INCOME TAX notes from lectures.

1/14/22

The inflow of wealth must not be a return of capital.

Capital can be likened to a tree and if the tree bears fruit then the fruit is income.

Income is an increase in capital. The fruit of capital.

If it is mere return of capital, then there’s no income.

If you lend 1k to your friend but you have forgiven him with that debt, does that 1k is an income as far
as your friend is concerned? No, it’s not an income because the inflow of wealth is gratuitous because
there’s no exchange of value for value.

When you inherit a parcel of land, there’s inflow wealth but such wealth came gratuitously, therefore
it’s not an income and not subject of income tax but subject of estate tax.

Property donated is not an income therefore not subject of income tax but donor’s tax.

Requisites for an inflow of wealth consider a taxable income.

1. There must be gain or profit-that gain is subject to income tax.

Is security deposit an income? There is none because ethe security deposit will be returned later.
There’s no gain there’s no profit. Commissioner v. Tour’s Specialists. No, because there’s no gain
because it only passes to the hands of Tours specialists to make use as a payment for hotels of client.

2. The gain or profit must be received or realized actually or constructively. It must already be
declared for tax purposes.

What is constructive receipt? Limpan Investment v. CIR. Refuse to accept the payment made by one of
the tenants. Deposit the money to the property owner and the owner knew about this. During the year
of payment, the property owner did not report the payment and later on withdrew the payment. When
should the property owner be considered to have received the income? Is it during the year the
payment was deposited or the year he withdrew the payment? The amount deposited is deemed an
income in so far the property owner is concerned is during the year the payment was deposited. He
already had control over it.

The income is considered received by the taxpayer when the income is subject to the control of the
taxpayer without any restriction. Interest on bank deposits is a classic example. The interests given by
the bank is considered an income even if it’s in your bank account because you already have control
over it even though it’s not in your possession yet. You are deemed to have constructively received it. It

In actual receipt the income is in the possession or custody of the person.

Principle of realization. When is income considered to be realized?

1. The earning process is complete.

2. Exchange has taken place.

A lawyer who is engaged by a client for a fee of 1M, the money has not yet been delivered to the lawyer,
is the earning process complete? There is already contract but no payment yet. The earning process is
not yet complete here.

Increase in Real Property value. You own a parcel of land worth 1M but because of the construction of
road, the price of property shoot up to 2M there is an increase in the value of property. Is that an
income already is so far as the property is concerned. Under the realization principle, the answer is no
because the earning process in not yet complete and the exchange has not taken place. You will realized
when you disposed the property.

Increase in the value of shares of stocks. The same principle is applied. There is still no realization of
income.
3. It should not be excluded from income taxation under a law or treaty. Sec 32 b of NIRC. They
are excluded therefore not subject of income taxation.
A. Proceed of life insurance. When someone dies the heirs are given the proceeds there is an
inflow of wealth but under the law that is excluded from income taxation. This is considered
as a mere return of capital. What is the lost capital? It is the life on insured.
B. Return of Premiums under lid=fer insurance, endowment. The premiums paid is inflow of
wealth. It’s a mere return of premium paid a return of capital. Therefore, it’s not an income.
The excess of amount return than the premiums paid is an income and subject to taxation.
C. The value of property acquired by gift, bequeathed, devised. These are gratuitous inflow of
wealth. This is subject to estate tax or donor’s tax.
D. Is amount received through accident or health insurance or under the workman’s
compensation act for personal injury sickness or the amount of damages received whether
by suit on account of such injury or sickness. They are excluded from income taxation.
E. Income exempt under a treaty. Pacta sunt servanda. income derived which is excluded
under a treaty are excluded form income tax.
F. Retirement benefits of official of private firms whether individuals or corporate. The
employee must be at least 50 years old and he must be of continuous service for at least 10
years. The benefit must be in accordance with the reasonable private benefit plan
maintained by the employer and approved the BIR. Absent one, the retirement benifir is not
excluded from income taxation.
G. Separation pay. Reasons are must be because of death sickness or other physical activities
or for any causes beyond the control of separated official or employee. Reorganization of
the company is beyond the control of employee therefore the septation pay must be
excluded from taxation. Employee commits insubordination but still given separation pay.
That is within the control of employee therefore the separation pay will be subject for
taxation.
H. SSS, Retirement gratuities, pension and other similar benefits received by aliens derived
from their employer will be exempt form taxation. The alien, however, must reside in the
PH permanently .
I. Benefits from US Veterans administration. Any person residing in the PH. It refers to pension
itself once it is deposited to the bank and earns interest, it will be subject to income tax
already.
J. SSS Benefits.
K. GSIS benefits and Retirement gratuities by government employees. Bromeo v. CSC.
Retirement gratuity as a bounty in consideration or recognition of meritorious service. The
monetary accumulated leave credits od retiring employee. 15 days VL 15 days SL every year.
L. Miscellaneous items
A. Income derived by foreign government financing institutions, international.
B. Income derived by government or its political subdivision accruing to the government or
its political subdivision. By operation of public utility. Proprietary in nature. Like MRT
operated by the gov.
C. Income derived form the exercise of governmental function. Like Health services
provided by the public hospitals.
D. Prizes and awards. Source must be: because of religious, chartable, scientific, education
artistic, literary or civic achievement. 2 conditions to be excluded from income taxation.
Recipient was selected without any action his part. He is not required to render future
service as consideration of the award. Incentives from being a topnotcher is not subject
to income tax. Having met the conditions required.
E. Sports competition whether local or international. Must be with the sanction of the
national sports association concerned. Is Hidliyn Diaz excluded from income taxation?
Yes if its is with the sanctin of national sports association concerned.
F. 13th month pay and other bonues. First 90k within the year it’s not taxable but if it’s
beyond 90k its taxable within the year.
G. GSIS, SSS, Philhealth and PAGIBIG, not taxable.
 H. Profits realized form retirement bonds with maturity of 5 years.
I. Gains by investors…

