1

SAINT LOUIS UNIVERSITY

SCHOOL OF LAW
Baguio City

OUTLINE IN TAXATION LAW

GENERAL PRINCIPLES OF TAXATION

A. Taxation : Its general concepts

a. Taxation as a power
1. Nature of the power of taxation
Inherent Power
Supreme, Plenary, Unlimited,
Comprehensive
Power to destroy vis--vis Power to Build
a. Sison v. Ancheta, 130 SCRA 654
b. Philippine Health Care Providers, Inc. v.
CIR, 18 September 2009
2. Importance of taxation and the Lifeblood
Doctrine
a. Commissioner v. Algue, 17 February
1988
b. NAPOCOR v. City of Cabanatuan, G.R.
No. 149110, April 9, 2003
3. Justifications for the exercise of the taxing
power
a. Benefits Received Theory
b. Necessity Theory
c. Symbiotic Theory
4. Characteristics of the Power of Taxation
5. Power of Taxation compared with other
powers
6. Objectives of taxation
a. Revenue
b. Non-revenue
i. Regulation/ As an implement of
Police Power
1. PAL v. Edu, 15 August 1988
2. Tio v. Videogram, 151 SCRA
208
ii. General Welfare
1. Lutz v. Araneta, 98 Phil 148
iii. Reduction of Social Inequity
iv. Protectionism (re Special Duties
under the Tariff and Customs
Code; See also RA 8800 re
Safeguard Measures Act)
v. As an implement of the Power of
Eminent Domain
1. CIR v. Central Luzon Drug
Corporation, April 15, 2005
b. Taxation as a process
1. Stages in the tax process
 2

a. Levy/imposition
b. Collection
2. Principles of a sound tax system
a. Fiscal Adequacy
b. Administrative Feasibility
i. Diaz v. Secretary of Finance, GR
No. 193007, 19 July 2011
c. Theoretical Justice
i. Article VI, Section 28, Constitution
B. The concept and characteristics of taxes
a. Enforced
b. Proportionate Contribution
c. Levied by law-making body
d. Having territorial jurisdiction
e. Personal in nature
f. Purposeraising money and other public needs
C. Taxes, in general
1. Tax as distinguished from other forms of exactions
a. Tariff
b. Toll
c. License fee
d. Special assessment
e. Debt

2. Kinds of taxes
a. As to object
i) Personal, capitation, or poll tax
ii) Property tax
iii) Privilege tax
b. As to burden or incidence
i) Direct
ii) Indirect
c. As to tax rates
i) Specifici
ii) Ad valorem
iii) Mixed
d. As to purposes
i) General or fiscal
ii) Special, regulatory, or sumptuary
e. As to scope or authority to impose
i) National internal revenue taxes
ii) Local real property tax, municipal tax
f. As to graduation
i) Progressive
ii) Regressive
iii) Proportionate

D. Limitations on the exercise of the taxing power

a. Inherent Limitations
1. Public Purpose
a. Planters Products Inc. v. Fertiphil
Corporation, GR No. 166006, 14 March
2008
b. Pascual v. Secretary of Public Works,
110 Phil 331
c. Lutz v. Araneta, supra
 3

d. Gomez v. Palomar, 25 SCRA 827

2. Inherently legislative
a. Coverage, Object, Nature, Extent, Situs
i. Pepsi v. Municipality of Tanauan,
69 SCRA 460
ii. Pepsi v. City of Butuan, 24 SCRA
789
b. Exceptions to non-delegation
i. LGUs
ii. Allowed by the Constitution
iii. Purely Administrative Functions
3. Territoriality
(a) Situs of taxation

(i) Meaning

(ii) Situs of income tax

(1) From sources within the Philippines
(2) From sources without the Philippines
(3) Income partly within and partly without the
Philippines

(iii) Situs of property taxes

(1) Taxes on real property
(2) Taxes on personal property

(iv) Situs of excise tax

(1) Estate tax
(2) Donors tax

(v) Situs of business tax

(1) Sale of real property
(2) Sale of personal property
(3) Value-Added Tax (VAT)

