Prof. D.

Lucenario

PART B: INCOME TAXATION (short version) I. OVERVIEW AND GENERAL PRINCIPLES A. Income - Sec. 36, Revenue Regulations No. 2 - Madrigal v. Rafferty, 38 Phil 414 B. Income Tax C. When is Income Taxable? - Secs. 43-44, NIRC - Secs. 51-53, Revenue Regulations No. 2 - Eisner v. Macomber, 252 US 89 - Raytheon Production v. CIR, 144 F2d 110 - CIR v. Tours Specialist, 183 SCRA 402 - CIR v. Javier, 199 SCRA 824 D. Capital Gain; Ordinary Gain; Presumed Gain - Capital Gain - Ordinary Gain - Business Income - Income from Trade/Practice of Profession - Passive Income - Other Forms - Presumed Gain - Sec. 24(D), NIRC E. Income Tax Systems - Global Tax System - Schedular Tax System - Sison v. Ancheta, GR L-59431, July 25, 1984 - Semi-schedular or Semi-global Tax System F. Criteria in Imposing Philippine Income Tax - Nationality/Citizenship - Residence - Source - Sec. 23, NIRC G. Tax Treaties I. TAXPAYERS A. General Principles - Sec. 23, NIRC B. Individuals - Sec. 23(A-D), NIRC Resident Citizens - Sec. 23(E), NIRC Non-Resident Citizens - Secs. 22(E), 23(B), NIRC Overseas Filipino Workers - Sec. 23(C), NIRC Resident Alien

2 - Secs. 22(F), 24(B), NIRC - Sec. 5, Revenue Regulations No. 2 Non-Resident Alien Engaged in Trade or Business - Secs. 22(G), 25(A), NIRC Non-Resident Alien Not Engaged in Trade or Business - Secs. 25(B), NIRC Special Aliens - Secs. 25(C-E), NIRC C. Corporations - Sec. 22(B), NIRC Large Taxpayers - Revenue Regulations No. 1-98 Partnership; Co-ownership; GPP - Secs. 22(B), 26, 73(D), NIRC - Art. 484, Civil Code - Evangelista v. Collector, 102 Phil 140 - Tan v. CIR, GR L-109289, Oct. 3, 1994 - Pascual v. CIR, 166 SCRA 560 - Afisco v. CIR, 302 SCRA 1 - Solidbank v. CIR, CTA Case No. 4868, June 19, 1997 Joint Venture; Exempt v. Taxable Domestic Corporations - Sec. 22(C), 27, NIRC - Revenue Memorandum Circular 16-2006 Resident Foreign Corporations - Marubeni v. CIR, 177 SCRA 500 Non-Resident Foreign Corporations - Secs. 22(D), 28, NIRC - Marubeni v. CIR, 177 SCRA 500 - CIR v. Procter and Gamble, 204 SCRA 277 D. Estates and Trusts - Secs. 22(J), 60-64, NIRC - Secs. 207-213, Revenue Regulations No. 2 - CIR v. Visayas Electric, 23 SCRA 715 - CIR v. CA, 207 SCRA 487 E. Registration of Taxpayers - Secs. 236(A, J), NIRC II. EXEMPT TAXPAYERS A. Exempt Individuals Minimum Wage Earners - RA 9504 Senior Citizens - Sec. 4, RA 9257 - Revenue Regulations No. 4-2006 Under Tax Treaty B. Exempt Corporations - Secs. 27(C), 30, NIRC - Omnibus Investments Code; RA 7916; RA 8502; RA 6983 - CIR v. CA, GR 124043, Oct. 14, 1998 - CIR v. CA, GR 115349, Apr. 18, 1997

