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TAX ON INCOME 1. The Tax Code has included under the term corporation partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies. [Sec. 24 now Sec. 24 (B) of the NIRC of 1997] 2. In Evangelista v. Collector, 102 Phil. 140, the Supreme Court held citing Mertens that the term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. 3. Certain business organizations do not fall under the category of corporations under the Tax Code, and therefore not subject to tax as corporations, include: a. General professional partnerships; b. Joint venture or consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations, pursuant to an operation or consortium agreement under a service contract st with the Government. [1 sentence, Sec. 22 (B), BIRC of 1997] 4. Co-heirs who own inherited properties which produce income should not automatically be considered as partners of an unregistered corporation subject to income tax for the following reasons: a. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. There must be an unmistakable intention to form a partnership or joint venture. (Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436) b. There is no contribution or investment of additional capital to increase or expand the inherited properties, merely continuing the dedication of the property to the use to which it had been put by their forebears. (Ibid.) c. Persons who contribute property or funds to a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock capital, and no community of interest as principal proprietors in the business itself from which the proceeds were derived. nd (Elements of the Law of Partnership by Floyd R. Mechem, 2 Ed., Sec. 83, p. 74 cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 5. The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains, and they may, without becoming partners, are among themselves as to the management and use of such property and the application of the proceeds therefrom.. (Spurlock v,. Wilson, 142 S.W. 363, 160 No. App. 14, cited in Pascual v. Commissioner of Internal Revenue, 166 SCRA 560) 6. The income from the rental of the house, bought from the earnings of co-owned properties, shall be treated as the income of an

unregistered partnership to be taxable as a corporation because of the clear intention of the brothers to join together in a venture for making money out of rentals. 7. Income is gain derived and severed from capital, from labor or from both combined. For example, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 108576, January 20, 1999) 8. The term taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997) 9. The cancellation and forgiveness of indebtedness may amount to (a) payment of income; (b) gift; or to a (c) capital transaction depending upon the circumstances. 10. If an individual performs services for a creditor who, in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services. 11. An insolvent debtor does not realize taxable income from the cancellation or forgiveness. (Commissioner v. Simmons Gin Co., 43 Fd 327 CCA th 10 ) 12. The insolvent debtor realizes income resulting from the cancellation or forgiveness of indebtedness when he becomes solvent. (Lakeland Grocery Co., v. Commissioner 36 BTA (F) 289) 13. If a creditor merely desires to benefit a debtor and without any consideration therefor cancels the amount of the debt it is a gift from the creditor to the debtor and need not be included in the latters income. 14. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. (Sec. 50, Rev. Regs. No. 2) 15. Members of cooperatives not subject to tax on the interest earned from their deposits with the cooperative. No less than our Constitution guarantees the protection of cooperatives. Section 15, Article XII of the Constitution considers cooperatives as instruments for social justice and economic development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of the State to promote social justice in all phases of national development. In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social justice shall include the commitment to create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an interpretation exempting the members of cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC (tax on interest earned by deposits) is more in keeping with the letter and spirit of our Constitution. (Dumaguete Cathedral Credit Coopertive [DCCC)] etc., v. Commissioner of Internal Revenue, G. R. No. 182722, January 22, 2010)

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In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. Thus, although taxes are the lifeblood of the government, the States power to tax must give way to foster the creation and growth of cooperatives. To borrow the words of Justice Isagani A. Cruz: The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice. (Ibid., citing Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) , 500 Phil. 586 (2005). 16. The Global system of income taxation is a system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 17. The Schedular system of income taxation is a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. del Rosario, Jr., 237 SCRA 324, 331) 18. Under the National Internal Revenue Code the global system is applicable to taxable corporations and the schedular to individuals. 19. Compensation income is considered as having been earned in the place where the service was rendered and not considered as sourced from the place of origin of the money. 20. Payment for services, other than compensation income, is considered as having been earned at the place where the activity or service was performed. 21. A non-resident alien, who has stayed in the Philippines for an aggregate period of more than 180 days during any calendar year, shall be considered as a non-resident alien doing business in the Philippines. Consequently, he shall be subject to income tax on his income derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC] He is allowed to avail of the itemized deductions including the personal and additional exemptions subject to the rule on reciprocity. 22. What are considered as de minimis benefits not subject to withholding tax on compensation income of both managerial and rank and file employees ? SUGGESTED ANSWER: a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; c. Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,000.00; d. Uniforms and clothing allowance not exceeding P3,000.00 per annum; e. Actual yearly medical benefits not exceeding P10,000.00 per annum; f. Laundry allowance not exceeding P300 per month;

g. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible persona property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by an employee under an established written plan which does not discriminate in favor of highly paid employees; h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; i. Flowers, fruits, books, or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and j. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000 ceiling of other benefits provided under Section 32 (B)(7)(e) of the Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 23. Income subject to final tax refers to an income collected through the withholding tax system. The payor of the income withholds the tax and remits it to the government as a final settlement of the income tax as a final settlement of the income tax due on said income. The recipient is no longer required to include the income subjected to a final tax as part of his gross income in his income tax return. 24. Distinguish exclusions from deductions. SUGGESTED ANSWER: a. Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayers taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE deductions are the amounts which the law allows to be subtracted from gross income in order to arrive at net income. b. Exclusions pertain to the computation of gross income WHILE deductions pertain to the computation of net income. c. Exclusions are something received or earned by the taxpayer which do not form part of gross income WHILE deductions are something spent or paid in earning gross income. An example of an exclusion from gross income are life insurance proceeds, and an example of a deduction are losses. 25. What are excluded from gross income ? SUGGESTED ANSWER: a. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured whether in a single sum or otherwise.

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b. Amounts received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term, or at maturity of the term mentioned in the contract, or upon surrender of the contract. c. Value of property acquired by gift, bequest, devise, or descent. d. Amounts received, through accident or health insurance or Workmens Compensation Acts as compensation for personal injuries or sickness, plus the amounts of any damages received on whether by suit or agreement on account of such injuries or sickness. e. Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. f. Retirement benefits received under Republic Act No. 7641. Retirement received from reasonable private benefit plan after compliance with certain conditions. Amounts received for beyond control separation. Foreign social security, retirement gratuities, pensions, etc. USVA benefits, SSS benefits and GSIS benefits. 26. What are the conditions for excluding retirement benefits from gross income, hence tax-exempt ? SUGGESTED ANSWER: a. Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with the employers reasonable private benefit plan approved by the BIR. b. Retiring official or employee 1) In the service of the same employer for at least ten (10) years; 2) Not less than fifty (50) years of age at time of retirement; 3) Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997] The retiring official or employee should not have previously availed of the privilege under the retirement plan of the same or another st employer. [1 par., Sec. 2.78 (B) (1), Rev. Regs. No. 2-98] 27. What kind of separation (retirement) pay is excluded from gross income, hence tax-exempt ? SUGGESTED ANSWER: a. Any amount received by an official, employee or by his heirs, b. From the employer c. As a consequence of separation of such official or employee from the service of the employer because of 1) Death, sickness or other physical disability; or 2) For any cause beyond the control of said official or employee [Sec. 32 (B) (6) (b), NIRC of 1997], such as retrenchment, st redundancy and cessation of business. [1 par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98] 28. What are the Itemized deductions from gross income and who may avail of them ? a. Ordinary and necessary trade, business or professional expenses. b. The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations,

estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. c. Taxes paid or incurred within the taxable year in connection with the taxpayers profession. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. d. Ordinary losses, losses from casualty, theft or embezzlement; and net operating losses. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. e. Bad debts due to the taxpayer, actually ascertained to be worthless and charged off within the taxable year, connected with profession, trade or business, not sustained between related parties. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. f. Depreciation or a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in trade or business. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. g. Depletion or deduction arising from the exhaustion of a nonreplaceable asset, usually a natural resource. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense.