4. International Comity
5. Tax exemption of the government
a. LRTA v. CBAA, 12 October 2000
b. MCIAA v. Marcos, 11 September 1996
c. MIAA v. Paranaque, GR No. 155650, 20
July 2006; MIAA v. Pasay City, GR No.
163072, 02 April 2009
b. Constitutional Limitations
1. Due Process Clause
a. CREBA v. Exec. Sec. Romulo, March 9,
2010
b. City of Manila v. Coca-Cola Bottlers
Philippines, GR No. 181845, 4 August
2009 (Direct Duplicate Taxation)
c. Villegas v. Hiu Chiong Tsai Pao Ho, 10
November 1978
d. City of Baguio v. De Leon, 25 SCRA 938
e. Sison v. Ancheta, supra
f. CIR v. CA and Fortune, GR No. 119761, 29
August 1996
 4

g. CIR v. M.J. Lhuiller Pawnshop, Inc. G.R.

No. 150947, July 15, 2003
2. Equal Protection Clause and the Rule on
Uniformity of Taxation
a. Commissioner of Customs v. Hypermix
Feeds Corporation, GR No. 179579, 01
February 2012
b. ABAKADA Guro Party List v. Purisima,
14 October 2008 (Rational Basis Test)
c. Association of Customs Brokers v.
Manila, 93 Phil 107
d. Shell v. Vano, 94 Phil 387
e. Kapatiran v. Tan, 30 June 1988
f. Tan v. Del Rosario, 3 October 1994
g. Tio v. Videogram, supra
h. Ormoc Sugar Central v. Ormoc
Treasurer, 17 February 1968
i. Philreca v. DILG, 10 June 2003
j. Judy Anne Santos v. People, GR No.
173176, 26 August 2008
3. Freedom of Religion
a. Free Exercise Clause
i. American Bible Society v. City of
Manila, 101 Phil 386
ii. Tolentino v. Secretary of Finance
b. Non-establishment Clause
4. Uniformity, Equitability and Progressivity of
Taxation
a. Tolentino v. Secretary of Finance, 25
August 1994
b. City of Baguio v. De Leon, 25 SCRA 398
5. Non-imprisonment for non-payment of poll
taxes
6. Non-impairment clause
a. Casanova v. Hord, 8 Phil 125
b. Cagayan Power and Light Co. v. CIR, GR
No. 60126, September 25, 1985
c. MERALCO v. Province of Laguna, G.R. No.
131359, May 5, 1999**
d. RCPI v. Provincial Assessor of South
Cotabato, GR No. 144486, 13 April 2005
e. City Government of Quezon City v.
Bayantel, G.R. No. 162015, March 6,
2006
f. Smart Communications v. City of Davao,
16 September 2008
g. Quezon City v. ABS-CBN Broadcasting, 6
October 2008
7. Tax exemption of traditionally exempted
taxpayers
a. Lladoc v. CIR, 14 Phil 292
b. Abra Valley College v. Aquino, 15 June
1988
c. Herrera v. QC Board of Assessment
Appeals, 30 September 1961
 5

d. Bishop of Nueva Segovia v. Provincial

Board of Ilocos Norte, 51 Phil 352
e. Lung Center of the Philippines v. QC, 29
June 2004
f. CIR vs. St. Luke's Medical Center, Inc.,
G.R. Nos. 195909 and 195960 dated 26
September 2012
8. Tax exemption of non-stock, non-profit
educational institutions
a. Angeles University v. City of Angeles, GR
No. 189999, 27 June 2012
b. RMC 76-2003
c. Department of Finance Order No. 137-87,
dated Dec. 16, 1987
d. CIR v. CA, 14 October 1998 (YMCA)
9. Origin of Revenue, Appropriation and Tariff
Bills
a. ABAKADA Guro Party List, et al., v. The
Honorable Executive Secretary Eduardo
Ermita, et al., G.R. No. 168056, 1
September 2005
10. Flexible Tariff Clause
a. ABAKADA Guro Party List, et al., v. The
Honorable Executive Secretary Eduardo
Ermita, et al., G.R. No. 168056, 1
September 2005
11. Non-impairment of SCs Jurisdiction
12. Taxation by LGUs
13. Voting Requirement re: Grant of Tax
Exemptions
c. The Doctrine of Judicial Non-interference
d. Taxpayers Suit
E. Forms of Escape from Taxation
a. Resulting to Losses governments revenue
1. Tax Evasion
2. Tax Avoidance
3. Tax Exemption
a) Meaning of exemption from taxation b)
Nature of tax exemption
c) Kinds of tax exemption
(i) Express
(ii) Implied
(iii) Contractual
d) Rationale/grounds for exemption
e) Revocation of tax exemption
f) Compromise vs Tax Exemption
g) Tax amnesty vs Tax Exemption
(i) Definition of Tax Amnesty
(ii) Distinguished from tax exemption

b. Not Resulting to Losses

1. Shifting
(i) Ways of shifting the tax burden
(ii) Taxes that can be shifted
(iii) Meaning of impact and incidence of
taxation
 6

