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TAX ON INCOME

therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v.
Commissioner of Internal Revenue, 166 SCRA 560)

Certain business organizations do not fall under the category of


corporations under the Tax Code, and therefore not subject to tax as
corporations, include:

6.

The income from the rental of the house, bought from the

earnings of co-owned properties, shall be treated as the income of an

a.

General professional partnerships;

unregistered partnership to be taxable as a corporation because of the clear

b.

Joint venture or consortium formed for the purpose of undertaking

intention of the brothers to join together in a venture for making money out of

construction projects engaging in petroleum, coal, geothermal, and other energy

rentals.

operations, pursuant to an operation or consortium agreement under a service


contract with the Government. [1st sentence, Sec. 22 (B), BIRC of 1997]

7.

Income is gain derived and severed from capital, from labor or

from both combined. For example, to tax a stock dividend would be to tax a capital
Co-heirs who own inherited properties which produce income should
not automatically be considered as partners of an unregistered corporation

increase rather than the income. (Commissioner of Internal Revenue v. Court of


Appeals, et al., G.R. No. 108576, January 20, 1999)

subject to income tax for the following reasons:


a. The sharing of gross returns does not of itself establish a partnership,

The term taxable income means the pertinent items of gross income

whether or not the persons sharing them have a joint or common right or interest in

specified in the Tax Code, less the deductions and/or personal and additional

any property from which the returns are derived. There must be an unmistakable

exemptions, if any, authorized for such types of income by the Tax Code or other

intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of

special laws. (Sec. 31, NIRC of 1997)

Internal Revenue, 139 SCRA 436)


b.

There is no contribution or investment of additional capital to

9.

The cancellation and forgiveness of indebtedness may amount

increase or expand the inherited properties, merely continuing the dedication of the

to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the

property to the use to which it had been put by their forebears. (Ibid.)

circumstances.

c.

Persons who contribute property or funds to a common enterprise

- If an individual performs services for a creditor who, in

consideration thereof, cancels the debt, it is income to the extent of the amount

and agree to share the gross returns of that enterprise in proportion to their

realized by the debtor as compensation for his services. /

contribution, but who severally retain the title to their respective contribution, are not

does

thereby rendered partners. They have no common stock capital, and no community

forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA 10th) / The

of interest as principal proprietors in the business itself from which the proceeds were

insolvent

derived. (Elements of the Law of Partnership by Floyd R. Mechem, 2

forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co.,

nd

Ed., Sec. 83, p.

74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560)

The common ownership of property does not itself create a

not

realize

debtor

taxable

realizes

income

income

from

resulting

An insolvent debtor

the

from

the

cancellation

cancellation

or

or

v. Commissioner 36 BTA (F) 289)

If a creditor merely desires to benefit a debtor and without any

partnership between the owners, though they may use it for purpose of making

consideration therefor cancels the amount of the debt it is a

gains, and they may, without becoming partners, are among themselves as to the

gift from the creditor to the debtor and need not be included in

management and use of such property and the application of the proceeds

the latters income.

Under the National Internal Revenue Code the global system is applicable to
If a corporation to which a stockholder is indebted forgives the debt, the

taxable corporations and the schedular to individuals.

transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2)
Compensation income is considered as having been earned in the place
Members of cooperatives not subject to tax on the interest earned from their
deposits with the cooperative.

No less than our Constitution guarantees the protection

where the service was rendered and not considered as sourced from the place of
origin of the money.

of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as


instruments for social justice and economic development. At the same time, Section 10 of

Payment for services, other than compensation income, is considered as

Article II of the Constitution declares that it is a policy of the State to promote social justice in

having been earned at the place where the activity or service was

all phases of national development. In relation thereto, Section 2 of Article XIII of the

performed.

Constitution states that the promotion of social justice shall include the commitment to create
economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the

A non-resident alien, who has stayed in the Philippines for an aggregate

foregoing provisions, we find that an interpretation exempting the members of cooperatives

period of more than 180 days during any calendar year, shall be considered

from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest

as a non-resident alien doing business in the Philippines. Consequently, he

earned

by

deposits) is

Constitution. (Dumaguete

more

in

keeping

Cathedral

with

Credit

the

letter

Coopertive

and

spirit

[DCCC)]

of

our

shall be subject to income tax on his income derived from sources from within the

etc.,

v.

Philippines. [Sec. 25 (A) (1), NIRC]. He is allowed to avail of the itemized deductions

Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

including the personal and additional exemptions subject to the rule on reciprocity.

