GENERAL PRINCIPLES
1. By going after all the heirs and collecting fromeach one of
- Taxation – mode by which government make exactions for
revenue in order to support their existence; power to tax;
act/process by which taxing power is exercised
- UNDERLYING THEORY: Taxes are the lifeblood of the
Government and their prompt and certain availability are in
imperious need  governmental necessity
- On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very
reason for government itself.1
- Taxation is the indispensible and inevitable price for civilized
society
- Revenue derived from taxes are intended primarily to
finance the government and its activities and are thus
exempt from execution.  Public funds are not subject to
levy and execution, unless otherwise provided for by statute 2
- Use of taxation for police power measures
Principles of Sound Tax System (Adam Smith)
1. Fiscal Adequacy –the proceeds of tax revenue should
coincide with, and approximate the needs of, government
expenditure; neither an excess or deficiency
2. Theoretical Justice – Fair to average taxpayer and based
upon his ability to pay
3. Administrative Feasibility – should be capable of being
properly and efficiently administered; enforced with least
inconvenience to the taxpayer
- Non-observance of these principles will not render the tax
imposition invalid, except to the extent those specific
constitutional or statutory limitations are impaired.
CIR v. PINEDA (1967)
The estate of Atanasio Pineda was divided among the heirs,
Manuel Pineda’s share amounted to P2,500. BIR assessed the
estate for income tax liability.
The Government can require Manuel B. Pineda to pay the full
amount of the taxes assessed. The Government has a lien on
the P2,500.00 received by him from the estate as his share in
the inheritance, for unpaid income taxes for which said estate
is liable, pursuant to the last paragraph of Section 315 of the
Tax Code.
By virtue of such lien, the Government has the right tosubject
the property in Pineda’s possession, i.e., theP2,500.00, to
satisfy the income tax assessment in thesum of P760.28. After
such payment, Pineda will have aright of contribution from his
co-heirs.
1CIR v. Algue (1988) – Algue acting as an agent for PSEDC was able
to sell PSEDC properties to VOIC. As commission, PSEDC paid Algue
P125,000, P75,000 of which was given to agents of Algue. Algue claims
that the P75,000 paid out is deductible from the taxable income of the
company. Algue has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees and thus
deductible.
2Mun. of Makati v. CA (1990) – Makati has not paid the price of an
expropriated land  RTC issued a writ of execution and Notice of
Garnishment on the bank accounts of Makati  SC: Where a
municipality fails or refuses, without justifiable reason, to effect
payment of a final money judgment rendered against it, the claimant
may avail of the remedy of mandamus in order to compel the
enactment and approval of the necessary appropriation ordinance.
The Government has 2 ways of collecting the tax in question:
them the amount of the tax proportionateto the inheritance
received.
2. By subjecting said property of the estate which isin the
hands of an heir or transferee to the payment ofthe tax
due by virtue of the lien
- By virtue of the lien in favor of the Government, this court
held that the property of the estate already in the hands of an
heir or transferee may be subject to the payment of the tax
due the estate. Before the inheritance has passed to the heirs,
the unpaid taxes due the decedent may be collected, even
without its having been presented under Section 2 of Rule
862 of the Rules of Court. It may truly be said that until the
property of the estate of the decedent has vested in the heirs,
the decedent, represented by his estate, continues as if he
were still alive, subject to the payment of such taxes as would
be collectible from the estate even after his death.3
- In re: Foreign Corporations - An activity may occur outside
the place of business. Section 24 of the Tax Code does not
require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the
activity creating the income is performed or done in the
Philippines. What is controlling, therefore, is not the place of
business but the place of activity that created an income.4
- Taxes must be paid immediately and without delay:
General Rule: A taxpayer who feels aggrieved by the
decision or ruling handed down by a revenue officer and
appeals from his decision or ruling to the CTA must pay the
tax assessed. Exception: if in the opinion of the Court the
collection would jeopardize the interest of the Government
and/or the taxpayer, it could suspend the collection and
require the taxpayer either to deposit the amount claimed or
to file a surety bond for not more than double the amount of
the tax assessed.5
CHAVEZ v. ONGPIN (1990)
The petition seeks to declare unconstitutional Executive Order
73 which provides for the Collection of Real Property Taxes
Based on the 1984 Property Values
Eo 73 does NOT impose new taxes nor increase them, but
simply changed its basis for the assessment of the values of real
property, which indirectly affected tax amounts
Without EO 73, the basis for collection of real property taxes
win still be the 1978 revision of property values. Certainly, to
continue collecting real property taxes based on valuations
arrived at several years ago, in disregard of the increases in the
value of real properties that have occurred since then, is not in
consonance with a sound tax system. Fiscal adequacy, which is
one of the characteristics of a sound tax system, requires that
sources of revenues must be adequate to meet government
expenditures and their variations.
3 Vera v. Fernandez (1979)
4 Phil. Guaranty Corp. v. CIR (1965); CIR v. BOAC (1987) - BOAC’s
sale of tickets in the Philippines is the activity that produces the
income. It exchanged hands here and payments for fares were also
made in Philippine Currency. The flow of wealth proceeded from and
occurred within the Philippine territory, enjoying protection of the
government.
5 CIR v. Yuseco (1961)
1
SCOPE AND LIMITATION OF TAXATION
- The power to tax is an attribute of sovereignty
- Due process clause may be invoked where a taxing statute is
arbitrary that it find no support in the Constitution (eg. when
taxation amounts to confiscation of property)
CIR v. PLACER DOME (2007)
The San Antonio Mines in Marinduque owned by Marcopper
Mining Corporation (Marcopper), mine tailings from the
Taipan Pit started to escape through the Makulapnit Tunnel
and Boac Rivers, causing the cessation of mining and milling
operations, and causing potential environmental damage to the
rivers and the immediate area. To contain the damage and
prevent the further spread of the tailing leak, Placer Dome, Inc.
undertook to perform the clean-up and rehabilitation of the
Makalupnit and Boac Rivers, through a subsidiary. To
accomplish this, PDI engaged Placer Dome Technical Services
Limited (PDTSL), a non-resident foreign corporation with
office in Canada, to carry out the project. In turn, PDTSL
engaged the services of Placer Dome Technical Services
(Philippines), Inc. (respondent), a domestic corporation and
registered VAT entity, to implement the project in the
Philippines.
As explicitly provided in the law, a zero-rated VAT transaction
includes services by VAT-registered persons other than
processing, manufacturing or repacking goods for other
persons doing business outside the Philippines, which goods
are subsequently exported, the consideration for which is paid
in foreign currency and accounted for in accordance with the
rules and regulations of the BSP.
Petitioner presently invokes the "destination principle," citing
that respondent’s services, while rendered to a non-resident
foreign corporation, are not destined to be consumed abroad.
Hence, the onus of taxation of the revenue arising therefrom,
for VAT purposes, is also within the Philippines.  WRONG
As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax. Goods
and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are
taxed.
The consumption contemplated by law does not imply that the
service be done abroad in order to be zero-rated. Its services,
having been performed in the Philippines, are therefore also
consumed in the Philippines. Unlike goods, services cannot be
physically used in or bound for a specific place when their
destination is determined. Instead, there can only be a
"predetermined end of a course" when determining the service
"location or position…for legal purposes."
Under the destination principle, as petitioner asserts, such
service is subject to VAT at the rate of 10 percent…However,
the law clearly provides for an exception to the destination
principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the BSP"
Inherent Limitations
- A violation of these inherent limitation can amount to taking
of property without due process of law
For a public purpose
- The proceeds of the tax must be used:
 Support of the State
 Objects of the Government/welfare of the community
- The legislature is without power to appropriate public
revenues for anything but a public purpose  It is the
essential character of the direct object of the expenditure
which must determine its validity as justifying a tax and not
the magnitude of the interest to be affected nor the degree to
which the general advantage of the community6
- The mere fact that a particular taxpayer receives no
special/immediate benefit is of no moment for it is the
general good that matters in taxation.
- A tax doesn’t cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed.The
public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor
one industry over another.7
- It is inherent in the power to tax that a state be free to select
the subject of taxation – inequities which result from a
singling out of one particular class for taxation/exemption
infringes no constitutional limitation
- In the wide field of its police power, the lawmaking body
could provide that the distribution of benefits be readjusted
among its components to enable it to resist the added strain
of the increase in taxes that it had to sustain8
TIO v. TRB (1987)
The tax imposed by the DECREE is not only a regulatory but
also a revenue measure prompted by the realization that
earnings of videogram establishments of around P600 million
per annum have not been subjected to tax, thereby depriving
the Government of an additional source of revenue.
The levy of the 30% tax is for a public purpose. It was imposed
primarily to answer the need for regulating the video industry,
particularly because of the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of
pornographic video tapes. And while it was also an objective of
the DECREE to protect the movie industry, the tax remains a
valid imposition. The public purpose of a tax may legally exist
even if the motive which impelled the legislature to impose the
tax was to favor one industry over another.
6Pascual v. Sec. of Public Works – An appropriation for the
purpose of construction of feeder roads on the land belongs to private
persons is null and void. A donation made after the effectivity of the
appropriation doesn’t cure the defect  “semblance of legality”
7Tio v. VRB (1987) - The levy of the 30% tax is for a public purpose. It
was imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of
pornographic video tapes. And while it was also an objective of the
DECREE to protect the movie industry, the tax remains a valid
imposition.
8Lutz v. Araneta (1955) - The law in question is Sugar Adjustment
Act. Section 2 of the law provided for an increase in the tax on the
manufacture of sugar, while Section 3 levies on owners or persons in
control of lands devoted to sugar cultivation a tax equivalent to the
difference between the money value of the rental collected and the
amount representing the assessed value of the land. Section 6 provided
that all the collections would accrue to a special fund in the Philippine
Treasury known as the Sugar Adjustment and Stabilization Fund and
to be paid out only for the improvement of the sugar industry.
2
 Inherently legislative
- Legislative in character and a legislative prerogative
- Power to tax is not inherent but merely delegated by
constitutional mandate or by law to local governments
- Legislative taxing power includes:
a. Nature (kind), object (purpose), extent (amount/rate),
coverage (subjects and objects) and situs (place of tax
imposition)
b. Grant tax exemptions or conditions
c. Specify/provide for administrative as well as judicial
remedies
- The power to tax may not be delegated except:
 To local governments/political subdivisions
 When allowed by the Constitution
 Merely for administrative implementation – discretionary
powers under a set of sufficient standards or implied from
the policy and purpose of the act
- Taxation may exceptionally be delegated, subject to such
well-settled limitations
 Shall not contravene any constitutional provision or the
inherent limitations of taxation
 Effect either by the Constitution or valid legislative
measures
 Except when the delegation is by the Constitution itself,
should only be in favor of the local legislative body of the
local or municipal government concerned
- By necessary implication, the legislative power to create
political corporations for the purposes of local self-
government carries with it the power to confer tax on such
local governmental agencies the power to tax.the State is
not limited to the exact measure of the power which is
exercise by itself. Thus, municipalities may be permitted to
tax subjects, which for reason of public policy the State has
not deemed wise to tax for general purposes
- The assessment and collection of taxes are executive or
administrative functions – not covered by the non-
delegation rule
- The LGU may resort to all means reasonably necessary and
proper to give effect to the powers expressly conferred upon
it, provided, however, that said means are not otherwise
contrary to any statutory or other more authoritative
provision on the subject.9
- It appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the
funds derived from it. At any rate, it is inherent in the power
to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that "inequalities which
9Hodges v. Municipal Board of Iloilo (1967) - The registration
with the registry of deeds of voluntary conveyances of real property
under the Torrens system.The Legislature appears to have specified the
minimum requirements for the registration of conveyances of real
property. Upon satisfaction of the said requirements, it becomes the
legal duty of the registrar to make the registration requested. No
entity, it seems clear enough, except the Legislature itself, may add to
or detract from or otherwise alter or amend the requirements it has so
enumerated.
result from a singling out of one particular class for taxation,
or exemption infringe no constitutional limitation"10
PEPSI-COLA v. CITY of BUTUAN (1968)
The tax prescribed in section 3 of Ordinance No. 110, as
originally approved, was imposed upon dealers "engaged in
selling" soft drinks or carbonated drinks. Thus, it would seem
that the intent was then to levy a tax upon the sale of said
merchandise. As amended by Ordinance No. 122, the tax is,
however, imposed only upon "any agent and/or consignee of
any person, association, partnership, company or corporation
engaged in selling ... soft drinks or carbonated drinks."
As a consequence, merchants engaged in the sale of soft drink
or carbonated drinks, are not subject to the tax, unless they are
agents and/or consignees of another dealer, who, in the very
nature of things, must be one engaged in business outside the
City. Besides, the tax would not be applicable to such agent
and/or consignee, if less than 1,000 cases of soft drinks are
consigned or shipped to him every month. When we consider,
also, that the tax "shall be based and computed from the cargo
manifest or bill of lading ... showing the number of cases" —
not sold — but "received" by the taxpayer, the intention to limit
the application of the ordinance to soft drinks and carbonated
drinks brought into the City from outside thereof becomes
apparent. Viewed from this angle, the tax partakes of the
nature of an import duty, which is beyond defendant's
authority to impose by express provision of law.
Even however, if the burden in question were regarded as a tax
on the sale of said beverages, it would still be invalid, as
discriminatory, and hence, violative of the uniformity required
by the Constitution and the law therefor, sinceonly sales by
"agents or consignees" of outside dealers would be subject to
the tax. Sales by local dealers, not acting for or on behalf of
other merchants, regardless of the volume of their sales, and
even if the same exceeded those made by said agents or
consignees of producers or merchants established outside the
City of Butuan, would be exempt from the disputed tax.
- In re: Injunction
 Taxes must be collected promptly is a policy deeply
entrenched in our tax system. Thus, no court is allowed to
grant injunction to restrain the collection of any internal
revenue tax…the modes adopted to enforce the taxes
levied should be interfered with as little as possible.11
 To be entitled to the writ, the party must show that it has
a clear and unmistakable right that is violated and that
there is an urgent necessity for its issuance.Tariff
protection is not a right, but a privilege granted by the
government and, therefore, a party cannot claim redress
for alleged violation thereof. The distinction between
statutory privileges and vested rights must be borne in
mind for persons have no vested rights in statutory
privileges. The state may change or take away rights,
which were created by the law of the state, although it
may not take.12
10 Lutz v. Araneta (1955)
11Ramos v. David (1951) – No suit for enjoining the collection of a
tax, disputed or undisputed, can be brought, the remedy being to pay
the tax first, formerly under protest and now without need of protest,
file the claim with the Collector, and if he denies it, bring an action for
recovery against him
12Ermita v. Aldecoa-Delorino (2011) - PGMA issued EO No. 486
reducing protective tariff rates from 10% to 5% on the entry of
3
 ANGELES CITY v. ANGELES CITY ELEC. (2010)
City Treasurer issued a Notice of Assessment to AEC for
payment of business tax, license fee and other charges for
the period 1993 to 2004 in the total amount of
P94,861,194.10.
On April 5, 2004, the City Treasurer levied on the real
properties of AEC.RTC issued an Order dated May 24,
2004 granting the issuance of a Writ of Preliminary
Injunction
Injunction is not proper to restrain the collection of taxes.
The issue here as of the moment is the restraining
of the respondent from pursuing its auction sale
of the petitioner’s properties. The right of ownership
and possession of the petitioner over the properties
subject of the auction sale is at stake.
The two essential requisites of an injunction have been
satisfied, as there exists a right on the part of the
petitioner to be protected, its rights of ownership and
possession of the properties subject of the auction sale,
and that the acts (conducting an auction sale) against
which the injunction is to be directed, are violative of the
said rights of the petitioner.
Unlike the NIRC, the Local Tax Code does notcontain any
specific provision prohibiting courts from enjoining the
collection of local taxes. Such statutory lapse or intent,
however it may be viewed, may have allowed preliminary
injunction where local taxes are involved but cannot
negate the procedural rules and requirements under Rule
58.Nevertheless, it must be emphasized that although
there is no express prohibition in the LGC, injunctions
enjoining the collection of local taxes are frowned upon.
- In re: Grant of Tax Exemptions
 The power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and
any reduction or diminution thereof with respect to its
mode or its rate, must be strictly construed, and the same
must be coached in clear and unmistakable terms in
order that it may be applied. More specifically stated, the
general rule is that any claim for exemption from the tax
statute should be strictly construed against thetaxpayer.13
 The FIRB, under its charter, had been empowered merely
to “recommend” tax exemptions. By itself, it could not
have validlyprescribed exemptions or restore
taxability.14 The legislature alone could accord tax
exemption privileges.
Territorial
inexpensive products, particularly plastic food packaging, from ASEAN
Free Trade (AFTA) member countries into the Philippines.  RTC
issued an injunction.
13Luzon
Stevedoring v. CTA (1988) – Sec 190 of the NIRC states
that the tax imposed in this section shall not apply… to articles to be
used by the importer himself as passenger and/or cargo vessel,
whether coastwise or oceangoing, including engines and spare parts of
said vessel. “Tug boats” cannot be considered a cargo vessel, therefore
not exempted fromtax.
14NPC v. Albay (1990) - NAPOCOR: questions the power of the
provincial government of Albay to collect real property taxes on its
properties located at Tiwi, Albay. ALBAY:defends the auction sale in
question on the theory that the various FIRB issuances constitute an
undue delegation of the taxing power and hence, null and void, under
the Constitution.
- Taxation may only be exercised within the territorial
jurisdiction of the taxing authority
- See Section 42.
- In fixing the tax situs, the following criteria are generally
observed:
a. Poll taxes – residence of the taxpayer
b. Property taxes – where the property is situated (eg. real
property tax cannot be imposed on property located
abroad)
c. Excise taxes – the tax situs can be the place:
 Where the privilege is exercised
 Where the taxpayer is a national of
 Where he has his residence
- In the selection of appropriate criteria, the taxing
authority is given wide latitude. But, unless
otherwise stated, the situs is deemed to be the place
where the privilege is exercised
- Tax on Persons (Local Government Code)
156 Community Tax. —Cities or municipalities may levy a
community tax in accordance with the provisions of
this Article.
157 Individuals Liable to Community Tax. —Every
inhabitant of the Philippines eighteen (18) years of
age or over who has been regularly employed on a
wage or salary basis for at least thirty (30) consecutive
working days during any calendar year, or who is
engaged in business or occupation, or who owns real
property with an aggregate assessed value of One
thousand pesos (P1,000.00) or more, or who is
required by law to file an income tax return shall pay
an annual additional tax of Five pesos (P5.00) and an
annual additional tax of One peso (P1.00) for every
One thousand pesos (P1,000.00) of income regardless
of whether from business, exercise of profession or
from property which in no case shall exceed Five
thousand pesos (P5,000.00).
In the case of husband and wife, the additional tax
herein imposed shall be based upon the total property
owned by them and the total gross receipts or
earnings derived by them.
158 Juridical Persons Liable to Community Tax. —Every
corporation no matter how created or organized,
whether domestic or resident foreign, engaged in or
doing business in the Philippines shall pay an annual
community tax…The dividends received by a
corporation from another corporation however shall,
for the purpose of the additional tax, be considered as
part of the gross receipts or earnings of said
corporation.
159 Exemptions. —The following are exempt from the
community tax:
1. Diplomatic and consular representatives; and
2. Transient visitors when their stay in the
Philippines does not exceed three (3) months.
4
160 Place of Payment. —The community tax shall be paid
in the place of residence of the individual, or in the
place where the principal office of the juridical entity
is located.
161
- Tax on Property
WELLS FARGO v. CIR (1940)
Birdie Lillian Eye, wife of Clyde Milton Eye, died in Los
Angeles, California, the place of her alleged last residence and
domicile. Among the properties she left is her one-half conjugal
share in 70,000 shares of stock in the Benguet Consolidated
Mining Company, organized and existing under the laws of the
Philippines, with is principal office in the City of Manila.
The Federal and State of California's inheritance taxes due on
said shares have been duly paid. Respondent Collector of
Internal Revenue sought to subject anew the aforesaid shares
of stock to the Philippine inheritance tax, to which petitioner-
appellant objected.
The actual situs of the shares of stock is in the Philippines, the
corporation being domiciled therein. And besides, the
certificates of stock have remained in this country up to the
time when the deceased died in California, and they were in
possession of one Syrena McKee, secretary of the Benguet
Consolidated Mining Company, to whom they have been
delivered and indorsed in blank. This indorsement gave Syrena
McKee the right to vote the certificates at the general meetings
of the stockholders, to collect dividends, and dispose of the
shares in the manner she may deem fit, without prejudice to
her liability to the owner for violation of instructions. For all
practical purposes, then, Syrena McKee had the legal title to
the certificates of stock held in trust for the true owner thereof.
In other words, the owner residing in California has extended
here her activities with respect to her intangibles so as to avail
herself of the protection and benefit of the Philippine laws.
MERALCO v. YATCO (1939)
Manila Electric Company insured with the city of New York
Insurance Company and the United States Guaranty Company,
certain real and personal properties situated in the Philippines.
The insurance companies are foreign corporations not licensed
to do business in the Philippines and having no agents therein.
By making and carrying out policies covering risks located in
this country which might require adjustment or the making of
proof of loss therein, did business in the Philippines and
subjected itself to its jurisdiction
Where the insured against also within the Philippines, the risk
insured against also within the Philippines, and certain
incidents of the contract are to be attended to in the
Philippines, such as, payment of dividends when received in
cash, sending of an unjuster into the Philippines in case of
dispute, or making of proof of loss, the Commonwealth of the
Philippines has the power to impose the tax upon the insured,
regardless of whether the contract is executed in a foreign
country and with a foreign corporation. Under such
circumstances, substantial elements of the contract may be
said to be so situated in the Philippines as to give its
government the power to tax. And, even if it be assumed that
the tax imposed upon the insured will ultimately be passed on
the insurer, thus constituting an indirect tax upon the foreign
corporation, it would still be valid, because the foreign
corporation, by the stipulations of its contract, has subjected
itself to the taxing jurisdiction of the Philippines. After all,
Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but
reasonable that the latter should pay a just contribution
therefor.
- Transfer by death or gift(Sec. 84 & 98, NIRC)
- Tax on Business
 The taxing power of cities, municipalities and municipal
districts may be used (1) "upon any person engaged in
any occupation or business, or exercising any privilege"
therein; (2) for services rendered by those political
subdivisions or rendered in connection with any
business, profession or occupation being conducted
therein, and (3) to levy, for public purposes, just and
uniform taxes, licenses or fees.15
 See CIR v. BOAC (In re: Foreign Corporations)
- Tax on Income (Sec. 23-28, 37 & 42)
- Multiple situs – subject to treaty applications
- The Phil. Government may legally levy taxes on
consignments from Philippine ports. That is what has been
done in the present instance. It has imposed the tax on local
transactions; it does not seek to tax transactions carried out
abroad. But when a foreign merchant, as the word
"merchant" is defined in our statutes, comes to our shores
and enters into transactions upon which a tax is laid, the
Government can, and does, place him on an equality with
domestic merchants and requires him to pay the same
privilege taxes.16
Subject to international comity
- Principles of sovereign equality among states and their
freedom from suit without their consent  limits the
authority of a government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its
property held, and activities undertaken in that capacity
- Even where one enters the territory of another, there is an
implied understanding that the former does not submit itself
to the authority and jurisdiction of the latter.
- The constitutional injunction against deprivation of property
without due process of law may not be passed over under the
guise of the taxing powers, except when the taxing of the
property is lawful, as when:
a. Public purpose
b. Rule on uniformity of taxation is observed
15Phil Match v. City of Cebu (1978) – The city can validlytax the
sales of matches to customers outside of the cityas long as the orders
were booked and paid for in thecompany's branch office in the city.In
essence, they are the same assales of matches fully consummated in the
city.
16VOC v. Wenceslao Trinidad (1924) – Local or Foreign merchant
who consigns merchandise abroad from the Philippine Islands must
pay the tax on his consignments. Art. 1459 defines the word
"merchant" as a person who is engaged in the sale, barter, or exchange
of personal property, but does not say that he must be so engaged in
the Philippine Islands in order to be considered a merchant. As far as
may be gathered from the plain language of the statute, he may do his
selling, bartering or exchanging wherever he pleases, but if he consigns
merchandise abroad from the Philippine Islands he must pay the tax
on his consignments.
5
 c. Person/property taxed is within the jurisdiction of the
government levying the tax
d. In the assessment and collection of certain taxes, notice
and opportunity for hearing are provided.
__________
Constitutional Limitations
- Taxation being inherent need not be clothed with any
constitutional authority. Constitutional provisions are meant
to regulate and define, rather than grant the power.
- The taxing power of a state does not extend beyond its
territorial limits, but within such it may tax persons,
property, income, or business. If an interest in property is
taxed, the situs of either the property or interest must be
found within the state. If an income is taxed, the recipient
thereof must have a domicile within the state or the property
or business out of which the income issues must be situated
within the state so that the income may be said to have a
situs therein. Personal property may be separated from its
owner, and he may be taxed on its account at the place where
the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of
the state which imposes the tax. But debts owing by
corporations are obligations of the debtors, and only possess
value in the hands of the creditors.
No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be
denied the equal protection of the laws (Art. III, Sec. 1)
- A corporation has a personality distinct from that of its
stockholders, enabling the taxing power to reach the latter
when they receive dividends from the corporation. It must be
considered as settled in this jurisdiction that dividends of a
domestic corporation, which are paid and delivered in cash
to foreign corporations as stockholders, are subject to the
payment in the income tax, the exemption clause in the
charter of the corporation notwithstanding.17
- The equal-protection guarantee does not require territorial
uniformity of laws. As long as there are actual and material
differences between territories, there is no violation of the
constitutional clause.18
- Tax should operate with the same force and effect in every
place where the subject may be found To satisfy this
requirement then, all that is needed Is that the statute or
ordinance in question "applies equally to all persons, firms
and corporations placed in similar situation." That
"inequalities which result from a singling out of one
particular class for taxation or exemption infringe no
constitutional limitation."19
17 Manila Gas Corp. v. CIR (1936)
18Tiu v. CA (1999) – Subic Special Economic Zone: It was reasonable
for the President to have delimited the application of some incentives
to the confines of the former Subic military base. It is this specific area
which the government intends to transform and develop from its status
quo ante as an abandoned naval facility into a self-sustaining industrial
and commercial zone
19 City of Baguio v. De Leon (1968) -
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation
(Art. VI, Sec. 28, par 1)
- Uniformity – requires that all subjects or objects of
taxation, similarly situated, are to be treated alike or put on
equal footing both in privileges and liabilities
- Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed
at the same rate
- Double taxation is not violative of due process. The
argument against double taxation may not be invoked where
one tax is imposed by the state and the other is imposed by
the city..., it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or
taxes be exacted with respect to the same occupation, calling
or activity by both the state and the political subdivisions
thereof.
- Classification is permitted:
1. Standards used are not arbitrary but reasonable and
substantial
2. If the classification is germane to achieve the purpose of
legislation
3. Applies to both present and future conditions, other
circumstances being equal
4. Applies equally to all those belonging to the same class
- The fact that only one person is affected by a tax law which is
otherwise of general application doesn’t render the law
invalid.20v. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar
central, of the same class as plaintiff,for the coverage of the
tax.21
- Taxpayers may be classified into different categories. It is
enough that the classification must rest upon substantial
distinctions that make real differences.22
20Shell v. Vano (1954) - The contention that the ordinance is
discriminatory and hostile because there is no other person in the
locality who exercises such "designation" or occupation is also without
merit, because the fact that there is no other person in the locality who
exercises such a "designation" or calling does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be applicable to
any person or firm who exercises such calling or occupation named or
designated as "installation manager."
21Ormoc Sugar v. Treasurer of Ormoc (1968) – The Municipal
Board of OrmocCitypassedan ordinance imposing "onany and all
productions of centrifugal sugar milled at theOrmoc Sugar Company,
Inc., in Ormoc City a municipaltax equivalent to one per centum (1%)
per export sale tothe United States of America and other
foreigncountries." Even if later asimilar company is set up, it cannot
be subject to the taxbecause the ordinance expressly points only to
OrmocCity Sugar Company, Inc. as the entity to be levied upon.
22Sison v. Ancheta (1984) – The petitioner failed to take into
consideration the distinction between a tax rate and a tax base.
Taxpayers who are recipients of compensation income are set apart as
a class. As there is practically no overhead expense, these taxpayers are
e not entitled to make deductions for income tax purposes because they
are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is
no uniformity in the costs or expenses necessary to produce their
income. It would not be just then to disregard the disparities by giving
all of them zero deduction and indiscriminately impose on all alike the
same tax rates on the basis of gross income. There is ample justification
then for the BatasangPambansa to adopt the gross system of income
taxation to compensation income, while continuing the system of net
income taxation as regards professional and business income.
6

