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BQ: Pedro Manalo, a Filipino citizen residing in (gain not taxable, loss not deductible)

Makati City, owns a vacation house and lot in San


Francisco, California, U.S.A., which he acquired in With regard to merger and consolidation (Section
2000 for P15 million. On January 10, 2006 he sold said 40(C)(2)a,b,c s
real property to Juan Mayaman, another Filipino
Exchange of property for stock
citizen residing in Quezon City, for P20 million. On
Exchange of stock for stock
February 9, 2006 Manalo filed the capital gains tax
Exchange of securities for stock or securities
return and paid P1.2 million representing 6% capital
TRANSACTIONS SOLELY IN KIND- NO CASH IS
gain tax. Since Manalo did not derive any ordinary
GIVEN, THEREFORE, TAX EXEMPT
income, no income tax return was filed by him for
2006. TRANSACTIONS NO CASH IS
SOLELY IN KIND GIVEN,
After the tax audit conducted in 2007, the BIR officer THEREFORE, TAX
assessed Manalo for deficiency income tax computed EXEMPT
as follows: P5 million (20M-15M)x35%=P1.75 million,
without the capital gains tax paid being being allowed TRANSACTIONS IF CASH IS GIVEN
as tax credit. Manalo consulted a real estate broker NOT SOLELY IN AS AN
who said that the P1.2 million capital gains tax should KIND ADDITIONAL
be credited from P1.75 million deficiency income tax. CONSIDERATION
FOR THE
TRANSACTION,
a. Is the BIR officer’s tax assessment correct?
GAIN is
Explain.
RECOGNIZED BUT
b. If you were hired by Manalo as his tax consultant, LOSS is NOT
what advice would you give him to protect his DEDUCTIBLE.
interest? Explain.

TRANSACTIONS WHEREIN THE


B. SALE OF SHARES OF STOCK NOT LISTED and
GAIN IS RECOGNIZED AND LOSS IS NOT DEDUCTIBLE
TRADED THRU LOCAL STOCK EXCHANGE.
1. TRANSACTIONS NOT SOLELY IN KIND
Sections 24(C), 25(3) [Tax on Individual] and Sections 2. Illegal Transactions
27(D)(2), 28(7)(c) [Tax on Corporations] of the NIRC. 3. Transactions between Related Taxpayers. Section
Rule: 36(B), NIRC (vs Strangers, Section 99(B) of the NIRC
1. Capital Gains not more than P100,000.00----
4. Wash Sale, Section 38 of the NIRC
-5% (final tax rate)
A sale or disposition of stock or securities, by a seller
2. Any amount exceeding P100,000.00 is
who is not a dealer in securities or shares or stocks,
subject to 10%. (final tax rate)
where substantially identical securities are acquired
NOW : all 15%
or purchased within a 61-day period, beginning 30
days before the sale and ending 30 days after the sale.
IF LISTED and TRADED thru STOCK EXCHANGE
Even if sold by a dealer in securities if the transaction
-Final Tax Rate on the net capital gains is ½ of 1%
was not made in the ordinary course of the business
(.005) of the Gross Selling Price.
of such dealer, there is WASH SALE.
NOW: 6/10 of 1% (.006) of the gross selling price

