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Taxation 1

Differentiate the following: 1. Tax 2. Taxation


3. Three Inherent Powers of the State

4. Eminent Domain 5. Police Power 6. What are the inherent limitations of taxation 7. What are the Constitutional Limitations of taxation 8. Justifications of Taxation ( Doctrines) a. Lifeblood Doctrine b. Symbiotic relationship 9. Powers of the BIR Commissioner
10. 3 Definitions of Income

11.

Accounting Methods

Answers:
1. Tax (es) The enforced proportional contributions levied by the law-making

body of the state by virtue of its sovereignty upon the persons or property within its jurisdiction for the support of the government and all public needs.

2. Taxation
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The process or means by which the sovereign, through its law-

making body, raises income to defray the necessary expense of the government The method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens.

3. Eminent Domain The right of the sovereign power to take private property for the good of the public

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4. Police Power a. Authority of Internal Revenue Officers to make arrests and seizures b. Authority of Officers to administer oaths and take testimony
c.

Authority of Internal Revenue Officer in searching for taxable articles

d. Remedy for enforcement of forfeitures e. When property to be sold or destroyed

5. Powers of BIR Commissioner a. To asses and collect all national internal revenue taxes, fees and charges; b. To enforced all forfeitures, penalties, and fines connected therewith; c. To execute judgment in all cases decided in its favor by the court of tax appeals and ordinary courts;
d. To give effect to and administer the supervisory and police power

conferred to it by law; e. To recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC).

6. Powers of the BIR Commissioner (Sec. 6 of NIRC) a. Examination of returns and determination of tax due; b. Failure to submit required returns, statements reports and other documents;

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c. Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross sales and receipts; d. Authority to terminate taxable period; e. Authority of the commissioner to prescribe property values; f. Authority of the commissioner to inquire to bank deposit accounts; g. Authority to accredit and register tax agents;
h. Authority of the commissioner to prescribe additional procedural or

documentary requirements.

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7. Three (3) definitions of income 1. Under Regulations, income means All wealth which flows into the taxpayer other than as a mere returns on capital that includes the forms of income specifically described as gains derived from the sale or other disposition of capital

2. Under United States Supreme Court The gain derived from capital, from labor, or both combined, provided it is understood to include profit gained through a sale or conversion of capital assets

3. Our Supreme Court The amount of money coming to person or corporation within a specified time, whether as payment for services, interest of profits from investment

8. Accounting Methods A method of amortized analysis based on accounting.

The accounting method often gives a more intuitive account of the amortized cost of an operation than either aggregate analysis or the potential method. However, this does not guarantee such analysis will be immediately obvious; often, choosing the correct parameters for the accounting method requires as much knowledge of the problem and the complexity bounds one is attempting to prove as the other two methods.

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Two primary accounting methods, cash and accrual basis, are

used to calculate taxable income. According to the Internal Revenue Code, a taxpayer may compute taxable income by: a) the cash receipts and disbursements method; b) an accrual method; c) any other method permitted by the chapter; or d) any combination of the foregoing methods permitted under regulations prescribed by the Secretary.

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As a general rule, a taxpayer must compute taxable income using the same accounting method he/she uses to compute income in keeping his/her books. Also, the taxpayer must maintain a consistent method of accounting from year to year. Should he/she change from the cash basis to the accrual basis (or vice versa), he/she must notify and secure the consent of the Secretary.

Methods of Accounting
1. Cash Method or Cash Basis It is nearly used by individuals.

All items of taxable income whether cash, property, or services actually or constructively are classed as receipts. Only amounts actually paid for deductible expenses are classed as disbursements. Business expenses must be paid within the taxable year. There is no such thing as constructive payment but there is constructive receipt.

Cash basis taxpayers include income when it is received, and

claim deductions when expenses are paid. A cash basis taxpayer can look to the doctrine of constructive receipt and the doctrine of cash equivalence to help determine when income is received. Most individuals start as cash basis taxpayers. There are three types of taxpayers that cannot use the cash basis: (1) C corporations; (2) partnerships with at least one C corporation partner; and (3) tax shelters.

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2. Accrual Method or Accrual Basis

It is used mostly by business concerns. Under this system, net income is measured, in a broad sense, by the excess of income over expenditures. Cash, property, or services earned during the taxable year, though not received have accrued to the taxpayer, and are classed as income. In the same way, expenses incurred during the taxable year are usually deductible even if they are not received during the year.

Accrual basis taxpayers include items when they are earned and

claim deductions when expenses are owed. An accrual basis taxpayer looks to the all-events test and earlier-of test to determine when income is earned. Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred that fix the right to receive income and the amount of the income can be determined with reasonable accuracy. Under the "earlier-of test, an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefore is due, or (3) payment therefore is made, whichever happens earliest. Under the earlier of test outlined in Revenue Ruling 74-607, an accrual basis taxpayer may be treated, as a cash basis taxpayer, when payment is received before the required performance and before the payment is actually due. An accrual basis taxpayer generally can claim a deduction in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.

3. Hybrid method combines the cash method and the accrual method
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