II.

INCOME TAXATION
A. Income Tax Systems
1. Global
2. Schedular
3. Semi-schedular or semi-global
B. Characteristics and Features of the Philippine Income Tax System
C. Definition of Income
Fisher vs. Trinidad
G.R. No. 17518, October 30, 1922
INCOME DEFINED AS THAT WORD IS USED IN THE INTERNAL REVENUE
LAW.An income may be defined as the amount of money coming to a
person or corporation within a specified time, whether as payment for
services, interest, or profit from investment. A mere advance in the
value of the property of a person or corporation in no sense constitutes
the "income" specified in the revenue law. Such advance constitutes
and can be treated merely as an increase of capital. An income means
cash received or its equivalent; it does not mean choses in action or
unrealized increments in the value of the property. The revenue law
with reference to the income tax employs the term "income" in its
natural and obvious sense, as importing something distinct from
principal or capital.
That during the year 1919 the Philippine American Drug Company was
a corporation- duly organized and existing under the laws of the
Philippine Islands, doing business in the city of Manila; that the
appellant was a stockholder in said corporation; that said corporation,
as a result of the business for that year, declared a "stock dividend;"
that the proportionate share of said stock dividend of the appellant was
P24,800; that the stock dividend for that amount was issued to the
appellant; that thereafter, in the month of March, 1920, the appellant,
upon demand of the appellee, paid, under protest, and involuntarily,
unto the appellee the sum of P889.91 as income tax on said stock
dividend. For the recovery of that sum (P889.91) the present action
was instituted.
The only question presented by this appeal is: Are the "stock
dividends" in the present case "income" and taxable as such under the
provisions of section 25 of Act No. 2833 ?
Having reached the conclusion, supported by the great weight of
authority, that "stock dividends" are not "income," the same cannot be

taxed under that provision of Act No. 2833 which provides for a tax
upon income. Under the guise of an income tax, property which is not
an income cannot be taxed. When the assets of a corporation have
increased so as to justify the issuance of a stock dividend, the increase
of the assets should be taken account of by the Government in the
ordinary tax duplicates for the purposes of assessment and collection
of an additional tax. For all of the foregoing reasons, we are of the
opinion, and so decide, that the judgment of the lower court should be
revoked, and without any finding as to costs, it is so ordered.
1. When is income taxable?
i. Realization Test
Manila Mandarin Hotels Inc. vs CIR
CTA Case no. 5046, March 24, 1997
Under the realization principle, revenue is generally recognized when
both of the following conditions are met: (a) the earning process is
complete or virtually complete, and (b) an exchange has taken place.
This principle requires that revenue must be earned before it is
recorded. Thus, the amounts received in advance are not treated as
revenue of the period in which they are received but as revenue of the
future period or periods in which they are earned. These amounts are
carried as unearned revenue, that is, liabilities to transfer goods in the
future until the earning render services in the process is complete.
(Compilation of Statements of Financial Accounting Standards No. 122, pp. 41-42).
This Court disagrees with the respondent in the assessment of the
deficiency percentage tax, primarily because the deposits made by
petitioner 's hotel clients should not be treated as part of its gross
income.
ii.

Claim of right doctrine

Manila Electric Company vs. CIR

CTA Case No. 7242, December 6, 2010
In the claim-of-right doctrine, if a taxpayer receives money or other
property and treats it as its own under the claim of right that the
payments are made absolutely and not contingently, such amounts are
included in the taxpayer's income, even though the right to the income
has not been perfected at that time. It does not matter that the
taxpayer's title to the property is in dispute and that the property may
later be recovered from the taxpayer.

In this case, by virtue of the claim-of-right doctrine and consistent with

the recognition of income and deduction under the NIRC of 1997,
Meralco recognized a bona fide claim over the amounts received out of
its overcharged rate as early as 1995 and not when the Decision of the
Supreme Court became final on 2003. It is proper that the overcharges
be taxed at the time of income recognition. A fortiori, the two (2)-year
prescriptive period for filing a claim for refund should be reckoned from
the time when income was recognized, i.e. "the date of payment of the
tax or penalty regardless of any supervening cause that may arise
after payment xxx."
Tax refunds are in the nature of tax exemptions. As such, they are
regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the exemption.
34 Thus, the burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant
of organic or statute law and cannot be permitted to exist upon vague
implications.
Since tax refunds partake of the nature of tax exemptions, which are
construed strictissimi juris against the taxpayer, evidence in support of
a claim must likewise be strictissimi scrutinized and duly proven.
Assuming without conceding, Meralco's claim has not yet prescribed,
the claim is at best premature and would still fail with respect to the
overcharges not yet refunded to petitioner's consumers. The amount to
be refunded has not yet been fully returned to the consumers. In
Meralco's Notes to Financial Statements for the year ended December
31, 2007, assuming the previous payments were indeed repaid, there
remained an estimated balance of P14,396M not yet refunded.
Moreso, the refund is subject to a condition that the overcharges
should have been actually given or credited to future consumption of
Meralco's consumers. Meralco admitted that some of the electric
service accounts of its consumers entitled to refund are terminated,
hence, it acceded to the probability that the entire gross refund
amount of P30,230,092,522.39 may not be fully refunded or credited to
future consumption.
This only shows that the instant case would still fail due to insufficiency
of evidence to determine whether the total amount was actually repaid
to Meralco's consumers. The determination of the amount repaid is
necessary in granting this tax refund otherwise the government would
be in a position of refunding an income tax, the tax base of which is
still within the coffers of Meralco and may or may not be repaid to its
consumers. Until and unless repayment can be ascertained, Meralco's

overcharges are still considered income under the claim of right

doctrine, thus, the claim for refund under this situation must fail.
iii.

All events test

CIR vs. Isabella Cultural Corporation
G.R. No. 172231, February 12, 2007

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.The all-events test requires the right
to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test
does not demand that the amount of 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 allevents 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. Accordingly, the term
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.
An exemption from the common burden cannot be permitted to exist
upon vague implications. And since a deduction for income tax
purposes partakes of the nature of tax exemption, then it must also be
strictly construed.Corollarily, it is a governing principle in taxation
that tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one who
claims an exemption must be able to justify the same by the clearest
grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. And since a
deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.