In closing, cooperatives, including their members, deserve a preferential tax


treatment because of the vital role they play in the attainment of economic development and

What are considered as de minimis benefits not subject to withholding tax

social justice. Thus, although taxes are the lifeblood of the government, the States power to

on compensation income of both managerial and rank and file employees ?

tax must give way to foster the creation and growth of cooperatives. To borrow the words of

SUGGESTED ANSWER:

Justice Isagani A. Cruz: The power of taxation, while indispensable, is not absolute and may

a.

be subordinated to the demands of social justice. (Ibid., citing Commissioner of Internal


Revenue v. American Express International, Inc. (Philippine Branch), 500 Phil. 586
(2005).

ten (10) days during the year;


b.

Medical cash allowance to dependents of employees not exceeding

P750.00 per employee per semester or P125 per month;


c.

The Global system of income taxation is a system employed where the tax

Monetized unused vacation leave credits of employees not exceeding

Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month

amounting to not more than P1,000.00;

system views indifferently the tax base and generally treats in common all categories

d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;

of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

e. Actual yearly medical benefits not exceeding P10,000.00 per annum;

The Schedular system of income taxation is a system employed where the

f.

Laundry allowance not exceeding P300 per month;

g.

Employees achievement awards, e.g. for length of service or safety

income tax treatment varies and is made to depend on the kind or category of taxable

achievement, which must be in the form of a tangible persona property other than

income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331)

cash or gift certificate, with an annual monetary value not exceeding P10,000.00

received by an employee under an established written plan which does not


discriminate in favor of highly paid employees;
h.

Gifts given during Christmas and major anniversary celebrations not

exceeding P5,000 per employee per annum;


i.

Flowers, fruits, books, or similar items given to employees under

special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
j.

Daily meal allowance for overtime work not exceeding twenty five

b.

Exclusions pertain to the computation of gross income WHILE

deductions pertain to the computation of net income.


c.

Exclusions are something received or earned by the taxpayer which

do not form part of gross income WHILE deductions are something spent or paid in
earning gross income.
An example of an exclusion from gross income are life insurance proceeds, and
an example of a deduction are losses.

percent (25%) of the basic minimum wage.


The amount of de minimis benefits conforming to the ceiling herein prescribed

25.

What are excluded from gross income ?

shall not be considered in determining the P30,000 ceiling of other benefits provided

SUGGESTED ANSWER:

under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the

a.

ceiling prescribed by these regulations, the excess shall be taxable to the employee
receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided,

Proceeds of life insurance policies paid to the heirs or beneficiaries

upon the death of the insured whether in a single sum or otherwise.


b.

Amounts received by the insured as a return of premiums paid by

further, that any amount given by the employer as benefits to its employees, whether

him under life insurance, endowment or annuity contracts either during the term, or

classified asde minimis benefits or fringe benefits, shall constitute as deductible

at maturity of the term mentioned in the contract, or upon surrender of the contract.

expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by

c.

Value of property acquired by gift, bequest, devise, or descent.

Rev. Regs. No. 8-2000]

d. Amounts received, through accident or health insurance or Workmens


Compensation Acts as compensation for personal injuries or sickness, plus the

23.

Income subject to final tax refers to an income collected

through the withholding tax system. The payor of the income withholds the tax
and remits it to the government as a final settlement of the income tax as a final
settlement of the income tax due on said income. The recipient is no longer required
to include the income subjected to a final tax as part of his gross income in his income
tax return.

amounts of any damages received on whether by suit or agreement on account of


such injuries or sickness.
e.

Income of any kind to the extent required by any treaty obligation

binding upon the Government of the Philippines.


f.

Retirement

benefits

received

under

Republic

Act

No.

7641. Retirement received from reasonable private benefit plan after compliance with
certain conditions. Amounts received for beyond control separation. Foreign social

24.

Distinguish exclusions from deductions.

SUGGESTED ANSWER:
a.

security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS
benefits.

Exclusions from gross income refer to a flow of wealth to the

taxpayer which are not treated as part of gross income for purposes of computing the
taxpayers taxable income, due to the following reasons: (1) It is exempted by the

26.

What are the conditions for excluding retirement

benefits from gross income, hence tax-exempt ?

fundamental law; (2) It is exempted by statute; and (3) It does not come within the

SUGGESTED ANSWER:

definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts

a.

which the law allows to be subtracted from gross income in order to arrive at net
income.

Retirement benefits received under Republic Act No. 7641 and those

received by officials and employees of private firms, whether individual or corporate,

in accordance with the employers reasonable private benefit plan approved by the
BIR.

c. Taxes paid or incurred within the taxable year in connection with the
taxpayers profession.

b.