2.Capitalization
3.Transformation
c. IllustrativeCases:
1.Republic v. Heirs of Cesar Jalandoni, 20 Sept
1965
2. CIR v. Yutivo and Sons (1961)
3. CIR v. Norton and Harrison, 31 August 1964
4. Philippine Acetylene v. CIR, 17 August 1967
(compare with CIR v. Pilipinas Shell
Corporation, GR No. 188497, 19 February
2014)
5. CIR v. American Rubber, 29 November 1966
6. CIR v. John Gotamco and Sons, 27 February
1987
7. Maceda v. Macaraig, 31 May 1991, 8 June
1993
8. CIR v. PLDT, GR 140230, 15 December 2005
9. Silkair Singapore v. CIR, GR No. 173594, 6
February 2008
10. Contex v. CIR, G.R. No. 151135, July 2,
2004
11. CIR v. Seagate Technology (Phils.), GR
No. 153866, 11 February 2005
12. CIR v. Estate of Benigno Toda Jr., G.R.
No. 147188. September 14, 2004
13. John Hay Peoples Alternative Coalition v.
Lim, et al., G.R. No. 119775, October 24, 2003
F. Rules of Construction of Tax Laws
a. CIR v. CA and Ateneo, 18 April 1997
b. Tax laws

(i) General rule

(ii) Exception
c. Tax exemption and exclusion
(i) General rule
(ii) Exception
d. Tax rules and regulations
(i) General rule only

e. Penal provisions of tax laws

f. Non-retroactive application to taxpayers
(i) Exceptions

g. The Concept of Tax Laws

a. Nature
b. Sources
i. Constitution
ii. Statutes
iii. Issuances by the Secretary of Finance
iv. Administrative Issuance by the BIR
1. CIR v. CA and Fortune, GR No. 119761, 29
August 1996
2. PB Com v. CIR, 28 January 1999
v. Tax Ordinances
vi. Tax Treaties
1. CIR v. SC Johnson and Son, 26 June 1999
 7

2. Deutsche Bank AG Manila Branch vs. Com

missioner
of Internal Revenue, 19 August 2013
c. Some principles involving taxation
i. Prospectivity
1. CIR v. Acosta, GR154068, 3 August 2007
ii. No Estoppel Against the Government
1. CIR v. Petron Corporation, GR No. 185568, 21
March 2012
iii. Imprescriptibility
iv. Double Taxation
1. Strict sense
2. Broad sense
3. Constitutionality of double taxation
4. Modes of eliminating double taxation
v. No Set-Off
1. Philex Mining Corp v. CIR, August 29, 1998
2. Point of Interest: Section 76, NIRC

INCOME TAXATION
BASIC CONCEPTS OF PHILIPPINE INCOME TAXATION

vi. The Concept of Income

1. Income, defined
a. Conwi v. CIR, 213 SCRA 83
2. Capital, defined
3. Income v. Capital
a. Madrigal v. Rafferty, 38 Phil 414
vii. Tests Applied in Determining the Existence of Income
1. Severance Test/Realization Test
2. Tax Benefit Rule
3. The Economic Benefit Test or the doctrine of
proprietary interest
4. Claim of Right Doctrine
5. Income from Whatever Source
viii. Requisites for the Taxability of an Income
1. Existence of a Gain
2. Realization of a Gain
a. Actual
b. Constructive (e.g. Sec 26, 73D)
c. Presumptive (e.g. Sec 24 d)
3. Gain must not be excluded (Section 32B)
ix. The Philippine Income Tax System
1. Types of Income Tax Systems
a. Schedular System v. Global System
i. Sison v. Ancheta, GR No. L-59431, 25
July 1984
ii. Discussion on semi-global; or semi-
schedular tax system
b. Schedular Rates of Taxes v. Schedular
System
2. The Philippine Income Tax System as a Semi-
Global/Mixed System
x. Criteria in Imposing Philippine Income Taxes
1. Place Where Income was Earned
2. Residency
 8