- Equitable – fair, just, reasonable and proportionate to
one’s ability to pay
- Progressive system – stresses on direct rather than indirect
taxes, on non-essentiality rather than essentiality to the
taxpayer of the object of taxation, or on the taxpayer’s ability
to pay.
No law impairing the obligation of contracts shall be
passed. (Art III, Sec. 10)
CAGAYAN ELECTRTIC v. CIR (1985)
Cagayan Electric is the holder of a legislative franchise,
Republic Act No. 3247, under which its payment of 3% tax on
its gross earnings from the sale of electric current is "in lieu of
all taxes and assessments…
RA 5431 amended Section 24 of the Tax Code by making liable
for income tax all corporate taxpayers not exempt under the
Section 24 and 27. Thus, Franchise companies were subjected
to income tax in addition to franchise tax.
Petitioner’s franchise was amended by RA 6020. This
amendment reenacted the tax exemption in its original charter
or neutralized the modification made by 5431 a year before
The 1973 Constitution provides that a franchise is subject to
amendment, alteration or repeal by the Congress when the
public interest so requires.23
The Tax Court acted correctly in holding that the exemption
was restored by the subsequent enactment on August 4, 1969
of Republic Act No. 6020 which reenacted the said tax
exemption. Hence, the petitioner is liable only for the income
tax for the period from January 1 to August 3, 1969 when its tax
exemption was modified by Republic Act No. 5431.
MISAMIS v. CEPALCO (1990)
CEPALCO for short) was granted a franchise on June 17,1961
under Republic Act No. 3247 to install, operate andmaintain an
electric light, heat and power system in theCity of Cagayan de
Oro and its suburbs. It’s franchise states that the grantee shall
pay afranchise tax equal to three per centum of the gross
earnings for electric current sold under this franchise…shall be
in lieu of all taxes andassessmentsof whatever authority upon
privilegesearnings, income, franchise, andpoles, wires,
transformers, and insulators of the granteefrom which taxes
and assessments the grantee is herebyexpressly exempted.
Local Tax Code was promulgated: “Any provision of special
laws tothe contrary notwithstanding, the province may
imposea tax on businesses enjoying franchise…”
Misamis Oriental enacted an Ordinance levying a franchise tax
of ½ of 1% of gross annual receipts of businesses enjoying
franchise.
The rule is that a special and local statute applicable to
aparticular case is not repealed by a later statute which
isgeneral in its terms, provisions and application even ifthe
terms of the general act are broad enough to includethe cases
in the special law (id.) unless there is manifestintent to repeal
or alter the special law.
23Constitution, Art. XII, Sec. 11 – “…Neither shall any such franchise or
right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common
good so requires.”
There is no provision in the LTC expressly orimpliedly
amending or repealing the CEPALCO franchise. The law
granting the franchise is special lawsapplicable only to
CEPALCO, while LTC is a general tax law. The presumption is
that the special statutes are exceptions to the general law
because theypertain to a special charter granted to meet a
particularset of conditions and circumstances.
CITY of SAN PABLO v. REYES (1999)
Escudero Electric ServicesCompany, a legislative franchise to
maintain andoperate an electric light and power system in the
City ofSan Pablo and nearby municipalities.Escudero’s
franchise was transferred to the MERALCO
Presidential Decree No. 551 was enacted: Any provision of law
or local ordinance to the contrarynotwithstanding, the
franchise tax payable by all grantees of franchiseto generate,
distribute and sell electric current for light, heat and
powershall be 2% of their gross receipts received from the
saleof electric current and from transactions incident to the
generation,distribution and sale of electric current.
Section 534 (f), the repealing clause of the LGC, providesthat
all general and special laws, acts, city charters,decrees,
executive orders, proclamations andadministrative regulations
or parts thereof which areinconsistent with any of the
provisions of the Code areherebyrepealed or modified
accordingly.
Section 534 (f) partakes of the nature of a general
repealingclause. It is certainly not an express repealing
clausebecause it fails to designate the specific act or
actsidentified by number or title, which are intended to
berepealed.
There was an implied repeal by RA 7160 of the
MERALCOfranchise insofar as the latter impose a 2% tax in
lieu ofall taxes and assessments of whatever nature.
The legislative purpose to withdraw tax privilegesenjoyed
under existing law or charter is clearlymanifested by the
language used in Section 137 and 193categorically withdrawing
such exemption subject onlyto the exceptions enumerated.
Since it would be not only tedious and impractical toattempt to
enumerate all the existing statutes providingfor special tax
exemptions or privileges, the LGCprovided for an express,
albeit general, withdrawal ofsuch exemptions or privileges. No
more unequivocallanguage could have been used.
- Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can
rightly be invoked, are those agreed to by the taxing
authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority and waives
its governmental immunity. Truly, tax exemptions of this
kind may not be revoked without impairing the obligations
of contracts. These contractual tax exemptions, however, are
not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which
is beyond the purview of the non-impairment clause of the
Constitution.24
24 MERALCO v. Province of Laguna (1999)
7
- Tax exemptions have never been deemed violative of the
equal protection clause.Charters or special laws granted and
enacted by the Legislature are in the nature of private
contracts. They do not constitute a part of the machinery of
the general government. The law granting tax exemption
may provide for its retroactive effect.25
No person shall be imprisoned for non-payment of poll
tax (Art III, Sec. 20)
- Poll tax – levied on persons within the territory of the taxing
authority without regard to their property, business of
occupation
- The prohibition is on imprisonment, hence an imposition of
a fine or imprisonment for any other violation than non-
payment would not be unconstitutional
The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import
and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the
national development program of the Government.
(Art. VI, Sec. 28, par 2)
- TCC: “the flexible tariff clause” – authorizes the president to
modify import duties
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt
from taxation. (Art. VI, Sec. 28, par 3)
- Tax exemption covers property taxes only. Special levies or
assessment, not being taxes are not covered. However, the
LGC extends the exemption to special assessments.
- Exclusively – means primarily not solely; not limited to
property actually indispensible therefore but extends to
facilities which are incidental to and reasonably necessary
for the accomplishment of said purposes
- "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to
exclude; as enjoying a privilege exclusively."  If real
property is used for one or more commercial purposes, it is
not exclusively used for the exempted purposes but is subject
to taxation. The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively"
without doing violence to theConstitutions and the law26
25CIR v. Lingayen Gulf (1988) – CIR assessed Lingayen Gulf with
deficiency tax at the rate of 5%. Pending the case, RA 3843 was enacted
reducing the assessable franchise tax at 2%, effective from the date the
original municipal franchise was granted.
26Phil. Lung Center v. QC (2004) - The petitioner failed to
discharge its burden to prove thatthe entirety of its real property is
actually, directly andexclusively used for charitable purposes. While
portionsof the hospital are used for the treatment of patientsandthe
- The property must be actually and directly used – idle land
or property let to others for unlike purposes are subject to
real estate tax
- What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the
use of the income from the real property that is
determinative of whether the property isused for tax-exempt
purposes.
- The issue of title or ownership is not relevant
- The test whether an enterprise is charitable or not is whether
it exists to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain, profit, or
privateadvantage.
- The exemption is regardless of whether or not material
profits are derived from the operation of the institutions. In
other words, Congress may, if it deems fit to do so, impose
taxes upon such "profits", but said "lands, buildings and
improvements" are beyond its taxing power.27
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
Members of the Congress. (Art. VI, Sec. 28, par 4)
- The concurrence of a majority not of the attendees
constituting a quorum but of all the members of the
Congress.
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out
for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds
of the Government. (Art. VI, Sec. 29, par 3)
dispensation of medical services to them, whetherpaying or non-
paying, other portions thereof are beingleased to private individuals for
their clinics and acanteen. Further, a portion of the land is being leased
toa private individual for her business enterprise. Accordingly, we hold
that the portions of the land leasedto private entities as well as those
parts of the hospitalleased to private individuals are not exempt from
suchtaxes. On the other hand, the portions of the landoccupied by the
hospital and portions of the hospitalused for its patients, whether
paying or non-paying, areexempt from real property taxes.
27Herrera v. QCBAA (1961) – Where rendering charity is its primary
object, and the funds derived from payments made by patients able to
pay are devoted to the benevolent purposes of the institution, the mere
fact that a profit has been made will not deprive the hospital of its
benevolent character;
Abra Valley College v. Aquino (1988) – While the use of the
second floor of the main building in the case at bar for residential
purposes of the Director and his family, may find justification under
the concept of incidental use, which is complimentary to the main or
primary purpose—educational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of education.
8
 The President shall have the power to veto any
particular item or items in an appropriation, revenueor
tariff bill, but the veto shall not affect the item or items
to which he does not object. (Art. VI, Sec. 27, par 2)
The Supreme Court shall have the following powers:
…Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may provide,
final judgments and orders of lower courts in:…All cases
involving the legality of any tax, impost, assessment, or
toll, or any penalty imposed in relation thereto. (Art.
VIII, Sec. 5, par 2[b])
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by
law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.(Art. XIV, Sec. 4[3])
- "Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school
maintained and administered by private individuals or
groups" with a government permit.
- "Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net
income or asset devoted to the institution's purposes and all
its activities conducted not for profit.
- The above exemption covers all internal revenues taxes,
custom duties, and other taxes imposed by either or both the
national or political subdivisions.
- The exemption doesn’t cover revenues derived from, or
assets used in, unrelated activities or enterprise
- The Constitutional power of the President to remit fines and
forfeitures does not embrace penalties imposed for non-
payment of taxes and other violations of tax laws. – power is
only in cases where fines and forfeitures form part of the
criminal liability.
- Charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to
address public needs, because certain private entities already
assume a part of the burden. Charitable institutions,
however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law
granting it. The power of Congress to tax implies the power
to exempt from tax.
- Under the NIRC, Congress extended the exemption
to INCOME TAX. While the property tax in the
Constitution did not define what a charitable institution is,
Section 30(E) of the NIRC did. Hence: (1) Non stock, (2)
organized for charitable purposes, (3) operating exclusively
for chartiable purposes, and (4) no part of its income inures
to the benefit of any member, organizer, officer, or any
specific person. Even if the charitable institution must be
"organized and operated exclusively" for charitable purposes,
it is nevertheless allowed to engage in "activities conducted
for profit" without losing its tax exempt status for its not-for-
profit activities. The only consequence is that such activity
will be subject to tax.
…The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. No religious test
shall be required for the exercise of civil or political
rights. (Art III, Sec. 5)
- Permit v. License Fee: a flat tax imposed on the exercise of a
privilege granted by the Bill of Rights…The power to impose
a license tax on the exercise of these freedom is indeed as
potent as the power of censorship which this Court has
repeatedly struck down28
Notes:
- Police power and eminent domain subordinate the
provisions of the Constitution except those intended to
regulate such inherent powers.
- However, taxation is subject to and subordinated by
constitutional provisions and precepts (eg. due process,
church-state separation, non-impairment clause)
- Taxation is the weakest of all 3 sovereign powers of the
government
- The constitutional provisions are to be considered
mandatory unless by express provision or by necessary
implication, a different intention is manifest.
- In statutory enactments, the aspects of levy and compliance
are treated as mandatory; those for administrative feasibility
as directory
28American Bible v. City of Manila (1957) – The provisions of City
of Manila Ordinance No. 2529, as amended, cannot be applied to
appellant, for in doing so it would impair its free exercise and
enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs.With respect to Ordinance No. 3000,
as amended, which requires the obtention the Mayor's permit before
any person can engage in any of the businesses, trades or occupations
enumerated therein, we do not find that it imposes any charge
upon the enjoyment of a right granted by the Constitution,
nor tax the exercise of religious practices. – But since selling of
bible by the ABS is not a business, Ordinance 3000 doesn’t apply to
them.
9
ASPECTS OF TAXATION
- Phases, processes, stages of, steps
Levy
- Act of imposition by the legislature
- When and how the tax is imposed, grant of tax exemption,
tax amnesties, or tax condonation
Assessment and collection
- Act of administration and implementation of tax the tax law
by the executive
- Assessment – notice and demand for payment v.
Assessment – listing and valuation of taxable real property
- Internal revenue taxes are self-assessing and no further
assessment by the government is required to create the tax
liability. An assessment, however, is not altogether
inconsequential; it is relevant in the proper pursuit of
judicial and extrajudicial remedies to enforce taxpayer
liabilities and certain matters that relate to it, such as the
imposition of surcharges and interest, and in the application
of statutes of limitations and in the establishment of tax
liens.29
- An assessment contains not only a computation of tax
liabilities, but also a demand for payment within a
prescribed period. The ultimate purpose of assessment is to
ascertain the amount that each taxpayer is to pay. An
assessment is a notice to the effect that the amount therein
stated is due as tax and a demand for payment thereof.
- Assessments made beyond the prescribed period would not
be binding on the taxpayer.
Payment
- Act of compliance by the taxpayer – incl. options, schemes,
or remedies
___________
CLASSIFICATION OF TAXES
According to subject matter
1. Personal, capitation, or poll taxes – fixed amount; without
regard to their property or business
2. Property taxes – assessed on things/property
3. Excise/license tax –on privilege, occupation, or business
According to burden or incidence
1. Direct taxes
- Demanded from persons who are primarily burdened to
pay them
- A taxpayer is directly liable on the transaction or
business it engages in
2. Indirect taxes
- Levied upon transactions or activities before the articles
subject matter thereof reach the consumer  burden is
ultimately charged or shifted to them
29Tupaz v. Alep (1999) - By its nature the violation could only be
committedafter service of notice and demand for payment of the
deficiency taxes upon the taxpayer. Hence, it cannot besaid that the
offense has been committed as early as1980, upon filing of the income
tax return. This is sobecause prior to the finality of the assessment, the
taxpayer has not committed any violation fornonpayment of the tax.
The offense was committed onlyafter the finality of the assessment
coupled withtaxpayer’s willful refusal to pay the taxes within
theallotted period.
- Primarily paid by persons who can shift the burden
upon someone else
According to determination of amount
1. Specific taxes – per head, unit, number, or by weight or
volume  requires no assessment beyond a listing and
classification of the subject to be taxed
2. Ad valorem taxes – Based on the value of the article subject
to tax
According to purpose
1. General or fiscal – for the general purpose of the
government
2. Special, regulatory, or sumptuary –imposed for a particular
legitimate object of government; may partake the nature of
both a revenue measure and a regulatory fee
Another classification according to purpose:
a. Fiscal
b. Regulatory
- While it may be true that certain impositions may partake of
the nature of both taxes (for revenue) and fees (for
regulation), it would be more appropriate to consider their
real essence
- If the imposition is principally for regulation – license fee,
otherwise it is a tax.
According to scope or authority imposing the tax
1. National – Imposed by the national government and
enforced throughout the Philippines
2. Municipal or local – by local governments
According to graduation
1. Progressive – tax rate increases as the tax base increases
2. Regressive – tax rate decreases as the tax base increases
3. Mixed – partly progressive and partly regressive
4. Proportionate – tax rates are fixed on a flat tax base
__________
DISTINGUISHED FROM CERTAIN KINDS OF
EXACTIONS
License fee
- Imposed for the regulation of lawful business or occupation
–police power’
- Limited to covering the expenses of issuing the license and
the cost of the necessary surveillance, inspection or
supervision by the government
- If unpaid, the business or activity itself can become illegal,
unlike in non-payment of tax
- Fees may be properly regarded as taxes even though they
also serve as an instrument of regulation. If the purpose is
primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called
a tax.30
30PAL v. EDU (1988) – The motor vehicle registration fees are not
collected for regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor vehicles
on public highways, for their express object is to provide revenue with
which the Government is to discharge one of its principal functions—
the construction and maintenance of public highways for everybody's
use. They are veritable taxes, not merely fees.
10
 Progressive Development Corp. v. QC (1989)
Progressive Development Corporation, owner and operator of a
public market known as the "Farmers Market & Shopping
Center" filed a Petition for Prohibition with Preliminary
Injunction against respondent before the then Court of First
Instance of Rizal on the ground that the supervision fee or
license tax imposed by the above-mentioned ordinances is in
reality a tax on income which respondent may not impose, the
same being expressly prohibited by Republic Act No. 2264.3
To be considered a license fee, the imposition questioned must
relate to an occupation or activity that so engages the public
interest in health, morals, safety and development as to require
regulation for the protection and promotion of such public
interest; the imposition must also bear a reasonable relation to
the probable expenses of regulation, taking into account not
only the costs of direct regulation but also its incidental
consequences as well. Accordingly, a charge of a fixed sum
which bears no relation at all to the cost of inspection and
regulation may be held to be a tax rather than an exercise of the
police power.
While it is true that the amount imposed by the questioned
ordinances may be considered in determining whether the
exaction is really one for revenue or prohibition, instead of one
of regulation under the police power, it nevertheless will be
presumed to be reasonable.The use of the gross amount of stall
rentals as basis for determining the collectible amount of
license tax does not by itself, upon the one hand, convert or
render the license tax into a prohibited city tax on income.
VILLEGAS v. HUI CHIONG TSAI (1978)
While it is true that the securing of an employment permit is a
valid regulatory power as in involves the exercise of discretion
and judgment in processing approval of applications, the
employment fee is NOT regulatory but a revenue measure.
There is NO LOGIC in requiring a fee for foreign employees
who are cleared for employment. It is unreasonable not only
because it is excessive but fails to consider valid substantial
differences among aliens.
While classifications are valid, it should be ubased on real and
substantial differences being germane to the purpose of law.
The fee is collected from EVERY EMPLOYED ALIEN whether
casual or permanent, part or full time, lowly or highly paid
person.
Toll
- An act or demand on proprietorship or ownership
- Contractual in nature and may be demanded by private
persons, or entities
- The word "toll" when used in connection with highways has
been defined as a duty imposed on goods and passengers
travelling public roads. The toll for use of a toll road is for its
use in travelling thereon, not for itsuse as a parking place for
vehicles.31
31City of Ozamis v. Lumapas (1975) - It is not pretended,
however,that the public utilityvehicles are subject to the payment, if
they pass withoutstopping thru the aforesaid sections of
ZuluetaStreet.Considering that the public utility vehicles are
onlycharged the fee when said vehicles stop on "any portionof the
existing parking areas for the purpose of loadingor unloading
passengers or cargoes", the fees collectedare actually in the nature of
parking fees and not toll feesfor the use of ZuluetaStreet.The tax was a
regulatory measure enacted in exercise of the City’s police power
Special assessment or levy
- To defray the cost of improvement on a real property owners
of a particular locale directly benefited by such improvement
- Assessable on the property itself
- In a general sense a tax is an assessment, and an assessment
is a tax, yet there is a recognized distinction between them in
that assessment is confined to local impositions
uponproperty for the payment of the cost of public
improvements in its immediate vicinity and levied
withreference to special benefits to the property assessed.32
Special Assessment
Levied only on land
Cannot be made a personal liability of the person assessed
Based wholly on benefits
Exceptional both as to time and locality
- The imposition of a charge on all property, real and personal,
in a prescribed area, is a tax and not an assessment, although
the purpose is to make a local improvement on a street or
highway. A charge imposed only on property owners
benefited is a special assessment rather than a tax
notwithstanding the statutecalls it a tax.
Other Fees
VICTORIA’S MILLING v. PPA (1987)
PPA wrote to VictoriaMilling, requiring it to have its
tugboatsand barges undergo harbor formalities andpay fees as
well as berthing fees effectiveMay 1, 1981. PPA required the
petitioner tosecure a permit for cargo handlingoperations.
Victoria’s Milling maintained that it isexempt from paying PPA
any fee becausethe wharf and an its facilities were builtand
installed in its land.
The fees and charges PPA collects are not for the use of the
wharf that petitioner owns but for the privilege of navigating
public waters, of entering and leaving public harbors and
berthing on public streams of waters.
Berthing charges against a vessel are collectible regardless of
the fact that mooring or berthing is made from a private pier or
wharf. This is because the government maintains bodies of
water in navigable condition and it is to support its operations
in this regard that dues andcharges are imposed for the use of
piersand wharves regardless of their ownership.
MATALIN COCONUT CO v. MUN. of MALABANG (1986)
Municipality of Malabang enacted an ordinance imposing a
police inspection fee of P0.30 per sack of cassava starch or
flour. Matalin filed a case against the municipality.
The amount collected under the ordinance in question partakes
of the nature of a tax, although denominated as "police
inspection fee" since its undeniable purpose is to raise
revenue.Although it is not a percentage tax which is beyond the
power of the municipality to impose, the ordinance is null and
void for being unjust and unreasonable.
The pretention of respondents that the police, aside from
counting the number of bags shipped out, is also inspecting the
cassava flour starch contained in the bags to find out if the said
cassava flour starch is fit for human consumption could not be
given credence by the Court because, aside from the fact that
32 Apostolic Prefect v. Treasurer of Baguio (1941)
11
said purpose is not so stated in the ordinance in question, the
policemen of said municipality are not competent to determine
if the cassava flour starch are fit for human consumption.
Debt/ordinary obligation
- Between parties for their private interest or resulting from
their own acts or omissions
- For certain purposes, taxes may be considered debt as their
collection is enforceable by court action; in the application of
certain statute of limitation; and in the matter of deductible
items from gross income
- Ataxpayer may not offset taxes due from the claims that he
may have against the government. Taxes cannot be the
subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.33
Other Cases:
ESSO STANDARD v. CIR (1989)
ESSO claimed as ordinary and necessary expenses in its tax
return the amount of P340,822.04, representing margin fees
paid to the Central Bank on its profit remittances to its New
York head office. CIR assessed ESSO a deficiency income tax
for the year 1960. The deficiency arose from the disallowance
of the margin fees paid by ESSO to the Central Bank on its
profit remittances to its New York head office.
An expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term
'ordinary' does not require that the payments be habitual or
normal in the sense that the same taxpayer will have to make
them often; the payment may be unique or non-recurring to
the taxpayer affected.
The margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the
Philippines. They were expenses incurred in the disposition of
said incomes; expenses for the remittance of funds after they
have already been earned by petitioner's branch in the
Philippines for the disposal of its Head Office in New York
which is already another distinct and separate income
taxpayer.
ESSO has not shown that the remittance to the head office of
part of its profits was made in furtherance of its own trade or
business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires. Claims for
deductions are a matter oflegislative grace and do not turn on
mere equitable considerations.
33Caltex v. COA (1992) - R.A. No. 6952 does not authorize oil
companies to offset their claims against their OPSF
contributions.BUTSEERepublic v. Judge Ericta (1989) – While
judgment should be rendered in favor of the Republic against
Sampaguita for unpaid taxes in the amount of P10,268.41, judgment
ought at the same time to issue for Sampaguita commanding payment
to it by the Republic of the same sum, representing the face value of the
certificates of indebtedness assigned to it and for recovery of which it
had specifically prayed in its counterclaim.
LOZANO v. ERB (1990)
Maceda and Lozano filed an injunctive relief to stop ERB
implementing a provisional increase of petroleum products.
Petitioners argue that the Board's Order was issued without
notice and hearing, and hence, without due process of law.
While under EO 172, a hearing is indispensable, it does not
preclude the Board from ordering, ex parte, a provisional
increase, as it did here, subject to its final disposition.
Republic Act No. 6965 operated to lower taxes on petroleum
and petroleum products by imposing specific taxes rather than
ad valorem taxes thereon; it is, not, however, an insurance
against an "oil hike", whenever warranted, or is it a price
control mechanism on petroleum and petroleum products. The
statute had possibly forestalled a larger hike, but it operated no
more.
Evidently, authorities have been unable to collect enough taxes
necessary to replenish the OPSF as provided by Presidential
Decree No. 1956, and hence, there was no available alternative
but to hike existing prices.
___________
INTERPRETATION AND CONSTRUCTION OF TAX
STATUTES
Tax Statutes
a. Legislative intent
b. Doubts must be resolved liberally in favour of taxpayers and
strictly against the taxing authority
c. However¸ (b) doesn’t extend to cases involving the validity
of the tax law itself, which in every case is presumed valid.
d. (b) doesn’t extend to issue of tax power – a broad
delegation of tax powers has been conferred to local
government
- General Rule: The government is never estopped from
collecting taxes because of mistakes or errors on the part of
its agents. Exception: in the interest of justice and fair play
- Tax burdens are not to be imposed nor presumed to be
imposed beyond what the statute expressly and clearly
imports
- Tax cannot be imposed without clear and express words for
that purpose accordingly
PANHANDLE OIL v. MISSISSIPPI (1928)
Since some time in 1925, petitioner has been engaged in the
business of distributing gasoline. The state (local government)
sued to recover taxes claimed on account of sales made by
petitioner to the United States NATIONAL GOVERNMENT for
the use of its Coast Guard fleet in service in the Gulf of Mexico
and its Veterans' Hospital at Gulfport
The states may not burden or interfere with the exertion of
national power or make it a source of revenue or take the funds
raised or tax the means used for the performance of federal
functions. States may NOT interfere with the exercise of the
government’s power to purchase from anyone resources for the
benefit of the country.
Pandhandle Oil should NOT be taxed for its sales to the
national government because taxing such interferes with the
powers of the national government. While Mississippi may
impose charges upon petitioner for the privilege of carrying on
trade that is subject to the power of the state, it may not lay any
12
tax upon transactions by which the United States secures the
things desired for its governmental purposes.
Tax Exemptions
- Exemptions are not presumed; strictly construed against the
grantee  the exemption cannot be established by mere
implication but it may be clearly expressed
- Tax exemptions are undoubtedly to be construed strictly but
not so grudgingly as knowledge that many impositions
taxpayers have to pay are in the nature of indirect taxes.34
Classification of tax exemption
1. Express – provided in the NIRC, Tariff and Customs
Code, Local Government Code, special laws
2. Implied or by omission
- The government, unless otherwise expressed, is
deemed not subject to a law imposing taxes. But there
is no prohibition against the government taxing itself
- There is no tax exemption solely on the ground of
equity, but equity can be used as a basis for statutory
exemption; thus, at times the law authorizes the
condonation of taxes on equitable considerations
3. Contractual
- Agreed to by the taxing authority in contracts lawfully
entered into by them under enabling laws
- These exemptions must not be confused with tax
exemptions granted under franchises which are not
contracts within the purview of the non-impairment
clause
- Contractual tax exemptions may not be revoked
without impairing the obligations of contract
- In a contract – the government sheds its cloak of
authority and waives its governmental immunity;
franchise – special privilege conferred by the
government within the scope of its governmental
functions
- In the ff. cases, the exemption are construed liberally in
favour of the grantee:
 When the law so provides for such liberal construction
 Exemptions granted under special circumstances to
special classes of people
 Exemptions in favour of the government, its political
subdivisions or instrumentalities
 Exemptions to traditional exemptees (eg. Religious, or
charitable institutions
Tax amnesties
- Liberally construed in favour of the taxpayer
- Never favoured nor presumed in law and if granted by
statute, must be construed strictly against the taxpayer and
liberally in favour of the taxing authority
34Maceda v. Macaraig (1993) - By the very nature of indirect
taxation, the economic burden of such taxation is expected to be passed
on through the channels of commerce to the user or consumer of the
goods sold.Because, however, the NPC has been exempted from both
direct and indirect taxation, the NPC must beheld exempted from
absorbing the economic burden of indirect taxation. This means, on the
one hand, that the oil companies which wish to sell to NPC absorb all
or part of the economic burden of the taxes previously paid to BIR,
which could they shift to NPC if NPC did not enjoy exemption from
indirect taxes.
DOCTRINES IN TAXATION
- Out internal revenue laws are not political in nature
therefore they are continued in force during the period of
enemy occupation and effected by the territorial
government.“Law once established continues until changed
by some competent legislative power. It is not changed
merely by change of sovereignty.”35
Prospectivity of Tax Laws
- Taxes may be imposed retroactively by law but, unless so
expressed by such law, these taxes must be imposed
prospectively
- Tax laws are neither political nor penal in nature, hence the
ex post facto rule would be inapplicable, except for the
penalty imposed (not the interest)
- In order to declare a tax as transgressing the constitutional
limitation, it must be so harsh and oppressive in its
retroactive application
- The legislative intent evincing that a tax statute should
operate retroactively should be explicit and perfectly clear 36
- In the same way that taxes can be made retroactive, so also
tax exemptions may be revoked. Contractual tax exemptions
may not be unilaterally so revoked.
Imprescriptibility of Taxes
- Unless otherwise provided by the tax law itself, taxes are
imprescriptible For the purpose of safeguarding taxpayer
from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in
the collection of taxes.
- NIRC provides for statutes of limitations. However, the
prescriptive periods therein contained were considered to be
applicable only to those taxes that were thereunder required
to be reported or returned by the tax payer for tax purposes.
- TCC doesn’t express any general statute of limitation, see
Sec. 1603
- LGC – prescriptive period for assessment: 5 years;
collection: 5 years
- Limitations upon the right of the government to assess and
collect taxes will not be presumed in the absence of clear
legislation to the contrary and that where the government
has not by express statutory provision provided a limitation
upon its right to assess unpaid taxes, such right is
imprescriptible.37
Double taxation
- Double taxation – taxing for the same tax period the same
thing or activity twice, when it should be taxed but once, for
the same purpose and with the same kind of character of tax
- Direct duplicate taxation – when the levies are made by the
same taxing authority
- Not being forbidden by our fundamental law, double
taxation is not a valid defense against the validity of a tax
measure. But from it might emanate such defense against
taxation as oppressiveness and inequality
35Hilado v. CIR (1956)
36Lorenzo v. Posadas (1937) - A statute should be considered as
prospective in its operation,whether it enacts, amends, or repeals an
inheritance tax, unlessthe language of the statute clearly demands or
expresses that itshall have a retroactive effect.
37CIR v. Ayala Securities (1980) - Since there is no express
statutory provision limiting the right of the Commissioner of Internal
Revenue to assess the tax on unreasonable accumulation of surplus
provided in Section 25 of the Revenue Code, said tax may be assessed
at any time.
13
 VILLANUEVA v. CITY of ILOILO (1968)
While it is true that the spouses are taxable under the Revenue
Code as real estate dealers, and taxable under the new
ordinance, double taxation may not be invoked. This is because
the same tax may be imposed by the national government as
well as by the local government. A license tax may be levied
upon abusiness or occupation although the land or property
used in connection therewith is subject to property tax. In
order to constitute double taxation, both taxes must be the
same kind or character. Real estate taxes and tenement taxes
are not of the same character. The former is a tax on the
property; the latter is a tax on the activity in which the property
is used.
- To avoid the resulting inequalities, measures that are
normally adopted by the sovereign taxing authority:
 Treaty provisions against double taxation
 Reciprocity provisions
 Tax credit provisions
Power to tax involves power to destroy
- The consequential nature of taxation and its resulting
implications:
 Tax must be exercised with caution to minimize injury to
the proprietary rights of the taxpayer
 But if the tax is lawful, the fact alone that it may destroy
an activity or object will not entirely permit the court to
afford any relief
 A subject or object that may not be destroyed by the
taxing authority may not likewise be taxed
- Taxation does not necessarily and unavoidably destroy. To
carry it to the excess of destruction would be an abuse, to
presume which would banish that confidence which is
essential to all Government.38
Escape from taxation
- Tax avoidance – tax saving device within the means
sanctioned by law (eg. Estate planning – conveyance of
property to a family corporation for shares)
- Tax evasion – scheme used outside of those lawful means
and, when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities
CIR v. VICENTE RUFINO (1987)
In a special meeting the stockholders passed the continuation
of its business after the end of its corporate life of the old
corporation and its subsequent merger with the New
Corporation by transferring its business, assets, goodwill, and
liabilities to the latter, which in exchange would issue and
distribute to the shareholders of the Old Corporation one share
for each share held by them in the said Corporation. The
aforesaid transfer was eventually made by the Old Corporation
to the New Corporation, which continued the operation of the
Lyric and Capitol Theaters and assumed all the obligations and
liabilities of the Old Corporation. In the same meeting, the
increased capitalization of the New Corporation to
P2,000,000.00 was also divided into 200,000 shares at
P10.00 par value each share. As agreed, and in exchange for
the properties, and other assets of the Old Corporation, the
New Corporation issued to the stockholders of the former
stocks in the New Corporation equal to the stocks each one
38McCollough v. Maryland - The State governments have no right
to tax any of the constitutional means employed by the Government of
the Union to execute its constitutional powers.
held in the Old Corporation.
The basic consideration, of course, is the purpose of the
merger. The criterion laid down by the law is that the merger"
must be undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation."It has
been suggested that one certain indication of a scheme to evade
the capital gains tax is the subsequentdissolution of the new
corporation after the transfer to it of the properties of the old
corporation and the liquidation of the former soon thereafter.
The fact isthat the merger had merely deferred the claim for
taxes,which may be asserted by the government later,
whengains are realized and benefits are distributed among the
stockholders as a result of the merger. In other words, the
corresponding taxes are not forever foreclosed or forfeited but
may at the proper time and without prejudice to
thegovernment still be imposed upon the private respondents
DELPHER TRADES CORP. v. IAC (1988)
Delfin and Pelagia Pacheco were co-owners of a lot
inValenzuela. CCI leased the property, it then assigned its
rights to Hydro Pipes. A deed of exchange was executed
between lessors Delfin and Pelagia Pacheco and Delpher
Trades Corporation (Delpher)whereby the former conveyed to
the latter the leasedproperty together with another parcel of
land (TCT No. 4273)also located in Malinta Estate, Valenzuela
for 2,500 shares ofstock of Delpher with a total value of
P1,500,000
Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095On the ground that it was not
given the first option to buy theleased property pursuant to the
proviso in the lease agreement.
The benefit to the spousesHernandez and Pacheco in
connection with their execution ofa deed of exchange on the
properties for no par value sharesof the defendant corporation
were continuous control of theproperty, tax exemption
benefits, and other inherent benefitsin a corporation. Having
fulfilled the conditions in the incometax law, providing for tax
free exchange of property, theywere able to execute the deed of
exchange free from incometax and acquire a corporation.
Doctrine of equitable recoupment
- A claim for refund barred by prescription may be allowed to
offset unsettled tax liabilities should be pertinent only to
taxes arising from the same transaction – no application
where the taxes involved are totally unrelated
- A mandatory provision cannot and should not be a
constraint against the application of the doctrine even where
that period had already lapsed; precisely it is an invocation
of equity rather than of law
- The Supreme Court rejected the doctrine in CIR v. UST as it
may work to tempt the collecting agency and the taxpayer to
delay and neglect their respective pursuits of legal action
within the period set by law
Set-off taxes
- Republic v. Mambulao Lumber: taxes are not subject to set-
off or legal compensation
- Domingo v. Garlitos: where the taxes and the taxpayer’s
claim are fully liquidated and demandable, legal
compensation can take place by operation of law.
- Mambulao appears to be the better view:
 Taxes are of a distinct kind and cannot be so classified in
merely the same category as ordinary obligations
14
  The applicable laws and principles governing each are
peculiar, and not necessarily common to each
 Public policy is better subserved if the integrity and
independence of taxes are maintained.
Taxpayer suit
- It is only when an act complained of, which may include a
legislative enactment, directly involves the disbursement of
public funds derived from taxation that the taxpayer suit
may be allowed
- Illegal expenditure of tax money
Compromises
- A tax compromise may be entered into and binding when:
a. The subject matter thereof is not expressly prohibited
from being compromised, and
b. The public official entering into it is authorized by law
- Eg. CIR, under certain conditions, enter into a compromised
of both the civil and criminal liability of the taxpayer;
Collector of Customs in cases involving imposition of fines,
surcharges and forfeitures
__________
POWERS AND DUTIES OF THE BIR
SEC. 2.Powers and Duties of the Bureau of Internal Revenue.
- The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Finance and its
powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and
charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect to
and administer the supervisory and police powers conferred to
it by this Code or other laws.
- Police power – Giving effect to and administering the
supervisory and police power conferred to the Bureau.
- As regards the exercise of its police powers, the BIR may do
so only in the enforcement of tax collection duties
Chief Officials of the BIR39
- Chief – Commissioner of Internal Revenue
- Assistant Chiefs – Deputy Commissioners
SEC. 4.Power of the Commissioner to Interpret Tax Laws
and to Decide Tax Cases. - The power to interpret the
provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or
other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.
- Powers of the CIR under Sec. 4:
a. Exclusive and original power to interpret tax laws,
subject to review by the Secretary of Finance
39Sec. 3 respondents as the informer's heirs.
b. Assess and collect
Assess and collect
- Internal revenue taxes are mostly self-assessing in nature
and no assessment by the BIR is required for the accrual
thereof
- An assessment must be sent to and received by a taxpayer,
and must demand payment of the taxes described therein
within a specific period. The NIRC doesn’t provide for the
specific definition and form of an assessment but it deifnes
specific functions and effects of an assessment40
- Within the applicable statute of limitation, the CIR may re-
examine or re-assess the taxpayer, the government not being
estopped by error or mistakes of its agents.
- Assessment – mere notice and demand but is normally
essential to initiate distraint and levy proceedings
- Sec 222 of the NIRC state that in cases where a false or
fraudulent return is submitted or in cases of failure to file a
return such as this case, proceedings in court may be
commencedwithout an assessment.41
Burden of proof
- Burden of proof on taxpayer to prove erroneous assessment
– Assessments are presumed to be correct and valid, and a
taxpayer who disagrees must not only prove that the
assessment is wrong but he must state the correct one42
- The presumption is prima facie, not final or conclusive
- To pass the test of judicial scrutiny, the assessment must be
based on actual facts and not itself, in turn, based on mere
presumptions
Mandamus43
- Mandamus only lies to enforce the performance of a
ministerial act or duty and not to control the performance of
a discretionary power. Purely administrative and
discretionary functions may not be interfered with by the
courts.
- Since the office of the Commissioner of Internal Revenue is
charged with the administration of revenue laws, which is
the primary responsibility of the executive branch of the
government, mandamus may not be against the
Commissioner to compel him to impose a tax assessment not
found by him to be due or proper for that would be
tantamount to a usurpation of executive functions.
40CIR v. Pascor Realty (1999) - To consider the affidavit attached to
the Complaint as a proper assessment is to subvert the nature ofan
assessment and to set a bad precedent that willprejudice innocent
taxpayers. On the case on hand,the affidavit merely contained
acomputationofrespondents’ tax liabilities. It did not contain a demand
or a period for payment and wasaddressed to the justice secretary
rather thatthetaxpayer.
41Id.
42Sy Po v. CTA, SEE ALSOMarcos II v. CTA (1997) - Apart from
failing to file the required estate tax returnwithin the time required for
thefiling of the same,petitioner, and the other heirs never questioned
the assessments served upon them, allowing the same to lapseinto
finality, and prompting the BIR to collect the saidtaxes by levying upon
the properties left by PresidentMarcos.
43Meralco Securities v. Savellano (1982) – Considering that
respondent judge may not order by mandamus the Commissioner to
issue the assessment against Meralco Securities Corporation when no
such assessment has been found to be due, no deficiency taxes may
therefore be assessed and collected against the said corporation. Since
no taxes are to be collected, no informer's reward is due to private
15
Power to enforce forfeitures, penalties & fines,
execute decisions of the CTA and ordinary courts
Requisites for forfeiture44
a. the wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit, or the wrongful
making or delivery by the same person of any invoice, letter
or paper - all touching on the importation or exportation of
merchandise;
b. the falsity of such declaration, affidavit, invoice, letter or
paper; and
c. an intention on the part of the importer/consignee to evade
the payment of the duties due.
Fraud
- Fraud must be proved to justify forfeiture. It must be actual,
amounting to intentional wrong-doing with the clear
purpose of avoiding the tax. Forfeiture is not favored in law
nor in equity. Mere negligence is not equivalent to the fraud
contemplated by law.45
False Return Fraudulent Return
Deviation from the truth, Intentional or deceitful entry
whether intentional or not with intent to evade the taxes
due
- Fraud cannot be presumed but must be proven – Fraudulent
intent could not be deduced from mistakes however frequent
they may be, especially if such mistakes emanate from
erroneous entries or erroneous classification of items in
accounting methods utilized for determination of tax
liabilities.46
- Prescription period – Normal circumstances:5 years
within which to assess tax liabilities.47Exception: Whenever
the government is placed at a disadvantage so as to prevent
its lawful agents from proper assessment of tax liabilities due
to false returns, fraudulent return intended to evade
payment of tax or failure to file returns, the period of ten
years from the discovery of the falsity/fraud/omission.48
Elements of tax evasion
1. the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due;
2. an accompanying state of mind which is described as being
"evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and
3. a course of action or failure of action which is unlawful.
_________
44Sec. 2530, TCC
45Republic v. CA (2001) – Mistake in naming GQ Garments as
consignee in the Inward Foreign Manifest and AGFHA as consignee in
the Clean Report Findings. What is here involved is an honest mistake,
not even directly attributable to private respondent, which will not
deprive the government of its right to collect the proper tax.
46Aznar v. CA (1974) - The lower court based its conclusion on a
presumption that fraud can be deduced from the very substantial
disparity of incomes as reported and determined by the inventory
method and on the similarity of consecutive disparities for six
years.Such a basis for determining the existence of fraud (intent to
evade payment of tax) suffers from an inherent flaw when applied to
this case.
47Sec. 331
48Sec. 332(a)
Power to obtain information, etc.
- obtaining information, summoning, examining, and taking
testimony of persons for purposes of ascertaining the
correctness of any return or in determining the liability of
any person for any internal revenue tax, or in collecting any
such liability
Best evidence obtainable rule49
- Sy Po v. CTA - a letter and a subpoena ducestecum were
issued against Silver Cup requesting production of the
accounting records and other related documents for the
examination of the team. Mr. Po did not produce his books of
accounts. Thus, the BIR team went to the warehouse and
seized different brands, consisting of 1,555 cases of
alcoholproducts.
- In the absence of accounting records of the taxpayer, his tax
liability may be determined by estimation. Approximation in
the calculation of taxes is justified. Exactness not required.
HOWEVER – The estimation must be arrived at justly. The
rule of valid estimation does not apply when it is arrived at
arbitrarily and capriciously.50
Requirement for a search warrant
- Seizure of evidence within the confines of constitutional
guarantees.
- The Commissioner may, at any time during the taxable year,
order inventory-taking of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities, or may place
the business operations of any person, natural or juridical,
under observation or surveillance if there is reason to believe
that such person is not declaring his correct income, sales or
receipts for internal revenue tax purposes. The findings may
be used as the basis for assessing the taxes for the other
months or quarters of the same or different taxable years and
such assessment shall be deemed prima facie correct.51
- Records in custodialegis may cannot be seized without leave
of court.
- Assessments made on the basis of illegally seized items
should not be enforced.52
49Sec. 6(b) - Failure to Submit Required Returns, Statements,
Reports and other Documents. - When a report required by law as a
basis for the assessment of any national internal revenue tax shall not
be forthcoming within the time fixed by laws or rules and regulations
or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax
on the best evidence obtainable.
In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or
fraudulent return or other document, the Commissioner shall make or
amend the return from his own knowledge and from such information
as he can obtain through testimony or otherwise, which shall be prima
facie correct and sufficient for all legal purposes.
50CIR v. Hantex (2005) – In this case, the tax deficiency assessment,
the findings of the EIIB agents, the Profit and Loss Statements of the
SEC and everything else were based on the PHOTOCOPIES OF THE
CONSUMPTION ENTRIES. Aside from those, no other evidence was
offered. Hence, the quantity of costs and importations of respondent
have no factual basis. Petitioner cannot rely on the presumption that
the BIR had performed their duties based on faulty evidence.
51Sec. 6(c)
52Bache v. Judge Ruiz (1971) - In the case at bar, no personal
examination at all was conducted by respondent Judge of the
complainant (De Leon) and his witness (Logronio).
16
BIR RULES AND REGULATIONS
Requisites for valid rules and regulations:
1. Consistent and in harmony with law
2. Reasonable
3. Useful and necessary
4. Published in the Official Gazette
- Nature of administrative rules & regulations – such
issuances must not override, but must remain consistent and
in harmony with, the law they seek to apply and implement.
Administrative rules and regulations areintended to carry
out, neither to supplant nor to modify,the law.53
- A revenue regulation, the issuance of which is authorized by
statute, has the force and effect of law
Extent of BIR interpretative rule
- 3 types of quasi-legislative/rule making powers of admin.
Agencies:
1. Supplementary or detailed legislation
2. Contingent legislation
3. Interpretative rule
- To interpret, clarify, or explain statutory regulations under
which the administrative body operates; merely to construe
the statutes being administered
- It need not be published and neither hearing is required
CIR v. CA, CTA and Fortune (1996)
MERON PANG SHIT DITO
Inasmuch as it is argued by the Commissioner of Internal
Revenue that RMC 37-93 was merely an interpretative ruling,
the administrative issuance was, in fact, a legislative rule,
which must be struck down, as it did not comply with the
requirements of notice, hearing and publication. It was
observed by the Court that the CIR did not merely construe the
law, as it would have us believe. By virtue of its resolution, the
CIR reclassified Hope, More, and Champion from locally
manufactured cigarettes not bearing foreign brands to locally
manufactured cigarettes bearing foreign brands, and
consequently removed it from the 45% ad valorem tax group
and placed it under the 55 % ad valorem bracket.
Effect of revocation of ruling
- General Rule:Any revocation, modification or reversal of
any of the rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers. Exceptions:
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document
required of him by the Bureau of Internal Revenue;
53CIR v. CA, ROH Auto Products (1995) - Section 4 of EO 41
enumerated, in no uncertain terms,taxpayers who may not avail to the
amnesty granted. Thecompany does not fall under any of the
exceptions. Theadded exception urged by the Commissioner based on
Revenue Memorandum Order 4-87, further restricting thescope of the
amnesty, work against the raison d’etre of EO 41 and clearly amounts
toadministrativelegislationcontrary to the mandate of the law
which the regulationought to implement. The rule in the order that
onlyassessments issued after 21 August 1986 shall be abated isbeyond
the contemplation of the law.
2. Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the
facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith.54
Wrong interpretation will not prejudice the
government
PBC v. CIR (1999)
Sec. 230 of the NIRC states that the taxpayer may file a claim
for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any
suit in CTA is commenced. The two-year prescriptive period
provided, should be computed from the time of filing the
Adjustment Return and final payment of the tax for the
year.When the Acting Commissioner of Internal Revenue
issued RMC 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of
Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.
Fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. As
pointed out by the respondent courts, the nullification of RMC
No. 7-85 issued by the Acting Commissioner of Internal
Revenue is an administrative interpretation which is not in
harmony with Sec. 230 of 1977 NIRC. for being contrary to the
express provision of a statute. Hence, his interpretation could
not be given weight for to do so would, in effect, amend the
statute.
Prospective application of circulars or rulings
- Rulings or circulars promulgated by the cir have no
retroactive application where to so apply them would be
prejudicial to taxpayers
ABS-CBN v. CTA and BIR (1981)
The prejudice to ABS of the retroactive application of
Memorandum Circular No. 4-71 is beyond question. It was
issued only in 1971, or 3 years after 1968, the last year ABS had
withheld taxes under General Circular No. V-334. The
assessment and demand on ABS to pay deficiency withholding
income tax was also made 3 years after 1968 for a period of
time commencing in 1965. ABS was no longer in a position to
withhold taxes due from foreign corporations because it had
already remitted all film rentals and no longer had any control
over them when the new Circular was issued. And in so far as
the enumerated exceptions are concerned, admittedly,
petitioner does not fall under any of them.
- General Rule: Government is never estopped from
collecting taxes because of mistakes or errors on the part of
its agents. Exception: in the interest of justice and fairplay.
54Sec. 246; CIR v. Burroughs (1986) – BIR contends that Burroughs
is no longer entitled to a refund because MC 8-82 (March 14, 1982) had
revoked the BIR Ruling of Jan. 21, 1980. This contention is without
merit. What isapplicable in the case at bar is still the Revenue Ruling
ofJanuary 21, 1980 because BurroughsLimited paid the branch profit
remittance tax in questionon March 14, 1979
17
CONCEPT OF INCOME the payment of the tax to theGovernment, he is the agent of
the taxpayer
Definition of Terms
- Persons – an individual, trust, estate, or corporation - Under the accrual basis method ofaccounting, income is
reportable when all the eventshave occurred that fix the
- Corporation – shall include: taxpayers right to receivethe income, and the amount can be
1. Partnerships, no matter how created or organized, determined withreasonable accuracy. Thus, it is the right to
2. Joint-stock companies, receiveincome, and not the actual receipt, thatdetermines
3. Joint accounts (cuentas en participacion), when to include the amount in gross income.
4. Association, or
5. Insurance companies, - Requisites of Accrual Basis Method:
a. That the right to receive the amount must be
But does not include: valid,unconditional and enforceable, i.e., not contingent
1. General professional partnership55 uponfuture time;
2. Joint venture or consortium formed for the purpose of b. The amount must be reasonably susceptible ofaccurate
undertaking construction projects or engaging in estimate; and
petroleum, coal, geothermal and other energy c. There must be a reasonable expectation that theamount
operations pursuant to an operating consortium will be paid in due course.
agreement under a service contract with the _________
Government.
TAXABLE INCOME
- Shares of stocks– shallinclude:
1. Shares of stock of a corporation, 3 categories:
2. Warrants and/or options to purchase shares of stock,
1. Passive investment income subject to final tax
3. Units of participation in a partnership (except general
2. Compensation income
professional partnerships), joint stock companies, joint
3. Non-compensation income
accounts, joint ventures taxable as corporations,
associations and recreation or amusement clubs (such
as golf, polo or similar clubs), and mutual fund T.0 General Principles of Income Taxation
certificates. Taxpayer Base Tax Rate
Income derived
- Taxpayer– any person subject to tax imposed by this Title sources within and
Resident citizen
(Tax on Income) without the
Philippines
0-32% on net
- Taxable year – the calendar year, or the fiscal year ending Nonresident citizen
income
during such calendar year, upon the basis of which the net OCW 56

