RR 2-40 (Income Tax Regulations)

(1)
February 10, 1940
REVENUE REGULATIONS NO. 02-40
INCOME TAX REGULATIONS
SECTION 1. Scope. — In accordance with the provisions of Sections

4 (I) and 338 of Commonwealth Act No. 466, otherwise known as the National
Internal Revenue Code, the following regulations affecting Sections 19 to 84 of the
same Code relating to the income tax are hereby promulgated to supersede all
circulars, precedents, rulings, and regulations heretofore published on the same
subject, and they shall be known as Revenue Regulations No. 2, or the Income Tax
Regulations:
(Only the section numbers of the Code are given below as their texts will be
found in the same Code. They serve as captions of the pertinent provisions of the
Regulations.)
(Section 20 of the Code)
SECTION 2. Application of title. — Section 20 provides that the

provisions of Title II of the National Internal Revenue Code shall apply only to
income received from January 1, 1939.
SECTION 3. Persons considered citizens of the Philippines. — The

following shall be considered citizens of the Philippines:
(1) Those who were citizens of the Philippines at the time of the adoption
of the Constitution of the Philippines.
(2) Those born in the Philippines of foreign parents who, before the
adoption of the Constitution, had been elected to public office in the Philippines.
(3) Those whose fathers are citizens of the Philippines.
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(4) Those whose mothers are citizens of the Philippines and, upon
reaching the age of majority, elect Philippine citizenship.
(5) Those who are naturalized in accordance with law. (Sec. 1, Article IV,
Constitution of the Philippines.)
Philippine citizenship may be lost or reacquired in the manner provided by

law. A foreigner who has come to reside in the Philippines and has filed his
petition to acquire Philippine citizenship but has not yet received the requisite
naturalization certificate still remains an alien.
SECTION 4. Tax on citizens and residents. — Section 21 imposes

progressive rates of income taxes on citizens and residents, starting from 3 per cent
upon the amount by which the net income does not exceed P2,000 and rising
gradually to 60 per cent upon the amount by which the net income exceeds
P500,000. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The following is a table, showing the rates of income tax under Section 21,
as amended by Section 1 of R.A. No. 2343, applicable to income received from
Jan. 1, 1959 and for fiscal periods ending after June 30, 1959:
1 2 3 4 5 6
Exceeding Not Bracket Rate Tax on Each Cumulative
Exceeding of Tax Bracket Amount of Tax
P- P2,000 2,000 3% P60 P60
2,000 4,000 2,000 6% 120 180
4,000 6,000 2,000 9% 180 360
6,000 8,000 2,000 16% 320 680
8,000 10,000 2,000 20% 400 1,080
10,000 20,000 10,000 24% 2,400 3,480
20,000 30,000 10,000 30% 3,000 6,480
30,000 40,000 10,000 36% 3,600 10,080
40,000 50,000 10,000 40% 4,000 14,080
50,000 60,000 10,000 42% 4,200 18,280
60,000 70,000 10,000 44% 4,400 22,680
70,000 80,000 10,000 46% 4,600 27,280
80,000 90,000 10,000 48% 4,800 32,080
90,000 100,000 10,000 50% 5,000 37,080
100,000 120,000 20,000 52% 10,400 47,480
120,000 140,000 20,000 53% 10,600 58,080
140,000 160,000 20,000 54% 10,800 68,880
160,000 200,000 40,000 55% 22,000 90,880
200,000 250,000 50,000 56% 28,000 118,880
250,000 300,000 50,000 57% 28,500 147,380
300,000 400,000 100,000 58% 58,000 205,380
400,000 500,000 100,000 59% 59,000 264,380
500,000 - - 60% - -
Note: Taxable income is arrived at after deducting personal and additional
exemptions to which taxpayer is entitled. IcEaST
SECTION 5. Definition. — A "non-resident alien individual" means

an individual —
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient or

sojourner is a resident of the Philippines for purposes of the income tax. Whether
he is a transient or not is determined by his intentions with regard to the length and
nature of his stay. A mere floating intention indefinite as to time, to return to
another country is not sufficient to constitute him a transient. If he lives in the
Philippines and has no definite intention as to his stay, he is a resident. One who
comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient. But if his purpose is of such a nature that an
extended stay may be necessary for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he becomes a resident, though it
may be his intention at all times to return to his domicile abroad when the purpose
for which he came has been consummated or abandoned.
SECTION 6. Loss of residence by alien. — An alien who has acquired

residence in the Philippines retains his status as a resident until he abandons the
same and actually departs from the Philippines. An intention to change his
residence does not change his status as a resident alien to that of a nonresident
alien. Thus an alien who has acquired a residence in the Philippines is taxable as a
resident for the remainder of his stay in the Philippines.
SECTION 7. Taxation of aliens in general. — For purposes of income

tax, alien individuals are divided generally into two classes, namely, resident
aliens and non-resident aliens. Resident aliens are taxable in the same manner as
citizens of the Philippines, that is, a resident alien is taxable on income derived
from all sources including sources without the Philippines. Non-resident aliens are
taxable only on income from sources within the Philippines.
SECTION 8. Taxation of non-resident aliens; classification. —

Non-resident alien individuals are divided into two classes: (1) Those engaged in
trade or business within the Philippines, and (2) those not engaged in trade or
business within the Philippines. Non-resident aliens falling within the first class
are subject to the graduated rates established in Section 21 with respect to their net
income from sources within the Philippines. Non-resident aliens falling within the
second class are subject to a flat rate of 20 per cent on their total income from
sources within the Philippines, if such total income does not exceed P23,800,
otherwise, the graduated rates established in Section 21 will apply to the total
income if it exceeds P23,800. (Conforms with amendments by R.A. 2343,
effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes

the performance of personal services within the Philippines. Whether a
non-resident alien has an "office or place of business," however, implies a place
for the regular transaction of business and does not include a place where casual or
incidental transactions might be, or are, effected. Neither the beneficiary nor the
grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in
trade or business in the Philippines or to have an office or place of business
therein, merely because the trustee is engaged in trade or business in the
Philippines or has an office or place of business therein. (Test of "office or place
of business" was deleted by R.A. 2343.)
SECTION 9. Personal exemption. — Personal exemption is an

arbitrary amount allowed for personal, living, or family expenses of the taxpayer.
It is allowed to citizens of the Philippines, to resident aliens, and to non-resident
aliens in certain cases. The procedure of arriving at the tax due after giving effect
to the exemptions allowable is set forth in Section 4 of these regulations. EHcaDT
SECTION 10. Personal exemption of single individuals. — A single

individual is entitled to a personal exemption of P1,800.
SECTION 11. Personal exemption of married persons and heads of

family. — A married person is entitled to a personal exemption of P3,000. Only
one exemption of P3,000 is allowed with respect to the aggregate income of both
husband and wife. (Conforms with amendments by R.A. 2343, effective June 20,
1959.)
A head of family is an individual who actually supports and maintains in

one household one or more individuals, who are closely connected with him by
blood relationship, relationship by marriage, or by adoption, and whose right to
exercise family control and provide for these dependent individuals is based upon
some moral or legal obligation. In the absence of continuous actual residence
together, whether or not a person with dependent relatives is a head of a family
within the meaning of the statute must depend on the character of the separation. If
a father is absent on business, or a child or other dependent is away at school or on
a visit, the common home being still maintained, the additional exemption applies.
If, moreover, through force of circumstances a parent is obliged to maintain his
dependent children with relatives or in a boarding house while he lives elsewhere,
the additional exemption may still apply. If, however, without necessity, the
dependent continuously makes his home elsewhere, his benefactor is not the head
of a family, irrespective of the question of support. A resident alien with children
abroad is not thereby entitled to credit as the head of a family. Chief support
means principal or main support. Partial support not amounting to chief support
will not entitle the taxpayer to claim exemption as a head of a family.
Under the law the following persons are entitled to P3,000 exemption: (a) a
married man; (b) a married woman; and (c) an unmarried man or woman with one
or both parents, or one or more brothers or sisters, or one or more legitimate,
recognized natural, or adopted children living with and dependent upon him or her
for their chief support, where such brothers, sisters, or children are not more than
23 years of age, unmarried and not gainfully employed or where such children are
incapable of self-support because mentally or physically defective. (Conforms with
amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 12. Additional exemption for dependents. — The taxpayer is

entitled to an additional exemption of P1,000 for each legitimate, recognized
natural, or adopted child wholly dependent upon and living with such person, if
such dependent is not more than 23 years of age, unmarried and not gainfully
employed or incapable of self-support because mentally or physically defective,
provided that the person claiming additional exemption is a head of family. The
children with respect to whom additional exemption is claimed must be wholly
dependent upon the taxpayer for support. (Conforms with amendments by R A.
2343, effv. June 20, 1959.)
SECTION 13. Change of status. — If the status of the taxpayer, insofar

as it affects the personal and additional exemptions, changes during the taxable
year by reason of his death, the amount of the personal and additional exemptions
shall be apportioned, in accordance with the number of months before and after
such change. For the purpose of such apportionment, a fractional part of a month
shall be disregarded unless it amounts to more than half a month in which case it
shall be considered as one month. (Conforms with amendment by R.A. 590, effv.
Sept. 22, 1950.)
SECTION 14. Personal exemption of non-resident aliens. — A

non-resident alien is entitled to a personal exemption in an amount equal to the
exemptions allowed by the income tax law in the country of which he is a citizen
or subject to citizens of the Philippines. The exemption allowed to non-resident
aliens is a reciprocal one; that is, it is only allowed if the country of said
non-resident aliens allows similar exemptions to Filipinos not residing in such
country but deriving income from sources therein. If the country of which the
non-resident alien is a citizen or subject does not have any income tax law, such
non-resident alien will not be entitled to personal exemption.
SECTION 15. Income tax on corporations. — The law imposes an

annual income tax of 22 per centum upon that portion of the net income of every
corporation not in excess of P100,000 and 30 per cent on the excess. The term
"corporation" includes partnership no matter how created or organized, joint-stock
companies, joint-account (cuentas en participacion), association, or insurance
companies but does not include duly registered general co-partnership (companias
colectivas). The tax is upon net income, which is undetermined by subtracting
from the gross income, as defined in the law, the allowable deductions. (Conforms
with amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 16. Corporations liable to tax. — Every corporation,

domestic or foreign, not otherwise exempt from tax under Title II or any other law,
is liable to tax. A domestic corporation is taxed on its income from sources within
and without the Philippines, but a foreign corporation is taxed only on its income
form sources within the Philippines.
The tax imposed by law on corporations is not imposed only upon such
corporations as are organized and operated for profit. Any corporation, firm or
association, no matter how created or organized, or what the purpose of its
organization may be, is subject to the tax, except as provided in Section 27,
relative to exemptions from tax on corporations. A corporation is not exempt
simply and only because it is primarily not organized and operated for profit.
SECTION 17. Dividends received by a corporation from a domestic

corporation. — Dividends received by a domestic or resident foreign corporation
from a domestic corporation subject to tax are taxable only to the extent of 25 per
cent thereof. All other classes of income (except net capital gains, Section 34) of
corporations are taxable in full. Likewise dividends from a foreign corporation,
whether resident or non-resident, are taxable in full. (See Sections 250 to 256 of
these regulations relative to taxation of dividends and other distributions.)
SECTION 17-A. Tax on life insurance companies. — Every life insurance

company organized in or existing under the laws of the Philippines, or foreign life
insurance company authorized to carry on business in the Philippines are taxable
on their total net investment income derived from interest, dividends and rents
from all sources whether within or without the Philippines, to the flat rate of
6-1/2%. However, purely cooperative insurance companies or associations which
are conducted by the members thereof with the money collected from among
themselves and solely for their own protection and not for profit are exempt from
income tax.
The total net investment income of domestic life insurance companies

means the gross investment income received during the taxable year from rents,
dividends and interest less deductions for real estate expenses, depreciation,
interest paid within the taxable year on its indebtedness except on indebtedness
incurred to purchase or carry obligation the interest upon which is wholly exempt
from taxation under existing laws, and such investment expenses paid during the
taxable year as are ordinary and necessary in the conduct of its investment. The
total net investment income of foreign life insurance companies doing business
here is that portion of their gross world investment income which bears the same
ratio to such income as their total Philippines reserve (whether kept in the
Philippines or abroad) bears to their total world reserve less that portion of their
total world investment expenses which bears the same ratio to such expenses as
their total Philippine investment income bears to their total world investment
income. The following equation simplifies this formula:
PGI = PR/WR x WGI
PIE = PGI/WGI x WIE
PGI - PIE = PNI
Legend:
PGI is Philippine Gross Investment Income
PNI is Philippine Net Investment Income
PR is Total Philippine Reserve
WR is Total World Reserve
WGI is World Gross Investment Income
PGI is Philippine Gross Investment Income
WIE is Total World Investment Expenses
PIE is Philippine Investment Expense
In both cases, the deductible expenses must be connected with the

investment income subjected to tax. For the proper determination of the income
tax liability of resident foreign life insurance companies, they should submit the
necessary financial statement reflecting the nature of the investment income and
corresponding expenses. These financial statements must be duly certified by an
independent certified public accountant and authenticated by a Philippine consular
official. STcHDC
Foreign life insurance companies not doing business in the Philippines are
subject to the normal income tax on their income received from sources within the
Philippines. They are subject to tax at the rate of 30% like any other foreign
corporation.
Domestic life insurance companies and foreign life insurance companies

doing business in the Philippines are not allowed to deduct from their gross
income the net additions, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the year on policy and
annuity contracts. (Proposed by the BIR. If adopted, this will supersede Sec. 124
of existing regulations.)
SECTION 18. Taxation of corporation formed or utilized for avoidance

of tax. — Section 25 imposes for each year, in addition to the tax imposed by
Section 24 a tax of 25 per cent on the undistributed portion of the profits or
surplus of a corporation which is formed or availed of for the purpose of
preventing 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 dividing or distributing them.
However, banks, insurance companies, personal holding companies and foreign
personal holding companies as defined in Chapter VIII, are excepted from taxation
under Section 25. The tax imposed by Section 25 applies whether the avoidance
was accomplished through the formation or use of only one corporation or a chain
of corporations. For example, if the capital stock of the M Corporation is held by
the N Corporation so that the dividend distributions of the M Corporation would
not be returned as income subject to the tax on individuals until distributed in turn
by the N Corporation to its individual shareholders, 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 foreign corporation, whether
resident or non-resident, is subject to the tax provided for under Section 25 in the
same manner and under the same circumstances as a domestic corporation.
SECTION 19. Purpose to avoid tax; evidence; burden of proof;

definitions of holding or investment company. — The Collector of Internal
Revenue's determination that a corporation was formed or availed of for the
purpose of avoiding the tax on its shareholders or members is subject to disproof
by competent evidence. The existence or non-existence of the purpose may be
indicated by circumstances other than the evidence specified in Section 25(b), and
whether or not such purpose was present depends upon the particular
circumstances of each case. In other words, a corporation is subject to taxation
under Section 25 if it is formed or availed of for the purpose of preventing the
imposition of the progressive rates of tax upon shareholders through the medium
of permitting earnings or profits to accumulate, even though the corporation is not
a mere holding or investment company 50 per cent or more of the outstanding
stock of which is owned directly or indirectly by one person, and does not have an
unreasonable accumulation of earnings or profits; and on the other hand, the fact
that a corporation is such a company or has an accumulation is not absolutely
conclusive against it if, by clear and convincing evidence, the taxpayer satisfies the
Commissioner of Internal Revenue that the corporation was neither formed nor
availed of for the purpose of avoiding the tax on individuals. All the other
circumstances which might be construed as evidence of the purpose to avoid the
tax on shareholders cannot be outlined, but among other things the following will
be considered: (1) Dealings between the corporation and its shareholders, such as
withdrawal by the shareholders as personal loans or the expenditure of funds by
corporation for the personal benefit of the shareholders, and (2) the investment by
the corporation of undistributed earnings in assets having no reasonable connection
with the business. The mere fact that the corporation distributed a large part of its
earnings for the year in question does not necessarily prove that earnings were not
permitted to accumulate beyond reasonable needs or that the corporation was not
formed or availed of to avoid the tax upon shareholders.
If the Commissioner of Internal Revenue determined that the corporation

was formed or availed of for the purpose of avoiding the progressive rates of tax
on individuals through the medium of permitting earnings or profits to accumulate,
and the taxpayer contests such determination of fact by litigation, the burden of
proving the determination wrong by a preponderance of evidence, together with
the corresponding burden of first going forward with evidence, is on the taxpayer
under principles applicable to income tax cases generally, and this is so even
though the corporation is not a mere holding or investment company and does not
have an unreasonable accumulation of earnings or profits. However, if the
corporation is a mere holding or investment company, then the law gives further
weight to the presumption of correctness already arising from the Commissioner of
Internal Revenue's determination by expressly providing an additional presumption
of the existence of a purpose to avoid the tax upon shareholders, while if earnings
or profits are permitted to accumulate beyond the reasonable needs of the business
then the law adds still more weight to the Commissioner of Internal Revenue's
determination by providing that irrespective of whether or not the corporation is a
mere holding or investment company, the existence of such an accumulation is
determinative of the purpose to avoid the tax upon shareholders unless the
taxpayer proves the contrary by such a clear preponderance of all the evidence that
the absence of such a purpose is unmistakable.
SECTION 20. Holding and investment companies. — A corporation

having practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company within the
meaning of Section 25. If the activities further include, or consist substantially of,
buying and selling stocks, securities, real estate, or other investment property
(whether upon an outright or a marginal basis) so that the income is derived not
only from the investment yield but also from profits upon market fluctuations, the
corporation shall be considered an investment company within the meaning of
Section 25.
SECTION 21. Unreasonable accumulation of profits. — An

accumulation of earnings or profits (including the undistributed earnings or profits
of prior years) is unreasonable if it is not required for the purposes of the business,
considering all the circumstances of the case. It is not intended, however, to
prevent accumulations of surplus for the reasonable needs of the business if the
purpose is not to prevent the imposition of the tax upon shareholders. No attempt
is here made to enumerate all the ways in which earnings or profits of a
corporation may be accumulated for the reasonable needs of the business.
Undistributed income is properly accumulated if retained for working capital
needed by the business; or if invested in additions to plant reasonably required by
the business; or if in accordance with contract obligations placed to the credit of a
sinking fund for the purpose of retiring bonds issued by the corporation. The
nature of the investment of earnings or profits is immaterial if they are not in fact
needed in the business. Among other things, the nature of the business, the
financial condition of the corporation at the close of the taxable year, and the use
of the undistributed earnings or profits will be considered in determining the
reasonableness of the accumulations.
The business of a corporation is not merely that which it has previously

carried on, but includes in general any line of business which it may undertake.
However, a radical change of business when a considerable surplus has been
accumulated may afford evidence of a purpose to avoid the tax. If one corporation
owns the stock of another corporation in the same or a related line of business and
in effect operates the other corporation, the business of the latter may be
considered in substance although not in legal form the business of the first
corporation. Earnings or profits of the first corporation put into the second through
the purchase of stock or otherwise may, therefore, if a subsidiary relationship is
established, constitute employment of the income in its own business. Investment
by a corporation of its income in stock and securities of another corporation is not
of itself to be regarded as employment of the income in its business. The business
of one corporation may not be regarded as including the business of another unless
the other corporation is a mere instrumentality of the first; to establish this it is
ordinarily essential that the first corporation own all or substantially all of the
stock of the second.
The Commissioner of Internal Revenue may require any corporation to

furnish a statement of its accumulated earnings and profits, the name and address
of, and number of share held by each of its shareholders or members, and the
amounts that would be payable to each, if the income of the corporation were
distributed.
SECTION 22. General co-partnerships. — General co-partnerships,

when duly registered, are not subject to income tax, but are required to file returns
of their income on B.I.R. Form No. 17.04 for the purpose of furnishing
information as to the share in the gains or profits which each partner shall include
in his individual return. Individuals carrying on business in general co-partnership
are, however, taxable upon their distributive shares of the net income of such
partnership, whether distributed or not, and are required to include such
distributive shares in their individual returns. The returns of duly registered general
co-partnerships should be rendered on or before April 15 of each year or within
sixty days after the end of their fiscal year depending on whether their books are
kept on the calendar or on the fiscal year basis. (Conforms with amendments by
R.A. 2343, effv. June 20, 1959.)
SECTION 23. Distributive shares of partners. — The distributive share

of the net profit of a general co-partnership must be included in the individual
returns of the partners. But where the result of partnership operation is a loss, the
loss will be divisible by the partners in the same proportion as the net income
would have been divisible (or, if the partnership agreement provides for the
division of a loss in a manner different from the division of a gain, in the manner
so provided) and may be taken by the individual partners in their respective returns
of income.
SECTION 24. Proof of exemption. — In order to establish its

exemption, and thus be relieved of the duty of filing returns of income and paying
the tax, it is necessary that every organization claiming exemption file an affidavit
with the Commissioner of Internal Revenue, showing the character of the
organization, the purpose for which it was organized, its actual activities, the
sources of its income and its disposition, whether or not any of its income is
credited to surplus or inures or may inure to the benefit of any private shareholder
or individual, and in general, all facts relating to its operations which affect its
right to exemption. To such affidavit should be attached a copy of the charter or
articles of incorporation, the by-laws of the organization, and the latest financial
statement showing the assets, liabilities, receipts, and disbursement of the
organization.
Upon receipt of the affidavit and other papers by the Commissioner of

Internal Revenue, the organization will be informed whether or not it is exempt.
When an organization has established its right to exemption, it need not thereafter
make and file a return of income as required under Section 46 of the Tax Code.
However, the organization should file on or before April 15 of each year, an
annual information return under oath, stating its gross income and expenses
incurred during the preceding year, and a certificate showing that there has not
been any substantial change in its By-Laws, Articles of Incorporation, manner of
operation and activities as well as sources and disposition of income. (As amended
by Revenue Regulations No. 7-64, approved November 25, 1964.)
SECTION 25. Agricultural and horticultural organizations. — The

organizations contemplated by subsection (a) of Section 27 of the Code as entitled
to exemption from income taxation are those which (1) have no net income inuring
to the benefit of any member; (2) are educational or instructive in character; and
(3) have as their objects the betterment of the conditions of those engaged in such
pursuits, the improvement of the grade of their products, and the development of a
higher degree of efficiency in their respective occupations. Organizations such as
provincial fairs and like associations of a quasi-public character, which are
designed to encourage the development of better agricultural and horticultural
products through a system of awards, prizes, or premiums, and whose income
derived from gate receipts, entry fees, donations, etc., is used exclusively to meet
the necessary expenses of upkeep and operation, are thus exempt. On the other
hand, associations which have for their purpose, for example, the holding of
periodical race meets, the profits from which may inure to the benefit of their
shareholders, are not exempt. Similarly, corporations engaged in growing
agricultural or horticultural products or raising live stock or similar products for
profits are not exempt from tax under this paragraph. ITScHa
SECTION 26. Mutual savings bank. — In order that a corporation may

be entitled to exemption as a mutual savings bank, it must appear that it is an
organization (1) which has no capital stock represented by shares, and (2) whose
earnings less only the expenses of operation, are distributable wholly among the
depositors. If it appears that the organization has shareholders who participate in
the profits, the organization will not be exempt from income tax.
SECTION 27. Fraternal beneficiary societies. — A fraternal
beneficiary society is exempt from tax only if operated under the "lodge system",
or for the exclusive benefit of the members of a society so operating. "Operating
under the lodge system" means carrying on its activities under a form of
organization that comprises local branches, chartered by a parent organization and
largely self-governing, called lodges, chapters, or the like. In order to be exempt, it
is also necessary that the society should have an established system for payment to
its members or their dependents of life, sick, accident, or other benefits.
SECTION 28. Building and loan associations. — (Now subject to tax,

as amended by Sec. 4, R.A. 82.)
SECTION 29. Cemetery companies. — A cemetery company may be

entitled to exemption, (1) if it is owned by and operated exclusively for the benefit
of its lot owners, or (2) if it is not operated for profit. Any cemetery corporation
chartered solely for burial purposes and not permitted by its charter to engage in
any business not necessarily incident to that purpose, is exempt from income tax,
provided that no part of its net earnings inures to the benefit of any private
shareholder or individual. A cemetery company which fulfills the other
requirement of the statute may be exempt, even though it issues preferred stock
entitling the holders to dividend at a fixed rate, provided that its articles of
incorporation require (a) that the preferred stock shall be retired at par as soon as
sufficient funds are realized from sales, and (b) that all funds not required for the
payment of dividends upon or for the retirement of preferred stock shall be used by
the company for the care and improvement of the cemetery property.
A cemetery company having a capital stock represented by shares, or which

is operated for profit or for the benefit of persons other than its members, does not
come within the exempted class.
SECTION 30. Religious, charitable, scientific, athletic, cultural, and

educational corporations. — A corporation falling among those enumerated in
subsection (e) of Section 27 is exempt from tax on its income (other than income
of whatever 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 from their

properties, real or personal, generally consists of income from corporate dividends,
rentals received from their properties, interests received from such capital loaned
to other persons, income from agricultural lands owned by such corporations,
profits from the sale of property, real or personal, and other similar income.
Income not derived from their properties, real or personal, are exempt. For
example, in the case of a religious corporation, income from the conduct of strictly
religious activities, such as fees received for administering baptismals, solemnizing
marriages, attending burials, holding masses, and other like income, is exempt. In
the case of an educational corporation, income from the holding of an educational
fair or exhibit is exempt. However, if such exempt income is invested by the
corporation, the income from such investment, as interests from the capital where
the capital has been loaned or dividends on stock where the capital has been
invested in shares of stock, will constitute taxable income. Donations and other
similar contributions received by such corporation from other persons are exempt.
The clause "except income expressly exempt by this Title" appearing in

subsection (e) of Section 27 refers to those classes of income which, in accordance
with subsection (b) of Section 29, are exempt from taxation under Title II.
Charitable corporations include an association for the relief of the families

of clergymen, even though the latter make a contribution to the fund established
for this purpose; or for furnishing the services of trained nurses to persons unable
to pay for them; or for aiding the general body of litigants by improving the
efficient administration of justice. Educational corporations may include
associations whose sole purpose is the instruction of the public. But associations
formed to disseminate controversial or partisan propaganda are not educational
within the meaning of the law. Scientific corporations include an association for
the scientific study of law with a view to improving its administration.
It does not prevent exemption that private individuals, for whose benefit a
charity is organized, receive the income of the corporation or association. The law
refers to individuals having a personal and private interest in the activities of the
corporation, such as stockholders. If, 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 income, the right to exemption
ceases to exist, even though the by-laws provide that the shareholders shall not
receive any dividend or other return upon their shares.
SECTION 31. Business leagues. — A business league is an association

of persons having some common business interest, which limits its activities to
work for such common interest and does not engage in a regular business of a kind
ordinarily carried on for profit. Its work need not be similar to that of a chamber of
commerce or board of trade. If it engages in a regular business of a kind ordinarily
carried on for profit, the fact that the business is conducted on a cooperative basis
or produces only sufficient income to be self-sustaining, is not ground for
exemption. An association engaged in furnishing information to prospective
investors, to enable them to make sound investments, is not exempt, since its
members have no common business interest, even though all of its income is
devoted to the purpose stated. A clearing house association, not organized for
profit, no part of the net income of which inures to any private shareholder or
individual, is exempt provided its activities are limited to the exchange of checks,
and similar work for the common benefit of its members. An association of
persons who are engaged in the transportation business, whether by land or water,
which is designed to promote the legitimate objects of such business, and all of the
income of which is derived from membership dues and is expended for office
expenses is exempt from tax. DSITEH
SECTION 32. Civic 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.
SECTION 33. Social clubs. — The exemption applies to practically all

social and recreation clubs which are supported by membership fees, dues, and
assessments. If a club, by reason of the comprehensive powers granted in the
charter, engages in business or in agriculture or horticulture, for profit, such club is
not organized and operated exclusively for pleasure, recreation, or social purposes,
and any profit realized from such activities is subject to tax.
SECTION 34. Mutual insurance companies and like organizations. —

It is necessary to exemption that the income of the company be derived solely from
assessments, dues, and fees collected from members. If income is received from
other sources, the corporation is not exempt. Income, however, from sources other
than those specified does not prevent exemption where its receipt is a mere
incident of the business of the company. Thus the receipt of interest upon a
working bank balance, or of the proceeds of the sale of badges, office supplies, or
equipment, will not defeat the exemption. The same is true of the receipt of
interest upon Government bonds, where they were purchased and were afterwards
sold. Where, however, such bonds are bought as a permanent investment, the
receipt of the interest destroys the exemption. The receipt of what is, in substance,
an entrance fee, charged by a mutual fire insurance company as a condition of
membership, does not render the company taxable, although this fee is called a
premium. If an organization issues policies for stipulated cash premiums, or if it
requires advance deposits to cover the cost of the insurance and maintains
investments from which income is derived, it is not entitled to exemption. On the
other hand, an organization may be entitled to exemption, although it makes
advance assessment for the sole purpose of meeting future losses and expenses,
provided that the balance of such assessments remaining on hand at the end of the
year is retained to meet losses and expenses or is returned to members. An
organization of a purely local character is one whose business activities are
confined to a particular community, place, or district, irrespective, however, of
political subdivisions.
SECTION 35. Farmers' cooperative marketing and purchasing

association. — Cooperative associations, acting as sales agents for farmers or
others, in order to come within the exemption must establish that for their own
account they have no net income. Cooperative dairy companies, which are engaged
in collecting milk and disposing of it or the products thereof and distributing the
proceeds, less necessary operating expenses, among their members upon the basis
of the quantity of milk or of butter fat in the milk furnished by such members are
exempt from the tax. If the proceeds of the business are distributed in any other
way than on such a proportionate basis, the company will be subject to tax. A
farmers' association is not exempt from taxation where in accounting to farmers
furnishing produce for the proceeds of sales it deducts more than the necessary
selling expenses incurred. Cooperative associations acting as purchasing agents are
not expressly exempt from tax, but rebates made to purchasers, whether or not
members of the association, in proportion to their purchases may be excluded from
gross income in computing the net income subject to tax. Any profits made from
non-members and distributed to members in the guise of rebates are, of course,
subject to tax.
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 exempting cooperative marketing associations.)
SECTION 36. Meaning of net income. — The tax imposed by law is

upon income. In the computation of the tax, various classes of income must be
considered: (a) Income, in the broad sense, meaning all wealth which flows into
the tax-payer 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. Income cannot be determined merely by
reckoning cash receipts, for the statute recognizes as income determining factor
other items, among which are inventories, accounts receivable, property
exhaustion, and accounts payable for expenses incurred. (b) Gross income,
meaning income (in the broad sense) less income which is by statutory provision
or otherwise exempt from the tax imposed by law. (c) Net income, meaning gross
income less statutory deductions. The statutory deductions are, in general, though
not exclusively, expenditures other than capital expenditures, connected with
production of income. (d) In the case of a taxpayer other than a corporation as
defined in Section 84 (b) of the Code, net income means gross income less
exemptions. Ordinarily the net income is to be computed in accordance with the
method of accounting regularly employed in keeping the books of the taxpayer.
SECTION 37. Computation of net income. — Net income must be

computed with respect to a fixed period. That period is twelve months ending
December 31st of every year except in the case of a corporation filing returns on a
fiscal year basis in which case net income will be computed on the basis of such
fiscal year. Items of income and of expenditures, which as gross income and
deductions, are elements in the computation of net income, need not be in the form
of cash. It is sufficient that such items may be appraised in terms of money. The
time as of which any item of gross income or any deduction is to be accounted for
must be determined in the light of the fundamental rule that the computation shall
be made in such a manner as would clearly reflect the taxpayer's income. If the
method of accounting regularly employed by him in keeping his books clearly
reflects his income, it is to be followed with respect to the time as of which items
of gross income and deductions are to be accounted for, otherwise the computation
of net income shall be made in such manner as in the opinion of the Commissioner
of Internal Revenue would clearly reflect it.
SECTION 38. Bases of computation. — Approved standard methods of

accounting will be ordinarily regarded as clearly reflecting income. A method of
accounting will not, however, be regarded as clearly reflecting income unless all
items of gross income and all deductions are treated with reasonable consistency.
All items of gross income shall be included in the gross income for the taxable
year in which they are received by the taxpayer and deductions taken accordingly,
unless in order clearly to reflect income such amounts are to be properly accounted
for as of a different period. For instance, in any case in which it is 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
gross income which have been credited to or set apart for him without restriction.
On the other hand, appreciation in value of property is not even an accrual of
income to a taxpayer prior to the realization of such appreciation through sale or
conversion of the property. (For methods of accounting and determination of
accounting period, see Sections 166 to 169 of these regulations.)
(Section 29(a) of the Code)
SECTION 39. What gross income includes. — Gross income includes,

in general, compensation for personal and professional services, business income,
profits from sales of and dealings in property, interests, rents, dividends, and gains,
profits, and income derived from any source whatever, unless exempt from tax by
law. In general, income is the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or
conversion of capital assets. Profit of citizens, resident aliens, or domestic
corporations derived from sales in foreign commerce must be included in their
gross income. Income may be in the form of cash or of property. IHDCcT
For the treatment of dividends for purposes of the tax, see Sections 250 to
256 of these regulations. For the treatment of capital gains, see Sections 132 to 135
of these regulations.
SECTION 40. Compensation for personal services. — Where no

determination of compensation is had until the completion of the services, the
amount received is ordinarily income for the taxable year of its determination, if
the return is rendered on the accrual basis; or, for the taxable year in which
received, if the return is rendered on a receipts and disbursements basis.
Commissions paid salesman, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, and pensions or
retiring allowances paid by private persons or by the Government of the United
States or of the Philippines (except pensions exempt by law from tax) are income
to the recipients; as are also marriage fees, baptismal offerings, sums paid for
saying masses for the dead, and other contributions received by a clergyman,
evangelists, or religious worker for services rendered. However, so-called pensions
awarded by one to whom no services have been rendered are mere gifts or
gratuities and are not taxable.
SECTION 41. Compensation paid other than in cash. — Where

services are paid for with something other than money, the fair market value of the
thing taken in payment is the amount to be included as income. If the services were
rendered at a stipulated price, in the absence of evidence to the contrary, such
price will be presumed to be the fair value of the compensation received.
Compensation paid an employee of a corporation in its stock is to be treated as if
the corporation sold the stock for its market value and paid the employee in cash.
When living quarters are furnished in addition to cash salary, the rental value of
such quarters should be reported as income.
SECTION 42. Compensation paid in promissory notes. — Promissory