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Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. h. Charitable and other contributions. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. i. Research and development expenditures treated as deferred expenses paid or incurred by the taxpayer in connection with his trade, business or profession, not deducted as expenses and chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. j. Contributions to pension trusts. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations on their gross incomes from within may also deduct this expense. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. k. Insurance premiums for health and hospitalization. Resident citizens, resident alien individuals and nonresident alien individuals who are engaged in trade and business, on their gross incomes other from compensation income are allowed to deduct these expenses. Nonresident citizens and nonresident alien individual engaged in trade or business in the Philippine on their gross incomes from within may also deduct these premiums. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct these premiums. l. Personal and additional exemptions. Resident citizens, and resident alien on their gross incomes and from compensation income are allowed to deduct these premiums. Nonresident citizens on their gross incomes from within may also deduct this expense. Nonresident alien individuals engaged in trade or business in the Philippines are allowed to deduct these exemptions under reciprocity. Nonresident alien individuals not engaged in trade or business in the Philippines are not allowed to deduct this expense. 29. Distinguish ordinary expenses from capital expenditures. SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the trade or business of the taxpayer WHILE capital expenditures are those incurred to improve assets and benefits for more than one taxable year. Ordinary

expenses are usually incurred during a taxable year and benefits such taxable year. Necessary expenses are those which are appropriate or helpful to the business. 30. What are the requisites for the deductibility of business expenses ? SUGGESTED ANSWER: The following are the requisites for deductibility of business expenses: a. Compliance with the business test: 1) Must be ordinary and necessary; 2) Must be paid or incurred within the taxable year; 3) Must be paid or incurred in carrying on a trade or business. 4) Must not be bribes, kickbacks or other illegal expenditures b. Compliance with the substantiation test. Proof by evidence or records of the deductions allowed by law including compliance with the business test. 31. What are the requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services ? SUGGESTED ANSWER: a. the expense must be ordinary and necessary; b. it must have been paid or incurred during the taxable year dependent upon the method of accounting upon the basis of which the net income is computed. c. it must be supported by receipts, records or other pertinent papers. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) 32. TMG Corporation is issuing the accrual method of accounting. In 2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by these firms only during the following year 2006. Since the bills for legal and auditing services were received only in 2006 and paid in the same year, TMG deducted the same from its 2006 gross income. The BIR disallowed the deduction ? Who is correct, TMG or BIR ? Explain. SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the services were rendered in 2005, there was already an obligation to pay them. (Commissioner of Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007) NOTES AND COMMENTS: a. Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) The two (2) principal accounting methods for recognition of income are the (a) accrual method; and the (b) cash method. b. Recognition of income and expenses under the accrual method of accounting. Amounts of income accrue where the right to receive them becomes fixed, where there is created an enforceable liability. Liabilities, are incurred when fixed and determinable in nature without regard to indeterminacy merely of time of payment.. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)

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The accrual of income and expense is permitted when the all-events test has been met. (Ibid.) c.All-events test. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of such income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain; if its basis is unchangeable, the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly,; it must be determined with reasonable accuracy implies something less than an exact or completely accurate amount. The propriety of an accrual must be judged by the fact that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction. (Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007) d. Under the cash method income is to be construed as income for tax purposes only upon actual receipt of the cash payment. It is also referred to as the cash receipts and disbursements method because both the receipt and disbursements are considered. Thus, income is recognized only upon actual receipt of the cash payment but no deductions are allowed from the cash income unless actually disbursed through an actual payment in cash. 33. The fringe benefits tax is a final withholding tax imposed on the grossedup monetary value of fringe benefits furnished, granted or paid by the employer to the st employee, except rank and file employees. [1 par., Sec. 2.33 (A), Rev. Regs. No. 398] 34. What is meant by fringe benefit for purposes of taxation ? SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees), such as but not limited to: a. Housing; b. Expense account; c. Vehicle of any kind; d. Household personnel, such as maid, driver and others; e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Educational assistance to the employee or his dependents; and j. Life or health insurance and other non-life insurance premiums or st similar amounts in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 par., Sec. 2.33 (B), Rev. Regs. No. 3-98]