income is computed under this Title. 'Taxable year' includes, Resident alien Income derived
in the case of a return made for a fractional part of a year Nonresident alien, from sources within
ETB the Philippines
under the provisions of this Title or under rules and
Nonresident alien, 25% on gross
regulations prescribed by the Secretary of Finance, upon
not ETB income
recommendation of the commissioner, the period for which
such return is made. - Minimum wage earners57 – shall be exempt from the
payment of income tax on their taxable income
- Fiscal year – An accounting period of twelve (12) months - Alien engaged in trade or business –an aggregate period of
ending on the last day of any month other than December. more than 180 days during any calendar year

- Paid or incurred/paid or accrued – shall be construed Income derived

according to the method of accounting upon the basis of Domestic sources within and
which the net income is computed under this Title Corporation without the 30% on net
Philippines income
Withholding tax; accrual method Resident foreign
Income derived
- The method of withholding tax at source is aprocedure of corporation
from sources within
collecting income tax. The withholdingagent is made Nonresident foreign 30% on gross
the Philippines
personally liable for theincome tax withheld corporation income
- The law sets no condition for thepersonal liability of the
withholding agent toattach. The reason is to compel the Liable for income
General Professional 0-32% on net
withholdingagent to withhold the tax under all tax only in their
Partnership income
circumstances.With respect to the collection separate and
and/orwithholding of the tax, he is the Governments agent.
Inregard to the filing of the necessary income taxreturn and 56 Including seamen who is a citizen of the Philippines and who
receives compensation for services abroad
57 Sec. 22 (HH) - The term 'minimum wage earner' shall refer to a
55'General professional partnerships' are partnerships formed by worker in the private sector paid the statutory minimum wage, or to an
persons for the sole purpose of exercising their common profession, no employee in the public sector with compensation income of not more
part of the income of which is derived from engaging in any trade or than the statutory minimum wage in the non-agricultural sector where
business he/she is assigned.
18
 individual capacity d. Not used in trade/business
__________ - Eg.
 Filipino nonresident, sale of property in the US – no CGT
Individuals impossible
On Citizen & Resident Alien  Filipino nonresident, sale of property in Quiapo – 6%
T1. Passive Income58
Currency bank deposit and yield or any other On Nonresident Alien (ETB)
monetary benefit from deposit substitutes and 20% Cash & property dividends from domestic 20%
from trust funds and similar arrangements corporation
Income from a depository bank under the General Rule: Prizes 20%
7 1/2%
expanded foreign currency deposit system Exception: Prizes < P10,000 0-32%
Long term deposits or investment59 exempt General Rule: Other winnings from sources 20%
General Rule: Royalties 20% within the PH
Exception: Royalties on books, literary works, Exception: Philippine Charity Sweepstakes
10%
and musical compositions and Lotto winnings
General Rule: Prizes 20% General Rule: Royalties 20%
Exception: Prizes < P10,000 0-32% Exc: Books, literary works, musical 10%
General Rule: Other winnings from sources compositions
20%
within the PH Exc: Cinematographic films 30%
Exception: Philippine Charity Sweepstakes and Long term deposit/investment63 exempt
Lotto winnings Capital Gains T3; T4

T2. Cash and Property Dividends60 Nonresident Alien (not ETB)

Cash and/or property dividends actually or Entire income 25% on GI
constructively received from a domestic 10%
Capital Gains T3,T4
corporation…
- Eg.
- Stock dividends – not taxable since there is no income
 Resident alien, musical compositions – 10% on royalties
derived; only income is equity shares
earned in the Philippines
- Eg.
 Alien on vacation, winnings on gambling – 25% on GI
 Nonresident Filipino, dividends from Apple – not taxable
 Alien nonresident (ETB), gambling – depends on amount
 Resident Filipino, dividends from Apple – 0-32%
of winnings
 Nonresident Filipino, dividends from SMC – 10%
__________
T3. Capital Gains – Sale of shares of stock not traded
Estates & Trusts
in stock exchange61
- Estate – accumulated property of the person not only
Not over P100,000 5%
determined at the time of death
On any amount in excess of P100,000 10%
- Tax is on the net capital gain
- Shares of stock traded in the stock exchange – income tax Imposition of taxes64
exempt, but subject to stock transaction tax of ½ of 1% of the - Tax upon individuals shall apply to the income of estates or
gross selling price of any kind of property held in trust, including:
1. Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent
T4. Capital Gains – sale of real property62
interests, and income accumulated or held for future
Sale of real property located in the Philippines distribution under the terms of the will or trust;
classified as capital assets, on: 2. Income which is to be distributed currently by the
a. Gross selling price 6% fiduciary to the beneficiaries, and income collected by a
b. Fair market value guardian of an infant which is to be held or distributed
Whichever is higher. as the court may direct;
Sales or other dispositions of real property to 6% 3. Income received by estates of deceased persons during
the government, at the option of the taxpayer 0-32% the period of administration or settlement of the estate;
- Tax is on the sale, not on the gain and
- Capital asset: 4. Income which, in the discretion of the fiduciary, may be
a. Not held for sale in the ordinary course of business either distributed to the beneficiaries or accumulated.
b. Not included in the inventory
c. Not subject to depreciation - Exception: Employee’s trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees. If:
58 Sec. 24 (B)(1)
59Pretermination before the 5th year: 1. if contributions are made to the trust by such employer,
 4 years to less than 5 years - 5%; or employees, or both for the purpose of distributing to
 3 years to less than 4 years - 12%; and such employees the earnings and principal of the fund
 Less than 3 years - 20%.
60 Sec. 24 (B)(2)
61 Sec. 24 (C) 63Supra note 59
62 Sec. 24 (D)(1) 64 Sec. 60 (A);(B)
19
 accumulated by the trust in accordance with such plan,
and
2. if under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or
income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive
benefit of his employees
- Provided: Any amount actually distributed to any
employee or distributee shall be taxable to him in the year in
which so distributedto the extent that it exceeds the amount
contributed by such employee or distributee.
- For tax purposes, the employees' reserve fund is a separate
taxable entity. The company, while retaining legal title and
custody over the property, holds it in trust for the
beneficiaries65
- To qualify for exemption, the employees’ trust must refer to a
definite program, scheme or plan. It must be set up in good
faith. There must be proof that there is no tax evasion
planned.
Computation and Payment66
- General Rule: paid by the fiduciary. Exceptions:
included in the taxable income of the grantor
1. Revocable trusts67
2. Income for the benefit of the grantor68
- Consolidation of income – two or more trusts, the
creator of the trust in each instance is the same person, and
the beneficiary in each instance is the same
- The tax shall be computed on such consolidated income, and
such proportion of said tax shall be assessed and collected
from each trustee which the taxable income of the trust
65 CIR v. Visayan Electric (1968)
66 Sec. 60 (C)
67Sec. 63 Revocable trusts. –Where at any time the power to revest
in the grantor title to any part of the corpus of the trust is vested
1. in the grantor either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, or
2. in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom,
the income of such part of the trust shall be included in
computing the taxable income of the grantor.
68Sec. 64 Income for Benefit of Grantor.-
A. Where any part of the income of a trust
1. is, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of
such part of the income may be held or accumulated for
future distribution to the grantor, or
2. may, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of
such part of the income, be distributed to the grantor, or
3. is, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of
such part of the income may be applied to the payment of
premiums upon policies of insurance on the life of the
grantor, such part of the income of the trust shall be
included in computing the taxable income of the grantor.
B. As used in this Section, the term ‘in the discretion of the grantor’
means in the discretion of the grantor, either alone or in
conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.
administered by him bears to the consolidated income of the
several trusts.
Taxable Income69
- Taxable income shall be computed in the same manner and
on the same basis as in the case of individuals.
- Deductions:
1. There shall be allowed as a deduction in computing the
taxable income of the estate or trust the amount of the
income of the estate or trust for the taxable year which is
to be distributed currently by the fiduciary to the
beneficiaries, and the amount of the income collected by
a guardian of an infant which is to be held or distributed
as the court may direct, but the amount so allowed as a
deduction shall be included in computing the taxable
income of the beneficiaries, whether distributed to them
or not. Any amount allowed as a deduction under this
Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any
succeeding taxable year.
2. In the case of income received by estates of deceased
persons during the period of administration or
settlement of the estate, and in the case of income
which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there
shall be allowed as an additional deduction in
computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary but the
amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or
beneficiary.
- In the case of a trust administered in a foreign country, the
deductions mentioned shall not be allowed: Provided, That
the amount of any income included in the return of said trust
shall not be included in computing the income of the
beneficiaries.
- Exemption Allowed to Estates and Trusts – There
shall be allowed an exemption of P20,000 from the income
of the estate or trust.70
__________
Corporation
- Corporations may adopt calendar or fiscal year; no such
option with individuals.
Taxable Income
Sales
(Returns, allowances&
discounts)
Net Sales
(Cost of goods sold)
Beginning inventory
Purchases
Total goods available for sale
(End inventory)
Gross Income
(Deductions)
Taxable Income
69 Sec. 61
70Sec. 62
20
 T5. Corporate income tax Foreign Corporations
Net income tax 30% on taxable income Branch office
Gross income tax 15% on gross income - Any profit remitted by a branch to its head office shall be
Minimum corporate income tax 2% on gross income subject to a tax of 15% which shall be based on the total
- The option to be taxed based on gross income shall be profits applied or earmarked for remittance without any
available only to firms whose ratio of cost of sales to gross deduction for the tax component thereof
sales or receipts from all sources does not exceed 55% - Income from all sources within the Philippines shall not be
__________ treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the
Domestic Corporations Philippines.