Section 40(C)) SALE/EXCHANGE OF PROPERTY


SPECIAL RULES in DETERMINING ACQUISITION
GENERAL RULE: ENTIRE AMOUNT OF GAIN or LOSS,
COST for the PURPOSE OF COMPUTING GAIN OR
as the case may be SHALL BE RECOGNIZED.
LOSS IN THE EXCHANGE OF PROPERTY Section 40(B)
EXEMPTIONS: No Gain, No Loss Recognized of the NIRC
1. If the property was acquired by purchase on or
after March 1, 1913, (Date of the FIRST Income Tax
4. If the property was acquired for less than full and
Law in the Philippines)
adequate consideration
BASIS: Acquisition Cost
BASIS: The amount paid by the transferee.
Land costing P1,000 on March 1, 1913 was
EXCHANGE for a cow with a cost of P30,000.00.
A sold a car costing P500,000.00 for only
Fair Market Values of the properties at the time of
P200,000.00 to B. B sold the same to C for
exchange are:
P290,000.00
Land P 150,000.00
What is the gain/loss on exchange?
Cow P 58,000.00
Sales Price to C P 290,000.00
What is the gain/loss on exchange?
Less: Amount
Fair market value
paid by the
of the Cow P 58,000.00
Transferee-C P 200,000.00
Less: Acquisition
Gain on Sale P 90,000.00
Cost of land P 1,000.00
Gain on
In January 1970, Juan Gonzales bought one hectare of
exchange P 57,000.00
agricultural land in Laguna for P100,000.00. This
2. If the property was acquired by inheritance
property has a current fair market value of P10 million
BASIS: in view of the construction of a concrete road
Fair Market Value at the date of acquisition/date traversing the property. Juan Gonzales agreed to
inherited exchange his agricultural lot in Laguna for a one-half
Car inherited was sold for P 100,000. hectare residential property located in Batangas, with
Fair Market Value of the car when inherited a fair market value of P10 million, owned by Alpha
P 150,000.00 Corporation, a domestic corporation engaged in the
Fair Market Value of the car when sold purchase and sale of real property. Alpha Corporation
P 90,000.00 acquired property in 2007 for P9 million.
What is the gain/loss on exchange? Questions:
Sales Price P 100,000.00 a. What is the nature of real properties
Less: FMV when exchanged for tax purposes- capital asset or
inherited P150,000.00 ordinary asset? Explain.
Loss on b. Is Juan Gonzales subject to income tax on the
exchange P 50,000.00 exchange of property? If so, what is the tax
3. If the property was acquired as a gift based and rate? Explain.
c. Is Alpha Corporation subject to income tax on
BASIS:
the exchange of property? If so, what is the
The same as it would be in the hands of the donor,
tax base and rate? Explain.
or the Fair Market Value at the time when the gift
was made, whichever is LOWER.
Donee received a ring as a gift. Donor acquired for INTEREST INCOME Sec. 32A (4)
P10,000.00.
-earning derived from depositing or lending of
Fair Market Value when given by the donor
money, goods, or credits. Unless exempted by law,
P 8,000.00
interest income received by the taxpayer, whether
Donee sold the ring to another person.
or not usurious, is subject to income tax.
P15,000.00
What is the gain/loss on exchange?
TAX EXEMPT INTEREST INCOME
Sales Price P 15,000.00
1.Section 32(B)(7)(a) (under Exclusions)
Less: Cost of SaleP 8,000.00
Gain on Sale P 7,000.00
-INCOME DERIVED from investments in the seaman’s book. However, if the account is jointly
Philippines in loans, stocks, bonds or other domestic in the name of the overseas contract worker or a
securities, or from INTEREST ON DEPOSITS in the Filipino seaman, and an individual (spouse or
banks in the Philippines by FOREIGN GOVERNMENT dependent) who is living in the Philippines, 50%
on the interest income from such bank deposit
shall be subject to a final withholding tax of 7.5%
2. Sections 24 (B)(1) & Sections 25 (A)(2) INTEREST
(NOW 15%).
INCOME on LONG TERM INVESTMENTS 5 years or
more. In 2007, spouses Renato and Judy Garcia opened
a peso and dollar deposits at the Philippine
-Section 22(FF), NIRC -Long term deposit or
Branch of the Hongkong Bank in Manila. Renato
investment certificate
is an overseas worker in HongKong while Judy
INTEREST INCOME on LONG TERM INVESTMENTS5 lives and works in Manila. During the year, the
years or more. bank paid interest income of P10,000.00 on the
peso deposit and US$1,000.00 on the dollar
BEFORE -But if pre-terminated before 5th year, entire deposit. The bank withheld final income tax
interest income will be subject to final tax based on equivalent to 20% of the entire interest income
remaining maturity: and remitted the same to the BIR.
- 4 years to less than 5 years – 5% a. Are the interest incomes on the bank
deposits of spouses Renato and Judy Garcia
- 3 years to less than 4 years – 12%
subject to income tax?
- 2 years to less than 3 years – 20%
b. Is the bank correct in withholding the 20%
NOW all – 20% (train law) final tax on the entire interest income?
Explain.
3. Section 24 (B)(1) and Section 25 (A)(2) of
the NIRC -- INTEREST INCOME on bank The dispositive portion of the decision on the case of
deposits under the expanded foreign DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs.
currency deposit if the interest income is COMMISSIONER OF INTERNAL REVENUE, (G.R. No.
received by a NON RESIDENT INDIVIDUAL 182722, January 22, 2010) is quoted as follows:
(NRC & NRA) “WHEREFORE, the Petition is hereby GRANTED. The
assailed December 18, 2007 Decision of the Court of
But if received by a RESIDENT INDIVIDUAL -Final Tax Appeals and the April 11, 2008 Resolution are
Tax Rate of 7.5% ( now 15%) REVERSED and SET ASIDE. Accordingly, the
But if received by a CORPORATE TAXPAYER assessment for deficiency withholding taxes on
Section 27(D)(1) and Section 28(A)(7)(a)- Final interest from the savings and time deposits of
Tax Rate of 7.5% (now 15%) petitioner’s members for the taxable years l999 and
2000 as well as the delinquency interest of 20% per
How About an Overseas Filipino Worker? annum are hereby CANCELLED..”
Revenue Regulation No. 1-2011 PHILIPPINE SUPREME COURT UPHOLDS TAX
EXEMPTION OF COOPERATIVES
Tax Treatment of Income Earnings and Money
Remittances of an overseas contract worker Every cooperative in the country owes it to
(OCW) or Overseas Filipino Worker (OFW) DUMAGUETE CATHEDRAL CREDIT COOPERATIVE
(DCCCO) for being instrumental in bringing to the
Exemption from 7.5% (now 15%) Final Tax on
Supreme Court the issue of whether cooperatives
Interest Income from a depository bank under
and cooperative members are exempted from
the expanded foreign currency deposit system
paying taxes on the interests earned in their deposits
upon presentation of proof of non-residency
with their cooperatives.
such as OEC (overseas exit clearance) or
The Supreme Court ruled in favor of cooperatives and  But is pre-terminated before 5th year, entire
their members—exempting them from paying the interest income will be subject to final tax
20% final withholding taxes on their deposits’ based on remaining maturity:
interests.
- 4 years to less than 5 years – 5%
5. Interest received by landlord paid by tenant on
- 3 years to less than 4 years – 12%
the price of land under a tenant purchaser
agreement as part of CARP. (COMPREHENSIVE - 2 years to less than 3 years – 20%
AGRARIAN REFORM LAW OF 1988 REPUBLIC ACT
NO. 6657) Now -20%

