V.

Taxpayer Suit
Case: Anti-graft League of the Phil. V. San Juan, G.R. No. 97787
August 1, 1996
Abaya v. Ebdane, G.R. No. 167919 February 14, 2007

VI. Tax Amnesty:

Case: Republic v IAC; G.R. No. L-69344, April 26, 1991

E. Sources of Tax Laws

Constitution
Statutes
Issuances by the Secretary of Finance
Administrative Issuances by the BIR: Legislative Rule and Interpretative Rule
Cases:
CIR v. CA and Fortune, GR No. 119761, 29 August 1996
PBCom v. CIR, G.R. No. 112024, January 28, 1999
CIR v. CA and Fortune GR 119761, August 29, 1996
CIR v. Michel Lhuiller GR 150947, July 25, 2003

Tax Ordinances
Case:
Tuzon v. CA, 212 SCRA 739
vi. Tax Treaties
Case:
Tanada v. Angara, GR118295, May 2, 1997
vii. Case Laws

F. Taxation as a process
Stages in the Tax process
1. Levy
2. Assessment and Collection
3. Payment
4. Refund

II. INCOME TAXATION1

A. Income
Sec. 36 Revenue Regulations No. 2
Cases:
 Conwi v. CTA, 213 SCRA 83
 CIR v. BOAC, 149 SCRA 395
 Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or
from profession, vocations, trades, business, commerce, sales, or dealings in property,
whether real or personal, growing out of the ownership or use of or interest in such

1
Based on the course outline of Atty. Carlos G. Baniqued in Tax II, Ateneo de Manila University School of Law, as revised and updated by Atty.Terence Conrad
H. Bello.
 property; also from interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profit or gains, profits, and income derived from any
source whatever"

 "income" refers to the flow of wealth

 The source of an income is the property, activity or service (PAS) that produced the
income. For the source of income to be considered as coming from the Philippines, it
is sufficient that the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of
such protection, the flow of wealth should share the burden of supporting the
government.
Madrigal v. Rafferty, 38 Phil. 414
 The essential difference between capital and income is that capital is a fund; income
is a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time is
called income. Capital is wealth, while income is the service of wealth.

B. Income Taxation
1. Income Tax Systems (see page 44 UP Law Rev)
2. Features of the Philippine Income Tax Law

C. Criteria in Imposing Philippine Income Tax

1. Citizenship Principle
2. Residence Principle
3. Source Principle

D. Tax Treaties

E. Taxable Period

F. Taxpayers
1. Individual Taxpayers
a. Citizens
i. Resident citizens
ii. Non-resident citizens
iii. Overseas Filipino Worker
As per the BIR, an OFW is a “Filipino citizen employed outside the Philippines and is physically
present in that country or territory in order to perform work”. OFW wages and salaries are paid by an
employer based abroad and is not borne by any entity or employer in the Philippines.
To be officially recognized as an OFW, the Filipino must be duly registered with the Philippine
Overseas Employment Administration (POEA) as an OFW.
However, as reiterated in BIR’s Revenue Memorandum No. 1-2011, the wage or income of an
OFW ” arising out of his overseas employment is exempt from income tax.”

Since OFW salaries are already taxed in the country they are working, the Philippines exempts
this taxable income through the virtue of Tax Reciprocity.

With the tax reciprocity rule, Filipinos working abroad are exempt from paying income taxes in the
Philippines, in the same way that foreigners working in the Philippines are taxed here for incomes
sourced within the Philippines and are also not required anymore to pay income taxes to their home
country.

b. Aliens
i. Resident aliens
ii. Non-resident aliens
a. Engaged in trade or business
b. Not engaged in trade or business
c. Special Class of Individual Employees
i. Minimum wage earner
2. Corporations
a. Domestic corporations
b. Foreign corporations
i. Resident foreign corporations
ii. Non-resident foreign corporations
3. Partnerships
a. General Professional Partnerships

4. Estates and Trusts

5. Co-ownerships

G. Income
a. Definition
b. Nature
c. When income is taxable
d. Tests in determining whether income is earned for tax purposes

Secs 43-44, NIRC

Sec. 51-53 Revenue Regulations No. 2
Cases:
Limpan v. CIR 17 SCRA 703
Republic v. dela Rama, 18 SCRA 861

F. Gross Income (page 54 UP Law Rev)

a. Definition
b. Concept of income from whatever source derived
c. Gross Income vis-à-vis Net Income vis-à-vis Taxable Income
d. Classification of Income as to Source

G. Sources of income subject to tax

1. Compensation Income
Cases:
Henderson v. Collector, 1 SCRA 649
CIR v. Castaneda, 203 SCRA 72
Polo v. CIR, GR L-78780, July23, 1987
2. Fringe Benefits
3. Professional Income
 4. Income from Business
5. Income from Dealings in Property
a. Types of Properties
b. Types of Gains from dealings in property
1. Ordinary income vis-à-vis Capital gain
Case:
China Banking Corporation v. CA, GR No. 125508 July 19, 2000
2. Installment Sales v. Deferred Sales
Case:
Banas v. CA, G.R. No. 102967. February 10, 2000
3. Wash sale
4. Actual gain vis-à-vis Presumed gain
5. Long term capital gain vis-à-vis Short term capital gain
6. Net capital gain, Net capital loss
7. Computation of the amount of gain or loss
General rule
Where no gain or loss shall be recognized
Exceptions
a. Meaning of merger, consolidation, control
b. Transfer of a controlled corporation
8. Income tax treatment of capital loss
a. Capital loss limitation rule
b. Net loss carry-over rule
9. Dealings in real property situated in the Philippines
10. Dealings in shares of stock of Philippine corporations
11. Sale of principal residence
6. Passive Investment Income
a. Interest Income
b. Dividend Income
Cases:
Republic v. dela Rama, 18 SCRA 861
CIR v. CA and ANSCOR, G.R. No. 108576, January 20, 1999
c. Royalty Income
Case:
Phil. American Life v. CIR, GR SP. No. 31283, April 25, 1995
d. Rental Income
7. Annuities, Proceeds from life insurance or other types of insurance
8. Prizes and awards
9. Pensions, retirement benefit, or separation pay
Case:
CIR v. GCL Retirement, 307 SCRA 487
10. Income from any source whatever