These are inflow of wealth however not subject of income tax by virtue of sec 32 of NIRC.

If there’s piacular law that says it’s exempt form income tax then it is exempt from income taxation. It’s
not just confied in NIRC. Such exemption can be seen from other special laws.

Exclusions are strictly construed against the taxpayer. Hence, strict interpretation needed.

The worker is afflicted by covid can he claim for workman’s compensation act. Yes, he can claim. The
amounts received as compensation for personal injury or sickness. Not taxable.

The term personal injury refers to bodily injuries. What is the relevance of this? Amounts of damages
whether received whether by suit or agreement on account of such injuries or sickness.

On his way to work, a man met and accident and is severely injured. There is settlement. The vehicle
owner said ill just give your 500k and he agreed. Out of court settlement. Is the 500k income? Therefore,
it’s not taxable. Juan refuses to settle an the case is in favor of the decision. Juan is awarded for
damages, is the award of damages subject to income taxation? No it’s not since the amount of damages
is by reason of personal damages suffered by reason of the accident then that award made my the court
is excluded from income taxation.

If someone posts defamatory statements against someone, you filed suit and you win. The court awards
damages in your favor. Is that exempt from income taxation? No, because ethe provision specifically
states that it must be on account of such injury or sickness. Personal injury means bodily injuries. \

FUNCTIONS OF INCOME TAX.

1. It is a dependable source of revenue for the government. A major part of gov revenue is derived
from income tax from compensation income earners
2. Regarded as a measure if the ability to pay. The more you earn the more you pay.
3. Effective means of removing inequalities in the distribution of wealth.

SITUS OF INCOME

1. NATIONALITY THEORY, the taxing authority of the country where income earner is a national of.
2. DOMCILIARY THEORY, taxing authority of the income tax earner where he is a resident of
abroad.
3. SOURCE THEORY, taxing authority where the income is earned.

Income earned by OFW can properly be taxed in the PH if the government wants to. Because such OFW
is still entitled from the protection if the government and under nationality theory the gov can impose
tax to person.

Exemption method. Exemption from income taxation from income by Filipinos earning abroad. Policy
adopted by the PH gov. but if PH wants to then it can impose tax to OFW.

Tax Credit method. Under this, income taxes paid abroad are allowed as deduction from the income tax
liabilities if the taxpayer in the PH. Like domestic corporations. That income can still be subjected to the
taxes form where such income is earned. To mitigate the harsh effect of this multiple taxation of
income, tax credit method is adopted. It is deducted from tax payable.

Deduction Method. Under this, the income taxes paid aboard are allowed to be deducted from the gross
income to arrive at the net income before coming with the tax due.

Reduction method. Under this, all the income taxes also imposed by PH, the rate however is lower.

The global and schedular system of income taxation.

Global system means whole. All kinds of income are treated similarly. Like basket full of eggs. They are
treated alike.
Schedular system. Different kinds of income are treated differently. Eggs are classified and treated
differently.

System of Gross income taxation. No deduction allowed.

Various kinds of system gross income taxation

Pure gross income taxation. No allowable deduction

Adjusted or modified gross income taxation, the gross income is allowed to be reduced by some items of
deductions fixed by the law. The amounts id fixed can no longer be altered or manipulated.

System where no deduction is allowed but the applicable rates are reduced.

Advantages of gross income taxation, computation of tax is simpler. Less discretion is given to tax
examiners thereby minimizing graft. Investigation of tax can be made faster. It can provide more
revenues to the government because the tax base is greater.

Disadvantages. It is inequitable to the taxpayer. The taxpayer is still liable to pay tax although in reality,
the taxpayer incurs loss because the basis is gross.

Classification of income tax

LECTURES 2/4/22

PASSIVE INCOME

Sec 24b or NIRC. Covers 3 income taxpayers.

Resident, non-resident, and resident aliens

Interest on bank deposits

Passive income subject to final tax which is 20%

Except on deposits under the expanded

Tax on Fringe Benefits,
General Professional partnership, those income na subject to tax or not;
interest income kung taxable or not;
foreign and domestic corporation;requirements for exclusion of a prize or award from
taxation;
witholding tax;
retirement benefits(gross income and exemption from taxation);
classification of tax payer, concept of doing business, Sec. 33 of NIRC as amended;
Tax Sparing Credit Rule