notes or other evidence of indebtedness received in payment for services, and not
merely as security for such payment, constitute income to the amount of their fair
market value. A taxpayer receiving as compensation a note regarded as good for its
face value at maturity, but not bearing interest, shall treat as income as of the time
of receipt the fair discounted value of the note at that time. Thus, if it appears that
such a note is or could be discounted on a 6 per cent basis, the recipient shall
include such note in his gross income to the amount of its face value less discount
computed at the prevailing rate for such transactions.
If the payment due on a note so accounted for are met as they become due,
there should be included as income in respect of each such payment so much
thereof as represents recovery for the discount originally deducted.
SECTION 43. Gross income from business. — In the case of a

manufacturing, merchandising, or mining business, "gross income" means the total
sales, less the cost of goods sold, plus any income from investments and from
incidental or outside operations or sources. In determining the gross income,
subtractions should not be made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the cost of goods sold.
SECTION 44. Long term contracts. — Income from long-term

contracts is taxable for the period in which the income is determined, such
determination depending upon the nature and terms of the particular contract. As
used herein the term "long-term" contracts means building, installation, or
construction contracts covering a period in excess of one year. Persons whose
income is derived in whole or in par from such contracts may, as to such income,
prepare their returns upon the following bases:
(a) Gross income derived from such contracts may be reported upon the
basis of percentage of completion. In such case there should accompany the return
certificate of architects, or engineers showing the percentage of completion during
the taxable year of the entire work performed under contract. There should be
deducted from such gross income all expenditures made during the taxable year on
account of the contract, account being taken of the material and supplies on hand
at the beginning and end of the taxable period for use in connection with the work
under the contract but not yet so applied. If upon completion of a contract, it is
found that the taxable net income arising thereunder has not been clearly reflected
for any year or years, the Commissioner of Internal Revenue may permit or require
an amended return.
(b) Gross income may be reported in the taxable year in which the
contract is finally completed and accepted if the taxpayer elects as a consistent
practice to so treat such income, provided such method clearly reflects the net
income. If this method is adopted there should be deducted from gross income all
expenditures during the life of the contract which are properly allocated thereto,
taking into consideration any material and supplies charged to the work under the
contract but remaining on hand at the time of the completion.
Where a taxpayer has filed his return in accordance with the method of
accounting regularly employed by him in keeping his books and such 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 accounting
in accordance with paragraphs (a) and (b) above, a statement showing the
composition of all items appearing upon his balance sheet and used in connection
with the method of accounting formerly employed by him, should accompany his
return.
SECTION 45. Gross income of farmers. — A farmer reporting on the

basis of receipts and disbursements (in which no inventory to determine profits is
used) shall include in his gross income for the taxable year (1) the amount of cash
or the value of merchandise or other property received from the sale of live stock
and produce which were raised during the taxable year or prior years, (2) the profit
from the sale of any live stock or other items which were purchased, and (3) gross
income from all other sources. The profit from the sale of live stock or other items
which were purchased is to be ascertained by deducting the cost from the sales
price in the year in which the sale occurs, except that in the case of the sale of
animals purchased as draft or work animals, or solely for breeding or dairy
purposes and not for resale, the profit shall be the amount of any excess of the
sales prices over the amount representing the difference between the cost and the
depreciation theretofore sustained and allowed as a deduction in computing net
income.
In the case of a farmer reporting on the accrual basis (in which an inventory
is used to determine profits), his gross profits are ascertained by adding to the
inventory value of live stock and products on hand at the end of the year the
amount received from the sale of live stock products, and miscellaneous receipts
for hire of teams, machinery, and the like, during the year, and deducting from this
sum the inventory value of live stock and products on hand at the beginning of the
year and the cost of live stock and products purchased during the year. In such
cases all live stock raised or purchased for sale shall be included in the inventory
at their proper valuation determined in accordance with the method authorized and
adopted for the purpose. Also, live stock acquired for drafts, breeding, or dairy
purposes and not for sale may be included in the inventory, instead of being
treated as capital assets subject to depreciation, provided such practice is followed
consistently by the taxpayer. In case of the sale of any live stock included in an
inventory their cost must not be taken as an additional deduction in the return of
income, as such deduction will be reflected in the inventory.
In every case of the sale of machinery, farm equipment, or other capital

assets (which are not to be included in an inventory if one is used to determine
profits) any excess over the cost thereof less the amount of depreciation
theretofore sustained and allowed as a deduction in computing net income, shall be
included as gross income. Where farm produce is exchanged for merchandise,
groceries, or the like, the market value of the article received in exchange is to be
included in gross income. Rents received in crop shares shall be returned as of the
year in which the crop shares are reduced to money or a money equivalent.
Proceeds of insurance, such as fire and typhoon insurance on growing crops,
should be included in gross income to the amount received in cash or its equivalent
for the crop injured or destroyed. If a farmer is engaged in producing crops which
take more than a year from the time of planting to the time of gathering and
disposing, the income therefrom may be computed upon the crop basis; but in any
such cases the entire cost of producing the crop must be taken as a deduction in the
year in which the gross income from the crop is realized. EaICAD
As herein used the term "farm" embrace the farm in the ordinarily accepted
sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations,
ranches, and all land used for farming operations. All individuals, partnerships, or
corporations that cultivate, operate, or manage farms for gain or profit either as
owners, or tenants, are designated farmers. A person cultivating or operating a
farm for recreation or pleasure, the result of which is a continual loss from year to
year, is not regarded as a farmer.
SECTION 46. Sale of patents and copyrights. — A taxpayer disposing

of patents or copyrights by sale should determine the profit or loss arising
therefrom by computing the difference between the selling price and the cost. The
taxable income in the case of patents or copyrights acquired prior to March 1,
1913, should be ascertained in accordance with the provisions of section 136 of
these regulations. The profit or loss thus ascertained should be increased or
decreased, as the case may be, by the amounts deducted on account of depreciation
of such patent or copyrights since March 1, 1913, or since the date of acquisition if
subsequent thereto.
SECTION 47. Sale of goodwill. — Gain or loss from a sale of goodwill

results only when the business, or a part of it, to which the goodwill attaches is
sold, 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 payment
was not made for goodwill acquired after March 1, 1913, there can be no
deductible loss with respect thereto, but gain may be realized from the sale of
goodwill built up through expenditures which have been currently deducted. It is
immaterial that goodwill may never have been carried on the books as an asset but
the burden of proof is on the taxpayer to establish the cost or fair market value on
March 1, 1913, of the goodwill sold.
SECTION 48. Annuities and insurance policies. — Annuities paid by

religious, charitable, and educational corporations under an annuity contract are
subject to tax to the extent that the aggregate amount of the payments to the
annuitant exceeds the amounts paid by him as consideration for the contract. An
annuity charged upon devised land is taxable to a donee-annuitant, whether paid
by the devisee out of the rents of the land or from other sources. The devisee is not
required to return as gross income the amount of rent paid to the annuitant, and he
is not entitled to deduct from his gross income any sums paid to the annuitant.
Amounts received by an insured as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, such as the so-called "dividends" of a
mutual insurance company, which may be credited against the current premium,
are not subject to tax. Distributions on paid-up policies which are made out of
earnings of the insurance company subject to tax are in the nature of corporate
dividends and should be included in the taxable income of the individual, without
any credit for the amount of tax paid by the corporation at source.
SECTION 49. Improvements by lessees. — When buildings are erected

or improvements made by a lessee in pursuance of an agreement with the lessor,
and such buildings or improvements are not subject to removal by the lessee, the
lessor may at his option report the income therefrom upon either of the following
bases;
(a) The lessor may report as income at the time when such buildings or
improvements are completed the fair market value of such buildings or
improvements subject to the lease.
(b) The lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvements at the termination of the lease
and report as income for each year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the lessee by the
lessor the lease is terminated, so that the lessor comes into possession or control of
the property prior to the time originally fixed for the termination of the lease, the
lessor receives additional income for the year in which the lease is so terminated to
the extent that the value of such buildings or improvements when he became
entitled to such possession exceeds the amount already reported as income on
account of the erection of such buildings or improvements. No appreciation in
value due to causes other than the premature termination of the lease shall be
included. Conversely, if the building or improvements are destroyed prior to the
expiration of the lease, the lessor is entitled to deduct as a loss for the year when
such destruction takes place the amount previously reported as income because of
the erection of such buildings or improvements, less any salvage value subject to
the lease to the extent that such loss was not compensated for by insurance. If the
buildings or improvements destroyed were acquired prior to March 1, 1913, the
deduction shall be based on the cost or the value subject to the lease to the extent
that such loss was not compensated for by insurance.
SECTION 50. Forgiveness of indebtedness. — The cancellation and

forgiveness of indebtedness may amount to a payment of income, to a gift, or to a
capital transaction, dependent upon the circumstances. If, for example, an
individual performs services for a creditor, who, in consideration thereof cancels
the debt, income to that amount is realized by the debtor as compensation for his
services. If, however, a creditor merely desires to benefit a debtor and without any
consideration therefor cancels the debt, the amount of the debt is a gift from the
creditor to the debtor and need not be included in the latter's gross income. If a
corporation to which a stockholder is indebted forgives the debt, the transaction
has the effect of the payment of a dividend.
SECTION 51. When income is to be reported. — Gains, profits, and

income are to be included in the gross income for the taxable year in which they
are received by the taxpayer, unless they are included when they accrue to him in
accordance with the approved method of accounting followed by him. If a person
sues in one year on a pecuniary claim or for property, and money or property is
recovered on a judgment therefore in a later year, income is realized in that year,
assuming that the money or property would have been income in the earlier year if
then received. This is true of a recovery for patent infringement. Bad debts or
accounts charged off subsequent to March 1, 1913, because of the fact that they
were determined to be worthless, which are subsequently recovered, whether or
not by suit, constitute income for the year in which recovered, regardless of the
date when amounts were charged off.
SECTION 52. Income constructively received. — Income which is

credited to the account of or set apart for a taxpayer and which may be drawn upon
by him at any time is subject to tax for the year during which so credited or set
apart, although not then actually reduced to possession. To constitute receipt in
such a case the income must be credited to the taxpayer without any substantial
limitation or restriction as to the time or manner of payment or condition upon
which payment is to be made. A book entry, if made, should indicate an absolute
transfer from one account to another. If the income is not credited, but is set apart,
such income must be unqualifiedly subject to the demand of the taxpayer. Where a
corporation contingently credits its employees with bonus stock, but the stock is
not available to such employees until some future date, the mere crediting on the
books of the corporation does not constitute receipt.
SECTION 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 for
other property instead of eventually being cashed. Defaulted coupons are income
for the year in which paid. The distributive share of the profits of a partner in a
general co-partnership duly registered is regarded as received by him, although not
distributed. Interest credited on savings bank deposits, even though the bank
nominally has a rule, seldom or never enforced, that it may require so many days'
notice in advance of cashing depositors' checks, is income to the depositor when
credited. An amount credited to shareholders of a building and loan association,
when such credit passes without restriction to the shareholder, has taxable status as
income for the year of the credit. When the amount of such accumulations has not
become available to the shareholder until the maturity of a share, the amount of
any share in excess of the aggregate amount paid in by the shareholder is income
for the year of maturity of the share. TaSEHC
SECTION 54. Creation of corporate sinking fund. — If a corporation

in order solely to secure payment of its bonds or other indebtedness, places
property in trust, or sets aside certain amounts in a sinking fund under the control
of a trustee who may be authorized to invest and reinvest such sums from time to
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 annual return.
SECTION 55. Acquisition or disposition by a corporation of its own

capital stock. — Whether the acquisition or disposition by a corporation of share
of its own capital stock gives rise to taxable gain or deductible loss depends upon
the real nature of the transaction, which is to be ascertained from all its facts and
circumstances. The receipt by a corporation of the subscription price of shares of
its capital stock upon their original issuance gives rise to neither taxable gain nor
deductible loss, whether the subscription or issue price be in excess of, or less
than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of

another corporation, the resulting gain or loss is to be computed in the same
manner as though the corporation were dealing in the shares of another. So also if
the corporation receives its own stock as consideration upon the sale of property
by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be
computed in the same manner as though the payment had been made in any other
property. Any gain derived from such transaction is subject to tax, and any loss
sustained is allowable as deduction where permitted by the provisions of Title II.
SECTION 56. Contributions by shareholders. — Where a corporation

requires additional funds for conducting its business and obtains such needed
money through voluntary pro rata payments by its shareholders, the amounts so
received being credited to its surplus account or to a special capital account, will
not be considered income, although there is no increase in the outstanding shares
of stock of the corporation. The payments in such circumstances are in the nature
of voluntary assessments upon, and represent an additional price paid for, in shares
of stock held by the individual shareholders, and will be treated as an addition to
and as a part of the operating capital of the company.
SECTION 57. Sale and retirement of corporate bonds. — (1) (a) If

bonds are issued by a corporation at their face value, the corporation realizes no
gain or loss. (b) If thereafter the corporation purchases and retires any of such
bonds at a price in excess of the issuing price or face value, 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 at a price less than the issuing price or face value, the excess of the issuing
price or face value over the purchase price is gain or income for the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of
such premium is gain or income which should be prorated or amortized over the
life of the bond. (b) If thereafter the corporation purchases and retires any of such
bonds at a price in excess of the issuing 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 premiums not yet returned as income) is a deductible expenses
for the taxable year. (c) If, however, the corporation purchases and retires any of
such bonds at a price less than the issuing price minus any amount of premium
already returned as income, the excess of the issuing price minus any amount of
premium already returned as income (or of the face value plus any amount of
premium not yet returned as income) over the purchase price is gain or income for
the taxable year.
(3) (a) If bonds are issued by a corporation at a discount, the net amount of
such discount is deductible and should be prorated or amortized over the life of the
bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a
price in excess of the issuing price plus any amount of discount already deducted,
the excess of the purchase price over the issuing price plus any amount of discount
already deducted (or over the face value minus any amount of discount not yet
deducted), is a deductible expense for the taxable year. (c) If, however, the
corporation purchases and retires any of such bonds at a price less than the issuing
price plus any amount of discount already deducted, the excess of the issuing price
plus any amount of discount already deducted (or of the face value minus any
amount of discount not yet deducted) over the purchase price is gain or income for
the taxable year.
SECTION 58. Income of corporation from leased property. — Where a

corporation has leased its property in consideration that the lessee shall pay in lieu
of other rental an amount equivalent to a certain rate of dividend on the lessor's
capital stock or the interest on the lessor's outstanding indebtedness, together with
taxes, insurance or other fixed charges, such payments shall be considered rental
payments and shall be returned by the lessor corporation as income,
notwithstanding the fact that the dividends and interest are paid by the lessee
directly to the shareholders and bondholders of the lessor. The fact that a
corporation has conveyed or let its property and has parted with its management
and control, or has ceased to engage in the business for which it was originally
organized, will not relieve it from liability to the tax. While the payments made by
the lessee directly to the bondholders or shareholders of the lessor are rentals as to
both the lessee and lessor (rentals paid in one case and rentals received in the
other), to the bondholders and the shareholders, such amounts are interest and
dividend payments received as from the lessor and as such shall be accounted for
in their returns.
SECTION 59. Gross income of a corporation in liquidation. — When a

corporation is dissolved, its affairs are usually wound up by a receiver or trustee in
dissolution. The corporate existence is continued for the purpose of liquidating the
assets and paying the debts, and such receiver or trustee stands in the stead of the
corporation for such purposes. Any sales of property by them are to be treated as if
made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60. Gross income of foreign corporations. — The gross

income of a foreign corporation subject to tax consists of its gross income from
sources within the Philippines. Gross income from sources within the Philippines,
as applied to foreign corporations, shall include interest received on bonds, notes,
or other interest-bearing obligations issued by residents, corporate or otherwise, as
well as income derived from dividends on the capital stock or from the net
earnings of domestic or resident foreign corporations, joint stock companies,
associations, or insurance companies, dividends from other foreign corporations to
the extent provided in Section 37 of the Code, and likewise income from rentals
and royalties from all sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61. Exclusions from gross income. — The term "gross

income" as used in the Act does not include those items of income exempted by
statute or by fundamental law. Such tax-free income should not be included in the
income tax return unless information regarding it is specifically called for. The
exclusion of such income should not be confused with the reduction of gross
income by the application of allowable deductions.
SECTION 62. Proceeds of insurance. — The proceeds of life-insurance

policies, paid by reason of the death of an insured to his estate or to any
beneficiary (individual, partnership, or corporation, but not a transferee for a
valuable consideration), directly or in trust, are excluded from the gross income of
the beneficiary. It is immaterial whether the proceeds are received in a single sum
or in installments. If, however, such proceeds are held by the insurer under an
agreement to pay interest thereon, the interest payments must be included in gross
income. Amounts received (other than amounts paid by reason of the death of the
insured and interest payments on such amounts) under a life insurance,
endowment, or annuity contract are excluded from gross income but, if such
amounts (when added to amounts received before the taxable year under such
contract) exceed the aggregate premiums or consideration paid (whether or not
paid during the taxable year) then the excess shall be included in gross income.
However, in the case of a transfer for a valuable consideration, by assignment or
otherwise, of a life insurance, endowment, or annuity contract, or any interest
therein, only the actual value of such consideration and the amount of the
premiums and other sums subsequently paid by the transferee are exempt from
taxation.
SECTION 63. Amounts received as compensation for injuries or

sickness. — The amounts received by an insured or his estate or beneficiaries
through accident or health insurance or under workmen's compensation acts as
compensation for personal injuries or sickness are excluded from the gross income
of the insured, his estate, and other beneficiaries. Any damages recovered by suit
or agreement on account of such injuries or sickness are similarly excluded from
the gross income of the individual injured or sick, if living, or of his estate or other
beneficiaries entitled to receive such damages, if dead.
SECTION 64. Gifts and bequests. — Property received as a gift or

received under a will or testament or through legal succession, is exempt from the
income tax, although the income therefrom or income derived from its investment,
sale, or otherwise is not. An amount of principal paid under a marriage settlement
is a gift. Neither alimony nor an allowance based on a separation agreement is
taxable income.
(Section 30(a) of the Code)
SECTION 65. Business expenses. — Business expenses deductible

from gross income include the ordinary and necessary expenditures directly
connected with or pertaining to the taxpayer's trade or business. The cost of goods
purchased for resale, with proper adjustment for opening and closing inventories,
is deducted from gross sales is computing gross income. Among the items included
in business expenses are management expenses, commissions, labor, supplies,
incidental repairs, operating expenses of transportation, equipment used in the
trade or business, traveling expenses while away from home solely in the pursuit
of a trade or business, advertising and other selling expenses, together with
insurance premiums against fire, storm, theft, accident, or other similar losses in
the case of a business, and rental for the use of business property. A taxpayer is
entitled to deduct the necessary expenses paid in carrying on his business from his
gross income from whatever source.
SECTION 66. Traveling expenses. — Traveling expenses as ordinarily

understood, include transportation expenses and meals and lodging. If the trip is
undertaken for other than business purposes, the transportation expenses are
personal expenses, and the meals and lodging are living expenses, and therefore,
not deductible. If the trip is solely on business, the reasonable and necessary
traveling expenses, including transportation expenses, meals and lodging, become
business instead of personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a
salary as full compensation for his services, without reimbursement for traveling
expenses, or is employed on a commission basis with no expense allowance, his
traveling expenses, including the entire amount expended far meals and lodging,
are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may deduct
such expenses. aDcHIC
(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 a hotel for the display of goods
is a business expense. Only such expenses as are reasonable and necessary in the
conduct of the business and directly attributable to it may be deducted. A taxpayer
claiming the benefit of the deductions referred to herein must attach to his return a
statement showing (1) the nature of the business in which he is engaged; (2) the
number of days away from home during the taxable year on account of business;
(3) the total amount of expenses incident to meals and lodging while absent from
home and business during the taxable year; (4) the total amount of other expenses
incident to travel and claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when

required by the Commissioner of Internal Revenue by record showing in detail the
amount and nature of the expenses incurred.
SECTION 67. Cost of materials. — Taxpayers carrying materials and

supplies on hand should include in expenses the charges for materials and supplies
only to the amount that they are actually consumed and used in operation during
the year for which the return is made, provided that the cost of such materials and
supplies has not been deducted in determining the net income for any previous
year. If a taxpayer carries incidental materials or supplies on hand for which no
record of consumption is kept or of which physical inventories at the beginning
and end of the year are not taken, it will be permissible for the taxpayer to include
in his expenses and deduct from gross income the 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.
SECTION 68. Repairs. — The cost of incidental repairs which neither

materially add to the value of the property nor appreciably prolong its life, but
keep it in an ordinarily efficient operating condition, may be deducted as expense,
provided the plant or property account is not increased by the amount of such
expenditure. Repairs in the nature of replacement, to the extent that they arrest
deterioration and appreciably prolong the life of the property should be charged
against the depreciation reserves if such account is kept.
SECTION 69. Professional expenses. — A professional may claim as

deductions the cost of supplies used by him in the practice of his profession,
expenses paid in the operation and repair of transportation equipment used in
making professional calls, dues to professional societies and subscriptions to
professional journals, the rent paid for office rooms, the expenses of the fuel, light,
water, telephone, etc.; used in such offices, and the hire of office assistants.
Amounts currently expended for books, furnitures, and professional instruments
and equipment, the useful life of which is short, may be deducted. But amounts
expended for books, furniture, and professional instruments and equipment of a
permanent character are not allowable as deductions. SEHTIc
SECTION 70. Compensation for personal services. — Among the

ordinary and necessary expenses paid or incurred in carrying on any trade or
business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be further
stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of dividend on stock. This is likely to occur in
the case of a corporation having few shareholders, practically all of whom draw
salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship
to the stockholdings of the officers or employees, it would seem likely that the
salaries are not paid wholly for services rendered, but that the excessive payments
are a distribution of earnings upon the stock. (b) An ostensible salary may be in
part payment for property. This may occur, for example, where a partnership sells
out to a corporation, the former partners agreeing to continue in the service of the
corporation. In such a case it may be found that the salaries of the former partners
are not merely for services, but in part constitute payment for the transfers of their
business.
(2) The form or method of fixing compensation is not decisive as to

deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments
on a contingent basis are to be treated fundamentally on any basis different from
that applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the
individual made before the services are rendered, not influenced by any
consideration on the part of the employer other than that of securing on fair and
advantageous terms the services of the individual, it should be allowed as a
deduction even though in the actual working out of the contract it may prove to be
greater than the amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed
what is reasonable in all the circumstances. It is in general just to assume that
reasonable and true compensation is only such amount as would ordinarily be paid
for like services by like enterprises in like circumstances. The circumstances to be
taken into consideration are those existing at the date when the contract for
services was made, not those existing at the date when the contract is questioned.
SECTION 71. Treatment of excessive compensation. — The income tax

liability of the recipient in respect of an amount ostensibly paid to him as
compensation, but not allowed to be deducted as such by the payer, will depend
upon the circumstances of each case. Thus, in the case of excessive payments by
corporations, if such payments correspond or bear a close relationship to
stockholdings, and are found to be distribution of earnings or profits, the excessive
payments will be treated as dividend. If such payments constitute payment for
property, they should be treated by the payer as a capital expenditure and by the
recipient as part of the purchase price. HSCcTD
SECTION 72. Bonuses to employees. — Bonuses to employees will

constitute allowable deductions from gross income when such payments are made
in good faith and as additional compensation for the services actually rendered by
the employees, provided such payment, when added to the stipulated salaries, do
not exceed a reasonable compensation for the service rendered. It is immaterial
whether such bonuses are paid in cash or in kind or partly in cash and partly in
kind. Donations made to employees and others, which do not have in them the
element of compensation or are in excess of reasonable compensation for services,
are not deductible from gross income.
SECTION 73. Pensions, compensation for injuries. — Amounts paid

for pensions to retired employees or to their families or others dependent upon
them, or on account of injuries received by employees, and lump-sum amounts
paid or accrued as compensation for injuries, are proper deductions as ordinary
and necessary expenses. Such deductions are limited to the amount not
compensated for by insurance or otherwise. When the amount of the salary of an
officer or employee is paid for a limited period after his death to his widow or
heirs, in recognition of the services rendered by the individual, such payments may
be deducted. Salaries paid by employers to employees who are absent in the
military, naval or other service of the Government, but who intend to return at the
conclusion of such service, are allowable deductions. (See Section 118 of these
regulations, relative to pension trust.)
SECTION 74. Rentals. — Where a leasehold is acquired for business

purposes for a specified sum, the purchaser may take as a deduction in his return
an aliquot part of such sum each year, based on the number of years the lease has
to run. Taxes paid by a tenant to or for a landlord for business property are
additional rent and constitute a deductible item to the tenant and taxable income to
the landlord, the amount of the tax being deductible by the latter. The cost borne
by a lessee in erecting buildings or making permanent improvements on ground of
which he is lessee is held to be a capital investment and not deductible as a
business expense. In order to return to such taxpayer his investment of capital, an
annual deduction may be made from gross income of an amount equal to the cost
of such improvements divided by the number of years remaining of the term of
lease, and such deduction shall be in lieu of a deduction for depreciation. If the
remainder of the term of lease is greater than the probable life of the buildings
erected, or of the improvements made, this deduction shall take the form of an
allowance for depreciation.
SECTION 75. Expenses of farmers. — A farmer who operates a farm

for profit is entitled to deduct from gross income as necessary expenses all
amounts actually expended in the carrying on of the business of farming. The cost
of ordinary tools of short life or small cost, such as hand tools, including shovels,
rakes, etc., may be included. The cost of feeding and raising livestock may be
treated as an expense deduction, in so far as such cost represents actual outlay, but
not including the value of farm produce grown upon the farm or the labor of the
taxpayer. Where a farmer is engaged in producing crops which take more than a
year from the time of planting to the process of gathering and disposal, expenses
deducted may be determined upon the crop basis, and such deductions must be
taken in the year in which the gross income from the crop has been realized. The
cost of farm machinery, equipment, and farm buildings represents a capital
investment and is not an allowable deduction as an item of 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 or dairy animals are regarded as
investments of capital, and may be depreciated unless such animals are included in
an inventory in accordance with Section 149 of these regulations. The purchase
price of transportation equipment even when wholly used in carrying on farm
operations, is not deductible but is regarded as an investment of capital. The cost
of gasoline or fuel, repairs, and upkeep of the transportation equipment if used
wholly in the business of farming is deductible as an expense; if used partly for
business purposes and partly for the pleasure or convenience of the taxpayer or his
family, such cost may be apportioned according to the extent of the use for
purposes of business and pleasure or convenience, and only the proportion of such
cost justly attributable to business purposes is deductible as a necessary expense. If
a farm is operated for recreation or pleasure and not on a commercial basis, and if
the expenses incurred in connection with the farm are in excess of the receipt
therefrom, the entire receipts from the sale of products may be ignored in
rendering a return of income, and the expenses incurred, being regarded as
personal expenses, will not constitute allowable deduction.
SECTION 76. When charges are deductible. — Each year's return, so

far as practicable, both as to gross income and deductions therefrom, should be
complete in itself, and taxpayers are expected to make every reasonable effort to
ascertain the facts necessary to make a correct return. The expenses, liabilities, or
deficit of one year cannot be used to reduce the income of a subsequent year. A
taxpayer has the right to deduct all authorized allowances and it follows that if he
does not within any year deduct certain of his expenses, losses, interests, taxes, or
other charges, he can not deduct them from the income of the next or any
succeeding year. If it is recognized, however, that particularly in a going business
of any magnitude there are certain overlapping items both of income and
deduction, and so long as these overlapping items do not materially distort the
income, they may be included in the year in which the taxpayer, pursuant to a
consistent policy, takes them into his accounts. Judgments or other binding judicial
adjudication, on account of damages for patent infringement, personal injuries, or
other cause, are deductible from gross income when the claim is so adjudicated or
paid, unless taken under other methods of accounting which clearly reflect the
correct deduction, less any amount of such damages as may have been
compensated for by insurance or otherwise: If subsequent to its occurrence,
however, a taxpayer first ascertains the amount of a loss sustained during a prior
taxable year which has not been deducted from gross income, he may render an
amended return for such preceding taxable year including such amount of loss in
the deduction from gross income and may in proper cases file a claim for refund of
the excess tax paid by reason of the failure to deduct such loss in the original
return. A loss from theft or embezzlement occurring in one year and discovered in
another is ordinarily deductible for the year in which sustained.
SECTION 77. Expenses allowable to non-resident aliens and foreign

corporations. — The expenses allowable to a non-resident alien or a foreign
corporation consist of only such expenses as are incurred in carrying on any
business or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78. Interest. — Interest paid or accrued within the taxable

year on indebtedness may be deducted from gross income, except that interest on
indebtedness incurred or continued to purchase bonds and other securities, the
interest upon which is exempt from tax, is not deductible. Interest paid by the
taxpayer on a mortgage upon real estate of which he is the legal or equitable
owner, even though the taxpayer is not directly liable upon the bond or not secured
by such mortgage, may be deducted as interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, 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 gross
income from all sources within and without this country; however, to avail of this
deduction, such non-resident alien individual or foreign corporation shall include
in the return all the information necessary for its calculation.
Interest paid by a corporation on scrip dividends is an allowable deduction.

So-called interest on preferred stock, which is in reality a dividend thereon, can
not be deducted in computing net income. In the case of banks and loan or trust
companies, interest paid within the year on deposits or on moneys received for
investment and secured by interest-bearing certificates of indebted issued by such
hank or loan or trust company may be deducted from gross income.
SECTION 79. Interest on capital. — Interest calculated for

cost-keeping or other purposes on account of capital or surplus invested in the
business, which does not represent a charge arising under an interest-bearing
obligation, is not allowable deduction from gross income.
(Section 30(c) of the Code)
SECTION 80. Taxes in general. — As a general rule, taxes are

deductible with the exception of those with respect to which the law does not
permit deduction. However, in the case of a non-resident alien individual and a
foreign corporation, deduction is allowed only if and to the extent that the taxes for
which deduction is claimed are connected with income from sources within the
Philippines.
Import duties paid to the proper customs officers, and business, occupation,
license, privilege, excise and stamp taxes and any other taxes of every name or
nature paid directly to the Government of the Philippines or to any political
subdivision thereof, are deductible. The word "taxes" means taxes proper and no
deductions should be allowed for amounts representing interest, surcharge, or
penalties incident to delinquency. Postage is not a tax. Automobile registration
fees are considered taxes. Taxes are deductible as such only by the person upon
whom they are imposed. Thus the merchants' sales tax imposed by law upon sales
is not deductible by the individual purchaser even though the tax may be billed to
him as a separate item. DHECac
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 obligations containing a tax-free

covenant clause the corporation paying a tax or any part of it, for someone else
pursuant to its agreement is not entitled to deduct such payment from gross income
on any ground.
SECTION 81. Income tax imposed by the Government of the

Philippines. — The law does not permit the deduction of the income tax paid to or
accrued in favor of the Government of the Philippines, and in no case may the
taxpayer avail of such deduction.
SECTION 82. Income, war-profits, and excess-profits taxes imposed by

the authority of a foreign country. — Income, war-profits, and excess-profits taxes
imposed by the authority of a foreign country (including the United States and
possessions thereof) are allowed as deductions only if the taxpayer does not
signify in his return his desire to have to any extent the benefits of the provisions
of law allowing credits against the tax for taxes of foreign countries. In the case of
a citizen of a foreign country residing in the Philippines whose income from
sources within such foreign country is not subject to income tax, only that portion
of the taxes paid to such foreign country which corresponds to his net income
subject to the Philippine income tax shall be allowed as deduction.
SECTION 83. Estate, inheritance, and gift taxes: taxes assessed

against local benefits. — Estate, inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local benefits, such as
street, sidewalk, and other like improvements, imposed because of and measured
by some benefit inuring directly to the property against which the assessment is
levied, do not constitute an allowable deduction from gross income. A tax is
considered assessed against local benefits when the property subject to the tax is
limited to the property benefited. Special assessments are not deductible, even
though an incidental benefit may inure to the public welfare. The taxes deductible
are those levied for the general public welfare, by the proper taxing authorities at a
like rate against all property in the territory over which such authorities have
jurisdiction. When assessments are made for the purpose of maintenance or repair
of local benefits, the taxpayer may deduct assessments paid as an expense incurred
in business, if the payment of such assessments is necessary to the conduct of his
business. When the assessments are made for the purpose of constructing local
benefits, the payments by the taxpayer are in the nature of capital expenditures and
are not deductible. Where assessments are made for the purpose of both
construction and maintenance or repairs, the burden is on the taxpayer to show the
allocation of the amounts assessed to the different purposes. If the allocation can
not be made, none of the amounts so paid is deductible.
SECTION 84. Analysis of credit for taxes: — If the taxpayer signifies

in his return his desire to claim a credit for taxes, the basis of such credit, in the
case of a citizen of the Philippines, whether resident or non-resident, and in the
case of a domestic corporation, is as follows: (a) The amount of any income,
war-profits, and excess-profits taxes paid or accrued during the taxable year to any
foreign country; and (b) an individual's proportionate share of any such taxes of
which he is a partner or of an estate or trust of which he is a beneficiary paid or
accrued during the taxable year to a foreign country if his distributive share of the
income of such partnership or trust is reported for taxation under Title II of the
Code.
In the case of an alien resident of the Philippines who signifies in his return
his desire to claim a credit for such taxes the basis of the credit is as follows: (a)
The amount of any such taxes paid or accrued during the taxable year to any
foreign country if the foreign country of which such alien resident is a citizen or
subject, in imposing such taxes, allows a similar credit to citizens of the
Philippines residing in such country; and (b) his proportionate share of any such
taxes of a partnership of which he is a partner or an estate or trust of which he is a
beneficiary paid or accrued during the taxable year to any foreign country if his
distributive share of the net income of such partnership or trust is reported for
taxation under Title II of the Code, and if the foreign country of which such alien
resident is a citizen or subject, in imposing such taxes, allows a similar credit to
citizens of the Philippines residing in such country.
If a taxpayer signifies in his return his desire to claim credit for taxes, such
action will be considered to apply to income, war-profits, and excess-profits taxes
paid to all foreign countries (including the United States and possessions thereof),
and no portion of any such taxes shall be allowed as a deduction from gross
income.
SECTION 85. Meaning of terms. — The "amount of any income,
war-profits, and excess-profits taxes paid or accrued during the taxable year"
means taxes proper (no credit being given for amounts representing interest or
penalties) paid or accrued during the taxable year on behalf of the taxpayer
claiming credit. "Foreign country" means any foreign state or political subdivision
thereof, or any foreign political entity, which levies and collects income,
war-profits, or excess-profits taxes, and includes the United States or any political
subdivision thereof.
SECTION 86. Conditions of allowance of credits. — If the taxpayer

signifies in his return his desire to claim credit for income, war-profits, or
excess-profits taxes paid other than to the Philippines, the income tax return must
be accompanied by the appropriate form prescribed by the Commissioner of
Internal Revenue. The form must be carefully filled in with all the information
there called for and with the calculations of credits there indicated, and must be
duly signed and sworn to or affirmed. If credit is sought for taxes already paid the
form must have attached to it the receipt for each such tax payment. If credit is
sought for taxes accrued, the form must have attached to it the return on which
each such accrued tax was based. This receipt or return so attached must be either
the original, a duplicate original, a duly certified or authenticated copy, or a sworn
copy. In case only a sworn copy of a receipt or return is attached, there must be
kept readily available for comparison on request the original, a duplicate original,
or a duly certified or authenticated copy. If the receipt of the return is in a foreign
language, a certified translation thereof must be furnished by the taxpayer. Any
additional information necessary for the determination of the amount of income
derived from sources without the Philippines and from each foreign country shall,
upon the request of the Commissioner of Internal Revenue, be furnished by the
taxpayer.
In the case of a credit sought for a tax accrued but not paid, the
Commissioner of Internal Revenue may in addition require as a condition
precedent to the allowance of credit a bond from the taxpayer. It shall be in such
sum as the Commissioner of Internal Revenue may prescribe, and shall be
conditioned for the payment by the taxpayer of any amount of tax found due upon
any redetermination of the tax made necessary by such credit proving incorrect,
with such further conditions as the Commissioner of Internal Revenue may
require. This bond shall be executed by the taxpayer, or the agent or representative
of the taxpayer, as principal, and by sureties satisfactory to and approved by the
Commissioner of Internal Revenue. aEcADH
If it is the desire of the taxpayer to claim as a credit and not as a deduction

accrued income, war-profits, and excess profits taxes imposed by the authority of
any foreign country or possession of the United States but at the time the return is
made it is impossible to estimate the amount of such taxes that may have accrued
for the period for which the return is made, the form required under this section
may be filed at a later date but a credit cannot be allowed for such taxes unless the
taxpayer signifies in his return his desire to have to any extent the benefits of
Section 30(c) (3) to (9).
SECTION 87. Redetermination of tax when credit proves incorrect. —