III. GROSS INCOME AND EXCLUSIONS A. Income from Whatever Source - Secs. 31-32, NIRC - Sec. 61, Revenue Regulations No. 2 - Gutierrez v. Collector, 101 Phil 713 - Eisner v. Macomber, 252 US 189 - CIR v. Javier, 199 SCRA 824 Situs of Income - Sec. 42, NIRC - Secs. 152-165, Revenue Regulations No. 2 From Sources Within the Philippines - Sec. 42 (A,B), NIRC - Revenue Regulations No. 16-86 - NDC v. CIR, 151 SCRA 472 - CIR v. CTA, 127 SCRA 9 - CIR v. Marubeni, GR 137377, Dec. 18, 2001 - Phil. Guaranty v. CIR, GR L-22074, Apr. 30, 1965 From Sources Without the Philippines - Sec. 42(C), NIRC Partly Within/Without the Philippines - Sec. 42(E), NIRC B. Compensation Income - Sec. 32(A), NIRC - Sec. 2.78.1(A), Revenue Regulations No. 2-98 - Henderson v. Collector, 1 SCRA 649; Convenience of the Employer Rule - CIR v. Castaneda, 203 SCRA 72 Fringe Benefits Exclusions: Compensation for Injuries or Sickness - Sec. 32(b)(4), NIRC 13th Month Pay and Other benefits - Sec. 32 (7)(b,e), NIRC - RA 7833 and its IRR (see RA 8424, Sec. 32(B)(7)(e)) - CIR v. Castaneda, 203 SCRA 72 Income Exempt Under Treaty - Sec. 28(b)(4), NIRC - Reagan v. CIR, 30 SCRA 968 C. Pensions/Retirement Benefits/Separation Pay - Sec. 32(A)(10), NIRC Exclusions: - Sec. 32(6)(a-f), NIRC - Sec. 2.78.1(B)(1-12), Revenue Regulations No. 2-98 - RA 4917; RA 7641 - CIR v. CA, 203 SCRA 72 - CIR v. GCI Retirement, 207 SCRA 487 - In re Zialcita, AM No. 90-6-015-SC, Oct. 18, 1990 D. Passive Income 1. Interest Income - Sec. 32(A)(4), NIRC Exclusions: - Sec. 32(B)(7)(a), NIRC

4 - NDC v. CIR, GR L-53961, June 30, 1987 2. Rentals/Leases - Sec. 32(A5), NIRC - Secs. 74, 49 and 58, Revenue Regulations No. 2 - Revenue Regulations 19-86 3. Royalties - Sec. 32(A)(6), NIRC - CIR v. SC Johnson, GR 127105, June 25, 1999 4. Dividends - Sec. 32(A)(70, NIRC - Secs. 58 and 71, 250-253, Revenue Regulations No. 2 - Sec. 73(C,D), NIRC - CIR v. CA, GR 108576, Jan. 20, 1999 Exclusions: - Income Exempt Under Tax Treaty - Passive Income of Foreign Government 5. Annuities and Insurance Proceeds - Sec. 32(A)(8), NIRC - Sec. 48, Revenue Regulations No. 2 Exclusions: Proceeds from Life Insurance - Sec. 32(B)(1), NIRC - Sec. 62, Revenue Regulations No. 2 - El Oriente Fabrica v. Posadas, 56 Phil 147 Return of Premium Paid - Sec. 32(B)(2), NIRC - Sec. 48, Revenue Regulations No. 2 Compensation for Injuries or Sickness - Sec. 32(B)(4), NIRC - Sec. 63, Revenue Regulations No. 2 6. Prizes and Winnings/Awards/Rewards - Sec. 32(A)(9), NIRC - Sec. 282, NIRC - CIR v. COA, GR 101976, Jan. 29, 1993 Exclusions: PCSO and Lotto Winnings - Sec. 24(B)(1), NIRC Sports Competition Prizes - Sec. 32(B)(7)(d), NIRC 7. Other Types of Passive Income - Found Treasure - Tax Refund; - Recovery of Bad Debt Previously Deducted; - Damages - Ramnani v. CIR, CTA Case No. 5108, Sept. 13, 1996 E. Gains Derived from Dealings in Property - Secs. 32(A)(3), 39-40, NIRC Exclusions: Shares of Stocks Classified as Capital Asset and Traded in PSE - Sec. 127, NIRC F. Business Income/ Income from Exercise of Profession - Secs. 32(A)(2), 27(E), NIRC - Secs. 36-38, 43-47, Revenue Regulations No. 2

5 Exclusions: - Income Exempt Under a Treaty - Income Derived by Governmental/Political Subdivision from Exercise of Essential Government Function G. Partners Distributive Share of the Gross Income of General Professional Partnerships - Sec. 32(A)(11), NIRC H. Exclusions under Special Laws - RA 9040 IV. DEDUCTIONS AND EXEMPTIONS A. Deductions in General - Sec. 34, NIRC - Secs. 119-120, Revenue Regulations No. 2 - - Zamora v. Collector, 8 SCRA 163 - Esso Standard v. CIR, 176 SCRA 149 - CM Hoskins v. CIR, 30 SCRA 434 - Gancayco v. Collector, 1 SCRA 980 - Commissioner v. Philippine Acetylene, 39 SCRA 70 - BIR Ruling No. 12-2004, Sept. 13, 2004 Kinds of Deductions - Itemized - Optional Standard - Special Deductions Limitations and Substantiation - Sec. 34, NIRC Allocation - Sec. 50, NIRC B. Allowable Deductions - Secs. 24(A), 25(A), 26, 27(A,B,C), 28(A)(1), NIRC Ordinary/Necessary Business Expenses - Goodrich v. Collector, CTA Case No. 468, June 8, 1965 - Sec. 34(2), NIRC Interest Expense - Sec. 34(B), NIRC - Revenue Regulations No. 13-00 - CIR v. Palanca, 18 SCRA 496 - CIR v. Vda. de Prieto, 109 Phil 592 - Paper Industries v. CA, 250 SCRA 434 Taxes - Secs. 34(3,4), NIRC; Tax Benefit Rule - Secs. 80-83, Revenue Regulations No. 2 - CIR v. Lednicky, GR L-18169, July 31, 1964 - Gutierrez v. Collector, 14 SCRA 33 Losses - Sec. 34(D), NIRC - Revenue Regulations No. 14-01 - Secs. 93-101, Revenue Regulations No. 2 - Revenue Regulations No. 12-77 - BIR Rulings No. 144-85, Aug. 26, 1985 - Revenue Memorandum Circular 26-85

