APPENDIX. BBB COMMONWEALTH OF ‘THE PHILIPPINES DEPARTMENT OF FINANCE. MANILA February 10, 1940 Subject: INCOME TAX REGULATIONS REVENUE REGULATIONS NO. 2 (See “Note” on page 120) To all intermil-revenue officers and others concerned: Section 1, Scope— In accordance with the provisions of sections 4 (1) and 338 of Commonwealth Act No. 466, otherwise known as the National Interhal Revenue Code, the following regulations affecting sections 19 to 84 of the same Code relating to the income tax are hereby promulgated to super Sede all cireulars, precedents, rulings, and regulations heretofore published fon the same subject, and they shall be known as Revenue Regulations No. 2, for the Income Tax’ Regulations:614 mumbers of the Code are given below as ‘ode. They serve as captions of the pe (Seetion 20 of the Code) — section 0 proves tte positon OUTS eae naar Code laall phy ook siacoe | (4) Those whose mothers are citizens of the reaching the age of maj ect Philippine citizens additional exemptions (Section 22 of the Code) ‘Come Amount of Faxof such a nat ment, and to he becomes a chat an extended stay may be necessary for its accomplish- snd the alien makes his home temporarily in the Philippines, ident, though it may be his intention at all times to return purpose for which he came has been con- departs from the Philippines. An nce does not change his status as 2 resident al 10 has acq e remainder of his st the Philippines. ippines, if such total income graduated rates established in section apply to. the it exceeds P23,S00. (Conforms with amendments by R. A. 2343, effective June 20, 1959:) pines” inchades ether 4 none implies place ansation of Gude a place where Transactions might be, oF are, effected. “Neither ary nor the grantor of # tnist, whether or. irevocab deemed to be engaged in trade or business in the Philippines to have an Sntses therein, merely because the trustee is engaged in trade Gr business in. the Philippines’ or has an office or place of business therein. Gest of oie or pce of business” was deleted by B.A. 2343) (Section 23 of the Code) spayer. Tt is (9 non-resident €0%) fo eee se) EE Aag Sec, 10. Personal exemption of ingle indiciduals—A single individual is PLE “P centied t0'3 personal exemption of Pr,Soo. Ste. 1x. Personal exemption of marriad persons and heads of fon. person fs entitled to a personal exemption of Ps,o00. Only one Aintan BF Proce i allowed with respect to the aggregee income of both F'6 > husband and wife. (Conforms June 20, 1959.) ‘amendments by R.A. 2343, effective fone household one or more individuals, ith him by ‘elationship by marriage, or by adoption, and whose right ide for these dependent individuals is based upon some moral or legal obligation. ‘absence of continuous actual residence together, whether a head of a fami che common home being f, moreover, through force of dependent children ss elsewhere, the additional ‘the dependent benefactor is not the head of a children for in 2 boarding Rouse apples I, however, Sontinuousiy makes is home ese trespective of the queston of atrod is not ered (b) a married woman: ‘one or more brothers ed or where st fe incap: ly defective. (Conforms with amendments by R. A. 2343, lependent sn 23 Years of ed or incapable of self-support beca the person claim dependent upon ments by R. A. 2543, eff. J6x8 a? See. 13. Change of statut.—If the status of the taxpayer, insofar as it af- 0% SA des ps (rere to pl ete et oper ist OU by reason of his death, the amount of the personal and add be apportioned, ater such cha nal exemptions yy 27%, th the number of months before and ON" radgond pat BX. = | For the purpose of such apportionm sregarded unless it amounts 0 m0 be considered ax one month, (Conforms Sept. 23, 1950) wreident aliens —A. nonresident al fo the exe of which he ie subject ed to non-resident aliens the country of sid non-resident ons similar exemptions to Filipinos not residing in such county Seriving income frm sources therein. Ifthe country of sehich the non-resident cone ta la sch non-resient See. 14. Personal exemption of is entitled to a personal exemption lowed by the he counts 100,000 and 30 per cent on the excess. The term cludes partnership no ‘companies, companies but does not include dul smpanias colectivas). ‘The tax is upon fered. general coparnerhip A domeatie corporation i the Philippines, but a foreign corporation i taxed only on is income form ources werthin the Philippines. for profit. Any corpo the purpose of its Section 27, is not exempt ‘of 2 per cent section 34) of ines, of foreign life insurance company authorized to carry on business in the Phi are taxable on their total net investment income derived from ddends and rents from all sources whether within or without the ness incurred to purchase or car exempt from taxation under existing during the taxable year as are*Wrdina vestment. The total net the interest upon which is whol ws, and such inv and necessary scome of foreign their gross th income a5 their yt abroad) bears to PGI = PRIWR x WGI PIE = PGIWGI x WIE PGI — PIE = PNI PR is Total Philippine Reserve Reserve, WGI is World Gross Investment Income PGI is Philippine Gross Investment Income WIE is Total Werld Investment Expenses PIE is Philippine Investment Expense620 submi ry financl and corresponding expenses. These certified by an independent certified public accountant and authe 2 Philippine consular offical Foreign life insurance companies not doi ‘the normal income tax on thei 1s. They are subject to tax at the rate of the Philippines id from sources, Philippines are not doing business i required income the net a to policy and annuity contracts. Supersede See. 124 of existing regul the year (Section 25 of the Code) 8, Taxation of corpor of a corporation which is formed or ng the imposition of the tax upon its shareholders or members or the shareholders ‘or members of any other corporation through the medium of permitting gains ‘or profits to accumulate instead of di ibuting them. However, banks, insurance companies, personal holding companies and foreign personal holding companies as defined in Chapter VIII, are excepted from tasation under section 25. The tax imposed by section 25 applies whether the avoidance was accomplished mm or use of only one corpora a chain of corporations. For dy yuted in turn by the N Corporat nevertheless the tax imposed by section 25 applies to the M Corporation, if ‘that corporation is formed or availed of for the purpose of preventing the imposition of the tax upon the individual shareholders of the N Corporation. A forcign corporation, whether reside subject to the tax: provided for under section 25 in the same manner and under circumstances stic corpor ‘or non-reside 621 Sec. 19, Purpose 1 acid tax; evidence; burden of prof: definitions of hold ing or incest compans.The Collector of Intemal Revenve's determination tees Comporaton was formed or aviied of forthe purpose of avoiding the tax Sk hs sharchlder or members sublec to daproo! By competent evidence. i be indicated by cireums- Becton 35 (band scular cireumatances of each tances other than the evidence specified such purpose vas present depends upon vords, a corporation is sul sc to taxation under section 25 if it is formed or ‘of for the purpose of preventing the imposition of the pro- gressive rat ‘upon shareholders through the medium of permitting earn- ngs oF profits to accumulate, even though the corporation is not a mere holding of investment company 0 per cent or more of the outstandi ich poe of av : hr ight be construed as evidence of the purpose to avoid but among other things the fl- Towing wl be considered: (1) Dealings betcen the eonpor Holders, suchas withdraval by the shareholders as per pent of fands by corporation for the personal bene! the investment by the eon ‘and this is s0 even though the corporation is not a mere he ener o ible accur Of investment company and does not have an_unreaso fof earnings oF profits, However, if the corporation is investment company, then jon by expressly prc fence of a purpose to avoid the less the taxpayer pr the evidence that the absence of such pu624 Ste. as. Agricultural and ‘contemplated by subsection tion from income taxut the benefit of any member; and (3) have as their 0 in such pursu development Organi rticultural organizations— The organizations ) of section 27 of the Code as entitled to exemp- jose which (1) have no net income inuring to are educational or instructive in character; cts the betterment of the conditions of those engaged the improvement of the grade of their products, and the higher degree of efficiency in the the holding of periodical race meets, the profits jure 10 the benefit of thelr sharehol growing agricul t-—In order that a corporation may be enti= bank, the depositors, icipate in the prot ies. — A fraternal beneficiary society ge 6 ‘oF for the ex operating. “Operating under 8 under a form of organi amended by Sec. 4, R. A. 82, Sec, 29, Cemetery companies.— A cemetery company may be entitled to ed by and operated exclusively for the benefit of its not operated for profit. Any cemetery corporation ted by its charter to engage is exempt from we benefit o it of its net earnings: ‘dual. A cemetery comy Y the other requireme: e Preferred stock entitling the holders to articles of incorporation require ( preferred stock sh: funds are realized from sales, and (b) fhe payment of dividends upon or for t ement of wed by the company for the care and improvement be o 625 ‘A cemetery company having a capital stock represented by shares, or which oft or for the benefit of persons other than its members, does in the exempted class. Spe. 30. Religious, charitable, scientific, athletic, ‘corporations — A. corporation falling among those enumer: fpf sestion 27 is exempt from tax on its income (other tha fr 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 fro properties, real or personal, gener of income from corporate dividends, rentals. received ‘fom properties, received from such capital loaned to other persons, income from ageic lands owned by such corporations, profits from the sale of property, real or personal, and ‘other similar income. Income not derived from their properties, or personal, are exempt. For example, in the cate of income from the is exempt. holding of an edueatio “except income expressly exempt by this Ti of section 27 refers to those classes of lance with subsection (b) of section 29, are exempt from ‘Tidle IL Charitable corpor of clerey is purpose; or for furnishing the services of to pay for them; or for a general body of iucational corporations ition of the p 8 propaganda626 individuals, for whose benefit It does not prevent exemption that pri a charity is organized, receive the income ‘The law refers to individuals having a personal and private interest in che of the corpor Tf, 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 the right to exemption ceases to etist, even though the by-laws the shareholders shall not receive any dividend or other return lupon their shares. Sec. 31. for such common fnteret and does aot cogage in a regular bi ordinarily carned on for prof, Te work be similar to that of 4 chamber of commerce or board of trade. of a kind ordinarily cared’ on. for prof {conducted “on a cooperative