3. Citizenship
xi. The Income Taxpayers and the General Principles of their Taxability
(Tax Situs for Income Tax Purposes)
1. Section 23 of the NIRC
2. Individual Taxpayers (Sections 24-26)
3. Corporations (Sections 27 to 30)
a. Please see RA 9337
4. Estates and Trusts (Sections 60-66)
5. Definition of Terms Under Section 22
xii. Source of Income (Section 42)
1. Services
a. CIR v. Marubeni Corp., GR No. 137377, 18
December 2001
b. CIR v. Juliane Baier-Nickel, GR No.
153793, 29 August 2006
2. Interest Income
a. NDC v. CIR, 151 SCRA 472
3. Dividends
4. Rent and Royalties
a. Royalty v. Compensation for Services &
Business Profits
i. CIR v. Smart Communications, GR No.
179045-46, 25 August 2010
5. Sale of Property
a. Real Property
b. Personal Propertypassage of title test
c. Tax treatment of properties produced within
but sold without or produced without but
sold within
d. Special Rules Re Software: RMC 44-
2005; BIRRuling DA-ITAD 13-08 dated
February 26, 2008.

DETERMINATION OF GROSS INCOME AND THE RULES

ON INCLUSION AND EXCLUSION FROM GROSS INCOME

A. The Concept of Gross Income

a. Gross Income, definition
i. CIR v. Filinvest Development Corporation, GR No.
163653, 19 July 2011
b. Gross Income v. Gross Sales/Receipts
B. The General Rules on Inclusion and Exclusion of Income Items
(Sections 31, 32A and 32B)
C. The Rules as Applied to Compensation Income and Other Benefits
a. Taxability of Compensation Income and the Application of
the Employers Convenience Rule
i. Henderson v. Collector, 1 SCRA 649
b. Retirement Payments, Pensions and Gratuities
i. RA 7641, RA 4917, Section 60B
c. Separation Payments
i. PLDT v. CIR, GR No. 157264, 31 January 2008
d. Leave Benefits
e. 13th Month Pay and other bonuses
f. SSS/GSIS Benefits
g. SSS/GSIS/PhilHealth/Pag-ibig/Union Dues
i. RMC 27-2011
h. Fringe Benefits (Section 33, Rev. Regs. 3-98 and 10-2000)
a. De Minimis Benefits (RR 2-98, 3-98, 5-2008 and
5-2011)
 9

b. Revenue Regulations No. 1-2015 dated

January 5, 2015
D. The Rules as Applied to Trade/Business or Professional Income
E. The Rules as Applied to Passive Income
a. Royalties, prizes and winnings
b. Interest Income from bank deposits and deposit substitutes
i. On Philippine Currency
ii. On Foreign Currency
iii. Long-term investments
c. Dividends
i. CIR v. CA and ANSCOR, G.R. No. 108576, January 20,
1999
ii. Section 73B
d. Sale of Real Property classified as capital asset
i. Forced sales
ii. Sale of principal residence
iii. Alternative taxation in case of sale to government
iv. (Note: If the property sold is an ordinary asset: CIR
v. UCPB, GR No. 179063, 23 October 2009)
v. Issues re foreclosed properties:
a. RMC 55-2011 (CGT on foreclosure sales)
b. Supreme Transliner Inc. v. BPI Family Savings
Bank, G.R. No. 165617, 25 February 2011
vi. RMC 007-12
e. Sale of shares of stocks not listed or traded in the stock
exchange
F. The Rules as Applied to Other Sources of Income
a. Cancellation of Indebtedness
b. Income from Lease and Leasehold Improvements
c. Income from Installment Transactions
i. Banas v. CA, G.R. No. 102967. February 10, 2000
d. Income from Long-Term Construction Projects
G. Exclusions by reason of special laws