Retiring official or employee

Resident citizens, resident alien individuals and nonresident alien individuals

1)

In the service of the same employer for at least ten (10) years;

who are engaged in trade and business, on their gross incomes other from

2)

Not less than fifty (50) years of age at time of retirement;

compensation income are allowed to deduct these expenses. Domestic corporations,

3)

Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of

estates and trusts may also deduct this expense. Nonresident citizens and foreign

1997] The retiring official or employee should not have previously availed of the
privilege under the retirement plan of the same or another employer. [1 par., Sec.
st

2.78 (B) (1), Rev. Regs. No. 2-98]

corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
d. Ordinary losses, losses from casualty, theft or embezzlement; and

27.

What kind of separation (retirement) pay is excluded from

gross income, hence tax-exempt ?

net operating losses.


Resident citizens, resident alien individuals and nonresident alien individuals

SUGGESTED ANSWER:

who are engaged in trade and business, on their gross incomes other from

a.

Any amount received by an official, employee or by his heirs,

compensation income are allowed to deduct these expenses. Domestic corporations,

b.

From the employer

estates and trusts may also deduct this expense. Nonresident citizens and foreign

c.

As a consequence of separation of such official or employee from the

corporations on their gross incomes from within may also deduct this expense.

service of the employer because of


1)

Death, sickness or other physical disability; or

2)

For any cause beyond the control of said official or employee [Sec.

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.
e.

Bad debts due to the taxpayer, actually ascertained to be

32 (B) (6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of

worthless and charged off within the taxable year, connected with profession, trade or

business. [1 par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]

business, not sustained between related parties.

st

Resident citizens, resident alien individuals and nonresident alien individuals


28.

What are the Itemized deductions from gross income and

who may avail of them ?

who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Domestic corporations,

a. Ordinary and necessary trade, business or professional expenses.

estates and trusts may also deduct this expense. Nonresident citizens and foreign

b.

corporations on their gross incomes from within may also deduct this expense.

The amount of interest paid or incurred within a taxable year on

indebtedness in connection with the taxpayers profession, trade or business.


Resident citizens, resident alien individuals and nonresident alien individuals
who are engaged in trade and business, on their gross incomes other from

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.
f.

Depreciation or a reasonable allowance for the exhaustion, wear

compensation income are allowed to deduct these expenses. Domestic corporations,

and tear (including reasonable allowance for obsolescence) of property used in trade

estates and trusts may also deduct this expense. Nonresident citizens and foreign

or business.

corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.

Resident citizens, resident alien individuals and nonresident alien individuals


who are engaged in trade and business, on their gross incomes other from
compensation income are allowed to deduct these expenses. Domestic corporations,

estates and trusts may also deduct this expense. Nonresident citizens and foreign

business, on their gross incomes other from compensation income are allowed to

corporations on their gross incomes from within may also deduct this expense.

deduct these expenses. Domestic corporations, estates and trusts may also deduct

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.
g.

this expense. Nonresident citizens and foreign corporations on their gross incomes
from within may also deduct this expense.

Depletion or deduction arising from the exhaustion of a non-

replaceable asset, usually a natural resource.

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.

Resident citizens, resident alien individuals and nonresident alien individuals

k. Insurance premiums for health and hospitalization. Resident citizens,

who are engaged in trade and business, on their gross incomes other from

resident alien individuals and nonresident alien individuals who are engaged in trade

compensation income are allowed to deduct these expenses. Domestic corporations,

and business, on their gross incomes other from compensation income are allowed to

estates and trusts may also deduct this expense. Nonresident citizens and foreign

deduct these expenses. Nonresident citizens and nonresident alien individual engaged

corporations on their gross incomes from within may also deduct this expense.

in trade or business in the Philippine on their gross incomes from within may also

Nonresident alien individuals not engaged in trade or business in the

deduct these premiums.

Philippines are not allowed to deduct this expense.


h. Charitable and other contributions. Resident citizens, resident

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct these premiums.

alien individuals and nonresident alien individuals who are engaged in trade and

l. Personal and additional exemptions. Resident citizens, and resident

business, on their gross incomes other from compensation income are allowed to

alien on their gross incomes and from compensation income are allowed to deduct

deduct these expenses. Domestic corporations, estates and trusts may also deduct

these premiums. Nonresident citizens on their gross incomes from within may also

this expense. Nonresident citizens and foreign corporations on their gross incomes

deduct this expense. Nonresident alien individuals engaged in trade or business in the

from within may also deduct this expense.

Philippines are allowed to deduct these exemptions under reciprocity.

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.