bass ww self-sust t ground for e though all of hhouse association, not organized for profit, of which inures to any private shareholder or individual, is exempt pro\ e limited to the exchange of checks, and similar work for the ymmon benefit of its members. An assoc are engaged his designed chi derived from mezabersip de and is expended for ofr expenses is exempt from tax Sec. 32, Cicie leagues. — Civic leagues entitled to exemption comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind are exempt from tax. ‘See. 33. Social —The exemption applies recreation Clubs whic supported by member of the comprehensive engages in bi not organized ai poses, and any prot hhowever, such bonds are bought rest destroys the exemption, nce fee, charged by 2 mutual organization may be although it makes advance assess- ment for the sole purpose meeting future losses and expenses, provided nts remaining on hand at the end of the for their own account they , which are engoged in ce for the proceeds of sal ing expenses incurred. Cooperative associations ‘gents aze not expressly exempt from tax, but rebates er oF not members cf the association, in propor- ses may be excluded from gross income in computing the 2s. Any profits made from non-members and distr he guise of rebates are, of course, subject to tax. ret income subject uted to members 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 exerapting cooperative marketing associations.) (Section 28 of the Code) come specifica od as gains and profits, from the sale or other disposition of capital assets. Income cannot be determined merely by reckor statute recognizes a5 inventories, accounts628 (©) Net income, meaning gross income less statutory deductions. ‘The statutory dedi in general, though not exclusively, expenditures expenditures, connected with production of income. (A) I ‘other than a corporation as defined in section Bq \come means gross income less exemptions. Ordinarily the net to be computed in accordance employed in keeping the books of See. 37. Computation of n respect 10 a fixed period. That of every year except in the case basis in which case Ttems of income and of expen are elements inthe computation of net income, need not bein the form of eh, {Q/It is sufficient that such items may be appraise 4 bbe computed of es, which as gross income and deduct as of which any item of gross income or any dedi must be deter mnable consistency. the gross income for the tax fare to be accounted for as of a different period. For instance, in any case in jis necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. A’ taxpayer is deemed to have received items of ch have been cret 10 of set apart for him Sr. 39. What gros incom ? compenstfon for pct ahs Wi from ses of and ealngs in proper ‘ivtdenda, rl pia, a" profs and income derived front any source whatever, unless exempt hoe grin derived from cpt ‘ofmbined, provided jr b& undertod to inside po vy ig version of capital assets. Profit of For the treatment of dividends for purposes of th to 236 of these regulations. For the treatment of cay 132 to 135 of these regulations, Sec. 40. Compensation for personal serv compensation is had until the comy is ordinarily income f of its determi rendered on the accrual basis; or, for the tax return is rendered on a receipts and disburse pstlesman, compensation for services ‘on the basis of a percentage of profits, )” commissions on insurance pre , and pensions or retiring allowances £ 1¢ Government of the United States or of the w from tax) are income to the smal offerings, sums paid for saying by a ists, awarded by one to whom néPservi and are not taxable, c. 48. Compensation paid other than in cath— Where services are paid ith something other than money, the fair market value of the thing taken ‘amount to be included as income. If the s the absence of evidence 10 the contrary, 0 be the fair value of the compen: ket value and paid the employee addition to cash salary, the — Promissory notes or ices, and not merely ¢ amount of their fair ‘A taxpayer recciving 2s compensation a note regarded as good ue at maturity, but not bearing shall treat as income e. Thus, note is or could be discounted on a 6 per cent basis, lude such note the payment due on a note so uld be included as income counted for are met as they become due, spect of each such payment #0 much630 Sec. 44. Long term contact Income from long-term contracts is tax- able for the period in which the income is determined, such determination depending upon the natore and terms of the particlar contrac. As used herein the term “longeterm” contracts means building, installation, oF construction contracts covering. period. in excess of one sear. Persone whaee income is derived in whole or in part from such contracts may, #8 t0 such income, Prepare their returns upon the following bases (2) Gross income deri such contracts may be reported upon the basis of percentage of uch case there should’ accompany return certificate of ach the percertages during the taxable year of the entie work performed under contrac should be deducted from auch gross income all expenditures made during the taxable year on account of the contract, account being taken of the material on hand atthe beginning and end of the taxable | Revenue may permit or require an amended return, (b) Gross income may be reported i contract is finally completed and accepted if the taxpayer elects as 2 consistent practice t0 s0 treat such income, provided such method clearly reflects the net income. If this there should be deducted from feof the contract which are prope in accordance with the method of Where a taxpayer has filed his ret regularly employed by him in keeping his books and euch 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 and (b) above, 2 statement ‘upon his balance sheet and formerly employed by him, —A farmer reporting on the bass of dete 5 profits is used) the amount of eh rem the sale of Hive or prior years, ich were pure oft from the sale 2 be ascertained by in the case of the sale of animals pur : for breeding or dairy purposes and not for resale, the profit the amount of any excess of the sales pri represen ting the di reen the cost and the deprec retofore sustained in computing net income. asa deduc + 631 ing on the accrual basis Foss profits a y adding 1d products on hand at the end of the year the le of live stock products, and ri for hire of teams, machinery, and the like, during the year, and_ deducting Stock and products on hand at the in accordance ive stock ac- be included thorized and adopted for the purpose. reading. or dry purses end hot for 1 article received in exchange is t0 be included in gross income. red in crop shares shall be returned as of the jich the crop shares are reduced to money or a ich as fire and typhoon insurance ‘A person, ‘of which Suc. 46. Sale of patents and copyrits—A taxpayer disposing of patents or copyrights by sale Should dctermise she pot of learning teettom by he dif Drive and the cost The table gue MOLY the cae ;° 632 I 633 Ste. 47. Sale of gooduill only when the business, or a part of 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 pay- improvements are ‘made for goodwill acquired after March r, 1913, there can be 7 titled to deduct 88 with respect thereto, but gain may be realized from the sale e year when such destruction takes place the amount previously: up throug! ich have been currently deducted, wve been carried on the books as an less any salvage value subject to the lease to the exter was not ‘compensated for by we. If the buildings or improvements destroyed market value on March 1, 1913, of the goot , were acquired prior to March 1, 1913, the deduction shall be based on the cost lue subject to the lease to the extent that such loss was not compen- sated for by insurance, hhe became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements, No See. 48. Arm charitable, and educat Sse. 50. Forgiveness of indebtedness. —‘The cancellation and forgiveness of indebtedness may amount tore payment of income, to a gift, or to a capital ‘transaction, dependent upon the circumstances. If, for example, an indi performs services for a ereditor, who, Gebt, income to that amount is realized by the devisee is not the ant paid to the paid by him under life insurance, end the so-called “dividends” of a mutual credited aga paid-up pol subject to tax sre in the in the taxable income of the amount of rent paid to q 2m his gross income an! insurance company lends and should be included Phen income is to be reported.— in the gross income for the received by the taxpayer, i accordat ‘op son sues in one year on a pecuniary dim 0 . See 4p lmpecemets by lever When buildings are erected or improve “oy Property is recovered on a judgement therefore sna later year nome alized ments made by a lesee in p lessor, ad su Di that year, aseumning Toney or property would have been income buildings or taal ener 7 Tada toe of a reaver the ‘easler year if then received YY infringement. Bad debi GY PeRe ofthe ace th sbsequen yaria covery for pat off subsequent to March (a) The lessor may report as income at the tim improvements are completed the fair market improvements subject to the lease. 52 cely rece F or set apart for a taxp. 1 is subject to tas forthe igs oF improvements at and report as income for each year of the lease an fr the lease steome muse the prope tigger Where a coon the Reser by Oe minated to the ext.634 See. 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 income for the year during which the coupons matured. This is true if the coupons are exchanged other property instead of eventually bei 1ed. Defaulted coupons are income for the year in which paid. The distribu 3 profits of a dis regarded as received by ugh not distributed. Interest eredited on savings .bank depos 10ugh the bank nominally hes a dom or never enforced, mn, when such credit passes status as income for the exces of he agere= fate amount paid in by the shareholder fs income for the year of maturity of the share, amounts in a 8 invest and reinvest such sums from time , the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the corporation and shall be included as such in its annal retur ion or disposition by a corporation of ite own capital sr the acquisition or disposition by a corporation of share of tock gives rise to gain or deductible loss depends upon ich is to be ascertained from all its facts 10 of the capital stock upon their original issuance gives rise to neither taxable ge ductible loss, whether the subscription or issue price excess of, or less than, the par or stated value of #4 ther property. Any gain dé sx, and any loss 1e provisions of subject to permitted by the nature of voluntary assessments upon, paid for, in shares of stock held by the individual shareholders, treated ‘as an addition to and as a part of the operating ca ‘company. Sec. 57. Sale and retirement of corporate bonds ff bonds are issued by @ corporation at their face value, the corporation realizes no gain or oss, (b) If thereafter the corporation purchases and retires any of such bonds ata price in excess issuing price or face 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 ‘excess of the issuing price of face value over the purchase price is gi income for the taxable year. (2) (a) If bonds are issued By a the net amount sd or amortized ng price minus any amount of premium already returned as income, the excess of the purchase price over ‘the issuing price minus any amount of premium already returned as income (or over the face value plus any amount of premiui gurned a8 in come) is a deductible expenses for the taxable year. ion purchases and retires any of such bonds at a price less than ‘of premium alread) (Gr ofthe face val purcha If bonds are issued by a corp is deductible and should be prorated or amortized over the ¢ purchase price over the iy deducted (or over the face value deducted) the tasable year. (c) corpora fof such bonds at a price less'than the issuing price discount already deductes not yet deducted) over the purchase price is gain o Sec. 58. Income of corporation from leased property.