In case credit has been given for taxes accrued, or a proportionate share thereof,
and the amount that is actually paid on account of such taxes, or a proportionate
share thereof, is not the same as the amount of such credit, or in case any tax
payment credited is refunded in whole or in part, the taxpayer shall immediately
notify the Commissioner of Internal Revenue. The Commissioner of Internal
Revenue will thereupon redetermine the amount of the tax of such taxpayer for the
year or years for which such incorrect credit was granted. The amount of tax, if
any, due upon such redetermination shall be paid by the taxpayer upon notice and
demand by the Commissioner of Internal Revenue. The amount of tax, if any,
shown by such redetermination to have been overpaid shall be credited or refunded
to the taxpayer in accordance with the provisions of Section 309 of the Code.
SECTION 88. Countries which do or do not satisfy the similar credit

requirements. — A country satisfies the similar credit requirement of Section
30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens of
the Philippines residing in such country a credit for the amount of income taxes
paid to the Philippines. A country does not satisfy the similar credit requirement of
Section (30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines
residing in such country for the amount of income taxes paid to the Philippines, or
if such country does not impose any income taxes. If the country of which a
resident alien is a citizen or subject does not allow to a Filipino citizen residing in
such country a credit for taxes paid by such citizen to another foreign country, no
credit is allowed to such resident alien for taxes paid by him to such foreign
country.
SECTION 89. When credit for taxes may be taken. — The credit for
taxes provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the
return for the year in which the taxes accrued or in which the taxes were paid,
dependent upon whether the accounts of the taxpayer are kept and his returns filed
upon the accrual basis or upon the cash receipts and disbursements basis. Section
30(c)(6) allows the taxpayer, at his option and irrespective of the method of
accounting employed in keeping his books, to take such credit for taxes as may be
allowable in the return for the year in which the taxes accrued. An election thus
made must be followed in returns for all subsequent years, and no portion of any
such taxes will be allowed as a deduction from gross income.
SECTION 90. Domestic corporation owning a majority of the stock of
foreign corporation. — In the case of a domestic corporation which owns a
majority of the voting stock of a foreign corporation from which it receives
dividends in any taxable rear, the credit for foreign taxes includes not only the
income, war profits and excess-profits taxes paid or accrued during the taxable
year to any foreign country by such domestic corporation, but also income,
war-profits and excess-profits taxes deemed to have been paid determined by
taking the same proportion of any income, war-profits, and excess-profits taxes
paid or accrued by such controlled foreign corporation to any foreign country upon
or with respect to the accumulated profits of such foreign corporation from which
such dividends were paid, which the amount of any such dividends received bears
to the amount of such accumulated profits. The amount of taxes deemed to have
been paid is limited, however, to an amount of the tax against which the credit for
foreign taxes is taken, which the amount of such dividends bears to the amount of
the entire net income of the domestic corporation in which such dividends are
included. If dividends are received from more than one controlled foreign
corporation, the limitation is to be computed separately for the dividends received
from each controlled foreign corporation. If the credit for foreign taxes includes
taxes deemed to have been paid, the taxpayer must furnish the same information
with respect to the taxes deemed to have been paid as it is required to furnish with
respect to the taxes actually paid or accrued by it. Taxes paid or accrued by a
controlled foreign corporation are deemed to have been paid by the domestic
corporation for purposes of credit only.
SECTION 91. Non-resident aliens and foreign corporations not

allowed credits against the tax. — Non-resident aliens and foreign corporations
may not claim credits against the tax from taxes of foreign countries.
SECTION 92. Limitation on credit for foreign taxes. — The amount of

credit for foreign taxes shall be subject to the following limitations:
(a) The amount of the credit in respect to the tax paid or accrued to any
country shall not exceed the same proportion of the tax against which such credit
is taken, which the taxpayer's net income from sources within such country taxable
under Title II bears to his entire net income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of
the tax against which such credit is taken, which the taxpayer's net income from
sources without the Philippines taxable under Title II bears to his entire net income
for the same taxable year.
(Section 30(d) of the Code)
SECTION 93. Losses by individuals. — Losses sustained by individuals
during the year not compensated for by insurance or otherwise are fully deductible
(except by non-resident aliens) —
(a) If incurred in a taxpayer's trade; or
(b) If incurred in any transaction entered into for profits; or
(c) Of property not connected with the trade or business if arising from
fires, storm, shipwreck, or other casualty, or from robbery, theft or embezzlement.
No loss shall, however, be allowed as a deduction if at the time of filing of the
return, such loss has been claimed as deduction for estate or inheritance tax
purposes in the estate or inheritance tax return.
SECTION 94. Losses by corporations. — Domestic corporations may

deduct losses actually sustained and charged off within the year and not
compensated for by insurance or otherwise.
SECTION 95. Losses by non-resident alien and foreign corporation. —

Non-resident aliens and foreign corporations are allowed only losses sustained in
business or trade conducted within the Philippines, losses of property within the
Philippines arising from fires, storms, shipwreck, or other casualty and from
robbery, theft, or embezzlement, and losses actually sustained in transactions
entered into for profit in the Philippines, although not connected with their trade or
business, not compensated by insurance or otherwise.
SECTION 96. Losses generally. — Losses must usually be evidenced

by closed and completed transactions. Proper adjustment must be made in each
case for expenditures or items of loss properly chargeable to capital account, and
for depreciation, obsolescence, amortization, or depletion. Moreover, the amount
of the loss must be reduced by the amount of any insurance or other compensation
received, and by the salvage value, if any, of the property. A loss on the sale of
residential property is not deductible unless the property was purchased or
constructed by the taxpayer with a view to its subsequent sale for pecuniary profit.
No loss is sustained by the transfer of property by gift or death. Losses sustained
in illegal transactions are not deductible. EAISDH
SECTION 97. Voluntary removal of buildings. — Loss due to the

voluntary removal or demolition of old buildings, the scrapping of old machinery,
equipment, etc., incident to renewals and replacements will be deductible from
gross income. When a taxpayer buys real estate upon which is located a building,
which he proceeds to raze with a view to erecting thereon another building, it will
be considered that the taxpayer has sustained no deductible expense on account of
the cost of such removal, the value of the real estate, exclusive of old
improvements, being presumably equal to the purchase price of the land and
building plus the cost of removing the useless building.
SECTION 98. Loss of useful value. — When through some change in

business conditions, the usefulness in the business of some or all of the capital
assets is suddenly terminated, so that the taxpayer discontinues the business or
discards such assets permanently from use of such business, he may claim as
deduction the actual loss sustained. In determinating the amount of the loss,
adjustment must be made, however, for improvements, depreciation and the
salvage value of the property. This exception to the rule requiring a sale or other
disposition of property in order to establish a loss requires proof of some
unforeseen cause by reason of which the property has been prematurely discarded,
as, for example, where an increase in the cost or change in the manufacture of any
product makes it necessary to abandon such manufacture, to which special
machinery is exclusively devoted, or where new legislation directly or indirectly
makes the continued profitable use of the property impossible. This exception does
not extend to a case where the useful life of property terminates solely as a result
of those gradual processes for which depreciation allowance are authorized. It does
not apply to inventories or to other than capital assets. The exception applies to
buildings only when they are permanently abandoned or permanently devoted to a
radically different use, and to machinery only when its use as such is permanently
abandoned. Any loss to be deductible under this exception must be charged off in
the books and fully explained in returns of income.
SECTION 99. Shrinkage in value of stocks. — A person possessing

stock of a corporation can not deduct from gross income any amount claimed as a
loss merely on account of shrinkage in value of such stock through fluctuation of
the market or otherwise. The loss allowable in such case is that actually suffered
when the stock is disposed of. If stock of a corporation becomes worthless, its cost
or other basis determined in accordance with these regulations may be deducted by
the owner in the taxable year in which the stock became worthless, provided a
satisfactory showing of its worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. — Losses incurred in the operation of

farms as business enterprises are deductible from gross income. If farm products
are held for favorable markets, no deduction on account of shrinkage in weight or
physical value or by deterioration in storage shall be allowed, except as such
shrinkage may be reflected in an inventory if used to determine profits. The total
loss by storm, flood, or fire of a prospective crop is not a deductible loss in
computing net income. A farmer engaged in raising and selling stock, cattle, sheep,
horses, etc., is not entitled to claim as a loss the value of animals that perish from
among those animals that were raised on the farm, except as such loss is reflected
in an inventory if used. If livestock has been purchased after March 1, 1913, for
any purpose, and afterwards dies from disease, exposure, or injury, or is killed by
order of the authorities, the actual purchase price of such stock, less any
depreciation allowable as a deduction in computing net income, with respect to
such perished, livestock, and also any insurance or indemnity recovered, may be
deducted as a loss. The actual cost of other property (with proper adjustment for
depreciation), which is destroyed by order of the authorities, may in like manner
be claimed as a loss; but if reimbursement is made in whole or in part on account
of stock killed or property destroyed, the amount received shall be reported as
income for the year in which reimbursement is made. The cost of any feed,
pasturage, or care which has been deducted as an expense of operation shall not be
included as part of the cost of the stock for the purpose of ascertaining the amount
of a deductible loss. If gross income is ascertained by inventories, no deduction
can be made for livestock or products lost during the year, whether purchased for
resale, produced on the farm, as such losses will be reflected in the inventory by
reducing the amount of livestock or products on hand at the close of the year. If an
individual owns and operates a farm, in addition to being engaged in another trade,
business or calling, and sustains a loss from such operation of the farm, then the
amount of loss sustained may be deducted from gross income received from all
sources, provided the farm is not operated for recreation or pleasure.
SECTION 101. Capital losses; losses on wash sales of stock or

securities. — Losses on sales or exchanges of capital assets are allowed to the
extent provided in section 34 of the Code. If any securities which are capital assets
become worthless during the taxable year, the loss resulting therefrom shall be
considered as a loss from the sale or exchange, on the last day of such taxable
year, of capital assets. Losses on "wash sales" of stock or securities are treated in
section 33 of the Code.
(Section 30 (e) of the Code)
SECTION 102. Bad debts. — Where all the surrounding circumstances

indicate that a debt is worthless, and the debt is charged off on the books of the
taxpayer within the year, the same may be allowed as a deduction in computing net
income. There should accompany the return a statement showing the propriety of
any deduction claimed for bad debts. Before a taxpayer may charge off and deduct
a debt, he must ascertain and be able to demonstrate, with a reasonable degree of
certainty, the uncollectibility of the debt. Any amount subsequently received on
account of a bad debt previously charged off and allowed as a deduction for
income tax purposes, must he included in gross income for the taxable year in
which received. In determining whether a debt is worthless the Commissioner of
Internal Revenue will consider all pertinent evidence, including the value of the
collateral, if any, securing the debt and the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all pro-ability not
result in the satisfaction of execution on a judgment, a showing of those facts will
be sufficient evidence of the worthlessness of the debt for the purpose of
deduction. Bankruptcy is generally an indication of the worthlessness of at least a
part of an unsecured and unpreferred debt. Actual determination of worthlessness
in bankruptcy is sometimes possible before and at other 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 mere fact that bankruptcy
proceedings instituted against the debtor are terminated in a later year, confirming
the conclusion that the debt is worthless, will not authorize shifting the deduction
to such later year. If a taxpayer computes his income upon the basis of valuing his
notes or accounts receivable at their fair market value when received, which may
be less than their face value, the amount deductible for bad debts in any case is
limited to such original valuation.
SECTION 103. Examples of bad debts. — Worthless debts arising from

unpaid wages, salaries, rents, and similar items of taxable income will not be
allowed as a deduction unless the income such items represent has been included
in the return of income for the year in which the deduction as a bad debt is sought
to be made or in a previous year. Only the difference between the amount received
in distribution of the assets of a bankrupt and the amount of the claim may be
deducted as a bad debt. The difference between the amount received by a creditor
of a decedent in distribution of the assets of the decedent's estate and the amount
of his claim may be considered a worthless debt. A purchaser of accounts
receivable which can not be collected and are consequently charged off the hooks
as bad debt is entitled to deduct them, the amount of 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 mortgaged

property and credits the indebtedness with the purchase price, the difference
between the purchase price and the indebtedness will not be allowable as a
deduction for a bad debt, for the property which was security for the debt stands in
the place of the debt. The determination of loss in such case is deferred until the
disposal of the property.
SECTION 104. Securities becoming worthless. — If any securities

which are capital assets are ascertained to be worthless and charged off within the
taxable year, the loss resulting therefrom shall, except in the case of a bank or trust
company incorporated under the laws of the Philippines or of the United States a
substantial part of whose business is the receipt of deposits, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105. Depreciation. — A reasonable allowance for the

exhaustion, wear and tear, and obsolescence of property used in the trade or
business may be deducted from gross income. For convenience such an allowance
will usually be referred to as depreciation, excluding from the term any idea of a
mere reduction in market value not resulting from exhaustion, wear and tear, or
obsolescence. The proper allowance for such depreciation of any property used in
the trade or business is that amount which should be set aside for the taxable year
in accordance with a reasonable consistent plan whereby the aggregate of the
amount so set aside, plus the salvage value, will, at the end of the useful life of the
property in business, equal the basis of the property. Due regard must also be
given to expenditures for current upkeep. cDCSTA
SECTION 106. Depreciable property. — The necessity for a

depreciation allowance arises from the fact that certain property used in the
business gradually approaches a point where its usefulness is exhausted. The
allowances should be confined to property of this nature. In the case of tangible
property, it applies to that which is subject to wear and tear, to decay or decline
from natural causes, to exhaustion and to obsolescence due to the normal progress
of the art, as where machinery or other property must be replaced by a new
invention, or due to the inadequacy of the property to the growing needs of the
business. It does not apply to inventories or to stock in trade, nor to land apart
from the improvements or physical development added to it. It does not apply to
bodies of minerals which through the process of removal suffer depletion. Property
kept in repair may, nevertheless, be the subject of a depreciation allowance. The
deduction of an allowance for depreciation is limited to property used in the
taxpayer's trade or business. No such allowance may be made in respect to
automobiles or other transportation equipment used solely for the pleasure, a
building used by the taxpayer solely as his residence, nor in respect of furniture or
furnishings therein, personal effects, or clothing; but properties and costumes used
exclusively in a business, such as theatrical business, may be the subject of a
depreciation allowance.
SECTION 107. Depreciation of intangible property. — Intangibles, the

use of which in the trade or business is definitely limited in duration, may be the
subject of a depreciation allowance. Examples are patents, copyrights, and
franchises. Intangibles, the use of which in the business or trade is not so limited,
will not usually be a proper subject of such an allowance. If however, an intangible
asset acquired through capital outlay is known from experience to be of value in
the business for only a limited period, the length of which can be estimated from
experience with reasonable certainty, such intangible asset may be the subject of a
depreciation allowance, provided the facts are fully shown in the return or prior
thereto to the satisfaction of the Commissioner of Internal Revenue.
SECTION 108. Capital sum recoverable through depreciation

allowances. — The capital sum to be replaced by depreciation allowances is the
cost or other basis of the property in respect of which the allowance is made. To
this amount should be added from time to time the cost of improvements,
additions, and betterment and from it should be deducted from time to time the
amount of any definite loss or damage sustained by the property through casualty,
as distinguished from the gradual exhaustion of its utility which is the basis of the
depreciation allowance. Where the lessee of real property erects buildings, or
makes permanent improvements which become part of the realty and income has
been returned by the lessor as a result thereof, as provided in Section 49 of these
regulations, the capital sum to be replaced by depreciation allowance is the same
as though no such buildings had been erected or such improvements made. No
depreciation deduction will be allowed in the case of property which has been
amortized to its scrap value and is no longer in use.
SECTION 109. Method of computing depreciation allowance. — The

capital sum to be replaced should be charged off over the useful life of the
property, either in equal annual installments or in accordance with any other
recognized trade practice, such as an apportionment of the capital sum over units
of production. Whatever plan or method of apportionment is adopted must be
reasonable and must have due regard to operating conditions during the taxable
period. While the burden of proof must rest upon the taxpayer to sustain the
deductions taken by him, such deductions must not be disallowed unless shown by
clear and convincing evidence to be unreasonable. The reasonableness of any
claim for depreciation shall be determined upon the conditions known to exist at
the end of the period for which the return is made. If it develops that the useful life
of the property will be longer or shorter than the useful life as originally estimated
under all the then known facts, the portion of the cost or other basis of the property
not already provided for through depreciation allowances should be spread over
the remaining useful life of the property as reestimated in the light of the
subsequent facts, and depreciation deductions taken accordingly.
SECTION 110. Obsolescence. — With respect to physical property the

whole or any portion of which is clearly shown by the taxpayer as being affected
by economic conditions that will result in its being abandoned at a future date prior
to the end of its normal useful life, so that depreciation deductions alone are
insufficient to return the cost (or other basis) at the end of its economic term of
usefulness, a reasonable deduction for obsolescence, in addition to depreciation,
may be allowed in accordance with the facts obtaining with respect to each item of
property concerning which a claim for obsolescence is made. No deductions for
obsolescence will be permitted merely because, in the opinion of a taxpayer, the
property may become obsolete at some later date. This allowance will be confined
to such portion of the property on which obsolescence is definitely shown to be
sustained and can not be held applicable to an entire property unless all portions
thereof are affected by the conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. — In computing

depreciation allowance in the case of a patent or copyright, the capital sum to be
replaced is the cost or other basis of the patent or copyright. The allowance should
be computed by an apportionment of the cost or other basis of the patent or
copyright over the life of the patent or copyright since its grant, or since its
acquisition by the taxpayer, or since March 1, 1913, as 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, etc., actually paid. Depreciation of a patent
can be taken on the basis of the fair market value as of March 1, 1913, only when
affirmative and satisfactory evidence of such value is offered. Such evidence
should whenever practicable be submitted with the return. If the patent becomes
obsolete prior to its expiration, such proportion of the amount on which its
depreciation may be based as the number of years of its remaining life bears to the
whole number of years intervening between the basic date when it legally expires
may be deducted, if permission to do so is specifically secured from the
Commissioner of Internal Revenue. Owing to the difficulty of allocating to a
particular year the obsolescence of a patent, such permission will be granted only
if affirmative and satisfactory evidence that the patent became obsolete in the year
for which the return is made is submitted to the Commissioner of Internal
Revenue. The fact that depreciation has not been taken in prior years does not
entitle the taxpayer to deduct in any taxable year a greater amount for depreciation
than would otherwise be allowable. AcDHCS
SECTION 112. Depreciation of drawings and models. — Where a

taxpayer has incurred expenditures in his business for designs, drawings, patterns,
models, or work of an experimental nature calculated to result in improvement of
his facilities or his product, if the period of usefulness of any such asset may be
estimated from experience with reasonable accuracy, it may be the subject of
depreciation allowances spread over such estimated period of usefulness. The facts
must be fully shown in the return or prior thereto to the satisfaction of the
Commissioner of Internal Revenue. Except for such depreciation allowances no
deduction shall be made by the taxpayer against any sum so set up as an asset
except on the sale or other disposition of such asset at a loss or on proof of a total
loss thereof.
SECTION 113. Charging off depreciation. — A depreciation allowance,

in order to constitute an allowable deduction from gross income, must be charged
off. The particular manner in which it shall be charged off is not material, except
that the amount measuring a reasonable allowance for depreciation must be either
deducted directly from the book value of the assets or preferably credited to a
depreciation reserve account, which must be reflected in the annual balance sheet.
The allowances should be computed and charged off with express reference to
specific items, units, or groups of property, each item or unit being considered
separately or specifically included in a group with others to which the same factors
apply. The taxpayer should keep such records to each item or unit of depreciable
property as will permit the ready verification of the factors used in computing the
allowance for each year for each item, unit, or group.
SECTION 114. Depreciation in the case of farmers. — A reasonable

allowance for depreciation may be claimed on farm buildings (other than a
dwelling occupied by the owner), farm machinery, and other physical property. A
reasonable allowance for depreciation may also be claimed on live stock acquired
for work, breeding, or dairy purposes, unless they are included in an inventory
used to determine profits in accordance with these regulations. Such depreciation
should be based on the cost or other basis and the estimated life of the live stock. If
such live stock be included in an inventory no depreciation thereof will be
allowed, as the corresponding reduction in their value will be reflected in the
inventory.
SECTION 115. Statement to be attached to return. — To each return in

which depreciation charges are claimed, there should be attached a statement
showing the item, unit, or group of depreciable property, the cost price or its
market value as of March 1, 1913, if acquired prior to that date, the rate of charge,
amount previously deducted, and the amount claimed in the return. These data
must agree with those appearing in the books of the taxpayer. TDESCa
(Section 30(g) of the Code)
SECTION 115-A-1. General Circular V-332, January 6, 1961 — Who

is entitled to deduct depletion. — In order to be entitled to percentage depletion
allowance, the taxpayer must have an economic interest in the property. To acquire
an economic interest, the taxpayer must have a capital investment in the property
and not a mere economic advantage. The taxpayer must have acquired at least, by
investment, any interest in oil or gas or mineral in place, and secures, by any form
of legal relationship, income derived from the extraction of the oil, gas or mineral,
to which he must look for a return of his capital. Thus the parties entitled to share
in oil or mineral extracted, or the gross proceeds therefrom (including the parties
to a lease providing for royalty payments of stated amounts per unit mined) have
economic interests in the oil or minerals in place. That is, they, as owners of the
rights in oil or other mineral in place, share the income from production, and the
depletion allowances thereon are regarded as designed to permit tax-free recovery
of at least their capital investments in such property rights.
SECTION 115-A-2. Basis for depletion. — On oil or gas wells the

percentage depletion allowance is fixed at 27 1/2% of gross income while on
mines, the percentage depletion allowance varies in accordance with the class of
minerals. The gross income basis is the amount remaining after deducting
therefrom rents or royalties paid or incurred by the taxpayer in respect to the
property. In both cases, the total percentage depletion allowance shall in no case
exceed 50% of the net income or profit.
Illustration
Subject: Oil and gas wells (1) (2)
Gross income after deducting rents and royalties P100.00 P100.00
27 1/2% thereof 27.50 27.50
Net income or net profit 50.00 70.00
50°/ of net income or net profit 25.00 35.00
Allowance depletion 25.00 27.50
Under column (1) P25.00 is the allowance depletion because the allowable
percentage cannot exceed 50% of the net profit or net income. Under column (2),
the allowable depletion is P27.50 because it does not exceed 50% of either the net
income or net profit.
SECTION 115-A-3. Definition of terms. — For purposes of the

depletion allowance for oil and gas wells and mines, the following terms and
phrases shall have the meaning indicated:
(a) Gross income. — Gross income means the "gross income from the
property". The gross income in the case of gas and oil wells is the amount for
which the taxpayer sells the oil and gas in the immediate vicinity of the well. If the
oil and gas are not sold on the property but are manufactured or converted into a
refined product prior to sale, the gross income from the property shall be assumed
to be equivalent to the representative market or field price (as of the date of sale)
of the oil and gas before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross
income from mining. The gross income from mining consists of the proceeds from
the sales of ores or minerals extracted from the mining property. Where ores are
sent abroad where the ordinary treatment processes are applied or where they are
refined and where they are sold, the actual cost of ocean freight as well as
insurance, should be deducted from the actual selling price for gross income
purposes. Also where minerals or mineral products are sold or consigned abroad
by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean
freight and insurance should be deducted.
(b) Mining. — The term "mining" includes not merely the extraction of
the ores or minerals from the ground but also the ordinary treatment process
normally applied by mine owners or operators in order to obtain the commercially
marketable mineral product or products, and so much of the transportation of ores
or minerals (whether or not by common carrier) from the point of extraction from
the ground to the plants or mills in which the ordinary treatment processes are
applied thereto as is not in excess of 50 miles unless the Commissioner of Internal
Revenue finds that the physical and other requirements are such that the ore or
mineral must be transported a greater distance to such plants or mills.
(c) Extraction of the ores or minerals from the ground. — The term
"extraction of the ores or minerals from the ground" includes the extraction by
mine owners or operators of ores or minerals from the waste or residue of prior
mining. Thus income derived from the working over of tailings, piles or culm
banks is included in determining "gross income from the property". The length of
time between the prior mining and extraction of ores or minerals from the waste or
residue of such mining is immaterial. Whether the waste or residue results from the
application of ordinary treatment processes or from the process of removal from
the ground, income derived therefrom is within the term "gross income from the
property". To be included in "gross income from the property", income derived
from the extraction of ores or minerals from the waste or residue of prior mining
must come from such extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. — The term "ordinary treatment

processes" includes the following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to

prevent freezing, and loading for shipment;
(2) In the case of sulfur recovered by the Frasch process — pumping to

vats, cooling, breaking, and loading for shipment;
(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and
minerals which are customarily sold in the form of a crude mineral product —
sorting, concentrating; and sintering to bring to shipping grade and form, and
loading for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash,
and ores which are not customarily sold in the form of the crude mineral
product-crushing, grinding, and beneficiation by concentration (gravity, flotation,
amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization,
precipitation (but not including as an ordinary treatment process electrolytic
deposition, roasting, thermal or electric smelting, or refining), or by substantially
equivalent processes, or extraction of the product or products from the ore,
including the furnacing of quicksilver ores; and
(5) The pulverization of talc, the burning of magnesite, and the sintering
and modulizing of phosphate rock.
(e) Net income or net profit. — "Net income" or "net profit" means the
taxpayer's taxable income from the property. Net income or net profit (computed
without allowance for depletion) means the "gross income from the property" less
the allowable deductions attributable to the mineral property upon which the
depletion is claimed and the allowable deductions attributable to the treatment
processes insofar as they relate to the product of such property, including overhead
and operating expenses, development costs properly charged to expense,
depreciation, taxes, losses sustained, etc. Deductions not directly attributable to
particular properties or processes shall be fairly allocated. ASaTHc
(f) Property. — For the purpose of computing the depletion allowance in

the case of mines and wells, the term "property" means each separate interest
owned by the taxpayer in each mineral deposit in each separate tract or parcel of
land.
If a taxpayer owns two or more separate operating mineral interests which

constitute part or all of an operating unit, he may elect to form (a) one aggregation
of, and to treat as one property, any two or more of such interests and (b) to treat
as a separate property each such interest which he does not elect to include within
the aggregation referred to in (a). Separate operating mineral interests which
constitute part or all of an operating unit may be aggregated whether or not they
are included in contiguous tracts or parcels. A taxpayer may not elect to form more
than one aggregation of operating mineral interests within any one operating unit.
Such election may be made by the taxpayer by the giving of notice of such election
to the Commissioner of Internal Revenue not later than the time prescribed for
filing of the return and any such election so made shall be binding upon the
taxpayer for all subsequent taxable years, except that the Commissioner of Internal
Revenue may consent to a different treatment of the interest with respect to which
the election has been made.
SECTION 115-A-4. Depletion deductible by non-resident aliens or

foreign corporations. — A non-resident alien individual or a foreign corporation is
entitled to an allowance for depletion of oil and gas wells or mines located in the
Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by
R.A. 2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts may be deducted. —

Contributions or gifts within the taxable year are deductible to an aggregate
amount not in excess of 6 per centum, in the case of an individual, and 3 per
centum, in the case of a corporation, of the taxpayer's taxable net income, if
actually paid or made to or for the use of the Government of the Philippines or any
political subdivision thereof for exclusively public purposes or to domestic
corporations or associations organized and operated exclusively for religious,
charitable, scientific, athletic, cultural or educational purposes, or to societies for
the prevention of cruelty to children or animals, provided that no part of the net
income of which inures to the benefit of any private stockholders or individual.
In connection with claims for deductions, there shall be stated on returns of

income the name and address of each organization to which a gift was made and
the approximate date and the amount of the gift in each case. Where the gift is
other than money, the basis for calculation of the amount thereof shall be the fair
market value of the property at the time of the gift. Contributions or gifts paid or
made to corporations or associations specified in the law will only be allowed as
deduction when the taxpayer attaches to his return the receipt duly signed by the
responsible officer of the corporations or associations 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)
SECTION 117. Allowance of deductions and credits. — Unless a

non-resident alien individual shall file or cause to be filed with the Commissioner
of Internal Revenue, a true and accurate return of income from all sources,
corporate, or otherwise, within the Philippines, regardless of amount, the tax shall
be collected on the basis of the gross income (not the net income) from sources
within the Philippines. In case of failure to file such return, the Commissioner of
Internal Revenue will cause a return of income to be made and include therein the
income of such non-resident alien from all source concerning which he has
information, and he will assess the tax and collect it from one or more of the
sources of income of such non-resident alien within the Philippines, without
allowance for deductions or credit. (Cf. effect of Sec. 22(b) as amended by R.A.
2343.)
(Section 30(j) of the Code)
SECTION 118. Payments to employees' pension trusts. — An employer

who adopts or has adopted a reasonable pension plan, actuarially sound, and who
establishes, or has established, and maintains a pension trust for the payment of
reasonable pensions to his employees shall be allowed to deduct from gross
income reasonable amounts paid to such trust, in accordance with the pension plan
(including any reasonable amendment thereof), as follows:
(a) If the plan contemplates the payment to the trust, in advance of the
time when pensions are granted, of amounts to provide for future pensions
payments, then (1) reasonable amounts paid to the trust during the taxable year
representing the pension liability applicable to such year, determined in
accordance with the plan, shall be allowed as a deduction for such year as an
ordinary and necessary business expense, and in addition (2) one-tenth of a
reasonable amount transferred or paid to the trust during the taxable year to cover
in whole or in part the pension liability applicable to the years prior to the taxable
year, or so transferred or paid to place the trust on a sound financial basis, shall be
allowed as a deduction for the taxable year and for each of the nine succeeding
taxable years.
(b) If the plan does not contemplate the payment to the trust, in advance of
the time when pensions are granted, of amounts to provide for future pension
payments, then (1) reasonable amounts paid to the trust during the taxable year
representing the present value of the expected future payments in respect of
pensions granted to employees retired during the taxable year shall be allowed as
deduction for such year as an ordinary and necessary business expense, and in
addition (2) one tenth of a reasonable amount transferred or paid to the trust during
the taxable year to cover in whole or in part the present value of the expected
future payments in respect of pensions granted to employees retired prior to the
taxable year, or so transferred or paid to place the trust on a sound financial basis,
shall be allowed as a deduction for the taxable year and for each of the nine
succeeding taxable years.
(Section 30(k) of the Code)
SECTION 118-A. Optional standard deduction. — In lieu of the

deductions allowed under this section an individual, other than a non-resident
alien, may elect a standard deduction. Such optional standard deduction shall be in
the amount of one thousand pesos or in an amount equal to ten per centum of his
gross income, whichever is the lesser. Unless the taxpayer signifies in his return
his intention to elect the optional standard deduction he shall be considered as
having availed himself of the deductions allowed in the preceding subsection. The
Secretary of Finance shall prescribe the manner of the election. Such election
when made in the return shall be irrevocable for the taxable year for which the
return is made.
SECTION 119. Personal, living, and family expenses. — Personal,

living, and family expenses are not deductible. Insurance paid on a dwelling
owned and occupied by a taxpayer is a personal expense and not deductible.
Premiums paid for life insurance by the insured are not deductible. In the case of a
professional man who rents a property for residential purposes, but incidentally
receives his clients, patients, or callers in connection with his professional work
(his place of business being elsewhere), no part of the rent is deductible as a
business expense. If however, he uses part of the house for his office, such portion
of the rent as is properly attributable to such office is deductible. Where the father
is legally entitled to the services of his minor children, any allowances which he
gives them, whether said to be in consideration of services or otherwise, are not
allowable deductions in his return of income. Alimony, and an allowance paid
under a separation agreement are not deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross

income may be made for any amounts paid out for new buildings or for permanent
improvements or betterments made to increase the value of the taxpayer's property,
or for any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance for depreciation or depletion or other
allowance is or has been made. Amounts expended for securing a copyright and
plates, which remain the property of the person making the payments, are
investments of capital. The cost of defending or perfecting title to property
constitutes a part of the cost of the property and is not a deductible expense. The
amount expended for architect's services is part of the cost of the building.
Commissions paid in purchasing securities are a part of the cost of such securities.
Commissions paid in selling securities are an 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 against the "corpus" of the estate and
are not allowable deductions. Amounts to be assessed and paid under an agreement
between bondholders or shareholders of a corporation, to be used in a
reorganization of the corporation, are investments of capital and not deductible for
any purpose in return of income. DaACIH
In the case of a corporation, expenses for organization, such as

incorporation fees, attorney's fees and accountants' charges, are ordinarily capital
expenditures; but where such expenditures are limited to purely incidental
expenses, a taxpayer may charge such items against income in the year in which
they are incurred. A holding company which guarantees dividends at a specified
rate on the stock of a subsidiary corporation for the purpose of securing new
capital for the subsidiary and increasing the value of its stockholdings in the
subsidiary may not deduct amounts paid in carrying out this guaranty in computing
its net income, but such payments may be added to the cost of its stock in the
subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any

amounts paid for premiums on any life insurance policy covering the life of an
officer or employee or of any person financially interested in the business of the
taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy
are not deductible.
SECTION 122. Losses from sales or exchanges of property. — No

deduction is allowed in respect of losses from sales or exchanges of property,
directly or indirectly —
(a) Between members of a family. As used in Section 31, 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) Except in the case of distributions in liquidation, between an

individual and a corporation more than fifty per centum in value of the outstanding
stock of which is owned, directly or indirectly, by or for such individual;
(c) Except in the case of distributions in liquidation, between two

corporations more than 50 per cent in value of the outstanding stock of each of
which is owned, directly or indirectly, by or for the same individual, if either one
of such corporations with respect to the taxable year of the corporation preceding
the date of the sale or exchange was, under the law applicable to such taxable year,
a personal holding company or a foreign personal holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if
the same person is a grantor with respect to each trust; or
(f) Between a fiduciary of a trust and a beneficiary of such trust.
SECTION 123. Gross income of insurance companies. — In general, the

gross income of insurance companies consists of their total revenue from the
operation of the business and of their income from all other sources within the
taxable year, except as otherwise provided by the statute. Gross income includes
net premiums (that is, gross premium less returned premiums on policies not
taken), investment income, profits from the sale of assets, and all gains, profits,
and income reported to the Insurance Commissioner, except income specifically
exempt from tax. A net decrease in reserve funds required by law within the
taxable year must be included in the gross income to the extent that such funds are
released to the general uses of the company and increase its free assets. Any net
decrease in reserves shall be added to the gross income, unless the company shall
show that such decrease resulted from the application of reserves to the purposes
for which they were established.
SECTION 124. Gross income of life insurance companies. — A life

insurance company shall not include in gross income such portion of any actual
premiums received from any individual policyholder as is paid back or credited to
or treated as an abatement of premium of such policyholder within the taxable
year. (a) "Paid back" means paid in cash. (b) "Credited to" means held to the credit
of, including dividends applied to pay renewal premiums, to purchase additional
paid-up insurance or annuities, or to shorten the endowment or premium-paying
period. It does not include dividends provisionally ascertained and apportioned
upon deferred dividends policies. Dividends provisionally ascertained,
apportioned, or credited on deferred dividends policies can not be excluded or
deducted from gross income for the reason that the assured has no vested or
enforceable right in them and can not at the time of the ascertainment,
apportionment, or credit, not until the maturity of the policy, avail himself of such
dividends; and in the event of the death of the assured prior to the expiration of the
deferred dividend period, the amount so ascertained, apportioned, or credited
lapses. (c) "Treated as an abatement of premium" means of the premium for the
taxable year. Where the dividend paid back is in excess of the premium received
from the policyholder within the taxable year there may be excluded from gross
income only the amount of such premium received, and where no premium is
received from the policyholder within the taxable year the company is not entitled
to exclude from its premiums received from other policyholders an amount in
respect to such dividend payment. (See changes in Sec. 24(b), Tax Code.)
SECTION 125. Gross income of mutual insurance companies. — The

gross income of mutual insurance companies (other than life) consists of their total
revenue from the operation of the business and of their income from all other
sources within the taxable year, except as otherwise provided by the statute.
Premiums received by mutual marine insurance companies which are paid out for
reinsurance should be eliminated from gross income and the payments for
reinsurance, from disbursement. Deposit premiums on perpetual risks received and
returned by mutual fire insurance companies should be treated in the same manner,
as no reserve will be recognized covering liability for such deposits. The earnings
on such deposits, including such portion, if any, of the premium deposits as are not
returned to the policyholders upon cancellation of the policies, must be included in
the gross income.
SECTION 126. Deductions allowed insurance companies. — Insurance

companies are entitled to the same deductions from gross income as other
corporations, and also to the deduction of the net addition required by law to be
made within the taxable year to reserve funds and of the sums other than dividends
paid with the taxable year on policy and annuity contracts. "Paid" includes
"accrued" or "incurred" (construed according to the method of accounting upon the
basis of which the net income is computed) during the taxable year, but does not
include any estimate for losses incurred but not reported during the taxable year.
As payments on policies there should be reported all death, disability and other
policy claims (other than dividends as above specified) paid within the year,
including fire, accident and liability losses, matured endowments, annuities,
payments on installment policies and surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies.