Do landowners pay taxes for transactions FINAL TAX RATES on INTEREST INCOME FOR
CORPORATE TAXPAYER
involving transfer of ownership?

No. Transfer of ownership transactions under RA


6657 are exempted from taxes arising from capital 1. Interest on any currency bank deposit, yield or
gains and from payment of registration fees and all other monetary benefits from deposit substitute,
other taxes and fees for the transfer trust fund and similar arrangement;

SEC. 66. Exemptions from Taxes and Fees of Land -20% For DC and RFC -Section 27(D)(1) Section
Transfers. - Transactions under this Act involving a 28(7)(a)
transfer of ownership, whether form natural or
2.Interest under the expanded foreign currency
juridical persons, shall be exempted form taxes
deposit system
arising from capital gains. These transactions shall
also be exempted from the payment of registration -7.5% For DC and RFC--Section 27(D)(1) Section
fees, and all other taxes and fees for the conveyance 28(7)(a) NOW – 15%
or transfer thereof: Provided, that all arrearages in
real property taxes, without penalty or interest, shall 3.Interest on foreign loans-20% For NRFC
be deductible from the compensation to which the (Section28(B)(5)(a)
owner may be entitled, 4. Interest on foreign currency loans granted by
FINAL TAX RATES on INTEREST INCOME FOR depository banks to RFC—
INDIVIDUAL TAXPAYER -10% For DC and RFC -- (Section28(A)(7)(b) (Section
1.Interest on any currency bank deposit, yield or 27(D)(3)last par.
other monetary benefits from deposit substitute,
trust fund and similar arrangement;
INTEREST INCOME subject to the NORMAL TAX RATE
--20% For RC,NRC, RA and NRAETB {Sections 24 (B)(1) 5% to 32%(individual) & 30% (corporation) (to be
& Sections 25 (A)(2)} reported in the Annual ITR)
2.Interest under the expanded foreign currency -If the INTEREST INCOME is earned in the normal
deposit system conduct of business like from lending money, goods
-7.5% For RC and RA (now 15%) or credits from one person to another without any
withholding tax made.
EXEMPT For NRC and NRAETB {Sections 24 (B)(1) &
Sections 25 (A)(2) } BQ: State with reasons the tax treatment of the
following in the preparation of annual income tax
3. Interest on long term deposit or investment in returns: Interest deposits with: (i) BPI Family Bank,
bank (maturity-5 years or more) and (ii) local offshore banking unit of a foreign bank.