DEDUCTIONS FROM GROSS INCOME

A. The Concept of Allowable Deductions

a. Deductions, defined
b. Deductions v. Exclusions
c. Deductions v. Cost
d. Deductions, when allowed
e. Deductions v. Tax Credit
i. CIR v. Central Luzon Drug Corp., GR No. 159647, 15
April 2005
ii. CIR v. Central Luzon Drug Corp., GR No. 148512, 26
June 2006 and Bicolandia Drug Corp. v. CIR, GR No.
142299, 22 June 2006 (See also: CIR v. Central Luzon
Drug Corp., GR No. 159610, June 2008, in relation to
RA9257)
iii. Carlos Superdrug Corporation v. DSWD, GR No. 166494,
29 June 2007
B. Kinds of Allowable Deductions
C. The Optional Standard Deduction (RA9504)
D. Itemized Deductions: Concepts, Kinds, Rules and Requisites
a. General Business Expenses
i. The All-Events Test
1. CIR v. Isabela Cultural Corporation, GR No.
172231, 12 February 2007
ii. Capital Expenditure v. Ordinary Expenditure
iii. Rule re: Proprietary Educational Institutions
 10

iv.
Reasonableness Test
1. CIR v. General Foods, Inc., G.R. No. 143672. April
24, 2003
2. CM Hoskins v. CIR, GR No. L-24059, 28 November
1969
v. Representation Expenses, Rev. Regs. 10-2002
vi. Substantiation Rule and the Cohan Rule
1. Gancayco v. Collector, 1 SCRA 980
2. H. Tambunting, Inc. vs. CIR, 29 July 2013: Its
reliance on withholding tax returns, cash
vouchers, lessors certifications, and the contracts
of lease was futile because such documents had
scant probative value. As the CTA En Banc
succinctly put it, the law required Tambunting to
support its claim for deductions with the
corresponding official receipts issued by the
service providers concerned.
b. Bad Debts
i. Philex Mining Corporation v. CIR, GR No. 148187, 16
April 2008
ii. Tax Benefit Rule
c. Interests
i. Requisites for Deductibility
ii. Tax Arbitrage Scheme
1. Rev. Regs. 13-2000
iii. On Capital Expenditure
iv. Rules re: deductibility
v. Interest on tax delinquencies
1. CIR v. Itogon Suyoc Mines, GR No. L-25399, 29
July 1969
d. Taxes
i. Requisites for Deductibility-:
a) must be in connection with taxpayers
business;
b) tax must be imposed by law on, and payable
by, taxpayer (direct tax); and
c) paid or incurred during the taxable year
ii. Deductible Taxes

iii. Non-deductible taxes

1. Income Tax
2. Estate and Donors Tax
3. Special Assessments
4. Excess Electric Consumption Tax
5. Foreign income tax, war profits and excess profit
tax, if the taxpayer makes use of tax credit
6. Final taxes being in the nature of income tax

e. Depreciation- is the gradual diminution in the useful (service)

value of tangible property used in trade, profession or business
resulting from exhaustion, wear and tear and obsolescence.

Requisites to be deductible:
1) Must be reasonable;
2) Must be on property used in the conduct of the
business;
3) Must be expensed (charged off) during the taxable
year; and
4) Schedule of allowance must be attached to the return
 11

i.
Properties subject to depreciation
1. Depreciable Assets:
a. Tangible property used in trade or business
b. Intangible property like patent copyrights and
franchises
2. Non-depreciable Assets:
a. Inventories or stock
b. Land
c. Bodies of Minerals subject to depletion
d. Personal effects and clothing

ii. Allowable modes of depreciation

1. Straight line method
2. Declining balance method
3. Sum of the years digit method
4. Any other method which may be prescribed by
Dept. of Finance upon recommendation of the CIR.

f. Depletion the exhaustion of natural resources like mines and

oil gas wells as a result of production or severance from such
mines or wells.

g. Losses
i. Ordinary Losses- incurred in trade, business, exercise, or
practice of profession.
1. H. Tambunting, INc. vs. CIR, 29 July 2013

G.R. No. 173373 July 29, 2013

To be entitled to claim a tax deduction, the taxpayer must competently establish the factual
anddocumentary bases of its claim.

Facts:

H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly licensed and authorized
toengage in the pawnshop business, appeals the adverse decision promulgated on April
24,2006,1 whereby the Court of Tax Appeals En Bane (CTA En Bane) affirmed the decision of the
CTAFirst Division ordering it to pay deficiency income taxes in the amount of P4,536,687.15 for
taxableyaar 1997, plus 20% delinquency interest computed from August 29, 2000 until full payment,
butcancelling the compromise penalties for lack of basis.