— Mutual insurance companies (other than mutual life and mutual marine
insurance companies), which require their members to make premium deposits to
provide for losses and expenses, are allowed to deduct from gross income the
aggregate amount of premium deposits returned to their policyholders or retained
for the payment of losses, expenses, and reinsurance reserves. In determining the
amount of premium deposits retained by a mutual fire or mutual casualty insurance
company for the payment of losses, expenses, and reinsurance reserves, it will be
presumed that losses and expenses have been paid out of earnings and profits other
than premiums to the extent of such earnings and profits. If, however, any portion
of such amount is applied during. the taxable year to the payment of losses,
expenses, or reinsurance reserves, or which a separate allowance is taken, then
such portion is not deductible; and if any portion of such amount for which an
allowance is taken is subsequently applied to the payment of expenses, losses, or
reinsurance reserves, then such payment can not be separately deducted. The
amount of premium deposits retained for the payment of expenses and losses and
the amount of such expenses and losses, may not both be deducted. A company
which invests part of the premium deposits so retained by it in interest-bearing
securities may, nevertheless, deduct such part, but not the interest received on such
securities. A mutual fire insurance company which has a guaranty capital is taxed
like other mutual fire insurance companies. A stock fire insurance company
operated on the mutual plan to the extent of paying dividends to certain classes of
policyholders, may make a return on the same basis as a mutual fire insurance
company with respect to its business conducted on the mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance

companies. — Mutual marine insurance companies should include in gross income
the gross premiums collected and received by them less amounts paid for
reinsurance. They may deduct from gross income amounts repaid to policyholders
on account of premiums previously paid by them together with the interest actually
paid upon such amounts between the date of ascertainment and the date of
payment thereof. The remainder of the premiums accordingly forms part of the net
income of the company, except to the extent that it is subject to then deductions
allowed such insurance companies and other corporations.
SECTION 129. Net addition to reserve funds. — All policy premiums on

which net addition to reserve is computed, must be included in gross income.
Insurance companies may deduct from gross income the net addition required by
law to be made within the taxable year to reserve funds. When the reserve at the
end of the year is less than at the beginning of the year there is a "released
reserve", and the amount so released must be included in gross income. In the case
of assessment insurance companies, whether domestic or foreign, the actual
deposit of sums with the officers of the Government of the Philippines, pursuant to
law, as addition to guaranty or reserve funds shall be treated as being payments
required by law to reserve funds. In the case of life insurance companies, the net
addition to the "reinsurance reserve" and the "reserve for supplementary
contracts", and in the case of fire, marine, accident, liability, and other insurance
companies, the net addition to the "unearned premium reserves", and only such
other reserves as are specifically required by the statute will be allowed as
deductions.
SECTION 130. Copy of report to Insurance Commissioner to be

furnished the Commissioner of Internal Revenue. — To facilitate the auditing of
income tax returns, insurance companies shall submit to the Commissioner of
Internal Revenue together with returns of income, wherever possible a copy of
their annual report to the Insurance Commissioner.
SECTION 131. Losses from wash sales of stock or securities. — (a) A

taxpayer cannot deduct any loss claimed to have been sustained from the sale or
other disposition of stock or securities, if, within a period beginning thirty days
before the date of such sale or disposition and ending thirty days after such date
(referred to in this section as the sixty-one-day period), he has acquired (by
purchase or by an exchange upon which the entire amount of gain or loss was
recognized by law), or has entered into a contract or option so to acquire,
substantially identical stock or securities. However, this prohibition does not apply
in the case of a dealer in stock or securities if the sale or other disposition of stock
or securities is made in the ordinary course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the
taxable year from the sale or other disposition of stock or securities, the provisions
of this section shall be applied to the losses in the order in which the stock or
securities the disposition of which resulted in the respective losses were disposed
of (beginning with the earliest disposition). If the order of disposition of stock or
securities disposed of at a loss on the same day cannot be determined, the stock or
securities will be considered to have been disposed of in the order in which they
were originally acquired (beginning with earliest acquisition).
(c) Where the amount of stock or securities acquired within the sixty-one
day period is less than the amount of stock or securities sold or otherwise disposed
of, then the particular shares of stock or securities the loss from the sale or other
disposition of which is not deductible shall be those with which the stock or
securities acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the

order of their acquisition (beginning with the earliest acquisition) with an equal
number of the shares of stock or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixty-
one-day period is not less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities the acquisition of
which resulted in the nondeductibility of the loss shall be those with which the
stock or securities disposed of are matched in accordance with the following rule:
The stock or securities sold or otherwise disposed of will be matched with

an equal number of the shares of stock or securities acquired in accordance with
the order of acquisition (beginning with the earliest acquisition) of the stock or
securities acquired.
(e) The acquisition of any security which results in the non-deductibility

of a loss under the provisions of this section shall be disregarded in determining
the deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by

purchase or by an exchange upon which the entire amount of gain or loss was
recognized by law, and comprehends cases where the taxpayer has entered into a
contract or option within the sixty-one-day period to acquire by purchase or by
such an exchange.
EXAMPLE (1): A, whose taxable year is the calendar year, on December 1,

1939, purchased 100 shares of common stock in the M Company for P10,000 and
on December 15, 1939, purchased 100 additional shares for P9,000. On January 2,
1940, he sold the 100 shares purchased on December 1, 1939, for P9,000. Because
of the provisions of Section 33 no loss from the sale is allowable as a deduction.
EXAMPLE (2): A, whose taxable year is the calendar year, on September

21, 1939, purchased 100 shares of the common stock of the M Company for
P5,000. On December 21, 1939, he purchased 50 shares of substantially identical
stock for P2,750, and on December 26, 1939, he purchased 25 additional shares of
such stock for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares
purchased on September 21, 1939. There is an indicated loss of P1,000 on the sale
of the 100 shares. Since within the sixty-one-day period A purchased 75 shares of
substantially identical stock, the loss on the sale of 75 of the shares (P3,750 less
P3,000, or P750) is not allowable as a deduction because of the provisions of
Section 33. The loss on the sale of the remaining 25 shares (P1,250 less P1,000, or
P250) is deductible subject to the limitations provided in Sections 31(b) and 34.
The basis of the 50 shares purchased December 21, 1939, the acquisition of which
resulted in the non-deductibility of the loss (P500) sustained on 50 of the 100
shares sold on January 2, 1940, is P2,500 (the cost of 50 of the shares sold on
January 2, 1940), plus P750 [the difference between the purchase price of the 50
shares acquired on December 21, 1939, (P2,750) and the selling price of 50 of the
shares sold on January 2, 1940 (P2,000)], or P3,250. Similarly the basis of the 25
shares purchased on December 26, 1939, the acquisition of which resulted in the
nondeductibility of the loss (P250) sustained on 25 of the shares sold on January 2,
1940, is P1,250 plus P125, or P1,375. (See Section 143 of these regulations.)
EXAMPLE (3): A, whose taxable year is the calendar year, on September

15, 1938, purchased 100 shares of the stock of the M Company for P5,000. He
sold these shares on February 1, 1940, for P4,000. On each of the four days from
February 15, 1940, to February 18, 1940, he purchased 50 shares of substantially
identical stock for P2,000. There is an indicated loss of P1,000 from the sale of the
100 shares on February 1, 1940, but since within the sixty-one-day period A
purchased not less than 100 shares of substantially identical stock, the loss is not
deductible. The particular shares of stock the purchase of which resulted in the
nondeductibility of the loss are the first 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. AScTaD
SECTION 132. Definition of "capital assets." — The law provides that

the term "capital assets" shall be held to mean property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or 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
property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property, used in the trade or business, of a
character which is subject to the allowance for depreciation provided in subsection
(f) of Section 30 of the Code. The term "capital asset" includes all classes of
property not specifically excluded by Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or
business of a taxpayer of a character which is subject to the allowance for
depreciation provided in Section 30(f) of the Code is limited to property used by
the taxpayer in the trade or business at the time of the sale or exchange. It has no
application to gains or losses arising from the sale of real property used in the
trade or business to the extent that such gain or loss is allocable to the land, as
distinguished from depreciable improvements upon the land. To such gain or loss
allocable to the land, the limitations of Section 34(b) and (c) apply (such limitation
may be inapplicable to a dealer in real estate, but, if so, it is because he holds the
land primarily for sale to customers in the ordinary course of his trade or business,
not because land is subject to a depreciation allowance). Gains or losses from the
sale or exchange of property used in the trade or business of the taxpayer of a
character which is subject to the allowance for depreciation provided in Section
30(f) of the Code, will not be subject to the percentage provisions of Section 34(b)
and losses from such transactions will not be subject to the limitation of losses
provided in Section 30(c). (Real property used in taxpayer's trade or business is no
longer capital asset per Am. R.A. 82.)
SECTION 133. Percentage taken into account. — In computing net

income, only 50 per cent of the gain or loss recognized upon the sale or exchange
for a capital asset shall be taken into account. Thus, in the case of a merchandising
concern which has an "ordinary net income" (net income exclusive of net gains
from the sale or exchange of capital assets) of P10,000 and a net capital gain of
P5,000, the net income subject to tax will be P10,000 plus P2,500 (50 % of
P5,000), of P12,500.
SECTION 134. Limitation on capital losses. — Losses from sales or

exchanges of capital assets are allowed only to the extent of the gains from such
sales or exchanges. If the dealings of the taxpayer in capital assets during the year
result in a net capital loss, such loss cannot be deducted from his ordinary income,
inasmuch as capital losses are allowable only to the extent of capital gains. In the
case, for example, of a taxpayer, engaged in buying and selling goods, having an
ordinary net income of P20,000, capital gains of P5,000 and capital losses of
P3,000 the taxable net income is computed as follows:
Ordinary net income P20,000
Gains from sales of capital assets
(as stocks or securities) P5,000
50% of such gains P2,500
Losses from sales of capital assets P3,000
50% of such losses P1,500
Net taxable capital gains 1,000
————
Taxable net income P21,000
=======
If such taxpayer had an ordinary net income of P20,000, capital gains of
P2,000 and capital losses of P7,000, the taxable net income would be computed as
follows:
Ordinary net income P20,000
Losses from sales of capital assets
(as stocks or securities) P7,000
50% of such losses P3,500
Gains from sales of capital assets 2,000
50% of such gains 1,000
———
Net capital losses P2,500
Taxable net income P20,000
======
(The net capital loss of P2,500 is not deductible in arriving at the taxable
net income inasmuch as capital losses are allowed only to the extent of capital
gains.)
SECTION 134-A. Capital loss carry-over-Illustration. — A, an individual

has the following incomes and losses:
1946 — Net income from business 1,000
Dividends received 750
Interest earned 500
Capital gains — on capital assets held for 8 months 5,000
Capital losses — on capital assets held for 9 months 10,000
1947 — Net income from business 2,000
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 P2,250
Capital gains and losses:
Capital gains P5,000
Less-Capital losses 10,000
———
Net loss carried over to 1947 (P5,000)
———
Net income subject to tax P2,250
In 1947, his taxable income is computed as follows:
Income from business and interest P2,200
Capital gains and losses:
Capital gains P5,000
———
One-half P2,500
———
Less-Capital loss carried over (#) 2,250
Net capital gain 250
———
Net income subject to tax P2,450
======
# The net capital loss of P5,000 sustained in 1946 and carried over in 1947
is reduced to P2,250 for the reason that the net income from business and other
sources (not including capital gain), for the year 1946 is only P2,250.
If a bank or trust company incorporated under the laws of the Philippines or

of the United States, a substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a government or political
subdivision thereof), with interest coupons or in registered form, any loss resulting
from such sale shall not be subject to the limitation contained in Section 34(c) and
shall not be included in determining the applicability of such limitation to other
losses.
SECTION 135. Gains and losses from short sales. — For income tax
purposes, a short sale is not deemed to be consummated until the delivery of
property to cover the short sale. If the short sale is made through a broker and 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 136. Basis for determining gain or loss from sale of property.
— For the purpose of ascertaining the gain or loss from the sale or exchange of
property, the basis is the cost of such property, or in the case of property which
should be included in the inventory, its latest inventory value. But in the case of
property acquired before March 1, 1913, when its fair market value as of that date
is in excess of its cost, the gain to be included in gross income is the excess of the
amount realized therefor over such fair market value. (See illustration I, Section
137 of these regulations). Also in the case of property acquired before March 1,
1913, when its fair market value as of that date is lower than its cost the deductible
loss is the excess of such fair market value over the amount realized therefor. (See
Illustration II, Id.). No gain or loss is recognized in the case of property sold or
exchanged (a) at more than cost but less than its fair market value as of March 1,
1913 (See Illustration III, Id.), or (b) at less than cost but at more than its fair
market value as of March 1, 1913. (See Illustration IV, Id., Id., Id.) In any case
proper adjustment must be made in computing gain or loss from the exchange or
sale of property for any depreciation or depletion sustained and allowable as
deduction in computing net income; the amount of depreciation previously charged
off by the taxpayer shall be deemed to be true depreciation sustained unless shown
by clear and convincing evidence to be incorrect. What the fair market value of
property was as of March 1, 1913, is a question of fact to be established by
evidence which will reasonably and adequately make it appear. The nature and
extent of the sales and the circumstances under which they were made should be
considered. Prices received at forced sales or for small lots of property may be and
often are no real indication of the value of the amount of property in question. For
instance, sales from time to time of a small number of shares of stock is little
indication of the value of a large or controlling interest in the corporation. If the
taxpayer can not determine the cost of securities purchased prior to March 1, 1913,
because of the loss, destruction, or failure to keep records, the value of the
securities at the date of approximate date of acquisition may be used in
determining the cost basis for purposes of computing the gain or loss from the sale
of the securities. When the date or approximate date of acquisition is unknown, no
general rule can be stated for determining the cost value of such securities. Each
case must be considered separately upon its own facts.
SECTION 137. Illustrations of the computation of gain or loss from the

sale or exchange of property acquired prior to March 1, 1913. — To avoid
complexity no adjustment has been made in these examples for depreciation or
depletion.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is in excess of its cost, the taxable gain is the excess of the
amount realized therefor over such fair market value.
ILLUSTRATION I
Fair Market
Cost Value Sale Price Taxable gain
Mar. 1, 1913
P20,000 P30,000 P40,000 P10,000
Excess of amount realized over fair
market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is lower than its cost, the deductible loss is the excess of such
fair market value over the amount realized therefor.
ILLUSTRATION II
Fair Market
Mar. 1, 1913
P20,000 P10,000 P6,000 P4,000
Excess of fair market value over

amount realized. Loss attributable to
the period prior to March 1, 1913, not
deductible.
No gain or loss is recognized in the case of property acquired before March

1, 1913, and sold or disposed of at more than cost but at less than its fair market
value as of that date.
ILLUSTRATION III
Fair Market
Mar. 1, 1913
P20,000 P60,000 P40,000 No taxable gain or deductible loss.
Reason: A gain on whole transaction,
which gain is attributed to period prior
to March 1,1913.
No gain or loss is recognized in the case of property acquired before March
1, 1913, and sold or disposed of at less than cost but at more than its fair market
value as of that date.
ILLUSTRATION IV
Fair Market
Mar. 1, 1913
P20,000 P6,000 P10,000 No taxable gain or deductible loss.
Reason: A loss on whole transaction,
which loss is attributable to period
prior to March 1, 1913.
Where the cost is equal to or greater than the fair market value as of March
1, 1913, and the selling price exceeds the cost, the gain to be included in gross
income is the excess of the selling price over the cost.
ILLUSTRATION V
Fair Market
Mar. 1, 1913
P20,000 P10,000 P40,000 P20,000
Reason: Gain on whole transaction,
all of which is attributable to period
subsequent to March 1, 1913.
Where the fair market value as of March 1, 1913, is equal to or greater than
the cost and the selling price is less than the cost, the deductible loss is the amount
by which the cost exceeds the selling price.
ILLUSTRATION VI
Fair Market
Mar. 1, 1913
P20,000 P30,000 P10,000 P10,000
Reason: Loss on whole transaction, all
of which is attributable to period
subsequent to March 1, 1913. Only
actual loss sustained deductible.
SECTION 138. Sale of property acquired by gift. — In computing the
gain or loss from the sale or other disposition of property acquired by gift, the
basis shall be the selling price and the fair market value of the property at the time
the gift was made, or its fair market value as of March 1, 1913, if acquired prior
thereto, determined in accordance with the next two preceding sections. 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.
SECTION 139. Sale of property acquired by devise, bequests, or

inheritance. — In computing the gain or loss from the sale or other disposition of
property acquired by devise, bequest, or inheritance, the basis shall be the fair
market price or value of such property at the time of the death of the decedent. The
term "property acquired by bequest, devise, or inheritance" as used herein includes
(a) such property interests as the taxpayer has received as the result of a transfer,
or creation of a trust, in contemplation of or intended to take effect in possession
or enjoyment at or after death, and (b) such property interest as the taxpayer has
received as the result of the exercise by a person of a general power of
appointment (1) by will, or (2) by deed executed in contemplation of or intended
to take effect in possession or enjoyment at or after death. In the case of property
acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the
taxable gain or deductible loss from the sale or other disposition thereof shall be
computed in accordance with sections 136 and 137 of these regulations. In the case
of property acquired by bequest, devise or inheritance, its value as appraised for
the purpose of the inheritance tax shall be deemed to be its fair market value when
acquired. DaIACS
SECTION 140. Exchange of property. — Gain or loss arising from the

acquisition and subsequent disposition of property is realized only when as the
result of a transaction between the owner and another person the property is
converted into other property (a) that is essentially different from the property
disposed of, and (b) that has a market value. The requirement that the property
received in exchange must be "essentially different from the property disposed of"
implies that there must be a change in substance and not merely a change in form.
By way of illustration, if a taxpayer owning ten shares of stock exchanges his
stock certificate for a voting trust certificate, no income is realized. The term
"market value" means the fair value of the property in money as between one who
wishes to purchase and one who wishes to sell. It is not, however, what can be
obtained for the property when the owner is under peculiar compulsion to sell or
the 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 value" is the price at which a seller willing to
sell at a fair price and a buyer willing to buy at a fair price, both having reasonable
knowledge of the facts, will trade. Evidence as to the assets and liabilities of a
corporation and as to its earnings may furnish definite indications of the market
value of its stock.
SECTION 141. Determination of gain or loss from the exchange of

property. — The amount of income derived or loss sustained from an exchange of
property is the difference between the market value at the time of the exchange of
the property received in exchange and the original cost, or other basis, of the
property exchange. If the property exchanged was acquired prior to March 1,
1913, see Sections 136 and 137 of these regulations.
SECTION 142. Readjustment of interest in a registered copartnership.

— When a partner retires from a duly registered copartnership, or the partnership
is dissolved, he realizes a gain or loss measured by the difference between the
price received for his interest and the cost to him of his interest in the partnership
including in such cost the amount of his share in any undistributed partnership net
income earned since he became a partner on which the income tax has been paid.
However, if such interest in the partnership was acquired prior to March 1, 1913,
both the cost as hereinbefore provided and the amount of such interest as of date,
plus the amount of the shares in any undistributed partnership net income earned
since March 1, 1913, on which the income tax has been paid, shall be ascertained
and the taxable gain derived or the deductible loss sustained shall 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 gain or suffers loss according
to the market value of the property received in liquidation. Whenever a new
partner is admitted, to a partnership, or any existing partnership is reorganized, the
facts as to such change or reorganization should be fully set forth in the next return
of income, in order that the Commissioner of Internal Revenue may determine
whether any gain or loss has been realized by any partner.
SECTION 143. Basis of stock or securities acquired in "wash sales". —

In the sale or other disposition of stocks or securities the acquisition of which (or
the contract or option to acquire which) resulted in the non deductibility of the loss
from the sale or other disposition of substantially identical stock or securities the
basis shall be the basis of the substantially identical stock so sold or disposed of,
increased or decreased, as the case may be, by the difference, if any, between the
price at which the stock or securities was acquired and the price at which such
substantially identical stock or securities were sold or otherwise disposed of. The
application of this rule may be illustrated by the following examples:
EXAMPLE (1): A purchased a share of common stock of the X Corporation

for P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1,
1940, he purchased a share of common stock of the same corporation for P90.00.
No loss from the sale is recognized under Section 33 of the Code. The basis of the
new share is P110; that is, the basis of the old share (P100) increased by P10,
excess of the price at which the new share was acquired (P90) over the price at
which the old share was sold (P80).
EXAMPLE (2): A purchased a share of common stock of the X corporation

for P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he
purchased a share of common stock of the same corporation for P70. No loss from
the sale is recognized under Section 33 of the Code. The basis of the new share is
P90; that is, the basis of the old share (P100) decreased by P10, the excess of the
price at which the old share was sold (P80) over the price at which the new share
was acquired (P70). (See Section 131 of these regulations).
SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253

publishing Republic Act No. 1921 amending Section 35 of the Code, particularly
subsection (c) thereof:
Features of the Amendment
1. Before and after the amendment. — Under the provisions of
subsection (c) of Section 35 of the National Internal Revenue Code, before its
amendment by Republic Act No. 1921, when property is exchanged for another
property, the property received in exchange shall, for the purpose of determining
gain or loss, be treated as the equivalent of cash to the amount of its fair market
value.
Paragraph 1 of subsection (c) of section 35 of the Tax Code after the

amendment states the general rule that upon the sale or exchange of property, the
entire amount of gain or loss as the case may be, is recognized, while paragraphs 2
and 3 give the exceptions where gain or loss is not recognized, or gain is
recognized only in part.
2. Exceptions to the rule recognizing gain or loss in exchanges of

property solely in kind. — Under paragraph 2 of subsection (c) of Section 35 of
the Tax Code after its amendment by Republic Act No. 1921, no gain or loss shall
be recognized in the following cases of exchanges made in pursuance of a plan of
merger or consolidation:
(a) By a corporation: If a corporation, a party to a merger or

consolidation, in pursuance of such plan of merger or consolidation,
exchanges property solely for stock in another corporation, a party to
the merger or consolidation.
(b) By a shareholder: A shareholder who exchanges his stock in a

corporation which is a party to the merger or consolidation solely for
stock of another corporation, also a party to the merger or
consolidation.
(c) By a security holder: A security holder of a corporation which is a

party to the merger or consolidation, who exchanges his securities in
such corporation solely for stock or securities in another corporation,
a party to the merger or consolidation.
3. Recognition of gain in part but not loss, where exchanges are not
solely in kind.
(a) By a shareholder or security holder. — If in connection with an

exchange made by a shareholder or security holder described in the
above exceptions, he receives not only stock or securities, permitted
to be received without recognition of loss or gain, but also money
and/or other property, then the gain, if any, to the recipient shall be
recognized, but in an amount not in excess of the sum of money and
the fair market value of such other property. The loss, if any, to the
shareholder or security holder from such an exchange is not to be
recognized to any extent. However, if the distribution of such other
property and/or money to a shareholder in the course of a merger or
consolidation has the effect of the distribution of a taxable dividend,
there shall be taxed to the distributee as a taxable dividend such an
amount of the gain recognized on the exchange as is not in excess of
the distributee's ratable share of the undistributed earnings and
profits of the corporation, and as a capital gain, the remainder, if
any, of the gain so recognized.
Example: A, in connection with a merger or consolidation in 1957

exchanges a share of stock in the X Corporation (a party to the
merger or consolidation) purchased in 1939 at a cost of P100 for a
share of stock of the Y Corporation (also a party to the merger or
consolidation), which has a fair market value of P90, plus P20 in
cash. The gain from the transaction is P10 and is recognized and
taxed as a gain from the exchange of property. However, if the share
of stock received had a fair market value of P70, the loss from the
transaction of P10 would not be recognized.
(b) By a corporation. — If, in pursuance of a plan of merger or

consolidation above described, the transferor corporation receives
not only stock permitted to be received without the recognition of
gain or loss, but also money and/or other property, then, if such
money and/or other property received by the corporation is
distributed by it pursuant to the plan of merger or consolidation, no
gain to the said corporation will be recognized. If the other property
and/or money received by the corporation is not distributed by it
pursuant to the plan of merger and consolidation, the gain, if any, to
the corporation from the exchange will be recognized in an amount
not in excess of the sum of money and the fair market value of the
other property so received which is not distributed. In either case no
loss from the exchange will be recognized.
4. Assumption of liability. — Where upon an exchange described in the

foregoing exceptions, a taxpayer receives stock or securities which would be
permitted to be received without the recognition of gain if it were the sole
consideration, and as part of the consideration, another party to the exchange
assumes a liability of the taxpayer, or acquires from the taxpayer property subject
to a liability, such assumption or acquisition shall not be considered as money
and/or other property, and shall not prevent the exchange from being within the
exceptions. Accordingly, the assumption of the aforesaid liabilities is not to be
treated as other property or money for the purpose of determining the amount of
realized gain.
5. Basis of stock or securities for the purpose of determining gain or loss

upon subsequent sale.
(a) By the transferor corporation, or its shareholder or security holder.

— The basis of the stock or securities received by the transferor corporation or its
shareholder or security holder upon the exchange specified in the above 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 by the amount treated as dividend of the shareholder and
the amount of any gain that was recognized on the exchange. The other property or
"boot" received in exchange shall have as basis its fair market value.
Examples: 1. A purchased a share of stock in the X Corporation in 1939 for

P100. Pursuant to a plan of merger or consolidation, A in 1957 exchanged his
share for one share in the Y Corporation, worth P90 and P30 in cash. A realized a
gain of P20 upon the exchange. The basis of the share of stock in the Y
Corporation is P90, that is, the basis of the share in the X Corporation (P100) less
the amount of money received by A (P30) plus the amount of the gain recognized
on the exchange (P20).
2. A purchased a share of stock in the X Corporation in 1939 for P100.