Nonresident alien individuals not engaged in trade or business in the


Philippines are not allowed to deduct this expense.

i. Research and development expenditures treated as deferred expenses


paid or incurred by the taxpayer in connection with his trade, business or profession,

29. Distinguish ordinary expenses from capital expenditures.

not deducted as expenses and chargeable to capital account but not chargeable to

SUGGESTED ANSWER: Ordinary expenses are those which are common to

property of a character which is subject to depreciation or depletion.

incur in the trade or business of the taxpayer WHILE capital expenditures are those

Resident citizens, resident alien individuals and nonresident alien individuals

incurred to improve assets and benefits for more than one taxable year. Ordinary

who are engaged in trade and business, on their gross incomes other from

expenses are usually incurred during a taxable year and benefits such taxable

compensation income are allowed to deduct these expenses. Domestic corporations,

year. Necessary expenses are those which are appropriate or helpful to the business.

estates and trusts may also deduct this expense. Nonresident citizens and foreign
corporations on their gross incomes from within may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the
Philippines are not allowed to deduct this expense.
j. Contributions to pension trusts. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and

30.

What are the requisites for the deductibility of business

expenses ?
SUGGESTED ANSWER: The following are the requisites for deductibility of
business expenses:
a.

Compliance with the business test:

1)

Must be ordinary and necessary;

2)

Must be paid or incurred within the taxable

3)

Must be paid or incurred in carrying on a trade or business.

4)

Must not be bribes, kickbacks or other illegal

Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12,


year;

expenditures

2007)
The two (2) principal accounting methods for recognition of income are the (a)
accrual method; and the (b) cash method.

b. Compliance with the substantiation test. Proof by evidence or records of


the deductions allowed by law including compliance with the business test.

b.

Recognition of income and expenses under the accrual

method of accounting. Amounts of income accrue where the right to receive them
becomes fixed, where there is created an enforceable liability. Liabilities, are incurred

31.

What are the requisites for the deductibility of ordinary and

when fixed and determinable in nature without regard to indeterminacy merely of

necessary trade, business, or professional expenses, like expenses paid for

time

legal and auditing services ?

Corporation, G. R. No. 172231, February 12, 2007)

SUGGESTED ANSWER:
a.

the expense must be ordinary and necessary;

b.

it must have been paid or incurred during the taxable year

of

c.

papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No.


172231, February 12, 2007)

of

Internal

Revenue

v,

Isabela

cultural

been met. (Ibid.)


c.

All-events test. This test requires:

1)
2)

it must be supported by receipts, records or other pertinent

(Commissioner

The accrual of income and expense is permitted when the all-events test has

dependent upon the method of accounting upon the basis of which the net income is
computed.

payment..

fixing of a right to income or liability to pay; and

the availability of the reasonable accurate determination of such income or

liability.
The test does not demand that the amount of such income or liability be known
absolutely, only that a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy.

32.

TMG Corporation is issuing the accrual method of

The all-events test is satisfied where computation remains uncertain; if its

accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various

basis is unchangeable, the test is satisfied where a computation may be unknown,

services which were billed by these firms only during the following year

but is not as much as unknowable, within the taxable year. The amount of liability

2006. Since the bills for legal and auditing services were received only in

does not have to be determined exactly,; it must be determined with reasonable

2006 and paid in the same year, TMG deducted the same from its 2006 gross

accuracy implies something less than an exact or completely accurate amount.

income. The BIR disallowed the deduction ?

The propriety of an accrual must be judged by the fact that a taxpayer knew,

Who is correct, TMG or BIR ? Explain.

or could reasonably be expected to have known, at the closing of its books for the

SUGGESTED ANSWER: The BIR is correct. TMG should have deducted

taxable year. Accrual method of accounting presents largely a question of fact; such

the professional and legal fees in the year they were incurred in 2005 and not in

that the taxpayer bears the burden of proof of establishing the accrual of an item of

2006 because at the time the services were rendered in 2005, there was already an

income or deduction. (Commissioner of Internal Revenue v, Isabela cultural

obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural

Corporation, G. R. No. 172231, February 12, 2007)

Corporation, G. R. No. 172231, February 12, 2007)

d.

Under the cash method income is to be construed as income for

NOTES AND COMMENTS:

tax purposes only upon actual receipt of the cash payment. It is also referred to as

a.

Accounting methods for tax purposes comprise a set of rules for

the cash receipts and disbursements method because both the receipt and

determining when and how to report income and deductions. (Commissioner of

disbursements are considered. Thus, income is recognized only upon actual receipt of

the cash payment but no deductions are allowed from the cash income unless actually
disbursed through an actual payment in cash.

c.

under the Tax Code or under any special law;


d.

33.

The fringe benefits tax is a final withholding tax imposed on the

grossed-up monetary value of fringe benefits furnished, granted or paid by the


employer to the employee, except rank and file employees. [1st par., Sec. 2.33 (A),
Rev. Regs. No. 3-98]

Fringe benefits which are authorized and exempted from income tax

Contributions of the employer for the benefit of the employee to

retirement, insurance and hospitalization benefit plans;


e.