Assignment for Tuesday, April 10 2018:

Deductions from Gross Income

1. General rules
Cases:
2. Return of capital (cost of sales or services)
3. Itemized deductions
a. Expenses
1. Requisites for deductibility
a. Nature: Ordinary and necessary
b. Paid and incurred during taxable year
Cases:
1. CIR v. Isabela Cultural Corporation, February 12, 2007
2. CIR v. General Foods, GR 143672, April 24, 2003
3. Gancayco v. Collector, 1 SCRA 980

2. Salaries, wages and other forms of compensation for personal

services actually rendered
3. Traveling/Transportation expenses
4. Cost of materials
5. Rentals and/or other payments for use or possession of property
6. Repairs and maintenance
7. Expenses under lease agreements
8. Expenses for professionals
9. Entertainment expenses
10. Political campaign expenses
11. Training expenses
b. Interest
1.Requisites for deductibility
2. Non-deductible interest expense
3. Interest subject to special rules
Cases:
1. CIR v. Itogon-Suyoc Mines, GR 25399, July 29, 1969
2. Paper Industries v. CA, 250 SCRA434
4. Tax Arbitrage Scheme

c. Taxes
d. Losses
1. Requisites for deductibility
Cases: 
1. Fernandez Hermanos v. CIR, 29 SCRA 552
2. Plaridel Security v. CIR, 21 SCRA 1187
2. Other types of losses
a. Capital losses
b. Securities becoming worthless
c. Losses on wash sales of stocks or securities
d. Wagering losses
e. NOLCO
Rev. Regs. 14-2001
75% interest retention rule
Case:
PICOP v. CIR, GR No. L-106949, 1 December 1995
e. Bad debts
Requisites for deductibility
Case:
Phil. Refining v. CA, 256 SCRA 667
f. Depreciation
1. Requisites for deductibility
2. Methods of computing depreciation allowance
a. Straight-line method
b. Declining-balance method
c. Sum-of-the-years-digit method
Case:
Basilan Estates v. CIR, 21 SCRA 17
g. Charitable and other contributions
1. Requisites for deductibility
2. Amount that may be deducted
Case:
Roxas v. CTA, 23 SCRA 276
h. Contributions to pension trusts
Requisites for deductibility

4. Optional standard deduction

Assignment for Tuesday, April 17, 2018:

4. Optional standard deduction

5. Items not deductible

a. General rules
b. Personal, living or family expenses
c. Amount paid for new buildings or for permanent improvements 
d. Amount expended in restoring property 
e. Premiums paid on life insurance policy covering life or any other officer
or employee financially interested
f. Interest expense, bad debts, and losses from sales of property between
related parties
g. Losses from sales or exchange or property
h. Non-deductible interest
i. Non –deductible taxes
j. Non-deductible losses
k. Losses from wash sales of stock or securities

J. Exempt Corporations

K. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

a. General rule
b. Taxation on Compensation Income
1. Inclusions
2. Exclusions
3. Deductions
c. Taxation of compensation income of a minimum wage earner
d. Taxation of Business Income/Income from Practice of Profession
e. Taxation of Passive Income
f. Taxation of capital gains

L. Taxation of Non-resident Aliens Engaged in Trade or Business

a. General rules
b. Cash and/or property dividends
c. Capital gains

M. Exclude Non-resident Aliens Not Engaged in Trade or Business

N. Individual Taxpayers Exempt from Income Tax

a. Senior citizens
b. Exemptions granted under international agreements

O. Taxation of Domestic Corporations

Case:
CIR v. Batangas Tayabas Bus Co. 102 Ohil 822

a. Tax payable
1.Regular tax
2. Minimum corporate income tax (MCIT)
b. Allowable deductions
1. Itemized deductions
2. Optional standard deduction
c. Taxation of Passive Income
d. Taxation of Capital Gains
e. Tax on proprietary educational institutions and hospitals
f. Tax on government-owned or controlled corporations, agencies or
instrumentalities
g. Large Taxpayers
Revenue Regulations No. 1-98

P. Taxation of Resident Foreign Corporations

a. General rule
b. With respect to their income from sources within the Philippines
c. Minimum corporate income tax
d. Tax on certain income
e. Exclusions
Cases:
1. Winship v. Philippine trust Co., 90 Phil 744
2. Marubeni v. CIR 177 SCRA 500

Q. Taxation of Non-resident Foreign Corporations

a. General rule
b. Tax on certain income
c. Exclusions 
Cases:
1. CIR v. Boac, 149 SCRA 395
2. Marubeni v. CIR, supra

Additional case assignment for Tuesday, April 24, 2018:

COMMISSIONER OF INTERNAL REVENUE vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING

CORPORATION and THE COURT OF TAX APPEALS (G.R. No. L-66838 December 2, 1991