Proprietary educational institutions and hospitals Headquarters of multinational

which are non-profit companies(Resident Foreign Corp)
General Rule: On taxable income 10% Regional or area headquarters73 0%
Exc: Passive income T Regional operating headquarters74 10%
Exc:If the gross income from unrelated trade,
business or other activity 50% of the total gross  Marubeni v. CIR (1989) - The dividends in question are
T5 income taxable to the Marubeni Corporation of Tokyo,
income derived by such educational
institutions or hospitals from all sources. Japan.Marubeni Corporation PhilippineBranch has no
participation or intervention, directly or indirectly, in the
- Proprietary educational institution – any private school investments and in the receipt of the dividends. And it
maintained and administered by private individuals or appears that the funds invested in the Atlantic Gulf & Pacific
groups with an issued permit to operate from Company did not come out of the funds infusedby the
- Non-stock and nonprofit educational institution – income Marubeni Corporation of Japan to theMarubeni Corporation
tax exempt71 Philippine Branch. Only profits remitted abroad by a branch
office to its head office which are effectively connected with
- Unrelated trade, business, or other activity – not its trade or business in the Philippines are subject to the 15%
substantially related to the exercise or performance by such profit remittance tax.
educational institution or hospital of its primary purpose or  See CIR v. P&G (1991)
function.
Non-resident Foreign Corporation
- See Section 30: Exception from tax on Corporations; RMC  See Sec.28 (B), (B)(5)
67-2012
Special types of corporations
Government corporations Proprietary Educational Institutions and Hospitals
- General Rule: All corporations, agencies, or CIR v. ST. LUKE’S (2012)
instrumentalities owned or controlled by the The Court finds that St. Luke's is a corporation that is not
Governmentshall pay such rate of tax upon their taxable "operated exclusively" for charitable or social welfare purposes
income as are imposed upon corporations or associations insofar as its revenues from paying patients are concerned.St.
engaged in a similar business, industry, or activity. Luke's, as a proprietary non-profit hospital, is entitled to the
- Exception:Income tax exempt corporations – preferential tax rate of 10% on its net income from its for-profit
a. GSIS activities.
b. SSS
c. PhilHealth  Section 30(E) and (G) of the NIRC requires that an
d. Local water districts institution be "operated exclusively" for charitable or social
e. PCSO welfare purposes to be completely exempt from income tax.

Tax on certain passive incomes72  An institution under Section 30(E) or (G) does not lose its
Interest on currency bank deposit and yield tax exemption if it earns income from its for-profit
Other monetary benefit from deposit activities. Such income from for-profit activities, under the
substitutes 20% last paragraph of Section 30, is merely subject to income
Trust funds tax, previously at the ordinary corporate rate but now at the
Similar arrangements preferential 10% rate pursuant to Section 27(B).
Interest from depositary bank under expanded
7 1/2%
foreign currency deposit system

Intercorporate dividends 73Sec. 22 (DD) Regional or area headquarters – A branch established

 Dividends received by a domestic corporation from another
domestic corporation shall not be subject to tax.
Capital Gains – Sale, Exchange or Disposition of
Lands and/or Buildings
in the Philippines by multinational companies and which headquarters
do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
74Sec. 22 (EE) Regional operating headquarters – A branch

 6% on the gain presumed to have been realized on the sale of established in the Philippines by multinational companies which are
land/building treated as capital asset. engaged in any of the following services: general administration and
__________ planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development
71 Sec. 30 (H) services and product development; technical support and maintenance;
72 Sec. 27 (D) data processing and communications; and business development.
21

Partnership v. Co-ownership
- Partnership: (1) contribute money, property, or industry to a
common fund and (2) that they intended to divide profit
among themselves.75
- The co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the
said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares
in the inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or approved by
the court in the corresponding testate or intestate
proceeding.76
- The sharing of gross returns does not of itself establish a
partnership
- Test: Whether there is a character of habitually peculiar
to business transactions engaged in for purposes of gain (ie.
isolated transactions doesn’t constitute a partnership)
Joint Accounts, Joint Ventures
- Afisco Insurance v. CIR (1999) – The pool is a taxable
entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is different from the
tax on the dividends received by the said companies.
- CIR v. BatangasTranspo(1989) – Joint emergency
operations of BatangasTranspo and Laguna-Tayabas Bus.
What was actually done in this case was that, although no
legal personality may have been created by the Joint
Emergency Operation, nevertheless, said Joint Emergency
Operation joint venture, or joint management operated the
business affairs of the two companies as though they
constituted a single entity, company or partnership, thereby
obtaining substantial economy and profits in the operation.
- The gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which
do not belong to them and do not redound to the taxpayer's
benefit; and it is not necessary that there must be a law or
regulation which would exempt such monies and receipts
within the meaning of grossreceipts under the Tax Code. 77
International Carrier (Resident Foreign
Corporation)78
- An international carrier doing business in the Philippines
shall pay a tax of 2 ½% on its ‘Gross Philippine Billings’
- Gross Philippine Billings
 The amount of gross revenue derived from carriage of
persons, excess baggage, cargo, and mail originating from
the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided,
That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross
Philippine Billings if the passenger boards a plane in a
port or point in the Philippines: Provided, further, That
for a flight which originates from the Philippines, but
transshipment of passenger takes place at any part
outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of
75Pascual v. CIR (1988)
76Ona v. CIR (1972)
77CIR v. Tours Specialist Inc. (1990) - Parenthetically, the room
charges entrusted by the foreign travel agencies to Tour Specialists do
not form part of its gross receipts within the definition of the Tax Code.
The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels.
78 Sec.28 (A) (3)
transshipment shall form part of Gross Philippine
Billings.
 The gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage
or freight documents.
- South African Airways v. CIR (2010)
 General Rule: Resident foreign corporations shall be
liable for a 32% income tax on their income from within
the Philippines. Exception: Resident foreign
corporations that are international carriers that derive
income from carriage of persons, excess baggage, cargo
and mail originating from the Philippines which shall be
taxed at 2 1/2% of their Gross Philippine Billings.
 If an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international
air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other
activities in the country will be taxed at the rate of 32% of
such income.
__________
GROSS INCOME
What is Income
- See Section 32
- Haig-Simons: Personal income may be defined as the
algebraic sum of (1) the change in value of rights exercised in
consumption, and (2) the change in value of the store of
property rights between the beginning and end of the period
in question.
- Problems of administration:
 Property devaluation – who decides the value of one’s
property rights
 Liquidity – Without a sale of one’s property, an
individual may not have available cash to pay for tax on
the property, eventhough the assessed value has
increased.
Capital v. Income
Capital Income
Fund Flow
Wealth Service of wealth
Tree Fruit
- When income has already been subject to tax, that income is
converted to capital
Severance test theory79
- Separation from capital of something which of exchangeable
value.
- Income may be defined as the gain derived from capital,from
labor, or from both combined, including profitgained
through sale or conversion of capital.
- Mere growth or increment of value in a capital investment
isnot income; income is essentially a gain or profit, in itself,
of exchangeable value, proceeding from capital, severed from
it, and derived or received by the taxpayer for his separate
use, benefit, and disposal.
- In re: Stock dividends
 Eisner v. Macomber – A stock dividend, evincing
merely a transfer of an accumulated surplus to the capital
account of the corporation, takes nothing from the
79 CIR v. CA (1999)
22
 property of the corporation and adds nothing to that of Where the manifest intention of the parties to the trust
the shareholder. A tax on such dividends is a tax on agreement was, in sum and substance, to treat the shares of a
capital increase, and not on income, and, to be valid deceased stockholder as absolutely outstanding shares of said
under the Constitution. The stockholder has not realized stockholder’s estate until they were fully paid. the declaration
of said shares as treasury stock dividend was a complete nullity
or received any income in the transaction
and plainly violative of public policy.A stock dividend, being
 CIR v. CA (1999)80 – It is not the stock dividends but the one payable in capital stock, cannot be declared out of
proceeds of its redemption that may be deemed as outstanding corporate stock, but only from retained earnings.
taxable dividends.The redemption converts into money
the stock dividends which become a realized profit or Where by the use of a trust instrument as a convenient
gain and consequently, the stockholders separate technical device, respondents bestowed unto themselves the
full worth and value of a deceased stockholder’s corporate
property. Profits derived from the capitalinvested cannot
holding acquired with the very earnings of the companies, such
escape income tax. package device which obviously is not designed to carry out the
 Fisher v. Trinidad (1922) – The stockholder who usual stock dividend purpose of corporate expansion
receives a stock dividend has received nothing but a reinvestment, e.g., the acquisition of additional facilities and
representation of his increased interest in the capital of other capital budget items, but exclusively for expanding the
the corporation.There has been no separation of the capital base of the surviving stockholders in the company,
cannot be allowed to deflect the latter’s responsibilities toward
interest of the stockholder from the general capital of the
our income tax laws. The conclusion is ineluctable that
corporation. A stock dividend, still being the property of whenever the company parted with a portion of its earnings "to
the corporation and not the stockholder, may be reached buy" the corporate holdings of the deceased stockholders, it
by an execution against the corporation, and sold as a was in ultimate effect and result making a distribution of such
partof the property of the corporation. earnings to the surviving stockholders. All these amounts are
consequently subject to income tax as being, in truth and in
fact, a flow of cash benefits to the surviving stockholders.
CIR v. MANNING (1975)
Under a trust agreement, Julius Reese who owned 24,700
Where the surviving stockholders, by resolution, partitioned
shares of the 25,000 common shares of MANTRASCO, and the
among themselves, as treasury stock dividends, the deceased
three private respondents who owned the rest, at 100 shares
stockholder’s interest, and earnings of the corporation over a
each, deposited all their shares with the Trustees. The trust
period of years were used to gradually wipe out the holdings
agreement provided that upon Reese’s death MANTRASCO
therein of said deceased stockholder, the earnings (which in
shall purchase Reese’s shares. The trust agreement was
effect have been distributed to the surviving stockholders when
executed in view of Reese’s desire that upon his death the
they appropriated among themselves the deceased
Company would continue under the management of
stockholder’s interest), should be taxed for each of the
respondents. Upon Reese’s death and partial payment by the
corresponding years when payments were made to the
company of Reeses’s share, a new certificate was issued in the
deceased’s estate on account of his shares. In other words, the
name of MANTRASCO, and the certificate indorsed to the
Tax Commissioner may not asses the surviving stockholders,
Trustees. Subsequently, the stockholders reverted the 24,700
for income tax purposes, the total acquisition cost of the
shares in the Treasury to the capital account of the company as
alleged treasury stock dividends in one lump sum. However,
stock dividends to be distributed to the stockholders. When the
with regard to payment made with the corporation’s earnings
entire purchase price of Reese’s interest in the company was
before the passage of the resolution declaring as stock
paid in full by the latter, the trust agreement was terminated,
dividends the deceased stockholder’s interest (while indeed
and the shares held in trust were delivered to the company.
those earnings were utilized in those years to gradually pay off
the value of the deceased stockholder’s holdings), the surviving
The Bureau of Internal Revenue concluded that the
stockholders should be liable (in the absence of evidence that
distribution of the 24,700 shares of Reese as stock dividends
prior to the passage of the stockholder’s resolution the
was in effect a distribution of the "assets or property of the
contributed of each of the surviving stockholder rose
corporation." It therefore assessed respondents for deficiency
corresponding), for income tax purposes, to the extent of the
income taxes as well as for fraud penalty and interest charges.
aggregate amount paid by the corporation (prior to such
The Court of Tax Appeals absolved respondent from any
resolution) to buy off the deceased stockholder’s shares. The
liability for receiving the questioned stock dividends on the
reason is that it was only by virtue of the authority contained in
ground that their respective one-third interest in the Company
said resolution that the surviving stockholders actually, albeit
remained the same before and after the declaration of the stock
illegally, appropriated and petitioned among themselves the
dividends and only the number of shares held by each of them
stockholders equity representing the deceased stockholder’s
had changed.
interest.
On a petition for review, the Supreme Court held that the newly
The fact that the resolution authorizing the distribution of
acquired shares were not treasury shares; their declaration as
earnings is null and void is of no moment. Under the National
treasury stock dividends was a complete nullity and that the
Internal Revenue Code, income tax is assessed on income
assessment by the Commissioner of fraud penalty and the
received from any property, activity or service that produces
imposition of interest charges pursuant to the provision of the
income. The Tax Code stands as an indifferent, neutral party
Tax Code were made in accordance with law.
on the matter of where the income comes from. The action
taken by the Commissioner of assessing fraud penalty and
Judgment of the Court of Tax Appeals se aside.
imposing interest charges pursuant to the provisions of the Tax
Code is in accordance with law.
80The reason behind the redemption is not material. The proceeds from
a redemption is taxable and ASC is duty bound to withhold the tax at
source. The Soriano Estate definitely profited from the redemption and
such profitis taxable
23
 3-part test81
1. An accession to wealth – is  richer?
2. Clearly realized – has some event happened such that  has
received the money?
3. Complete dominion – does the  have a choice about how
to spend it (eg. credit liabilities are incurred voluntarily)
Not part of gross salary, not taxable
- In re: Terminal leave pay82
 Commutation of leave credits; In the exercise of sound
personnel policy, the Government encourages unused
leavesto be accumulated. The Government recognizes
that for most public servants, retirement pay is always
less than generous if not meager and scrimpy.
 Being part of the gross salary or income of a government
official or employee but a retirement benefit, terminal
leave pay is not subject to income tax.
Source of interest income
NDC v. CIR (1987)
NDC argues that the Japanese shipbuilders were not subject to
tax under the above provision because all the related activities
— the signing of the contract, the construction of the vessels,
the payment of the stipulated price, and their delivery to the
NDC — were done in Tokyo. The law, however, does not speak
of activity but of "source," which in this case is the NDC. This is
a domestic and resident corporation with principal offices in
Manila. Clearly, therefore, the interest (5%p.a.) remitted to the
Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the
unpaid balance of the purchase price of the vessels acquired by
petitioner is interest derived from sources within the
Philippines subject to income tax
Sec 37 (a)(1) – Gross income from sources within the
Philippines…Interest derived from sources within the
Philippines, and interest on bonds, notes, or other interest-
bearing obligations of residents, corporate or otherwise. v. Sec.
29 (b)(4) Exclusion from gross income…Interest upon the
obligations of the Government of the Republic of the
Philippines or any political subdivision thereof, but in the case
of such obligations issued after approval of this Code, only to
the extent provided in the act authorizing the issue thereof.
There is no basis for saying that the interest payments were
obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities
exempt from taxation. The law invoked by the petitioner as
authorizing the issuance of securities is R.A. No. 1407 (The
Philippine Overseas Shipping Act of 1955), which in fact is
silent on this matter.
Partnership theory
- A fundamental doctrine of income taxation is that the right
of a government to tax income emanates from its partnership
in the production of income, by providing the protection,
resources, incentive, and proper climate for such production.
Functions of income tax83
- To mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on
those best able to pay.
81 Commissioner v. Glenshaw (1955)
82 CIR v. CA & Castaneda (1991)
83 Madrigal v. Rafferty (1918)
Control test84
- Revenue laws define "realization" of income as the taxable
event, rather than the acquisition of the right to receive it.
And "realization" is not deemed to occur until the income is
paid.
- The rule that income is not taxable until realized has never
been taken to mean that the taxpayer, even on the cash
receipts basis, who has fully enjoyed the benefit of the
economic gain represented by his right to receive income can
escape taxation because he has not himself received payment
of it from his obligor.
- He, who owns or controls the source of the income, also
controls the disposition of that which he could have received
himself and diverts the payment from himself to others as
the means of procuring the satisfaction of his wants.
- The power to dispose of income is the equivalent
ofownership of it. To procure the payment of income
toanother is the enjoyment, and hence the realization, ofthe
income by him who exercises it.
Taxability of association dues
RMC 65-2012
The amounts paid in as dues or fees by members or tenants of a
condominium corporation form part of the gross income of the
latter subject to income tax. This is because a condominium
corporation furnishes its members and tenants with benefits,
advantages, and other assessment/charges collected by a
condominium corporation constitute income payments or
compensation for beneficial services it provides to its members
and tenants. The previous interpretation that the assessment
dues are funds which are merely held in trust by a corporation
lack legal basis and is hereby abandoned
Elements in the imposition of income tax85
1. There must be gain or profit,
2. That the gain or profit is realized or received, actually or
constructively, and
3. It is not exempted by law or treaty from income tax
_________
Income from whatever source
- Non-compensation income – any other income that is not
derived from personal services or not related to employer-
employee relationship.
Compensation for services
- Includes compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items.86
84Helvering v. Horst (1940) – When When, by the gift of the
coupons, he has separated his right to interest payments from his
investment and procured the payment of the interest to his donee, he
has enjoyed the economic benefits of the income in the same manner
and to the same extent as though the transfer were of earnings. The
taxpayer cannot attribute the fruit (the interest coupon) to a different
tree from that on which it grew (the bond itself). If Horst had given
both the bond and the interest coupons to his son, the interest would
have been taxable to his son.
85CIR v. Agrinture (2015) - Even if there was an undeclared
purchase, such does not by itself lead to imposition of deficiency
income taxes and VAT. For income tax purposes, a taxpayer is free to
deduct from its gross income a lesser amount, or not claim any
deduction at all. What is prohibited by the income tax law is to claim a
deduction beyond the amount authorized therein.
24
- It is not necessary for there to be an employee-employer
relationship
- Form of payment irrelevant (eg. stock notes, property etc. –
valuation is the FMV)
OLD COLONY TRUST CO. v. COMMISSIONER (1929)
August 3, 1916, the American Woolen Company had adopted
the following resolution, which was in effect in 1919 and
1920:That this company pay any and all income taxes, State
and Federal, that may hereafter become due and payable upon
the salaries of all the officers of the company, including the
president, William M. Wood…to the end that said persons and
officers shall receive their salaries or other compensation in full
without deduction on account of income taxes, State or
Federal, which taxes are to be paid out of the treasury of this
corporation.
question presented is whether a taxpayer, having induced a
third person to pay his income tax or having acquiesced in such
payment as made in discharge of an obligation to him, may
avoid the making of a return thereof and the payment of a
corresponding tax. We think he may not do so. The payment of
the tax by the employers was in consideration of the services
rendered by the employee and was a gain derived by the
employee from his labor. The form of the payment is expressly
declared to make no difference. It is therefore immaterial that
the taxes were directly paid over to the Government. The
discharge by a third person of an obligation to him is
equivalent to receipt by the person taxed. The certificate shows
that the taxes were imposed upon the employee, that the taxes
were actually paid by the employer and that the employee
entered upon his duties in the years in question under the
express agreement that his income taxes would be paid by his
employer. This is evidenced by the terms of the resolution
passed August 3, 1916, more than one year prior to the year in
which the taxes were imposed. The taxes were paid upon a
valuable consideration, namely, the services rendered by the
employee and as part of the compensation therefor. We think
therefore that the payment constituted income to the
employee.
- See Sec. 24 – Progressive tax rate structure
- Income may be defined as an amount of money coming to a
person or corporation within a specified time, whether as
payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent.
Income can also be though of as flow of the fruits of one's
labor.87
- Money received by mistake is income88
- When a law-abiding taxpayer mistakenly receives income in
one year, which receipt is assailed and found to be invalid in
a subsequent year, the taxpayer must nonetheless report the
amount as "gross income" in the year received.
- Constructive receipt of income
LIMPAN CORP. v. CIR (1966)
Petitioner admitted that the difference of the undeclared sum
of rentals in 1957 was because a certain tenant (Go Tong)
deposited in court his rentals (P10,800.00), over which the
86Sec. 32 (A)(1)
87Conwi v. CTA (1992) – dollar-peso conversion should be based on
the floating rate prescribed under the RMC and not the par value rate
based on the CB Circulater.
88Javier v. CA (1991) – Javier received 1M USD from Prudential
Bank. Prudential claimed that its remittance of 1M USD is a clerical
error and should have been 1K only.
corporation had no actual or constructive control and which
were withdrawn only in 1958.
The withdrawal in 1958 of the deposits in court pertaining to
the 1957 rental income is no sufficient justification for the non-
declaration of said income in 1957, since the deposit was
resorted to due to the refusal of Limpan Corp. to accept the
same, and was not the fault of its tenants; hence, Limpan Corp.
is deemed to have constructively received such rentals in 1957.
The payment by the sub-tenant in 1957 should have been
reported as rental income in said year, since it is income just
the same regardless of its source.
- Increase in net worth is not taxable if it is not the result of
the receipt by it of unreported or unexplained taxable
income, but were shown to be merely the result of the
correction of errors in its entries in its books relating to its
indebtednesses to certain creditors, which had been
erroneously overstated or listed as outstanding when they
had in fact been duly paid.89
- Increase in value of the property is not income until it is
realized upon the sale or exchange or the property
__________
Recovery of damages
- Damages from injury
 In lieu of what were the damages awarded?" Where the
suit is not to recover lost profits but is for injury to good
will, the recovery represents a return of capital, is not
taxable.
 Farmers& Merchant Bank v. CIR (1949) –Petitioner
did not insist upon the restoration of anticipated profits
as a matter of fact, but based its claim for damages upon
an alleged tortious injury to the good will of its business.
The true measure of damages was compensation to be
determined by ascertaining how much less valuable its
business was by reason of the wrongful acts of the
Reserve Bank.Profits were one of the chief indications of
the worth of the business; but the usual earnings before
the injury, as compared with those afterward, were only
an evidential factor in determining actual loss and notan
independent basis for recovery.
 CIR v. Glenshaw Glass (1955) – The mere fact that
the payments were extracted from the wrongdoers as
punishment for unlawful conduct cannot detract from
their character as taxable income to the recipients.
Respondents concede that the recoveries are taxable to
the extent that they compensate for damages actually
incurred. It would be an anomaly that could not be
justified in the absence of clear congressional intent to
say that a recovery for actual damages is taxable, but not
the additional amount extracted as punishment for the
same conduct which caused the injury. And we find no
such evidence of intent to exempt these payments. The
intention of Congress to tax all gainsexcept those
specifically exempted.
 Reytheon Production Corp v. CIR (1944)90 - But, to
say that the recovery represents a return of capital in that
89Fernandez v. CIR (1969)
90 Case remanded. There was insufficient evidence to enable it to
determine what part of the lump sum payment received by the taxpayer
was properly allocable to compromise of the suit and what part was
25
 it takes the place of the business good will is not to
conclude that it may not contain a taxable benefit.
Although the injured party may not be deriving a profit as
a result of the damage suit itself, the conversion thereby
of his property into cash is a realization of any gain made
over the cost or other basis of the good will prior to the
illegal interference. Although no gain was derived by
from the suit, his prior gain due to the appreciation in
value is realized when it is turned into cash by the money
damages.
- Employment related awards
 RA 304:Any amount of back pay received by an officer
or employee under the provisions of this Act, whether in
cash or by means of the certificate of indebtedness, shall
be exempt from all taxes of every kind and nature.91
 Sec. 32 (B) Exclusions from Gross Income xxx
(4)Compensation for Injuries or Sickness. –Amounts
received, through Accident or Health Insurance or under
Workmen’s Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on
account of such injuries or sickness.
Sec. 32 (B)(6) Retirement Benefits, Pensions, Gratuities,
etc.-
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 a
reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least ten
(10) years and is not less than fifty (50) years of age at the
time of his retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by an
official or employee only once. For purposes of this
Subsection, the term ‘reasonable private benefit plan’
means a pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of some or
all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or
both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that
at no time shall any part of the corpus or income of the fund
be used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and employees.
b. Any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of
such official or employee from the service of the employer
because of death sickness or other physical disability or for
any cause beyond the control of the said official or
employee.
c. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by
allocable to payment for certain patent license rights which were
conveyed as a part of the settlement.
91An Act To Provide For The Registration Of The Claims Of All Officers
And Employees Of The Government Of The Commonwealth Of The
Philippines, Its Branches And Instrumentalities And The Corporations
Owned Or Controlled By The Government And Those Of The Free
Local Civil Governments, Provincial And Municipal, Duly Organized
For Purposes Of Resistance Against The Enemy, To Salaries And
Wages During The Enemy Or Japanese Occupation Of The Philippines
And To Provide For The Manner Of Their Settlement
resident or nonresident citizens of the Philippines or aliens
who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private
or public.
d. Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United
States administered by the United States Veterans
Administration.
e. Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act
No. 8282.
f. Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by government
officials and employees.
 Payment of Separation Assistance Plan under
R.A. 8291 - Pursuant to Section 32(B)(6)(f) of the Tax
Code of 1997, benefits from the GSIS under Republic Act
No. 8291, including retirement gratuity received by
government officials and employees shall not be included
in gross income and shall be exempt from income tax. For
officials and employees of the Philippine Tourism
Authority (PTA) who are already qualified to avail of the
optional and/or compulsory retirement under Republic
Act No. 8291, the payment of the Separation Assistance
Plan benefits shall be considered as part of their
retirement gratuity and therefore exempt from the
payment of income tax pursuant to Section 32(B)(6)(f) of
the Tax Code of 1997. However, for official/employees of
the PTA who are not yet qualified to avail of the optional
and/or compulsory retirement and who want to avail of
the Separation Assistance Plan by resigning from their
position, the benefits that they will receive under the Plan
shall be considered as part of their compensation income
which are subject to income tax and consequently to the
withholding tax on wages under Section 79, Chapter XIII,
Tittle II of the Tax Code of 1997.92
__________
Recovery of items previously deducted from gross
income
PERRY v. US (1958)
Plaintiff William F. Perry in 1944 created a trust for thebenefit
of the Town of Fitzwilliam, New Hampshire. Thecorpus was to
be used for the construction of an additionto the Public Library
and for no other purpose.The town decided that it did not
desire to build the additionto the library, and the corpus1 of the
trust was returned to thesettlor in 1953.CIR required plaintiffs
to include in their income taxreturn for 1953 the amount
returned to them in thatyear.
There can be no doubt that what the taxpayer receivedfrom the
town in 1953 was a return of capital and notincome, except for
the accumulations of interest anddividends on the corpus.The
taxpayer is not required to accountfor the appreciation in value
of the securities.
In computing income for 1953, the taxpayers should
excludefrom their income the amount of the corpus returned to
them
in that year, but they should add to the tax thus computed
ontheir 1953 income the amount by which their taxes in
prioryears had been decreased on account of the
deductionsmade for contributions to this trust fund. So
92BIR Ruling No. 142-99, September 13, 1999
26
computed, theGovernment would recoup the taxes escaped in
the prior yearon account of the deduction.
- Tax benefit rule - It would be inequitable for the taxpayer to
reduce his taxesfor prior years on account of the
contributions, and not to paytaxes on them when he got
them back. The tax benefit rule is based on equity
considerations. But if the benefit claimed by the taxpayer is
fairly within the statutory language and the construction
sought is in harmony with the statute as anorganic whole,
the benefits will not be withheld from the taxpayer though
they represent an unexpected windfall
_________
Forgiveness of indebtedness
BRADFORD v. CIR (1956)
In 1938 the petitioner's husband owed a Nashville bank
approximately $305,000.Fearing that disclosure of so much
indebtednessmight impair the position of his brokerage firm
withthe NY Stock Exchange, he persuaded the bank
tosubstitute the note of his wife, the petitioner, for aportion of
his indebtedness.
In 1943 a bank examiner required the bank to writeoff $50,000
of the petitioner's $100,000 unsecurednote. In 1946 the bank
advised petitioner that it waswilling to sell the $100,000 note
for $50,000, its thenvalue on the bank's books.
The petitioner's husband accordingly persuaded hishalf-
brother, a Mr. Duval, to purchase the note fromthe bank for
$50,000 with funds furnished by thepetitioner and her
husband.
The Tax Court found that this transaction "was, inessence, a
discharge of Mrs. Bradford's indebtedness for$50,000” and
concludedthat the petitioner had realized unreported ordinary
income of $50,000 in 1946
The diminution of loss is not gain, profit, or income. The
taxpayer receivednothing of value when the indebtedness
wasassumed. Although the indebtedness wasdischarged at less
than its face value, the taxpayerwas in fact poorer by virtue of
the entire transaction.
- Cancellation and forgiveness of indebtedness may amount to
a payment of income, to a gift, or to a capital transaction,
dependent upon the circumstances. Eg:
 Creditor forgives the debt of the debtor in consideration
of the latter’s performance of a service – taxable income
because the debtor realized compensation for the service
 Creditor forgives the debt without any consideration –
the amount of debt is a gift
 If a corporation to which a stockholder is indebted
forgives the debt, the transaction is in effect payment of
dividends
 When a creditor cancels a debt as part of a business
transaction, the debtor is enriched or its net assets has
been increased and, therefore, he realized taxable income
- BIR Ruling 076-89: A transaction whereby nothing of
exchangeable value comes to or is received by a taxpayer
does not give rise to or create taxable income. Accordingly,
the condonation of GMPI's indebtedness by GM-US is not
subject to income tax since before and after the condonation
GMPI remains insolvent, i.e., in a capital deficiency position.
The condonation is likewise not subject to gift tax since there
is no donative interest on the part of GM-US but solely for
business consideration since Isuzu will only acquire the
GMPI shares from GM-US if GMPI has a "clean" balance
sheet with no outstanding liabilities except those to Isuzu.
Moreover, a return to solvency due to a possible future
additional capital infusion by Isuzu and/or subsequent
profitability in a different taxable year will not affect the non-
taxability of the condonation
__________
Income derived from illegal business
- Collins v. Commissioner (1993)
 When a taxpayer acquires earnings, lawfully or
unlawfully, without the consensual recognition, express
or implied, of an obligation to repay and without
restriction as to their disposition, "he has received
income which he is required to return, even though it
may still be claimed that he is not entitled to retain the
money, and even though he may still be adjudged liable
to restore its equivalent." In such case, the taxpayer has
"actual command over the property taxed—the actual
benefit for which the tax is paid," This standard brings
wrongful appropriations within the broad sweep of "gross
income"; it excludes loans.
 We do not believe that Congress intended to treat a law-
breaking taxpayer differently. Just as the honest taxpayer
may deduct any amount repaid in the year in which the
repayment is made, the Government points out that, "If,
when, and to the extent that the victim recovers back the
misappropriated funds, there is of course a reduction in
the embezzler's income.
 Taxpayer would not be able to deduct gambling losses
from theft income because the Internal Revenue Code
only allows gambling losses to offset gamblingwinnings.
 There is no double penalty in having a taxpayer
prosecuted for the crime that resulted in his obtaining ill-
gotten gains and subsequently being required to pay
taxes on those illegal gains. Once the taxpayer makes
restitution payments to OTB or its insurer, he will be able
in that year to deduct the amount of those paymentsfrom
his gross income.
- James v. US (1961) – Priority to tax liens over the claims of
others, including "judgment creditors."However, if it later
happens that the debtor-creditor relationship between the
embezzler and his victim is discharged by something other
than full repayment, such as by the running of a Statute of
Limitations against the victim's claim, or by a release given
for less than the full amount owed, the embezzler at that
time, but not before, will have made a clear taxable gain and
realized "an accession to income" which he will be required
under full penalty of the law to report in his federal income
tax return for that year. No honest taxpayer could be harmed
by this rule.
HOBSON v. COMMISSIONER (1992)
Embezzled funds are income to the embezzler. This does not
stand for the proposition that all misappropriated funds are
gross income of the person who illegally misapplied the funds.
The decision necessarily confines taxation of an embezzler to
27
circumstances where the embezzler receives a sufficiently 7. Expenses for foreign travel;
cognizable benefit under the normal principles of income 8. Holiday and vacation expenses;
taxation. 9. Educational assistance to the employee or his
dependents; and
McComiskey knew the illegitimate deposits were advances
10. Life or health insurance and other non-life insurance
from the bank, that he was the ultimate obligor, and that, at
some point, he would have to pay the money back to the bank. premiums or similar amounts in excess of what the law
This was so whether or not the advances were made in allows.
accordance with bank policy and regardless of the possibility of
the illegality of the deposits or other advances. Hobson did not - Fringe Benefits Not Taxable:
personally benefit from these advances. We 1. Fringe benefits which are authorized and exempted
cannot accept respondent's contention that Hobson benefited
from tax under special laws;
from later misapplications to the extent that they covered prior
misapplications, because we conclude that the bank's 2. Contributions of the employer for the benefit of the
customers consensually recognized that the advances would employee to retirement, insurance and hospitalization
have to be repaid to the bank. benefit plans;
3. Benefits given to the rank and file employees, whether
We do not reach the same conclusion, however, with respect to granted under a collective bargaining agreement or not;
the funds that Hobson misappropriated into his own brokerage and
account, diverted to Furniture World, a related corporation, or
4. De minimis benefits94
took in cash. We hold that these funds constitute
embezzlement income to Hobson. a. Monetized unused vacation leave credits of
employees not exceedingten (10) days during the
We have held that Hobson's misappropriations diverted to his year and the monetized value of leave credits paid
own accounts constitute embezzlement income to Hobson and togovernment officials and employees;
should have been reported. Unlike the funds advanced to b. Medical cash allowance to dependents of employees
McComiskey and Aerobics in Action as loans, Hobson had the not exceedingP750.00 per employee per semester or
use and benefit of these funds.
P125 per month;
___________
c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg.
rice per monthamounting to not more than
Fringe Benefits93
P1,500.00;
- Fringe benefit tax = 32% on the grossed-up monetary value
d. Uniforms and clothing allowance not exceeding
of the fringe benefit.
P4,000.00 per annum;
- Actual monetary value/0.68 = gross-up monetary value
e. Actual yearly medical benefits not exceeding
- FBT of Aliens = (actual monetary value/0.75) x 0.25
P10,000.00 per annum;
f. Laundry allowance not exceeding P300.00 per
- General Rule: FBT is imposed on the grossed-up monetary
month;
value of fringe benefit furnished or granted to the
g. Employees achievement awards, e.g., for length of
employee by the employer, whether an individual or a
service or safetyachievement, which must be in the
corporation. Exception: Rank and file employees – FB is
form of a tangible personal property other thancash
part of gross income
or gift certificate, with an annual monetary value not
- Employer’s convenience rule: no FBT imposed on the fringe
exceeding P10,000.00received by the employee
benefit required:
under an established written plan which does
a. By the nature of, or necessary to the trade, business or
notdiscriminate in favor of highly paid employees;
profession of the employer, or
h. Gifts given during Christmas and major anniversary
b. When the fringe benefit is for the convenience or
celebrations notexceeding P5,000.00 per employee
advantage of the employer.
per annum;
i. Flowers, fruits, books, or similar items given to
- Fringe benefit – any any good, service or other benefit
employees underspecial circumstances, e.g., on
furnished or granted in cash or in kind by an employer to an
account of illness, marriage, birth of a baby, etc.; and
individual employee (except rank and file employees as
j. Daily meal allowance for overtime work not
defined herein) such as, but not limited to, the following:
exceeding twenty fivepercent (25%) of the basic
1. Housing;
minimum wage.
2. Expense account;
3. Vehicle of any kind;
- Sec. 32 (B) Exclusions from Gross Income xxx (7)
4. Household personnel, such as maid, driver and others;
Miscellaneous Items xxx (e)13th Month Pay and Other
5. Interest on loan at less than market rate to the extent of
Benefits. – Gross benefits received by officials and
the difference between the market rate and actual rate
employees of public and private entities: Provided, however,
granted;
That the total exclusion under this subparagraph shall not
6. Membership fees, dues and other expenses borne by the
exceed eighty-two thousand pesos (P82,000)  de minimis
employer for the employee in social and athletic clubs or
not included
other similar organizations;

