3 types of capital asset

Shares of stock
Real property
Other capital assets
o Only where withholding period applies
o Global approach

Definition of capital asset

Why classify? Specific provision applies to each

Determined by taxable year of seller

Off setting applies only on same kind of capital asset

SECS. 23, 42

What are the different classes of income

Global or schedular which applies to each classification

Compensation income
Consider EER
global
Taxable retirement benefits part of compensation income even if received
after EER
Rank and file receives fringe benefts part of compensation income

Fringe benefits
Schedular

Income from trade

Global

Passive income
Those subjet to specific tax rate schedular
General motors case dividends received no final withholding tax
Not schedular interest from a loan to a friend
Royalties from abroad

Withholding
Withhholding should always be a resident

Capital gains
From sales of stock of domestic corporation schedular
Real properties schedular 6%

Corporations no holding period

Define taxable income

Items in gross income minus deductions and exemptions

What comprises gross income

Sec. 32 (a)

Deductions
Legal or illegal income? Allowed?
Deduction even if illegal practice

Gains derived from dealings in propoerty

Part of gross income?

Annuities

Winnings
If beyond 10k is it still taxable>

Obligation to pay tax shifts to withholding agent

Partnership

Exclusions from gross income

Proceeds of life insurance

Return of premium
What is the reason

What about endowment contract

Insured will get insurance proceeds if still alive
Amount will be received includes premium paid
Deduct amount premium paid from amount that will be received, difference
will be taxable. Hence, not entire amount received will be taxable. Same case
as deposit that incurs interest.
Always remove the capital component
But if dies before the period, proceeds will be received by beneficiary
(excluded)

Propoerty acquired by gift

Javier case. How much is taxable
Exclude the gift, bequest
Ratio: not considered income because not from labor or capital
Transfer of divided interest in property
Donor donates propoerty by trust
Trustee not donee
Income to wife for life (usufruct), but son as owner of remainder of property (naked
title)
Can the wife argue donation to be exempted from income tax? No.
Irwing case certificate of time deposits to child, income given to mother. Still
subject to tax

Personal injury cases

Award of damages

Retirement benefits

RA 4917
While retirement benefits come from reasonable benefit plan by employer to cover
all employees
Requirments:
Service requirement (10 years minimum); broken period considered
Age requirement (at least 50 years of age)
Frequency

If retirement benefit not excluded, check if wholly taxable or partly taxable

Contributory/non
Sec. 60

RA 7641
Retirement benefits given my employers to employee who meet at least 2
requirements in order to qualify
Retirement age is not less than 60 not more than 65
Service requirement 5 years at least

Minimum benefits

NIPPON Life case

Distinction: gain vs interest. Gain active income. Interest is passive

Gain from redemption from shares in mutual fund companies to encourage

investors

EXCLUSION RULES review

Case of involuntary searation must always be involuntary to be excluded

Herrera law service requirement 5 years

Illegal dismissal included No. because there is contributory fault

2 ways to deduct bad debts

1. expense/direct method

requirement for deductibility of bad debt must be written off

depreciation
-definition
-allowance for the gradual diminution of the asset used in trade
-set aside the part of business income in order to accumulate the fund to provide for
replacement of asset
-diminution shall be gradual, not abrupt
-if abrupt falls under casualty losses

depletion
- what difference with depreciation
- -wasting assets
- procedure which they can recover their invested capital
- invested capital shall not pertain to depreciable assets
- cause depletion method recovery of invested capital is to be determined by
the number of units to be extracted from the mining site
- fernandez hermanos case
o invested capital equal the depletion no further depletion
- what happens to the unrecovered investment capital
o abandonment losses deductible (Sec. 35)
- if fully recovered no further deduction allowed

Charitable and other contribution

- two types deductible in full, deductible subject to limitation
- requirements for deductibility
- what are each
- in full
o to the government for priority progrmas
o to international organizations
- limitations

Contribution to pension trust

- pertains to contributions made by employer, not by the employee
- determine first if contributory or not (by the employee)
- if contributed by employee?
- Only pertains to current liability of employer
o How to determine
 o Employer established a retirement plan, the contribution by employee
must not necessarily be the same; factors to be considered (age, salary
grade)
- Ratable deduction lump sum contribution
- If contribution made in properties

Premium payments on health

- Maximum
- Family deduction
- Allowed only if agregte income of spouses do not exceed Php 250,000.00
- Limitations