EXEMPT For RC, NRC, RA and NRAETB


RENTAL INCOME Sec. 32A (5) Total lease income to be P1,550,000
reported
Rental income -Earnings derived from leasing real
estate as well as personal property. 2. SOM
-It also includes ALL other obligations assumed to be Cost of the building P1,500,000
paid by the lessee to the third party in behalf of the
lessor. Less: Accumulated
depreciation at the end
Subject to Normal/Regular Tax Rate 900,000
of the lease
(P1,500,000/5 years) 3
BASIS: Gross receipts for the year, EARNED or
years
UNEARNED.
Book value of
INCOME FROM LEASEHOLD IMPROVEMENTS -When
improvement at the end P 600,000
Lessee built permanent improvements (in the nature
of the lease
of building) on the LEASED Property which will
become the property of the Lessor upon the Divide by the term of the
expiration of the lease. 3
lease (in years)
What would be the tax treatment? Annual income on
leasehold improvement P 200,000
There are two (2) methods are recognized in
reporting such additional Rent Income. Add: Annual rental 50,000
1. Outright Method Total lease income to be P 250,000
reported
Report as Income with the fair market value after
the construction in that taxable year.
Outright Year 1 Year 2 Year 3 Total
2. Spread-Out Method
Method
Spread out over the life of the lease using the
depreciated value of the property/book value of the Improvement 1,500,000 - 0 - - 0 - 1,500,000
property. income

Mr. X leases its lot to Mrs. Y for a term of 3 years Depreciation ( (300,000) (300,000) (900,000)
with an annual rental of P50,000. As of January of expense 300,000)
the first year, Mrs. Y completed the construction of Net income 1,200,000 (300,000) (300,000) 600,000
an improvement on the lot with a value of from
P1,500,000 with an estimated life of 5 years. improvement
The leasehold contract stipulates that the
improvement will belong to Mr. X after the term of
the lease. Spread-Out
Method
1. OM -
Net income
Value of building P1,500,000 from
improvement
Add: Annual rental per 50,000
agreement (1,500,000 – 200,000 200,000 600,000
900,000)/3 200,000
ROYALTIES Sec. 32A (6) Reason why Liquidating Dividend is NOT TAXABLE-
Return of stockholders investment. It arises from the
-payment or portion of proceeds paid to the owner
distribution of assets by a corporation to its
of a right, such as an oil right or a patent for the use
stockholders upon corporate dissolution. (Section
of it, or a portion of the proceeds from the work of an
73(A) NIRC.
author or composer.
CONFLICTING ISSUES on LIQUIDATING DIVIDEND
FOR INDIVIDUAL TAXPAYERS-always subject to final
tax SECTION 8 of BIR Revenue Regulation No. 06-08,
April 22, 2008- “xxx upon surrender by the
1.Royalty from books, literary works and musical
stockholder of its shares in exchange for cash and/or
compositions -10% For RC, NRC,RA,NRAETB
property distributed by the corporation upon its
2.Royalties other than books, literary works, and dissolution and liquidation, the stockholder shall
musical compositions -20% For RC, NRC, RA, NRAETB recognize either capital gain or loss. xxx” (as capital
gains)
Royalties other than books, literary works, and
musical compositions -20% For RC, NRC, RA, NRAETB Wise & Co., Inc. vs. Collector of Internal Revenue (78
Phil. 655) -“xxx the amount distributed in the
--includes those which are derived from natural liquidation of the corporation shall be treated as
resources or products such as coal, gas, oil, copper, payments in exchange for shares, and any gain or
silver, gold, and other similar products. profit realized thereby shall be taxed to the distributee
as other gains or profit. xxx” (as normal tax)
FOR CORPORATE TAXPAYERS-always subject to final
tax 2nd paragraph of Section 73(A) of the NIRC. - “Where
a corporation distributes all of its assets in complete
ROYALTIES -20% For DC, and RFC,
liquidation or dissolution, the gain realized or loss
DIVIDEND INCOME Sec. 32A (7) sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductible loss, as
earnings derived from the distribution made by a the case may be.” (as normal tax)
corporation out of its earnings or profits and payable
to its stockholders, whether in money (cash dividend) “there was no discussion to guide taxpayers on how
or in other property (property dividend) to treat liquidating dividends. In so doing, the BIR put
in limbo anew the tax treatment of liquidating
Note: the different provisions of the NIRC imposing a dividends and added yet another legal thorn to an
tax on dividend income only includes within its already complicated, time-consuming and costly
purview cash and property dividends making stock dissolution process.”
dividends exempt from income tax.
4. DIVIDENDS received from a COOPERATIVE (R.A.
TAX EXEMPT DIVIDEND INCOME 6938)
1.Dividends received by: 5. STOCK DIVIDEND Section 73(B)
Another Domestic Corporation from a Domestic Reason why Stock Dividend is NOT TAXABLE- There
Corporation (inter corporate dividends) Section is no flow of wealth so no realized gain. It is just a
27(D)4 transfer of surplus account to the capital account.
2.Dividends received by: INSTANCES where STOCK DIVIDEND is SUBJECT TO
RESIDENT FOREIGN CORPORATION from Domestic TAX
Corporation Section 28(A)(7)(d) a. When there is a change in the stockholder interest
3. PURE LIQUIDATING DIVIDEND in the net equity of the corporation
The role of the corporation’s management is to FINAL TAX RATES on DIVIDEND INCOME
increase the value of the firm to its stockholders. It
1.Dividends received by:
will include what form of profit should be returned to
the shareholders in the form of dividends. Resident Citizen (RC)