93 Section 33 94 RR 10-2008
28

- Work-related fringe benefits
US v. GOTCHER (1968)
This case involved a twelve-day expense-paid trip to Germany
for Mr. and Mrs. Gotcher to tour Volkswagen facilities in
Germany. The trip cost $1,372.30. Mr. Gotcher’s employer,
Economy Motors, paid $348.73 while the remainder, $1023.53,
was paid by Volkswagen of Germany and Volkswagen of
America. Mr. and Mrs. Gotcher failed to include any part of the
$1,372.30 in gross income for income tax purposes for 1960.
The Commissioner of Internal Revenue assessed a tax
deficiency after determining the taxpayers (the Gotchers) had
realized income of $1,372.30 from the trip. The Gotchers paid
the deficiency and filed suit for a refund. The district court held
that the cost of the trip was not income, or in the alternative,
that the cost of the trip was income and deductible as an
ordinary and necessary business expense
Concept of economic gain to the taxpayer, two distinct
requirements: There must be an economic gain, and this gain
must primarily benefit the taxpayer personally.
The trip was made in 1959 when VW was attempting to expand
its local dealerships in the United States. The "Buy American"
campaign and the fact that the VW people felt they had a "very
ugly product" prompted them to offer these tours of Germany
to prospective dealers. The activities in Germany support the
conclusion that the trip was oriented to business. So far as
Economy Motors was concerned, Mr. Gotcher knew that if he
was going to be a part-owner of the dealership, he had better
do all that was required to foster good business relations with
VW. Besides having no choice but to go, he had no control over
the schedule or the money spent. VW did all the planning.
As for Mrs. Gotcher, the trip was primarily a vacation. She did
not make the tours with her husband to see the local dealers or
attend discussions about the VW organization. This being so
the primary benefit of the expense-paid trip for the wife went
to Mr. Gotcher in that he was relieved of her expenses. He
should therefore be taxed on the expenses attributable to his
wife. Wife's presence served no bona fide business purpose for
her husband. Only when the wife's presence is necessary to the
conduct of the husband's business are her expenses deductible
- Meals & Lodging
COMMISSIONER v. KOWALSKI (1977)
The State of New Jersey instituted a cash meal allowance for its
state police officers in July 1949. Before that, troopers were
provided a mid-shift meal at one of several meal stations
located throughout the State. The State had decided that this
system was unsatisfactory, as it required troopers to leave their
patrol areas unattended for extended periods of time. The new
system provided troopers with a cash allowance, which
troopers could use to purchase a meal at a location within their
patrol area, thus making it unnecessary for them to leave the
area unmonitored.
The meal allowance was paid bi-weekly in advance and was
included, although separately, with a troopers salary. The
money was also separately accounted for in the State’s
accounting system, and funds from the meal allowance account
were never mixed with the salary accounts. Troopers were not
required to spend the allowance on mid-shift meals, nor were
they required to account for the manner in which the money
was spent. This meant that troopers were allowed to eat at
home if their home was within their patrol area, or to bring a
meal with them to eat in or near their patrol cars.
Kowalski, a state trooper, reported wages for 1970 that
included only a portion of his meal allowances (he included
$326.45, which omitted $1,371.09 in allowances). The
Commissioner believed that this amount should have been
included in income, and determined a tax deficiency. Kowalski
argued that the cash meal allowance was not compensatory,
but was furnished for the convenience of the employer and
therefore wasn’t income under I.R.C. §61(a), and that
alternatively, it was excluded under I.R.C. §119.
By its terms, § 119 covers meals furnished by the employer, and
not cash reimbursements for meals. This is not a mere
oversight."Section 119 applies only to meals...in kind...Any cash
allowances for meals...received by an employee will continue to
be includable to the extent that such allowances constitute
compensation."
Even assuming that cash meal payments made for the
convenience of the employer could qualify for an exclusion
notwithstanding the express limitations upon the doctrine
embodied in § 119, there would still be no reason to allow the
meal allowance here to be excluded. To avoid the completely
unwarranted result of creating a larger exclusion for cash than
kind, the meal allowances here would have to be demonstrated
to be necessary to allow respondent "properly to perform his
duties." There is not even a suggestion on this record of any
such necessity.
- Eg. Employer provides lunch meal to employees – (1) The
employee is required to stay in the office  not taxable
because it is for the convenience of the employer; (2)
Employee is not required to stay in the office  taxable
income because the employee has freedom/control
- Educational plan for children
BIR Ruling 189-99
Section 2.33(A)(9)(b) provides that the cost of educational
assistance extended by an employer to the dependents of an
employee shall be treated as taxable fringe benefits of the
employee unless the assistance was provided through a
competitive scheme under the scholarship program of the
company. Since the educational benefit is granted through a
competitive scheme, i.e. qualifying exam, such educational
assistance shall not be subject to the fringe benefit tax
prescribed under Section 33 of the Tax Code of 1997.
However, the exemption of any fringe benefit from the fringe
benefit tax imposed under Section 33 of the Tax Code of 1997
and implemented by Revenue Regulations No. 3-98, shall not
be interpreted to mean exemption from any other income tax
imposed under the Code or under any other existing law. Thus,
if the fringe benefit is exempted from the fringe benefit tax, the
same may, however, still form part of the employees' gross
compensation income which is subject to income tax, hence,
likewise subject to withholding tax on compensation income.
Such being the case, the amount of the tuition waiver benefit
granted to the children of full time faculty members who were
in the active service before May 1987 shall be considered as
part of compensation income of said faculty members which
shall be subject to withholding tax prescribed under Section 79
of the Tax Code of 1997.
- Free Housing Assistance
BIR Ruling 208-99
The term "fringe benefit" is defined under Section 33(B) of the
Tax Code of 1997 as 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). It
includes, among others, housing benefit granted to the
managerial and supervisory employees of the company. The
29
Directors of TAP who are at same time receiving fixed salaries
as TAP officers, are considered as employees holding positions
other than rank and file positions i.e. managerial and/or
supervisory positions.
Accordingly, the housing assistance granted by TAP to the
expatriates who are directors and at the same time holding
managerial and supervisory positions, is considered as fringe
benefit subject to the Fringe Benefit Tax under Section 33 (B)
of the Tax Code of 1997 and implemented by Revenue
Regulations No. 3-98. The source of the fringe benefit granted
to the employees does not affect the taxability of the said fringe
benefit. Thus, the housing allowance of the director/officer of
TAP which is paid out of its Retained Earnings, is still
considered as a fringe benefit subject to the fringe benefit tax
imposed under Section 33 of the Tax Code of 1997 as
implemented by Revenue Regulations No. 3-98.
Section 33 of the Tax Code of 1997 on fringe benefit applies to
managerial and supervisory employees. Thus, where the
officer/director of TAP is considered as an employee regardless
of whether a fixed monthly income is given or their
remuneration is determined by the Board of Directors based on
the Retained Earnings of the corporation, the housing
assistance granted to the said officers/directors are still subject
to the Fringe Benefit Tax. On the other hand, where a director
is being paid on a retainer basis, no employer-employee
relationships exist between the company and the director.
Thus, the housing assistance granted to him shall not be
considered as fringe benefit subject to the Fringe Benefit Tax
but is considered as part of his gross income which is subject to
the applicable tax rates under Section 24(A)(1)(c)of the Tax
Code of 1997.
__________
their respective properties in Pasay City, Dumaguete City and
San Carlos City respectively, because there is no consideration
involved in the transactions other than Alger Foundation's
undertaking to use the said properties or premises solely for
the purposes for which the Alger Foundation was organized.
Accordingly, CFSPI, the city government of San Carlos City,
Negros Occidental as well as Alger Foundation shall not be
subject to income tax on the aforementioned transactions.
Moreover, since CFSPI and the San Carlos City government are
not engaged in the leasing of property, the transactions are not
subject to value-added tax under Section 102 of the Tax Code,
as amended by Republic Act No. 8241.
Furthermore, since no income will be realized by Alger
Foundation or the City of Dumaguete when the Alger
Foundation grants an interest-free loan to the city government
of Dumaguete for use by the latter to fund its
resettlement/housing project for city squatters, the transaction
is not subject to income tax. The transaction is likewise not
subject to value-added tax since Alger Foundation is not a
lending investor and does not derive any economic benefit
from any of its programs/projects.
_________

IMPUTED INCOME

- Benefits received by an entity from:

(1) use of its own assets or property,
(2) performance of its own services and/or
(3) consumption of its self-produced goods and services

- Excluded from gross income because it is merely based on

presumption of income. Realization is absent, tax must be
based on facts not on presumptions

- Reasons for not taxing:

(a) No political wisdom in a rule no one would
understand or accept
(b) Valuation and record-keeping
(c) Privacy concerns implicated if the service had to
enforce compliance in accounting for services
performed for one’s self

- Eg. Imputed rental-value of owner-occupied homes

BIR RULING 114-97

in the broad sense, means all wealth which flows into the
taxpayer other than a mere return of capital. It includes the
forms of income specifically described as gains and profits,
including gains derived from the sale or other disposition of
capital assets. (Section 36, Revenue Regulations No. 2)
Considering that CFSPI, the city government of San Carlos
City, Negros Occidental as well as the Alger Foundation will not
realize income when CFSPI and the San Carlos City
government allow the Alger Foundation to use, free of rent,
30
EXCLUSIONS FROM GROSS INCOME95
Gifts & Bequests
Sec. 32 (B)(3) Gifts, Bequests, and Devises
The value of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such property,
as well as gift, bequest, devise or descent of income from any
property, in cases of transfers of divided interest, shall be
included in gross income.
- Gift – transfer of property of one to another out of personal,
as distinguished from, business reasons; a detached and
disinterested generosity, out of affection, respect,
admiration, charity, etc.
- Bequest – a gift of personal property, such as money, stock,
bonds, or jewelry, owned by a decedent at the time of death
which is directed by the provisions of the decedent's will; a
legacy.
- Devises – testamentary gift of real property
- Employer gifts to employees are not excluded in gross
income  such transaction may be de minimis/fringe
benefits
Tips
- Taxable because it relates to rendering of service96
2016 US MASTER TAX GUIDE
Tips received by cab drivers, waiters, barbers, hotel, railroad
and cruise ship employees, etc., are taxable. In the absence of
proof of the actual amount of tips received, tip income may be
reconstructed on the basis of average tips in a given locality for
a given type of service…If an employer was unable to withhold
social security and Medicare taxes on reported tip income, the
uncollected taxes are shown on Form W-2 and reported as an
additional tax on the tipped employee’s income tax return.
Noncash tips and tips of less than $20 per month are not
subject to social security and Medicare tax. These amounts,
however, are subject to income tax and must be reported on the
employee’s return. See ¶2605 regarding the duty to report tips
monthly to employer on Form 4070, ¶2606 regarding the
employer’s withholding requirements, and ¶ 1365R regarding
an employer credit for its portion of social security taxes on
employee cash tips.
- Tips and gratuities. — Tips or gratuities paid directly to an
employee by a customer of the employer which are not
accounted for by the employee to the employer are
considered as taxable income but not subject to
withholding.97
Labor Code, Article 96 Service charges. —
All service charges collected by hotels, restaurants and similar
establishments shall be distributed at the rate of eighty five
percent for all covered employees and fifteen percent for
management. The share of the employees shall be equally
distributed among them. In case the service charge is
95Sec.32 (B)
96The term "compensation" means all remuneration for services
performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Code.The
name by which the remuneration for services is designated is
immaterial.
97Revenue Regulation 02-98
abolished, the share of the covered employees shall be
integrated into their wages.
COMMISSIONER v. DUBERSTEIN
No. 376, Commissioner v. Duberstein
Berman was president of Mohawk Metal Corporation.
Duberstein was president of the Duberstein Iron & Metal
Company. They would often talk on the phone and give each
other names of potential customers. After receiving some
particularly helpful information, Berman decided to give
Duberstein a gift of a Cadillac. Although Duberstein said he did
not need the car as he already had a Cadillac and an
Oldsmobile, he eventually accepted it. Mohawk Metal
Corporation later deducted the value of the car as a business
expense, but Duberstein did not include the value of the
Cadillac in his gross income when he filed his tax return,
deeming it a gift. The Commissioner asserted a deficiency for
the car’s value against Duberstein. The Tax court affirmed.
No. 546, Stanton v. United States
Stanton worked for the Trinity Church in New York City as the
comptroller of the Church corporation and president of the
corporation. He resigned from both positions to go into
business for himself. As a "gratuity" the corporation's directors
awarded Stanton $20,000 in appreciation of the services
rendered. While some directors testified that Stanton had been
well liked by all in the Vestry and the $20,000 was a gift to
show that good will, there was also some evidence given that
Stanton was being forced to resign. The trial judge made a
simple finding that the payments were a "gift".
Donor’s intent is key – the proper criterion is one that inquires
“what the basic reason for his conduct was in fact – the
dominant reason that explains his action in making the
transfer of property.
When determining whether something is a gift for taxation
purposes, the critical consideration is the transferor's
intention. This is a question of fact that must be determined on
a "case-by-case basis". The body that levies the tax must
conduct an objective inquiry that looks to "the mainsprings of
human conduct to the totality of the fact of each case." The trier
of fact must consider all of the evidence in front of it and
determine whether the transferor's intention was either
disinterested or involved.
The trier of facts must consider:
(1) Non-technical nature of statutory standard
(2) Close relationship of (1) to human experience
(3) Multiplicity of factual elements
Duberstein – Despite the allegations of Duberstein and the
absence of any obligation, it was clearly compensation for
Duberstein’s past services OR an inducement for him to be of
further service.
Stanton – The Tribunal (District Court) made only the simple
and unelaborated finding that the transfer was a gift. However,
conciseness is to be strived for. There is a need for investigation
of the facts behind the alleged gratuity to determine its taxable
nature.
- Deemed donation
Section 100 Transfer for Less Than Adequate and full
Consideration. –
Where property, other than real property referred to in Section
24(D), is transferred for less than an adequate and full
consideration in money or money’s worth, then the amount by
which the fair market value of the property exceeded the value
of the consideration shall, for the purpose of the tax imposed
31
by this Chapter, be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar year.
WOLDER v. COMMISSIONER
Victor R. Wolder represented Marguerite K. Boyce as her
attorney. In a written agreement with Boyce, Wolder agreed to
render legal services “from time to time as long as both… shall
live and not to bill her for such services.” In exchange, Boyce
promised to make a codicil to her will giving Wolder stock or
securities from her estate. Wolder provided legal services
without billing Boyce and she revised her will, bequeathing to
him $15,845 and 750 shares of stock.
Wolder argues that the legacy he received under Mrs. Boyce's
will is specifically excluded from income by virtue of 102(a),
Int.Rev.Code of 1954, which provides that 'Gross Income does
not include the value of property acquired by gift, bequest,
devise or inheritance . Here there is no dispute but that the
parties did contract for services and-- while the services were
limited in nature-- there was also no question but that they
were actually rendered. Thus the provisions of Mrs. Boyce's
will, at least for federal tax purposes, went to satisfy her
obligation under the contract. The contract in effect was one
for the postponed payment of legal services, i.e., by a legacy
under the will for services rendered during the decedent's life.
The true test is whether in actuality the gift is a bona fide gift or
simply a method for paying compensation: Examination of the
intent of the parties, the reasons for the transfer, and the
parties' performance in accordance with their intentions--
'what the basic reason for (the donor's) conduct was in fact--
the dominant reason that explains his action in making the
transfer
Income exempt under treaty
Sec. 32 (B)(5) Income Exempt under Treaty. –
Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
Retirement benefits, pensions, gratuities
Sec. 32 (B)(6) Retirement Benefits, Pensions,
Gratuities, etc.-
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
a reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or employee
has been in the service of the same employer for at least
ten (10) years and is not less than fifty (50) years of age at
the time of his retirement: Provided, further, That the
benefits granted under this subparagraph shall be availed
of by an official or employee only once. For purposes of
this Subsection, the term ‘reasonable private benefit plan’
means a pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of some or
all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or
both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that
at no time shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose other than
for the exclusive benefit of the said officials and
employees.
b. Any amount received by an official or employee or by his
heirs from the employer as a consequence of separation of
such official or employee from the service of the employer
because of death sickness or other physical disability or for
any cause beyond the control of the said official or
employee.
c. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens
who come to reside permanently in the Philippines from
foreign government agencies and other institutions,
private or public.
d. Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United
States administered by the United States Veterans
Administration.
e. Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
f. Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by
government officials and employees.
- Even if there is no retirement plan, retirement pay is still tax-
exempt (see Labor Code)
Sec. 32 (B)(7) Miscellaneous items
Income by foreign government
Income Derived by Foreign Government. –
Income derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and
(iii) international or regional financial institutions established
by foreign governments.
Income by the government or its political
subdivisions
Income Derived by the Government or its Political
Subdivisions. –
Income derived from any public utility or from the exercise of
any essential governmental function accruing to the
Government of the Philippines or to any political subdivision
thereof.
- As to "Government", generally speaking, any entity through
which the functions of government are exercised is or can be
included in the word "Government." Thus, the national
government, the local governments (which include "political
subdivisions and local authorities), and the agencies of the
Government, all form part of Government. As to agencies of
the Government, they refer to the various units of the
Government, including a department, bureau, office,
instrumentality, a local government or a distinct unit
therein, and even a GOCC. However, whether a government-
owned or controlled corporation, being an agency of the
Government, can be considered as Government as it is, it
should be understood that a government-owned or
controlled corporation cannot be considered as such because
by its very nature it does not perform governmental
functions.98
98Under the Philippines-Netherlands tax treaty, instead of being
exempt from income tax, interests to be paid by Napocor and MWSS
on the Bonds and the Notes they issued to NIB Bank are subject to the
lower tax of 10% based on the gross amount thereof
32
- Government-owned or controlled corporations have a contracts, either during the term or at the maturity of the term
personality of their own, separate and distinct from the mentioned in the contract or upon surrender of the contract.
government, their funds, therefore although considered to be
public in character, are not exempt from garnishment.99 - Policy
- When the government enters into commercial business, it a. Proceeds are a result of premiums
abandons its sovereign capacity and is to be treated like any b. Taxes have already been paid on the amount you sent in
other corporation.100 for premiums – because they were income from salary
before you paid insurance company
Support and government transfer payments __________
- Support provided by family members, like intra-family gifts,
is not included in gross income CAPITAL APPRECIATION AND RECOVERY BASIS
- Exclude most government benefits and other welfare
payments, but the Congress can clearly choose to tax such Sale of real property Sale of shares of stock
payments (not traded through the stock
exchange)
Prizes Capital gains tax is based on: Basis for the net gain
Prizes and Awards. – 1. Selling price 1. Value at the stock
Prizes and awards made primarily in recognition of religious, 2. Fair market value exchange
charitable, scientific, educational, artistic, literary, or civic 3. Zonal value 2. Book value
achievement but only if: 3. Selling price
a. The recipient was selected without any action on his part Tax on the sale Tax on the gain
to enter the contest or proceeding; and
b. The recipient is not required to render substantial future Capital recovery & basis
services as a condition to receiving the prize or award.
Total sales
Prizes and Awards in Sports Competition. – Less: Cost of the goods sold
All prizes and awards granted to athletes in local and Gain/loss
international sports competitions and tournaments whether
held in the Philippines or abroad and sanctioned by their - Capital asset – property held by the taxpayer (whether or not
national sports associations. connected with his trade or business), but does not include
stock in trade of the taxpayer or other property of a kind
- General Rule: Prizes are subject to final tax of 20%, unless which would properly be included in the inventory of the
the amount is P10,000 or less – subject to graduated rates. taxpayer if on hand at the close of the taxable year, or
Exceptions: property held by the taxpayer primarily for sale to customers
1. Sec. 37 (B) (7) (c) in the ordinary course of his trade or business, or property
2. Sec. 27 (B) (7) (d) used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F)
Annuities and Life Insurance of Section 34; or real property used in trade or business of
Annuities the taxpayer.101
- A form of insurance or investment entitling the investor to a - [MAY SHIT PA DITO]
series of annual sums. ___________
- The payer of the policy is also the recipient
- Proceeds: REALIZATION REQUIREMENT
a. Some portion is return of capital
b. Some portion is income - Amounts do not need to be received in cash to be included in
*there is a need to determine how much of proceeds represents gross income
income/growth element of the investment - Fair market value of property received is often included in
income at the time of the receipt. However, this is not to be
Life insurance proceeds interpreted to include unrealized appreciation in income
Life Insurance. – - Time of realization is not always clear. The taxpayer have
The proceeds of life insurance policies paid to the heirs or considerable flexibility in the timing of taxation of gains and
beneficiaries upon the death of the insured, whether in a single
losses
sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest
payments shall be included in gross income. Windfalls
CESARINI v. US
Amount Received by Insured as Return of Premium. – The plaintiffs were a husband and wife who purchased a used
The amount received by the insured, as a return of premiums piano at an auction sale in 1957 for approximately $15.00.[1] In
paid by him under life insurance, endowment, or annuity 1964, while cleaning the piano, they discovered $4,467.00 in
old currency in the piano. Plaintiffs exchanged the old currency
for new at a bank and reported $4,467.00 on their 1964 joint
99Philippine
National Bank vs. Pabalan, 83 SCRA 595
100Philippine
National Railways vs. Union de Maquinistas, Fogoneros y
Motormen, 84 SCRA 223 101Sec. 39
33
U.S. federal income tax return as ordinary income from other
sources.On October 18, 1965, the couple filed an amended
return, eliminating $4,467.00 from the gross income
computation and requesting a refund of $836.51. On January
18, 1966, the Internal Revenue Service (IRS) rejected their
refund claim, and they later filed a lawsuit. The taxpayers
asserted three arguments: (1) $4,467.00 is not includable in
gross income under Internal Revenue Code section 61; (2) Even
if the money was gross income, it was due and owing in the
year the piano was purchased, 1957, and by 1964 the statute of
limitations provided by 26 U.S.C. Sec. 6501 had elapsed; and
(3) If the money is gross income in 1964, then plaintiffs are
entitled to capital gains treatment under Section 1221 of the
Internal Revenue Code.
The finder of treasure-trove is in receipt of taxable income, for
Federal income tax purposes. Windfalls, including found
monies, were properly includable in gross income.
Treasure trove, to the extent of its value in United States
currency, constitutes gross income for the taxable year in
which it is reduced to undisputed possession. The $4,467.00 in
old currency was not "reduced to undisputed possession" until
its actual discovery in 1964, and thus the United States was not
barred by the statute of limitations from collecting the $836.51
in tax during that year.
Not entitled to capital gain treatment. Aside from the fact that
the piano for which plaintiffs paid $15.00 and the $4,467.00 in
currency found within it are economically dissimilar, neither
the piano nor the currency have been sold or exchanged. The
benefits of capital gains treatment in the taxing statutes are not
allowed to flow to every gain growing out of a transaction
concerning capital assets, but only to gains from the "sale or
exchange" of capital assets
*The fact that you can sever the cash from the piano shows
that there is realization in the cash
HAVERLY v. US
During the years 1967 and 1968 Charles N. Haverly was the
principal of the Alice L. Barnard Elementary School in Chicago,
Illinois. In each of these years publishers sent to the taxpayer
unsolicited sample copies of textbooks
In 1968 taxpayer donated the books to the Alice L. Barnard
Elementary School Library. The parties agreed that the
donation entitled the taxpayer to a charitable deduction in the
amount of $400, the value of the books at the time of the
contribution.
Taxpayer's report of his 1968 income did not include the value
of the textbooks received, but it did include a charitable
deduction for the value of the books donated to the school
library. The Internal Revenue Service assessed a deficiency
against the taxpayer representing income taxes on the value of
the textbooks received. Taxpayer paid the amount of the
deficiency, filed a claim for refund and subsequently instituted
this action to recover that amount.
The receipt of textbooks is unquestionably an "accession to
wealth." Taxpayer recognized the value of the books when he
donated them and took a $400 deduction therefor. Possession
of the books increased the taxpayer's wealth. Taxpayer's receipt
and possession of the books indicate that the income was
"clearly realized." Taxpayer admitted that the books were given
to him for his personal retention or whatever disposition he
saw fit to make of them. Although the receipt of unsolicited
samples may sometimes raise the question of whether the
taxpayer manifested an intent to accept the property or
exercised "complete dominion" over it, there is no question
that this element is satisfied by the unequivocal act of taking a
charitable deduction for donation of the property.
The district court recognized that the act of claiming a
charitable deduction does manifest an intent to accept the
property as one's own. It nevertheless declined to label receipt
of the property as income because it considered such an act
indistinguishable from other acts unrelated to the tax laws
which also evidence an intent to accept property as one's own,
such as a school principal donating his sample texts to the
library without claiming a deduction. We need not resolve the
question of the tax consequences of this and other hypothetical
cases discussed by the district court and suggested by the
taxpayer. To decide the case before us we need only hold, as we
do, that when a tax deduction is taken for the donation of
unsolicited samples the value of the samples received must be
included in the taxpayer's gross income.
__________
BORROWED FUNDS
Loans and discharge of indebtedness
- Principal is part of capital  loans are not income because
they do not change the balance sheet (asset – liability)
- No deduction allowed:
 When making principal payments on the loan
 Interest payments – lender will earn income in the form
of interest
- Discharge of indebtedness – see forgiveness of indebtedness,
p. 27
ZARIN v. COMMISSIONER
Resorts International Hotel & Casino, a casino in Atlantic City,
New Jersey, granted David Zarin, a housing developer
gambling addict, a credit line of $10,000 in June, 1978.
Pursuant to this arrangement, Zarin could write a check
("marker") and in return receive chips in order to gamble at the
casino's tables; Zarin would almost invariably play craps. Over
time Resorts regularly increased his credit line, and by
November, 1979, Zarin's permanent line of credit had reached
$200,000. The New Jersey Division of Gaming Enforcement
filed with the New Jersey Casino Control Commission a
complaint against Resorts in response to allegations of credit
abuse. Subsequently, a Casino Control Commissioner issued an
Emergency Order which made further credit extensions to
Zarin illegal. Nevertheless, Resorts continued to extend Zarin's
credit limit. In April, 1980, Zarin delivered personal checks and
counterchecks to Resorts which were returned as having been
drawn against insufficient funds. Those dishonored checks
totaled $3,435,000. In response, Resorts cut off Zarin's credit
and filed action in New Jersey state court. Resorts and Zarin
settled their dispute for a total of $500,000.
The Commissioner subsequently determined deficiencies in
Zarin's federal income taxes, arguing that Zarin had recognized
$2,935,000 of income in 1981 from the cancellation of
indebtedness which resulted from the settlement with Resorts.
The Tax Court agreed with the Commissioner
Section 108 and section 61(a) (12) of the Code set forth "the
general rule that gross income includes income from the
discharge of indebtedness." inapplicable in the case at bar
Indebtedness:
(A) for which the taxpayer is liable, or
(B) subject to which the taxpayer holds property.
Because the debt Zarin owed to Resorts was unenforceable as a
34
matter of New Jersey state law,7 it is clearly not a debt "for DEDUCTIONS AND CREDITS
which the taxpayer is liable." Liability implies a legally
enforceable obligation to repay, and under New Jersey law,
Zarin would have no such obligation. - MATH NG DEDUCTIONS
- Economic value of deductions:
Moreover, Zarin did not have a debt subject to which he held  Deductions: no peso per peso value; Exclusions: have
property as required by section 108(d)(1)(B). Zarin's peso per peso value
indebtedness arose out of his acquisition of gambling chips.
The Tax Court held that gambling chips were not property, but
Corporations
rather, "a medium of exchange within the Resorts casino" and a
"substitute for cash." Alternatively, the Tax Court viewed the - MATH ALSO HERE
chips as nothing more than "the opportunity to gamble and
incidental services ..." We agree with the gist of these Individuals
characterizations, and hold that gambling chips are merely an
accounting mechanism to evidence debt. Pure compensation income earners
Total compensation earned
Instead of analyzing the transaction at issue as cancelled debt, Less: Personal exemption (Sec. 35)
we believe the proper approach is to view it as disputed debt or Gross Income
contested liability. Under the contested liability doctrine, if a Less: Allowable deductions (Sec. 34 (M))
taxpayer, in good faith, disputed the amount of a debt, a
Net Taxable Income
subsequent settlement of the dispute would be treated as the
amount of debt cognizable for tax purposes. The excess of the
Income Tax Due
original debt over the amount determined to have been due is
Less: taxes withheld “below the line items”
disregarded for both loss and debt accounting purposes. Thus,
P 0.00 – if properly computed or one employer
if a taxpayer took out a loan for $10,000, refused in good faith
in the taxable year
to pay the full $10,000 back, and then reached an agreement
with the lendor that he would pay back only $7000 in full
satisfaction of the debt, the transaction would be treated as if Pure business income earner
the initial loan was $7000. When the taxpayer tenders the Gross Income
$7000 payment, he will have been deemed to have paid the full Less: Deductions (Sec. 34) or Optional
amount of the initially disputed debt. Accordingly, there is no Standard Deduction (Sec. 34 (L))
tax consequence to the taxpayer upon payment. Net Business Income
Less: Personal Exemptions (Sec. 35)
To summarize, the transaction between Zarin and Resorts can Total Taxable Income
best be characterized as a disputed debt, or contested liability.
Zarin owed an unenforceable debt of $3,435,000 to Resorts. Income Tax Due
After Zarin in good faith disputed his obligation to repay the Less: Creditable Withholding Taxes – related to
debt, the parties settled for $500,000, which Zarin paid. That business income
$500,000 settlement fixed the amount of loss and the amount Net Income Tax Payable
of debt cognizable for tax purposes. Since Zarin was deemed to
have owed $500,000, and since he paid Resorts $500,000, no Combined business and compensation income
adverse tax consequences attached to Zarin as a result. earner
- Compensation income and business income are computed
In conclusion, we hold that Zarin did not have any income
separately
from cancellation of indebtedness for two reasons. First, the
Code provisions covering discharge of debt are inapplicable - Basic personal exemption – first applied to compensation
since the definitional requirement in I.R.C. section 108(d)(1) income
was not met. Second, the settlement of Zarin's gambling debts - Excess from the personal exemption – charged to business
was a contested liability. income
__________ - Basic personal exemption is charged only once