Benefits given to the rank and file employees, whether granted

under a collective bargaining agreement or not; and


f.

De minimis benefits as defined in the rules and regulations to be

promulgated by the Secretary of Finance upon recommendation of the Commissioner


34. What is meant by fringe benefit for purposes of taxation ?

of Internal Revenue. [1st par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs.

SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any

No. 3-98]

good, service, or other benefit furnished or granted in cash or in kind by an employer


to an individual employee (except rank and file employees), such as but not limited
to:

36. De minimis benefits are facilities and privileges (such as


entertainment, medical services, or so-called courtesy discounts on purchases),

a.

Housing;

furnished or offered by an employer to his employees. They are not considered as

b.

Expense account;

compensation subject to income tax and consequently to withholding tax, if such

c.

Vehicle of any kind;

facilities are offered or furnished by the employer merely as a means of promoting the

d.

Household personnel, such as maid, driver and others;

health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3),

e.

Interest on loan at less than market rate to the extent of the

Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]

difference between the market rate and actual rate granted;


f.

Membership fees, dues and other expenses borne by the employer

for the employee in social and athletic clubs or other similar organizations;

37. Preferred shares are considered capital regardless of the


conditions under which such shares are issued and dividends or interests

g.

Expenses for foreign travel;

paid thereon are not allowed as deductions from the gross income of

h.

Holiday and vacation expenses;

corporations. (Revenue Memorandum Circular No. 17-71)

i.

Educational assistance to the employee or his dependents; and

j.

Life or health insurance and other non-life insurance premiums or

38. Bad debts are those which result from the worthlessness or

similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997;

uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising

1st par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

from money lent or from uncollectible amounts of income from goods sold or services
rendered. (Sec. 2.a, Rev. Regs. 5-99)

35.

Fringe benefits that are not subject to the fringe benefits tax:

a.

When the fringe benefit is required by the nature of, or necessary to

the trade, business or profession of the employer; or


b.

When the fringe benefit is for the convenience or advantage of the

employer. [Sec. 32(A), NIRC of 1997; 1 par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
st

39.

Who are related parties ?

SUGGESTED ANSWER: The following are related parties:


a.

Members of the same family. The family of an individual shall

include only his brothers and sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants;

b.

An individual and a corporation more than fifty percent (50%) in

SUGGESTED ANSWER: The tax benefit rule posits that the recovery of bad

value of the outstanding stock of which is owned, directly or indirectly, by or for such

debts previously allowed as deduction in the preceding year or years shall be included

individual;

as part of the taxpayers gross income in the year of such recovery to the extent of

c.

Two corporations more than fifty percent (50%) in value of the

the income tax benefit of said deduction.

outstanding stock of which is owned, directly or indirectly, by or for the same

NOTES AND COMMENTS:

individual;

a.

If in the year the taxpayer claimed deduction of bad debts written-

d.

A grantor and a fiduciary of any trust; or

off, he realized a reduction of the income tax due from him on account of the said

e.

The fiduciary of a trust and the fiduciary of another trust if the same

deduction, his subsequent recovery thereof from his debtor shall be treated as a

person is a grantor with respect to each trust; or


f.

receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC

of 1997]

b.

If the said taxpayer did not benefit from the deduction of the said

bad debt written-off because it did not result to any reduction of his income tax in the
year of such deduction (i.e. where the result of his business operation was a net loss

40. What are the requisites for valid deduction of bad debts from
gross income ?

even without deduction of the bad debts written-off), then his subsequent recovery
thereof shall be treated as a mere recovery or a return of capital, hence, not treated

SUGGESTED ANSWER:

as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)

a. There must be an existing indebtedness due to the taxpayer which must be


valid and legally demandable;

42.

b. The same must be connected with the taxpayers trade, business or practice
of profession;

tangible

Depreciation is the gradual diminution in the useful value of

property resulting

from

ordinary

wear

and

tear

and from

normal

obsolescence. The term is also applied to amortization of the value of intangible

c. The same must not be sustained in a transaction entered into between

assets the use of which in the trade or business is definitely limited in duration.

related parties;
d. The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year; and
e. The

debt

must

be

actually ascertained

to

be

worthless

and

uncollectible during the taxable year;


f.

The

debts are uncollectible

despite

diligent

effort

exerted

by

the

taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in

43.

The methods of depreciation are the following:

a.

Straight line method;

b.

Declining balance method;

c.

Sum of years digits method; and

d.