6 - Fernandez Hermanos v. CIR, 29 SCRA 552 - Plaridel Security v. CIR, 21 SCRA 1187 - China Bank v. CA, 336 SCRA 178 Bad Debts - Sec. 30(b), NIRC Tax Benefit Rule - Secs. 102-104, Revenue Regulations No. 2 - Collector v. Goodrich, 21 SCRA 1336 Depreciation - Sec. 34(F), NIRC - Secs. 105-115, Revenue Regulations No. 2 - Revenue Regulations 19-86 - Basilan Estates v. CIR, 21 SCRA 17 - Zamora v. Collector, 8 SCRA 163 Depletion - Sec. 34(G), NIRC - Revenue Regulations No. 5-76 R&D Expenses - Sec. 34(I), NIRC Charitable and Other Contributions - Sec. 34(H), NIRC - Revenue Regulations No. 13-98 - BIR-NEDA Regulations Nos. 1-81 and 1-82 - Roxas v. CTA, 23 SCRA 276 Contribution to a Pension Trust - Sec. 34(J), NIRC - Sec. 118, Revenue Regulations No. 2 Non-Deductible Expenses - Sec. 26, NIRC - Secs. 119-122, Revenue Regulations No. 2 - Gancayco v. Collector, 1 SCRA 980 Losses between Related Taxpayers - Sec. 36(B), NIRC Losses on Wash Sales - Sec. 38, NIRC Illegal Expenses - Sec. 34(1), NIRC Special Deductions - Sec. 37, NIRC Deductions for Individuals Optional Standard Deductions - Sec. 34(L), NIRC Premium Payments - Sec. 34(M), NIRC Personal Exemptions - Sec. 35, NIRC - RA 9504 Basic Personal Exemption - Sec. 2.79(I)(1)(a), Revenue Regulations No. 2-98 (Note: amended by RA 9504 and RR 10-08) Additional Exemption for Dependents - Sec. 2.79(I)(1)(b), Revenue Regulations No. 2-98 Reciprocity

C.

D. E.

F.

V. TAX ON INDIVIDUALS: BASES AND RATES A. Resident Citizens and Resident Aliens Taxable Income - Sec. 24(A)(1)(a-c), NIRC Passive Income: Interest, Royalties, Prizes and Other Winnings - Secs. 24(B)(1), 24(FF), NIRC Dividends - Sec. 24(B)(2), NIRC Capital Gains on Shares of Stocks - Sec. 24(C), NIRC Capital Gains on Real Property - Sec. 24(D), NIRC B. Non-Resident Aliens Engaged in Trade or Business Taxable Income - Sec. 25(A)(1), NIRC Passive Income - Sec. 25(A)(2), NIRC Capital Gains - Sec. 25(3) C. Non-Resident Aliens Not Engaged in Trade or Business - Sec. 25(B) D. Special Aliens - Sec. 25(C-E), NIRC E. Members of GPP - Sec. 26, NIRC VI. TAX ON CORPORATIONS: BASES AND RATES A. Domestic Corporations Taxable Income - Sec. 27(A), NIRC Passive Income: Interest, Royalties - Sec. 27(D)(1, 3), NIRC Dividends - Sec. 27(4), NIRC Capital Gains - Sec. 27(D)(2, 5), NIRC B. Resident Foreign Corporations Taxable Income - Sec. 28(A), NIRC - NV Reederit v. CIR, 162 SCRA 487 Branch Profit Remittance Tax - Sec. 28(A)(5), NIRC - Bank of America v. CIR, GR 10392, July 21, 1994, 234 SCRA 302 - Marubeni v. CIR, 177 SCRA 500 - Campania General de Tabacos, CTA 4451, Aug 23, 1993 Passive Income:

