1.

What is the definition of “gross income”

under the NIRC?
A: Except when otherwise provided, gross income means all income derived from
whatever source, including (but not limited to) to the following items: [CG2I- R2DAP3]

1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional
partnership. (Sec. 32 [A], NIRC)

Note: Gross income under Sec. 32 is different from the limited meaning of Gross Income
for purpose of Minimum Corporate Income Tax (MCIT), which means Gross Sales less
Sales Returns, Discounts, and Allowances and Cost of Goods Sold.

What is taxable income or net income?

A: All pertinent items of gross income specified in the NIRC, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income by the
NIRC or other special laws.

Q: Distinguish gross income from net income.

A: GROSS INCOME NET INCOME

As to deductions
Allows no deductions Allows deductions
As to exemptions
Grants no exemptions Grants exemptions
As to tax base
Gross Income Net Income
Advantages/Disadvantages
Simplifies the income tax system Confusing and complex process
of filing income tax return
Substantial reduction in corruption and Vulnerable to corruption on
tax evasion as the exercise of discretion, account of margin of discretion in
to allow or disallow deductions, is
dispensed with
More administratively feasible
Does away with wastage of manpower
and supplies
the grant of deductions
Provides equitable releifs in the
form of deductions, exemptions
and tax credit
Tax audit minimizes fraud

2. Who is the proper claimant for additional

deduction for married individual
In case of married individuals and both are working, who is entitled to additional
exemptions?
A: Additional exemption for dependents shall only be allowed to one of the spouses.
The husband shall be the proper claimant unless he explicitly waives his right in favor of
the wife in the Application for Registration (Sec. 35 [B], NIRC)

SEC. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby amended to read as follows:

"SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

"(A) In General. - For purposes of determining the tax provided in Section 24(A) of
this title, there shall be allowed a basic personal exemption amounting to Fifty
thousand pesos (P50,000) for each individual taxpayer.

"In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.

"(B) Additional Exemption for Dependents. - There shall be allowed an additional

exemption of Twenty-five thousand pesos (25,000) for each dependent not
exceeding four (4).

"The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.

3. Requisites for deductibility of taxes from

gross income.
• Paid or incurred within the taxable year.
• Paid or incurred in connection with taxpayer's business
• Deductible only by the person upon whom the tax is imposed by law.
4. Are income from theft or gambling taxable?
In ust reviewer etoh tanong, Income from juetengtaxable?-pero ung answer is answerable sa tanong
na bigay --

• Taxable, for gross income includes "all income derived from whatever source,"
(Sec. 32 [A], NIRC) interpreted as all income not expressly excluded or exempted
from the class of taxable income, irrespective of the voluntary or involuntary
action of the taxpayer in producing the income. Thus, the income may proceed
from a legal or illegal source such as from jueteng. Unlawful gains, gambling
winnings, etc. are subject to income tax. The NIRC stands as an indifferent neutral
party on the matter of where the income comes from. (CIR v. Manning, GR L-
28398, Aug. 6, 1975)

5. Give 3 kinds of business expenses.

• Compensation for Personal services
• Travelling Expenses
• Advertising and Promotional Expenses
• Rent Expense
• Cost of material and supplies
• Repairs

6. Explain deductions for health and /or

hospitalization insurance
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 dependents shall be entitled to this deduction.

7. Taxability of Partnership

Registration of a partnership is immaterial for income tax purposes. It is taxable as long

as the following requisites concur: AI
1. There is an Agreement, oral or writing, to contribute money, property, or industry to
a common fund; and
2. There is an Intention to divide the profits

8. Explain the convenience of the employer rule

This refers to a benefit provided by the employer for the employee but which would be
more beneficial to the employer than to the employee, as such they are not considered
as taxable.

9. Proprietary Doctrine

10. Enumerate the individual taxpayers and

their taxable income
SOURCES OF INCOME TAX BASE

RC W/N & W/O TAXABLE INCOME

NRC WITHIN TAXABLE INCOME
RA WITHIN TAXABLE INCOME
NRA-ETB WITHIN TAXABLE INCOME
NRA-NETB WITHIN TAXABLE INCOME

11. Cohan Rule Principle

If there is a showing that expenses have been incurred but the exact amount thereof
cannot be ascertained due to the absence of documentary evidence, it is the duty of the
BIR to make an estimate of deduction that may be allowed in computing
the taxpayer's taxable income bearing heavily against the taxpayer whose inexactitude
is of his own making. A disallowance of 50% of the taxpayer's claimed deduction is valid

12. What are exclusions from gross income?

—pag tig apot na exclusions lang uni.