— Where a corpora nhs Teased its property in consideration that the lessee shall pay in Tiew of other rental an amount equivalent to a certain rate of dividend on the lessor's edness, together be consideredi oe 3 636 corporation has conveyed or lt its property and has parted with its manage- ment and contro, or has cated to engage in the business for Which it aa gnaly organized, wil not reeve i from labty to the tax "While the psyments made by the lessee directly wo the bondholders or shareholders ofthe Testor are rentals a to both theless and lesor (renal pu in one case ad io the bondholders and the shareboer such lend payments received as from the este and Peer hd ome rin whe re rentals received in the othe 59. Gross income of a corpo issolved, its affairs are usual dating the assets and paying the debts, and such receiver or trustee in the stead of the corporation for such purposes. Any sales of prope by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss, extent provided in section income from rentals and royalties from all sources within the Philippines. (Section 29 (b) of the Code ) See. 61. Exclusions from gross income.—The term “gross income” in the Act does not include those items of income exempted by fundamental law. Such tax-free income should not be included inless information regarding f such income should not be confused with the reduction the application of allowable deductions. Sec. 62. Proceeds of insurance —The proceeds of life-insurance policies, \n of the death of an insured to his estate or to any bene ‘ ration, but not a transferee for a valuable G4) are excluded from the gross inet er the proceeds are received in a exceed the aggregate (whether oF the ta in gross incor ¢ j SSS Se by assignment or otherwise, of insurance, endowment, orannuity antrac only the actual value of such consideration ims and other sums subsequently paid by the transferee are exempt from taxation. See. 63, Amounts recived as com amounts received by an insured or his tr heath insurance or und for personal inured, i for injuries or sickest. — "The ce oF benehcares through accident ive such damage operty received as a gift or received under 3 through legal succession, is exempt fro Sn amount of principal paid ur er alimony nor an allowance based on a separation (Section 30 Sec. 65. Business expenses. — come incl with or pertaining. chased for resale, is deducted from gross sale included in business expenses are managemé incidental re property. A carrying on his business from is gross income from whatever sou 1g expenses a8 ordinarily Ste, 6. Traveling egeier, alee spain Cals bn fdging, If the od, include transportation expenses uundercaken for other than \® personal expens fore, not det siness purposes, the transportation expenses are the me ing expenses, and there- expenses, meals and ‘onal expenses. (@) If, then, an individual, whose bb a salary as full compensation for his set traveling expenses, or is employed on a allowance, his traveling expenses, including ‘meals and lodging, ate deductible from gross in (b)_If an individual receives a salary and expenses, he shall include in gross income, deduct such expenses. ‘no expense pended for hie actual traveling he amount so repaid and may«on hand for which no record of consumption is kept oF of s Pe 638 (c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such ‘meals and lodging may be deducted therefrom. A payment for the use of a sample room at « hotel for the display of goods is a business expense, Only such expenses a8 are reasonable and neceseary in the conduct of the business and directly atributable to it may be deducted, claiming the benefit of the deductions referred to herein must ment showing (1) the nature of the bu he is engaged; (2) the number of ing he taxable ‘other expenses incident to travel and claimed as 2 8 referred to herein must be substantiated, when by the Commissioner of Internal Revenue by record showing in the amount and nature of the expenses incurred. cpenses that they’ are consumed provided If a taxpayer carries incidental mat used in operation at the cost of such inventories at the beginning and end of the year are not. taken, permissible for the taxpayer to include in his expenses and deduct from gross i 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, they © property. should reserves if such account is kept. appreci be charged against the depreciat water, telephone, etc. Amounts curren 639 Suc. 70. Compensation for personal expen pail ded resonable services seta Extpensition,paypents oie taecad avmments purty. for servic, "This test and it pi Rother stated and illustrated as follows: and_are, in fact, application may be Any amount paid purchase price of se ‘corporation may be a distrib ies are in excess of those ordinarily 1 services, and the excessive payment correspond or bear a close to the stockholdings of the officers or employees, it would seem the salaries are id wholly for services ren payments ‘upon the stock. (b) An osten- This sible salary may be in part where 2 partnership sells 1 Corpor that the salaries of the former partners ‘constitute payment for the transfers different from that applying to compen if contingent compensation is paid pursuant to a free bargain betwee plover and the individual made before the services are rendered, not influenced by any consideration on the part of the emplover other than that of securing ir and advantageous terms the services 28.2 deduction even though in th it may prove to be greater than the amount 3) _In any event the allowance for compensation paid may not exceed fis reasonable in ll the circumstances Te in general jut 1 aoe reasonable and true compensation is only such amount a3 would ot ‘be paid fo 1e date when the ices was made, not those existing at the date when the con- tract is questioned. Sec. 71, Treatment of excessive compensation, —The income tax Vabil 1¢ recipient in respect of an amount ostensibly paid to him as compensation, not allowed to be deducted as such by the payer, will depend upon the of excessive payments by cor640 . Bonuses to employees. — Bonuses to employees deductions from gross income when such payments nal compensation for the services actu thether such bonuses are paid in cash or in kind or partly in kind. Donations made to employees and others, which ‘excess of reasonable compensation for services, are not deductible from gross income. — Amounts paid for pensions See. 74. Re is acquired for be for a specified sum, the purchaser may take as 2 deduction aliquot part of such sum each year, based on the number of yea hhas to run. Taxes paid by a tenant to or for 2 landlord for busine are additional rent. and constitute a deductible item to the tenant The cost borne by a lessee in erecting buildings or making permanent improve- tpents gn ground of which be i lees is eld tobe a cial invesment and not deductible as a bus In order to return to such taxpayer PRS investment of cap ofan crout cgualro the cet of such knprore a? ; a ee neers than the probable life of the b this de take the form of an allowance for depreciatic rakes, ete,, may be included, treated as an expense deduction, in so far a b cluding the value of farm. produ of the taxpayer. Where a farmer 64x ‘The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not an allowable de« cof 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 sy be depreciated ‘business purposes and , such cost butable ro busines purposes i operated for recreation or pleasure the expenses incurred in connor rm are in exces of therefom, the entre receipts fo of products may be ignored rendering a return of income, and the expenses incured, being regarded a5 personal expenses, allowable dedu 1. When charges are deductible —E: 1d deductions therefrom, payer has the he does not wit tases, or other charges, he e or ay seceding yea.“ ing business of 45) Frcome and deduction, an distort the income, they may be included inthe year fw ake them into his accounts, Judgmen ‘other binding judicial adjudi juries, or ather cause, are deductible from gross income when, ‘methods of642 Sec. 77. Expenses allowable to non-resident aliens and foreign corporatons.— The expenses allowable to a nonresident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business or uuade conducted within the Philippines exclusively. (Se: 30(b) of the Code) of which he ‘or euit= ablé-owner, even though the taxpayer is not directly liable upon the bond or ~# ‘hot secured by such mortgage, may be deducted as interest on his indebtedness. In the case of non-resident alien individual or foreign comporation, 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 Ve from. all sources within and with ra ya Fo ‘rust companies, interest pa 3 depositor on moneys recived for investment and secured br interest-bearing eefentes of indebted aed By euch baniortonnor rune company nny be deducted fom gros teams = 79. Interest on capital.