NOTES ON INCOME TAXATION such as police power and the compensatory
purposes. (Domondon, p. 397)
1. Define Income
All wealth which flows into the taxpayers
other than as a mere return of capital. It
includes the forms of income specifically
described as gains and profits, including
gains derived from the sale or other
disposition of capital assets. (Revenue
Regulation No. 2, Sec. 36)
2. Upon which is income tax based?
I dont understand the question?
Net income and gross income ang answer?
3. What is the nature of income tax?
Income taxation is in the nature of an excise
taxation system, or taxation on the exercise of
privilege, the privilege to earn yearly profits
from various sources. It is a system that does
not provide for the taxation of property.
(Domondon, p. 395-396)
4. Basis of the right of government to
tax income?
(Not Sure) It is generally conceded that the
main objective of tax laws, including income
tax laws, is the revenue purpose (life blood
doctrine) and a host of non-revenue purpose
5. Define Income
Ibid.
6. Distinguish Capital from Income
Suggested Answer Bar 1965:
a. Capital is wealth or fund; while
income is profit or gain from the flow
of wealth. (CIR V. CA)
b. Capital is a fund of property existing
at an instant of time; while income is
that flow of services rendered by that
capital by the payment of money from
it or any other benefit rendered by a
fund of capital in relation to such fund
through a period of time.
c. Capital is wealth; while income is the
service of wealth.
d. Capital is the tree; while income is the
fruit. (Madrigal V. Rafferty)
7. Requisites for taxable income
Personal Notes according to dean and
UP Notes;
a. There must be income
b. Received or realized
c. Not exempted under the law
Sec. 31 of the ICR Taxable income means
the pertinent items of gross income specified
in this code, less the deductions and or
personal and additional exemptions, if any,
authorized for such types of income by this
code or other special laws.
8. When is income considered
received?
1. If actually or physically received by
the taxpayer; or
2. If constructively received by the
taxpayer.
(Revenue Regulation No. 2, Sec 52.)
9. Examples of Constructive Receipt
a. Deposits in banks which are made
available to the seller or service
without restriction
b. Issuance by the debtor of a notice of
offset any debt or obligation and
acceptance thereof by the seller as
payment.
c. Transfer of the amounts retained by
the payor to the account of the
contractor. (RR. 16-2005, Sec 4)
d. Interest in coupons that have matured
and are payable but have not been
cashed.
e. Undistributed share of a partner in the
profits of a gen. partnership.
f. It was once held that there was
constructive receipt of income where
the income was applied in payment of
debt legally demandable and
chargeable. (Republic V. De la Rama
et. Al)
g. Dividends set off against valid debts
in favor of the corporation, but not if
the debt are not valid or are
controversial (ibid case above)
10. Purpose of doctrine of constructive
receipt?
For Financial accounting. BUT I DONT
WHY? Please help.
11. A taxpayer received through
mistake an amount which is not
due. Is the excess taxable income?
Bar question 2013.
In 2010, Mr. Plation sent his sister helen
One Thousand Dollars (1000) via
telegraphic transfer through Bank of PI.
The banks clerk made a mistake and
credited helen with One Million Dollars
(1,000,000) which she promptly
withdrew. The bank demanded for the
excess but helen refused. The BIR entered
the investigated Helen. Would the BIR be
correct if determines that helen earned
taxable income under these facts?
 a. No, she had no income because she
had no right to the mistakenly
credited funds.
b. Yes, the income is income regardless
of the source.
c. No, it was not her fault that the funds
in excess of the 1, 000 were credited
to her.
d. No, the funds in excess of 1,000 in
effect was donated to her.
SUGGESTED ANSWER (B)
12. When is co ownership subject to
tax?
13. When is co ownership not subject
to tax?
UP NOTES:
When Co-ownership is not subject to tax:
When the co-ownerships activities are
limited merely to the preservation of the co-
owned property and to the collection of the
income from the property. The income
derived by a co-owner from the property shall
be reported in his individual tax return
regardless of whether such income is actually
or constructively received.
When Co-ownership is subject to tax:
The following circumstances would render a
co-ownership subject to a corporate income
tax: (a) When a co-ownership is formed or
established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
reinvested his share in the co-ownership to
produce another income-generating activity,
and (c) When the inherited property remained
undivided for more than ten years, and no
attempt was ever made to divide to same
among the co-heirs, nor was the property
under administration proceedings nor held in
trust, the property should be considered as
owned by an unregistered partnership.
Automatically converted into an unregistered
partnership the moment the said common
properties and/or the incomes derived from
them are used as a common fund with intent
to produce profits for the heirs in proportion
to their respective shares in the inheritance as
determined in a project partition either duly
executed in an extrajudicial settlement or
approved by the court in the corresponding
testate or intestate proceeding. [Ona v. CIR,
May, 25 1972]
14. Are allowances part of the gross
compensation income?
UP NOTES:
Income arising from an ER-EE relationship.
It means all remuneration for services
performed by an EE for his ER, including the
cash value of all remuneration paid in any
medium other than cash. (Sec. 78(A)). It
includes, but is not limited to salaries and
wages, commissions, tips, allowances, thereof cancels the amount of the debt is
bonuses, Fringe Benefits of rank and file EEs a gift from the creditor and need not be
and other forms of compensation. included in the income.

15. Employers convenience rule 17. Gross income from farming

UP NOTES: include:
If meals, living quarters, and other facilities a. The amount of cash or value of
and privileges are furnished to an employee merchandise or other property
for the convenience of the employer, and received from the sale of livestock,
incidental to the requirement of the produce which were raised during the
employees work or position, the value of taxable year or prior years.
that privilege need not be included as b. The profit from the sale of any
compensation (Henderson v. Collector). livestock or other items which were
purchases; and
16. Cancellation or forgiveness of c. The gross income from all other
indebtedness amount to payment of sources.
income? (Revenue Regulation 2, Sec. 45)
The cancellation and forgiveness of
indebtedness may amount to payment of 18. Life insurance proceeds received
income, to a gift, or to a capital transaction by the corporate employer that
depending upon the circumstance; took the insurance policy subject to
a. When cancellation of debt is income tax?
INCOME:
If an individual performs services for a
creditor, who in consideration thereof,
cancels the debt, it is income to the extent
of the amount realized by the debtor as 19. Are stock dividends subject to
compensation for his services. income tax?
b. When cancellation of debt is GIFT. Suggested Answer Bar 1997
If a creditor merely desires to benefit a NO, Stock dividends are unrealized gains
debtor and without any consideration and cannot be subject to income tax until
 the gains have been realized. Stock
dividends represent capital and do not
constitute income to its recipient.

20. Are liquidating dividends subject

to income tax?
Bar question 2013:
ABC Corp. was dissolved and liquidating
dividends were declared and paid to
stockholders. What tax consequence follows?
a. ABC Corp should deduct a final tax
of 10% for the dividends.
b. The stockholders should declare their
gain from their investment and pay
income tax at the ordinary rates.
c. The dividends are exempt from tax.
d. ABC Corp. should withhold a 10%
creditable tax.
Suggested Answer: (b)