Any other method prescribed by the Secretary of Finance upon the

recommendation of the Commissioner of Internal Revenue:

Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al.,

1)

Apportionment to units of production;

256 SCRA 667]

2)

Hours of productive use;

3)

Revaluation method; and

4)

Sinking fund method.

g. Must have been reported as receivables in the income tax return of the
current or prior years. (Sec. 103, Rev. Regs. No. 2)
:
41. What is the tax benefit rule ?

44.

What are personal and additional exemptions ?

SUGGESTED ANSWER: These are the theoretical persona, living and family
expenses of an individual allowed to be deducted from the gross or net income of an
individual

taxpayer.

d.

provided that the total number of dependents for which additional

exemptions may be claimed


1)

shall not exceed four (4) dependents. [1st par., Sec. 2.79 (I) (1) (b), Rev.

Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and
These are arbitrary amounts which have been calculated by our lawmakers to

numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by Rep. Act No. 9504]

be roughly equivalent to the minimum of subsistence, taking into account the personal

NOTES AND COMMENTS:

status and additional qualified dependents of the taxpayer. They are fixed amounts in

a.

It is clear that under the amendment, single individuals may now

the sense that the amounts have been predetermined by our lawmakers and until our

claim for the additional exemptions. Furthermore, the concept of head of a family

lawmakers make new adjustments on these personal exemptions, the amounts

does not find application anymore.

allowed

to

be

by

b.

A dependent means

Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991,

a.

a legitimate, illegitimate or legally adopted child

November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil.

b.

chiefly dependent upon and living with the taxpayer

414, 418 (1918)]

c.

if such dependent is

45.

deducted

by

taxpayer

are

fixed

as

predetermined

What is the amount allowed as basic personal exemption ?

SUGGESTED ANSWER: There shall be allowed a basic personal exemption

1)

not more than twenty-one (21) years of age,

2)

unmarried and

3)

not gainfully employed or

amounting to Fifty thousand pesos (P50,000) for each individual taxpayer.

d.

if such dependent,

In the case of married individuals where only one of the spouse is deriving

1)

regardless of age

gross income, only such spouse shall be allowed the personal exemption. [Sec. 35

2)

is incapable of self-support

(A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev.
Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008]
NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the
spouses may claim the P50,000.00. Thus, the total familial basic personal
exemption for spouses is P100,000.00.
Furthermore, the distinctions between the concepts of single, married and

3)

because of mental or physical defect.

[2nd par., Sec. 2.79 (I) (1) (b),

Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and
numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by Rep. Act No. 9504]
c.

It is to be noted that under the NIRC of 1997, as amended by Rep.

Act No. 9504, only qualified dependent children are considered for additional
exemptions. Grandparents, parents, as well, as brothers or sisters, and other

head of the family for purpose of availing of the basic personal exemption has

collateral relatives are not qualified dependents to be claimed as additional

already been eliminated by Rep. Act No. 9504.

exemptions.
However, if they are senior citizens they may qualify as additional

45.

What are the amounts of additional exemptions ?

SUGGESTED ANSWER:

An individual,

a.

whether single or married,

b.

shall be allowed an additional exemption of Twenty-Five Thousand

Pesos (P25,000.00)
c.

for each qualified dependent child,

exemptions under the Senior Citizens Law but not under the NIRC of 1997, as
amended by Rep. Act No. 9504.
Senior citizen shall be treated as dependents provided for in the National
Internal Revenue Code, as amended, and as such, individual taxpayers caring for
them, be they relatives or not shall be accorded the privileges granted by the Code

insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep. Act No.
7432, as amended by Rep. Act 9257, The Expanded Senior Citizens Act of 2003]

h.

Real

property,

whether

single

detached,

townhouse,

or

condominium unit, not used in trade or business as evidenced by a certification from


the Barangay Chairman or from the head of administration, in case of condominium

47. Capital assets shall refer to all real properties held by a taxpayer,

unit, townhouse or apartment, and as validated from the existing available records of

whether or not connected with his trade or business, and which are not included

the Bureau of Internal Revenue, owned by an individual engaged in business, shall be

among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-

treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003)

2003)
The term capital assets means property held by the taxpayer (whether or not
connected with his trade or business), BUT DOES NOT INCLUDE:

excluded from the definition of capital assets, namely:

a. Stock in trade of the taxpayer, or

a. Stock in trade of a taxpayer or other real property of a kind which would

b. Other property of a kind which would properly be included in the


inventory of the taxpayer if on hand at the close of the taxable year, or
c.

49. Ordinary assets shall refer to all real properties specifically

properly be included in the inventory of a taxpayer if on hand at the close of the


taxable year; or

Property held by the taxpayer primarily for sale to customers in the

ordinary course of his trade or business, or

b. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business; or

d. Property used in the trade or business, of a character which is subject to the


allowance for depreciation; or real property used in the trade or business of the
taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and
arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003]

c. Real

property

used

in

trade

or

business

(i.e.

buildings

and/or

improvements), of a character which is subject to the allowance for depreciation; or


d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev.
Regs. No. 7-2003)

48.