—Interest calculated for cost-ke s€8 on account of capital or surplus invested present a charge arising under an inter ‘ble deduction from gross income. (Section 30 (c) of the Code) ies paid to the proper customs officers, and business, occupa- lege, exc taxes and any 0 irectly to the Government of 643, 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 ob! ‘covenant clause the corporation paying a tax or ‘else pursuant to its agreement is not entitled to deduct such ‘gross income on any ground. ing a taxfree for someone . Income tax imposed by the Government of the law does not permit the deduction of the income tax paid to Sic. 82: Thcome, aro, and eset toes ino. by the authority of « fren comtiy = Income, war-profte and esce profi taxes 2 eS af ling the United States cexpayer docs case of a citizen of a foreign income from sources B thin such foreign country is not subj that portion of the taxes paid to such foreign country to his net income subject to the Philippine income tax s! deduction, See. 83, Evtate inheritence, and benefit. — Ente, inheritance, and il assessments, paid for local benefits, such as Sorcalled taxes, more proy Tike ‘imposed because of and measured sreet, sidewalk, and othe payer may deduct Eeccroments pid as an expense payment of such fisessmente & necessary to the conduct of his busines. When the asesaments ing local bene, the payments by the fare made for the purpose of constr cree id as ‘hereon XS QE tare e taxes paid t6 the Philippines, or if such country does not impose any income a taxes IF the country’ of which a resident alien in a etzen or suber tees not allow to a Filipino citizen res such country a credit for taxes paid by Proportion of the tax such citizen to another foreign country, no credit is allowed to such tesideny payer's net income from sources within such alien for taxes pad by him to such foreign country. country taxable under Title II bears to his entire net income for the same taxable year; and accrued to any ‘Sec. 89. When credit for taxes may be taken provided by section ( ms Feturn for the year in ‘The credit for taxes (3) to (9) may ordinarily be taken either in the of the tax against which euch hich the taxes accrued or h the taxes were from sources without the Phil ther the accounts of the taxpayer are kept and 1 net income for the same taxat 3} basis of upon the cash receipts and \ (Section 30 (d) of the Code) eo, a es sy CB! the year not compensated for by insurance or otherwise are fully deductible Cie homeriee °)G@) If incurred in a taxpayer's trade; or Domestic corporation owning a majority of the stock of foreien oe —In the case of a dom el Peto whieh ne ot Le . Joy, eg If incurred in any transaction entered into for profits; Sec. 90, Of property not connected in fires, storm, shipwreck, or other of the return, suc i. wre 9 see 94, Laser by exprain,— Domenic corporations ay dete nt By at Spa Dror ements, sey tas eas any foreign county by cach domes eta and excessprofs taxes deemed to have beet ime. proportion of any income, accrusl by such contrlled fo v ion ano SAS Bgl bpm alin ont foes poration — Now deen ‘of the as apne resident ens and foreign coporatons ne towed only lane sosained 3 mnie {he rei for for such dividends x ‘business or trade conducted within the Philippines, losses of property within CBs ih anoun corportion in A) ihe Phlippine srg fom fre, stonmn,siperedy or other" and os fom mor 8 iy susan in taser 0 computed yy led foreign eo Sec. 96. Lowes generaly.— Losses must usualy be and completed transactions. Proper adjustment mast )\ for expenditures or items of loss és eolescence, with respect to the to furnish with respect ued been paid ax paid or accrued sa and by the salvage value, a the sale of residential property is not d purchased or constructed by. the taxpayer af the property. A loss on ‘unl the propery was i ubeeqoent eae Drapery by git Nonresident liens ant foreign corporations not allnced "Nonresident lens dnd freer on eet for tae ‘The amount of eredit on Vol cations: - op oF deme650 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 ings instituted against the debtor are termi- ‘confirming the conclusion that the debt is worthless, shifting the deduction to such. 1e basis of valuing hi jue when received, which may be less than their face luctible for bad debts in any case is limited to such original valuation. See, Examples of bad sset8 of a bankrupt a may be deducted as a bad debt. The difference between the'amount received by a creditor of a decedent decedent's estate and the amount of hi debt. ‘A purchaser of accounts receivable charged off the books as bad debr is entitled ff 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 mort- aged propery and credits, the indebtedness with the purchae price, the able a5 a deduction for a bad debt, for the property debt stands place of the debt. ‘The determi is deferred until the disposal of the property. except in the case of a bank or trast United States ‘of deposits, be considered t day of such taxable year, of intial part of whose business is the re ss from the sale or exchange, on the market value not resulting from exhaustion, obsolescence. ‘The proper allowance for such depreciation of any property used in the trade ‘or business is that amount which should be st aside for the taxable year in accordance fe 29 ance atises fiom the fat approaches a point where Ee confined wo propery of thie nature. In the ease of tangible property. plies to that whichis subject to wear decay or decline fom natural Exizes,t0 exhaustion end to obsolescence duc o the normal progres of the art, SS where machinery or other propery must be repaced bya rowing needs of the business. n trade, nor to land apart from the through the proces of removal sufer dep ep in repair may jen of a depres ‘The deduction of inthe expayer to sutomabies ‘or the plese 1 building used by the taxpayer solely athe residence, nor in reapect of farnitore ‘or furnishings chain, personal effec, or clothing; ut properdes 5) such as thesia busines, may respect be the subject of a depreciation Sac. 107. Depreciation of inthe trade or Busines Subject of a deprecation allorance : the use of copyrights, and fr trade is not so f any del image sustained by the pro distinguished from the gradual exhaustion of its utiluy the depreciation allowance, Where the lessee of real property erects buildings, ‘or makes permanent improvements which become part of the realty and income same at though ments made, No d ‘hich has Been amortized to it serap practice, such as an Whatever plan or m648 from gross income, When a taxpayer buys real estate upon which is located 2 building, which he proceeds to raze with a view to erecting thereon another te considered that the taxpayer has sustsined no. deductible 3 cost of such removal, the value ofthe real estat, ing. presumably equal to the purchase pris coat of removing the useless building? See. 98. Lost of utful value When through some change in business conditions the tefl in the busines of sme oo al of he’ ape sts 5B suddenly terminated, the axpayer discards such ‘saets permanently from use of sich business, he may c Tn determinating the amount of the oss, wat be made, however, for improvements, deprecation and the the propery. This exception to the rule of property in order 2 Tose requires, proof tute by fearon of Property has been prema ce a for expe whee ‘manufacture of sa result of thote goad Sepreniaton allowance ate authorized other than espital fue permanently abandoned or permanenty devoted to sr se, snd to machinery only when its use at auch is permanently abandoned. Any loss to be deducble under this exception mist be charged of in the books and fully explained in returns of income x ‘Scorporation can not dey from gross income any amount claimed 20a lose SX metey'on acount of shrinkage in valve of such stock through taston of QY theimarket or otherwise. The fost allowable in such eae i that actually sufered aS when the y . 99. Shrinkage in value of stocks— A person possessing stock of a -k is disposed of. If stock of a cor ther basis determined in accordance ss, provided a satafctory showing of its worthlesenes be tage, a6 in the case of bad debts. 7 7 Set, 109. Lanes of farmers ty #8 bine ers “9 Sethld for tmortle marke ne SP Gphassl alco destonton a wore sh : = e 3¢ reflected in an inventory Baer, See 206)-) 649 SPO erry oxy, le by one of watchin coal pt pf i ny epee tema a Sees meg Siti tioel ag laces teed dere ie rere aye eed Fae ct ot eerie eee ed ere Seer al ble A ile The of 7 ar re i i gg one meee’ Ineo pis nt du sCaguia pee ‘addition to being engaged in another loss from such operation of the farm, deducted from gross income received ‘ded the farm is not operated for recreation or pleasure. from all sources, p Sec, rot, Capital loses; loser on tzash sles of Losses" on sles or exchanges of capt provided in seston of the Code, If Become worthless du be considered a+ tasable yar, of tie treaied in secon 33 0f the Code (Section 30(e) of the Code) yer within the yea, the same may Bet income. ‘There ‘should. accompany the tad debts Before jount subsequently re land allowed 2s a deduction for income tax purposes, must be inclu In diSee, 112, Depreciation of drawings and modelt Where a taxpayer has rings, patterns, models, in improvement of his any such asset may be and must have due regard to operating conditions during the taxable period. wi sof prot must Fo ups stain the deductions incurred expenditures in his business for designs, di se shown by clear 3 work of an experimental and convincing evidence to be unreasonable. The reasonableness of any claim facilities or his product, if for depreciation shall be determined upon the condions known to exist at cstimated from experience with reasonable accuracy, it may be the subject of the end of the period for which the revurn is made. If it develops that the use ‘depreciation allowances spread over such estimated period of usefulness, ‘The ful life of the property longer or shorter thar useful life as inally facts must be fully shown in the return or prior thereto to the satisfaction cstimated under al the then known facta, the potion ofthe cost or other bass of the Commissioner ‘of Internal Revenus. Except for such deprecation of the property not already provided for through depreciation allowances allowances. no deduction shall be made by the taxpayer against any sum so Should be spread over te remaining useful ated fet up saan asset except on the sale or ether lopotion of sath abet a 8 he light of the subsequent facts, and depreciation deductions taken accord loss or on proof of a total loss thereof. Charging off depreciat an allowable deduction ‘manner in whic that the amount measuring a reasonable allowance for depreciation raust be ther deducted directly froni¥b book valve of the assets or preferably credited to 2 depreciation reserve account, which must be reflected in balance sheet. ‘The allowances should be computed and charged See. 110, Obsolesce respect to physical property the whole or any portion of which is clearly s ‘as being affected by economic conditions that will res prior to the end of its normal usef are insufficient to return the c See 30 ®~ 11 be 26fhig in the case of a patent or copyright, cost or other basis of the patent or copyright. ‘be computed by an apportionment of the cost oF other basi copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, a8 the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experimental models, attorney's fees, development or experimental expenses, ete., actually paid, Deprecation ‘of the fair market value as of March 1, ed. se 90 Da ip te allowed, as the corresponding reduction in ther amount previously deducted, data must agree with those appearing Se 206)-12- er 30 ip. (Seti 30 al Circular V-332, Jamuary percentage de Gener economic interest, the and not # mere economic advantage, ‘The taxpayer m654 cil or gas or mineral in place, and secures, fom the extraction of the The must look for a return of his capital. ‘Thus in oil or mineral extracted, or the gross proceeds ing the parties t0 2 lease providing for royalty payments of the parties therefrom ‘stated amounts per unit mined) have economic lace. ‘That is, they, as owners of the rights in place, share the income from production, and the depletion Ere regarded as designed to permit tax-free recovery of investments in such property rights. 