Shareholders equity changes due to three (3) things: Non Resident Citizen (NRC)

1.Net income or losses Resident Alien (RA)

2.Payment of dividends From a Domestic Corporation

3.Share issuance or repurchase --10% Section 24 (B)2 of the NIRC

b.When it is received by a usufructuary 2. Dividends received by:

Stock dividends cannot be issued to a person who NON Resident Alien-Engaged in Trade or Business
is not a stockholder in payment for services (NRA-ETB) From a Domestic Corporation
rendered.
--20% Section 25 (A)2 of the NIRC
Stock dividends can be issued only to stockholders
and not to strangers or non-stockholders. 3. Dividends received by:

c. When Board of Directors declared Stock Dividend NON Resident Alien-Not Engaged in Trade or Business
not in accordance with the Corporation Code of the (NRA-NETB) From Domestic Corporation
Philippines. --25% Section 25 (B) of the NIRC
Example: Declaration of Stock Dividend out of the
Outstanding Capital Stock

d.Redemption or cancellation of the Stock dividend


distributed to the extent that it represents a 4. Dividends received by:
distribution of earnings or profits. Section 73(B) NIRC
NON Resident Foreign Corporation (NRFC) From
REASON : resorting to devious means to circumvent Domestic Corporation
the law and evade the tax. Corporate earnings would
be distributed under the guise of its initial a. 15% Section 28 (B)(5)(b) of the NIRC- with
capitalization by declaring the stock dividends reciprocity
previously issued and later redeem said dividends by b. If without reciprocity 30% R.A 9337
paying cash to the stockholder.
Cash and property dividends received from a
e.When it is in the nature of DISGUISED DIVIDEND domestic corporation by a non-resident foreign
Example: Payment of services rendered will be paid corporation are subject to final withholding tax of
by stocks. 35%. The 35% rate for dividends paid to a non-
resident foreign corporation may be reduced to 15%
Disguised dividends in income taxation? Give an subject to the conditions that the country in which
example. the non-resident foreign corporation is domiciled
allows a credit against the tax due from the non-
Non Resident Foreign Corporation (Principal) - resident foreign corporation, taxes deemed to have
Domestic Corporation (Subsidiary) (Payment of been paid in the Philippines equivalent to 20%,
Income to NRFC for the Services rendered by NRFC)- which represents the difference between the regular
- But these payments are disproportionately larger tax on corporations and the reduced tax on
than the actual value of the services rendered – so dividends.
TAXABLE
Provided, that effective January 1, 2009, the credit
against the tax due shall be equivalent to 15%, which
represents the difference between the regular b. Annuity payment represents RETURN of PREMIUM
income tax of 30% and the 15% tax on dividends – not taxable
(As amended by R.A. No. 9337)

BQ: On January 3, 1998, X, a Filipino citizen residing in PRIZES AND WINNINGS Sec. 32A (9)
the Philippines, puchased 100 shares in the capital
stock of Y Corporation, a domestic company. On PRIZES -a reward for a contest or a competition. In
January 3, 2000, Y Corporation declared , out of the other words, a prize is a remuneration of an effort
profits of the company earned after January 1, 1998, reflecting one’s superiority, like prize money of a
a 100% stock dividends on all stockholders of record boxing contest.
as of December 31, 1999 as a result of which X holding
WINNING- a reward for an event that depends by
in Y Corporation became 200 shares. Are the stock
chance.
dividends received by X subject to income tax?
Explain. 8% For example, winnings from gambling, lottery or raffle
ticket.
DIVIDEND INCOME subject to the NORMAL
CORPORATE TAX RATE (30%) (to be reported in the Prizes amounting to Subject to FINAL TAX
Annual ITR) more than P10,000.00 20%

Section 42(A)(2)(b) Prizes P10,000.00 or less Subject to NORMAL


TAX
1. Dividend received by a domestic corporation given
to be included in the
by or received from a FOREIGN CORPORATION from
Income Tax Return
income derived from sources within.