Upon a merger or consolidation of the X Corporation in 1957, A received in place
of his stock in the X Corporation a share of stock in the Y Corporation worth P60,
a Treasury Bond worth P50, and in addition P20 in cash. A realized a gain of P30
upon the exchange. The basis of the property received in exchange is the basis of
the old stock decreased in the amount of money received (P20) and increased in
the amount of gain that was recognized (P30), which results in a basis for the
property received of P110. This basis of P110 is apportioned between the Treasury
Bond and the share of stock, the basis of the Treasury Bond being its fair market
value at the date of the exchange, P50, and of the share of stock, the remainder,
P60.
(b) By the transferee. — The basis of the property transferred in the hands
of the transferee shall be the same as it would be in the hands of the transferor,
increased by the amount of the gain recognized to the transferor on the transfer.
(c) If corporation shareholder or security holder received several kinds of

stock or securities. — When securities of a single class were exchanged for new
securities of different classes where no gain or loss was recognized, the proper
method of apportionment is to allocate to each class of new securities that
proportion of the original basis which the market value of the particular class bears
to the market value of all securities received on the date of the exchange, for
purposes of determining the gain or loss on the subsequent sale of any of the new
securities. For example, if 100 shares of common stock par value P100, are
exchanged for 50 shares of preferred and 50 shares of common each of P100 par
value, and the cost of the old stock was P250 per share, or P25,000, but the market
value of the preferred stock on the date of the exchange was P110 per share, or
P5,500 for the 50 shares, and the market value of the common was P440 per share
or P22,000 for the 50 shares of common, one-fifth of the original cost, or P5,000,
would be regarded as the cost of the preferred and four-fifths, or P20,000 as the
cost of the common.
As previously shown cash "boot" operates in the first instance to reduce

basis. Then to this result must be added the gain recognized. The remainder is to
be allocated between the several types of stock and securities permitted to be
received without the recognition of gain or loss. To illustrate: The taxpayer in a
nontaxable exchange trades A stock which cost P100 for one share of common
stock and one share of preferred stock of B corporation, together worth P100
(P100 each), and P50 cash. The basis for the share of B common stock will
therefore be P50 (1/2 of P100) and the B preferred stock will likewise take a P50
basis.
6. Definitions:
(a) The term "securities" means bonds and debentures but not "notes" of
whatever class or duration.
(b) The term "merger" or "consolidation" shall be understood to mean the

ordinary merger or consolidation, or the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock. In order that
a transaction may be regarded as a merger or consolidation within the purview of
the amendment, it must be undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden on taxation. In determining whether
a bona fide business purpose exists, each and every step of the transaction shall be
considered and the whole transaction or series of transactions shall be treated as a
single unit. The term "property" shall be taken to include the cash assets of the
transferor for purpose of determining whether the property transferred constitutes a
substantial portion of the property of the transferor. "Substantially all" as used
under this amendment means the acquisition by one corporation of at least 80% of
the assets, including cash, of another corporation, which has the element of
permanence and not merely momentary holding.
SECTION 144. Need of inventories. — In order to reflect the net income

correctly, inventories at the beginning and end of each year are necessary in every
case in which the production, purchase or sale of merchandise is an income
producing factor. The inventory should include raw materials and supplies on hand
that have been acquired for sale, consumption, or use in productive processes
together with all finished or partly finished goods. Only merchandise title to which
is vested in the taxpayer should be included in his inventory. Accordingly the
seller should include in his inventory goods under contract for sale but not yet
segregated and applied to the contract and goods out upon consignment, but should
exclude from inventory goods sold, title to which has passed to the purchaser. A
purchaser should include in inventory merchandise purchased, title to which has
passed to him although such merchandise is in transit or for other reasons has not
been reduced to physical possession, but should not include goods ordered for
future delivery transfer of title to which has not yet been effected.
SECTION 145. Valuation of inventories. — The law provides two tests

to which each inventory must conform. — (1) It must conform as nearly as
possible to the best accounting practice in the trade or business, and (2) it must
clearly reflect the income. It follows, therefore, that inventory rules can not be
uniform but must give effect to trade customs which come within the scope of the
best accounting practice in the particular trade or business. In order to clearly
reflect income, the inventory practice of a taxpayer should be consistent from year
to year, and greater weight is to be given to consistency than to any particular
method of inventory or basis of valuation, as long as the method or basis used is
substantially in accord with these regulations. An inventory that can be used under
the best accounting practice in a balance sheet showing the financial position of
the taxpayer is, as a general rule, regarded as clearly reflecting his income.
The bases of valuation most commonly used by business concerns and

which meet the requirements of the Income Tax Law are (a) cost price or (b) cost
or market price, whichever is the lower. Any goods in an inventory which are
unsalable at normal prices or unusable in the normal way because of damage,
imperfections, shop wear, changes of style, odd or broken lots, or other similar
causes, including second hand goods taken in exchange, should be valued at "bona
fide" selling prices whether basis (a) or (b) is used, or if such goods consist of raw
materials or partly finished goods held for use or consumption, they should be
valued upon a reasonable basis, taking into consideration the usability and the
condition of the goods, but in no case shall such value be less than the scrap value.
"Bona fide" selling price means actual offerings of goods during a period ending
not later than thirty days after inventory date. The burden of proof will rest upon
the taxpayer to show that such exceptional goods as are valued upon such selling
bases come within the classifications indicated above, and he shall maintain such
records of the disposition of the goods as will enable a verification of the inventory
to be made. aHTDAc
In respect to normal goods, whichever basis (a) or (b) is adopted must be
applied with reasonable consistency to the entire inventory. Taxpayers were given
the option to adopt either basis (a) or (b) for their 1921 inventories, and the basis
adopted for that year is controlling and a change can now be made after permission
is secured from the Commissioner of Internal Revenue. Goods taken in the
inventory which have been so intermingled that they can not be identified with
specific invoices will be deemed to be either (a) the goods most recently purchased
or produced and the cost thereof will be the actual cost of the goods purchased or
produced during the period in which the quantity of goods in the inventory has
been acquired, or (b) where the taxpayer maintains book inventories in accordance
with a sound accounting system in which the respective inventory accounts are
charged with the actual cost of the goods purchased or produced and credited with
the value of the goods used, transferred, or sold, calculated upon the basis of the
actual cost of the goods acquired during the taxable year (including the inventory
at the beginning of the year) the net value as shown by such inventory accounts
will be deemed to be the cost of the goods on hand. The balances shown by such
inventories should be verified by physical inventories at reasonable intervals and
adjusted to conform therewith.
Inventories should be recorded in a legible manner, properly computed and

summarized, and should be preserved as a part of the accounting record of the
taxpayer. The inventories of taxpayers on whatever basis taken will be subject to
investigation by the Commissioner of Internal Revenue and the taxpayer must
satisfy the Commissioner of Internal Revenue of the correctness of the price
adopted.
The following methods, among 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.:
(1) Deducting from the inventory a reserve for price changes, or an

estimated depreciation in the value thereof.
(2) Taking work in process, or other parts of the inventory, at a nominal

price or at less than its proper value.
(3) Omitting portions of the stock on hand.
(4) Using a constant price or nominal value for a so called normal quantity
of materials or goods in stock.
(5) Including stock in transit, either shipped to or from the taxpayer, the
title to which is not vested in the taxpayer.
SECTION 146. Inventories at cost price. — Cost means: (1) In the case
of merchandise on hand at the beginning of the taxable year, the inventory price of
such goods.
(2) In the case of merchandise purchased since the beginning of the

taxable year, the invoice price less trade or other discounts, except strictly cash
discounts, approximating a fair interest rate, which may be deducted or not at the
option of the taxpayer, provided a consistent course is followed. To this net
invoice price should be added transportation or other necessary charges incurred in
acquiring possession of the goods.
(3) In the case of merchandise produced by the taxpayer since the

beginning of the taxable year, (a) the cost of raw materials and supplies entering
into or consumed in connection with the products; (b) expenditures for direct
labor; (c) indirect expenses incident to and necessary for the production of the
particular article, including therein a reasonable proportion of management
expenses, but not including any cost of selling or return on capital whether by way
of interest or profit.
(4) In any industry in which the usual rules for computation of cost of
production are inapplicable, costs may be approximated upon such basis as may be
reasonable and in conformity with established trade practice in the particular
industry. Among such cases are: (a) Farmers and raisers of livestock; (b) miners
and manufacturers who by a single process or uniform series of processes derive a
product of two or more kinds, size or grade, the unit cost of which is substantially
alike; and (c) retail merchants who use what is known as the "retail method" in
ascertaining approximate cost.
SECTION 147. Inventories at market price. — Under ordinary

circumstances, and for normal goods in an inventory "market price" means the
current bid price prevailing at the date of the inventory for the particular
merchandise in the volume in which usually purchased by the taxpayer and is
applicable in the cases (a) of goods purchased and on hand, and (b) of basic
elements of cost (materials, labor, and burden) in goods in process of manufacture
and in finished goods on hand; exclusive, however, of goods on hand or in process
of manufacture for delivery upon firm sales contracts (i.e., those not legally subject
to cancellation by either party) at fixed prices entered into before the date of the
inventory, which goods must be inventoried at cost. Where no open market exists
or where quotations are nominal due to stagnant market condition, the taxpayer
must use such evidence of a fair market price at the date or dates nearest the
inventory as may be available, such as specific purchase or sales by the taxpayer
or others in reasonable volume and made in good faith, or compensation paid for
cancellation of contracts for purchase commitments. Where the taxpayer in the
regular course of business has offered for sale such merchandise at prices lower
than the current price as above defined, the inventory may be value at such prices
and the correctness of prices will be determined by reference to the actual sales of
the taxpayer for a reasonable period before and after the date of the inventory.
Prices which vary materially from the actual prices so ascertained will not be
accepted as reflecting the market price.
SECTION 148. Inventories by dealers in securities. — A dealer in

securities who in his books of account regularly inventories unsold securities on
hand either —
(a) At cost;
(b) At, cost or market, whichever is lower; or
(c) At market value.
may make his return upon the basis upon which his accounts are kept;
provided that a description of the method employed shall be included in or
attached to the return, that all the securities must be inventoried by the same
method, and that such method must be adhered to in subsequent years, unless
another method be authorized by the Commissioner of Internal Revenue. A dealer
in securities in whose books of accounts separate computations of the gain or loss
from the sale of the various lots of securities sold are made on the basis of the cost
of each lot shall be regarded, for the purposes of this section, as regularly
inventorying his securities at cost. For the purposes of this rule a dealer in
securities is a merchant of securities, whether an individual, partnership; or
corporation, with an established place of business, regularly engaged in the
purchase of securities and their resale to customers; that is, one who as a merchant
buys securities and sells them to customers with a view to the gains and profits that
may be derived therefrom. If such business is simply a branch of the activities
carried on by such person, the securities inventoried as here provided may include
only those held for purposes of resale and not for investment. Taxpayers who buy
and sell or hold securities for investment or speculation, irrespective of whether
such buying or selling constitutes the carrying on of a trade or business, and
officers of corporations and members of partnerships who in their individual
capacities buy and sell securities, are not dealers in securities within the meaning
of this rule.
SECTION 149. Inventories of livestock raisers 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 closing inventories for the year in which the change is made. There should be
included in the opening inventory all farm products (including livestock)
purchased or raised which were on hand at the date of the inventory, but
inventories must not include real estate, buildings, permanent improvements, or
any other fixed assets. DEICTS
(2) Because of the difficulty of ascertaining actual cost of livestock and

other farm products, farmers who render their returns upon an inventory basis may
at their option value their inventories for the current taxable year according to the
"farm-price method" which provides for the valuation of inventories at market
price less cost of marketing. If the use of the "farm-price method" of valuing
inventories for any taxable year involves a change in method of pricing inventories
from that employed in prior years, the opening inventory for the taxable year in
which the change is made should be brought in at the same value as the closing
inventory for the preceding taxable year. If such valuation of the opening inventory
for the taxable year in which the change is made results in an abnormally large
income for that year, there may be submitted with the return for such taxable year
an adjustment statement for the preceding year based on the "farm-price method"
of 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 year.
(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 closing inventory for the preceding year into agreement with opening complete
inventory for the current taxable year.
SECTION 150. Inventories of miners and manufacturers. — A taxpayer

engaged in mining or manufacturing who by a single process or uniform series of
processes derives a product of two or more kinds, sizes or grades, the unit cost of
which is substantially alike, and who in conformity to a recognized trade practice
allocates an amount of cost to each kind, size, or grade of product which in the
aggregate will absorb the total cost of production, may use such allocated cost a
the basis for pricing inventories, provided such allocation bears a reasonable
relation to the respective selling values of the different kinds of products.
SECTION 151. Inventories of retail merchants. — Retail merchants who

employ what is known as the "retail method" of pricing inventories may make their
returns upon that basis, provided that the use of such method, is designated upon
the returns, that accurate accounts are kept and that such method is consistently
adhered to unless a change is authorized by the Commissioner of Internal
Revenue. Under this method the goods in the inventory are ordinarily priced at the
selling prices and the total retail value of the goods in each department or of each
class of goods is reduced to approximate cost by deducting the percentage which
represents the difference between the retail selling value and the purchase price.
This percentage is determined by departments of a store or by classes of goods,
and should represent as accurately as may be the amounts added to the cost prices
of the goods to cover selling and other expenses of doing business and for the
margin of profit. In computing the percentage above mentioned, proper adjustment
should be made for all mark-ups and mark-downs.
A taxpayer maintaining more than one department in his store or dealing in

classes of goods carrying different percentages of gross profit should not use a
percentage of profit based upon an average of his entire business but should
compute and use in valuing his inventory the proper percentages for the respective
departments or classes of goods.
SECTION 152. Income from sources within the Philippines. — The law
divides the income of taxpayers into three classes:
(1) Income which is derived in full from sources within the Philippines;
(2) Income which is derived in full from sources without the Philippines;
and
(3) Income which is derived partly from sources within and partly from
sources without the Philippines.
Non-resident alien individuals and foreign corporations are taxable only

upon income from sources within the Philippines. Citizens and residents of the
Philippines and domestic corporations are taxable upon income derived from
sources both within and without the Philippines.
The taxable income from sources within the Philippines includes that
derived in full from sources within the Philippines and that portion of the income
which is derived partly from sources within and partly from sources without the
Philippines which is allocated or apportioned to sources within the Philippines.
SECTION 153. Interest. — Interest on bonds or notes or other interest

bearing obligations of residents, corporate or otherwise, constitutes income from
sources within the Philippines.
SECTION 154. Dividends. — Gross income from sources within the

Philippines includes dividends, as defined by Section 83 of the Code:
(a) From a domestic corporation; and
(b) From a foreign corporation unless less than 50 per cent of its gross
income for the three-year period ending with the close of its taxable year preceding
the declaration of such dividends, or for such part of such period as it has been in
existence, was derived from sources within the Philippines; but only in an amount
which bears the same ratio to such dividends as the gross income of the
corporation for such period derived from sources within the Philippines bears to its
gross income from all sources.
Dividends will be treated as an income from sources within the Philippines

unless the taxpayer submits sufficient data to establish to the satisfaction of the
Commissioner of Internal Revenue that they should be excluded from gross
income under Section 37(a)(2)(B).
SECTION 155. Compensation for labor or personal services. — Gross

income from sources within the Philippines includes compensation for labor or
personal services performed within the Philippines regardless of the residence of
the payor, of the place in which the contract for service was made, or of the place
of payment. If a specific amount is paid for labor or personal services performed in
the Philippines, such amount shall be included in the gross income. If no accurate
allocation or segregation of compensation for labor or personal services performed
in the Philippines can be made, or when such labor or service is performed partly
within and partly without the Philippines, the amount to be included in the gross
income shall be determined by an apportionment of the time basis, i.e., there shall
be included in the gross income an amount which bears the same relation to the
total compensation as the number of days of performance of the labor or services
within the Philippines bears to the total number of days performance of labor or
services for which the payment is made. Wages received for services rendered
inside the territorial limits of the Philippines and wages of an alien seaman earned
on a coastwise vessel are to be regarded as from sources within the Philippines.
SECTION 156. Rentals and royalties. — Gross income from sources

within the Philippines includes rentals or royalties from property located within
the Philippines or from any interest in such property, including rentals or royalties
for the use of or the privilege of using in the Philippines, patents, copyrights,
secret processes and formulas, goodwill, trademarks, trade brands, franchises, and
other like property. The income arising from the rental of property whether
tangible or intangible located within the Philippines, or from the use of property,
whether tangible or intangible, located within the Philippines, is from sources
within the Philippines.
SECTION 157. Sale of real property. — Gross income from sources

within the Philippines includes gain, computed under the provisions of Section 35,
derived from the sale or other disposition of real property located in the
Philippines. For the treatment of capital gains and losses, see Sections 132 to 135
of these regulations.
SECTION 158. Income from sources without the Philippines. — Gross

income from sources without the Philippines includes:
(1) Interest other than that specified in Section 37(a)(1), as being derived
from sources within the Philippines;
(2) Dividends other than those derived from sources within the Philippines
as provided in Section 37(a)(2);
(3) Compensation for labor or personal services performed without the

Philippines;
(4) Rentals or royalties derived from property without the Philippines or

from any interest in such property, including rentals or royalties for the use of or
for the privilege of using without the Philippines, patents, copyrights, secret
processes and formulas, goodwill, trade-marks, trade brands, franchises, and other
like property; and
(5) Gain derived from the sale of real property located without the
Philippines.
SECTION 159. Sale of personal property. — Income derived from the

purchase and sale of personal property shall be treated as derived entirely from the
country in which sold. The world "sold" includes "exchanged". The "country in
which sold" ordinarily means the place where the property is marketed. This
section does not apply to income from the sale of personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines or
produced (in whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations.)
SECTION 160. Apportionment of deductions. — From the items

specified in Section 37(a) as being derived specifically from sources within the
Philippines there shall be deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any other expenses,
losses or deductions which can not definitely be allocated to some item or class of
gross income. The remainder shall be included in full as net income from sources
within the Philippines. The ratable part is based upon the ratio of gross income
from sources within the Philippines to the total gross income.
EXAMPLE: A non-resident alien individual whose taxable year is the

calendar year, derived gross income from all sources for 1939 of P180,000,
including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000
————
Total P36,000
that is, one-fifth of the total gross income was from sources within the Philippines.
The remainder of the gross income was from sources without the Philippines,
determined under Section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources
within the Philippines and the amount of P40,000 is properly allocated to income
from sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to

any class of income. A ratable part thereof, based upon the relation of gross
income from sources within the Philippines to the total gross income, shall be
deducted in computing net income from sources within the Philippines. Thus, there
are deducted from the P36,000 of gross income from sources within the
Philippines expenses amounting to P14,000 (representing P8,000 properly
apportioned to the income from sources within the Philippines and P6,000, a
ratable part (one-fifth) of the expenses which could not be allocated to any item or
class of gross income). The remainder, P22,000, is the net income from sources
SECTION 161. Other income from sources within the Philippines. —

Items of gross income other than those specified in Section 37(a) and (c) shall be
allocated or apportioned to sources within or without the Philippines, as provided
in Section (37)(e).
The income derived from the ownership or operation of any farm, mine, oil
or gas well, other natural deposit, or timber, located within the Philippines, and
from the sale by the producer of the products thereof within or without the
Philippines, shall ordinarily be included in gross income from sources within the
Philippines. If, however, it is shown to the satisfaction of the Commissioner of
Internal Revenue that due to the peculiar conditions of productions and sale in a
specific case or for other reasons all of such gross income should not be allocated
to sources within the Philippines and to sources without the Philippines shall be
made as provided in Section 162 of these regulations.
Where items of gross income are separately allocated to sources within the
Philippines, there shall be deducted therefrom, in computing net income, the
expenses, losses, and other deductions properly apportioned or allocated thereto
and a ratable part of other expenses, losses, or other deductions which cannot
definitely be allocated to some item or class of gross income.
SECTION 162. Income from the sale of personal property derived from
sources partly within and partly without the Philippines. — Items of gross income
not allocated by Sections 152 to 159 or 161 of these regulations to sources from
within or without the Philippines shall (unless unmistakably from a source within
or a source without the Philippines) be treated as derived from sources partly
within and partly without the Philippines. EcICSA
The portion of such income derived from sources partly within the
Philippines and partly within a foreign country which is attributable to sources
within the Philippines shall be determined according to the following rules and
cases:
PERSONAL PROPERTY PRODUCED AND SOLD: — Gross income

derived from the sale of personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a foreign country, or produced (in
whole or in part) by the taxpayer within a foreign country and sold within the
Philippines shall be treated as derived partly from sources within the Philippines
and partly from sources within a foreign country under one of the cases below. As
used herein the word "produced" includes created, fabricated, manufactured,
extracted, processed, cured, or aged.
CASE 1. Where the manufacturer or producer regularly sells a part of his

output to wholly independent distributors or other selling concerns in such a way
as to establish fairly an independent factory or production price — or shows to the
satisfaction of the Commissioner of Internal Revenue that such an independent
factory or production price has been otherwise established — unaffected by
considerations of tax liability, and the selling or distributing branch or department
of the business is located in a different country from that in which the factory is
located or the production carried on, the net income attributable to sources within
the Philippines shall be computed by an accounting which treats the products as
sold by the factory or productive department of the business to the distributing or
selling department at the independent factory price as established. In all such cases
the basis of the accounting shall be fully explained in a statement attached to the
return.
CASE 2. Where an independent factory or production price has not been

established as provided under Case 1, the net income shall first be computed by
deducting from the gross income derived from the sale of personal property
produced (in whole or in part) by the taxpayer within the Philippines and sold
within a foreign country or produced (in whole or in part) by the taxpayer within a
foreign country and sold within the Philippines, the expenses, losses, or other
deductions properly apportioned or allocated thereto and a ratable part of any
expenses, losses, or other deductions which can not definitely be allocated to some
item or class of gross income. Of the amount of net income so determined,
one-half shall be apportioned in accordance with the value of the taxpayer's
property within the Philippines and within the foreign country, the portion
attributable to sources within the Philippines being determined by multiplying such
one half by a fraction the numerator of which consists of the value of the
taxpayer's property within the Philippines, and the denominator of which consists
of the value of the taxpayer's property both within the Philippines and within the
foreign country. The remaining one-half of such net income shall be apportioned
in accordance with the gross sales of the taxpayer within the Philippines and
within the foreign country, the portion attributable to sources within the
Philippines being determined by multiplying such one-half by a fraction the
numerator of which consists of the taxpayer's gross sales for the taxable year or
period within the Philippines, and the denominator of which consists of the
taxpayer's gross sales for the taxable year, or period both within the Philippines
and within the foreign country. The "gross sales of the taxpayer within the
Philippines" means the gross sales made during the taxable year which were
principally secured, negotiated, or effected by employees, agents, offices, or
branches of the taxpayer's business resident or located in the Philippines. The term
"gross sales" as used in this paragraph refers only to the sales of personal property
produced (in whole or in part) by the taxpayer within the Philippines and sold
within a foreign country or produced (in whole or in part) by the taxpayer within a
foreign country and sold within the Philippines, and the term "property" includes
only the property held or used to produce income which is derived from such
sales. Such property should be taken at its actual value, which in the case of
property valued or appraised for purposes of inventory, depreciation, depletion, or
other purposes of taxation shall be the highest amount at which so valued or
appraised, and which in other cases shall be deemed to be its book value in the
absence of affirmative evidence showing such value to be greater or less than the
actual value. The average value during the taxable year or period shall be
employed. The average value of property as above prescribed 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 fairly
represent the average for such year or period, in which event the average shall be
determined upon a monthly or daily basis. Bills and accounts receivable shall
(unless satisfactory reason for a different treatment is shown) be assigned or
allocated to the Philippines when the debtor resides in the Philippines.
CASE 3. Applications for permission to base the return upon the

taxpayer's books of account will be considered by the Commissioner of Internal
Revenue in the case of any taxpayer who, in good faith and unaffected by
considerations of tax liability, regularly employs in his books of account a detailed
allocation of receipts and expenditures which reflects more clearly than the
processes or formulas herein prescribed, the income derived from sources within
the Philippines.
SECTION 163. Foreign steamship companies. — The returns of foreign

steamship companies whose vessels touch ports of the Philippines should include
as gross income, the total receipts of all out-going business whether freight or
passengers. With the gross income thus ascertained, the ratio existing between it
and the gross income from all parts, both within and without the Philippines of all
vessels, whether touching ports of the Philippines or not, should be determined as
the basis upon which allowable deductions may be computed, the principle being
that allowable deductions shall be computed upon a basis which recognizes that
the income arising and accruing from business done if any from this country shall
bear its share, and no more, of expense, incident to the earning or creation of such
income, in the ratio that the gross income arising in and from this country bears to
the entire gross income arising from business done both within and without this
country. In other words, the net income of a foreign steamship company doing
business in or from this country is ascertained for the purpose of the income tax,
by deducting from the gross receipts from outgoing business such a portion of the
aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts
from all ports of all vessels, including in each case incoming of a nonshipping
character but incidental, to the shipping business such as dividends from
investments, interests on deposits, etc. For example —
Given
(a) Gross receipts from outgoing freights and passengers
from P.I. ports P20,000
(b) Gross receipts from outgoing freights and passengers
from all ports other than those of P. I 200,000
(c) Interests and other nonshipping income received by P.I.
office 5,000
(d) Interests, dividends, and other nonshipping income received
by all offices other than those in P.I. 50,000
(e) Total expenses and deductions of the company as a whole,
including those incurred by P.I. office 150,000
Computation of P.I. Net Income

(f) P.I. Gross Income:
Freights and passengers P20,000
Interest and other income 5,000
———
Total 25,000
(g) P.I. expenses:
P.I. gross income
—————————— x World's expenses, or
World's gross income
20,000 plus 5,000
—————————————————— x 150,000, or
200,000 plus 20,000 plus 50,000 plus 5,000
25,000
————— x 150,000 = 13,636
275,000
(h) P.I. net income:
P.I. gross income less P.I. expenses, or
P25,000 less P13,636 = P11,364
SECTION 164. Telegraph and cable service. — A foreign corporation
carrying on the business of transmission of telegraph or cable messages between
points in the Philippines and points outside the Philippines derives income partly
from sources within and partly from sources without the Philippines.
(1) GROSS INCOME. — The gross income from sources within the
Philippines derived from such services shall be determined by adding (a) its gross
revenues derived from messages originating in the Philippines and (b) amounts
collected abroad on collect messages originating in the Philippines and deducting
from such sum amounts paid or accrued for transmission of messages beyond the
company's own circuit. Amounts received by the company in the Philippines with
respect to collect messages originating without the Philippines shall be excluded
from gross income.
(2) NET INCOME. — In computing net income from sources within the
Philippines there shall be allowed as deductions from gross income determined in
accordance with paragraph (1): (a) all expenses incurred in the Philippines (not
including any general overhead expenses), incident to the carrying on of the
business in the Philippines; (b) all direct expenses incurred abroad in the
transmission of messages originating in the Philippines (not including any general
overhead expenses or maintenance, repairs, and depreciation of cable and not
including any amount already deducted in computing gross income); (c)
depreciation of property (other than cables) located in the Philippines and used in
the trade or business therein; and (d) a proportionate part of the general overhead
expenses [not including any items incurred abroad corresponding to those
enumerated in (a), (b), and (c)], and of maintenance, repairs, and depreciation of
cables of the entire cable system of the enterprise based on the ratio which the
number of words originating in the Philippines bears to the total words transmitted
by the enterprise.
SECTION 165. Computation of income. — If a taxpayer has gross

income from sources within or without the Philippines as defined by Section 37 (a)
or (c) together with gross income derived partly from sources within and partly
from sources without the Philippines, the amounts thereof, together with the
expenses and investment applicable thereto, shall be segregated, and the net
income from sources within the Philippines shall be separately computed
therefrom. TcHCIS
SECTION 166. General rule. — The method of accounting regularly

employed by the taxpayer in keeping his books, if such method clearly reflects his
income is to be followed with respect to the time as of which items of gross
income and deductions are to be accounted for. If the taxpayer does not regularly
employ a method of accounting which clearly reflects his income, the computation
shall be made in such manner as in the opinion of the Commissioner of Internal
Revenue clearly reflects it. (See Section 137 of these regulations for computation
of net income, and Section 38 for bases of computation. For the use of inventories,
see Sections 144 to 151 of these regulations.)
SECTION 167. Methods of accounting. — It is recognized that no

uniform method of accounting can be prescribed for all taxpayers, and the law
contemplates that each taxpayer shall adopt such forms and systems of accounting
as are in his judgment best suited to his purpose. Each taxpayer is required by law
to make a return of his true income. He must, therefore, maintain such accounting
records as will enable him to do so. Any approved standard method of accounting
which reflects taxpayer's income may be adopted. Among the essentials are the
following:
(1) In all cases in which the production, purchase, or sale of merchandise

of any kind is an income producing factor, inventories of the merchandise on hand
(including 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 net income of
the year in accordance with Sections 144 to 151 of these regulations;
(2) Expenditures made during the year should be properly classified as

between capital and income; that is to say, expenditures for items of plant,
equipment, etc., which have a useful life extending substantially beyond the year
should be charged to a capital account and not to an expense account; and
(3) In any case in which the cost of capital assets is being recovered
through deductions for wear and tear, depletion, or obsolescence, any expenditure
(other than ordinary repairs) made to restore the property or prolong its useful life
should be added to the property account or charged against the appropriate reserve
and not to current expenses.
SECTION 168. Changes in accounting methods. — The true income,

computed under the law shall in all cases be entered in the return. If for any reason
the basis of reporting income subject to tax is changed, the taxpayer shall attach to
his return a separate statement setting forth for the taxable year and for the
preceding year the classes of items differently treated under the two systems,
specifying in particular all amounts duplicated or entirely omitted as the result of
such change.
A taxpayer who changes the method of accounting employed in keeping his

book shall, before computing his income upon such new method for purposes of
taxation, secure the consent of the Commissioner of Internal Revenue. For the
purposes of this action, a change in the method of accounting employed in keeping
books means any change in the accounting treatment of items of income or
deductions, such as a change from cash receipts and disbursements method to the
accrual method, or vice versa; a change involving the basis of valuation employed
in the computation of inventories (see Sections 144 to 151 of these regulations); a
change from the cash or accrual method to the long-term contract method, or vice
versa; a change in the long-term contract method from the percentage of
completion basis to the completed contract basis or vice versa (see Section 44 of
these regulations); or a change involving the adoption of, or a change in the use of,
any other specialized basis of computing net income such as the crop basis.
Application for permission to change the method of accounting employed and the
basis upon which the return is made shall be filed within 90 days after the
beginning of the taxable year to be covered by the return. The application shall be
accompanied by a statement specifying all amounts which would be duplicated or
entirely omitted as a result of the proposed change. Permission to change the
method of accounting will not be granted unless the taxpayer and the
Commissioner of Internal Revenue agree to the terms and conditions under which
the change will be effected.
SECTION 169. Accounting period. — Income tax returns, whether for

individuals or for corporations, associations, or partnerships, are required to be
made and their income computed for each calendar year ending on December 31st
of every year. However, corporations, associations, or partnerships may with the
approval of the Commissioner of Internal Revenue first secured, file their returns
and compute their income on the basis of a fiscal year which means an accounting
period of twelve months ending on the last day of any month other than December.
But in no instance shall individual taxpayers be authorized to establish a fiscal
year as basis for filing their returns and computing their income. (For authority to
file on fiscal year basis see Section 172 of these regulations.)
SECTION 170. When included in gross income. — Except as otherwise

provided in Section 39 in the case of the death of a taxpayer, gains, profits, and
income are to be included in the gross income for the taxable year in which they
are received by the taxpayer, unless they are included as of a different period in
accordance with the approved method of accounting followed by him. If a
taxpayer has died there shall also be included in computing net income for the
taxable period in which he died amounts accrued up to the date of his death if not
otherwise properly includible in respect of such period or a prior period, regardless
of the fact that the decedent may have kept his books and made his returns on the
basis of cash receipts and disbursements.
(For income not reduced to possession but considered as constructively

received and for examples of constructive receipt, see Sections 52 and 53 of these
regulations. For the treatment of income from long-term contracts, see Section 44
of these regulations.)
SECTION 171. "Paid or incurred" and "paid or accrued". — (a) The

terms "paid or incurred" and "paid or accrued" will be construed according to the
method of accounting upon the basis of which the net income is computed by the
taxpayer. The deductions and credits must be taken for the taxable year in which
"paid or accrued" or "paid or incurred", unless in order clearly to reflect the
income such deductions or credits should be taken as of a different period. If a
taxpayer desires to claim a deduction or a credit as of a period other than the
period in which it was "paid or accrued" or "paid or incurred", he shall attach to
his return a statement setting forth his request for consideration of the case by the
Commissioner of Internal Revenue together with a complete statement of the facts
upon which he relies. However, in his income tax return he shall take the
deduction or credit only for the taxable period in which it was actually "paid or
incurred", or "paid or accrued", as the case may be. Upon the audit of the return,
the Commissioner of Internal Revenue will decide whether the case is within the
exception provided by the law, and the taxpayer will be advised as to the period
for which the deduction or credit is properly allowable.
(b) The provisions of paragraph (a) of this section in general are not
applicable with respect to the taxable period during which the taxpayer dies. In
such case there shall also be allowed as deductions and credits for such taxable
period amounts accrued up to the date of his death if not otherwise allowable with
respect to such period or a prior period, regardless of the fact that the decedent was
required to keep his books and make his returns on the basis of cash receipts and
disbursements. (See also Section 76 of these regulations.)
SECTION 172. Change of accounting period. — If a corporation,

including a duly registered general co-partnership, desires to change its accounting
period from fiscal year to calendar year or from calendar year to fiscal year, or
from one fiscal year to another, it shall at any time not less than thirty days prior to
the date fixed in Section 46(b) of the Code for the filing of its return on the basis
of its original accounting period submit a written application to the Commissioner
of Internal Revenue designating the proposed date for the closing of its new
taxable year, together with a statement of the date on which the books of account
were opened and closed each year for the past three years, the date on which the
taxable year began and ended as shown on the returns filed for the past three years,
and the reasons why the change in accounting period is desired. (See also Section
46(d) of the Code.)
SECTION 173. Returns for periods of less than twelve months. — No

return can be made for a period of more than twelve months. A separate return for
a fractional part of a year is therefore required whenever there is a change, with
the approval of the Commissioner of Internal Revenue, in the basis of computing
net income from one taxable year to another taxable year. The periods to be
covered by such separate returns in the several cases are stated in Section 42(a).
The requirements with respect to the filing of a separate return and the payment of
tax for a part of a year are the same as for the filing of a return and the payment of
tax for a full taxable year closing at the same time. DAETcC
SECTION 174. Sale of personal property on installment plan. —

Dealers in personal property ordinarily sell either for cash or on the personal credit
of the purchaser or on the installment plan. Dealers who sell on the installment
plan usually adopt one of four ways of protecting themselves in case of default —
(a) By an agreement that title is to remain in the vendor until the

purchaser has completely performed his part of the transaction;
(b) By a form of contract in which title is conveyed to the purchaser

immediately, but subject to a lien for the unpaid portion of the selling price;
(c) By a present transfer of title to the purchaser, who at the same time
executes a reconveyance in the form of a chattel mortgage to the vendor; or
(d) By conveyance to a trustee pending performance of the contract and

subject to its provisions.
The general purpose and effect being the same in all of these cases, the
same rule is uniformly applicable. The general rule prescribed is that a person who
regularly sells or otherwise disposes of personal property on the installment plan,
whether or not title remains in the vendor until the property is fully paid for, may
return as income therefrom in any taxable year that proportion of the installment
payments actually received in that year which the total or gross profit (that is, sales
less cost of goods sold) realized or to be realized when the property is paid for,
bears to the total contract price. Thus the income of a dealer in personal property
on the installment plan may be ascertained by taking as income that proportion of
the total payments received in the taxable year from installment sales (such
payments being allocated to the year against the sales of which they apply) which
the total or gross profit realized or to be realized on the total installment sales
made during each year bears to the total contract price of all such sales made
during that respective year. No payments received in the taxable year shall be
excluded in computing the amount of income to be returned on the ground that
they were received under a sale the total profit from which was returned as income
during a taxable year or years prior to the change by the taxpayer to the installment
basis of returning income. Deductible items are not to be allocated to the years in
which the profits from the sales of a particular year are to be returned as income,
but must be deducted for the taxable year in which the items are "paid or incurred"
or "paid or accrued", as provided by Section 40 and 84(q) of the Code. A dealer
who desires to compute his income on the installment basis shall maintain books
of account in such a manner as to enable an accurate computation to be made on
such basis in accordance with the provisions of this section.
The income from a casual sale or other casual disposition of personal

property (other than property of a kind which should properly be included in
inventory) may be reported on the installment basis only if (1) the sale price
exceeds P1,000 and (2) the initial payments do not exceed 25 per cent of the
selling price.
If for any reason the purchaser defaults in any of his payments, and the
vendor returning income on the installment basis repossesses the property sold
whether title thereto had been retained by the vendor or transferred to the
purchaser, gain or loss for the year in which the repossession occurs is to be
computed upon any installment obligations of the purchaser which are satisfied or
discharged upon the repossession or are applied by the vendor to the purchase or
bid price of the property. Such gain or loss is to be measured by the difference
between the fair market value of the property repossessed and the basis in the
hands of the vendor of the obligations of the purchaser which are so satisfied,
discharged, or applied, with proper adjustment for any other amounts realized or
costs incurred in connection with the repossession. The basis in the hands of the
vendor of the obligations of the purchaser satisfied, discharged, or applied upon
the repossession of the property shall be the excess of the face value of such
obligations over an amount equal to the income which would be returnable were
the obligations paid in full. No deduction for a bad debt shall in any case be taken
on account of any portion of the obligations of the purchaser which are treated by
the vendor as not having been satisfied, discharged, or applied upon the
repossession, unless it is clearly shown that after the property was repossessed the
purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the
obligations with respect to which the purchaser remained liable after the
repossession. If the property repossessed is bid in by the vendor at a lawful public
auction or judicial sale, the fair market value of the property shall be presumed to
be the purchase or bid price thereof in the absence of clear and convincing proof to
the contrary. The property repossessed shall be carried on the books of the vendor
at its fair market value at the time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income

from installment sales on the straight accrual or cash receipts and disbursement
basis, such a course is permissible.
SECTION 175. Sale of real property involving deferred payments. —

