, in a particular case,
the aid, assistance, counsel, or advice given by
any person extends over a period of more than
thirty days, such person may file a return at the
end of each thirty days included within such
period and at the end of the fractional part of a
thirty day period, if any, extending beyond the
Revenue Regulations 02-40
last full thirty days. In each such case, the
return must disclose all the required
information which was not reported on a prior
return.
(b) SPECIAL PROVISIONS. — (1)
Employers. — In the case of aid, assistance,
counsel, or advice in, or with respect to, the
formation, organization, or reorganization of a
foreign corporation given by a person in whole
or in part through the medium of subordinates
or employees (including in the case of a
corporation the officers thereof), the return of
the employer must set forth to the full extent
all information prescribed by these
regulations, including that which, as an
incident to such employment, is within the
possession or knowledge or under the control
of such subordinates or employees.
(2) EMPLOYEES. — The obligation of a
subordinate or employee (including in the
case of a corporation the officers thereof) to
file a return with respect to any aid,
assistance, counsel, or advice in, or with
respect to, the formation, organization, or
reorganization of a foreign corporation, given
as an incident to his employment, will be
satisfied if a complete and adequate return as
prescribed by these regulations is duly filed by
the employer setting forth all of the
information within the possession or
knowledge or under the control of such
subordinate or employee.
Clerks, stenographers, and other
subordinates or employees, rendering aid or
assistance solely of a clerical or mechanical
character in, or with respect to, the formation,
organization or reorganization of a foreign
corporation are not required to file returns by
reason of such services.
(3) RETURNS JOINTLY MADE. — If two or
more persons aid, assist, counsel, or advise
in, or with respect to, the formation,
organization, or reorganization of a particular
foreign corporation, any two or more of such
persons may, in lieu of filing several returns
jointly execute and file one return.
(c) PENALTIES. — For criminal
penalties for failure to file the return
required by Section 80, see Section 73 of
the Code.
(d) CONTENTS OF RETURNS. —
The return shall set forth the following
information to the full extent such
information is within the knowledge or
possession or under the control of the
person required to file the return.
(1) The name and address of the
person (or persons) to whom and the
person (or persons) for whom or on
whose behalf the aid, assistance,
counsel, or advice was given;
(2) A complete statement of the aid,
assistance, counsel, or advice given;
(3) Name and address of the foreign
corporation and the country under the
laws of which it was formed, organized,
or reorganized;
(4) The months and year when the foreign
corporation was formed, organized, or
reorganized;
(5) A statement of how the formation,
organization, or reorganization of the foreign
corporation was effected;
(6) A complete statement of the reasons
for, and the purposes sought to be
accomplished, by, the formation,
organization, or reorganization of the
foreign corporation;
(7) A statement showing the classes and
kinds of assets transferred to the foreign
corporation in connection with formation,
organization, or reorganization, including a
detailed list of any stock or securities included
in such assets, and a statement showing the
names and addresses of the persons who
were the owners of such assets immediately
prior to the transfer;
(8) The names and addresses of the
shareholders of the foreign corporation at the
time of the completion of its formation,
organization, or reorganization, showing the
classes of stock and number of shares held
by each;
(9) The name and address of the person
(or persons) having custody of the books of
account and records of the foreign
corporation;
(10) Such other information as may be required
by the return form; and
(11) Where any of the information required
to be furnished is withheld because its
character is claimed to be privileged as a
communication between attorney and client
within the meaning of Section 80, the return
must so state and must contain a complete
statement of the nature and the
circumstances of the communication on
which a decision as to the propriety of the
claim of privilege may be reached.
If a person aids, assists, counsels, or
advises in or with respect to, the formation,
organization, or reorganization of more
than one foreign corporation, a separate
return must be filed with respect to each
foreign corporation.
(e) VERIFICATION OF RETURN. —
All returns required by Section 80 and
this section shall be verified under oath
or affirmation.
(Section 81 of the Code)
SECTION 247.Disposition of income tax
returns. — All income tax returns filed with
the Commissioner of Internal Revenue
constitute public records which shall be open
to inspection under rules and regulations
prescribed by the Secretary of Finance with
the approval of the President of the
Philippines. The circumstances under which
income tax returns may be inspected by
interested parties are dealt with under
separate regulations.
SECTION 248.Publication of list of persons
filing returns and paying taxes. — The
second paragraph of Section 81 expressly
authorizes the Commissioner of Internal
Revenue, with the approval of the Secretary
SECTION 250.Dividends. — Dividends, for
the purpose of the law, comprise any
distribution whether in cash or other property,