Requirement of witthholding and remittance in order to be claimed as deduction

OSD (Sec. 34 L)
- Who can claim
o Individuals
Taxable on net income but not allowed OSD non resident
alien engaged in business
o Corporations domestic or resident foreign
Non resident cannot claim because they are taxed on gross
income
- 40% of gross sale or receipt
- how
o checking appropriate box in ITR
- need not prove existence of actual expenses
- not allowed to shift to itemized deduction during the same yer; OSD is
irrevocable
o cannot amend ITR
- difference between OSD of individual vs. corporation
- income of self employed individual
o income minus deductions minus personal exemptions
- individual with mixed income
o compensation + trade/business/profession
o two classes of income in ITR
compute using compartmentalized approach
o from compensation income deduct personal exemptions, then excess
against business income
o income of spouses 50% only attributable to each

Passive Income
- what are passive income and their percentage
- withholding agent who, how
- 20 lender rule
- cash and property dividends on individuals
o not stock dividend because it is not considered a realized gain
 o when is there change in interest option given if dividend cash or
(something)

corporation
- what is corporation in terms of tax purposes
- purposive test
- gatchalian case
- obillos case
- pascual case
- guide on WON association is taxable what is the purpose of organization? If
intended for profit - taxable

how to tax rentals

what is a gift
must be with total divestment of property

2 types of gratuitous transfer

donation mortis causa
donation inter vivos

definision of estate tax

it is a tax on the privilege of transmitting properties upon death and to the special
privilege that a person is given in controlling to a certain extent the disposition of
his properties to take effect upon his death

important factor: control of the decedent at the time of his death or ascertainable at
the time of his death included in his estate

relinquishment of control that makes the donation taxable

composition of the gross estate

only properties within the control of the decedent
residents and citizens all properties wherever situated
non-resident aliens only properties situated in the Philippines, provided that, with
respect to intangible personal properties, we follow the rule of reciprocity
Sec. 85 in relation to Sec. 104, NIRC

Rulw of reciprocity
Applies only to intangible personal properties situated in the Philippines owned by
a non-resident alien
Collector vs Campos Rueda (1971)

If intangible personal property not situated In pHilippines resident of Philippines

cannot invoke rule of reciprocity
Specific Rules on inclusions and exclusions (Sec. 85, NIRC)
Decedents interest
TICOD transfer in contemplation of death
Ex: property owner declared sufferring with terminal cancer
Revocable transfer
Property passing under general power of appointment
Proceeds of life insurance
Transfer for insufficient consideration
Capital of the surviving spouse

Requriments of ticod
-transfer for insufficient consideration/no consideration
-enjoyment/possession will not vest on transferee before transferors death
-must retain, if not, subject to donors tax

Use of Special power of appointment

-will work to relieve the heir from the imposition of the estate tax upon his death
- the two transfers will be taxed but once

Life Insurance
-proceeds of life insurance are not subject to income tax
-proceeds may or may not be included as part of gross estate depending on the
designation of the beneficiary
-nature of designation is immaterial if the beneficiary is the estate, executor or
administrator

Exempt transfers (sec. 87)

-merger of the usufruct in the owner of the naked title
-transmission by the fiduciary heir or legatee to the fideicommissary
- transmission from the first heir to another beneficiary in accordance with the
wishes of the predecessor
-bequests, deviecs, legacies or transfers to social welfare, cultural and charitable
institutions

Rules of valuation
-FMV of all properties as of the time of death (Sec. 88)
- real property- higher value between the FMV determined by the CIR and the FMV
as shown in the schedule of values fixed by the Provincial and City Assessors
-personal property recently acquired by the decedent purchase price may indicate
FMV
- in case of shares of stocks, the FMV will depend on whether or not the shares are
traded in the SE
- traded shares arithmetic mean between highest and lowest quotation
-unlisted shares
- common shares book value (RR 6-2013)
-preferred shares par value
Deductions from the Gross estate
ELIT
Property previously taxed
Transfer for public use mode of transfer
Family home
Standard deduction
Medical expenses
Benefits under RA 4917 (Reasonable private benefit plan)

Posadas case

Legal requirements of vanishing deduction

Location of the property
Identification with substitution
Interval of transfer must be within 5 years
Previous payment of estate tax or donors tax
No vanishing deduction in previous estate involving the same property or property
in exchange

Administrative provisions
Notice of death all cases of transfers subject to tax or exempt but value of GE
exceeds Php 20,000.00
Time of giving notice within 2 months from death or within like period after
qualifying as seuch executor or administrator
Filinf of the estate tax return
- who will file executor, administrator or heirs
- time for filing and payment within 6 months from death; pay-as-you-file
procedure; extension of time to file return not more than 30 days
- extension of time to pay due to financial difficulties 5 years if settled
judicially and 2 years if settled extra-judicially
- effects of non payment of estate tax no property can be transferred to an
heir

read donors tax law, title 4 NIRC