1g-A-z, Basis for depletion— On oil or ga! lowance is fixed at 27 1/2% of gross income whil ance varies in accordance with the ‘the amount remaining after deduct curred by the taxpayer percentage depletion me oF profit. Subject: Oil and gas wells @ ® Gross income after deducting rents royalties P 100.00 P 100.00 9h, thereof 2750 ne oF net profit 000 f net income’ or net profit 25.00 ance depletion = 25.00 'P25,00 is the allowance depletion because the all percentage cannot exceed 50% of the net profit or net income. Under column Go) the allowable depletion is P27.so because it does nat exceed 50% of either net profit. ss of the depletion Definition of terms. —For_ put a sf terms and phrases is and mines, the follo cated: sacome means the snd g38 are not into a refined prod ‘be assumed to be eq the date of sale) of the to sale, the he ‘representative market or field price ind gas before conversion or transportation. ‘Gross income from the property” means rom mining. "The gross income from’ mining consists of the proceeds xr minerals extracted from the mining property. hhete the ordinary treatment processes are applied or the actual cost of ocean freight 1g price for gross ineral products are sold or con- rine under C.L bbe deducted, signed abroad ost of ocean freight and insurance sl (b) Mining. The term the ores or minerals from the ground but also the or fe owners or operators in ord products, and s0 plants or mils ess of 50 miles the physical and te transported s greater distance to such 's from the application of of ‘of removal from the ground, from the property”. d from such processes! In the case of coal—cleaning, breaki int freezing, and loading for shipment; is recovered by the Frasch process—pumping t0 fof the product or products iver ores; and pulverization of, 1g of phosphat(€)_Net income or net profit. —"Net income” or “net profit” means the taxpayer's taxable income from the property. income or net profit (comput ‘ance for depletion) means the “gross income from the Property ble deductions attributable to the sibutable 1g overhead and operating expenses, development costs © expense, deprecation, tnt, loses sistaned etc. Dedc~ shall be lar properties or process the term “property” means each separate interest ‘each mineral deposit in each separate tract or parcel cor more separate operating mineral an operating unit, he may elect to form f such interes by the taxpayer ermal Revenue aliens or foreign r ign corporation i ‘and gas wells or mines locate i "ax Code, as, R.A. 2698), (Section 30 (h) of the Code) Gu 26 G)~ 7 de Ge)j~/ 657 Tn connection with claims for deductions, ‘of income the name and address of each 1¢ approximate date and the amount ‘ther than money, the basis for calc shall be stated on returns ich a gift was made sift in each case. Where the f shall 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 ) Unless 2 non-resident Commissioner of Internal , corporate, oF of reasonable pensions income reasonable az in accordance ‘ordinary sear represe respect of pen658 659 fan offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees, and executor’s commissions, are chargeable i f the estate and are not allowable deductions, Amounts id under an agreement between bondholders or share- bbe used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in return of Inthe cate ofa corporation, expenses for organization, such 2s incorporation fees attorneys fen and accountants’ charges, are orditalyeapiad pends ture, but where sch expen 9 pore 2 taxpayer may charge such items against income it he Je Incured. A holding fon the sock ofa subs forthe subsidiary and ine igross income, taxpayer signifies in guaran return his intention to fue % pligamserde dekolte aon ite ret income, but such paymeminay the cost deductions allowed in the preceding ibe the manner of the election. he return shall be irrevocable for the taxab year for which the return is made. (Section 3r of the Code ) Premiums on life for premiums on any life 7 taxpayer when the taxpay WY policy are not deductible i and family expences. — Personal, sxpenses are not deductible. Insurance paid on a dw Sec, 122, Losses from sales or exchanges of property.—No d Fespect of losses from sales or exchanges of property, le. In the case of a pr purposes, but incidentally th his professional work ere), no part of the rent is, he uses part of the house for ly i in section 31, the family of an include only his bi and sisters (whether by the whole lood), spouse, ancestors, and lineal descendant his pI SJ brsinese exper portion of the rent as is pro Where the father is legal allowanees which he gi oF otherwise, are not and an his minor children, them, whether said to be in consideration of se table deductions in his return of income. Al der a separation agreement are not deductible ty per cent h is owned, directly or indirecth ony, n from gross income may new buildings or for permanent ints made to increase the value fear, a personal holding company personal holding company; 5 lowance is or has bee Gh copyright and’ plates, (@) Between a grantor and a fiduciary of any trust; (©) Between the fiduciary of a trust es a part of the cost of th the same person i-a grantor with respec ‘The amount expended for a es is part of issions paid in purchasing. secu Commissions paid in selling sect © prop (A) Between a fiduciary of a trust and a beneficiary of such trust.660 (Section 32 of the Code ) Sec. 123, Gross income of insurance compar income of insurance companies consists of their operation of the business and of their income from (that is, gross premium less returned premiums on from the sale of assets, and all lecrease in reserve funds required in the taxable year must be included in the gross income to the increase its free assets. Any n less the company sh renewal premiums, to purchase ance or annuities, or to shor endowment credited on deferred > scerttned, apport NE bevencluded of dedu ascertainment, apportionms , imself of such prior to the expiration Ss tained, apportioned, or credi ‘means of the premium in excess of the pr the taxable year there may be excluded from gross income only the amount of such premium received, and received and returned by mutual in the same manner, as no reserve will be recognized cov deposits, The earnings on such deposits, including im deposits as are not re the policyholders upon canct ion of the policies, must be in gross income, Pa within the taxable year to reserve funds and of the sums other tha ve 661 Spe. 126. Deduetions allowed insurance companies.—Insurance companies ited to the same deductions from gross income as other corporations, Iso to the deduction of the net addition required by law to be made id W the taxable year on pol includes oF (construed according to the method of accounting upon the basis of which the net the taxable year, but does not include any estimate for lo uring the taxable year. As payt disability and other and annuity contra to make premium deposits deduct from gross income returned to their policyholders ind reinsurance reserves. In retained by 2 mutual fire or tof losses, expenses, and Tasses and expenses have ‘been 3c extent of such gate amount of pr od for the payment of losses, expenses, iag the amount of premium depos ‘mutual casualty insurance company for the reinsurance reserves, it will be presumed th: ‘of earnings and profits ch a separate allowance any portion of such sm applied to the payment of ex or reinsurance reserves, then sich payment can not be separ “The amount of premium Aeposite retained forthe pasment of expenses and losees and the amount of such espentes and loses, may not both be deducted. “A company which inceats part of the premium deposits so terest beating ss det sich pi, .y make a return on t respect to its business conducted on the surance companies— include in grass income the gross paid for reinsurance.1! et addition to revere funds. — All policy premiums on The stock or se which net addition to reserve is computed, must be included in gros income order of their acqu acquisition) with an Tesurance companies may dedvet from gross income the net addition required qual number of the shares of stock of securities sold or otherwise deposed of by law to be made w to reserve funds, When the reserve beginning ofthe (@) Where the amount of stock or securities acquired wi 80 released must riod is nc than the amount of ot or — disposed of, then the particclar shares of stock o foreign, the actual deposit of sums ion of which resulted in the nondeductibility ofthe loss shell be those Philippines, 7 the stock or securities disposed of are matched in accordance ‘ rule rene companies, ‘ acquired We alowed ss deduct tok or srw oo 7 : 2% returns, insurance companies shall submit to the Com cf ree ones ih ftrs of cane ever pone» copy of cates 2 {D. The, word “acquired” at used in this section means acquired by section e Code purchase or by an exchange upon which the entre amount of gain or Tons wae (Section 33 of the Code ) Fecognized by la, and comprehend cases where the taxpayer fas entered Sato SecrION 141. Loner from cash sales of sock or secu a contract oF option within the snty-one-day period to acquire by purchase payer cannot deduct any loss claimed to have been sustaine ‘other disposition of stock or secu bef Sh an exchange, " ° i eid ening ty dye the date of sich sale or deposition and ending thir days afcy sed erred to in thi section a8 the ssty-one-day period), he has sequired EXAMPLE (): A whan auble et eh elenr ge, on Desens Schanae ceo it one day period), he as sequired +, 1939, purchased 100 shares of common stock in the ML Company for Pioeoo saat OP ou « of g i and on December 1: purchased 100 additional shares for Pg,000. On Janvary 2, 1940, he sold the too shares purchased on December 19g, for ions 000. Becase ofthe provisions of section 33 no loss from the sale tow. able a a deduction lendar year, on December disposition of stock or securit as such dealer. A, Jc year isthe calendar year, on September purchand aon hme ef tae common sek af the i Combany fe Ps.coo. On December 1, 1959 he purchased So provisions of the stock or sec were’ disposed * y aeecacet ase cecum ae ree 100 shares purchased on September 2 be determined, the sock or secure speced Prioon on the sale of the tao sh af in the ordet in which they were orginally acted (eghen sad ee Alpucased 7g shares of substan scquisition). 75 of the shares (P3,750 less 3.000, y because of the provisions of section 33. vag a5 hats ovided in sections 3 DecemberMeo sy Car) 664, the 50 shares acquired on December 21, 1939, (P2,750) and the selling pri Of 50 of the shares sold on January 2, 1940 (P2,000) ], or 3,250. Simla the basis of the 25 shares purchased on December of which resulted in the nondeductibility of the loss (P2s0) sustained on 3g of the shares sold on January 2, 1940, is Pago plus Dias, of 375. (Bee section 143 of these regulations.) whose taxable vear is the calendar year, on September + 1938, purchased 100 shares of the stock of the M Comp: 5,000, He sold ‘these shares on February 1, 1940, for P4,00. On each of the four days from February of substanti from the s ‘one-day period A purchased not less thar stock, the loss is not deductible. The particular shares of stock the purchase d in the nondeductibillty of the loss are the fist 100 shares: Purchased within such period, that is, the 50 shares purchased on: February. 