8 Interest - Sec. 28(A)(7)(a-b), NIRC Dividends - Sec. 28(A)(7)(d), NIRC Capital Gains - Sec. 28(A)(7)(c), NIRC C. Non-resident Foreign Corporations Taxable Income - Sec. 28(B)(1) Passive Income: Interest - Sec. 28(B)(5)(a), NIRC Dividends - Sec. 28(B)(5)(b), NIRC - CIR v. Procter and Gamble, 160 SCRA 650; 204 SCRA 377 - Marubeni v. Commissioner, 177 SCRA 500 Capital Gains - Sec. 28(B)(5)(c), NIRC D. Special Corporations - Sec. 27(B-C), NIRC Private Educational Institutions and Non-profit Hospitals - Sec. 4(3), Art. XIV, 1987 Constitution Non-profit-non-stock Educational Institution Non-resident Cinematographic Film Owner, Lessor or Distributor International Carriers - Sec. 28(3), NIRC Non-resident Owner of Vessels Non-resident Lessor of Aircraft, Machineries and Other Equipment Foreign Currency Deposit Units/Offshore Banking Units - Sec. 28(4), NIRC - RA 9294 Regional or Area Headquarters and Regional Operating Headquarters - Secs. 22(D-E), 28(A)(6), NIRC Petroleum Service Contractor and Subcontractor BCDA, PEZA and BOI Registered Enterprises E. F. Omnibus Investments Code Minimum Corporate Income Tax Secs. 27(E), 28(A)(2), NIRC Improperly Accumulated Earnings Tax Sec. 29, NIRC Cyanamid Phils. v. CA, GR 1008067, Jan. 20, 2000 CIR v. Antonio Tuason, GR 85749, May 15, 1989 Manila Wine Merchants v. CIR, GR L-26145, Feb. 25, 1984

G. Fringe Benefits Tax; De Minimis Benefits; ACA; RATA; PERA - Sec. 33, NIRC

VII.

ORDINARY ASSETS AND CAPITAL ASSETS

9 A. Capital Asset v. Ordinary Asset - Secs. 24(D), 39, NIRC - Secs. 132-135, Revenue Regulations No. 2 - Roxas vs. CIR, G.R. No. L-25043, Apr. 26, 1968 B. Treatment of Sale or Exchange of Ordinary Assets C. Treatment of Sale or Exchange of Capital Assets which are not Real Property - Secs. 39(A), 40, NIRC Net Capital Gain and Net Capital Loss Holding Period D. Treatment of Sale or Exchange of Capital Assets which are Real Property Capital Tax on Presumed Gain - Secs. 6(E), 24(A), 24(D)(1), NIRC E. Foreclosure Sales of Real Property Redemption period VIII. TAX-FREE EXCHANGES AND OTHER TAX-EXEMPT TRANSACTIONS A. In General B. Merger or Consolidation - Sec. 40(C)(2) and (6)(b), NIRC De Facto Merger C. Exchange of Property for Shares of Stock - Sec. 40(C)(2), NIRC D. Other Tax-Exempt Transactions Sale of Principal Residence - Sec. 24(D)(2), NIRC - Revenue Regulations Nos. 13-99 and 14-2000 Community Mortgage Program Socialized Housing Secs. 19, 20, 32, RA 7279 - Secs. 93, 188, NIRC Deeds of Trusts Transfers by Mistakes - Sec. 196, NIRC Transfers of Rights Rescinded Contracts Equitable Mortgage Condominium Corporations Miscellaneous Exempt Transactions - Sec. 24(D), NIRC - RA 6657 E. Administrative Requirements IX. ACCOUNTING PERIODS AND METHODS Calendar Year v. Fiscal Year - Secs. 22, 43-47, NIRC - Secs. 51-53, 166-172, Revenue Regulations No. 2 Recognition of Income Long Term Contracts - Sec. 48, NIRC

10 Installment Sales - Secs. 49-50, NIRC Termination of Leasehold - Sec. 49, NIRC - Filipinas Synthetic v. CA, 316 SCRA 480 Recording of Income and Expenses/Keeping of Books - Secs. 175-179, Revenue Regulations No. 2 - CIR v. Wyeth Suaco, 202 SCRA 135 X. WITHHOLDING OF TAXES - Secs. 57-59, NIRC - RA 9504 - Revenue Memorandum Circular Nos. 46-2002 and 72-2004 - CIR v. Procter and Gamble, GR 66838, Dec. 2, 1991 - CIR v. Procter and Gamble, 160 SCRA 560 - CIR v. Procter and Gamble, 204 SCRA 377 - Marubeni v. CIR, 177 SCRA 501 - CIR v. CA, GR 127105, June 25, 1999 and Aug. 30, 1999 XI. RETURNS AND PAYMENT OF TAXES A. In General B. Individuals - Secs. 51, 55-56, NIRC C. Corporations - Secs. 52-54, 75-77, 47, NIRC - Sec. 244, Revenue Regulations No. 2.