A: Exclusions from gross income refer to the removal of otherwise taxable items from
the reach of taxation either because they:
1. Represent return of capital;
2. Are not income, gain or profit;
 3. Are subject to another kind of internal revenue tax;
4. Are income, gain or profit that are expressly exempt from income tax under the
Constitution, Tax treaty, Tax Code, or general or a special law.

Pero pag tig apot kung anong items—uni

What are those items that are excluded in gross income and shall be exempt from
gross income taxation?

These are: [GLAM-RIC]

1. Gifts, bequests and devises
2. Life insurance proceeds
3. Amount received by insured as return of premium
4. Retirement benefits, pensions, gratuities, etc.
5. Income exempt under treaty
6. Compensation for injuries or sickness
7. Miscellaneous items. (13P2I2G3)
a. 13thmonth pay and other Benefits;
b. Prizes and awards
c. Prizes and awards in sports competitions
d. Income derived by foreign government
e. Income derived by the government or its political subdivisions
f. GSIS, SSS, Medicare and other contributions
g. Gains from the sale of bonds, debentures or other certificate of
indebtedness
h. Gains from redemption of shares in mutual fund

13. Why is the proceeds of life insurance

excluded from Gross Income?
Proceeds of life insurance - not taxable
Reason: indemnity rather than as gain or profit. Insurance contract is a contract of
indemnity.
Exception - interest payments shall be included in gross income if such amount is held
by the insurer under the agreement to pay interest thereon.
However, proceeds of life insurance where the beneficiary is revocable is subject to
estate tax. The excluslon from income taxation applies regardless of who the beneficiary
is, whether a family member, or other Individual.

14. Distinguish MCIT from regular income tax

Under the normal income tax, the taxable income of a corporation during each taxable
year is multiplied with the applicable rate of 30%.
Note: The resulting amount should then be compared with the income tax payable using
the MCIT. Whichever is higher between the two shall be the tax due.
It is applicable to domestic and resident foreign corporations.

WHILE
Minimum Corporate Income Tax
Under the MCIT, tax is imposed on a corporation at the rate of 2% based on gross
income
It is applicable to domestic and resident foreign corporations which are subject to
regular income tax.
.
Q: What are the instances when the MCIT is imposed?

A: The MCIT shall be imposed:

1. When there is zero or negative taxable income; or
2. Whenever the amount of the minimum corporate income tax is greater than the
normal tax of 30% due on the taxable income due from the corporation.
Note: The reason for MCIT is to forestall the prevailing practice of corporations of
overstating deductions, in order to reduce their income tax payments.

15. Immediacy Test.

To determine the 'reasonable needs' of the business in order to justify an accumulation
of earnings, the Courts of the United States have invented the so-called "Immediacy
Test" which construed the words 'reasonable needs of the business' to mean the
immediate needs of the business, and it was generally held that if the corporation did
not prove an immediate need for the accumulation of earnings and profits, the
accumulation was not for the reasonable needs of the business, and the penalty tax
would apply.

16. What items are not deductible from gross

income

A: In computing net income, no deduction shall in any case be allowed in respect to:

1. Personal, living or family expenses – these are personal expenses and not related to
the conduct of trade or business
2. Any amount paid out for new buildings of for permanent improvements, or
betterments made to increase the value of any property or estate – these are capital
expenditures added to the cost of the property and the periodic depreciation is the
amount that is considered as deductible expense
 Note: Shall not apply to intangible drilling and development costs incurred in
petroleum operations which are deductible under Subsection (G) (1) of Sec. 34 of
the NIRC

3. Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made
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 (Sec. 36 [A], NIRC)
5. Losses from sales or exchanges of property between related parties (Sec. 36 [B], NIRC)
6. Interest expense, bad debts, and losses from sales of property between related
parties
7. Non-deductible interest
8. Non-deductible taxes
9. Non-deductible losses
10. Losses form wash

17. Deductibility of Charitable and Educational

Institutions

CHARITABLE AND OTHER CONTRIBUTIONS

KINDS:
(a .) Ordinary - subject to limitation;
(b.) Special - deductible in full.

REQUISITES FOR DEDUCTIBILITY

a.) Contribution or gift must be actually paid during the taxable year.
b.) Must be given to the organization specified by Tax Code or special law.
c.) The net income of the institution must not inure to the benefit of any member or
individual.