in the ordinary course of business, even
though extraordinary in amount, made by a
domestic or resident foreign corporation, joint-
stock company, partnership, joint account
(cuentas en participacion), association, or
insurance company to the shareholders or
members out of its earnings or profits
accumulated since March 1, 1913.
Although interest on certain Government
bonds and other similar obligations is not
taxable when received by a corporation,
upon amalgamation with the other funds of
the corporation, such income loses its
identity and when distributed to
shareholders, is taxable to the same extent
as other dividend.
A taxable distribution made by a corporation
to individual stockholders or members shall
be included is the gross income of the
distributees when the cash of other property
is unqualifiedly made subject to their demand.
Dividends, in cash or other property received
by an individual, are subject to tax in his
hands in the same manner another income.
Dividends, whether in cash or other property,
received by a domestic or resident foreign
corporation from a domestic corporation are
taxable only to the extent of 25 per cent
thereof in accordance with Section 24 of the
Page 44 of
of Finance, to cause to be prepared and
published in any newspaper or made
available to public inspection through other
means, lists containing the names and
addresses of persons who have filed income
tax returns, or lists of those who paid income
taxes, or both such kinds of lists. (Section 82
of the Code)
SECTION 249.Recovery of tax. — A suit or
proceeding may be maintained for the
recovery of any internal-revenue tax alleged
to have been erroneously or illegally
assessed and collected, in accordance with
Section 306 of the Code. However, where
the Commissioner of Internal Revenue
believes that a return is false or fraudulent
or contains any understatement or
undervaluation and proceeds to assess and
collect the tax due, no portion of the tax so
collected shall be recovered by any suit
unless it is proved that the return was not in
fact false or fraudulent and did not contain
any understatement or undervaluation,
except with respect to return is made in
good faith regarding annual depreciation of
oil or gas wells and mines.
(Section 83 of the Code)
Code. Dividends received by a domestic
corporation from a foreign corporation, whether
resident or nonresident, are taxable to the
extent that they constitute income from sources
within the Philippines, as provided in Section
37 (a) (2) (b) of the Code. Dividends paid by
the domestic corporation to a nonresident
foreign corporation are taxable in full. (For
definition of the different classes of
corporations, see Section 84 of the Code).
SECTION 251.Dividends paid in property. —
Dividends paid in securities or other property
(other than its own stock), in which the earnings
of a corporation have been invested, are
income to the recipients to the amount of the
full market value of such property when
receivable by individual stockholders.
When receivable by corporations, the amount
of such dividends includible for purposes of the
tax on corporations are specified in Section 24
of the Code. (See also Section 250 of these
regulations). A dividend paid in stock of another
corporation is not a stock dividend, even though
the stock distributed was acquired through the
transfer by the corporation declaring the
dividends of property to the corporation the
stock of which is distributed as a dividend.
Where a corporation declares a dividend
payable in a stock of another corporation,
setting aside the stock to be so distributed and
notifying the stockholders of its action, the
income arising to the recipients of such stock is
its market value at the time the dividend
becomes payable. Scrip dividends are subject
Revenue Regulations 02-40
to tax in the year in which the warrants are
issued.
SECTION 252.Stock dividends. — A stock
dividend which represents the transfer of
surplus to capital account is not subject to
income tax. However a dividend in stock may
constitute taxable income to the recipients
thereof notwithstanding the fact that the
officers or directors of the corporation (as
defined in Section 84) choose to call such
distribution as a stock dividend. The
distinction between a stock dividend which
does not, and one which does, constitute
income taxable to the shareholder is the
distinction between a stock dividend which
works no change in the corporate entity, the
same interest in the same corporation being
represented after the distribution by more
shares of precisely the same character, and a
stock dividend where there either has been a
change of corporate identity or a change in
the nature of the shares issued as dividends
whereby the proportional interest of the
shareholders after the distribution is
essentially different from his former interests.
A stock dividend constitutes income if it gives
the shareholder an interest different from that
which his former stock holdings represented.
A stock dividend does not constitute income if
the new shares confer no different rights or
interests than did the old — the new
certificates plus the old representing the same
proportionate interest in the net assets of the
corporation as did the old.
SECTION 253.Sale of stock received as
dividends. — Stock issued by a corporation,
as a dividend, does not constitute taxable
income to a stockholder in such corporation,
but gain may be derived or loss sustained by
the stockholder, whether individual or
corporate, from the sale of such stock, which
gain or loss will be treated as arising from the
sale or exchange of a capital asset. (See