On June 26, 2000, the Bureau of Internal Revenue (BIR), through then Acting Regional
DirectorLucien E. Sayuno of Revenue Region No. 6 in Manila, issued assessment notices and
demandletters, all numbered 32-1-97, assessing Tambunting for deficiency percentage tax, income
tax andcompromise penalties for taxable year 1997,2as follows:

On July 26, 2000, Tambunting instituted an administrative protest against the assessment noticesand
demand letters with the Commissioner of Internal Revenue.3

On June 29, 2006, the CTA En Banc also denied Tambuntings motion for reconsideration for its
lackof merit.

Issue: Tambunting argues that the CTA should have allowed its deductions because it had beenable
to point out the provisions of law authorizing the deductions

Ruling:

The petition has no merit.

We affirm the aforequoted ruling of the CTA En Banc.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in
strictissimijuris against the taxpayer is well settled. 20 Corollary to this rule is the principle that when a
taxpayerclaims a deduction, he must point to some specific provision of the statute in which that
deduction isauthorized and must be able to prove that he is entitled to the deduction which the law
allows.21 Anitem of expenditure, therefore, must fall squarely within the language of the law in order to
bedeductible.22 A mere averment that the taxpayer has incurred a loss does not automatically warrant
a deduction from its gross income.
 12

ii. Capital Losses- deductible only to the extent of capital

gains:

a. Losses from sale/ exchange of capital assets

b. Losses resulting from securities becoming worthless
and which are capital assets
c. Losses from short sale of properties
d. Losses due to failure to exercise privilege or option to
buy/sell property

iii. Special Losses

a. Wagering Losses deductible only to the

extent of gain/ winnings. [Sec. 34(D)(6)]

b. Losses on Wash Sales of Stocks not

deductible because these are artificial loss

Wash sales a sale or other disposition of

stock or securities where substantially identical
securities are acquired or purchased within 61-day
period, beginning 30 days before the sale and
ending 30 days after the sale. [Sec. 38]
General rule: Losses from wash sales are not
deductible.
Exception: When the sale 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, losses from such sale is
deductible.

c. Abandonment losses in petroleum operation

and producing well. [Sec. 34 (D) (7)]
a. In case a contract area where
petroleum operations are undertaken is
partially or wholly abandoned, all accumulated
exploration and development expenditures
pertaining thereto shall be allowed as a
deduction.
b. In case a producing well is
abandoned, the unamortized cost thereof, as
well as the undepreciated cost of equipment
directly used therein, shall be allowed as
deduction in the year the well, equipment or
facility is abandoned.

d. Losses of mines other than oil and gas wells

e. Losses due to voluntary removal of building

incident to renewal/replacements
deductible expense from gross income.

f. Loss of useful value of capital assets due to

changes in business conditions deductible
up to the extent of actual loss sustained
 13

(after adjustment for improvement,

depreciation and salvage value).

g. Losses from sales or exchanges of property

between related taxpayers losses of this
nature are not deductible but gains are
taxable.

h. Losses of farmers if incurred in the

operation of farm business, it is deductible.

iv. Other Kinds of Losses

v. NOLCO (Net Operating Loss Carry Over)

1. Rev. Regs. 14-2001

2. PICOP v. CIR, GR No. L-106949, 1 December 1995
3. 75% interest retention rule

NOLCO:
- Refers to the excess of allowable deductions over gross income of
the business for any taxable year which had not been previously offset as
deduction from gross income.
- Can be carried over as a deduction from gross income for the net 3
consecutive years immediately following the year of such loss.
- For mines, other than oil and gas well, net operating loss incurred in
any of the first ten years of operation may be carried over for the next 5
years.

Requirements:
1. The taxpayer was not exempt from income tax in the year of such
net from operating loss;
2. There has been no substantial change in the ownership of the
business or enterprise.
** There is no substantial change in the ownership of the business or
enterprise when:
a. Not less than 75% in nominal value of the outstanding
issued shares is held by or on behalf of the same persons; or
b. Not less than 75% of the paid up capital is held by or on
behalf of the same person.
3. Property connected with the trade, business or profession, if the
loss arises from fire, storm, and other casualties.