Examples of capital assets:

50.. Examples of ordinary assets hence not capital assets:

a.

Stock and securities held by taxpayers other than dealers in

a.

securities;

The machinery and equipment of a manufacturing concern subject to

depreciation;

b.

Jewelry not used for trade and business;

b. The tractors, trailers and trucks of a hauling company;

c.

Residential houses and lands owned and used as such;

c. The condominium building owned by a realty company the units of which

d.

Automobiles not used in trade and business;

e.

Paintings, sculptures, stamp collections, objects of arts which are not

are for rent or for sale;

used in trade or business;


f.
pursuant

the

government

mandate

under

land

reform,

then

sold

to

tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)
g.

The wood, paint, varnish, nails, glue, etc. which are the raw

materials of a furniture factory;

Inherited large tracts of agricultural land which were subdivided


to

d.

e.

Inherited parcels of land of substantial areas located in the heart of

Metro Manila, which were subdivided into smaller lots then sold on installment basis
after introducing comparatively valuable improvements not for the purpose of simply

Real property used by an exempt corporation in its exempt

liquidating the estate but to make them more saleable ; the employment of an

operations, such as a corporation included in the enumeration of Section 30 of the

attorney-in-fact for the purpose of developing, managing, administering and selling

Code, shall not be considered used for business purposes, and therefore considered as

the lots; sales made with frequency and continuity; annual sales income from the

capital asset. (last sentence, 3 par., Sec. 3.b, Rev. Regs. No. 7-2003)
rd

sales was considerable; and the heir was not a stranger to the real estate

otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 7-

business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)

2003)

f. Inherited agricultural property improved by introduction of good roads,


concrete gutters, drainage and lighting systems converts the property to an ordinary
asset. The property forms part of the stock in trade of the owner, hence an ordinary

53. Transactions covered by the presumed capital gains tax on


real property:

asset. This is so, as the owner is now engaged in the business of subdividing real

a.

sale,

estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672)

b.

exchange,

c.

or other disposition, including pacto de retro sales and other

51. Tax

treatment

of

real

properties

that

have

been

transferred. Real properties classified as capital or ordinary asset in the hands of the
seller/transferor

may

buyer/transferee. The

change

their

classification

of

character
such

in

property

the
in

the

hands
hands

of
of

the
the

buyer/transferee shall be determined in accordance with the following rules:

forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and
arrangement supplied]
d.

Sale, exchange, or other disposition includes taking by the

government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals,


et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861)

a. Real property transferred through succession or donation to the heir or


donee who is not engaged in the real estate business with respect to the real property

54.

In

case

the

mortgagor

exercises

his

right

of

inherited or donated, and who does not subsequently use such property in trade or

redemption within one (1) year from the issuance of the certificate of sale, in a

business, shall be considered as a capital asset in the hands of the heir or donee.

foreclosure of mortgage sale of real property, no capital gains tax shall be imposed

b. Real property received as dividend by stockholders who are not engaged


in the real estate business and who not subsequently use such real property in trade

because no capital gains has been derived by the mortgagor and no sale or transfer of
real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]

or business shall be treated as capital assets in the hands of the recipient even if the
corporation which declared the real property dividend is engaged in real estate
business.

55. In case of non-redemption of the property sold upon a foreclosure of


mortgage sale, the presumed capital gains tax shall be imposed, based on the bid

c. The real property received in an exchange shall be treated as ordinary

price of the highest bidder but only upon the expiration of the one year period of

asset in the hands of the transferee in the case of a tax-free exchange by taxpayer

redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118,

not engaged in real estate business to a taxpayer who is engaged in real estate

and shall be paid within thirty (30) days from the expiration of the said one-year

business, or to a taxpayer who, even if not engaged in real estate business, will use in

redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]

business the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003)
56. The basis for the final presumed capital gains tax of six per
52. The tax is imposed upon capital gains presumed to have

cent (6%) is whichever is the higher of the

been realized from the sale, exchange, or other disposition of real property

a. gross selling price, or

located in the Philippines, classified as capital assets. [Sec. 24 (D) (1`), NIRC

b.

the current fair market value as determined below:

of 1997] Revenue Regulations No. 7-2003 has defined real property as having the

1) the fair market value or real properties located in each zone or area as

same meaning attributed to that term under Article 415 of Republic Act No. 386,

determined by the Commissioner of Internal Revenue after consultation with


competent appraisers both from the private and public sectors; or

2) the fair market value as shown in the schedule of values of the Provincial
and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of

a.