CONTRIBUTIONS DEDUCTIBLE IN FULL

a.) Donations to the government or political subdivision including fully-owned
government corporation
to be used exclusively in undertaking priority activities in:
a. education;
b. health;
c. youth and sports development;
d. hum<'ln settlement;
e. science and culture;
f. economic development.
b.) Donations to international organizations or foreign institutions in compliance with
agreements
or treaties.
c.) Donations to accredited non-government organizations (NGO).

CONTRIBUTION SUBJECT TO LIMITATION (5% or 10% of Net Income before Charitable

Contribution)
A. Not in accordance with priority plan.
B. Conditions are not complied with.
C. Donation to the g0vernment of the Philippines
D. or political subdivision exclusive for public
E. purposes.
F. Donations to domestic corporations organized
G. exclusively for:
a. religious;
b. charitable;
c. scientific;
d. cultural;
e. educational;

18. Can bir suspend the implementation of

MCIT?
Can the payment of MCIT be suspended?
A: Yes. The Secretary of Finance, upon recommendation of the BIR, may suspend the
imposition of MCIT on any corporation which suffers loss on account of: [PFL]

1. Prolonged Labor Dispute – arising from a strike staged by the employees which
lasted for more than 6 months within a taxable period and which has caused the
temporary shutdown of business operations.

2. Force Majeure – a cause due to an irresistible force as by ‘Act of God’ like

lightning, earthquake, storm, flood and the like. It shall also include armed
conflicts like war or insurgency.

3. Legitimate Business Reverses – include substantial losses due to fire, theft or

embezzlement or for other economic reason as determined by the Secretary of
Finance.

19. Define Compensation Income and

Allowable Deductions
COMPENSATION INCOME
All remuneration for services rendered by an employee for his employer unless
specifically excluded
under the Tax Code (Revenue Regulations 2-98). It Includes salaries, wages,
emoluments, honoraria,
bonuses, allowances (transportation, representation, etortainment and the like), fringe
benefits (monetary
ind non-monetary fees) including director's fee, taxable pensions and retirement pay
and other income of similar nature including compensation paid in kind.

Designation/name of the remuneration upon which it is paid and the manner of

payment is IMMATERIAL.
What is important is that it is derived from employer-employee relationship.

However, not every compensation income is includible under the term gross
compensation income.
Compensation for services rendered by an independent contractor does not fall under
the legal category of "gross compensation income."

Amounts paid either as advances or reimbursement for transportation, representation

and other
bona fide ordinary and necessary expenses incurred in the performance of his duties -
not taxable
compensation income. Only the excess, if any, over actual expenses is taxable.

Three years back wages shall be taxable to an illegally separated employee but not
attorney's fees
which are not subject to tax (BIR Ruling, July 13,1992).

Income derived by partner from professional partnership does not form part of the
gross compensation
income.

REQUISITES FOR TAXABILITY

(1.) Personal services actually rendered;
(2.) Payment is for such services rendered;
(3.) Payment is reasonable.

ALLOWABLE DEDUCTIONS FROM GROSS COMPENSATION INCOME

1. Personal exemptions: (Married or Single)

a.) Basic Personal Exemption (R.A. No. 9504)

• Each married individual - P50,000.00
• Head of family - P50,000 00
• Single or Legally Separated - P50,000 00
 • Additional exemption for qualified dependent child - P25,000.00 but not in excess
of four
(4) or P100,000 (R.A. No. 9504 ).

2. Premium Payments on Health and/or Hospitalization Insurance (2001 Bar).

Conditions:
a.) Claimant: spouse claiming the additional exemption for dependents.
b ) Amount allowed: P2,400.00 per annum or P200.00 a month.
c ) Limitation: family gross income must not be more than P250,000.00 for the taxable
year.
20. What is claim of right doctrine

Claim of Right Doctrine – A taxable gain is conditioned upon the presence of a claim of
right to the alleged gain and the absence of a definite unconditional obligation to return
or repay.

21. Explain the Taxability of Fringe Benefits

What is a fringe benefit?
Fringe benefits refer to goods, services, or other benefits furnished or granted by an
employer, in cash or in kind, in addition to basic salaries, to
managerial or supervisory employees such as, but not limited to the following:
• Housing;
• Expense account;
• Vehicle of any kind;
• Household personnel, such as maid, driver and others;
• Interest on loan at less than market rate (benchmark rate of 12%) to the extent of
the difference between the market rate and actual rate granted;
• Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations
• Expenses for foreign travel;
• Holiday and vacation expenses;
• Educational assistance to the employee or his dependents; and
• Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.