Net operating loss means the excess of allowable deduction over gross income of the
business in a taxable year.

Revenue Regulation 14-2001 implements a statute that the allowance to net operating loss-
carry over will be a deduction from gross income.

Accordingly, the net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year which had not been previously offset as
deduction from gross income shall be carried over as a deduction from gross income for the
next three (3) consecutive taxable years immediately following the year of such loss; Provided,
however, that any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction under this Subsection: Provided, further,
that a net operating loss carry-over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that

1. Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if
the business is in the name of a corporation, is held by or on behalf of the same persons; or
2. Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the same persons.
 14

vi. Casualty Losses

1. RMO 31-2009, 16 October 2009
vii. Requisites for Deductibility of each kind of loss.

h. Charitable Contributions
Requisites to be deductible:
1. The contribution/gift must be actually paid.
2. Given to the organizations specified in the code.
3. The Net Income of the organization must not inure
to the benefit of any private stockholder/individual.

ii. With Limitation

Donations to the following shall be allowed LIMITED
deductibility:
1. Phil govt or any of its agencies or any political
subdivision thereof exclusively for public purposes;
2. Accredited domestic corporation or associations
organized and operated exclusively for religious,
charitable, scientific, youth and sports devt,
cultural or educational purposes, or for the
rehabilitation of veterans;
3. Social welfare institutions, or
4. Non-govt organizations.

>The aforementioned donations shall be deductible only to

the extent:
- Not in excess of 5% of taxable income in case of a
corporation
- Not in excess of 10% of the taxable income in case of an
individual

iii. Deductible in Full

Donations to the following shall be allowed full
deductibility:

1. Philippine government or to any of its agencies, or

political subdivisions, including fully owned
government corporations undertaking priority
activities;
2. Foreign institutions or international organizations,
pursuant to agreements, treaties or commitments
entered into by the Phil. Govt or special laws;
3. Donations to certain accredited NGOs.

i. Pension Trusts a deduction applicable only to the employer on

account of its contribution to a private pension plan for the
benefit of its employees. This deduction is purely business in
character.

Requisites to be deductible:
1. The employer must have established a pension or
retirement plan to provide for the payment of
reasonable pensions to his employees;
2. The pension plan is reasonable and actuarially
sound;
3. It must be funded by the employer;
4. The amount contributed must no longer be subject
to the control and disposition of the employer;
 15

5. The payment has not yet been allowed as a

deduction; and
6. The deduction is apportioned in equal parts over a
period of 10 consecutive years beginning with the
year in which the transfer of payment is made.

j. Research and Development Costs

Requisites to be deductible:
1. If incurred in connection with the trade, business
or profession of the taxpayer; and
2. If not charged to capital account

Treatment of the R&D and expenditures:

At the option of the taxpayer, the R&D expenditures may

be treated as deferred expenses:
1. If incurred in connection with the trade, business, or
profession of the taxpayer;
2. If not treated as expense; and
3. If chargeable to capital account not subject to
depreciation.
If treated as deferred expense, the R&D shall be amortized over
a period of not less than 60 months.

Expenses not considered as R&D:

1. Expenditures for the acquisition or improvement of land, or

for the improvement of property to be used in connection with
R&D of a character which is subject to depreciation and
depletion; and

2. Expenditures paid or incurred for the purpose of ascertaining

the existence, location, extent, or quantity of any deposit or ore
or other mineral including oil or gas.

E. Other Forms of Deductions

SPECIAL INCOME TAX TREATMENT OF GAINS AND LOSSES

FROM DEALINGS IN PROPERTY

A. Background of the Special Rules

B. Ordinary Assets v. Capital Assets
a. China Banking Corporation v. Court of Appeals, G.R. No.
125508. July 19, 2000
C. Rules on Ordinary Gains and Losses
D. Special Rules on Capital Transactions (Capital Gains and Losses)
a. Rules on Real Property classified as capital asset
b. Rules on gains/losses from sale of shares of stocks not listed or
traded in the stock exchange by non-dealers in securities
c. Rules regarding other capital assets
i. Loss Limitation Rule
ii. Holding Period Rule
iii. Net Capital Loss Carry-Over (NCLCO) Rule
E. Special Capital Transactions
F. Wash Sales
a. Revenue Regulations 6-2008, April 22, 2008
G. Installment Sales v. Deferred Sales
a. Banas v. CA, G.R. No. 102967. February 10, 2000
 16