Under Section 43 deferred-payment sales of real property include (a) agreements
to purchase and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has been paid,
and (b) sales in which there is an immediate transfer of title, the vendor being
protected by a mortgage or other lien as to deferred payments. Such sales either
under (a) or (b), fall into two classes when considered with respect to the terms of
sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash 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.
(2) Deferred-payment sales not on the installment plan, that is sales in

which the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is made
exceed 25 per cent of the selling price.
In the sale of mortgaged property the amount of the mortgage, whether the
property is merely taken subject to the mortgage or whether the mortgage is
assumed by the purchaser, shall be included as a part of the "selling price" but the
amount of the mortgage, to the extent that it does not exceed the basis to the
vendor of the property sold, shall not be considered as a part of the "initial
payments" or of the "total contract price", as those terms are used in Section 43 of
the Code, in Sections 174 and 176 of these regulations, and in this section. The
term "initial payments" does not include amounts received by the vendor in the
year of sale from the disposition to a third person of notes given by the vendee as
part of the purchase price which are due and payable in subsequent years.
Commissions and other selling expenses paid or incurred by the vendor are not to
be deducted or taken into account in determining the amount of the "initial
payments," the "total contract price", or "the selling price". The term "initial
payments" contemplates at least one other payment in addition to the initial
payment. If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the first year, the income may not be returned on
the installment basis. Income may not be returned on the installment basis where
no payment in cash or property, other than evidences of indebtedness of the
purchaser, is received during the first year, the purchaser having promised to make
two or more payments, in later years.
SECTION 176. Sale of real property on installment plan. — In

transactions included in class (1) in the preceding section the vendor may return as
income from such transactions in any taxable year that proportion of the
installment payments actually received in that year which the total profit realized
or to be realized when the property is paid for bears to the total contract price. DAaHET
If the purchaser defaults in any of his payments, and the vendor returning
income on the installment basis reacquires the property sold, whether title thereto
had been retained by the vendor or transferred to the purchaser, gain or loss for the
year in which the reacquisition occurs is to be computed upon any installment
obligations of the purchaser which are satisfied or discharged upon the
reacquisition or are applied by the vendor to the purchase or bid price of the
property. Such gain or loss is to be measured by the difference between the fair
market value of the property acquired (including the fair market value of any fixed
improvements placed on the property by the purchaser) and the basis in the hands
of the vendor of the obligations of the purchaser which are so satisfied, discharged,
or applied, with proper adjustment for any other amounts realized or costs incurred
in connection with the reacquisition. The basis in the hands of the vendor of the
obligations of the purchaser satisfied, discharged, or applied upon the reacquisition
of the property will be the excess of the face value of such obligations over an
amount equal to the income which would be returnable were the obligations paid
in full. No deduction for a bad debt shall in any case be taken on account of any
portion of the obligations of the purchaser which are treated by the vendor as not
having been satisfied, discharged, or applied upon the reacquisition of the
property, unless it is clearly shown that after the property was reacquired the
purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the
obligations with respect to which the purchaser remained liable after the
acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale,
the fair market value of the property shall be presumed to be the purchase or bid
price thereof in the absence of clear and convincing proof to the contrary. If the
property reacquired is subsequently sold, the basis for determining gain or loss is
the fair market value of the property at the date of reacquisition (including the fair
market value of any fixed improvements placed on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income

from installment sales on the straight accrual or cash receipts and disbursements
basis, such a course is permissible, and the sales will be treated as
deferred-payment sales not on the installment plan.
SECTION 177. Deferred-payment sale of real property not on

installment plan. — In transactions included in class (2) in Section 175 of these
regulations, the obligations of the purchaser received by the vendor are to be
considered as the equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in
any of his payments, and the vendor repossesses the property, the difference
between (1) the entire amount of the payments actually received on the contract
and retained by the vendor plus the fair-market value at the time of repossession of
fixed improvements placed on the property by the purchaser and (2) the sum of the
profits previously returned as income in connection therewith and an amount
representing what would have been a proper adjustment for exhaustion, wear and
tear, obsolescence, amortization, and depletion of the property during the period
the property was in the hands of the purchaser had the sale not been made will
constitute gain or loss, as the case may be to the vendor for the year in which the
property is repossessed, and the basis of the property in the hands of the vendor
will be the original basis at the time of the sale plus the fair market value at the
time of repossession, of fixed improvements placed on the property by the
purchaser. If the vendor has previously transferred title to the purchaser, and the
purchaser defaults in any of his payments and the vendor reacquired the property,
such reacquisition shall be regarded as a transfer by the vendor, in exchange for
the property for such of the purchaser's obligations as are applied by the vendor to
the purchase or bid price of the property. Such an exchange will be regarded as
having resulted in the realization by the vendor of gain or loss, as the case may be
for the year of reacquisition, measured by the difference between the fair market
value of the property including fixed improvements placed by the purchaser on the
property, and the amount of the obligations of the purchaser which were applied
by the vendor to the purchase or bid price of the property. The fair market value of
the property reacquired shall be presumed to be the amount for which it is bid in
by the vendor in the absence of clear and convincing proof to the contrary. If the
property reacquired is subsequently sold the basis for determining gain or loss is
the fair market value of the property at the date of reacquisition including the fair
market value of the fixed improvements placed on the property by the purchaser.
SECTION 178. Sale of real estate in lots. — Where a tract of land is

purchased with a view to dividing it into lots or parcels of ground to be sold as
such, the entire fair market value as of March 1, 1913, or the cost, if acquired
subsequently to that date, shall be equitably apportioned to the several lots or
parcels and made a matter of record on the books of the taxpayer, to the end that
any gain derived from the sale of any such lots or parcels may be returned as
income for the year in which the sale was made. This rule contemplates that there
will be a measure of gain or loss on every lot or parcel sold, and not that the
capital invested in the entire tract shall be extinguished before any taxable income
shall be returned. The sale of each lot or parcel will be treated as a separate
transaction and the gain or loss will be accounted for accordingly.
SECTION 178(a). In all cases where a taxpayer sells during the year real or
personal property on the installment basis, there should be attached to the income
tax return a statement of each sale made during the year containing the following
information:
(a) Name of buyer
(b) Address of buyer
(c) Date of sale
(d) Selling price
(e) Payments received during the year corresponding to each sale.
(This new section has been inserted in Revenue Regulations No. 2 by

Revenue Regulations No. 8-65 dated June 1, 1965. Took effect upon their
promulgation in the Official Gazette on September 27, 1965).
SECTION 179. Determination of the taxable net income of a controlled
taxpayer. — (A) DEFINITIONS. — When used in this section —
(1) The term "organization" includes any organization of any kind,

whether it be a sole proprietorship, a partnership, a trust, an estate, or a
corporation or association, irrespective of the place where organized, where
operated, or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity
of any kind, regardless of whether or where organized, whether owned
individually or otherwise, and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect,
whether legally enforceable, and however exercisable or exercised. It is the reality
of the control which is decisive, not its form or the mode of its exercise. A
presumption of control arises if income or deductions have been arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more
organizations, trades, or businesses owned or controlled directly or indirectly by
the same interests. aCHDST
(5) The terms "group" and "group of controlled taxpayers" mean the
organizations, trades, or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled
taxpayer, the net income (or, as the case may be, any item or element affecting net
income) which would have resulted to the controlled taxpayer, had it in the
conduct of its affairs (or, as the case may be, in the particular contract, transaction,
arrangement, or other act) dealt with the other member or members of the group at
arm's length. It does not mean the income, the deductions, or the item or element
of either, resulting to the controlled taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled taxpayer, or the interests controlling it,
chose to make (even though such contract, transaction, or arrangement be legally
binding upon the parties thereto).
(b) SCOPE AND PURPOSE. — The purpose of Section 44 is to place a

controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. The interests controlling a group of
controlled taxpayers are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting record truly
reflect the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done, and the taxable net incomes are
thereby understated, the statute contemplates that the Commissioner of Internal
Revenue shall intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions, or of any
item or element affecting net income, between/or among the controlled taxpayers
constituting the group, shall determine the true net income of each controlled
taxpayer dealing at arm's length with another uncontrolled taxpayer. The standard
to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no
right to a controlled taxpayer to apply its provisions at will, nor does it grant any
right to compel the Commissioner of Internal Revenue to apply such provisions.
(c) APPLICATION. — Transactions between the controlled taxpayer and

another will be subjected to special scrutiny to ascertain whether the common
control is being used to reduce, avoid, or escape taxes. In determining the true net
income of a controlled taxpayer, the Commissioner of Internal Revenue is not
restricted to the case of improper accounting, to the case of a fraudulent, colorable,
or sham transaction, or to the case of a device designed to reduce or avoid tax by
shifting or distorting income or deductions. The authority to determine true net
income extends to any case in which either by inadvertence or design the taxable
net income in whole or in part, of a controlled taxpayer, is other than it would have
been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer
dealing at arm's length with another uncontrolled taxpayer.
SECTION 180. Individual returns. — Returns, in duplicate, are required

of: (a) Every citizen or resident alien having a gross income of P1,800 or more for
the taxable year; (b) every non-resident alien having income from sources within
the Philippines irrespective of amount; and (c) guardians, trustees, executors,
administrators, receivers, conservators, and all others acting in any fiduciary
capacity, when, for the taxable year, the gross income of the person, trust, or estate
for whom or which they act reaches P1,800. (See Section 214 of these
regulations.)
For each calendar year, every person whether married or single, having a
gross income from all sources of P1,800 or over, including dividends, excepting
stock dividends, must make a return of income although the tax has been paid at
source and the return shows no tax liability. Whether or not an individual is the
head of a family or has dependents is immaterial in determining his liability to
render a return. The husband shall include in his return the income derived not
only from his services, labor, or industry or the income derived from the conjugal
partnership but also the income of the wife derived from her industry or labor as
well as that derived from her separate, data, or paraphernal property. Where,
however, the filing of one consolidated return is impracticable, married persons
may file separate returns but the incomes declared in such returns will be
consolidated and the tax computed on such consolidated income.
The law requires that the income of unmarried minors derived from
property received from a living parent shall be included in the return of the parent,
except (1) when the gift tax imposed under Chapter II of Title III of the Code has
been paid on such property, or (2) where the transfer of such property is exempt
from the gift tax.
A signature affixed to a return is presumed to be genuine.
SECTION 181. When and where to file individual returns. — The return
must be filed with the Commissioner of Internal Revenue, provincial revenue
agent, or treasurer of the province, city or municipality in which the taxpayer has
his legal residence or principal place of business, on or before April 15th of the
year following that for which the return is filed.
When the last due date for filing return falls on Sunday or a legal holiday,
the last due date will be held to be the day following such Sunday or legal holiday,
or if placed on the mails, it should be posted in ample time to reach the
Commissioner of Internal Revenue, provincial revenue agent or treasurer of the
province, city, or municipality in which the taxpayer has his legal residence or
principal place of business, under ordinary handling of mail, on or before the date
on which the return is required to be filed. When question is raised as to whether
or not the return was posted in ample time to reach the proper official, the
envelope in which the return was transmitted and the return should be submitted to
the Commissioner of Internal Revenue with such comment and recommendation as
the receiving officer may consider proper to make. aHSCcE
SECTION 182. Persons under disability. — If the taxpayer is unable to

make his own return, on account of minority, illness, absence or non-residence, the
return may be made by his duly authorized agent or representative or by the
guardian or other person charged with the care of his person or property, the
principal and his representative or guardian assuming the responsibility of making
the return and incurring penalties provided for erroneous, false, or fraudulent
returns.
SECTION 183. Form of return. — Individual returns shall be prepared

on B.I.R. Form No. 17.01. The forms may be had from the office of the
Commissioner of Internal Revenue in Manila, or in the office of the provincial
treasurers or their deputies.
A taxpayer will not be excused from making a return by the fact that no
return form has been furnished him. Taxpayers not supplied with the proper forms
should make application therefor to the Commissioner of Internal Revenue or to
the provincial treasurers, or their deputies in ample time to have their returns
prepared, verified, and filed with the proper official on or before the due date.
Each taxpayer should carefully prepare his return so as to fully and clearly set
forth the data therein called for. Imperfect or incorrect returns will not be accepted
as meeting the requirements of the statute. (There are now BIR Provincial Revenue
Officers.)
SECTION 184. Corporation returns. — Corporations are required to

make returns of income in duplicate, regardless of the amount of their net income.
A corporation claiming exemption from tax and from the filing of returns
must establish its right to exemption in accordance with the procedure set forth in
Section 24 of these regulations, otherwise it will be amenable to the penalties for
failure to file returns.
In the case of ordinary corporations, partnerships, and joint accounts

(cuentas en participacion), the return shall be on the form prescribed for
corporations (B.I.R Form No. 17.02), and the returns of insurance companies, on
the prescribed form (B.I.R. Form No. 17.03). A corporation having an existence
during any portion of a taxable year is required to make a return. A corporation
which has received a charter, but has never perfected its organization, and which
has transacted no business and had no income from any source, may upon
presentation of the facts to the Commissioner of Internal Revenue be relieved from
the necessity of making a return so long as it remains in an unorganized condition.
In the absence of a proper showing to the Commissioner of Internal Revenue such
corporation must file the necessary return.
A corporation desiring to change its accounting period from calendar year

to fiscal year must comply with the procedure set forth in Section 172 of these
regulations relative to the change in accounting period of corporations.
SECTION 185. Returns of insurance companies. — Insurance

companies transacting business in the Philippines or deriving income from sources
therein are required to file returns of income. The return shall be made on the
prescribed form (B.I.R. Form No. 17.03).
SECTION 186. Returns of foreign corporations. — Every foreign

corporation having income from sources within the Philippines must make a return
of income on the form prescribed for corporation (B.I.R. Form No. 17.02). If such
a corporation has no office or place of business in this country, but has a resident
agent therein, the latter shall make the return. Although the foreign corporation is
not engaged in business in this country and has no office, branch, or agency in the
Philippines, it is required to make a return if it has received income from sources
SECTION 187. Time and place for filing corporate returns. — Returns
of corporations, associations, or partnerships must be filed on or before the
fifteenth day of April in each year or on or before the 15th day of the fourth month
following the close of a duly designated fiscal year. The return, if placed in the
mails, should be posted in ample time to reach the Commissioner of Internal
Revenue, provincial, revenue agent, or treasurer of the province, city or
municipality in which is located the principal office of the corporation where its
books of account and other data are kept, on or before the last due date for the
filing of the return. When the last due date falls on Sunday or a legal holiday, the
returns may be filed without penalty on the next succeeding business day.
(Conforms with Am. by R.A. 2343.)
SECTION 188. Extension of time for filing returns. — The

Commissioner of Internal Revenue may, in meritorious cases, grant a reasonable
extension of time for filing returns of income. Requests for such extension of time
must be submitted before the last day of the period for filing returns. Absence or
sickness is considered as reasonable cause, whereas, inability to close the books or
to gather information required due to various circumstances will be subject to
careful investigations before the request for extension is favorably considered. DEScaT
SECTION 189. Returns by receiver. — Receivers, trustees in

dissolution, trustees in bankruptcy, and assignees, operating the property or
business of corporations, partnerships, or associations must make returns of
income for such corporations, partnerships or associations covering each year or
part of the year during which they are in control. Notwithstanding that the powers
and functions of a corporation are suspended and that the property and business
are for the time being in the custody of the receiver, trustee, or assignee, subject to
the order of the court, such receiver, trustee, or assignee stands in the place of the
corporate officers and is required to perform all the duties and assume all the
liabilities which would devolve upon the officers of the corporation were they in
control. A receiver in charge of only part of the property of a corporation,
however, as a receiver in mortgage foreclosure proceedings involving merely a
small portion of its property, need not make a return of income.
SECTION 190. Returns of duly registered general co-partnerships. —

Duly registered general copartnerships are required to render, in duplicate, a return
of their earnings, profits and income, setting forth the items of the gross income
and the deductions allowable, and the names and addresses of the individuals who
would be entitled to the net earnings, profits, and income, if distributed. (See
sections 22 and 23 of these regulations.)
SECTION 191. Verification of returns. — All income tax returns must

be verified by the oath or affirmation of the person rendering them. Oath may be
taken before any officer authorized to administer oaths or if desired, before the
Commissioner of Internal Revenue or any internal-revenue officer especially
deputized by him or authorized by law to administer oaths, free of charge.
SECTION 192. Discovery of understatement of income. — If the amount

of income declared in a return has been found to be understated, the Commissioner
of Internal Revenue or any internal-revenue officer shall notify the taxpayer of
such fact, and the taxpayer may, if he so desires, under a sworn statement, present
testimony to the contrary and disprove the findings made.
SECTION 193. Assessment of tax. — All income tax returns filed with
the provincial revenue agents or with the treasurers of provinces, cities, or
municipalities must be stamped with the date of their receipt and immediately
forwarded to the Commissioner of Internal Revenue. All assessments of income
tax shall be made by the Commissioner of Internal Revenue and all taxpayers shall
be notified of the amount for which they are respectively liable on or before the
first day of May of each successive year. In the case of a corporation filing returns
on the basis of a fiscal year, it shall be notified of the amount for which it is liable
on or before the first day of the fifth month following the close of its fiscal year.
(See changes made by R.A. 2343, effv. June 20, 1959, introducing here self
assessment.)
SECTION 194. Payment of tax. — The total amount of tax assessed shall
be paid on or before the fifteenth day of April following the close of the calendar
year by the person subject to tax, and in the case of a corporation, by the president,
vice-president, or other responsible officer thereof. In the case of corporations
filing returns on the basis of a fiscal year, the total amount of tax shall be paid on
or before the fifteenth day of the fourth month following the close of the fiscal
year. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
Where the tax assessed against the taxpayer is in excess of P500, the
taxpayer may elect to pay the tax in two equal installments. The first installment
shall be paid on or before the date prescribed in section 51 (a) and the second
installment on or before the fifteenth day of July following the close of the
calendar year or on or before the fifteenth day of the seventh month following the
close of the fiscal year, as the case may be. Upon failure to pay any installment on
the date fixed for its payment, the whole amount of the tax unpaid becomes due
and payable, together with the delinquency penalties. (Conforms with amendments
by R.A. 2343, effv. June 20, 1959.)
SECTION 195. Commissioner's authority to make returns. — In cases

wherein taxpayers have neglected or refused to make return, and in cases wherein
returns are found, upon examination or otherwise, to be erroneous, false, or
fraudulent, the Commissioner of Internal Revenue shall upon discovery thereof,
make a return upon the best evidence obtainable, and the tax so discovered to be
due, together with the penalties prescribed, shall be assessed and the amount
thereof shall be paid immediately upon notice and demand. aIcHSC
SECTION 196. Surcharge and interest in case of delinquency. — Upon

failure to pay any tax or installment thereof, of any deficiency tax, when the same
is due, a penalty of 5 per cent of the amount of tax unpaid, and interest at the rate
of 1 per cent per month upon the said tax from the time the same became due until
paid, shall be added to the amount of such tax. (See Sec. 51(b) to (e) as amended
by R.A. 2343, effv. June 20, 1959.)
SECTION 197. Receipts for income tax payments. — It shall be the duty
of the collecting officer to acknowledge the receipt of the payment of income tax
due from each taxpayer by issuing the requisite Revenue Official Receipt (B.I.R.
Form No. 25.24).
SECTION 198. Withholding tax at source. — Withholding is required

(a) of a tax of 20 per centum in the case of fixed or determinable annual or
periodical income, including dividends or net gains or net profits received from
corporations, partnerships or associations, payable to non-resident alien
individuals not engaged in trade or business and not having an office or place of
business in the Philippines; and (b) of a tax of 20 per centum in the case of interest
upon bonds, obligations or securities issued by domestic or resident foreign
corporations, containing a so-called tax-free covenant clause, payable either to
citizens or aliens, residents or non-residents, where the owner of such interest
income does not file with the withholding agent a signed notice on B.I.R. Form
No. 17.13 claiming the benefit of personal exemption. Subject to the exception just
mentioned, withholding taxes takes place in all cases of payments of interest upon
tax-free covenant bonds or other securities regardless of the place where such
bonds or securities are issued or marketed and the interest thereupon paid. Bonds
issued under a trust deed containing a tax-free covenant are treated as if they
contain such a covenant.
SECTION 199. Fixed or determinable annual or periodical income. —

Only fixed or determinable annual or periodical income is subject to withholding.
The statute specifically includes in such income, interests, dividends, rents,
salaries, wages, premiums, annuities, compensations, remunerations, and
emoluments, but other kinds of income may be included, as for instance, royalties.
Income is fixed when it is to be paid in amounts definitely pre-determined.

On the other hand, it is determinable whenever there is a basis of calculation by
which the amount to be paid may be ascertained.
The income need not be paid annually if it is paid periodically; that is to

say, from time to time, whether or not at regular intervals. That the length of time
during which the payments are to be made may be increased or diminished in
accordance with some one's will or with the happening of an event does not make
the payments any the less determinable or periodical. A salesman working by the
month for a commission on sales which is paid or credited monthly receives
determinable periodical income. The income derived from the sale in the
Philippines of property whether real or personal, is not fixed or determinable
annual or periodical income.
Dividends from every domestic corporation are subject to the withholding

provisions of the law. Dividends from a foreign corporation are subject to
withholding if (1) such foreign corporation is engaged in trade or business within
the Philippines or has an office or place of business therein, and (2) more than 85
per cent of its gross income for the three-year period ending with the close of its
taxable year preceding the declaration of such dividends (or for such part of such
period as the corporation has been in existence) was derived from sources within
the Philippines. In case the owners of any securities are not known to the
withholding agent, the latter should deduct and withhold a tax of 20 per cent on
the interest on such securities.
SECTION 200. Payments to non-resident alien individuals. — The law

requires withholding of the tax on income payable to a non-resident alien
individual not engaged in trade or business in the Philippines and not having an
office or place of business therein. A non-resident alien individual is presumed not
to be engaged in trade or business in the Philippines and not to have an office or
place of business therein, unless the withholding agent has definite knowledge that
such resident is engaged in trade or business in the Philippines and of the name
and address of his resident agent in this country, or unless the withholding agent
definitely knows that such non-resident has an office or place of business in the
Philippines and of the location of such office or place of business. An individual
whose address is without the Philippines is presumed to be a non-resident alien,
unless the withholding agent has definite knowledge that such person is either a
citizen or a resident of the Philippines. An individual whose address is within the
Philippines, may be presumed to be a resident of the Philippines, unless the
withholding agent has reason to believe that such individual, not being a citizen of
the Philippines, has not established residence in this country.
In case of doubt, a withholding agent may always protect himself by

withholding the tax due, and promptly causing a query to be addressed to the
Commissioner of Internal Revenue for the determination of whether or not the
income paid to an individual is not subject to withholding. In case the
Commissioner of Internal Revenue decides that the income paid to an individual is
not subject to withholding the withholding agent may thereupon remit the amount
of tax withheld.
SECTION 201. Exception from withholding. — Withholding of a tax on

interests upon bonds or other obligations containing a tax-free covenant clause
shall not be required in the case of a citizen or resident alien individual if he files
with the withholding agent when presenting interest coupons for payment, not later
than February 1 following the taxable year, an ownership and exemption
certificate on the requisite form (B.I.R. Form No. 17.13) claiming a personal
exemption or credits for dependents. The withholding agent shall forward such
certificate to the Commissioner of Internal Revenue with a letter of transmittal.
The income of domestic and resident foreign corporations is free from
withholding.
SECTION 202. Ownership certificates for interest coupons. — The

owners, except domestic and resident foreign corporations, of bonds or other
obligations containing a tax-free covenants clause, issued by a domestic or resident
foreign corporation, when presenting interest coupons for payment, shall file a
certificate of ownership on B.I.R. Form No. 17.13, for each issue of bonds,
showing the name and address of the debtor corporation, the name and address of
the owner of the bonds, the nature of the obligations, the amount of interest and its
due date, and the amount of any tax withheld. In the case of corporate bonds or
similar obligations not containing a tax-free covenant clause, no ownership
certificates are required. But ownership certificates are required in the case of such
bonds if the owner is unknown to the withholding agent. Ownership certificates
need not be filed in the case of interest payments on bond or similar obligations of
the United States or of the Government of the Philippines or of any political
subdivision thereof.
Where in connection with the sale of its property payment of the bonds or
other obligations of a corporation is assumed by the assignee, such assignee,
whether an individual, partnership, corporation, province, city or municipality,
must deduct and withhold such taxes as would have been required to be withheld
by the assignor had not such sales and transfer been made.
SECTION 203. Return and payment of tax withheld. — (a) Every

withholding agent shall make an annual return in duplicate, on B.I.R. Form No.
17.43 of the tax withheld from interest on corporate bonds or other obligations on
or before the 15th day of April of each year for the preceding calendar year. (b)
Every person required to deduct and withhold any tax from income other than such
bond interest shall make an annual return thereon, in duplicate, on B.I.R. Form No.
17.43 on or before April 15 of each year for each non-resident alien individual not
engaged in trade or business within the Philippines and not having any office or
place of business therein, to whom income other than bond interest was paid
during the previous taxable year. The entire amount of the income from which the
tax was withheld shall be included in gross income without deduction for such
payment of the tax. (Conforms with amendments by R.A. 2343, effv. June 20,
1959.)
The tax due on withholding income tax returns are payable at the same time
and in the same manner as taxes due on individual returns.
SECTION 204. Income of recipient. — Income upon which the tax is

required to be withheld at source shall nevertheless be included in the return of the
recipient of such income. However, the amount of tax withheld shall be credited
against the amount of income tax due on such return, and the amount, if any, by
which the tax withheld at source exceeds the tax due on the return shall be
refunded in accordance with the provisions of Section 309 of the Code. TaCSAD
SECTION 205. Withholding of tax on income of nonresident foreign

corporations, firms, etc. — All persons, corporations, partnerships, and
associations, having the control, receipt, custody, disposal, or payment of interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical
gains, profits, and income received or obtained from sources within the Philippines
by a non-resident alien firm, copartnership, corporation, association, trust
company, trustee, and insurance company, not engaged in business or trade within
the Philippines and not having an office or place of business therein, are required
to withhold a tax of 30 per cent thereon, file the requisite withholding return on the
prescribed form (B.I.R. Form No. 17.43), and pay the tax withheld, in accordance
with the provisions of sections 198 to 204 of these regulations. The withholding
provisions of the law are likewise applicable to the income derived from interest
upon bonds, mortgages, or deeds of trust, or other interest-bearing obligations of a
domestic or resident foreign corporation, firm or association, whether or not the
bonds and other such obligations, or securities contain the so-called tax-free
covenant clause, and regardless of the place where such bonds, obligations, or
securities are issued, negotiated, or marketed and the interest thereon paid, in case
where such interest-income is received or obtained by, or paid to, a non-resident
alien firm, corporation, association, trust company, or trustee, not engaged in
business or trade within the Philippines and not having an office or place of
business therein. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
A foreign corporation is presumed not to be engaged in trade or business

within the Philippines and not to have office or place of business therein, unless
the withholding agent has definite knowledge that such foreign corporation is in
fact engaged in trade or business in the Philippines and of the name and address of
its resident agent, or unless the withholding agent has definite knowledge that such
foreign corporation has a branch office or business in this country and of the
location of such branch office or place of business.
SECTION 206. Income tax not otherwise collectible from taxpayer

chargeable to his representative. — It is the intent and purpose of the law to
charge and collect income tax imposed under Title II of the Code on all gains,
profits, and income of a taxable class, and the tax is required to be paid by the
owner of such gains, profits. and income or by the proper representative having the
receipt, custody, control, or disposal of the same. Thus, where a non-resident has
charged a resident, under a power of attorney, to sell in his behalf property, real or
personal in the Philippines, the proper tax due may be collected from the owner of
the gains or profits or from the representative who had the receipt, custody, control
or disposal of such gains, profits, or income, as the personal liability of such
representative.
(Sections 56 to 60 of the Code)
SECTION 207. Estates and trusts. — "Fiduciary" is a term which

applies to all persons or corporations that occupy positions of peculiar confidence
towards others, such as trustees, executors, or administrators; and a fiduciary, for
income tax purposes, is any person or corporation that holds in trust an estate of
another person or persons. In order that a fiduciary relationship may exist, it is
necessary that a legal trust be created.
In general, the income of a trust for the taxable year which is to be

distributed to the beneficiaries must be returned by and will be taxed to the
respective beneficiaries, but the income of a trust which is to be accumulated or
held for future distribution, whether consisting of ordinary income or gain from the
sale of assets included in the corpus of the trust, must be returned by and will be
taxed to the trustee. Three exceptions to this general rule are found in the law: (1)
in the case of revocable trust (Section 59); (2) in the case of a trust the income of
which, in whole or in part, may be held or distributed for the benefit of the grantor
(Section 60); and (3) in the case of a trust administered in a foreign country
[Section 57(c)]. In the first case, the income from such part of the trust estate title
to which may be revested in the grantor should be included in the grantor's return.
In the second case, part of the income of the trust, which may be held or
distributed for the benefit of the grantor, should be included in the grantor's return.
In the third case, the trustee is not entitled to the deductions mentioned in
subsections (a) and (b) of Section 57 and the net income of the trust undiminished
by any amounts distributed, paid or credited to beneficiaries will be taxed to the
trustees; however, the income included in the return of the trustees is not to be
included in computing the income of the beneficiaries.
SECTION 208. Consolidation of incomes of two or more trusts. —

Section 56(b)(2) expressly requires the consolidation of the income of two or more
trusts where the creator of the trust in each instance is the same person and the
beneficiary in each instance is the same. The tax due on the consolidated income
will be collected from the trustees in proportion to the net income of the respective
trusts. (See Section 215 of these regulations.)
SECTION 209. Estates and trusts taxed to fiduciary. — In the case of a

decedent's estate the settlement of which is the object of testamentary or intestate
proceedings, the fiduciary, executor, or administrator is required to file an annual
return for the estate up to the final settlement thereof. In the same manner, the
fiduciary is required to file a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained
persons or persons with contingent interests or otherwise. In both cases the income
of the estate or trust is taxed to the fiduciary. Where under the terms of a will or
deed, the trustee, may in his discretion, distribute the income or accumulate it, the
income is taxed to the trustee, irrespective of the exercise of his discretion. The
imposition of the tax is not affected by the fact that an ultimate beneficiary may be
a person exempt from tax.
SECTION 210. Estate and trust taxed to beneficiaries. — In the case of

(a) a trust the income of which is to be distributed annually or regularly; (b) an
estate of a decedent the settlement of which is not the object of judicial
testamentary or intestate proceedings; and (c) properties held under a
co-ownership or tenancy in common, the income is taxable directly to the
beneficiary or beneficiaries. Each beneficiary must include in his return his
distributive share of the net income of the trust, estate, or co-ownership. In the
case of trusts which are in whole or in part subject to revocation by the grantor, or
which are for the benefit of the grantor, the income of the trust is to be included in
computing the net income of the grantor. aITECD
SECTION 211. Decedent's estate administration. — The "period of

administration or settlement of the estate" is the period required by the executor or
administrator to perform the ordinary duties pertaining to administration, in
particular, the collection of assets and the payment of debts and legacies. Estates
during the period of administration have but one beneficiary and that beneficiary is
the estate.
No taxable income is realized from the passage of property to the executor

or administrator on the death of the decedent, even though it may have appreciated
in value since the decedent acquired it. In the event of delivery of property in kind
to a legatee or distributee, no income is realized. Where, however, prior to the
settlement of the estate, the executor or administrator sells property of a decedent's
estate for more than the appraised value placed upon it at the death of the
decedent, the excess is income, taxable to the estate. Where property is sold after
the settlement of the estate by the devisee, legatee or heir at a price greater than the
appraised value placed upon it at the time he inherited the property from the
decedent, he is taxable individually on any profit derived. An allowance paid a
widow or heir out of the corpus of the estate is not deductible from gross income.
SECTION 212. Liability for tax on estate or trusts. — Liability for

payment of the tax attaches to the person of an executor or administrator up to and
after his discharge, where prior to distribution and discharge he had notice of his
tax obligations or failed to exercise due diligence in determining whether or not
such obligations existed. Liability for the tax also follows the estate itself, and
when the estate has been distributed, the heirs, devisees, legatees, and distributors
may be required to discharge the amount of the tax due and unpaid, to the extent of
and in proportion to any share received. The same consideration apply to other
trusts. Where the tax has been paid on the net income of an estate or trust by the
fiduciary, the net income on which the tax is paid is free from tax when distributed
to the beneficiaries.
SECTION 213. Exemption allowed to estate or trusts. — An estate or a

trust is allowed a personal exemption of P1,800. Each beneficiary is entitled to but
one personal exemption, no matter from how many trusts he may receive income.
SECTION 214. Fiduciary returns. — Fiduciaries are required to make

returns of income on B.I.R. Form No. 17.01, in duplicate, when the gross income
of the person, trust, or estate for whom or which they act amounts to P1,800 or
more and will be subject to all the provisions of law which apply to individuals. A
fiduciary making return shall make oath that he has sufficient knowledge of the
affairs of the person trust, or estate for whom or which he acts to enable him to
make such return, and that the same is, to the best of his knowledge and belief,
true and correct. A return by one of two or more joint fiduciaries in the form
prescribed filed in the municipality or city in which such fiduciary resides shall be
sufficient compliance with the requirement for fiduciary returns.
A fiduciary acting as the guardian of a minor or other incapacitated person

must make a return for such minor or incapacitated person and pay the tax, unless
such minor or incapacitated person himself makes a return or cause it to be made.
The parent is held to be the natural guardian of a minor child.
SECTION 215. Returns in case of two or more trusts. — Where, in the

case of more than one trust, the creator of the trust in each instance is the same
person and the trustee in each instance is the same but the beneficiaries are
different, the trustee should make a separate return for each of the trusts in his
hands. When a trustee holds trust created by different persons for the benefit of the
same beneficiary, he should also make a return for each trust separately. But where
a person creates two or more trusts in favor of the same beneficiary [Section 56(b)
(2)] appointing two or more trustees, the latter should each make a separate return
for each trust but in such case the Commissioner of Internal Revenue will
consolidate the net incomes of the different trusts and compute the tax on such
consolidated income, allowing only one absolute exemption of 1,800.
SECTION 216. Return by receiver. — A receiver who stands in the

place of an individual or corporation must render a return of income and pay the
tax for his trust, but a receiver of only part of the property of an individual or
corporation need not. If the receiver acts for an individual the return shall be on
B.I.R. Form No. 17.01. When acting for a corporation a receiver is not treated as a
fiduciary, and in such case the return shall be made, as if by the corporation itself,
on B.I.R. Form No. 17.02.
SECTION 217. Fiduciaries indemnified against claims for taxes paid. —