Nature of Fringe Benefits Tax

The FBT is a tax imposed o fringe benefits which are granted or are paid by an employer
to an employee occupying a managerial or supervisory position.
The FBT is a measure to ensure that an income tax is paid on fringe benefits. If they
were given in case, an income is automatically witheld and collected by the
governement. An additional compensation which is given in non-cash form is virtually
untaxed.

Who should pay the FBT? (2003 Bar)

The FBT is a tax on the income of an employee which is paid by the employer on behalf
of the employee. The FBT is collected from the employer even if the employer is a tax-
exempt·corporation, or an instrumentality of the Philippine government.

22. State the tax treatment for separation pay.

Separation pay is not taxable irrespective of the age of the employee, length of service,
number of benefits received or the recipient thereof.

The conditions in order that separation pay may be excluded from gross income?
1. Amount received by an official, employee or by his heirs;
2. From the employer; and
3. As a consequence of separation of such official or employee from the service of
the employer:
a. Because of death, sickness or other physical disability; or
b. For any cause beyond the control of the official or employee.

23. Same answer in #19

24. What is De Mininis benefits

Facilities or privileges furnished by an employer to his employees, are of relatively small
value and offered as a means of promoting the health, goodwill, contentment, or
efficiency, are exclusions, from gross income, in the tax code, they shall not be reported
in the annual income tax return.

25. Distinguish Personal Exemption from

Additional Exemption
SEC. 4. Section 35(A) and (B) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby amended to read as follows:

"SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

"(A) In General. - For purposes of determining the tax provided in Section 24(A) of
this title, there shall be allowed a basic personal exemption amounting to Fifty
thousand pesos (P50,000) for each individual taxpayer.
 "In the case of married individual where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.

"(B) Additional Exemption for Dependents. - There shall be allowed an additional

exemption of Twenty-five thousand pesos (25,000) for each dependent not
exceeding four (4).

"The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.

"In the case of legally separated spouses, additional exemptions may be claimed
only by the spouse who has custody of the child or children:

Provided, That the total amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional exemptions herein allowed.

"For purposes of this Subsection, a "dependent" means a legitimate, illegitimate

or legally adopted child chiefly dependent upon and living with the taxpayer if
such dependent is not more than twenty-one (21) years of age, unmarried and not
gainfully employed or if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.

26. What are the classifications of individual

taxpayer
1. Resident Citizen (RC) – Citizens of the Philippines who are residing therein.

2. Non-resident Citizen (NRC) –

a. A citizen of the Philippines who establishes to the satisfaction of the CIR the fact
of his physical presence abroad with a definite intention to reside therein;
b. A citizen of the Philippines who leaves the Philippines during a taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis;
c. A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most
of the time during the taxable year;
d. A citizen who has been previously considered as NRC and who arrives in the
Philippines at any time during the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the
date of his arrival in the Philippines;
e. The taxpayer shall submit proof to the CIR to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the
Philippines as the case may be for purposes of this section. (Sec. 22 [E], NIRC)

3. Resident Alien (RA) – An individual whose residence is within the Philippines but who
is not a citizen thereof. (Sec. 22 [F], NIRC)
Note: He is one who is actually present in the Philippines and not a mere transient or
sojourner. Residence does not mean mere physical presence, an alien is considered a
resident or non-resident depending on his intention with regard to the length and
nature of his stay.

4. Non-resident Alien (NRA) – an individual whose residence is not within the Philippines
and who is not a citizen thereof. (Sec. 22 [G], NIRC)

27. Wagering Loss

Losses is included as one of the allowed deductions from Gross Income.

LOSSES
The term implies an unintentional parting with something of value. It is used in the
income tax law in very broad sense to comprehend all losses which are not general or
natural to the ordinary course of business and are not covered under some other
heading such as bad debts, inventory tosses
depreciation, etc.

SPECIAL KINDS OF LOSSES:

a.) Wagering losses - deductible only to the extent of gain or winning:

Thus, a taxpayer whose gambling transactions resulted in losses of P500 and gains
of P400 in another gambling game, would be obliged to report the gain of P400 in
order to obtain a deduction of the loss for P500. The excess of the loss over tl1e
gain is not deductible. On the other hand, the excess of the gain over loss is taxable.