15, 1940, and the 50 shares purchased on February 16, 1940. (Section 34 of the Code ) of “capital assets." ~The law provides that the shall be held to mean property held by the taxpayer ‘or not connected with his trade or business), but does not inchide 1 taxpayer or other property of a kind which would properly ded in the inventory of the taxpayer if on hand at the close of the n includes all classes of property ‘The exclusion from the term of property usei or business of a i ich is subject to the apply (such limitation may be inapplicable to a dealer in if'so, it is because he holds the land primarily for sale to customers ‘of his trade or business, not because land is subject to a the sale or exchange of property of a chara is subj “A & os “6, See. 133. Percentage taken into account—In computing net income, conly 50 per cent of the gain or loss recognized upon the sale of ex: 1 capital asset shall be taken into account. Thu: concern which has an “ ain of P5,000, of Ps,000}, or Pra,sc0. income, inasmuch capi gains. In the ease, for example, goods, having an ordinary ‘capital losses of 3,000 the taktble net income is computed 28 fo Ordinary net income 50% of such gains Losses from sales of capital assets s0%of such losses Net tasable capital gains. ‘Taxable net income If such taxpayer had an ordinary ‘of P2,000 and capital losses of P7,co0, the taxable net income ‘computed as follows: Ordinary net income ‘Losses from sales of capi (as stocks or securities). such losses 59% 50% of such gains Net capital losses Taxable net income Gains from sales of capital assets 665 the case of a merchandising rdinary net income” (net income exclusive of net from the sale or exchange of capital ase net income subject to tax (200, capi income of P20,000, capi be P1o,000 plus P2,500 (50% capital 8666 ——-P 1,000 750 = 50 5,000 losses—on capital assets held for 9 months 16,000 1947—Net income from busin€S$ cemngon-— wenn 5 Interest earned — "200 Capital gains—on capital assets held for 15 months 5,000 In 1946, his taxable income is computed as follows: Income from business, dividends and interest = P 2,250 Capital gains and loses = _. -P 5,000 Net loss carried over to 1947 (Ps.000) Net income subject to tax. _ eee 5250) In 1947, his taxable income is computed a8 follows: Income from business and interest ne 2,200 Capital gains and losses: Capital gains —_ ee P 5.000 One-half = — P 2,500 Less—Capi — Net capital gain — Net income subject to tax : # The net cay 1947 is reduced to other sources (not 1946 and the net income from for the year 1946 is of If 4 bank or trust company incorporated under the avs ofthe Phi oof the United States, a substantial part of whose busines deposits, sells any bond, debenture, note, or cerieate or Indebtedness insted by any. corporation ment or forr Fi 667 a See. 135. Gains and losses from short sales. — For income tax Property to cover the short sale, Ifthe short sele is made through a broker and (Spun sh a nt dle om ue en M 5 d é the broker borrows property to make delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the brokers to replace the property borrowed by such broker. (Section 35 of the Code ) in or loss from sale of property.— ss from the sale or exchange of the case of property over the No gain or loss is recognized ‘any case proper a in computing ie exchange or sale of fr depletion sustained and allowable as deduct the amount of depreciation previously charg a question of fact to be established by easonably and ade; make property may be of property in qui of keep records, the of acquisit used in determining the cost in 0: loss from the sale of the secu ‘general rule ka ao668 y ; “ / DX See. 137. Matas of the computation of gan ores from the sale or => ILLUSTRATION OI exchange of property acuired prior to March 1, 1913.—To avoid complesty a plexity oo ‘Ro adjustment has been made in these examples for depreciation or depletion. Fair Market cose | Faia Deductible Loss cP llth sof open snide Mann market value as of that date isin ence ized therefor Panove | P6000 | P yoce ILLUSTRATION 1 period prior £0 March 1, 1903 Fair Market 5 y ase of property acquired before _ Value _ | Sale Price Taxable gain at less than cost but at more than Mar. 1, 1923 = =a we P 20,000 | P 30,000 | P 40,000 | : ILLUSTRATION IV | Fair Market ] | Cost value | Sale Price Deductible Loss | | | Mar, 2913 | ae —tsEeEeer—eresee panoe | be | Prac In the case of property acquired before March 1, 1913, when its fair market value 28 of that date is lower than its co the excess of such fair market value over the amount realized therefor. - Where the cost is equal to or greater than the fair market value as of March 1, 1913, and the selling. pric ; the gain to be ILLUSTRATION 1 included “in gross income is the excess of the aclling price over the cost, ILLUSTRATION V Cost Deductible Loss = Mar. 1, 1913 Fair Marke B Cost value | Sale Price Taxable gain P 20,000 | P10,0c0 | Mar. x, 1913 Se Procco | Projo | P 40,000 P 20.000 sold or disposed of at more than cost but of that date,Pe 670 ILLUSTRATION VI Fair Market ‘Value | Sale Price Mar. x, 1913 g P 20,000 | P 30,000 OK annarelcl by PA 75 138. Sale of property acquired by gift—In computing the gain or sale or other disposition of prope shall be the selling price and the ue the gift was made, or its fair market value as of March rioF thereto, determined in accordance with the next In the case of gifts made on or after July 1, 1939, the value taken as a basis, for gift tax purposes shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the property. Ses See. 139. Sale of property acquired by devise, bequests, Ta computing the tin or fon front the sak at other Bi acquired by devise, beg price or value of such property at the taxpayer has received as the re fa san in contemplation of or intended to effect in. possesion or enjoyment’ at or after death, and (b) such pro interest as the taxpayer has fecelved asthe result of the exercke by 4 person oer power of appoints’ (3) by wil or) by deed excited in contemplation of or intende to take effect in possession of enjoyment ator death, Inthe case of propercy acquired By gif, 9 March the table gain or deductible thereof shall be: computed in. accordance In the case of property squire 1 as appraised forthe purpose of the fsir market value when equ Exchange of pro tion and subsequent dspestion result of a transaction be is converted into other props perty disposed of, and —Gain or loss arising from the acquisi- of property i realized only ween the owner and another person the property ‘different from stration, if a taxpayer owning ten shares of for a voting trust certificate, no income is, ic” means the fair value of the property in ‘purchase and one who wishes to a change in form. By way stock exchanges his stock certi realized, The term “market vi money as between one who wishes Te is hot, however, what can be obtained for the property when the ownes ‘under peculiar compulsion to che purchaser to buy; nor is it a purely speculative value which an owner could not reasonably expect to obtain for the property although he might possibly be fortunate enough to do so. “Market fe price at which a seller willing to sell at a fair price and a buyer ig to buy at a fair price, both having. le knowledge of the facts, fidence as to the assets and mn and 28 t0 ue of its stock. ¢ Picea eee 6” ‘The amount of income derived or loss sustained from an exchange of property , >” ig the difference between the market value at the time of the exchange of wy ‘the property received in excHange and the orig sost, or other basis, of eit in a repteredcoparnerchp—When fa partner retires from 2 duly registered copartnership, or the partnership is solved, he realizes 2 gain or loss measured by the difference between the red for his interest and the cost to him of ig in such cost the amount of his share in any undistributed ed since he b fon which the income ship was acquired and the amount any undistributed ich the income tax Ibe ascertained and the taxable gain derived or the deduct ible loss sustal be computed as provided in sections 136 and 137 of these regulations, If the partnership distributes its assets in kind and not in cash, the partner realizes gun or suffers lst according to the market value of on, Whenever a new partner is adi 3 facts the property received her disposi be the basis of67 I EAMPLE (2): A purchased a share of common stock of the X Corpore sits for Proo in 1936, which be sold Jancary 15, 1940 for PB ny oe Eee 4 share of common stock of the same comnentey cognzed under section ay af te Caan th basis 'No loss from the s ‘The basis of the new share is (Proo) increased by Pio, excess of acquired (P90) over the price at ; of common stock of the X corpor which he sold Januery 15,1940 for PB On fares ‘share of common stock of the same corporation fox The phe, lps from the sale is recognized under acca ee The basis ofthe new shae we Poe baie ofthe at sha dscreased by Pio, the exe (P80) over the pices whee es 131 of these regulations R. General Citeular No. V-253 pub- 5 of the Cod, pr of subsection fore its amendment inged for another prope, urpose of determining gas © equivalent of cash to the amoust of fe fan ee is exeha 4 PE te lanier ene oper solely in kind.—Under paragraph’ of n (c) of section § ae ar a etn) tn a ing cases of exchanges made in pursuance of @ plan of 1 a corporation, «part to 2 merger or consolidation, lan of merger of cnet . ry foe consolidation, P fa corportion ida nges his securities in sch part he megs om olay nh echapas i secures ih Eerparaton solely for sock or acces 4 Recognition of gain in part but not loss, chere exchanges are not solely in kind. he @)_ By a shri or sscaity anade oy 2 sharif secu gain, but also money and if any, to the recipient shall be recognized, OEE ite ere te fPenys tothe sharcholder of seu be recogniaed to a © lo one efecrof the UE abe ted earnings and peo Example: exchanges hare of stock att chased ei sane occ ot ea is * and is recognized os Ce asa sin from ram eae of ek mated eo ara Hower thc tantasion of Pro would not be recognized 2 plan of merger or cons 4 erportion In prsuance of» pan ofr (0) ited the transferor Corpor fon receiv to be received without the recognition o wher property, then, sf such money and or onporsic is isiuted by it purtuant tthe in othe sid corporation money and the fa 7 i ibuted. In ne taxpayer property tot be consigered. purpose of determining674, - ~ 675 5. Basis of stock.or securities for the purpose of determining gain or loss ‘upon subsequent sale. operates in the first instance to reduce As previously shown cash “boot ded the gain recognized. The remainder must be By the transferor corporation, or its shareholder or security holder— is to be alloc yck and securities permitted ‘The. basis of the stock or securities received by the transferor corporation or to be received without the recognition of gxin ot "The tax ite shareholder or security holder upon the exchange specified in the above payer in a nontaxable exchange trades A stock w joo for one share ‘Rand one share of preferred stock of B corporation, together foo cach), and Pso cash. ‘The basis for the share of B common [2 of Pico) and the B preferred stock will like- ‘exceptions shall be the same as the basis of the property, stock or securities exchanged decreased by the money received and the fair market value of the ‘other property received, and increased f the hhave as basis its fair Examples: 