35. Fringe benefits that are not subject to the fringe benefits tax: a. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer; or b. When the fringe benefit is for the convenience or advantage of the st employer. [Sec. 32(A), NIRC of 1997; 1 par., Sec. 2.33 (A), Rev. Regs. No. 3-98] c. Fringe benefits which are authorized and exempted from income tax under the Tax Code or under any special law; d. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; e. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and f. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance upon recommendation of the Commissioner of st Internal Revenue. [1 par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 398] 36. De minimis benefits are facilities and privileges (such as entertainment, medical services, or so-called courtesy discounts on purchases), furnished or offered by an employer to his employees. They are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec. 2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000] 37. Preferred shares are considered capital regardless of the conditions under which such shares are issued and dividends or interests paid thereon are not allowed as deductions from the gross income of corporations. (Revenue Memorandum Circular No. 17-71) 38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99) 39. Who are related parties ? SUGGESTED ANSWER: The following are related parties: a. Members of the same family. 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. An individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; c. Two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual; d. A grantor and a fiduciary of any trust; or e. 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. A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]

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40. What are the requisites for valid deduction of bad debts from gross income ? SUGGESTED ANSWER: a. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; b. The same must be connected with the taxpayers trade, business or practice of profession; c. The same must not be sustained in a transaction entered into between related parties; d. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and e. The debt must be actually ascertained to be worthless and uncollectible during the taxable year; f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E) (1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine Refining Corporation v. Court of Appeals, et al., 256 SCRA 667] g. Must have been reported as receivables in the income tax return of the current or prior years. (Sec. 103, Rev. Regs. No. 2) : 41. What is the tax benefit rule ? SUGGESTED ANSWER: The tax benefit rule posits that the recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction. NOTES AND COMMENTS: a. If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due from him on account of the said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99) b. If the said taxpayer did not benefit from the deduction of the said bad debt written-off because it did not result to any reduction of his income tax in the year of such deduction (i.e. where the result of his business operation was a net loss even without deduction of the bad debts written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99) 42. Depreciation is the gradual diminution in the useful value of tangible property resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. 43. The methods of depreciation are the following: a. Straight line method; b. Declining balance method; c. Sum of years digits method; and d. Any other method prescribed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue: 1) Apportionment to units of production; 2) Hours of productive use;

3) 4)

Revaluation method; and Sinking fund method.

44. What are personal and additional exemptions ? SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum of subsistence, taking into account the personal status and additional qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have been predetermined by our lawmakers and until our lawmakers make new adjustments on these personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No. 159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414, 418 (1918)] 45. What is the amount allowed as basic personal exemption ? SUGGESTED ANSWER: There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. In the case of married individuals where only one of the spouse is deriving gross income, only such spouse shall be allowed the personal exemption. [Sec. 35 (A), NIRC of 1997 as amended by Rep. Act No. 9504; Sec. 2.79 (I) (1) (a), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008] NOTES AND COMMENTS: It is clear from Rep. Act No. 9504 that each of the spouses may claim the P50,000.00. Thus, the total familial basic personal exemption for spouses is P100,000.00. Furthermore, the distinctions between the concepts of single, married and head of the family for purpose of availing of the basic personal exemption has already been eliminated by Rep. Act No. 9504. 45. What are the amounts of additional exemptions ? SUGGESTED ANSWER: An individual, a. whether single or married, b. shall be allowed an additional exemption of Twenty-Five Thousand Pesos (P25,000.00) c.for each qualified dependent child, d. provided that the total number of dependents for which additional exemptions may be claimed st 1) shall not exceed four (4) dependents. [1 par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (B), NIRC of 1997 as amended by Rep. Act No. 9504] NOTES AND COMMENTS: a. It is clear that under the amendment, single individuals may now claim for the additional exemptions. Furthermore, the concept of head of a family does not find application anymore. b. A dependent means a. a legitimate, illegitimate or legally adopted child b. chiefly dependent upon and living with the taxpayer c.if such dependent is