The cost of the unsold tickets of a sweepstakes agent constitutes his investment in
a wagering transaction. Losses he may incur therefrom can be allowed as deduction
only up to the extent of the gains realized. But, R.A. No. 1169 exempts sweepstakes
winnings from taxation, it follows that no losses incurred therefrom can be allowed
as deductions from gross income (BIR Ruling No. 62-006, 26 January 1962).
Losses from an illegal transaction are not deductible and they cannot be off-
set against gains from illegal transactions.
28. Requisites of the taxability of business
expenses (what?)
pero etoh answer ko para sa business expenses to be deductible..

a. the expenses must be ordinary and necessary

b.expenses must be incurred in trade or business carried on by the taxpayer
c.expenses must be substantiated by proof
d. the expenses must be reasonable
e.paid or incurred during the taxable yeatr
f. expenses must not be against public policy,public moral,or law
g. if subject to withholding tax, proof of payment to bir must be shown.

29. Requisites for Income to be Taxable.

1. There must be gain or profit, whether in cash or its equivalent,
2. The gain must be realized or receved.

Doctrine of Constructive Receipt of Income - Income which is credited to the

account of and set apart for a taxpayer and which may be drawn by him at any time is
subject to tax for the year during which it was so credited or set apart although not yet
then actually received or reduced to his possession. To constitute receipt in such case,
the income must be credited to the taxpayer without any substantial limitation or
condition upon which payment is to be made.

3. The gain must not be excluded by law or treaty from taxation. This means that not
all income is required to be included in computing the taxable income.
DOCTRINES ON DETERMINATION OF TAXABLE INCOME
• Claim of right doctrine - illegally acquired income constitutes realized gain
• Severance test theory- separation from capital of something which is of
exchangeable value
• Control test - power to procure the payment of Income and enjoy the benefit
thereof

30. What are the requisites in order for prizes

and awards made be exempted from tax?
1. Primarily in recognition of Scientific, Civic, Artistic, Religious, Educational,
Literary, or Charitable achievement [SCAR-CEL]
2. The recipient was selected without any action on his part to join; and
3. He is not required to render substantial future services as condition to receiving
the prize or award.
31. Tax Arbitrage
What is tax arbitrage? (UST)
A: It is a strategy which takes advantage of the difference in tax rates or tax systems as
the basis for profit.

DEFINITION of 'Tax Arbitrage'

The practice of profiting from differences between the way transactions are treated for
tax purposes. The complexity of tax codes often allows for many incentives which drive
individuals to restructure their transactions in the most advantageous way in order to
pay the least amount of tax. Some forms of tax arbitrage are legal while others are
illegal.

BREAKING DOWN 'Tax Arbitrage'

Tax arbitrage can, for example, involve recognizing revenues in a low tax region while
recognizing expenses in a high tax region. Such a practice would minimize the tax bill by
maximizing deductions while minimizing taxes paid on earnings. It is suspected that tax
arbitrage is extremely widespread, but by its nature, it is difficult to give precise figures
as to what extent tax arbitrage is employed.

32. Improperly Accumulated Earnings Tax

Q: What is an improperly accumulated earnings tax (IAET)?
A: A tax equivalent to 10% of improperly accumulated income. (Sec. 29 [A], NIRC)

Q: What is improperly accumulated income?

A: Improperly accumulated earnings refer to profits of a corporation that are
accumulated instead of distributing it to its shareholders for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of another corporation.
Note: If the earnings and profits were distributed, the shareholders would be liable for
income tax, whereas if there is no distribution, they would incur no tax with respect to
the undistributed earnings of the corporation. Hence, IAET is imposed:
1. In the nature of a penalty to the corporation for the improper accumulation of its
earnings; and
2. As a form of deterrent to the avoidance of tax upon shareholders who are supposed
to pay dividends tax on the earning distributed to them by the corporation

Q: To whom is it imposed?
A: Upon a domestic corporation and closely-held corporations which is formed or
availed of for the purpose of avoiding the income tax with respect to its shareholders or
the shareholders of any other corporation by permitting earnings and profits to
accumulate instead of dividing or distributing it.
Note: IAET does not apply to the following:
1. Publicly-held corporations (Sec. 29 B [2], NIRC)
2. Banks, other non-bank financial intermediaries
3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non- taxable joint ventures
8. Enterprises duly registered with the Philippine Economic Zone Authority under R.A.
7916, and enterprises registered pursuant to the Bases Conversion and Development
Act of 1992 under R.A. 7227, as well as other enterprises duly registered under special
economic zones declared by law which enjoy payment of special tax rate on their
registered operations or activities in lieu of other taxes, national or local. (Sec. 4, RR 2-
2001)