Section 34 of the Code.) The amount of gain
derived or loss sustained from the sale of
such stock, or from the sale of the stack with
respect to which it is issued, shall be
determined in accordance with the following
rules:
Page 45 of
distribution of a stock dividend, proceeds to sources within the United States.
(a) Where the stock issued as dividend is
cancel or redeem its stock at such time and in Accordingly, items of deductions allocable to
all or substantially the same character
such manner as to make the distribution and income of such taxpayer from sources
or preference as the stock upon which
cancellation or redemption essentially
the stock dividend is paid, the cost of
equivalent to the distribution of a taxable
each share (or when acquired prior to
dividend, the amount received in redemption
March 1, 1913, the fair market value
or cancellation of the stocks shall be treated
as of such date) will be the quotient of
as a taxable dividend to the extent of the
the cost (or such fair market value) of
earnings or profits accumulated by such
the old shares of stock divided by the
corporation since March 1, 1913.
total number of the old and new
shares.
SECTION 255.Sources of distribution. — For
(b) Where the stock issued as a dividend is
the purpose of income taxation every
in whole or in part of a character or
distribution made by a corporation is made
preference materially different from the
out of earnings or profits to the extent thereof
stock upon which the stock dividend is
and from the most recently accumulated
paid, the cost (and when acquired prior
earnings or profits. In determining the source
to March 1, 1913, the fair market value
of a distribution, consideration should be
as of such date) of the old shares of
given first, to the earnings or profits of the
stock shall be divided between such old
taxable year; second, to the earnings or
stock and the new stock, in proportion,
profits accumulated since February 28, 1913,
as nearly as may be, to the respective
only in the case where, and to the extent
value of each class of stock, old and
that, the distribution made during the taxable
new, at the time the new shares of stock
year are not regarded as out of the earnings
are issued, and the cost (or when
or profits of the taxable year and all the
acquired prior to March 1, 1913, the fair
earnings or profits accumulated since
market value as of such date) of each
February 28, 1913, have been distributed;
share of stock will be the quotient of the
and, fourth, to sources other than earnings or
cost (or such fair market value as of
profits only after the earnings or profits have
March 1, 1913) of the class to which
been distributed.
such share belongs divided by the
number of shares in that class.
SECTION 256.Distribution in liquidation. — In
(c) Where the stock with respect to which
all cases where a corporation (as defined in
a stock dividend is issued was
Section
purchased at different times and at
84) distributes all of its property or assets in
different prices and the identity of the
lots can. not be determined, any sale of complete liquidation or dissolution, the gain
realized from the transaction by the
the original stock, will be charged to the
earliest purchases of such stock, and stockholder, whether individual or corporate,
any sale of dividend stock issued with is taxable to the extent recognized in Section
respect to such stock will be presumed 34(b) of the Code. For this purpose, the term
to have been made from the stock "complete liquidation" includes any one of a
issued with respect to the earliest series of distributions made by a corporation
purchased stock, to the amount of the in complete cancellation or redemption of all
dividend chargeable to such stock. of its stock in accordance with a bona fide
(d) Where the stock with respect to which a plan of liquidation under which the transfer of
all the assets under liquidation is to be
stock dividend is declared was
complete within a reasonable time from the
purchased at different times and at
date of the first distribution, usually not to
different prices, and the dividend stock
exceed one year from the time of such first
issued with respect to such stock can
distribution. If the amount received by the
not be identified as having been issued
stockholder in liquidation is less than the cost
with respect to any particular lot of such
stock, then any sale of such dividend or other basis of the stock, the loss in the
stock will be presumed to have been transaction is deductible to the extent allowed
made from the stock issued with respect in Section 34(c) of the Code.
to the earliest purchased stock, to the (Section 84 of the Code)
amount of the stock dividend chargeable
to such stock. SECTION 257.Income and deductions of
American citizens residing in the
SECTION 254.Declaration and subsequent Philippines. — Under subsection (u) of
redemption of a stock dividend. — A true Section 84, a citizen of the United States
stock dividend is not subject to tax on its residing in the Philippines, is taxable on
receipt in the hands of the recipient. income from sources both within and
Nevertheless, if a corporation, after the without the Philippines, except income from
within the United States are not deductible from his income subject to Philippine income tax. (Deemed
repealed since our independence).

SECTION 258. Effective date. — These regulations shall take effect upon their promulgation in the
Official Gazette.

(Promulgated February 11, 1941, XXXIX Off. Gaz., No. 18, page 325)

Recommended by:

BIBIANO L. MEER
Collector of Internal Revenue

MANUEL ROXAS
Secretary of Finance