H. Instances when gains are taxable but losses are non-deductible

I. Instances when gains and losses are not recognized for tax purposes
a. Section 40, NIRC
b. CIR v. Filinvest Development Corporation, G.R. No. 163653, 19
July 2011

TAXATION OF INCOME OF INDIVIDUAL TAXPAYERS

A. Classification of Individual Income Taxpayers and the Factors

Affecting Their Taxability
B. Rules Applicable to Returnable Income
C. Rules Applicable to Passive Income
D. Personal Exemptions (Please see RA 9504)
a. Basic Personal Exemptions
b. Additional Exemptions
c. Change of Status
i. Pansacola v. CIR, GR No. 159991, 16 November 2006
E. Taxation of Married Individuals
F. Taxation of Minors
G. Tax Returns and Other Administrative Requirements

TAXATION OF INCOME OF CORPORATE TAXPAYERS

A. Definition of a Corporation
B. Tests in Determining the Existence of a Corporate Taxpayer
C. The Tests Applied to Partnerships, Co-ownerships and Estates
a. Ona v. CIR, 45 SCRA 74
b. Pascual and Dragon v. CIR, 166 SCRA 560
c. Obillos v. CIR, 139 SCRA 436
d. Afisco Insurance Corp. v. CIR, 1999
e. Evangelista v. CIR, 102 Phil 140
D. Kinds of Corporations
H. Rules Applicable to Returnable Income
a. Please See R.A. 9337
I. Rules Applicable to Passive Income
a. Tax Sparing Rule
i. CIR v. Proctor and Gamble, 204 SCRA 378
E. Taxes Peculiar to Corporations
a. Minimum Corporate Income Tax
i. CREBA v. Exec. Sec. Romulo, supra
ii. Manila Banking Corporation v. CIR, GR No. 168118, 28
August 2006
iii. CIR v. PAL, GR No. 180066, 7 July 2009
b. Optional Corporate Income Tax
c. Improperly Accumulated Earnings Tax
i. Cyanamid Phils. v. CA, G.R. No. 108067, January 20,
2000 (Immediacy Test)
F. Special Corporations
a. Exempt Organizations and Corporations
i. R.A. 10026 (Re: Tax Exemption of Local Water Districts)
ii. RMC 51-2014
iii. Philippine Amusement and Gaming Corporation vs.
Bureau of Internal Revenue Supreme Court (En
Banc), G.R. No. 215427 promulgated December 10,
2014
b. Corporations enjoying preferential tax rates
i. Domestic
ii. Foreign
1. Branch Profit Remittance Tax
 17

2. Gross Philippine Billings

a. British Overseas Airways Corp. v. CIR, 149
SCRA 395 vis--vis Section 23 A (3) (b) and
Rev. Regs. 15-2002
b. South African Airways v. CIR, GR No.
180356, February 16, 2010
c. RA No. 10378, or the Act Recognizing
the Principle of Reciprocity as Basis for
the Grant of Income Tax Exemptions to
International Carriers, an international
carrier doing business in the
Philippines may avail itself of exemption
from tax on GPB from carriage of
persons and their excess baggage,
provided its home country also grants
income tax exemption to Philippine
carriers. Considering that Qatar grants
a reciprocal tax exemption to Philippine
air carriers under its Income Tax Law, A
Co. is exempt from income tax on its
GPB from the carriage of persons and
their excess baggage. The exemption
does not apply to transport of cargo and
mail.
G. Tax Returns and Other Administrative Requirements
a. Paseo Realty and Development Corp. v. CA, G.R. No. 119286,
October 13, 2004
b. CIR v. Mirant (Philippines) Operations Corporation, G.R. No.
171742, 15 June 2011
c. CIR v. PL Management International Philippines, Inc., G.R No.
G.R. No. 160949, April 4, 2011.

TAXATION OF ESTATES AND TRUSTS

A. Taxation of Income of Estates

B. Taxation of Income of Trusts
a. Miguel J. Ossorio Pension Foundation, Inc. v. CA and CIR, GR
No. 162175, 28 June 2010
C. Tax Returns and Other Administrative Requirements

END OF OUTLINE