Treatment of senior citizens102

- Senior citizen/elderly – any resident Filipino citizen aged 60
years old and above
- Exempt from the payment of individual income tax provided
that their annual taxable income doesn’t exceed the poverty
level
- Income determination excludes:
a. Interest income from Philippine currency bank deposit
b. Capital gains from sales of shares of stock
c. Capital gains from sales of real property

- A benefactor of the senior citizen shall be considered as head

of family and shall be allowed to avail him/herself of that
status subject to the ff. conditions:

102 RR 4-2006
35
 1. The senior citizen must be living with and dependent
upon his benefactor for his chief support
2. It shall be the duty of the benefactor to register the
senior citizen as his dependent and him/herself as
benefactor
3. The benefactor shall be entitled only to the basic
personal exemption (P25, 000)
4. If required to file an ITR, the benefactor shall state
therein the name, birthday, and OSCA ID of the
dependent
The benefactor shall not, however, be entitled to claim the
additional exemption of P8,000 per dependent allowable
only to a married individual or head of family with qualified
dependent child/ren under Sec. 35 (B)
_________
Business Expenses103
Expenses. -
1. Ordinary and Necessary Trade, Business or Professional
Expenses. -
a. In General. –
There shall be allowed as deduction from gross income
all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on or
which are directly attributable to, the development,
management, operation and/or conduct of the trade,
business or exercise of a profession, including:
i. A reasonable allowance for salaries, wages, and
other forms of compensation for personal services
actually rendered, including the grossed- up
monetary value of fringe benefit furnished or
granted by the employer to the employee:
Provided, That the final tax imposed under Section
33 hereof has been paid;
ii. A reasonable allowance for travel expenses, here
and abroad, while away from home in the pursuit
of trade, business or profession;
iii. A reasonable allowance for rentals and/or other
payments which are required as a condition for the
continued use or possession, for purposes of the
trade, business or profession, of property to which
the taxpayer has not taken or is not taking title or
in which he has no equity other than that of a
lessee, user or possessor;
iv. A reasonable allowance for entertainment,
amusement and recreation expenses during the
taxable year, that are directly connected to the
development, management and operation of the
trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the
conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the
Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the
Commissioner, taking into account the needs as
well as the special circumstances, nature and
character of the industry, trade, business, or
profession of the taxpayer: Provided, That any
expense incurred for entertainment, amusement
or recreation that is contrary to law, morals, public
policy or public order shall in no case be allowed
as a deduction.
b. Substantiation Requirements. –
No deduction from gross income shall be allowed
103 Sec. 34 (A)
under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official
receipts or other adequate records:
i. the amount of the expense being deducted; and
ii. the direct connection or relation of the expense
being deducted to the development, management,
operation and/or conduct of the trade, business or
profession of the taxpayer.
c. Bribes, Kickbacks and Other Similar Payments. –
No deduction from gross income shall be allowed
under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the
national government, or to an official or employee of
any local government unit, or to an official or employee
of a government-owned or-controlled corporation, or
to an official or employee or representative of a foreign
government, or to a private corporation, general
professional partnership, or a similar entity, if the
payment constitutes a bribe or kickback.
2. Expenses Allowable to Private Educational Institutions. –
In addition to the expenses allowable as deductions under
this Chapter, a private educational institution; referred to
under Section 27(B) of this Code, may at its option elect
either: (a) to deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities, or (b) to
deduct allowance for depreciation thereof under Subsection
(F) hereof.
Trade or business expenses
- All ordinary and necessary expenses pair or incurred during
the taxable year in carrying on a trade or business
- Rationale: If tax policy is to tax income, then it is
inappropriate to tax costs in producing income
- Requisites for deductibility:
a. the expense must be ordinary and necessary,
b. it must be paid or incurred within the taxable year, and
c. it must be paid or incurred in carrying in a trade or
business.
- Visayan Cebu Terminal V. CIR: when representation
expenses fall under business expenses
1. Said business expenses must be ordinary and necessary
expenses paid or incurred in carrying on any trade or
business;
2. That those expenses must also meet the further test of
reasonableness in amount
Trade or business activity
Hospital de San Juan de Dios v. Commissioner (1990)
Hospital is engaged in both taxable and non-taxable
operations. The income derived from the operations of the
hospital and the nursing school are exempt from income tax
while the rest of petitioner's income are subject thereto. Its
taxable or non-operating income consists of rentals, interests
and dividendS received from its properties and investments. In
the computation of its taxable income for the years 1952 to
1955, petitioner allowed all its taxable income to share in the
allocation of administrative expenses. Respondent disallowed,
however, the interests and dividends from sharing in the
allocation of administrative expense on the ground that the
expenses incurred in the administration or management of
petitioner's investments are not allowable business expenses
inasmuch as they were not incurred in 'carrying on any trade or
36
business'
The interests and dividends received by the petitioner "were
merely incidental income to petitioner's main activity, which is
the operation of its hospital and nursing schools [hence] the
conclusion is inevitable that petitioner's activities never went
beyond that of a passive investor, which under existing
jurisprudence do not come within the purview of carrying on
any 'trade or business'.
The principle of allocating expenses is grounded on the
premise that the taxable income was derived from carrying on
a trade or business, as distinguished from mere receipt of
interests and dividends from one's investments, the Court of
Tax Appeals correctly ruled that said income should not share
in the allocation of administrative expenses.
“Business” in its ordinary and common use means "human
efforts which have for their end living or reward; it is not
commonly used as descriptive of charitable, religious,
educational or social agencies" or "any particular occupation or
employment habitually engaged in especially for livelihood or
gain" or "activities where profit is the purpose or livelihood is
the motive."
- Not every income-producing and profit-making endeavor
constitutes a trade or business. The income tax law, almost
from the beginning, has distinguished between a business or
trade, on the one hand, and "transactions entered into for
profit but not connected with…business or trade," on the
other. To be engaged in a trade or business, the taxpayer
must be involved in the activity with continuity and
regularity and that the taxpayer's primary purpose for
engaging in the activity must be for income or profit. A
sporadic activity, a hobby, or an amusement diversion does
not qualify.104
- Capital expenditures105
 Expenses relating to recapitalization and reorganization
of the corporation, the cost of obtaining stock
subscription, promotion expenses, and commission or
fees paid for the sale of stock reorganization are capital
expenditures.
 Efforts to establish reputation are akin to acquisition of
capital assets and, therefore, expenses related thereto are
not business expense but capital expenditures.
 In re: Stock listing fee – The single payment made to
the stock exchange was a capital expenditure, as
distinguished from the instant case, where payments
were made annually. For this reason, we hold that said
listing fee is an ordinary and necessary business expense
104Comms’r v. Groetzinger (1987) – If one's gambling activity is
pursued full time, in good faith, and with regularity, to the production
of income for a livelihood, and is not a mere hobby, it is a trade or
business within the meaning of the statutes with which we are here
concerned. Groetzinger satisfied that test in 1978. Constant and large-
scale effort on his part was made. Skill was required and was applied.
He did what he did for a livelihood, though with a less-than-successful
result. This was not a hobby or a passing fancy or an occasional bet for
amusement.
105Atlas Consolidated Mining v. Comms’r (1981) – Expenditure
paid to P.K. Macker & Co. is not an ordinary expense. The CTA ruled
that the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional
shares issued by Atlas; consequently, the stockholders relation service
fee was in effect spent for the acquisition of additional capital, ergo, a
capital expenditure.
- Expenses incurred in the disposition of income – see Esso
Standard v. CIR, p.12
- Entertainment expenses; No means to ascertain personal
from business expenses
ZAMRA v. CIR (1963)
Mariano Zamora, owner of the Bay View Hotel and Farmacia
Zamora, Manila, filed his income tax returns the years 1951 and
1952. He alleged that the CTA erred in dissallowing
P10,478.50, as promotion expenses incurred by his wife for the
promotion of the Bay View Hotel and Farmacia Zamora (which
is ½ of P20,957.00, supposed business expenses)
Claim for the deduction of promotion expenses or
entertainment expenses must also be substantiated or
supported by record showing in detail the amount and nature
of the expenses incurred.
The application of Mrs. Zamora for dollar allocation shows that
she went abroad on a combined medical and business trip, not
all of her expenses came under the category of ordinary and
necessary expenses; part thereof constituted her personal
expenses
There having been no means by which to ascertain which
expense was incurred by her in connection with the business of
Mariano Zamora and which was incurred for her personal
benefit, the Collector and the CTA in their decisions,
considered 50% of the said amount of P20,957.00 as business
expenses and the other 50%, as her personal expenses.
“Ordinary”; “Necessary” 106
- Ordinary – doesn’t that the payments must be habitual or
normal in the sense that the same taxpayer will have to make
them often The expense is an ordinary one because we know
from experience that payments for such a purpose, whether
the amount is large or small, are the common and accepted
means of defense against attack.
- Necessary – for the development of the taxpayer's business,
at least in the sense that they were appropriate and helpful.
Reasonable allowance for salaries
- Test for reasonableness varies based on circumstances of the
situation as a whole. CIR has the right to determine what is
reasonable or not.
- In re: Bonuses
 Bonuses to employees made in good faith and as
additional compensation for services rendered are
deductible, provided such payments, when added to
salaries, DO NOT exceed a reasonable compensation for
services rendered. Conditions required for deduction are:
a. Payment of bonuses is in fact compensation
b. Must be for personal services rendered
c. Bonuses, when added to salaries, are reasonable
when measured by the amount and quality of
services performed.107
106 Welch v. Helvering (1933)- The Court cannot say, in the absence
of proof and as a matter of judicial knowledge, that payments on the
debts of a corporation, made by its former officer after its discharge in
bankruptcy and for the purpose of strengthening his own business
standing and credit were ordinary and necessary expenses of his
business.
107 Kuenzle and Streiff Inc. v. CIR
37
  No fixed test for determining reasonableness of a given
bonus as compensation – depends on many factors, such
as amount and quality of services performed, payment in
good faith, character of business, volume of earnings,
locality, extent of service, salary policy of corporation,
size of business, employee’s qualifications, general
economic factors. In determining the test, we must
consider the situation as a WHOLE. No single factor is
decisive.108
- Deductibility of compensation109:
a. Have personal services been actually rendered by said
officers?
b. In the affirmative case, what is the reasonable allowance?
Reasonable allowance for travel expenses110
- Not deductible if the activities were not directly in the
conduct of his trades or businesses. Rather, the activities
merely occurred in the course of transportation connected
with taxpayer's trades or businesses.
- Where the cost is an adjunct of, and not a direct cost of
transporting an individual, the expense is not allowed as a
transportation cost deduction.
Origin of the claim111
- The controlling basic test of whether the expense was
"business" or "personal," and hence whether it is deductible
or not
- A basic restriction upon the availability of the deduction is
that the expense item involved must be one that has a
business origin; those that relate to a "business," that is,
profit-seeking, purpose.
108CM Hoskins v. CIR (1969) – CM Hoskins & Co paid to Mr. C. M.
Hoskins, its founder and controlling stockholder the amount of
P99,977.91 representing 50% of supervision fees earned by it and set
aside respondent's disallowance of three other minor items. Being both
a 99.6% stockholder of the company, Chairman of the BOD, AND
participating salesman, CM Hoskins receipt of the 50% supervision fee
of the company was highly improper and unreasonable. The amount is
inordinately large and could not be accorded the treatment of an
ordinary business expense allowed as deductible
109Aguinaldo Industries v. CIR (1982) – The records show that the
sale was effected through a broker who was paid by petitioner a
commission of P51,723.72 for his services. On the other hand, there is
absolutely no evidence of any service actually rendered by petitioner's
officers which could be the basis of a grant to them of a bonus out of
the profit derived from the sale. This being so, the payment of a bonus
to them out of the gain realized from the sale cannot be considered as a
selling expense; nor can it be deemed reasonable and necessary so as to
make it deductible for tax purposes.
110Gilliam v. Comms’r (1986) - Gilliam is, and was at all material
periods, a noted artist. It is not ordinary for people in such trade or
business to be involved in altercations of the sort here involved in the
course of any such travel. The travel was not itself the conduct of
Gilliam’s trade or business. The expenses here are not strictly a cost of
his transportation. Neither the altercation nor the expenses were
undertaken to further his trade or business.
111US v. Gilmore (1963) - At the time of the divorce proceedings,
instituted by the wife but in which the husband also cross-claimed for
divorce, respondent's property consisted primarily of controlling stock
interests in three corporations. The Commissioner found that
expenses in connection with this litigation are "personal" or "family"
expenses, and, as such, none of them deductible.
Expenses contrary to public policy
- High standards for disallowance of deduction based on
public policy considerations112
1. Deductions of expenses, in the absence of specific
legislation, are disallowed only where their allowance
would severely and immediately frustrate sharply
defined national or state policies proscribing particular
forms of conduct.
2. Further, the "policies frustrated must be national or
state policies evidenced by
some governmental declaration of them."
3. Finally, the "test of non-deductibility always is the
severity and immediacy of the frustration resulting from
allowance of the deduction."
- Sec. 34 (1)(c) – disallows bribes, kickback and other similar
payments as a means to curb graft and corruption
Employee business expenses
- Deductible employee expenses:
 Ordinary and necessary in carrying on trade/business
 Issue is often whether they are actually personal expenses
 Professional expenses deductible (eg. supplies, dues to
professional societies, etc)
 Requirement of proper taxes to be withheld to make such
deduction allowable113
__________
Interest114
Interest. -
1. In General. –
The amount of interest paid or incurred within a taxable
year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction
from gross income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall be
reduced by forty-two percent (42%) of the interest income
subjected to final tax: Provided, That effective January 1,
2009, the percentage shall be thirty-three percent (33%).
2. Exceptions. –
No deduction shall be allowed in respect of interest under
the succeeding subparagraphs:
a. If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
112Comms’r v. Tellier (1966) – Tellier, securities dealer was tried
and found guilty of violating the Securities Act of 1933. He claimed a
deduction on his income tax return for legal fees incurred in defending
the prosecution. The criminal charges against the respondent found
their source in his business activities as a securities dealer. Our
decisions establish that counsel fees comparable to those here involved
are ordinary business expenses, even though a "lawsuit affecting the
safety of a business may happen once a lifetime." No public policy is
offended when a man faced with serious criminal charges employs a
lawyer to help in his defense. That is not "proscribed conduct." It is his
constitutional right
113 Sec. 34 (K) – Additional Requirements for Deductibility of Certain
Payments. –
Any amount paid or payable which is otherwise deductible from, or
taken into account in computing gross income or for which
depreciation or amortization may be allowed under this Section, shall
be allowed as a deduction only if it is shown that the tax required to be
deducted and withheld therefrom has been paid to the Bureau of
Internal Revenue in accordance with this Section 58 and 81 of this
Code.
114 Sec. 34 (B)
38
 indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such
interest shall be allowed a deduction in the year the
indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of
the principal amortized or paid during the year shall be
allowed as deduction in such taxable year;
b. If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
specified under Section 36 (B); or
c. If the indebtedness is incurred to finance petroleum
exploration.
3. Optional Treatment of Interest Expense. –
At the option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a profession
may be allowed as a deduction or treated as a capital
expenditure.
- BACK TO BACK LOAN
Interest must accrue from indebtedness115
- In order that interest may be deductible, it must be paid "on
indebtedness". It is therefore imperative to show that there is
an existing indebtedness which may be subjected to the
payment of interest.
- The term indebtedness is restricted to its usual import which
"is the amount which one has contracted to pay the use of
borrowed money."
- Exceptions – Sec. 34 (B)(2)
- Optional treatment of interest expense – Sec. 34 (B)(3)
- Personal, non-business interest generally is not deductible
What is interest?
- Interest – the "amount which one has contracted to pay for
the use of borrowed money,” and as "compensation for the
use or forbearance of money."
- There is a general reluctance of courts to characterize
payments as interest when not specifically labeled “interest”
- Penalty charge is not interest116
 The formula for calculating the late charge provision
bears little resemblance to standard interest
computations. The amount of the late charge has no
correlation with the passage of time and is unrelated to
the prevailing market rate interest.
 The bank is not required to prove the actual expenses
sustained as a result of the delinquent payments.
Liquidated damages compensate the bank for: (1) its
administrative expenses of collection, and (2) lost
earnings or the cost of the money wrongfully withheld.
115Kuenzle & Seriff v. CIR (1959) - There is no dispute that these
items accrued on unclaimed salaries and bonus participation of
shareholders and employees. The items involved are unclaimed salaries
and bonus participation which in our opinion cannot constitute
indebtedness within the meaning of the law because while they
constitute an obligation on the part of the corporation, it is not the
latter's fault if they remained unclaimed.
116West v. Comms’r (1991) - In 1980, petitioners purchased a home
in Redwood City, California, for $175,000. The purchase was financed,
in part, with a $140,000, 30-year loan from the Bank of America. In
1983, petitioners paid $997 as delinquency charges, of which $469
related to 1982. Petitioners deducted the $997 as interest on their 1983
tax return.
 The delinquency charge enables the bank to partially
recoup income it otherwise could have earned from
reinvesting a timely installment payment.
- Interest on taxes deductible117
 The term "debt" is properly used in a comprehensive
sense as embracing not merely money due by contract,
but whatever one is bound to render to another, either for
contract or the requirements of the law. Where statutes
impose a personal liability for a tax, the tax becomes at
least in a broad sense, a debt. The taxes already due have
not, strictly speaking, the same concept as debts, they are,
however obligations that may be considered as such.
 CIR v. Prieto: The distinction between "taxes" and
"debts" was recognized in this jurisdiction, the variance
in their legal conception does not extend to the interests
paid on them, at least insofar as [Section 30 (b) (1)] of the
National Internal Revenue Code is concerned
__________
Taxes118
Taxes
1. In General. –
Taxes paid or incurred within the taxable year in connection
with the taxpayer’s profession, trade or business, shall be
allowed as deduction, except
a. The income tax provided for under this Title;
b. Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph (3)
of this subsection (relating to credits for taxes of foreign
countries);
c. Estate and donor’s taxes; and
d. Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
Provided, That taxes allowed under this Subsection, when
refunded or credited, shall be included as part of gross
income in the year of receipt to the extent of the income tax
benefit of said deduction.
2. Limitations on Deductions. –
In the case of a nonresident alien individual engaged in
trade or business in the Philippines and a resident foreign
corporation, the deductions for taxes provided in paragraph
(1) of this Subsection (C) shall be allowed only if and to the
extent that they are connected with income from sources
within the Philippines.
3. Credit Against Tax for Taxes of Foreign Countries. –
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this Title
shall be credited with:
a. Citizen and Domestic Corporation. –
In the case of a citizen of the Philippines and of a
domestic corporation, the amount of income taxes paid
or incurred during the taxable year to any foreign
country; and
117 Palanca v. Comms’r (1966) - Palanca Sr. donated to his son
shares of stock. For failure file a return for the donation within the
proper period, he was assessed with gift tax with surcharge and
interest. Palanca, Jr. filed a return for the calendar year 1955, claiming
therein an additional deduction in the amount of P47,868.70
representing interest paid on the donee's gift tax.
118 Sec. 34 (C)
39
 b. Partnerships and Estates. – under said paragraph, such amount to be determined
In the case of any such individual who is a member of a under rules and regulations prescribed by the Secretary
general professional partnership or a beneficiary of an of Finance; and
estate or trust, his proportionate share of such taxes of c. All other information necessary for the verification and
the general professional partnership or the estate or computation of such credits.
trust paid or incurred during the taxable year to a
foreign country, if his distributive share of the income of - General Rule: Taxes paid or incurred within the taxable
such partnership or trust is reported for taxation under
year in connection with the taxpayer’s profession, trade or
this Title.
business deductible. Exceptions:
An alien individual and a foreign corporation shall not a. Income tax provided under this code
be allowed the credits against the tax for the taxes of b. Income tax paid to foreign country if taxpayer is not
foreign countries allowed under this paragraph. using the benefit of the credit
c. Estate taxes
4. Limitations on Credit. – d. Donors tax
The amount of the credit taken under this Section shall be
e. Taxes against local benefits which would increase the
subject to each of the following limitations:
a. The amount of the credit in respect to the tax paid or value of the property assessed.
incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, VAT
which the taxpayer’s taxable income from sources within - VAT not deductible
such country under this Title bears to his entire taxable
income for the same taxable year; and
Commissioner v. American Rubber (1966)
b. The total amount of the credit shall not exceed the same
American Rubber Company, a domestic corporation, from
proportion of the tax against which such credit is taken,
January 1, 1955 to December 1, 1958, was engaged in producing
which the taxpayer’s taxable income from sources
rubber. After paying under protest, the petitioner claimed
without the Philippines taxable under this Title bears to
refund of the sales taxes paid by it on the ground that under
his entire taxable income for the same taxable year.
section 188, paragraph b, of the Internal Revenue Code, as
amended, its rubber products were agricultural products
5. Adjustments on Payment of Incurred Taxes. –
exempt from sales tax.
If accrued taxes when paid differ from the amounts claimed
Products are agricultural which are exempt from sales
as credits by the taxpayer, or if any tax paid is refunded in
tax
whole or in part, the taxpayer shall notify the
The exemption from sales tax of sales of agricultural products,
Commissioner; who shall redetermine the amount of the
whether in their original form or not, made by the producer or
tax for the year or years affected, and the amount of tax due
owner of the land where produced is not taken away merely
upon such redetermination, if any, shall be paid by the
because the produce undergoes processing at the hand of said
taxpayer upon notice and demand by the Commissioner, or
producer or owner for the purpose of working his product into
the amount of tax overpaid, if any, shall be credited or
a more convenient and valuable form suited to meet the
refunded to the taxpayer. In the case of such a tax incurred
demand of an expanded market
but not paid, the Commissioner as a condition precedent to
the allowance of this credit may require the taxpayer to give
The addition of ammonia prevents its deterioration for about a
a bond with sureties satisfactory to and to be approved by
month, and we see no reason why this preservative process
the Commissioner in such sum as he may require,
should wrest away from the preserved latex the protective
conditioned upon the payment by the taxpayer of any
mantle of the tax exemption.
amount of tax found due upon any such redetermination.
The bond herein prescribed shall contain such further
American Rubber has the right to claim for refund of
conditions as the Commissioner may require.
the taxes.
The sales tax in this case is by law imposed directly, not on the
6. Year in Which Credit Taken. –
thing sold, but on the act (sale) of the manufacturer, producer
The credits provided for in Subsection (C)(3) of this Section
or importer, who is exclusively made liable for its timely
may, at the option of the taxpayer and irrespective of the
payment. There is no proof that the tax paid by plaintiff is the
method of accounting employed in keeping his books, be
very money paid by its customers.
taken in the year which the taxes of the foreign country
were incurred, subject, however, to the conditions
Where the tax money paid by the plaintiff came from is really
prescribed in Subsection (C)(5) of this Section. If the
no concern of the Government, but solely a matter between the
taxpayer elects to take such credits in the year in which the
plaintiff and its customers. Anyway, once recovered, the
taxes of the foreign country accrued, the credits for all
plaintiff must hold the refund taxes in trust for the individual
subsequent years shall be taken upon the same basis and no
purchasers who advanced payment thereof, and whose names
portion of any such taxes shall be allowed as a deduction in
must appear in plaintiff's records.
the same or any succeeding year.
It is also absurd to say that only the buyers have the right to
7. Proof of Credits. –
claim for refund because the individual customers to whom the
The credits provided in Subsection (C)(3) hereof shall be
tax is ultimately shifted will ordinarily not care to sue for its
allowed only if the taxpayer establishes to the satisfaction of
recovery, in view of the small amount paid by each and the high
the Commissioner the following:
cost of litigation for the reclaiming of an illegal tax. The Medina
a. The total amount of income derived from sources
Doctrine is not applicable.
without the Philippines;
b. The amount of income derived from each country, the
MEDINA v. CITY OF BAGUIO: The amount collected from the
tax paid or incurred to which is claimed as a credit
theatergoers as additional price of admission tickets is not the
40
property of plaintiffs or any of them. It is paid by the public. If
anybody has the right to claim it, it is those who paid it. Only
owners of property has the right to claim said property. The
cine owner acted as mere agents of the city in collecting
additional price charged in the sale of admission tickets.
Medina is not applicable to the present case, since the
municipal taxes therein imposed were taxes on the admission
tickets sold, so that, in effect, they were levies upon the
theatergoers who bought them; so much so that (as the
decision expressly ruled) the tax was collected by the theater
owners as agents of the respective municipal treasurers. This
does not obtain in the case at bar.
Cebu Portland Co v. Collector (1968)
This case involves petitioner's claim for refund of P458,241.45
sales tax paid from November 1, 1954 to March, 1955, and
P427,552.95 ad valorem tax paid from April, 1955 to September
30, 1956 from the sale of APO Portland cement produced by
the petitioner.
It was alleged in the petition that the percentage taxes collected
by respondent are refundable since under Republic Act 1299,
producers of cement are exempt from the payment of said tax.
The petition was amended on October 24, 1959, and again
amended on June 23, 1961, to include a claim for refund of ad
valorem taxes alleged to have been overpaid through double
payments.
CTA ruled that petitioner is not entitled to deduction from the
gross selling price of the cost of raw materials, the value of the
bag containers and gypsum in the absence of evidence that they
had been previously subjected to the 7% tax imposed by
sections 186 and 190 of the Tax Code; that for so much of the
sales taxes that were billed, charged to, and paid for by its
customers, the petitioner is not the proper party to claim for
refund
Petitioner is entitled to the deduction – absent any showing
that they manufactured the containers, it is presumed that
these were already taxed.
In the absence of any showing that the petitioner itself
manufactured the bag containers, the inference is that these
bags were bought from others from whom taxes had been
levied for the original sale thereof. The same holds true with
the gypsum used in the process of the manufacture of cement,
considering that said component is imported, and subject to
compensating tax
Petitioner is also the proper party to claim the refund because
it is presumed to be the producer who is being taxed as per Tax
Code.
The Code states that the sales tax "shall be paid by the
manufacturer or producer," who must make a true and
complete return of the amount of his, her or its gross monthly
sales, receipts or earnings or gross value of output actually
removed from the factory or mill warehouse and within twenty
days after the end of each month, pay the tax due thereon.
It may indeed be that the economic burden of the tax finally
falls on the purchaser; when it does, the tax becomes a part of
the price which the purchaser must pay. It does not matter that
an additional amount is billed as tax to the purchaser. The
method of listing the price and the tax separately and defining
taxable gross receipts as the amount received less the amount
of the tax added, merely avoids payment by the seller of a tax
on the amount of the tax. The effect is still the same, namely,
that the purchaser does not pay the tax. He pays, or may pay
the seller more for the goods because of the seller's obligation,
but that is all and the amount added because of the tax is paid
to get the goods and for nothing else.
But the tax burden may not even be shifted to the purchaser at
all. A decision to absorb the burden of the tax is largely a
matter of economics. Then it can no longer be contended that a
sales tax is a tax on the purchaser.
___________
Losses119
Losses. -
1. In General. –
Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity
shall be allowed as deductions:
a. If incurred in trade, profession or business;
b. Of property connected with the trade, business or
profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft or
embezzlement.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate
rules and regulations prescribing, among other things,
the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or
from robbery, theft or embezzlement during the
taxable year: Provided, however, That the time limit to
be so prescribed in the rules and regulations shall not
be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or
robbery, theft or embezzlement giving rise to the loss.
c. No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, such
loss has been claimed as a deduction for estate tax
purposes in the estate tax return.
Limitations on deductions for losses
a. Actual and related to the company120
- The law intended to treat taxable or non-exempt industry
as separate and distinct from tax exempt industry, and
did not mean to grant an entrepreneur, engaged at the
same time in a taxable or non-exempt industry and a new
and necessary industry, the benefit or privilege of
deducting his gains or profit derived from the operation
of the first from the losses incurred in the operation of
the second.
- Taxpayer cannot deduct from the profits realized from its
taxable industries, the losses sustained by its tax exempt
business activities
b. Sustained in a closed and completed transaction
c. Must not be compensated by insurance
d. Must not be charged against other taxes
e. Limitation for gambling losses
- Losses from wagering transactions shall be allowed only
to the extent of the gains from such transactions.121
f. Abandonment loses of petroleum operations
1. In the event a contract area where petroleum operations
are undertaken is partially or wholly abandoned, all
119 Sec. 34 (D)
120 Marcelo Steel v. CIR (1960)
121 Sec.34 (D) (6)
41
 accumulated exploration and development expenditures
pertaining thereto shall be allowed as a deduction…
2. In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated
costs of equipment directly used therein, shall be
allowed as a deduction in the year such well, equipment
or facility is abandoned by the contractor: Provided,
That if such abandoned well is reentered and production
is resumed, or if such equipment or facility is restored
into service, the said costs shall be included as part of
gross income in the year of resumption or restoration
and shall be amortized or depreciated, as the case may
be.
For purposes of this subsection, the term ‘not operating
loss’ shall mean the excess of allowable deduction over
gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net
operating loss without the benefit of incentives provided for
under Executive Order No. 226, as amended, otherwise
known as the Omnibus Investments Code of 1987, incurred
in any of the first ten (10) years of operation may be carried
over as a deduction from taxable income for the next five
(5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of
the five (5) taxable years following the loss, and any portion
of such loss which exceeds, the taxable income of such first
year shall be deducted in like manner form the taxable
income of the next remaining four (4) years.