new principal residence;

1997]

b.
It does not matter whether there was an actual gain or loss because the tax

the proceeds of which is fully utilized in acquiring or constructing a

within eighteen (18) calendar months from the date of sale or

disposition

is a presumed capital gains tax. It is the transaction that is taxed not the gain.

c.

the BIR Commissioner shall have been duly notified by the taxpayer

within thirty (30) days from the date of sale or disposition through a prescribed return
57. Holding period not applied to the taxation of the presumed capital

of his intention to avail of the tax exemption; and

gains derived from the sale of real property considered as capital assets.

d.

the said tax exemption can only be availed of once every ten (10)

years. [Sec. 24 (D) (2), NIRC of 1997]


58. The tax liability, of individual taxpayers (not corporate), if
any, on gains from sales or other dispositions of real property, classified as

61.

MBC was incorporated in 1961 and engaged in commercial

capital assets, to the government or any of its political subdivisions or agencies or

banking operations since 1987. On May 22, 1987, it ceased operations that

to government owned or controlled corporations shall be determined, at the option of

year by reason of insolvency and its assets and liabilities were placed under

the taxpayer, by including the proceeds as part of gross income to be subjected to the

the charge of a government-appointed receiver. On June 23, 1999, the BSP

allowable deductions and/or personal and additional exemptions, then to the

authorized MBC to operate as a thrift bank.

schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of

In 2000, It filed its tax return for the year 1999 paying the amount of

1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1)

P33 million computed in accordance with the minimum corporate income tax

in relation to Sec. 6 (E), both of the NIRC of 1997]

(MCIT). It sought the BIRs ruling on whether it is entitled to the four (4)
year grace period for paying on the basis of MCIT reckoned from 1999. BIR

59. The seller of the real property, classified as a capital asset, pays
the presumed capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];

then ruled that cessation of business activities as a result of being placed


under involuntary receivership may be an economic reason for suspending
the imposition of the MCIT.

1) Citizen, whether resident or not [Ibid.];


2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25
(A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec.
25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];

As a result of the ruling MBC filed an application for refund of the P33
million. Due to the BIRs inaction, MBC filed a petition for review with the
CTA.
The CTA denied the petition on the ground that MBC is not a newly
organized corporation. In a volte facie the BIR now maintains that MBC
should pay the MCIT beginning January 1, 1998 as it did not close its

b. an estate or trust (Ibid.);

business operations in 1987 but merely suspended the same. Even if placed

c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]

under receivership, the corporate existence was never affected. Thus, it falls
under the category of an existing corporation recommencing its banking

60. Excepted from the payment of the presumed capital gains tax
are those presumed to have been realized from the disposition by natural
persons of their principal place of residence

operations.
Should the refund be granted ?

SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the

For purposes of the MCIT, the taxable year in which business operations

fourth taxable year immediately following the year in which the corporation

commenced shall be the year in which the domestic corporation registered with the

commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997]

Bureau of Internal Revenue (BIR).

The date of commencement of operations of a thrift bank is the date it was


registered with the SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 495)

Firms which were registered with BIR in 1994 and earlier years shall be
covered by the MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No.
168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-

Clearly then. MBC is entitled to the grace period of four years from June 23,
1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT

95 specifically refers to thrift banks.)


c.

Purpose of the four (4) year grace period. The intent of

should be applied to it. (Manila Banking Corporation v. Commissioner of Internal

Congress relative to the MCIT is to grant a four (43) year suspension of tax payment

Revenue, G. R. No. 168118, August 26, 2006)

to newly organized corporations. Corporations still starting their business operations

NOTES AND COMMENTS:

have to stabilize their venture in order to obtain a stronghold in the industry. It does

a.

not come as a surprise then when many companies reported losses in their initial

The MCIT and when should be imposed and the four (4) year

grace period. A minimum corporate income tax of two percent (2%) of the gross

years of operations.

income as of the end of the taxable year, as defined herein, is hereby imposed on a

Thus, in order to allow new corporations to grow and develop at the initial

corporation taxable under this Title, beginning on the fourth taxable year immediately

stages of their operations, the lawmaking body saw the need to provide a grace period

following the year in which such corporation commenced its business operations,

of four years from their registration before they pay their minimum corporate income

when the minimum corporate income tax is greater than the tax computed under

tax. (Manila Banking Corporation v. Commissioner of Internal Revenue,G. R. No.

Subsection (A) of this section for the taxable year. [Sec. 27 (E) (1), NIRC of 1997]

168118, August 26, 2006)

b.

Period when a corporation becomes subject to the MCIT. (5)

Specific rules for determining the period when a corporation becomes subject to the
MCIT (minimum corporate income tax) -