Fiduciaries are indemnified against the claims or demands of every beneficiary for
all payments of taxes which they shall be required to make and they shall have
credit for such payments in any accounting which they make as such fiduciaries.
SECTION 218. Tax on personal holding companies. — Section 63
imposes for such taxable year beginning after December 31, 1938 (in addition to
the tax imposed by Section 24 of the Code), a tax upon corporations classified as
personal holding companies. Corporations so classified are exempt from the
additional tax on corporation improperly accumulating surplus imposed by Section
25, but are not exempt from the other taxes imposed by Title II of the Code.
Unlike the tax imposed by Section 25, the tax imposed by Section 63 applies to all
personal holding companies defined as such in Section 64, regardless of whether
or not they were formed or availed of to accumulate earnings or profits for the
purpose of avoiding the tax upon shareholders. The tax imposed by Section 63 is
45 per cent of the amount of the undistributed net income.
A foreign corporation, whether resident or non-resident, which is classified

as a personal holding company under Section 64 (not including a foreign personal
holding company as defined in Section 67) is subject to the tax imposed by Section
63 with respect to its income from sources within the Philippines. The term
"personal holding company" as used in Chapter VIII of Title II of the Code does
not include a foreign corporation if (1) its gross income from sources within the
Philippines for the period specified in Section 37(a) (2) (B) is less than 50 per cent
of its total gross income from all sources and (2) all of its stock outstanding during
the last half of the taxable year is owned by nonresident alien individuals, whether
directly or indirectly through other foreign corporations. ESDHCa
SECTION 219. Definition of personal holding company. — A personal

holding company is any corporation (other than a corporation specified in section
64(b) which for the taxable year meets (a) the gross income requirement specified
in Section 220 of these regulations, and (b) the stock ownership requirement
specified in Section 221 of these regulations. Both requirements must be satisfied
and both must be met with respect to each taxable year.
SECTION 220. Gross income requirement. — To meet the gross income

requirement, it is necessary that either of the following percentages of gross
income of the corporation for the taxable year be personal holding company
income as defined in Section 65:
(a) Eighty per cent or more; or
(b) Seventy per cent or more if the corporation has been classified as a
personal holding company for any taxable year beginning after December 31,
1938, unless —
(1) A taxable year has intervened since the last taxable year for which it
was so classified, during no part of the last half of which the stock ownership
requirement specified in Section 64(a) (2) exists; or
(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its personal holding company
income was less than 70 per cent of its gross income.
In determining whether the personal holding company income is equal to

the required percentage of the total gross income, the determination must not be
made upon the basis of gross receipts, since gross income is not synonymous with
gross receipts. For a further discussion of what constitutes "gross income", see
Section 29 of the Code and the regulations prescribed under that section.
SECTION 221. Stock ownership requirements. — To meet the stock

ownership requirement, it is necessary that at some time during the last half of the
taxable year more than 50 per cent it value of the outstanding stock of the
corporation be owned, directly or indirectly, by or for not more than five
individuals: For such purpose, the ownership of the stock must be determined as
provided in Section 66.
In the event of any change in the stock outstanding during the last half of
the taxable year, whether in the number of shares or classes of stock, or whether in
the ownership thereof, the conditions existing immediately prior .and subsequent
to each change must be taken into consideration.
In determining whether the statutory conditions with respect to stock

ownership are present at any time during the last half of the taxable year, the
phrase "in value" shall, in the light of all the circumstances, be deemed the value
of the corporate stock outstanding at such time (not including treasury stock). This
value may be determined upon the basis of the company's net worth, earning and
dividend paying capacity, appreciation of assets, together with such other factors
as have a bearing upon the value of the stock. If the value of the stock is greatly at
variance with that reflected by the corporate books the evidence of such value
should be filed with the return. In any case where there are two or more classes of
stock outstanding, the total value of the stock should be allocated among the
different classes according to the relative value of each class therein.
The rules stated in the last two preceding paragraphs are equally applicable
in determining the stock ownership requirement specified in Section 65(e); relating
to personal service contracts and Section 65(f), relating to the use of corporation
property by a shareholder. The stock ownership requirement specified in these
sections relates, however, to the stock outstanding at anytime during the entire
taxable year and not merely during the last half thereof.
SECTION 222. Personal holding company income. — The term

"personal holding company income" means the portion of the gross income which
consists of the following:
(1) DIVIDENDS. — The term "dividends" includes dividends as defined

in Section 83 (a), and amounts required to be included in gross income under
Section 69 (b) of this Code. It does not include stock dividends (to the extent that
they do not constitute income to the shareholders with the meaning of Section
83(b) of the Code) and liquidating dividends.
(2) INTEREST (other than interest constituting rent). — The term

"interest" means any amount, includible in gross income, received for the use of
money loaned except that it does not include interest constituting rent [see
subparagraph (1)].
(3) ROYALTIES (other than mineral, oil, or gas royalties). — The term
"royalties" include amounts received for the privilege of using patents, copyrights,
secret processes and formulas, good will, trade marks, trade brands, franchises,
and other like property. It does not include rents, or overriding royalties received
by an operating company. As used in this paragraph the term "overriding royalties"
means amounts received from the sublease by the operating company which
originally leased and developed the natural resources property in respect of which
such overriding royalties are paid.
(4) ANNUITIES. — The term "annuities" includes annuities only to the

extent includible in the computation of gross income. [See Section 29(b) (2)].
(5) GAINS FROM THE SALE OR EXCHANGE OF STOCK OR

SECURITIES. — The term "gains from the sale or exchange of stock or securities"
as used in Section 65(b) applies to all gains (including gains from liquidation
dividends and other distributions from capital) from the sale or exchange of stock
or securities includible in gross income. The term "stock or securities" as used in
Section 65(b) includes shares or certificates of stock, or interest in any corporation
(including any joint stock company, insurance, company association, or other
organization classified as a corporation under Title II) certificates of interest or
participation in mineral royalty, or leave, collateral trust certificates, voting trust
certificates, stock rights or warrants, bonds, debentures, certificates of
indebtedness, notes, car trusts certificates, bills of exchange, obligations issued by
or on behalf of a Government, State, Territory, or political subdivision thereof. In
the case of "regular dealers in stock or securities" the term does not include gains
derived from the sale or exchange of stock or securities made in the normal course
of business. The term "regular dealer in stock or securities" means corporations
with an established place of business regularly engaged in the purchases of stock
or securities and their resale to customers, but such corporations are not dealers
with respect to stock or securities held for speculation or investment.
(6) GAINS FROM FUTURES TRANSACTIONS IN COMMODITIES.

— Gains from futures transactions in commodities include gains from futures
transactions in any commodity on or subject to the rules of a board of trade or
commodity exchange, but do not include gains from cash transactions or gains by a
producer, processor, merchant, or handler of the commodity, which arise out of
bonafide hedging transactions reasonably necessary to the conduct of its business
in the manner in which such business is customarily and usually conducted by
others. In general, personal holding company income includes gains on futures
contracts which are speculative. Futures contracts representing true hedges against
price fluctuations in spot goods are not speculative transactions, though not
concurrent with spot transactions. Futures contracts which are not hedges against
spot transactions are speculative unless they are hedges against concurrent futures
or forward sales or purchases.
(7) INCOME FROM ESTATES AND TRUSTS. — The income from

estates and trusts which is to be included in personal holding company income
consists of the income from estates and trusts which is required to be included in
the gross income of the corporation under Section 29 in relation to Section 56 of
the Code, together with the gains derived by the corporation from the sale or other
disposition of any interest in an estate or trust.
(8) AMOUNTS RECEIVED UNDER PERSONAL SERVICE

CONTRACTS. — Amounts includible in personal holding company income as
amount received under personal service contracts consist of amounts received
pursuant to a contract under which the corporation is to furnish personal services,
and amounts received from a sale or other disposition of such a contract, if —
(a) Some person other than the corporation has the right to designate (by
name or by description) the individual who is to perform the services or if the
individual who is to perform the services is designated (by name or by description)
in the contract; and
(b) At some time during the taxable year 25 per cent or more in value of
the outstanding stock of the corporation is owned, directly or indirectly, by or for
the individual who has performed, is to perform, or may be designated (by name or
by description), as the one to perform such services. For this purpose the stock
ownership must be determined as provided in Section 66 of the Code.
The application of Section 65(e) may be illustrated by the following

examples:
Example (1): A, whose profession is that of an actor, owns all of the

outstanding capital stock of the M Corporation. The Corporation entered into a
contract with A under which A was to perform personal services for the person or
persons whom the M Corporation might designate, in consideration of which A
was to receive P10,000 a year from the M Corporation. The M Corporation
entered into a contract with the O Corporation in which A was designated to
perform personal services for the O Corporation in consideration of which the O
Corporation was to pay the M Corporation P500,000 a year. The P500,000
received by the M Corporation from the O Corporation constitutes a personal
holding company income.
Example (2): The N Corporation, the entire outstanding capital stock of

which is owned by four individuals, is engaged in engineering. The N Corporation
entered into a contract with the O Corporation to perform engineering services for
the O Corporation, in consideration of which the O Corporation was to pay the N
Corporation P50,000. The individual who was to perform the services was not
designated (by name or by description) in the contract and no one but the N
Corporation had the right to designate (by name or by description) such individual.
The P50,000 received by the N Corporation from the O Corporation does not
constitute personal holding company income. HTaIAC
(9) COMPENSATION FOR USE OF PROPERTY. — The compensation

for the use of, or the right to use, the property of the corporation which is to be
included in personal holding company income consists of amounts received as
compensation (however designated and from whomsoever received) for the use of,
or the right to use, property of the corporation in any case in which, at any time
during the taxable year 25 per cent or more in value of the outstanding stock of the
corporation is owned, directly or indirectly, by or for an individual entitled to the
use of the property, whether such right is obtained directly from the corporation or
by means of a sublease or other arrangement. The property may consist of a yacht,
a city residence, a country house, or any other kind of property.
(10) RENTS (including interest constituting rent). — The rents which are
to be included in personal holding company income consist of compensation,
however, designated including charter fees, etc., for the use of, or the right to use,
real property, or any other kind of property and the interest on debts bowed to the
corporation, to the extent such debts represent the price for which real property
held primarily for sale to customers in the ordinary course of its trade or business
was sold or exchanged by the corporation, but do not include amounts constituting
personal holding company income under Section 65(f) and paragraph (9) of this
section. However, rents do not constitute personal holding company income if
constituting 50 per cent or more of the gross income of the corporation.
(II) MINERAL, OIL, OR GAS ROYALTIES. — The income from

mineral, oil, or gas royalties is to be included as personal holding company
income, unless (A) the aggregate amount of such royalties constitutes 50 percent or
more of the gross income of the corporation for the taxable year and (B) the
aggregate amount of deductions allowable for expenses under Section 30 (a) of the
Code (other than compensation for personal services rendered by the shareholders
of the corporation) equals 15 per cent or more of the gross income of the
corporation for the taxable year.
The term "mineral, oil, or gas royalties" means all royalties, except
"overriding royalties", received from any interest in mineral, oil, or gas royalties.
As used in this paragraph the term "overriding royalties" means amounts received
from the sublease by the operating company which originally leased and developed
the natural resources property in respect of which such overriding royalties are bid.
SECTION 223. Stock ownership. — For the purpose of determining

whether —
(a) A corporation is a personal holding company in so far as such

determination is based on the stock ownership requirement specified in Section
64(a) (2), or
(b) Amounts received under a personal service contract or from the sale of
such a contract constitute personal holding company income in so far as such
determination is based on the stock ownership requirement specified in Section 65
(e), or
(c) Compensation for the use of property constitutes personal holding

company income in so far as such determination is based on the stock owner-ship
requirement specified in Section 65(f), stock owned by an individual includes
stock constructively owned by him as provided in Section 66. All forms and
classes of stock, however denominated, which represent the interests of
shareholders, members, or beneficiaries in the corporation shall be taken into
consideration.
SECTION 224. Stock not owned by individual. — In determining the

ownership of stock for any of the purposes set forth in the preceding section, stock
owned, directly or indirectly, by or for a corporation, partnership, estate, or trust
shall be considered as being owned proportionately by its shareholders, partners,
or beneficiaries. For example, if A and B, two individuals, are the exclusive and
equal beneficiaries of a trust or estate, and if such trust or estate owns the entire
capital stock of the M Corporation, and if the M Corporation in turn owns the
entire capital stock of the N Corporation, then the stock of both the M Corporation
and the N Corporation shall be considered as being owned equally by A and B as
the individuals owning the beneficial interest therein.
SECTION 225. Family and partnership ownership. — In determining

the ownership of stock for any of the purposes set forth in Section 223 of these
regulations, an individual shall be considered as owning the stock owned, directly
or indirectly, by or for his family or by or for his partner. For the purposes of such
determination the family of an individual includes only his brothers and sisters
(whether by the whole or half blood), spouse, ancestors, and lineal descendants.
The application of the family and partnership rule in determining the

ownership of stock for the purpose set forth in (a) of Section 223 of these
regulations is illustrated by the following example:
Example: The M Corporation at some time during the last half of the
taxable year had 1,800 shares of outstanding stock, 450 of which were held by
various individuals having no relationship to one another and none of whom were
partners, and the remaining 1,350 were held by 51 shareholders as follows:
Relationship Shares Shares Shares Shares Shares
An individual A 100 B 20 C 20 D 20 E 20
His father AF 10 BF 10 CF 10 DF 10 EF 10
His wife AW 10 BW 40 CW 40 DW 40 EW 40
His brother AB 10 BB 10 CB 10 DB 10 EB 10
His son AS 10 BS 40 CS 40 DS 40 ES 40
His daughter by
former marriage
(son's half sister) ASHS 10 BSHS 40 CSHS 40 DSHS 40 ESHS 40
His brother's wife ABW 10 BBW 10 CBW 10 DBW 160 EBW 10
His wife's father AWF 10 BWF 10 CWF 110 DWF 10 EWF 10
His wife's brother AWB 10 BWB 10 CWB 10 DWB 10 EWB 10
His wife's brother's
wife AWBW 10 BWBW 10 CWBW 10 DWBW 10 EWBW 110
Individual's partner AP 10 - - - - - - - -
By applying the statutory rule provided in Section 66(a) five individuals

own more than 50 per cent of the outstanding stock as follows:
A (including AF, AW, AB, AS, ASHS, AP) 160
B (including BF, BW, BB, BS, BSHS) 160
CW (including C, CS, CWF, CWB) 220
DB (including D, DF, DBW) 200
EWB (including EW, EWF, EWBW) 170
——
Total, or more than 30 per cent 910
Individual A represents the obvious case where the head of the family owns
the bulk of the family stock and naturally is the head of the group. A's partner
owns to shares of the stock. Individual B represents the case where he is still head
of the group because of the ownership of stock by his immediate family.
Individuals C and D represent cases where the individuals fall in groups headed in
C's case by his wife and in D's case by his brother because of the preponderance of
holdings on the part of relatives by marriage. Individual E represents the case
where the preponderant holding of others eliminate that individual from the group.
The method of applying the family and partnership rule as illustrated in the
foregoing example also applies in determining the ownership of stock for the
purposes stated in (b) and (c) of Section 223 of these regulations.
SECTION 226. Options. — In determining the ownership of stock for

any of the purposes set forth in Section 223 of these regulations if any person has
an option to acquire stock, such stock may be considered as owned by person. The
term "option" as used in this section includes an option to acquire such an option
and each one of a series of such options, so that the person who has an option on
an option to acquire stock may be considered as the owner of the stock.
SECTION 227.
Definition of foreign personal holding company. — A
foreign personal holding company is any foreign corporation (other than a
corporation exempt from taxation under Section 27 of the Code) which for the
taxable year meets (a) the gross income requirements specified in Section 67 (a)
(1), and (b) the stock ownership requirement specified in Section 67(a) (2). Both
requirements must be satisfied and both must be met with respect to each taxable
year.
A foreign corporation which comes within the classification of a foreign

personal holding company for any taxable year beginning after December 31,
1938, is not subject to taxation for such taxable year under Section 25 of the Code
but may be subject to taxation under that section for other taxable years. The fact
that a foreign corporation is a foreign personal holding company does not relieve
the corporation from liability for the tax imposed generally under Section 24 upon
foreign corporations, since such tax applies regardless of the classification of the
foreign corporation as a-foreign personal holding company.
SECTION 228. Gross income requirement. — To meet the gross income

requirement, it is necessary that either of the following percentages of gross
income of the corporation for the taxable year be foreign personal holding
company income in accordance with Section 68 in relation to Section 65 of the
Code:
(a) Sixty per cent of more; or
(b) Fifty per cent or more if the foreign corporation has been classified as
a foreign personal holding company for the taxable year ending after December
31, 1938, unless —
(1) A taxable year has intervened since the last taxable year for which it
was so classified, during no part of which the stock ownership requirement
specified in Section 67 (a) (z) exist; or
(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its foreign personal holding
company income was less than 50 per cent of its gross income.
In determining whether the foreign personal holding company income is

equal to the required percentage of the total gauss income, the determination must
not be made on the basis of gross receipts since gross income is not synonymous
with gross receipts. For a further discussion on what constitutes "gross income,"
see Section 29(n) and the regulations prescribed under that section.
SECTION 229. Stock ownership requirement. — To meet the stock

ownership requirement it is necessary that at some time in the taxable year more
than 50 per cent in value of the outstanding stock of the foreign corporation be
owned, directly or indirectly, by or for not more than five individuals who are
citizens or residents of the Philippines.
In the event of any change in the stock outstanding during the taxable year,
whether in the number of shares or classes of stock, or whether in the ownership
thereof, the conditions existing immediately prior and subsequent to each change
must be taken into consideration, since a corporation comes within the
classification if the statutory conditions with respect to stock ownership are
present at any time during the taxable year.
In determining whether the statutory conditions with respect to stock

ownership are present at any time during the taxable year, the phrase "in value"
shall, in the light of all the circumstances, be deemed the value of the corporate
stock outstanding at such time (not including treasury stock). This value may be
determined upon the basis of the company's net worth, earning and dividend
paying capacity, appreciation of assets, together with such other factors as have a
bearing upon the value of the stock. If the value of the stock which is used is
greatly at variance with that reflected by the corporate books, the evidence of such
value should be filed with the return. In any case where there are two or more
classes of stock outstanding, the total value of all the stock should be allocated
among the different classes according to the relative value of each lass therein. DIcSHE
SECTION 230. Gross income and stock ownership requirements of

foreign personal holding companies. — For the purpose of determining whether a
foreign corporation satisfies the gross income requirement prescribed under
Section 67(a)(1), the same items of income classified under Section 65 as personal
holding company income shall, if received by a foreign corporation, be considered
as foreign personal holding company income. In determining whether a foreign
corporation satisfies the stock ownership requirement prescribed under Section
67(a) (2) the rules established in Section 66 shall apply.
SECTION 231. Income of foreign personal holding companies taxed to

Philippine shareholders. — (a) General rule. — Section 69 does not impose a tax
on foreign personal holding companies. The undistributed net income (from all
sources), of such companies, however, must be included in the manner and to the
extent set forth in this section, in the gross income of their "Philippine
shareholders", that is, the shareholders who are individual citizens or residents of
the Philippines.
(b) AMOUNT INCLUDIBLE IN GROSS INCOME. — Each Philippine

shareholder, who was a shareholder on the day in the taxable year of the, foreign
personal holding company which was the last day on which the stockholders
satisfying the stock ownership requirement of Section 67(a)(2), hereinafter referred
to as the "Philippines group", existed with respect to the company, shall include in
his gross income a dividend, for the taxable year in which or with which the
taxable year of the company ends, the amount he would have received as a
dividend if on such last day there has been distributed by the company and
received by the shareholders an amount which bears the same ratio to the net
income of the company for the taxable year as the portion of such taxable year up
to and including such last day bears to the entire taxable year.
The undistributed net income of the foreign personal holding company is

includible only in the gross income of the Philippine shareholders who were
shareholders in the company on the last day of its taxable year on which the
Philippine groups existed with respect to the company. Such Philippine
shareholders, accordingly, are determined by the stock holdings as of such
specified time. This applies to every Philippine shareholder who was a shareholder
in the company at the specified time regardless of whether the Philippine
shareholder is included with the Philippine group.
The Philippine shareholders must include in their gross income their

distributive shares of that proportion of the undistributed net income for the
taxable-year of the company which is equal in ratio to that which the portion of the
taxable year up to and including the last day on which the Philippine group with
respect to the company existed bears to the entire taxable year. Thus if the last day
in the taxable year on which the required Philippine group existed was also the end
of the taxable year, the portion of the taxable year up to and including such last
day would be equal to 100 per cent and in such case, the Philippine shareholders
would be required to return their distributive shares in the entire undistributed net
income. But if the last day on which the required Philippine group existed was
September 30, and the taxable year was a calendar year, the portion of the taxable
year up to and including such last day would be equal to nine-twelfths of the
undistributed net income.
The amount which each Philippine shareholder must return is that amount
which he would have received as a dividend if the above specified portion of the
undistributed net income had in fact been distributed by the foreign personal
holding company as a dividend on the last day of its taxable year on which the
required Philippine group existed. Such amount is determined, therefore, by the
interest of the Philippine shareholder in the foreign personal holding company, that
is, by the number of shares of stock owned by the Philippine shareholder and the
relative rights of his class of stock, if there are several classes of stock outstanding.
Thus, if a foreign personal holding company has both common and preferred stock
outstanding and the preferred shareholders are entitled to a specific dividend
before any distribution may be made to the common shareholders, then the
assumed distribution of the stated portion of the undistributed net income must
first be treated as a payment of the specified dividend on the preferred stock before
any part may be allocated as a dividend on the common stock.
The assumed distribution of the required portion of the undistributed net

income must be returned as dividend income by the Philippine shareholders for
their respective taxable years in which or with which the taxable year of the
foreign personal holding company ends. In applying this rule, the date as of which
the Philippine group last existed with respect to the company is immaterial.
SECTION 232. Information returns by officers and directors of certain

foreign corporations. — (a) REQUIREMENT FOR FILING RETURNS. — (1)
General. — Under Section 70 (a), on the 15th day of each month which begins
after July 1, 1939, each individual who on such 15th day is an officer or, a director
of a foreign corporation which, with respect to its taxable year preceding the
taxable year in which such month occurs, was a foreign personal holding
company, is required to file with the Commissioner of Internal Revenue a monthly
information return as provided in Section 70(a). The Commissioner of Internal
Revenue may authorize the filing of returns covering periods longer than a month.
(2) RETURNS JOINTLY MADE. — If two or more officers or directors

of a foreign corporation are required to file information returns for any period
under Section 70(a), any two or more of such officers or directors may, in lieu of
filing separate returns for such period, jointly execute and file one return.
(b) FORM OF RETURN. — The return under Section 70(x). of the Code
and this section shall be made on the form prescribed by the Commissioner of
Internal Revenue. Each officer or director should carefully prepare his return so as
to set forth fully and clearly the information called for therein and by the
applicable regulations. Returns which have not been so prepared will not be
considered as meeting the requirements of the law.
(c) CONTENTS OF RETURN. — The return shall, in accordance with

provisions of this section and the instructions on the form, set forth with respect to
the preceding period the following information:
(1) Name and address of corporation;
(2) Kind of business in which the corporation is engaged;
(3) Date of incorporation;
(4) The country under the laws of which the corporation is incorporated;
(5) Number of shares and par value of common stock of the corporation
outstanding as of the beginning and end of the period;
(6) Number of shares and par value of preferred stock of the corporation
outstanding as of the beginning and end of the period, the rate of
dividend on such stock and whether such dividend is cumulative or
noncumulative;
(7) A description of the convertible securities issued by the corporation,

including a statement of the face value of, and rate of interest on,
such securities:
(8) The name and address of each shareholder, the class and number of
shares held by each, together with any changes in stock holdings
during such period;
(9) The name and address of each holder of securities convertible into
stock of the corporation, the class, number and face value of the
securities held by each, together with any changes in the holding of
such securities during the period;
(10) A certified copy of any resolution or plan, and any amendments

thereof or supplements thereto, for or in respect of the dissolution of
the corporation of the liquidation of the whole or any part of its
capital stock; and
(11) Such other information as may be required by the return form.
If a person is required to file a return under Section 70(a) of the

Code and this section with respect to more than one foreign
corporation, a separate return must be filed with respect to each
foreign corporation.
(d) VERIFICATION OF RETURNS. — All returns required by Section

70(a) and this section shall be verified under oath or affirmation of the parties
rendering the same.
SECTION 233. Annual information returns by officers and directors of

certain foreign corporations. — (a) Requirement for filing returns.
(1) GENERAL. — Under Section 70(b), on the sixtieth day after the close
of the taxable year of a foreign personal holding company each individual who on
such sixtieth day is an officer or director of the corporation shall file with the
Commissioner of Internal Revenue an annual information return as provided in
that section of the Code and this section.
(2) RETURNS JOINTLY MADE. — If two or more officers or directors

of a foreign corporation are required to file annual information returns under
Section 70(b) for any taxable year of the corporation any two or more of such
officers or directors may in lieu of filing separate annual returns for such taxable
year, jointly execute and file one annual return.
(b) FORM OF RETURN. — The return under Section 70(b) and this
section shall be made on the form prescribed by the Commissioner of Internal
Revenue. Each officer or director should carefully prepare his returns so as to set
forth fully and clearly the information called for therein and by the applicable
regulations. Returns which have not been so prepared will not he considered as
meeting the requirements of the law.

the provisions of this section and the instructions on the form, set forth with
respect to the taxable year of the foreign personal holding company the following
information:
(1) The gross income, deductions and credits, net income, and
undistributed net income of the foreign personal holding company
for such taxable year, in complete detail;
(2) The same information with respect to such taxable year which is
required by Section 70(a) and paragraph (c) of the preceding section,
except that if all the required returns with respect to such year have
been filed under Section 70(a) and the preceding section, no
information under Section 70(b) (2) and this paragraph need be set
forth in such annual return; and
(3) Such other information as may be required by the return form.

70(b) and this section shall be verified under oath or affirmation of the parties
rendering the same.
SECTION 234. Information returns by shareholders of certain foreign

corporations. — (a) REQUIREMENT FOR FILING RETURNS.
(1) General. — On the 15th day of each month which begins after July 1,
1939 each Philippine shareholder, by or for whom 50 per cent or more in value of
the outstanding stock of a foreign corporation is owned, directly or indirectly
[including, in the case of an individual, stock owned by members of his family as
defined in Section 66(b)], if such foreign corporation with respect to its taxable
year preceding the taxable year in which such month occurs was a foreign personal
holding company, shall file with the Commissioner of Internal Revenue an
information, return as provided in Section 71(a). The Commissioner of Internal
Revenue may authorize the filing of returns covering period longer than a month.
(2) Duplicate returns. — If a shareholder in a foreign corporation files, as

an officer or director in such corporation, the returns required by Section 70(b),
such returns shall be considered as returns filed under Section 71(a).
(b) FORM OF RETURN. — The return under Section 71(a) shall be made
on the form prescribed by the Commissioner of Internal Revenue. Each
shareholder should carefully prepare his return so as to set forth fully and clearly
the information called for therein and by the applicable regulations. Returns which
have not been so prepared will not be considered as meeting the requirements of
the law.

respect to the preceding period the same information as required, to be shown on
that form by Section 70(a) and paragraph (c) of Section 232 of these regulations.
If a person is required to file a return under Section 71(a) of the Code and
this section with respect to more than one foreign corporation, a separate return
must he filed with respect to each foreign corporation.

71(a) of the Code and this section shall be verified under oath or affirmation of the
parties rendering the same.
SECTION 235. Annual information returns by shareholders of certain

foreign corporations. — (a) REQUIREMENT FOR FILING RETURNS.
(1) General. — Under Section 71(b) of the Code, on the sixtieth day after
the close of the taxable year of a foreign personal holding company, each
Philippine shareholder, by or for whom on such sixtieth day 50 per cent or more in
value of the outstanding stock of the company is owned, directly or indirectly
[including the case of an individual stock owned by members of his family as
defined in Section 66(b)], shall file with the Commissioner of Internal Revenue an
information returns as provided in that section and this section.
(2) Duplicate returns. — If a shareholder in a foreign corporation files as

an officer or director in such corporation, the return required by Section 70(b),
such returns shall be considered as returns filed under Section 71(b).
(b) FORM OF RETURN. — The return under Section 71(b) shall be

made on the form prescribed by the Commissioner of Internal Revenue. Each
shareholder should carefully prepare his return so as to set forth fully and clearly
the information called for therein and by the applicable regulations. Returns which
have not been so prepared will not be considered as meeting the requirements of
the law.

respect to the taxable year of the foreign personal holding company the same
information which is required under Section 71(a), paragraph (c) of Section 232 of
these regulations and paragraph (c) of the preceding section, except that if all the
required returns with respect to such year have been filed under Section 71(a), no
return under Section 71(b) is required.
If a person is required to file an annual return under Section 71(b) with

respect to more than one foreign personal holding company, a separate return must
be filed with respect to each foreign personal holding company.

71(b) and this section shall be verified under oath or affirmation of the parties
rendering the same.
SECTION 236. Ad valorem penalty for failure to file return. — In case

of a failure to make and file a return or list within the time prescribed by law, not
due to willful neglect, where such return or list is voluntarily filed by the taxpayer
without notice from the Commissioner of Internal Revenue or other officer and it
is shown that the failure to file it in due time was due to a reasonable cause, no
surcharge will be added to the amount of tax due on the return. In such cases, in
order to avoid the imposition of the surcharge, the taxpayer must make a statement
showing all the facts alleged as a reasonable cause for failure to file the return on
time in the form of an affidavit which should be attached to the return. If the
Commissioner of Internal Revenue is satisfied that the delinquency was due to a
reasonable cause, no surcharge will be added to the tax due on the return. Whether
or not reasonable cause exists will depend upon the circumstances of each case. As
a general rule, if the taxpayer exercised ordinary business care and prudence and
was nevertheless unable to file the return within the prescribed time, the delay will
be considered as being due to a reasonable cause.
In case of a failure to make and file a return or list within the time
prescribed by law, not due to willful neglect, where the taxpayer voluntarily files
the return without notice from the Commissioner of Internal Revenue or other
officer and attaches to such return the affidavit mentioned in the preceding
paragraph but where the Commissioner of Internal Revenue is not satisfied as to
the reasonableness of the cause of the delinquency, a surcharge of 25 per cent will
be added to the amount of tax due on the return.
In case the failure to make and file a return or list within the time prescribed
by law is due to willful neglect a surcharge of 50 per cent will be added to the
amount of tax due on the return. There is willful neglect in the case of a taxpayer
who, being liable to file a return, knowingly delays the filing of such return.
Where the filing of the return has been delayed for a considerable length of time,
the delinquency will be presumed to be due to willful neglect. DHIcET
The amount of surcharge so added to the tax due on the return shall be
collected at the same time and in the same manner and as part of the tax unless the
tax has been paid before the discovery of the cause giving rise to the imposition of
the surcharge, in which case the amount so added shall be collected in the same
manner as the tax.
SECTION 237. Ad valorem penalty for false or fraudulent return. — In

case a false or fraudulent return or list is made, the Commissioner of Internal
Revenue shall add to the tax ascertained to be due on the true net income of the
taxpayer a surcharged of 50 per cent of the amount of such tax. If payment has
been made on the basis of such false or fraudulent return before the discovery of
the falsity or fraud, the basis of the surcharge of 50 per cent will be the amount of
the tax due on the true net income less the amount so paid.
SECTION 238. Penalty for failure to file return or to pay tax. — Any
person liable to pay the tax, to make a return or to supply information required
under Title II of the Code, who refuses or neglects to pay such tax, to make such
return or to supply such information at the time or times specified in each case
shall be punished by a fine of not more than P2,000 or by imprisonment for not
more than six months, or both. In case of a corporation failing to file its, return or
pay the tax, the penalty prescribed under the first paragraph of Section 73 will be
imposed upon the president, vice-resident, or other responsible officer required to
file the return of the corporation or pay the tax due from the same, in accordance
with the provisions of Section 46(a) and 51(b) of the Code. In the case of a duly
registered general copartnership, failing to file the return required under Section 49
of the Code, the penalty prescribed under the first paragraph of Section 73 will be
imposed upon the managing partner or other responsible officer of such
partnership.
SECTION 239. Penalty imposed upon person causing a false or

fraudulent corporate return to be filed. — If a false or fraudulent return is filed for
a corporation or duly registered general copartnership, the individual or any officer
thereof causing such return to be filed shall be punished by a fine not exceeding
P4,000 or by imprisonment for not more than one year, or both.
SECTION 240. Penalty on corporation refusing or neglecting to make

return. — A corporation or duly registered general copartnership, refusing or
neglecting to make a return required under Title II of the Code, or, rendering a
false or fraudulent return, will be liable to a fine of not exceeding P20,000. The
fine imposed under Section 74 will be paid by the corporation or duly registered
general copartnership as an entity, and is in addition to the penalty which may be
imposed under Section 73 of the Code upon the president, vice-president, or other
responsible officer of a corporation or duly registered general copartnership.
SECTION 241. Return of information as to payments of dividends. —

Every domestic resident foreign corporation is hereby required to render a return,
in duplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of its
payments of profits or dividends to stock holders for the taxable year or period
covered by the return, stating the name and address of each stockholder, the
number and class of shares owned by him, the date and amount of such dividend
paid him, and when the surplus out of which it was paid was accumulated. Such
return should be verified by the oath or affirmation of the person rendering the
same. aHcACT
SECTION 242. Application for and issuance of license for collecting

foreign items. — Every individual or organization undertaking, for profit or
otherwise, the collection of dividends or interest on foreign securities (not payable
in the Philippines) by means of coupons, checks, or bills of exchange shall, upon
application, obtain a license therefor from the Commissioner of Internal Revenue.
The application shall show the name, address, occupation, and status (as to
citizenship or nationality and residence) of the applicant.
SECTION 243. Return of information as to payments of P1,800 or more.