Proof of Loss - Operating loss of the business in the immediate preceding

2. Proof of Loss. – year, not compensated by insurance may be carried over as a
In the case of a nonresident alien individual or foreign deduction of the current year: provided, that the same has
corporation, the losses deductible shall be those actually not been offset already as a deduction for the next 3
sustained during the year incurred in business, trade or
consecutive taxable years.
exercise of a profession conducted within the Philippines,
when such losses are not compensated for by insurance or - Provided, there has been no substantial change in ownership
other forms of indemnity. The secretary of Finance, upon in the enterprise
recommendation of the Commissioner, is hereby authorized
to promulgate rules and regulations prescribing, among Eg. 1
other things, the time and manner by which the taxpayer Year 1 Year 2 Year 3
shall submit a declaration of loss sustained from casualty or Income 100 100 100
from robbery, theft or embezzlement during the taxable (Loss) (250) (150) (50)
year: Provided, That the time to be so prescribed in the (150) (50) 50
rules and regulations shall not be less than thirty (30) days
nor more than ninety (90) days from the date of discovery
Eg. 2
of the casualty or robbery, theft or embezzlement giving rise
to the loss; and Year 1 Year 2 Year 3
Loss Recovered 200
Income 100 (100) (100)
- Proof of loss must be submitted within 30=90 days from the
(Loss) (250) (150) (50)
date of the discovery of the casualty or robbery, theft or
(150) (250) (350)
embezzlement
- Should not add the recovered amount, there is no benefit
because the company is at a loss
When do losses occur?
- 3-part test on income applicable (see p. 24)
Capital losses
- Losses occur not when/as they accrue, realization is required
4. Capital Losses. -
a. Limitation. –
NOLCO
Loss from sales or Exchanges of capital assets shall be
3. Net Operating Loss Carry-Over. – allowed only to the extent provided in Section 39.
The net operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable b. Securities Becoming worthless. –
year, which had not been previously offset as deduction If securities as defined in Section 22 (T) become
from gross income shall be carried over as a deduction from worthless during the taxable year and are capital
gross income for the next three (3) consecutive taxable assets, the loss resulting therefrom shall, for purposes
years immediately following the year of such loss: Provided, of this Title, be considered as a loss from the sale or
however, That any net loss incurred in a taxable year during exchange, on the last day of such taxable year, of
which the taxpayer was exempt from income tax shall not capital assets.
be allowed as a deduction under this Subsection: Provided,
further, That a net operating loss carry-over shall be
- Limitation
allowed only if there has been no substantial change in the
ownership of the business or enterprise in that - Sec. 39 Capital Gains and Losses. -
i. Not less than seventy-five percent (75%) in nominal A. Definitions. –
value of outstanding issued shares., if the business is in As used in this Title -
the name of a corporation, is held by or on behalf of the 1. Capital Assets. –
same persons; or The term ‘capital assets’ means property held by the
ii. Not less than seventy-five percent (75%) of the paid up taxpayer (whether or not connected with his trade or
capital of the corporation, if the business is in the name business), but does not include stock in trade of the
of a corporation, is held by or on behalf of the same taxpayer or other property of a kind which would
persons. properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year, or property

42
 held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business, or
property used in the trade or business, of a character
which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
2. Net Capital Gain. –
The term ‘net capital gain’ means the excess of the
gains from sales or exchanges of capital assets over the
losses from such sales or exchanges.
3. Net Capital Loss. –
The term ‘net capital loss’ means the excess of the
losses from sales or exchanges of capital assets over the
gains from such sales or exchanges.
B. Percentage Taken into Account. –
In the case of a taxpayer, other than a corporation, only the
following percentages of the gain or loss recognized upon
the sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss, and
net income:
1. One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months; and
2. Fifty percent (50%) if the capital asset has been held
for more than twelve (12) months;
C. Limitation on Capital Losses. –
Losses from sales or exchanges of capital assets shall be
allowed only to the extent of the gains from such sales or
exchanges. If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof),
with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the
applicability of such limitation to other losses.
D. Net Capital Loss Carry-over. –
If any taxpayer, other than a corporation, sustains in any
taxable year a net capital loss, such loss (in an amount not
in excess of the net income for such year) shall be treated in
the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than twelve
(12) months.
 Limitation on capital losses – General Rule: Losses
from sales or exchanges of capital assets shall be allowed
only to the extent of the gains from such sales or
exchanges. Exception: Bank or trust company, etc. not
subject to the foregoing limitation
- Securities becoming worthless
 The term ‘securities’ means shares of stock in a
corporation and rights to subscribe for or to receive such
shares. The term includes bonds, debentures, notes or
certificates, or other evidence or indebtedness, issued by
any corporation, including those issued by a government
or political subdivision thereof, with interest coupons or
in registered form.122
122 Sec. 22 (T)
 General Rule: Securities becoming worthless shall not
be deductible unless they have actually been sustained
(paper losses not allowed). Exception: when companies
have ceased operations.
FERNANDEZ HERMANOS v. CIR (1969)
Fernandez Hermanos, Inc., is a domestic corporation
organized for the principal purpose of engaging in business as
an "investment company" with main office at Manila. It
deducted its losses in Mati Lumber Co. (1950)  P 8,050.00
The Commissioner of Internal Revenue questions the Tax
Court's allowance of the taxpayer's writing off as worthless
securities in its 1950 return the sum of P8,050.00 representing
the cost of shares of stock of Mati Lumber Co. acquired by the
taxpayer on January 1, 1948, on the ground that the
worthlessness of said stock in the year 1950 had not been
clearly established. The Commissioner contends that although
the said Company was no longer in operation in 1950, it still
had its sawmill and equipment which must be of considerable
value. The Court, however, found that "the company ceased
operations in 1949 when its Manager and owner, a certain Mr.
Rocamora, left for Spain ,where he subsequently died. When
the company eased to operate, it had no assets, in other words,
completely insolvent. This information as to the insolvency of
the Company — reached (the taxpayer) in 1950," when it
properly claimed the loss as a deduction in its 1950 tax return.
We find no reason to disturb this finding of the Tax Court.
There was adequate basis for the writing off of the stock as
worthless securities. Assuming that the Company would later
somehow realize some proceeds from its sawmill and
equipment, which were still existing as claimed by the
Commissioner, and that such proceeds would later be
distributed to its stockholders such as the taxpayer, the amount
so received by the taxpayer would then properly be reportable
as income of the taxpayer in the year it is received.
Eg. – Expiration of corporate life
Investment P100,ooo shares
Upon distribution P150,000 assets
P50,000 gain  Tax rate
applicable is tax
rate on dividends
Loss from wash sales
5. Losses From Wash Sales of Stock or Securities. –
Losses from ‘wash sales’ of stock or securities as provided in
Section 38.
Sec. 38 Losses from Wash Sales of Stock or Securities
A. In the case of any loss claimed to have been sustained from
any sale or other disposition of shares of stock or securities
where it appears that within a period beginning thirty (30)
days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired
(by purchase or by exchange upon which the entire amount
of gain or loss was recognized by law), or has entered into a
contact or option so to acquire, substantially identical stock
or securities, then no deduction for the loss shall be allowed
under Section 34 unless the claim is made by a dealer in
stock or securities and with respect to a transaction made in
the ordinary course of the business of such dealer.
B. If the amount of stock or securities acquired (or covered by
the contract or option to acquire) is less than the amount of
stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss form the
43
 sale or other disposition of which is not deductible, shall be
determined under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner.
C. If the amount of stock or securities acquired (or covered by
the contract or option to acquire which) resulted in the non-
deductibility of the loss, shall be determined under rules
and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
- A wash sale occurs when the taxpayer sell or trade securities
at a loss and within 30 days before or after the sale the
taxpayer:
a. Buy substantially identical securities,
b. Acquire substantially identical securities in a fully
taxable trade, or
c. Acquire a contract or option to buy substantially
identical securities.
- General Rule: No deduction for the loss from wash sales
shall be allowed. Unless, the claim is made by a dealer in
stock or securities and with respect to a transaction made in
the ordinary course of the business of such dealer.
Loss – on a transaction v. activity
- Loss on a transaction – can be carried forward as a
NOLCO, assuming definition is met (eg. Taxpayer buys a
property at P1,000 and sells it at P750, the taxpayer suffers a
loss of P250)
- Loss on activity – based on overall set of transactions –
where the activity resulted in a loss, or excess of deductions
over income for that activity
Note: Personal losses not deductible (see p. 51)
__________
Bad Debts123
Bad Debts. -
1. In General. –
Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year except
those not connected with profession, trade or business and
those sustained in a transaction entered into between
parties mentioned under Section 36 (B) of this Code:
Provided, That recovery of bad debts previously allowed as
deduction in the preceding years shall be included as part of
the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.
2. Securities Becoming Worthless. –
If securities, as defined in Section 22 (T), are ascertained to
be worthless and charged off within the taxable year and are
capital assets, the loss resulting therefrom shall, in the case
of a taxpayer other than a bank or trust company
incorporated under the laws of the Philippines a substantial
part of whose business is the receipt of deposits, for the
purpose of this Title, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital
assets.
123 Sec. 34 (E)
Debt must be related to the taxpayer’s trade or
business
- Eg. loans, sale on credit
- Uncollected income is not a bad debt, unless it has been
included as income
- General Rule: Debts due to the taxpayer actually
ascertained to be worthless and charged off within the
taxable year are deductible. Exceptions: Not deductible if
a. Debts are not connected with profession, trade or
business; or
b. Losses from sale/exchange of property in/directly:
i. Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants; or
ii. Except in the case of distributions in liquidation,
between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for
such individual; or
iii. Except in the case of distributions in liquidation,
between 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 if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale of exchange was
under the law applicable to such taxable year, a
personal holding company or a foreign personal
holding company;
iv. Between the grantor and a fiduciary of any trust; or
v. Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person
is a grantor with respect to each trust; or
vi. Between a fiduciary of a trust and beneficiary of
such trust.
- Debt must be ascertained as worthless, mere difficulty in
collecting is not a basis.
Debt must be written off as worthless and must be
written off in full
FERNANDEZ HERMANOS v. CIR (1969)
Hermanos gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to
P587,308.07 by the end of 1951. Despite these advances and
the resumption of operations by Palawan Manganese Mines,
Inc., it continued to suffer losses. By 1951, petitioner became
convinced that those advances could no longer be recovered.
While it continued to give advances, it decided to write off as
worthless the sum of P353,134.25. This amount "was arrived at
on the basis of the total of advances made from 1945 to 1949 in
the sum of P438,981.39, from which amount the sum of
P85,647.14 had to be deducted, the latter sum representing its
pre-war assets. Petitioner decided to maintain the advances
given in 1950 and 1951 in the hope that it might be able to
recover the same, as in fact it continued to give advances up to
1952. From these facts, and as admitted by petitioner itself,
Palawan Manganese Mines, Inc., was still in operation when
the advances corresponding to the years 1945 to 1949 were
written off the books of petitioner. Under the circumstances,
was the sum of P353,134.25 properly claimed by petitioner as
44
deduction in its income tax return for 1951, either as losses or
bad debts?
The advances made by the taxpayer to its 100% subsidiary,
Palawan Manganese Mines, Inc. amounting to P587,308,07 as
of 1951 were investments and not loans. The evidence on
record shows that the board of directors of the two companies
since August, 1945, were identical and that the only capital of
Palawan Manganese Mines, Inc. is the amount of P100,000.00
entered in the taxpayer's balance sheet as its investment in its
subsidiary company. This fact explains the liberality with which
the taxpayer made such large advances to the subsidiary,
despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its
subsidiary as against the Tax Court's finding that under their
memorandum agreement, the taxpayer did not expect to be
repaid, since if the subsidiary had no earnings, there was no
obligation to repay those advances, becomes immaterial, in the
light of our resolution of the question. The Tax Court correctly
held that the subsidiary company was still in operation in 1951
and 1952 and the taxpayer continued to give it advances in
those years, and, therefore, the alleged debt or investment
could not properly be considered worthless and deductible in
1951, as claimed by the taxpayer. Furthermore, neither under
Section 30 (d) (2) of our Tax Code providing for deduction by
corporations of losses actually sustained and charged off
during the taxable year nor under Section 30 (e) (1) thereof
providing for deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year, can there be
a partial writing off of a loss or bad debt, as was sought to be
done here by the taxpayer. For such losses or bad debts must
be ascertained to be so and written off during the taxable year,
are therefore deductible in full or not at all, in the absence of
any express provision in the Tax Code authorizing partial
deductions.
The Tax Court held that the taxpayer's loss of its investment in
its subsidiary could not be deducted for the year 1951, as the
subsidiary was still in operation in 1951 and 1952. The
taxpayer, on the other hand, claims that its advances were
irretrievably lost because of the staggering losses suffered by its
subsidiary in 1951 and that its advances after 1949 were "only
limited to the purpose of salvaging whatever ore was already
available, and for the purpose of paying the wages of the
laborers who needed help." The correctness of the Tax Court's
ruling in sustaining the disallowance of the write-off in 1951 of
the taxpayer's claimed losses is borne out by subsequent events
shown in Cases L-24972 and L-24978 involving the taxpayer's
1957 income tax liability. (Infra, paragraph 6.) It will there be
seen that by 1956, the obligation of the taxpayer's subsidiary to
it had been reduced from P587,398.97 in 1951 to P442,885.23
in 1956, and that it was only on January 1, 1956 that the
subsidiary decided to cease operations.
- “Allowance for bad debts” is not the bad debt deductible for
tax purposes, what is required is the actual write off
- Journal entry:
Allowance for bad debt
Accounts receivable
Tax benefit rule
- Tax benefit rule is applied, wherein a recovery is treated as
an income for the current year when the taxpayer has
benefited from the write off of the previous year. It should be
noted that this will be subject to modification because of the
NOLCO provision because write off may benefit the taxpayer
in subsequent periods other than the year of the write off.
- Note: Effects of condonation of debt (see p. 27)
__________
Recovery of Capital Expenses – Depreciation124
Depreciation. -
1. General Rule. –
There shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of
property used in the trade or business. In the case of
property held by one person for life with remainder to
another person, the deduction shall be computed as if the
life tenant were the absolute owner of the property and
shall be allowed to the life tenant. In the case of property
held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the instrument
creating the trust, or in the absence of such provisions, on
the basis of the trust income allowable to each.
- The provision does not say that the property must decline in
value
- Recovery limited to acquisition cost125
 Depreciation shall be determined on the acquisition cost
not on the reappraised value of the assets.
 The income tax law does not authorize the depreciation of
an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed.
The reason is that deductions from gross income are
privileges, not matters of right. They are not created by
implication but upon clear expression in the law.
 Moreover, the recovery, free of income tax, of an amount
more than the invested capital in an asset will transgress
the underlying purpose of a depreciation allowance. For
then what the taxpayer would recover will be, not only
the acquisition cost, but also some profit. Recovery in due
time thru depreciation of investment made is the
philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the
underlying reason for the allowance of a deduction for
depreciation
- Depreciation of motor vehicles
RR 12-2012
 Guidelines to claim depreciation as a deduction in the gross
income:
1. Only one vehicle for land transport is allowed for the use
of an official or employee;
2. The value of which should not exceed P 2,400,000;
3. It must be substantiated with sufficient evidence, such
as official receipts or other adequate records; and
4. There is a direct connection or relation of the Vehicle to
the development, management, operation, and/or
conduct of the trade or business or profession of the
taxpayer.
 Generally, no deduction in the gross income shall be
allowed for depreciation of the following:
1. Yachts, helicopters, airplanes and/or aircrafts; and
2. Land vehicles with a value of more than P 2,400,000.
124 Sec. 34 (F)
125 Basilan Estate v. CIR (1967)
45
 Exception: the taxpayer is in the business of transport  Sum-of-years digit method
operations, or lease of transportation equipment and the  Same as declining-balance method as it allocates
vehicles purchased are used in said operations. larger depreciation during the early life of the
machine
 In addition, the following shall be disallowed as deduction in
 Percentage is computed on the ration of the current
the gross income:
1. All maintenance expenses on account of non- years over total years life
depreciable Vehicles; and
2. Input taxes on the purchase of non-depreciable Vehicles Eg.
and all input taxes on maintenance expenses. 20 years
x 950K = depreciation
(20+19+18…)
- Depreciation deduction is designed to allow taxpayers to
treat as an expense in determining taxable income an  Any other method that may be prescribed by the DoF
allocable part of the cost of business or investment asset that
have a limited life. - Rules
 Sec. 34 (F)(3)
Recovery of capital  Secretary of Finance will promulgate rules and
- Methods to determine depreciation allowance regulations on depreciation
2. Use of Certain Methods and Rates. –  Taxpayer may seek adjustment of useful life with
The term ‘reasonable allowance’ as used in the preceding agreement from the commissioner but it will be
paragraph shall include, but not limited to, an allowance incumbent upon the taxpayer to prove useful life
computed in accordance with rules and regulations
 If the taxpayer adopts a certain useful life without
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, under any of the objection from the BIR, the same is deemed binding on
following methods: the parties.
a. The straight-line method;  Rules on depreciation of properties used in petroleum
b. Declining-balance method, using a rate not exceeding operations126
twice the rate which would have been used had the  Rules on depreciation of properties used in mining
annual allowance been computed under the method
described in Subsection (F) (1); operations127
c. The sum-of-the-years-digit method; and FERNANDEZ HERMANOS v. CIR (1969)
d. any other method which may be prescribed by the The Court sustains the Tax Court's disallowance of the
Secretary of Finance upon recommendation of the sums of P8,989.76 and P27,732.66 spent by the
Commissioner. taxpayer for the operation of its Balamban coal mines in
Cebu in 1950 and 1951, respectively, and claimed as
losses in the taxpayer's returns for said years. The Tax
Eg.
Court correctly held that the losses "are deductible in
Cost of building – P1,000,000 1952, when the mines were abandoned, and not in 1950
Salvage value – P50,000 and 1951, when they were still in operation." 9 The
Useful life – 20 years taxpayer's claim that these expeditions should be
allowed as losses for the corresponding years that they
 Straight-line method – cost of asset is allocated in were incurred, because it made no sales of coal during
equal amounts over its useful life; consistent for the said years, since the promised road or outlet through
which the coal could be transported from the mines to
entire useful life the provincial road was not constructed, cannot be
sustained. Some definite event must fix the time when
Eg. the loss is sustained, and here it was the event of actual
Cost – SV P1M – P50K = P47,500 – abandonment of the mines in 1952. The Tax Court held
Useful life 20 years depreciation expense that the losses, totalling P36,722.42 were properly
per year deductible in 1952, but the appealed judgment does not
show that the taxpayer was credited therefor in the
 Declining balance method determination of its tax liability for said year. This
 Accelerated depreciation additional deduction of P36,722.42 from the taxpayer's
taxable income in 1952 would result in the elimination
 Allocates a larger portion of cost to earlier years and of the deficiency tax liability for said year in the sum of
lesser portion to later years P3,600.00 as determined by the Tax Court in the
 Constant percentage is used, but is applied each year appealed judgment.
to amount remaining after depreciation of previous
years has been substracted  Depreciation deductible by nonresident aliens engaged in
 Double the straight-line rate trade or business or resident foreign corporations – a
reasonable allowance for the deterioration of Property
Eg. arising out of its use or employment or its non-use in the
1
= 5% x P950K = depreciation
20