33. When is separation pay exempt from income

tax?
The conditions in order that separation pay may be excluded from gross income:
 Amount received by an official, employee or by his heirs;
 From the employer; and
 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 official or employee. (Sec 32
B [6] b, NIRC)

34. Explain the deductability of interest

The following requirements must be met for interest to be deductible:

1. There must be an indebtedness;

2. Incurred in connection with the taxpayer’s trade or business;
3. Indebtedness must be that of the taxpayer;
4. Interest is stipulated in writing; and
5. Interest expense was incurred or paid during the taxable year.

35. What are the test on the realization of

income?
What are the tests in determining whether income is earned for tax purposes?

1. Flow of Wealth Test – The determining factor for the imposition of income tax is
whether or not any gain or profit was derived from the transaction. (Collector v.
Administratix of the Estate of Echarri, GR 45544, Apr. 25, 1939)

2. Realization Test – Unless income is deemed realized, then there is no taxable

income.

Revenue is generally recognized when both conditions are met:

a. The earning process is complete or virtually complete; and
b. An exchange has taken place. (Manila Mandarin Hotels, Inc. v. CIR)

3. Economic-benefit Principle – Taking into consideration the pertinent provisions of law,

income realized is taxable only to the extent that the taxpayer is economically
benefited.

4. Claim of Right Doctrine – A taxable gain is conditioned upon the presence of a claim
of right to the alleged gain and the absence of a definite unconditional obligation to
return or repay.

5. Severance Test – Income is recognized when there is separation of something which is

of exchangeable value. (Eisner v. Macomber, 252 US 189 [1920])

6. Net Effect Test – The substance of the whole transaction, not the form, usually
controls the tax consequences.

7. Principle of Constructive Receipt of Income – Income which is credited to the account

of or set apart for a taxpayer and which may be drawn upon by him at any time is
subject to tax for the year during which so credited or set apart, although not then
actually reduced to possession.

36. What are the requisites for deductibility of

taxes?
1. Payments must be for taxes;
2. Tax must be imposed by law on, and payable by the taxpayer;
3. Paid or incurred during the taxable year in connection with taxpayer’s trade, business
or profession; and
4. Taxes are not specifically excluded by law from being deducted from the taxpayer’s
gross income.
37. What are the Basic feature of our present
Income Tax?
Our present income tax system has the following basic features:
1. It has adopted a comprehensive tax situs by using the nationality, residence, and
source rules.

2. The individual income tax system is mainly progressive in nature in that it provides
graduated rates of income tax.

Note: Corporations in general are taxed at a flat rate of 30% of net income.
3. It has retained a more schedular than global features with respect to individual
taxpayers but has maintained a more global treatment on corporations.

4. Direct Tax – tax burden is borne by the income tax receipient upon whom the tax is
imposed. (1996 Bar Question)

38. Is co-ownership subject to income tax?

GR: It shall not be subject to income tax if the activities of the co-owners are limited to
the preservation of the property and the collection of income therefrom. In such case,
the co-owners shall be taxed individually on their distributive share in the income of the
co-ownership.
XPN: If the co-owners invest the income in a business for profit they would constitute
themselves into a partnership and such shall be taxable as a corporation.

39. Explain the taxability of Special Domestic

Corporation.
What are the special domestic corporations under the NIRC?
A: These are the domestic corporations that are subject to concessionary tax rates
that are lower than those imposed upon ordinary domestic corporations. Among
such special domestic corporations are:
1. Proprietary educational institutions
2. Non-profit hospitals
3. Insurance companies
4. Depositary banks
5. GOCCs, government instrumentalities or agencies
6. Franchise holders

Q: How are proprietary educational institutions and non-profit hospitals treated?

GR: They shall pay a 10% tax on their taxable income except those passive income
covered by Sec. 27 [D] of the NIRC. (Sec. 27 [B], NIRC)
XPN: They shall pay 30% corporate income tax if the gross income from unrelated
trade, business or other activity exceeds 50% of the total gross income derived
from all sources.