The Philippine Income should be at least 50% of


the World Income of said foreign corporation for the
three year period ending with the close of its taxable BQ: Jose Miranda, a young artist and designer,
year preceeding the declaration of such dividend. received a prize of P100,000.00 for winning on-the-
spot peace poster contest sponsored by a local Lions
2. Dividends received by a resident foreign Club. Shall the reward be included in the gross
corporation from domestic corporation are not income of the recipient for tax purposes?
subject to tax. (TAX-EXEMPT DIVIDEND) Dividends
received by a domestic corporation from a foreign WINNINGS regardless of any amount -Always
corporation are subject to corporate tax. Subject to FINAL TAX of 20%

3. Dividends received by a partner in a general BUTTTTT -But if received outside the Philippines, it is
professional partnership. Section 24(B)(2) subject to NORMAL TAX Section 24(B)(1)

BQ: State with reasons the tax treatment of the Winnings from LOTTO and PCSO are EXEMPT FROM
following in the preparation of annual income tax TAX Section 24(B)(1) – BEFORE-
returns: Dividends received by a domestic
NOW – exceeds 10,000 = 20 % FT
corporation from (i) another domestic corporation;
and (ii) a foreign corporation; -Is the prize of One Million Pesos awarded by the
Reader’s Digest subject to withholding final tax?
ANNUITIES Sec. 32A (8)
Who is responsible for withholding the tax?
-subject to regular tax/normal tax
What are the liabilities for failure to withhold such
-installment payments received for life insurance
tax?
sold by insurance companies.
PENSIONS Sec. 32A (10)
a. Annuity payment represents INTEREST - taxable
- allowance paid regularly to a person on his N – not arising from transactions between related
retirement or to his dependents on his death, in taxpayers
consideration of past services, meritorious work, age,
-Shall be included in the Gross Income in the year of
loss, or injury.
recovery to the extent of the tax benefit of said
Generally -TAXABLE deduction.

NOT TAXABLE, in the following instances It is taxable because the taxpayer received tax benefit
through the reduction of its income in the preceding
A. When the LAW provides.
year. . .
B. When BIR approves a pension plan of a private
So, upon recovery of bad debts, it is a taxable gain
company, provided the following requisites are met:
2.TAX REFUND/CREDIT
BIR approves PENSION PLAN
GR : Refunds from taxes paid are TAXABLE
Requisites:
Exception: Refunds of taxes paid in Estate or Donor’s
1.Private retirement plan maintained by the
Tax, Philippine Income Tax, Stock Transaction Tax and
employer approved by the BIR for the exclusive
VAT (claimed as an input)
benefit of all the employee.
-It shall be included as part of gross income in the year
2.Retiring official or employee who has rendered at
of receipt to the extent of the income tax benefit of
least 10 years of service;
the said deduction.
3.At least 50 years of age at the time of retirement
PRINCIPLE OF TAX BENEFIT RULE WILL APPLY (bad
and availed of retirement for the first time.
debts recovery and tax refund)
PARTNER’S DISTRIBUTIVE SHARE FROM THE NET
-states that: if a taxpayer deducted an item on his
INCOME OF THE GENERAL PROFESSIONAL
income tax return and enjoyed a tax benefit
PARTNERSHIP Sec. 32A (11)
(reduction of his tax liability) and in the subsequent
-subject to regular/normal tax year recovers all or part of that item, he will recognize
gross income in the year the deducted item is
BUT, if the partner’s share is from a business recovered.
partnership or general partnership in trade- Such
partner’s share is SUBJECT TO FINAL TAX Also known as RECAPTURE RULE

3. INCOME FROM WHATEVER SOURCE

OTHER SOURCES OF INCOME ILLEGALLY OBTAINED INCOME is TAXABLE

1.BAD DEBTS RECOVERY Examples;

Requisites for the deductibility of Bad Debts Expense a. Gambling

C –charged off or written off against the books of the b. Ransom Money from Kidnapping
taxpayer
c. Extortion
U – the amount written off must be uncollectible in
d. Smuggling
the near future, no slim chance of recovery collecting
such an amount. e. Embezzlement

B – it must arise from business trade/profession

A – ascertain to be worthless