1. A purchased a share of stock in the X. Corporation in Pion, Pursuant a plan of tation, Ain 1957 exchanged efor one share i my north Pop and Pye in ea "The basis of the sare of stock of the share inthe X Corpor ‘exchange (P20). ' of stock in the X Corporation in 1939 for Poo. ssa merger of cons a e of the amendmer must be undertaken for a bona fide pon not sly for the purpose of escaping the burden on ta Jo Gecermining whether 2 bona fide business purpose zealized a guin of P3o upon sep of the transaction shall be considered and the who he basis of ‘of transactions shall be treated as single taken to include the eash assets of Mhether the prop Pato is ap perty of the 7 is amendment basis of the ‘Treasury Bond being ite fair market value at the date of the eats the acquisition by one corpor assets including exchange, Po, and of the share the remainder, P6o. « ‘of another corporation, which has the permanence and not (0) By the transferee —The basis of the propery transferred in the hands momentary holding be inthe hands of the transferor, ‘the gain recognized tothe transferor on the transfer. (Seetion 36 of the Code) received several kinds of stock exchanged for new sec- sec. 144. Need of incentories. —In order to reflect the net income recognized, the proper ft entorce a4 the beginning and end of each year are necessary in tht pro- « every cate in which the produ come producing factor. ‘The inver jes on hand that have bet for purposes of determi bs le of 2 ‘subsequent sale of a the new securities. For example, if 10 shares of common stock par value P10, are exchanged for 50 shares of preferred and so shares of common each of P100 per share, or 25,000, he ‘yet segregated and applied to ‘consignment, but should exclude from ‘has passed to the purchaser. A purchaser sl Se 76-1676 Sec. 145. Valuation of incentories. — The law provides two tests to which each inventory must conform.—(1) It must conform 2s nearly as possible to the best acoountin reflect the income. ractice in the trade or business, and (2) it must clearly lows, therefore, or business. In order accounting prac financial position of the taxpayer is, as a general rule, regarded as clearly fiecting his income. used by business concerns and which meet the requirements of the Income Tas Law are (a) cost price or (b) o wer. Any goods in an i basis, taking no case shi ” selling price means actual offerings of goods during than thirty days after inventory date. The burden taxpayer to show that such except ing bases. come jin such records of the disposition of the goods as of the inventory to be made. hich have been £0 intermingled bbe deemed to be produced and the c purchased oF pi ferred, or sold, calculated upor quired during the taxable 67 Inventories should be recorded in a legible manner, properly computed and summarized, and should be preserved as @ part of the accounting record of the taxpayer. ‘The inventories of taxpayers on whatever basis taken will be subject tc igation by the Commissioner of Internal Revenue and the tax- ‘must satisfy the Commissioner of Internal Revenue of the correctness price adopted. The 1g methods, smong 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.: Dedueting from the wwentory a reserve for price changes, or an depreciation in the lve thereof. in process, or other parts of the inventory, at a nominal 's proper value. ) Taking wor price or at less tha ) Omitting portions FH the stock on hand. price or nomi ‘of materials or goods in stock. or a so called normal quantity including stock in transit, either shipped to or from the taxpay ich is not vested in the taxpayer. the 2 invoice price shou surred in acquiring possession of a abe in the case of merchandise produced by the taxpayer since the begin- taxable year, (a) the cost of raw materials and suy ‘or consumed in connection with the products; (b) expenditures for direct and necessary for the production of the particular industry. Among such eases are: (3) (6) miners and a68 Sec. 147. Inventories at market price and for normal goods in an inectory : gt the date ofthe inventory for the part ‘which usually purchased by the taxpayer and is applicable the cases (a) of goods purchased and on hand, and (0) af bare clesenis poe (imaterial, labor, and burden) in good in process of manufacture sdf frisigd fools on hand excuse, ‘of goods on hand or in proces of amis facture for de les contracts (ie, those-not Legally subject to xed pri io before te date of the here quotations are no stagnant fair market price at the date or dates he inventory as may be available, such as specific pur ‘by the taxpayer or others in reasonable volume and’ made fn. good fe ion of contracts for purchase commitments, taxpayer in the regular course of business has offered for sale such ‘merchindise ‘at prices lower than the current price as above defined, the inventory may be valued at such prices and the co determined by reference to period before and after the date of the from the actual prices so ascerta price. Sec. 148 Incentories by dealers in securities. deal ‘ho in his books of account regularly inventories unsold secu either— (a) At cost; (b) At cost or market, whichever is lower; or (©) At market value, of accounts separate s of securities sold are made on hall be regarded, for the purpuses of this section, ig his securities at cost, For the purposes of ‘merchant of Partnership, or corporation, with an est ‘engaged in the purchase who as a merchant inclide payers 679 for investment or speculation, irrespective of whether such buying or constitutes the carrying on of'a trade or business, and officers of vorpor and members of partnerships who in thei idual capacities buy and securities, are not dealers in sec vithin the meaning of this rule. See. 149. Inventories of livestock raiters and other farmers.—(1) Farmers ‘may change the basis of their returns from that of receipts and disbursements to that of an inventory basis, which necessitates the use of opening and clo ries for the year in which the change is made. The in the opening inventory or raised which were on hand at the stock and other farm products, farmers who render their returns upon an inventory basis may at their option value their inventories for the current taxable ye farm-price method” which provides for ice less cost of mark If tory for the preceding for the taxable year change year, there may be submitted wi lent statement for the preceding year based on the valuing inventories; upon the amount of which adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in effect for such preceding (3) Where returns have been made in which the taxable net income has been computed upon incomplete inventories, the abnormality should be corrected by submitting with the return for the current taxable year a statement for the preceding year in which such adjustments shall be made as are necessary to bring the tory for the preceding year into agreement with ‘opening complete inventory for the current taxable year. 2 tories, py to the respective selling values of the& Fes 20g, a thc — 680 Sec. 151, Inventories of retail merchants. Retail merchants who employ what is knovn as the “retail method” of pricing inventories may make their returns upon that basis, provided that the use of such method, is desig- nated upon the returns, ssuch method ily priced at the department or of of good ducting the percentage which fepresents the difference between, the seling value and the purchase price, This percentage determined by depart ments of a store or by clases of goods, and should represent se sctrately st Inay be the amounts added to the cost prices ofthe goods to cover seling and her expenses of Going busines and fr the margin of pro. In com the percentage above mentioned, proper adjustment should be mage mark-ups and mark-do Proper ss) js reduced to approximate cos A taxpayer ma in chaser of goods tse a percentage of should compute and us (Section 37 of the Code) ‘Sec. 152. Income from sources ccithin the S ppines. — The law divides the income of taxpayers into three classes: (2) Income which is 681 sae 7G1 0) -F mds. — Gross income from is, as defined by section 83 Sec. 154. Di pines includes (@) From 2 domestic corporation; and corporation unless Iss income for the threesvear period ending with the close dents, or for such cent of is gross Fits taxable year pre- cf such pert as pines but only in an amount me of the cor the Commissioner of Internal Reven fgross income under section 49:(a) (2) ‘for labor or personal ser payor, ofthe gt payment, pevformed in the Philippines, }, Some. If no accurate allocation or segregition of compensation for personal series performed in the Phibppines can be made, lays of performance of th to the total number of days performance of labor or Philippines or from any inter Erthe wee of or the privilege of ights, secret_ proce franchises, and other nfrom sources without the P \ 59. Sale of personal proper ‘pucchase and sale of personal property W From the country in RY : vw y Sees 330g 682 Sec. 158. Income from sources scithout the Philippines. — Gross income pines includes: specified in section 37 (a) (1), as being derived (3) Compensation for labor or personel services performed without the Philippines; (4) Rentals or . patents, copyrights, rade-marks, trade brands, franchises, Gain derived from the sale of real property located without the ‘The “counts 1 where the proj t apply to income from the sale of ‘exp: 62 of these regulations.) in section 3 pines there be included in full a8 net income from sources within the Philippines. ‘The ratable part is based upon the ratio of ross income from sources within pines to the total gross income, EXAMPLE: A non-resident alien indi calendar year, dual whose taxable year is the ved gr9ss income from all sources for 1939 of P180,000, 983 ‘The expenses of the tax expenses the amount of PS, within the Philippines and the income from sources witho for the year amou: roperly allocated nount of P3o,c00 pines, to Pron. OF these allocated to ‘The remainder of the expense, P5000, cannot be defisitely allocated to aay clas of income, A ratable par there, based upon the telson of er income from sources within the Philipines to the total gros income be deducted ing net income from tourees within the Ph ‘Thus, there are deducted from the P36cco of gros income from fearee e Philippines expenses amounting to Pr4.ceo (representing PB,cce ted (0 the income from toures thin the Phuippines ane could not be alocted ‘The remainder, Baaoco, is the the P pines and to sources ippines shall be made as provided in section 162 of these re 1g net income, apportioned or allocated Ec. 162. Income from the sale of personal property derived from sources cand partly without the Philippines. Items of gross income not 39 or 161 of these x rules and cases:PERSONAL PROPERTY PRODUCED AND SOLD:— Gross income a foreign country, or whole or in part) by the taxpayer within a foreign co be treated as derived partly from sources within the Philippines and partly from sources within’ a foreig under one of the cases bel “As used herein the word “produced! ¢ factory or production ner of Internal Revenue unaffected by considerations branch or department e production carried on, th hin the Philippines shall be computed by an ace ere principally secured, nes. 685 by employees, agents, offices, or branches of the taxpayer's business resident located inthe Philipines. ‘The term “gross ales" ss ned in this paragraph fefers only to the eles of personal property produced {in whole of in patt) by the taxpayer within the Philippines and sold foreign county of hin foregut oper” includes only derived from such sales. ic in the case of ion, deple- at which © ‘The average value average value of proper 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 fa the average for such year or period, in which ‘event the average shi CASE 3. Appl books of account will be considered by the Commissioner of the case of any taxpayer who, in 00 ploy cures Which reflects more clearly than the processes fr formulas herein prescribed, the income derived from sources within the Philippines. Sac. 163. Foreign steamship companies.