40. Define gross income

(A) General Definition. - Except when otherwise provided in this Title, gross
income means all income derived from whatever source, including (but not limited
to) the following items:

(1) Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;

(2) Gross income derived from the conduct of trade or business or the
exercise of a profession;

(3) Gains derived from dealings in property;

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;

(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general
professional partnership.

41. Severance Test Theory

Income is recognized when there is separation of something which is of
exchangeable value. (Eisner v. Macomber, 252 US 189 [1920])

42. Deductability of de mininis benefits

Which are facilities or privileges furnished by an employer to his employees, are of
relatively small value and offered as a means of promoting the health, goodwill,
contentment, or efficiency, are exclusions, from gross income, in the tax code, they shall
not be reported in the annual income tax return.

Include only:

a. monetized unused vacation leave credits of private employees not exceeding 10

days during the year
b. monetized value of leave credits paid to government officials and employees
c. medicalcash allowance to dependents of not exceeding 750 per employee per
semester or 125 per month
d. rice subsidy of 1500 or one sack 50kg.rice per month amounting to not more than
1500
e. uniform and clothing allowance not exceeding 5000 per annum
f. actual medical assistance not exceeding 10000 per annum
g. laundry allowance not exceeding 300 per month
h. employee achievement awards not exceeding 10000
i. gifts during christams or anniversary not exceeding 5000 per annum
j. daily meal allowance for overtime and night graveyard shift not exceeding 25% of
the basic minimum wage
k. collective bargaining agrrement benefits and benefits derived from productivity
incentive schemes not exceeding 10,000 per annum

43. What are the kinds of losses?

a.) Ordinary losses those incurred in trade or business.
b.) Those incurred in any transaction entered for profit though not connected with the
trade, or business.
c.) Casualty Losses those incurred by property connected with the trade or business, if
the loss arises from fire, storm, shipwreck, or other casualties or from robbery, theft or
embezzlement.
d.) Capital losses deductible only to the extent of capital gains:
• Losses from sale or exchange of capital assets;
• Losses resulting from securities becoming worthless which are capital assets.

Two important requisites:

a.) It becomes worthless upon the happening of an identifiable event which
evidences destruction of value. However, when the decline in value is due
to a fluctuation in the market price or to other similar cause, the amount
of loss is not deductible until it is disposed of (Sec. 99, Rev.Reg. No. 2).
b.) Must be claimed in the year the worthlessness occurs. The law requires
that it must be considered as a loss from the sale or exchange of capital
assets on the last day of the taxable year in which it occurred.

e.) Losses from short sale of property.

f.) Losses due to fai lure to exercise privilege or option to buy or sell property.
g.) Abandonment losses (oil exploration).
 • All accumulated exploration and development expenditures pertaining to partially
or fully abandoned petroleum operations shall be allowed as deduction. In all
cases, notices of abandonment shall be filed with the BIR.

• Subsequently abandoned producing well ----- the unarmortized costs and

undepreciated costs of equipment directly used shall be allowed as deduction. If
the well is reentered and production resumed, or if such equipment or facility is
restored into service - the costs shall be included as part of the gross income and
shall be amortized or depreciated, as the case may be.

45. Taxability of GPP

They are not subject to income tax but are required to file information returns for its
income for the purpose of furnishing information as to the share in net income of the
partnership which each partner should include in his individual return. Partners shall be
liable for income tax in their separate and individual capacities. The share in
thepartnership income is taxable to the individual partners, whether or not the share
has been distributed, because the GPP itself is not taxable. Thus, there is a constructive
receipt of income in case of GPPs

Is GPP subject to income tax? (UST)

A: No, but it is required to file information returns for its income for the purpose of
furnishing information as to the share in net income of the partnership which each
partner should include in his individual return. Partners shall be liable for income tax in
their separate and individual capacities.

46. Explain the progressive system of taxation

principle
The individual income tax system is mainly progressive in nature because of the
graduated rates of income taxes..

47. What is a corporation for tax purposes?

What is a corporation for tax purposes?

1. The term “corporation” shall include:

a. Partnerships, no matter how created

b. Joint stock companies
c. Joint accounts (cuentas en participacion)
d. Associations
 e. Insurance companies

2. It does not include:

a. General professional partnerships and
b. A joint venture or consortium formed for purposes of undertaking
construction projects engaging in:
i. Petroleum
ii. Coal
iii. Geothermal
iv. Other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government.