— All persons, corporations, partnerships, and associations, making payment to
another person of fixed or determinable income of P1,800 or more in a taxable
year must render a return thereof to the Commissioner of Internal Revenue within
the time fixed for the filing of the annual returns of said person, corporations,
partnerships, and associations. The name and address of the recipient of the
income should be stated, if possible. Although to make necessary a return of
information the income must be fixed or determinable, it need not be annual or
periodical.
The names of all employees to whom payments of P1,800 or over a year are
made, whether such total sum is made up of wages, salaries, commissions, or
compensation in any other form, must be reported. Compensations in kind, such as
living quarters, meals, and lodging, are taxable income to the recipient and, as
such, should be reported if the sum total of the same and the other compensation in
cash received shall amount to P1,500 or more during the year.
In the case of payments of annual or periodical income to nonresident alien
individual or to foreign corporations or firm not engaging in trade or business
within the Philippines and not having any office or place of business therein, the
return by withholding agents shall constitute and be treated as return of
information.
SECTION 243. Return of information as to payments of P1,800 or more.

— All persons, corporations, partnerships and associations making payments to
another of fixed or determinable income of P1,800 or more in a taxable .year must
render a return thereof in duplicate on the form prescribed therefor (BIR Form No.
17.01-B). These forms should be attached to and filed together with the annual
income tax returns of said persons, corporations, partnerships and associations as
payers, within the time fixed by law for the filing of income tax returns. The
payments referred to herein do not include the following:
(1) Dividend payments mentioned under Section 75 of the National

Internal Revenue Code.
(2) Salaries, wages, bonuses, and other compensations in kind, such as

living quarters, meals, and lodging which are subject to withholding
tax and reported in W-2 forms as provided for under Republic Act
590.
(3) Payments subject to withholding tax at source enumerated under

Section 53 of the National Internal Revenue Code.
Examples of income covered by these regulations and to be declared in BIR

Form 17.01-B are interests, rents, commissions, royalties, advertisements,
professional fees, and the like, arising generally from payments between payers
and recipients who have no employer-employee relationship.
(Revenue Regulations No. 9-65 amending and superseding section 243

appearing on page 723. As of October 20, 1965, these Regulations, dated June 30,
1965, have not yet been published in the Official Gazette).
SECTION 244. Return of corporation contemplating dissolution or

retiring from business. — All corporations, partnership, joint accounts and
associations, contemplating dissolution or retiring from business without formal
dissolution shall, within 30 days after the approval of such resolution authorizing
their dissolution, and within the same period after their retirement from business,
file their income tax returns covering the profit earned or business done by them
from the beginning of the year up to the date of such dissolution or retirement and
pay the corresponding income tax due thereon upon demand by the Commissioner
of Internal Revenue to addition to the income tax return required to be filed they
shall also submit within the same period the following:
(a) Copy of the resolution authorizing such dissolution;
(b) Balance sheet at the date of dissolution or retirement and a profit and
loss statement covering the period from the beginning of the taxable
year to the date of dissolution or retirement;
(c) In the case of a corporation, the names end addresses of the

shareholders and the number and par value of the shares held by
each; and in the case of a partnership, joint-account or association,
the name of the partners or members and the capital contributed by
each;
(d) The value and a description of, the assets received in liquidation by
each shareholder;
(e) The name and address of each individual or corporation, other than
shareholders, if any, receiving assets at the time of dissolution
together with a description and the value of the assets received by
such individuals or corporations; and the consideration, if any, paid
by each of them for the assets received.
SECTION 245. Return of information by brokers. — When required by

the Commissioner of Internal Revenue, each person doing business as a broker
shall render a return or statement showing the names and addresses of customers to
whom or for whom payments were made or from whom business was transacted
during the calendar year or other specified period, and giving all other particulars
which may be needed by the Commissioner of Internal Revenue.
SECTION 246. Information returns as to formation, etc., of foreign

corporation. — (a) IN GENERAL. — Any attorney, accountant, fiduciary, bank,
trust company, financial institution, or other person, who, after July 5, 1939, aids,
assists, counsels, or advises in, or with respect to, the formation, organization, or
reorganization of any foreign corporation (including a foreign association or
partnership) shall file with the Commissioner of Internal Revenue, within thirty
days after giving such aid, assistance, counsel or advise, an information return; as
provided in Section 80 and this section. The return must be filed in every such case
(1) regardless of the nature of the counsel or advice given, whether for or against
the formation, organization, or reorganization of the foreign corporation, or the
nature of the aid or assistance rendered and (2) regardless of the action taken upon
the advice or counsel, that is, whether the foreign corporation is actually formed,
organized, or reorganized.
If, in a particular case, the aid, assistance, counsel or advice given by any
person extends over a period of more than one day and not for more than thirty
days, such persons, to avoid the multiple filing of returns, may file a single return
for the entire period. In such case, the return shall be filed within thirty days from
the first day of such period: If, in a particular case, the aid, assistance, counsel, or
advice given by any person extends over a period of more than thirty days, such
person may file a return at the end of each thirty days included within such period
and at the end of the fractional part of a thirty day period, if any, extending beyond
the last full thirty days. In each such case, the return must disclose all the required
information which was not reported on a prior return.
(b) SPECIAL PROVISIONS. — (1) Employers. — In the case of aid,

assistance, counsel, or advice in, or with respect to, the formation, organization, or
reorganization of a foreign corporation given by a person in whole or in part
through the medium of subordinates or employees (including in the case of a
corporation the officers thereof), the return of the employer must set forth to the
full extent all information prescribed by these regulations, including that which, as
an incident to such employment, is within the possession or knowledge or under
the control of such subordinates or employees.
(2) EMPLOYEES. — The obligation of a subordinate or employee

(including in the case of a corporation the officers thereof) to file a return with
respect to any aid, assistance, counsel, or advice in, or with respect to, the
formation, organization, or reorganization of a foreign corporation, given as an
incident to his employment, will be satisfied if a complete and adequate return as
prescribed by these regulations is duly filed by the employer setting forth all of the
information within the possession or knowledge or under the control of such
subordinate or employee.
Clerks, stenographers, and other subordinates or employees, rendering aid

or assistance solely of a clerical or mechanical character in, or with respect to, the
formation, organization or reorganization of a foreign corporation are not required
to file returns by reason of such services.
(3) RETURNS JOINTLY MADE. — If two or more persons aid, assist,

counsel, or advise in, or with respect to, the formation, organization, or
reorganization of a particular foreign corporation, any two or more of such persons
may, in lieu of filing several returns jointly execute and file one return.
(c) PENALTIES. — For criminal penalties for failure to file the return
required by Section 80, see Section 73 of the Code.
(d) CONTENTS OF RETURNS. — The return shall set forth the

following information to the full extent such information is within the knowledge
or possession or under the control of the person required to file the return.
(1) The name and address of the person (or persons) to whom and the
person (or persons) for whom or on whose behalf the aid, assistance,
counsel, or advice was given;
(2) A complete statement of the aid, assistance, counsel, or advice given;
(3) Name and address of the foreign corporation and the country under
the laws of which it was formed, organized, or reorganized;
(4) The months and year when the foreign corporation was formed,
organized, or reorganized;
(5) A statement of how the formation, organization, or reorganization of

the foreign corporation was effected;
(6) A complete statement of the reasons for, and the purposes sought to
be accomplished, by, the formation, organization, or reorganization
of the foreign corporation;
(7) A statement showing the classes and kinds of assets transferred to the
foreign corporation in connection with formation, organization, or
reorganization, including a detailed list of any stock or securities
included in such assets, and a statement showing the names and
addresses of the persons who were the owners of such assets
immediately prior to the transfer;
(8) The names and addresses of the shareholders of the foreign

corporation at the time of the completion of its formation,
organization, or reorganization, showing the classes of stock and
number of shares held by each;
(9) The name and address of the person (or persons) having custody of
the books of account and records of the foreign corporation;
(10) Such other information as may be required by the return form; and
(11) Where any of the information required to be furnished is withheld
because its character is claimed to be privileged as a communication
between attorney and client within the meaning of Section 80, the
return must so state and must contain a complete statement of the
nature and the circumstances of the communication on which a
decision as to the propriety of the claim of privilege may be reached.
If a person aids, assists, counsels, or advises in or with respect to, the

formation, organization, or reorganization of more than one foreign corporation, a
separate return must be filed with respect to each foreign corporation.
(e) VERIFICATION OF RETURN. — All returns required by Section 80

and this section shall be verified under oath or affirmation.
SECTION 247. Disposition of income tax returns. — All income tax

returns filed with the Commissioner of Internal Revenue constitute public records
which shall be open to inspection under rules and regulations prescribed by the
Secretary of Finance with the approval of the President of the Philippines. The
circumstances under which income tax returns may be inspected by interested
parties are dealt with under separate regulations.
SECTION 248. Publication of list of persons filing returns and paying

taxes. — The second paragraph of Section 81 expressly authorizes the
Commissioner of Internal Revenue, with the approval of the Secretary of Finance,
to cause to be prepared and published in any newspaper or made available to
public inspection through other means, lists containing the names and addresses of
persons who have filed income tax returns, or lists of those who paid income taxes,
or both such kinds of lists.
SECTION 249. Recovery of tax. — A suit or proceeding may be

maintained for the recovery of any internal-revenue tax alleged to have been
erroneously or illegally assessed and collected, in accordance with Section 306 of
the Code. However, where the Commissioner of Internal Revenue believes that a
return is false or fraudulent or contains any understatement or undervaluation and
proceeds to assess and collect the tax due, no portion of the tax so collected shall
be recovered by any suit unless it is proved that the return was not in fact false or
fraudulent and did not contain any understatement or undervaluation, except with
respect to return is made in good faith regarding annual depreciation of oil or gas
wells and mines.
SECTION 250. Dividends. — Dividends, for the purpose of the law,

comprise any distribution whether in cash or other property, in the ordinary course
of business, even though extraordinary in amount, made by a domestic or resident
foreign corporation, joint-stock company, partnership, joint account (cuentas en
participacion), association, or insurance company to the shareholders or members
out of its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar

obligations is not taxable when received by a corporation, upon amalgamation with
the other funds of the corporation, such income loses its identity and when
distributed to shareholders, is taxable to the same extent as other dividend.
A taxable distribution made by a corporation to individual stockholders or

members shall be included is the gross income of the distributees when the cash of
other property is unqualifiedly made subject to their demand. Dividends, in cash or
other property received by an individual, are subject to tax in his hands in the same
manner another income.
Dividends, whether in cash or other property, received by a domestic or

resident foreign corporation from a domestic corporation are taxable only to the
extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends
received by a domestic corporation from a foreign corporation, whether resident or
nonresident, are taxable to the extent that they constitute income from sources
within the Philippines, as provided in Section 37 (a) (2) (b) of the Code. Dividends
paid by the domestic corporation to a nonresident foreign corporation are taxable
in full. (For definition of the different classes of corporations, see Section 84 of the
Code). AIHDcC
SECTION 251. Dividends paid in property. — Dividends paid in

securities or other property (other than its own stock), in which the earnings of a
corporation have been invested, are income to the recipients to the amount of the
full market value of such property when receivable by individual stockholders.
When receivable by corporations, the amount of such dividends includible for
purposes of the tax on corporations are specified in Section 24 of the Code. (See
also Section 250 of these regulations). A dividend paid in stock of another
corporation is not a stock dividend, even though the stock distributed was acquired
through the transfer by the corporation declaring the dividends of property to the
corporation the stock of which is distributed as a dividend. Where a corporation
declares a dividend payable in a stock of another corporation, setting aside the
stock to be so distributed and notifying the stockholders of its action, the income
arising to the recipients of such stock is its market value at the time the dividend
becomes payable. Scrip dividends are subject to tax in the year in which the
warrants are issued.
SECTION 252. Stock dividends. — A stock dividend which represents

the transfer of surplus to capital account is not subject to income tax. However a
dividend in stock may constitute taxable income to the recipients thereof
notwithstanding the fact that the officers or directors of the corporation (as defined
in Section 84) choose to call such distribution as a stock dividend. The distinction
between a stock dividend which does not, and one which does, constitute income
taxable to the shareholder is the distinction between a stock dividend which works
no change in the corporate entity, the same interest in the same corporation being
represented after the distribution by more shares of precisely the same character,
and a stock dividend where there either has been a change of corporate identity or
a change in the nature of the shares issued as dividends whereby the proportional
interest of the shareholders after the distribution is essentially different from his
former interests. A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock holdings represented. A stock
dividend does not constitute income if the new shares confer no different rights or
interests than did the old — the new certificates plus the old representing the same
proportionate interest in the net assets of the corporation as did the old.
SECTION 253. Sale of stock received as dividends. — Stock issued by a

corporation, as a dividend, does not constitute taxable income to a stockholder in
such corporation, but gain may be derived or loss sustained by the stockholder,
whether individual or corporate, from the sale of such stock, which gain or loss
will be treated as arising from the sale or exchange of a capital asset. (See Section
34 of the Code.) The amount of gain derived or loss sustained from the sale of
such stock, or from the sale of the stack with respect to which it is issued, shall be
determined in accordance with the following rules:
(a) Where the stock issued as dividend is all or substantially the same
character or preference as the stock upon which the stock dividend is paid, the cost
of each share (or when acquired prior to March 1, 1913, the fair market value as of
such date) will be the quotient of the cost (or such fair market value) of the old
shares of stock divided by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a

character or preference materially different from the stock upon which the stock
dividend is paid, the cost (and when acquired prior to March 1, 1913, the fair
market value as of such date) of the old shares of stock shall be divided between
such old stock and the new stock, in proportion, as nearly as may be, to the
respective value of each class of stock, old and new, at the time the new shares of
stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair
market value as of such date) of each share of stock will be the quotient of the cost
(or such fair market value as of March 1, 1913) of the class to which such share
belongs divided by the number of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity of the lots can.
not be determined, any sale of the original stock, will be charged to the earliest
purchases of such stock, and any sale of dividend stock issued with respect to such
stock will be presumed to have been made from the stock issued with respect to
the earliest purchased stock, to the amount of the dividend chargeable to such
stock.
(d) Where the stock with respect to which a stock dividend is declared
was purchased at different times and at different prices, and the dividend stock
issued with respect to such stock can not be identified as having been issued with
respect to any particular lot of such stock, then any sale of such dividend stock will
be presumed to have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the stock dividend chargeable to such stock.
SECTION 254. Declaration and subsequent redemption of a stock

dividend. — A true stock dividend is not subject to tax on its receipt in the hands
of the recipient. Nevertheless, if a corporation, after the distribution of a stock
dividend, proceeds to cancel or redeem its stock at such time and in such manner
as to make the distribution and cancellation or redemption essentially equivalent to
the distribution of a taxable dividend, the amount received in redemption or
cancellation of the stocks shall be treated as a taxable dividend to the extent of the
earnings or profits accumulated by such corporation since March 1, 1913.
SECTION 255. Sources of distribution. — For the purpose of income

taxation every distribution made by a corporation is made out of earnings or profits
to the extent thereof and from the most recently accumulated earnings or profits. In
determining the source of a distribution, consideration should be given first, to the
earnings or profits of the taxable year; second, to the earnings or profits
accumulated since February 28, 1913, only in the case where, and to the extent
that, the distribution made during the taxable year are not regarded as out of the
earnings or profits of the taxable year and all the earnings or profits accumulated
since February 28, 1913, have been distributed; and, fourth, to sources other than
earnings or profits only after the earnings or profits have been distributed.
SECTION 256. Distribution in liquidation. — In all cases where a

corporation (as defined in Section 84) distributes all of its property or assets in
complete liquidation or dissolution, the gain realized from the transaction by the
stockholder, whether individual or corporate, is taxable to the extent recognized in
Section 34(b) of the Code. For this purpose, the term "complete liquidation"
includes any one of a series of distributions made by a corporation in complete
cancellation or redemption of all of its stock in accordance with a bona fide plan of
liquidation under which the transfer of all the assets under liquidation is to be
complete within a reasonable time from the date of the first distribution, usually
not to exceed one year from the time of such first distribution. If the amount
received by the stockholder in liquidation is less than the cost or other basis of the
stock, the loss in the transaction is deductible to the extent allowed in Section
34(c) of the Code.
SECTION 257. Income and deductions of American citizens residing in

the Philippines. — Under subsection (u) of Section 84, a citizen of the United
States residing in the Philippines, is taxable on income from sources both within
and without the Philippines, except income from sources within the United States.
Accordingly, items of deductions allocable to income of such taxpayer from
sources within the United States are not deductible from his income subject to
Philippine income tax. (Deemed repealed since our independence).
SECTION 258. Effective date. — These regulations shall take effect

upon their promulgation in the Official Gazette.
(Promulgated February 11, 1941, XXXIX Off. Gaz., No. 18, page 325)
Recommended by:
BIBIANO L. MEER
Collector of Internal Revenue
MANUEL ROXAS
Secretary of Finance
SUPPLEMENT A — WITHHOLDING ON WAGES
(Articles 1 to 9 will be found after Section 84 of the Code)
APPENDIX CCC
Subject : Tax exemptions of (1) all donations and grants to the Philippine
Inventors Commission and (2) the manufacture of local
inventions
The Law : Republic Act No. 3850 (Excerpts)
SEC. 1. This Act shall be known and cited as the "Philippine Inventors
Incentives Act."
SEC. 9. All donations and grants to the Commission shall be

tax-exempt and deductible in full from the donor's income tax returns when evidenced by a
certificate duly issued by the Commissioner. Any person who evades or defeats, or
attempts to evade or defeat in any manner any tax imposed by law by availing himself of
the provisions of this section through fraud or misrepresentation shall be punished by a
fine of not more than five thousand pesos or imprisonment not exceeding one year or both,
in the discretion of the court. In case the violator is a corporation or association, the
president or general manager thereof shall be criminally liable without prejudice to the
criminal responsibility of the member, officer or employee thereof committing such
violation.
SEC. 10. To promote and encourage the manufacture of local inventions, they
shall be exempted from all kinds of taxes, licenses and permits during the first five years
from the date of the grant of the letters of patent: Provided, That their capitalization does
not exceed fifty thousand pesos: And provided, further, That their manufacture is carried
out by the inventor himself as a home industry.
SEC. 15. This Act shall take effect upon its approval.
Approved, April 13, 1964.
APPENDIX DDD
Subject : Tax and other exemptions of "naphtha" in certain cases, for five
years from January 1, 1965 to December 31, 1969
The Law : Republic Act No. 4068
SEC. 1. Any provision of law to the contrary notwithstanding, any

person, partnership, company or corporation engaged or which shall engage in the
manufacture of chemical products, including the direct reduction of iron ore shall be
entitled to exemption from the payment of special import tax, specific tax, fees, dues,
customs duties and all other taxes of whatever nature or description, payable by such
person, partnership, company or corporation in respect to their local purchase and
importation of naphtha when used as a feedstock or raw material in chemical industries
and the direct reduction of iron ore and only when, in the course of such manufacture, its
chemical structure is changed: Provided, however, That naphtha when used as a fuel,
solvent, lubricant, feedstock for petroleum refineries or for other purposes, is subject to
the corresponding taxes, dues and customs duties: Provided, further, That the exemption
from the special import tax, specific tax, fees, dues and customs duties and all other taxes
of whatever nature and description on such naphtha shall be made only when the
Department of Finance, after investigation, finds that the following concur:
(a) Naphtha sought to be exempted has the following specifications:

Gravity, ° API 60 to 88
Distillation, ASTM, ° F 80 to 450
Total Sulfur, wt. % 0.01 to 0.2
Unsaturates, vol. % trace to 1.0
Aromatics, vol. % trace to 30
(b) It will be used directly and exclusively as feedstock or raw material and that,
in the course of manufacture, its chemical structure is changed.
(c) It will be stored separately and such storage shall be provided with facilities
to measure or record the quantity of naphtha used as raw material or feedstock.
(d) The shipping and other supporting documents covering the local purchase or
importation are in the name of the tax-exempt firm to whom the goods shall be delivered
directly.
SEC. 2. Any person, partnership, company or corporation eligible to

tax exemption privileges under the preceding section and enjoying tax exemption
privileges on its local purchase and importations of raw materials under other existing
laws, shall not enjoy tax exemption privileges under this Act without relinquishing its tax
exemption privileges under other existing laws insofar as its local purchase and
importations of naphtha are concerned.
SEC. 3. The Department of Finance shall promulgate the rules and regulations
necessary for the implementation of this Act: Provided, That any violation of this Act or of
the rules and regulations issued in accordance with this section, and any misrepresentation
of any essential fact required by said rules, shall subject the offender to cancellation of his
exemption privilege and to the payment of double the duties and taxes involved; and to
imprisonment of not less than two nor more than four years and a fine of not less than ten
thousand pesos nor more than twenty thousand pesos. Where the offender is a partnership,
corporation or other entity, the president, manager or person in charge thereof shall be
criminally responsible therefor and, in the case of an alien, he shall be ordered deported.
SEC. 4. All existing laws, executive orders, and administrative rules

and regulations or parts thereof, which are inconsistent with the provisions of this Act are
hereby repealed or modified accordingly.
SEC. 5. This Act shall be effective for a period of five years beginning January
first, nineteen hundred sixty-five to December thirty-first, nineteen hundred sixty-nine.
Approved, June 18, 1964.
APPENDIX EEE
Subject : Exemption from duties and taxes of certain importations by the

textile industry, subject to specified conditions
SEC. 2. Period of non-payment of duties and taxes. Any person, partnership,

company or corporation covered by this Act shall be excluded from the payment of duties
and taxes as follows:
(a) One hundred per centum of the taxes and duties due during the period from
the date of the approval of this Act up to December thirty-first, nineteen hundred sixty-six;
(b) Seventy-five per centum of the taxes and duties due during the period from
January first, nineteen hundred sixty-eight;
(c) Fifty per centum of the taxes and duties due during the period from January
first to December thirty-first, nineteen hundred seventy;
(e) On or after January first, nineteen hundred seventy-one all taxes and duties
shall be paid in full.
SEC. 4. All textile manufacturers who register under this Act shall, in lieu of
the taxes herein exempted, be assessed and shall pay a special tax of one per centum of
their gross sales as defined by the National Internal Revenue Code, to be paid in the same
manner and at the same time and subject to the same penalties and surcharges as the
sales-tax, which shall constitute a Special Textile Research Fund, to be disposed of and
disbursed by the National Science Development Board for research, experiment and study
in such projects as, in its judgment, will contribute to the local growth, production or
manufacture of raw materials needed by the industry; and to the improvement or invention
of machinery equipment processes or production methods for the industry.
SEC. 5. Any person, partnership, company or corporation eligible to tax

exemption privileges under this Act and enjoying tax exemption under other existing laws
shall not enjoy tax exemption privileges under this Act.
APPENDIX FFF
Subject : Tax exemption of private development banks
SEC. 1. This Act shall be known as "The Private Development Bank's Act."
SEC. 10. All existing private development banks shall be totally exempted from
the payment of income and gross receipts taxes for a period of three (3) years after the
effectivity of this Act. Thereafter, they shall be taxed on a gradually increasing basis of
twenty-five percent (25%) per year for the next succeeding four (4) years after the end of
which period they shall pay all taxes in full. Those banks that may be established within
three (3) years from the date of effectivity of this Act, shall be totally exempted from
income and gross receipts taxes for three years from the date off their organization.
Thereafter they shall be taxed on a gradually increasing basis of twenty-five per cent
(25%)) per year for the next succeeding four (4) years after the end of which period they
shall pay all such taxes in full.
APPENDIX GGG
Subject : Limitation in the tariff or taxes that may be imposed on

importation of high grade foreign leaf tobacco
SEC. 4. Importation of foreign leaf tobacco only for blending

purposes. . . . : Provided, further, That no other tariff or taxes shall be imposed on high
grade foreign leaf tobacco so imported except an amount equivalent to one hundred per
centum; of its landed cost.
SEC. 10. Effectivity. — This Act shall take effect upon its approval.
APPENDIX HHH
THE INTERNAL REVENUE LAWS PRIOR TO THEIR CODIFICATION IN

1939
Citations of the sources or patterns of the original provisions of the Code, as found
mostly in Volume II of the Report of the Tax Commission, tabulated section by section.
Sources or Patterns of the Original Provisions of the
Code as found mostly in the Report of the
Tax Commission, Volume II.
(1) (2) (3) (4)
Sections of Sections of Sections of the
the Code the Report 2 Adm. Code 3 Other Sources or Patterns
1 1 1420
2 2 1421
3 3 1423
4 1424, as amended by Acts Nos. 2819, 2833 and 2835
5 4 1425
6 5 1426
7 6 1427
8 7 1428
9 8 1429
10 9 1430
11 10 1431
12 11 1432
13 12 1433
14 13 1434
15 14 1435, as amended by SEC. 1 of Act No. 2892
16 15 1436
17 16 1437
18 17 1438, as amended by SEC. 2 of Act No. 2819

19 to 84 18 to 83 Act of the U. S. Congress of October 3, 1913
(in force from March 1, 1913 to December 31,
1915)
Act of the U. S. Congress of September 8, 1916
(in force from January 1, 1916 to December 31,
1918)
Act No. 2833 of the Philippine Legislature
(in force from January 1, 1919 to December 31,
1919)
Act No. 2926 of the Philippine Legislature (in
force from January 1, 1920 to December 31,
1935)
Commonwealth Act No. 117 (in force from
January 1, 1936 to December 31, 1938)
85 84 No citation
86 85 1536, as amended by SEC. 10, Act No. 2835, sec. 1
Act No. 3031; and sec. 1, Commonwealth
Act No. 106
87 86 1541
88 87 Section 302 of the U. S. Revenue Act 1926, as amended
by SEC. 401 of the Revenue Act of 1934 and by
sec. 805 of the Revenue Act of 1936
89 88 1538 and 1539, as amended by secs. 1 and 2, respectively, of
Act No. 3606
90 89 1543
91 90 1542
92 91 No citation
93 92 1544
94 93 No citation
95 94 1545
96 95 No citation
97 96 No citation
98 97 No citation
99 98 No citation
100 99 No citation
101 100 No citation
102 101 No citation
103 102 1546
104 103 1547
105 104 1548
106 105 1537, as amended by section II of Act No. 2835
107 106 2739
108 to 122 107 to 121 No citation
123 122 1478
124 123 1479
125 124 1480
126 125 1482
127 126 1483
128 127 1484
128-A No citation
129 128 1485, as amended by section 1 of Act No. 2733
130 129 1488
131 130 1489
136 135 1490
137 137 1492
139 139 No citation
140 140 No citation
141 142 1494
142 143 1495
143 144 1496
144 145 No citation
145 146 No citation
146 147 1497
147 148 1498
148 149 1498-A
149 151 1553
150 152 1554
151 153 1555
152 154 1556
153 155 1557
154 156 1558
155 157 1559
156 158 1560
157 159 1561
158 160 1562
159 161 1563
160 162 1564
161 163 1565
162 164 1566
163 165 1567
164 166 1568
165 167 1569
166 168 1470
167 169 1571
168 170 1572
169 171 1573
170 172 2721
171 173 2724
172 174 2725
173 175 2726
174 176 2727
175 177 2728, as amended by SECTION 2 of Commonwealth Act 207
176 178 2730
177 179 2736
178 180 1453
179 181 1454
180 182 1455
181 183 1456
182 184 1457, as amended by Commonwealth Act No. 243
183 185 1458
184 186 1459
185 191 No citation
185-A No citation
186 No citation
186-A No citation
187 No citation
188 No citation
189 No citation
190 189
191 193 1462
192 194 1463
193 195 1464
194 196 1465
195 197 1466
196 198 1468
197 199 1469
198 200 1470
199 201 1471
200 202 1472
201 203 1473
202 204 1474
203 205 1449
204 206 No citation
205 207 1550
206 208 1551
207 209 1552
208 210 2722
209 211 2723
210 212 1449
211 213 1449 (a)
212 124 1449 (b)
213 215 1449 (c)
214 216 1449 (d)
215 127 1949 (e)
216 218 1449 (f)
217 219 1449 (g)
218 220 1449 (h)
219 221 1449 (i)
220 222 1449 (j)
221 223 1449 (k)
222 224 1449 (l)
223 225 1449 (m)
224 226 1449 (n)
225 227 1449 (o)
226 228 1449 (p)
227 229 1449 (q)
228 230 1449 (s)
229 231 1449 (t)
230 232 1449 (u)
231 233 1449 (v)
232 234 1449 (w)
233 235 1449 (x)
234 236 1449 (y)
235 237 1449 (z)
236 238 1450
237 239 1451, as amended by sec. 2 of Act No. 3047
239 241 2721
240 242 2720
241 243 No citation

242 244 Section 3 of Act No. 2719, as amended by
sec. 1 of Act No. 3516
Section 79 of Commonwealth Act No. 137
243 245 No citation
244 246 Sections 79 and 88 of Commonwealth Act No. 137
245 247 No citation
246 248 No citation
247 249 No citation
248 250 No citation
250 252 1500
251 253 1501
252 254 1502
253 255 1503
254 256 1504
255 257 1505
256 258 1506
257 259 1507

258 260 Section 192 of Act No. 2427, as amended by section 2
of Act. No. 2648 and section 4 of Act No. 3575
259 261 1508
260 262 Section 1 of Commonwealth Act No. 128
260-A No citation
260-B No citation
260-C No citation
261 263 Section 2 of Commonwealth Act No. 128
262 264 1509
263 265 1510
264 266 1511
265 267 1512
266 268 1513
267 269 1514
268 270 1515
269 271 1516

270 272 1517
271 273 1518
272 274 1519
273 275 1520
274 276 1521
275 277 1522
276 278 1523
277 279 1524
278 280 1525
279 281 1526
280 282 1527
281 283 1528
282 284 1529
283 285 1530
284 286 1531
285 287 1532
286 288 1533
287 289 2732
298 290 2733
289 291 2734
290 292 Section 1 of Act No. 3097
Commonwealth Act No. 195

303 305 Section 22 of Act No. 2152 (Irrigation Act)
304 306 Section 23 of Act No. 2152 (Irrigation Act)
305 307 1578

306 308 1579 and Section 3226 of the U.S. Revised Statutes, as
amended by the Revenue Act of 1932
307 309 1580
308 310 1581
309 311 1582
310 312 1583
311 313 1584
312 314 1585
313 315 1586
314 316 1587
315 317 1588
316 318 1589
317 319 No citation
318 320 1590
319 321 1591
320 322 1591
321 323 1592
322 324 1593
323 325 1594
324 326 1595
325 327 1596
326 328 1597
327 329 1598
328 330 1599
329 331 1600
330 332 1601
331 333 Section 275 of the U. S. Revenue Act of 1938
334 336 Section 1 of Act No. 3292 (Bookkeeping Law)
338 340 No citation
339 341 1574
340 342 1575
341 343 1576
342 344 1577
343 345 No citation
344 346 No citation
345 347 2714
346 348 2715
347 349 2716
348 350 2717
349 351 2731
350 352 No citation
351 353 No citation
352 354 2741
353 355 No citation
355 357 No citation
356 358 2738
357 359 485
358 360 486
359 361 488
361 363 1495
362 364 490
363 365 491
364 366 492
365 367 494
366 368 495
367 369 498
368 370 497
369 371 Laws repealed
371 373 Effective date

1 Commonwealth Act No. 466.
2 Report of the Tax Commission, Volume II.
3 Act No. 2711 (Revised Administrative Code of the Philippines)
Endnotes
1 (Popup - Popup)
Appendix CCC
Appendix DDD
Appendix EEE
Appendix FFF
Appendix GGG
Appendix HHH

RR 2-40 (Income Tax Regulations)

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February 10, 1940

REVENUE REGULATIONS NO. 02-40

INCOME TAX REGULATIONS

SECTION 1. Scope. — In accordance with the provisions of Sections

(Section 20 of the Code)

SECTION 2. Application of title. — Section 20 provides that the

(Section 21 of the Code)

SECTION 3. Persons considered citizens of the Philippines. — The

(3) Those whose fathers are citizens of the Philippines.

Philippine citizenship may be lost or reacquired in the manner provided by

SECTION 4. Tax on citizens and residents. — Section 21 imposes

(Section 22 of the Code)

SECTION 5. Definition. — A "non-resident alien individual" means

(a) Whose residence is not within the Philippines; and

(b) Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or

SECTION 6. Loss of residence by alien. — An alien who has acquired

SECTION 7. Taxation of aliens in general. — For purposes of income

SECTION 8. Taxation of non-resident aliens; classification. —

The phrase "engaged in trade or business within the Philippines" includes

(Section 23 of the Code)

SECTION 9. Personal exemption. — Personal exemption is an

SECTION 10. Personal exemption of single individuals. — A single

SECTION 11. Personal exemption of married persons and heads of

A head of family is an individual who actually supports and maintains in

SECTION 12. Additional exemption for dependents. — The taxpayer is

SECTION 13. Change of status. — If the status of the taxpayer, insofar

SECTION 14. Personal exemption of non-resident aliens. — A

(Section 24 of the Code)

SECTION 15. Income tax on corporations. — The law imposes an

SECTION 16. Corporations liable to tax. — Every corporation,

SECTION 17. Dividends received by a corporation from a domestic

SECTION 17-A. Tax on life insurance companies. — Every life insurance

The total net investment income of domestic life insurance companies

PGI = PR/WR x WGI

PIE = PGI/WGI x WIE

PGI - PIE = PNI

PGI is Philippine Gross Investment Income

PNI is Philippine Net Investment Income

PR is Total Philippine Reserve

WR is Total World Reserve

WGI is World Gross Investment Income

PGI is Philippine Gross Investment Income

WIE is Total World Investment Expenses

PIE is Philippine Investment Expense

In both cases, the deductible expenses must be connected with the

Domestic life insurance companies and foreign life insurance companies

(Section 25 of the Code)

SECTION 18. Taxation of corporation formed or utilized for avoidance

SECTION 19. Purpose to avoid tax; evidence; burden of proof;

If the Commissioner of Internal Revenue determined that the corporation

SECTION 20. Holding and investment companies. — A corporation

SECTION 21. Unreasonable accumulation of profits. — An

The business of a corporation is not merely that which it has previously

The Commissioner of Internal Revenue may require any corporation to

(Section 26 of the Code)

SECTION 22. General co-partnerships. — General co-partnerships,

SECTION 23. Distributive shares of partners. — The distributive share

(Section 27 of the Code)

SECTION 24. Proof of exemption. — In order to establish its

Upon receipt of the affidavit and other papers by the Commissioner of

SECTION 25. Agricultural and horticultural organizations. — The

SECTION 26. Mutual savings bank. — In order that a corporation may