[950K – (depreciation of previous year)] x 5% =

depreciation expense for the year 126 Sec. 34 (F)(4)
127 Sec. 34 (F)(5)
46
 business trade or profession shall be permitted only when
such property is located in the Philippines.128
- Amortization
 Almost exclusively refers to intangibles
 The allocation (and charge to expenses) of the cost or
other basis of an intangible asset over its estimated useful
life
 Sacrifices accuracy for simplicity
 Goodwill, trademarks, tradenames not subject to
depreciation or amortization
- Land
 Not depreciable, but can be depleted
 Buildings – depreciable
 Dissallowance of depreciation of land
 Land doesn’t wear out or become obsolete
 Land has no “ascertainable useful life”
- Antiques
 Antiques are generally not depreciable because they do
not have a determinable useful life defined by the
physical conditions of the art work
 But if taxpayer uses an antique in connection with his
trade/business (eg. violin player), taxpayer has a stronger
argument for depreciation.
Recovering capital
- Once determined, that item must be capitalized as a separate
asset, and must be added to basis of the original item
- Method of allowing the taxpayer to recover cost
Recovery of Capital – Depletion of oil and gas wells
and mines129
- Depletion is an accrual accounting technique used to allocate
the cost of extracting natural resources such as timber,
minerals and oil from the earth. Unlike depreciation and
amortization, which mainly describe the deduction of
expenses due to the aging of equipment and property,
depletion is the actual physical depletion of natural resources
by companies.
- In the case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in
accordance with the cost-depletion method shall be granted
- The value or research and development, as well as the value
of the land itself if allowed to be taken as a deduction
because the property will have little or no value at the end of
the extraction
__________
Charitable and other contributions130
General Rule:
1. In General. –
Contributions or gifts actually paid or made within the
taxable year to, or for the use of the Government of the
Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to
128 Sec. 34 (F)(6)
129 Sec. 34 (G)
130 Sec. 34 (H)
accredited domestic corporation or associations organized
and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to non-government organizations, in
accordance with rules and regulations promulgated by the
Secretary of finance, upon recommendation of the
Commissioner, no part of the net income of which inures to
the benefit of any private stockholder or individual in an
amount not in excess of ten percent (10%) in the case of an
individual, and five percent (5%) in the case of a
corporation, of the taxpayer’s taxable income derived from
trade, business or profession as computed without the
benefit of this and the following subparagraphs.
- Taxpayers cannot deduct charitable contributions in excess
of the ff. percentage limits:
a. Individual taxpayer: Deduction <10% of income
computed without the benefit of the contribution
b. Corporate taxpayer: Deduction <5% of the income
Eg.
Gross Profit P1,000
Less: Expenses, exceptions 600
Contributions (100)
P500 x 5% or 10%
Exception:
2. Contributions Deductible in Full. –
Notwithstanding the provisions of the preceding
subparagraph, donations to the following institutions or
entities shall be deductible in full;
a. Donations to the Government. –
Donations to the Government of the Philippines or to
any of its agencies or political subdivisions, including
fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking
priority activities in education, health, youth and sports
development, human settlements, science and culture,
and in economic development according to a National
Priority Plan determined by the National Economic and
Development Authority (NEDA), In consultation with
appropriate government agencies, including its regional
development councils and private philantrophic persons
and institutions: Provided, That any donation which is
made to the Government or to any of its agencies or
political subdivisions not in accordance with the said
annual priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;
b. Donations to Certain Foreign Institutions or
International Organizations. –
Donations to foreign institutions or international
organizations which are fully deductible in pursuance of
or in compliance with agreements, treaties, or
commitments entered into by the Government of the
Philippines and the foreign institutions or international
organizations or in pursuance of special laws;
c. Donations to Accredited Nongovernment Organizations.
–
The term ‘nongovernment organization’ means a non
profit domestic corporation:
1. Organized and operated exclusively for scientific,
research, educational, character-building and youth
and sports development, health, social welfare,
cultural or charitable purposes, or a combination
47
 thereof, no part of the net income of which inures to
the benefit of any private individual;
2. Which, not later than the 15th day of the third
month after the close of the accredited
nongovernment organizations taxable year in which
contributions are received, makes utilization
directly for the active conduct of the activities
constituting the purpose or function for which it is
organized and operated, unless an extended period
is granted by the Secretary of Finance in accordance
with the rules and regulations to be promulgated,
upon recommendation of the Commissioner;
3. The level of administrative expense of which shall,
on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, but in no case to exceed thirty
percent (30%) of the total expenses; and
4. The assets of which, in the even of dissolution,
would be distributed to another nonprofit domestic
corporation organized for similar purpose or
purposes, or to the state for public purpose, or
would be distributed by a court to another
organization to be used in such manner as in the
judgment of said court shall best accomplish the
general purpose for which the dissolved
organization was organized.
Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term
‘utilization’ means:
i. Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited nongovernment organization was
created or organized.
ii. Any amount paid to acquire an asset used (or held
for use) directly in carrying out one or more
purposes for which the accredited nongovernment
organization was created or organized.
An amount set aside for a specific project which comes
within one or more purposes of the accredited
nongovernment organization may be treated as a
utilization, but only if at the time such amount is set
aside, the accredited nongovernment organization has
established to the satisfaction of the Commissioner that
the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, but not to
exceed five (5) years, and the project is one which can be
better accomplished by setting aside such amount than
by immediate payment of funds.
Valuation; gifts of appreciated property
3. Valuation. –
The amount of any charitable contribution of property
other than money shall be based on the acquisition cost of
said property.
- Taxpayer who gives appreciated property to a charity does
not realize a gain because the NIRC requires the transfer of
the property to be based n acquisition cost
 The gain is also transferred but not taxed because the
acquisition cost will be the basis
- The taxpayer will also not realize a loss:
 Unless sells first to realize a loss for taxes;
 Contributes the proceeds
Substantiation requirement
4. Proof of Deductions. –
Contributions or gifts shall be allowable as deductions only
if verified under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner.
RR 13-98, SEC. 8
Donors claiming donations and contributions to accredited
non-stock, non-profit corporation/NGO as deductions from
their taxable business income should submit evidences or
proofs to the BIR by showing the Certificate/s of Donation and
indicating therein the following:
i. Actual receipt by the accredited non-stock, non-profit
corporation/NGO of the donation or contribution and the
date of receipt thereof; and
ii. The a mount of the charitable donation or contribution, if
in cash; if property, whether real or personal, the
acquisition cost of the said property.
When is a transfer to a charity a contribution?
ROXAS v. CTA (L-25043)
BANQUET TICKETS
Roxas y Cia. deducted from its gross income the amount of
P40.00 for tickets to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel beer given as gifts to
various persons. The deduction was claimed as representation
expenses. The evidence does not show such link between the
expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
PASAY CITY POLICE, PASAY CITY FIREMEN AND
BAGUIO CITY POLICE
The contributions to the Christmas funds of the Pasay City
Police, Pasay City Firemen and Baguio City Police are not
deductible for the reason that the Christmas funds were not
spent for public purposes but as Christmas gifts to the families
of the members of said entities. Under Section 39 (h), a
contribution to a government entity is deductible when used
exclusively for public purposes. For this reason, the
disallowance must be sustained.
MANILA POLICE TRUST FUND
The contribution to the Manila Police trust fund is an allowable
deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its
public functions.
PHILIPPINES HERALD’S FUND
The contributions to the Philippines Herald’s fund for Manila’s
neediest families were disallowed on the ground that the
Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code. It should be
noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens
organized by the Philippines Herald solely for charitable
purposes. There is no question that the members of this group
of citizens do not receive profits, for all the funds they raised
were for Manila’s neediest families. Such a group of citizens
may be classified as an association organized exclusively for
charitable purposes mentioned in Section 30 (h) of the Tax
Code. (so deductible if the ground is an association organized
exclusively for charitable purposes)
48
OUR LADY OF FATIMA CHAPEL
The Commissioner of Internal Revenue disallowed the
contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives
dividends to its stockholders. Located within the premises of
the university, the chapel in question has not been shown to
belong to the Catholic Church or any religious organization. On
the other hand, the lower court found that it belongs to the Far
Eastern University, contributions to which are not deductible
under Section 30 (h) of the Tax Code for the reason that the net
income of said university inures to the benefit of its
stockholders. The disallowance should be sustained.
__________
Research and Development costs131
Research and Development. –
1. In General. - a taxpayer may treat research or
development expenditures which are paid or incurred by
him during the taxable year in connection with his trade,
business or profession as ordinary and necessary expenses
which are not chargeable to capital account.
The expenditures so treated shall be allowed as deduction
during the taxable year when paid or incurred.
Requirements
1. Paid/incurred during the taxable year
2. Connected with trade/business
3. Not chargeable to capital account
2. Amortization of Certain Research and
Development Expenditures. - At the election of the
taxpayer and in accordance with the rules and regulations
to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following
research and development expenditures may be treated as
deferred expenses:
a. Paid or incurred by the taxpayer in connection with his
trade, business or profession;
b. Not treated as expenses under paragraph (1) hereof;
and
c. Chargeable to capital account but not chargeable to
property of a character which is subject to depreciation
or depletion.
In computing taxable income, such deferred expenses shall
be allowed as deduction ratably distributed over a period of
not less than sixty (60) months as may be elected by the
taxpayer (beginning with the month in which the taxpayer
first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may be made
for any taxable year beginning after the effectivity of this
Code, but only if made not later than the time prescribed by
law for filing the return for such taxable year.
The method so elected, and the period selected by the
taxpayer, shall be adhered to in computing taxable income
for the taxable year for which the election is made and for
all subsequent taxable years unless with the approval of the
Commissioner, a change to a different method is authorized
with respect to a part or all of such expenditures.
The election shall not apply to any expenditure paid or
incurred during any taxable year for which the taxpayer
makes the election.
131 Sec. 34 (I)
Amortization treatment
a. Paid/incurred and connected with trade/business
b. Not treated as an expense for the year
c. Chargeable to capital account but not connected to an asset
subject to depreciation or depletion
d. Allowed as a deferred deduction for a period not less than
60 months
3. Limitations on Deduction - This Subsection shall not
apply to:
a. Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
connection with research and development of a
character which is subject to depreciation and
depletion; and
b. Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral, including oil or
gas.
___________
Pension Trusts132
Pension Trusts. - An employer establishing or maintaining a
pension trust to provide for the payment of reasonable
pensions to his employees shall be allowed as a deduction (in
addition to the contributions to such trust during the taxable
year to cover the pension liability accruing during the year,
allowed as a deduction under Subsection (A) (1) of this Section)
a reasonable amount transferred or paid into such trust during
the taxable year in excess of such contributions, but only if
such amount (1) has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts over a period
of ten (10) consecutive years beginning with the year in which
the transfer or payment is made.
- Pension trust is for the benefit of the employees of the
company
- Yearly pension expenses are treated as expenses under Sec.
34 (A)(1)
- Amortization of past service costs are allowed under this
provision, provided:
1. The amount had not been previously allowed as a
deduction
2. Is appropriated in equal parts over a 10 year period
__________
Withholding of tax
Additional Requirements for Deductibility of Certain
Payments. - Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross
income or for which depreciation or amortization may be
allowed under this Section, shall be allowed as a deduction only
if it is shown that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this Code.
1. Final withholding tax
2. Withholding tax on compensation – before the employee
receives the income
___________
132 Sec. 34 (J)
49
Optional Standard Deduction133
Optional Standard Deduction - In lieu of the deductions
allowed under the preceding Subsections, an individual subject
to tax under Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case
maybe. In the case of a corporation subject to tax under
Sections 27(A) and 28 (A)(1), it may elect a standard deduction
in an amount not exceeding forty percent (40%) of its gross
income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intention to elect the
optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding
Subsections. Such election when made in the return shall be
irrevocable for the taxable year for which the return is made:
Provided, That an individual who is entitled to and claimed for
the optional standard deduction shall not be required to submit
with his tax return such financial statements otherwise
required under this Code: Provided, further, That except when
the Commissioner otherwise permits, the said individual shall
keep such records pertaining to his gross sales or gross
receipts, or the said corporation shall keep such records
pertaining to his gross income as defined in Section 32 of this
Code during the taxable year, as may be required by the rules
and regulations promulgated by the Secretary of Finance,
upon, recommendation of the Commissioner
- The presumption is the itemized deduction, unless there is a
manifest intention to elect optional deduction, which will be
irrevocable for the year such election was made. – cannot
shift from itemized deduction to OSD, or vice versa within
the year
- Taxpayer opting for OSD need not file financial statements
with his income tax return
- Taxpayer is still required to keep records of his gross receipt
income as may be required by rules and regulations
Individual Taxpayer
Gross Sales P1,000
Less: OSD (P1,000 x 40%) 400
Taxable Income 600
Corporate Taxpayer
Gross Sales P1,000
Less: COGS 200
800
Less: OSD (800 x 40%) 320
Taxable Income 480
___________
Premium Payments on Health and/or Hospitalization
Insurance of an Individual Taxpayer134
Premium Payments on Health and/or Hospitalization
Insurance of an Individual Taxpayer. – The amount of
premiums not to exceed Two thousand four hundred pesos
(P2,400) per family or Two hundred pesos (P200) a month
paid during the taxable year for health and/or hospitalization
insurance taken by the taxpayer for himself, including his
family, shall be allowed as a deduction from his gross income:
Provided, That said family has a gross income of not more than
Two hundred fifty thousand pesos (P250,000) for the taxable
year: Provided, finally, That in the case of married taxpayers,
only the spouse claiming the additional exemption for
133 Sec. 34 (L)
134 Sec. 34 (M)
dependents shall be entitled to this deduction.
- In general:
 Insurance must not exceed P2,400/family or P2,000/mo
For health and/or hospitalization
 Taken by taxpayer himself, including his family
 Provided that family income does not exceed P250,000
annually
- This is an individual expense and does not relate to
corporate payments for the said benefit of its employees.
Such corporate payments can be considered as deductions
under Sec. 34 (A)(1)
- See also rules under fringe benefits
RR 5-2017
PWDs can claim at least 20-percent discount from hotels and
lodging establishments, restaurants, recreation centers,
theaters, cinema houses, concert hall, among other leisure and
amusement facilities.
PWDs can also avail themselves of the discount from all
drugstores for purchase of both branded and generic medicines
as well as in all government and private hospitals and facilities
offering dental and medical services.
The discount will also be extended to local air and sea
transportation expenses as well as land transport fares.
The beneficiaries of PWDs can also get discounts for burial and
funeral services upon presentation of the deceased’s death
certificate and PWD identification card, although publication
of obituary as well as memorial lot costs will not be discounted.
The 20-percent discount will be deducted from the amount net
of the 12-percent VAT.
To illustrate, for an amount of sale with VAT worth P1,120, the
P120 VAT will be deducted such that the 20-percent sales
discount will be computed from the amount net of VAT or
P1,000. As such, the total amount due for the PWD will only be
P800.
Under the rules, establishment that grant sales discounts to
PWDs for goods and services will be entitled to deduct such
discounts from their gross income.
The rules nonetheless prohibit availment of double discounts
such that a PWD who is also a senior citizen can only claim one
20-percent sales discount on a particular transaction, the BIR
said.
__________
50
Non-Deductible Personal, Living, or Family Expenses
Items not Deductible. -
A. General Rule. - In computing net income, no deduction
shall in any case be allowed in respect to -
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and
development costs incurred in petroleum operations
which are deductible under Subsection (G) (1) of Section
34 of this Code.
3. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
4. Premiums paid on any life insurance policy covering the
life of any officer or employee, or of any person
financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under
such policy.
Personal, living, or family expenses – in general
TREBILCOCK v. COMMS’R (1977)
Trebilcock paid minister Wardrop to conduct prayer meetings
and to counsel him and his employees. He also performed
business-related activities, he visited sawmills with petitioner,
ran errands, and mailed materials for Litco. Petitioner and his
wife deducted the $7,020 paid to Wardrop in both 1969 and
1970 as an ordinary and necessary business expense
Amend case: Amend sought the assistance of Halverstadt in
both business and personal matters. Halverstadt's aid did not
sharpen his business skills; instead, it gave him heightened
spiritual awareness. We concluded that Halverstadt's services
were no different from those regularly provided by ministers,
that all benefits derived from such services are inherently
personal in nature.
The solutions Wardrop offered were not based upon his
expertise in the brokerage of wood products; he admits he had
no such expertise. Rather, his solutions came through prayer
from God.
However, deduction should be allowed with regard to
payments to Wardrop in performing business-related
functions. The court estimated that $1,000 dollars in each year
should be allowed to be deducted.
PEVSNER v. COMMS’R (1980)
Sandra J. Pevsner was a manager of the Yves Saint Laurent
(YSL) boutique in Dallas, Texas. She was required by her
employer to wear YSL clothing while at work and at work-
related fashion shows and luncheons. She spent $1,381.91 on
YSL clothing (at a discount) to meet these requirements, and
subsequently deducted that amount from her 1975 federal
income tax return as an ordinary and necessary business
expense.
In the tax court, the Commissioner argued that the clothing
was “suitable for general or personal wear” and should
therefore not be deductible. Pevsner argued (and the
commissioner stipulated) that she has never worn the clothing
outside of work and considers the clothing “too expensive for
her simple everyday lifestyle.” The tax court ruled that the test
should be subjective to the taxpayer, and allowed the deduction
on the grounds that “wearing of YSL apparel outside work
would be inconsistent with … (taxpayer’s) lifestyle.
Cost of clothing is deductible as a business expense only if:
a. the clothing is of a type specifically required as a condition
of employment,
b. it is not adaptable to general usage as ordinary clothing,
and
c. it is not so worn.
The court held that the question of whether clothing is
adaptable to general usage is to be approached with an
objective test, rejecting the subjective test employed by the tax
court below.
Under an objective test, no reference is made to the individual
taxpayer's lifestyle or personal taste. Instead, adaptability for
personal or general use depends upon what is generally
accepted for ordinary street wear. An objective test, although
not perfect, provides a practical administrative approach that
allows a taxpayer or revenue agent to look only to objective
facts in determining whether clothing required as a condition
of employment is adaptable to general use as ordinary
streetwear.
- Gonzales Note: Clothing allowance (eg. For uniform, etc.)
can be justified as non-taxable under the employer’s
convenience rule. Washing allowance is also non-taxable
because it is a de minimis.
__________
Travel away from home
Transportation expenses
MCCABE v. COMMS’R (1982)
Petitioner McCabe is a police officer assigned to Manhattan’s
28th Precinct. NYC Regulation required him to be armed at all
times when in the city.
McCabe resided in a remote suburb of NYC, adjacent to New
Jersey. The quickest route going to work would be a commute
straight through Jersey. HOWEVER, New Jersey Law required
anyone carrying a gun to acquire a permit with the New Jersey
gov’t AND also to use it only when engaged in official duty.
Further, the permits were issued only to people whose job
requirements necessitate being armed IN NEW JERSEY.
Alleging that he could not acquire a permit in NJ, McCabe used
his personal automobile as his transportation. Records indicate
that his commuting costs would be reduced if he traveled
through New Jersey.
3-part test:
a. Incurred in pursuit of business – must have direct
connection between expense and trade
b. Necessary and appropriate
c. Not personal to the taxpayer
McCabe’s commute is NOT a deductible – it was his choice to
live far from work. The New York City requirement that police
officers be armed within city limits presented a problem for
appellant simply because of the location of his home. Had he
lived almost any place else in the New York City metropolitan
area of New York State he would not have had to travel through
the neighboring state of New Jersey. The Police Department
required that officers be armed within New York City limits; it
did not require them to be armed otherwise. Thus, the added
expense incurred by appellant did not further the New York
City Police Department's business of preventing crime within
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the City itself.
Fausner v. CIR: When a taxpayer is required to incur additional
travel expenses to carry job-required materials to and from
work, such expenses may be classified as business expenses. 
Although concededly he incurred additional expense, in order
to deduct it he must first show that it was ordinary and
necessary. As noted, the location of one's home is personal and
did not serve to further the business of the taxpayer's employer
in this case.
- General Rule: Expenses incurred as a result of commuting
from home to work are personal and not deductible.
Exception: transporting job-required tools and material to
and from work, travel expenses incurred between residence
and a temporary place of business  business exigencies
Food and lodging
US v. CORRELL (1967)
The respondent, a traveling salesman from Tennessee,
routinely took same-day business trips throughout 1960 and
1961. He would leave on business early in the morning and
come back by dinner. Because he would eat breakfast and
lunch on the road, he deducted the cost of those meals from his
1960 and 1961 income tax return pursuant to § 162(a)(2). §
162(a)(2) allows the taxpayer to deduct "traveling expenses
[incurred] while away from home in the pursuit of a trade or
business." The Commissioner of Internal Revenue
("Commissioner") disallowed the deductions on the ground
that the respondent did not meet the definition of "away from
home" under § 162(a)(2) because his trip did not require him to
sleep or rest. Therefore, the Commissioner ruled that the cost
of the meals was not a § 162(a)(2) business expense, but rather
a "’personal, living’ expense under § 262." The respondent paid
the tax and sued for a refund in the District Court. He received
a favorable verdict in the District Court, which was affirmed by
the Court of Appeals for the Sixth Circuit. The Supreme Court
granted certiorari “in order to resolve a conflict among the
circuits on this recurring question of federal income tax
administration.”
The statute speaks of "meals and lodging . . . away from home"
It speaks of meals and lodging as a single unit. Congress
contemplated a deduction for the cost of meals only where the
travel in question involves lodging as well.
Travel "away from home" to exclude all trips requiring neither
sleep nor rest, regardless of how many cities a given trip may
have touched, how many miles it may have covered, or how
many hours it may have consumed.
HANTZIS v. COMMS’R (1981)
Catherine Hantzis (plaintiff) was a full-time student at Harvard
Law School and resided in Boston, Massachusetts. Hantzis
secured a temporary summer job as a legal assistant in New
York. While working in New York, Hantzis regularly traveled
back to Boston to see her husband. On her federal tax return,
Hantzis deducted her travel and living costs while in New York
as a business expense pursuant to 26 U.S.C. § 162(a)(2). The
federal tax commissioner (commissioner) (defendant)
disallowed Hantzis’s business-expense deduction, determining
that (1) Hantzis’s home for purposes of § 162(a)(2) was New
York, her place of employment, such that her costs were not
incurred while away from home; and (2) Hantzis’s costs were
not incurred in pursuit of a trade or business. Hantzis
petitioned the United States Tax Court for a redetermination.
The tax court rejected both of the commissioner’s positions,
holding that Boston was Hantzis’s home for purposes of §
162(a)(2) because her employment in New York was only
temporary. The tax court entered judgment for Hantzis. The
commissioner appealed to the United States Court of Appeals
for the First Circuit.
Where a taxpayer resides and works at a single location, he is
always home, however defined; and where a taxpayer is
constantly on the move due to his work, he is never "away"
from home. (In the latter situation, it may be said either that he
has no residence to be away from, or else that his residence is
always at his place of employment.)
Mrs. Hantzis' trade or business did not require that she
maintain a home in Boston as well as one in New York. Though
she returned to Boston at various times during the period of
her employment in New York, her visits were all for personal
reasons. It is not contended that she had a business connection
in Boston that necessitated her keeping a home there; no
professional interest was served by maintenance of the Boston
home as would have been the case, for example, if Mrs. Hantzis
had been a lawyer based in Boston with a New York client
whom she was temporarily serving. The home in Boston was
kept up for reasons involving Mr. Hantzis, but those reasons
cannot substitute for a showing by Mrs. Hantzis that the
exigencies of her trade or business required her to maintain
two homes. Mrs. Hantzis' decision to keep two homes must be
seen as a choice dictated by personal, albeit wholly reasonable,
considerations and not a business or occupational necessity.
We therefore hold that her home for purposes of section
162(a)(2) was New York and that the expenses at issue in this
case were not incurred "while away from home."
- Flowers Test: be deductible, an expense must be "incurred
... in the pursuit of a trade or business." In Flowers the
Supreme Court read this phrase to mean that "the exigencies
of business rather than the personal conveniences and
necessities of the traveler must be the motivating factors."
1. From business exigencies rather than personal choice
2. Ordinary and necessary
3. Incurred while away from home
Entertainment and business meals
MOSS v. COMMS’R (1983)
John Moss, who was a lawyer in a Chicago law firm, and his
wife (plaintiffs) deducted the cost of his weekday lunches as a
tax-deductible business expense under § 162(a) of the federal
tax code. The law firm’s eight lawyers knew and worked well
with each other. The lawyers had to meet each day to set their
schedules and trial strategies, but because of their schedules
and the unavailability of office conference space, the lawyers
could only meet over lunch at a nearby restaurant. Clients
rarely attended these lunch meetings. The meetings were brief,
and the lawyers spent no more money at the restaurant than
they would have spent on lunch anywhere else in Chicago. The
commissioner of internal revenue determined that Moss’s
lunch costs were nondeductible personal expenses, and
disallowed the § 162(a) business-expenses deduction that Moss
and his wife sought. The Mosses filed a petition challenging the
disallowance in tax court, which ruled for the commissioner.
The Mosses appealed.
In the instant case, we are convinced that petitioner and his
partners and associates discussed business at lunch, that the
meeting was a part of their working day, and that this time was
the most convenient time at which to meet. We are also
convinced that the partnership benefited from the exchange of
information and ideas that occurred.
But this does not make his lunch deductible any more than
riding to work together each morning to discuss partnership
affairs would make his share of the commuting costs
52
deductible. If only the four partners attended the luncheons,
petitioner's share of the expenses (assuming they were coequal
partners) would have corresponded to his share of the
luncheons. This is not an occasion for the general taxpayer to
share in the cost of his daily sustenance.

We may assume it was necessary for Moss's firm to meet daily

to coordinate the work of the firm, and also, as the Tax Court
found, that lunch was the most convenient time. But it does not
follow that the expense of the lunch was a necessary business
expense. The members of the firm had to eat somewhere, and
the Cafe Angelo was both convenient and not too expensive.
They do not claim to have incurred a greater daily lunch
expense than they would have incurred if there had been no
lunch meetings. Although it saved time to combine lunch with
work, the meal itself was not an organic part of the meeting, as
in the examples we gave earlier where the business objective, to
be fully achieved, required sharing a meal.

Home office expenses135

- The statute does not refer to the "principal office" of the
business. If it had used that phrase, the taxpayer's deduction
claim would turn on other considerations. The statute refers
instead to the "principal place" of business. It follows that
the most important or significant place for the business must
be determined.
- Two primary considerations in deciding whether a home
office is a taxpayer's principal place of business:
a. The relative importance of the activities performed at
each business location – Analysis of the relative
importance of the functions performed at each business
location depends upon an objective description of the
business in question.
b. The time spent at each place.
- There may be cases when there is no principal place of
business, and the courts and the Commissioner should not
strain to conclude that a home office qualifies for the
deduction simply because no other location seems to be the
principal place. The taxpayer's house does not become a
principal place of business by default.

Note: Losses from sales or exchanges of property – see Losses

(p. 44)

135Commissioner v. Soliman (1992) – Nader E. Soliman, an

anaesthesiologist, his residence had a spare bedroom which he used
exclusively as an office. The actual treatment was the most significant
event in the professional transaction. The home office activities, from
an objective standpoint, must be regarded as less important to the
business of the taxpayer than the tasks he performed at the hospital.
The 10 to 15 hours per week spent in the home office measured against
the 30 to 35 hours per week at the three hospitals are insufficient to
render the home office the principal place of business
53