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1) not more than twenty-one (21) years of age, 2) unmarried and 3) not gainfully employed or d. if such dependent, 1) regardless of age 2) is incapable of self-support nd 3) because of mental or physical defect. [2 par., Sec. 2.79 (I) (1) (b), Rev. Regs. No. 2-98 as amended by Rev. Regs. No. 10-2008, arrangement and numbering supplied; Sec. 35 (b), NIRC of 1997, as amended by Rep. Act No. 9504] c. It is to be noted that under the NIRC of 1997, as amended by Rep. Act No. 9504, only qualified dependent children are considered for additional exemptions. Grandparents, parents, as well, as brothers or sisters, and other collateral relatives are not qualified dependents to be claimed as additional exemptions. However, if they are senior citizens they may qualify as additional exemptions under the Senior Citizens Law but not under the NIRC of 1997, as amended by Rep. Act No. 9504. Senior citizen shall be treated as dependents provided for in the National Internal Revenue Code, as amended, and as such, individual taxpayers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. [last par. Sec. 5 (a), Rep. Act No. 7432, as amended by Rep. Act 9257, The Expanded Senior Citizens Act of 2003] 47. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his trade or business, and which are not included among the real properties considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003) The term capital assets means property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE: a. Stock in trade of the taxpayer, or b. 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 c. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or d. Property used in the trade or business, of a character which is subject to the allowance for depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 7-2003] 48. Examples of capital assets: a. Stock and securities held by taxpayers other than dealers in securities; b. Jewelry not used for trade and business; c. Residential houses and lands owned and used as such; d. Automobiles not used in trade and business; e. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or business; f. Inherited large tracts of agricultural land which were subdivided pursuant to the government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals, etc. L-25043, April 26, 1968)

g. Real property used by an exempt corporation in its exempt operations, such as a corporation included in the enumeration of Section 30 of the Code, shall not be considered used for business purposes, and therefore considered as rd capital asset. (last sentence, 3 par., Sec. 3.b, Rev. Regs. No. 7-2003) h. Real property, whether single detached, townhouse, or condominium unit, not used in trade or business as evidenced by a certification from the Barangay Chairman or from the head of administration, in case of condominium unit, townhouse or apartment, and as validated from the existing available records of the Bureau of Internal Revenue, owned by an individual engaged in business, shall be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003) 49. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets, namely: a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year; or b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c. Real property used in trade or business (i.e. buildings and/or improvements), of a character which is subject to the allowance for depreciation; or d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 7-2003) 50.. Examples of ordinary assets hence not capital assets: a. The machinery and equipment of a manufacturing concern subject to depreciation; b. The tractors, trailers and trucks of a hauling company; c. The condominium building owned by a realty company the units of which are for rent or for sale; d. The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture factory; e. Inherited parcels of land of substantial areas located in the heart of Metro Manila, which were subdivided into smaller lots then sold on installment basis after introducing comparatively valuable improvements not for the purpose of simply liquidating the estate but to make them more saleable ; the employment of an attorneyin-fact for the purpose of developing, managing, administering and selling the lots; sales made with frequency and continuity; annual sales income from the sales was considerable; and the heir was not a stranger to the real estate business. (Tuazon, Jr. v. Lingad, 58 SCRA 170) f. Inherited agricultural property improved by introduction of good roads, concrete gutters, drainage and lighting systems converts the property to an ordinary asset. The property forms part of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal Revenue, 144 SCRA at p. 672) 51. Tax treatment of real properties that have been transferred. Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following rules:

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a. Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in the hands of the heir or donee. b. Real property received as dividend by stockholders who are not engaged in the real estate business and who not subsequently use such real property in trade or business shall be treated as capital assets in the hands of the recipient even if the corporation which declared the real property dividend is engaged in real estate business. c. The real property received in an exchange shall be treated as ordinary asset in the hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate business, will use in business the property received in the exchange. (Sec. 3.f., Rev. Regs. No. 7-2003) 52. The tax is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 7-2003 has defined real property as having the same meaning attributed to that term under Article 415 of Republic Act No. 386, otherwise known as the Civil Code of the Philippines. (Sec. 2.c, Rev. Regs. No. 7-2003) 53. Transactions covered by the presumed capital gains tax on real property: a. sale, b. exchange, c. or other disposition, including pacto de retro sales and other forms of conditional sales. [Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied] d. Sale, exchange, or other disposition includes taking by the government through condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v. Court of Tax Appeals, et al., 121 Phil. 861) 54. In case the mortgagor exercises his right of redemption within one (1) year from the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99] 55. In case of non-redemption of the property sold upon a foreclosure of mortgage sale, the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but only upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99] 56. The basis for the final presumed capital gains tax of six per cent (6%) is whichever is the higher of the a. gross selling price, or b. the current fair market value as determined below:

1) the fair market value or real properties located in each zone or area as determined by the Commissioner of Internal Revenue after consultation with competent appraisers both from the private and public sectors; or 2) the fair market value as shown in the schedule of values of the Provincial and City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] It does not matter whether there was an actual gain or loss because the tax is a presumed capital gains tax. It is the transaction that is taxed not the gain. 57. Holding period not applied to the taxation of the presumed capital gains derived from the sale of real property considered as capital assets. 58. The tax liability, of individual taxpayers (not corporate), if any, on gains from sales or other dispositions of real property, classified as capital assets, to the government or any of its political subdivisions or agencies or to government owned or controlled corporations shall be determined, at the option of the taxpayer, by including the proceeds as part of gross income to be subjected to the allowable deductions and/or personal and additional exemptions, then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997] or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997] 59. The seller of the real property, classified as a capital asset, pays the presumed capital gains tax whether: a. an individual [Sec. 24 (D) (1), NIRC of 1997]; 1) Citizen, whether resident or not [Ibid.]; 2) Resident alien [Ibid.]; 3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A) (3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; 4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25 (B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997]; b. an estate or trust (Ibid.); c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997] 60. Excepted from the payment of the presumed capital gains tax are those presumed to have been realized from the disposition by natural persons of their principal place of residence a. the proceeds of which is fully utilized in acquiring or constructing a new principal residence; b. within eighteen (18) calendar months from the date of sale or disposition c. the BIR Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption; and d. the said tax exemption can only be availed of once every ten (10) years. [Sec. 24 (D) (2), NIRC of 1997] 61. MBC was incorporated in 1961 and engaged in commercial banking operations since 1987. On May 22, 1987, it ceased operations that year

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by reason of insolvency and its assets and liabilities were placed under the charge of a government-appointed receiver. On June 23, 1999, the BSP authorized MBC to operate as a thrift bank. In 2000, It filed its tax return for the year 1999 paying the amount of P33 million computed in accordance with the minimum corporate income tax (MCIT). It sought the BIRs ruling on whether it is entitled to the four (4) year grace period for paying on the basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as a result of being placed under involuntary receivership may be an economic reason for suspending the imposition of the MCIT. As a result of the ruling MBC filed an application for refund of the P33 million. Due to the BIRs inaction, MBC filed a petition for review with the CTA. The CTA denied the petition on the ground that MBC is not a newly organized corporation. In a volte facie the BIR now maintains that MBC should pay the MCIT beginning January 1, 1998 as it did not close its business operations in 1987 but merely suspended the same. Even if placed under receivership, the corporate existence was never affected. Thus, it falls under the category of an existing corporation recommencing its banking operations. Should the refund be granted ? SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable year immediately following the year in which the corporation commenced its business operations. [Sec. 27 (E) (1), NIRC of 1997] The date of commencement of operations of a thrift bank is the date it was registered with the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever comes later. (Sec. 6, Rev. Regs. No. 495) Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006) NOTES AND COMMENTS: a. The MCIT and when should be imposed and the four (4) year grace period. A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the tax computed under Subsection (A) of this section for the taxable year. [Sec. 27 (E) (1), NIRC of 1997] b. Period when a corporation becomes subject to the MCIT. (5) Specific rules for determining the period when a corporation becomes subject to the MCIT (minimum corporate income tax) For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98) Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 495 specifically refers to thrift banks.)

c. Purpose of the four (4) year grace period. The intent of Congress relative to the MCIT is to grant a four (43) year suspension of tax payment to newly organized corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations. Thus, in order to allow new corporations to grow and develop at the initial stages of their operations, the lawmaking body saw the need to provide a grace period of four years from their registration before they pay their minimum corporate income tax. (Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)