Forgiveness of Indebtedness

A.On account of debtor’s services to the creditor, the same is

taxable income to the debtor.
B. If no services were rendered and but the creditor condones
the debt. It is taxable gift not taxable income.
C. If the creditor is a corporation and the debtor is a
stockholder - the forgiveness of indebtedness has the effect of
a payment of dividend.
D.If the creditor is a stockholder and the debtor is a
corporation – the forgiveness of indebtedness shall be
considered as an additional investment.
 Illustration

Ferdie, an architect owes Mel, a businessman P30,000. the latter

engaged the services to the former to remodel his house. The
value of the service amounted to P30,000.
Subsequently, Mel cancelled the debt of Ferdie.

A. Is the P30,000 value of services taxable to Ferdie?

B. Suppose Mel condone the debt of Ferdie without requiring the
latter to render any services. Is the P30,000 subject to income
tax?
 Answer
A.
-YES, because it is simple case of paying the indebtedness to
Mel.
Consequently, the P30,000 is taxable to Ferdie.

B.
NO. It is not an income, it is considered more as a gift which is
governed by the law on donor’s taxation.
 Remuneratory donations

Remuneratory donations are those which remunerate past

services which do not constitute demandable debts. The
motivating cause is gratitude acknowledgement of a debt, or a
desire to compensate and not the liberality of the donor.

They are deemed income subject to income tax.

 Illustration

Berganio saved the life of Buenafe who met a car accident. The
latter in display of gratitude gave him cash of P50,000.

Is the P50,000 taxable income?

 Answer

YES, because this is a case of remuneratory donation which is

subject to Income tax.
 Illustration

Suppose without doing anything, Berganio received P50,000

from Buenafe due purely to the liberality of the latter.
Is the P50,000 taxable?
 Answer

NO, because the situation does not concern remuneratory

donation anymore.

The cause of the gift is purely the liberality of Berganio.

Hence, it is not considered taxable income.
 Recovery of bad debts previously deducted

When bad debts are ascertained to be worthless and charged off

during the year, they are allowed as deductions from the gross
income of the taxpayers, whether individual or corporate

There are situations where bad debts that have been claimed as
deduction from gross income are recovered by the taxpayer in
the succeeding periods. The recovery of the bad debts
previously deducted shall be included as part of the gross
income in the year of recovery to the extent of the income tax
benefit of the said deduction. (Tax Benefit Rule)
 Illustration
Indicate the amount of taxable income or deductible loss.
2014 CASE 1 CASE 2 CASE 3

Net Income/loss before write-off P60,000 P(30,000) P60,000

Less: Bad debt written off 10,000 10,000 100,000

Net income/loss after bad debt 50,000 (40,000) (40,000)

2015

Bad debt recovered 10,000 10,000 100,000

Case 1: Taxable to the extent of P10,000

Case 2: Not Taxable
Case 3: Only the amount of P60,000 is taxable
 Refund of Tax
Tax refund is taxable if the tax was previously
deducted as an expense in computing the tax
during the previous year.
It shall be included as part gross income in the
year of receipt to the extent of the income tax
benefit the said deduction.
If the tax is not deductible, refund of which is not
taxable.
 Illustration
Sol Dranto had the ff data in 2015
Taxable Income before deduction of taxes P150,000
Taxes paid:
Income Tax 12,000
Common carrier’s tax 15,000
Local Business Tax 10,000
Donor’s Tax 6,000

These taxes have been refunded to her in 2016

How much is the taxable income of Sol Dranto in 2016 if her income
tax refund is P200,000?
 Answer

Taxable Income before tax refund P200,000

Add: Common carrier’s tax P15,000
Local Business taxes 10,000 25,000
Taxable Income P225,000
 Refund of Indirect Tax

If the tax is an indirect tax, the proper party to

question, or seek a refund of an indirect tax is the
statutory taxpayer, the person on whom the tax is
imposed by the law and who paid the same even
if he shifts the burden thereto to another.
 Illustration

Bart Company purchased from Grace Gasoline Station

100,000 liters of fuel from January to December 2010.
such product is subject to Excise Tax which is added to
the price it paid to the gasoline station.

If Bart Company is exempt from excise tax, who is entitled

to claim refund on the excise taxes erroneously paid to the
government?
 Answer

In the refund of indirect taxes, the statutory

taxpayer is the proper party who can claim the
refund.