— The returns of foreign steam= ship companies whose vessel the gross income thus 2 cand the gross income from all parts, b rom investments,Gig 686 Given (@) Gross receipts from outgoing freights and passengers from PLL. ports oe eames P 20,000 (©) Gross receipts from outgoing freights amd passengers from all ports other than those of P.T. 200,000 Interests and other nonshipping income received by P.1. office 000 (€) Interests, dividends, and other nonshipping income received by all offices other than those in 59,000 (6) Total expenses and deductions of the company as « whole, including those incurred by P.L. office... 150,000 Computation of P.1. Net Income (9 PAL. Gross Income: Freights and passengers eee P 20,000 Interest and other income Total (©) P-L. expenses: gross_income - x World’s expenses, or 's gross income sts) 120,000 plus §,000 700,600 plus 20,006 plus 50,000 plus 5,000 X 150,000, or (a) PL. gross income less P. I. expenses, o 25,000 less P13,636 == Pru,364- 164. Telegraph and cable service— A foreign corporation carrying meseages between GROSS INCOME.— The. gre ines derived from such services shall be determined by adding gross revenues derived from messages originating SMounts callected abroad on collect messages originating in the Pi rom such sum amounts paid or accrued for transmission of ‘yond the company’s own circuit. Amounts received b} ines ‘with respect to collect messages originating bbe excluded from gross income. “T INCOME.—In computing net income from source Philippines the red a deductions from gross income accordance ‘ll expenses incurred io the Philippines lading any general overhead expenses), incident to the carrying on of business in the Philippines ses incurred abroad i the emission of Tessage5 ener overhead expenses . 1d not includin; 7 Philippin 2 proportionate part of the ineurred abroad corres- ‘and of maintenance, repairs, based taxpayer has gross income from defined by scetion 37 (a) oF (©) igross income derived partly from sources within and partly from thout the Philippines, the amounts thereof, together with the expen ‘be segregated, and the net income ‘be separately computed therefrom. ses and (Section 38 of the Code) 66. General rule, — The method of act regularly _em- in keeping his books, if such method clearly reflects wed with respect t0 the time as of which items of gross fare to. be accounted. for. ich clearly ref 167. Methods of. accou hod of accounting can be tes that each taxpayer shpurchase, or sale of merchandise inventories of the merchandise on luding finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the sections 144 to 152 of these (2) Expenditures made during the year should be properly between capital and income; that is to say, expenditures for items of pl i €tc., which have a useful life extending substantially beyond year should be charged to a capital account and not to an expense accou! and In any case in which the cost of capital assets js being recovered through 18 for wear and tear, depletion, or obsolescence, any expenditure ian ordinary repairs) made to restore the property or prolong its Property account or charged against the st expenses. cccouting methods. — The true income, eo all eases be entered in income tubjet nia separate atatement setting for the preceding yest the clases of items diferent treated under ing in particular all amounts duplicated or entirely f such change: " A taxpayer who changes the method of accou his book shall, before computing his income upor >, Secure the consent of the Commissioner of I For the purposes of this action, a change in the method of accou in keeping books means any change in the accounting treatment of items of income or dedu such a8 a change from cash receipts and disbursements method, or i ja change in the long-term contract method mn basis to the completed contract basis or the adop- “44 of these regul he use of ‘has the crop basis. Ap fed and the basis upot the be mn for permission to change t ich the return is made she Revenue agree ‘flected ao =~ 689 Sec 169. Accounting period. — Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required te bbe made and ther income computed for each calendar year ending on Des. ember 316t of every year. However, corporations, ssecatons, or parnerigs over of st ‘scare, year which ive months ending of any 2 fal var 3 re and computing ther income. (For authority 172 of these regulations) (Section 39 of the Code) See. 170. When included in gross provided in Section 39 inthe eage of the de Income are to be inchided inthe gros h they are received by the taxpayer, unless they are included as of a diferent iod in accordance with the approved method of accounting fllowed by him. taxpayer has no be included in computing net income i S accrued up to the date of his of such period or 2 prior kept his books and income not reduced to possession but considered constructive! received and for exams + 52 and 53 of Contracts, see (Section 40 of the Code) Sec. 171. “Paid or incurred” and sccried”,— (a) The ‘conarucd serding method of accounting upon the bass by the taxpayer. The de ie “paid or accrued” or unless in order clearly be taken as of a different edit a8690 not otherwi od or a prior period, regardless of the fact required to keep his books and make his returns on the ‘isbursements (See also section 76 ofthese regulations) (Section 4r of the Code) Peviod fom facal yar centr rom one fecal year another Prior to the date fel in secon i ‘on the basis of a the Com iginal ae orisnal accounting real Revenue des the reasons why the change in accou! > 46{d) of the Code.) period is desi See. 173. Re can be made for 2 fractional part af rh fF me from one taxable year to. ant fered by such separate returns in ‘The requirements with respect to the fling of a f tax for a part of a year are the same as for the the payment of tax for 2 full taxable year closing at (Section 43 of the Code ) See. 174. Sale of personal personal property ordina the purchaser plan usually adope one of fou .greement i to remain in the performed his part (b)_ By a form of 0 immediately, but subj ‘endor until the purchaser is conveyed to the purchaser the unpaid portios 1 (©) By a present 691 ‘The general purpose and eect being the same in al of these cases, the same rule is uniformly applicable. The general rule prescribed i that a person who regularly sells of otersise disposes of personal property on the ‘tall ft pan Seer of not ie rea in the vendor un the property fully paid rom in any table yest that pro- : ly received in tha year which the cs less cost of goods sald) realized or tbe for, bears to the total taking as income that proportion of the total payments receive’ the taxable year from installment sales (such payments being allocated the sales of which they ap ich the total oF gross profit sales made during each vear bears ide during that respective year. ents received in the taxable year shall be excluded ‘curred” or “paid or accrued”, as provided by section 4o and 84(4) of A dealer who desires to compute his income on the in: books of account in such a manner as to enable an accurate computa- the provisions of this section, tion to be made on such basis in accordance come from a casual sale or other cas than property of a kind rent basis only if (1) the sale price do not exceed 25 per cent of the If for any reason the vendor returning income in any of his payment, and the bis repsseses the property sold Whether thereto had been 3 the vendor tranaerrl toe par Shaser, gin or los forthe sear in which the yposeesion occu sf Be cae puted upon any insta mf th prc whch oe ed br discharged upon the repossession or are applied by the vendor t the pus ures rg Such sing ban tobe meme ie* 652 after the property was repossessed the purchaser remained isle for such Portion: and in no event shall the amount of the deduction exceed the base Jn the hands of the vendor of the portion of the obligations with seapect to ‘hich che purchase rem le after the repossession. If repossessed is bid in by the vendor ata lawful pubic suction or pad the fair market value of the propery shall be presumed to be 2: bid prie thereof inthe absence of clear and convincing proof the Lomtnay, ‘The property repossessed shall be catried on the books of the vendor at fe fair market value a the time ofthe repossession, €3 28 a matter of consistent practice to return the income rent sales on the straight accrual or cash receipts and ‘ment basis, such 2 course is perm . Sale of real property section 43 deferred-payment sales purchase and sale vendor bei Such sales either under () or (ball into two clases when consideccd respect to the tems of sale, a8 follows: lcs of property on the installment plan, that is, siles in which the nts received in cath 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. Deferred-payment seles not on the installment plan, 1 the payments received ot property other tha indebtedness of the purchaser during the taxable year in whi made exceed 25 per cent of the selling price. In the sale of mortgaged property the amount of the mortgage, whether Property is merely taken subject to the mortgage or whether the is assumed by Dut the amount i purchaser, shal ing price” does not exceed the basis to vendor of be considered as a part of payments” o rice”, 2s those terms are used in section of the Cad ‘The term in the year is to be paid payment during the first year, the income may =f 093) be returned on the installment basis, Income may not be returned on the sent basis where no payment in cash or property, other than evidences redness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments, ‘years. Spe. 176. Sale of real property on i plan. —In transactions included in class (1) in the preceding section the vendor may return as income from such transactions in be realized when the pro} in any of his payments, and the vé basis react che property thereto had been retained by the vendor or transferred sf che pure ro be computed upon ie purchaser x e satisfied oF discharged the reacquisition or are-applied by the vendor to the purchase or bid in oF loss is to be met ‘or applied realized or costs ed the purchase! shall the amount of the de (of the portion of the obligatior respect iisiton. If the property reacquired is 5S the fair market value of the property shall be pr be the purchase of bid price thereof in the absence