C.

Definition of Income
Fisher vs. Trinidad
In the case of Eisner vs. Macomber (252 U.S., 189), income was defined as the gain derived from capital,
from labor, or from both combined, provided it be understood to include profit gained through a sale or
conversion of capital assets.
The New Standard Dictionary, edition of 1915, defines an income as "the amount of money coming to
a person or corporation within a specified time whether as payment or corporation within a specified
time whether as payment for services, interest, or profit from investment."
Webster's International Dictionary defines an income as "the receipt, salary; especially, the annual
receipts of a private person or a corporation from property." Bouvier, in his law dictionary, says that an
"income" in the federal constitution and income tax act, is used in its common or ordinary meaning and
not in its technical, or economic sense. (146 Northwestern Reporter, 812)
Mr. Black, in his law dictionary, says "An income is the return in money from one's business, labor, or
capital invested; gains, profit or private revenue."
"An income tax is a tax on the yearly profits arising from property, professions, trades, and offices."
We believe that the Legislature, when it provided for an "income tax," intended to tax only the "income"
of corporations, firms or individuals, as that term is generally used in its common acceptation; that is
that the income means money received, coming to a person or corporation for services, interest, or profit
from investments. We do not believe that the Legislature intended that a mere increase in the value of
the capital or assets of a corporation, firm, or individual, should be taxed as "income."
Generally speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period.

Facts: Philippine American Drug Company was a corporation duly organized and existing under the
laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in said
corporation. Said corporation, as result of the business for that year, declared a "stock dividend" and that
the proportionate share of said stock divided of Fisher was P24,800. Said the stock dividend for that
amount was issued to Fisher. For this reason, Trinidad demanded payment of income tax for the stock
dividend received by Fisher. Fisher paid under protest the sum of P889.91 as income tax on said stock
dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition upon the
ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained and
Fisher appealed.
Issue: Whether or not the stock dividend was an income and therefore taxable.

Held: No. Generally speaking, stock dividends represent undistributed increase in the capital of
corporations or firms, joint stock companies, etc., etc., for a particular period. The inventory of the
property of the corporation for particular period shows an increase in its capital, so that the stock
theretofore issued does not show the real value of the stockholder's interest, and additional stock is
issued showing the increase in the actual capital, or property, or assets of the corporation.
1. When is income taxable
i.
Realization Test
SECTION 38. Bases of computation. Approved standard methods of
accounting will be ordinarily regarded as clearly reflecting income. A method
of accounting will not, however, be regarded as clearly reflecting income unless
all items of gross income and all deductions are treated with reasonable
consistency. All items of gross income shall be included in the gross income
for the taxable year in which they are received by the taxpayer and deductions
taken accordingly, unless in order clearly to reflect income such amounts are to
be properly accounted for as of a different period. For instance, in any case in
which it is necessary to use an inventory, no accounting in regard to purchases
and sales will correctly reflect income except an accrual method. A taxpayer is
deemed to have received items of gross income which have been credited to or
set apart for him without restriction. On the other hand, appreciation in value
of property is not even an accrual of income to a taxpayer prior to the realization
of such appreciation through sale or conversion of the property. (For methods
of accounting and determination of accounting period, see Sections 166 to 169
of these regulations.)

Accrual Method of Accounting - Accounting method that records revenues (earned) and expenses
when they are incurred, regardless of when cash is exchanged. The term "accrual" refers to any
individual entry recording revenue or expense in the absence of a cash transaction.

Manila Mandarin Hotels, Inc. vs. CIR, CTA case No. 5046 dated March 24, 1997
Petitioner contends that a substantial portion of the VAT assessment stems from the respondent's
inclusion of an additional sum of P35,900,388.53 as part of its gross receipts subject to the 10% VAT.
The additional amount of P35,900,388.53 represents the tolling charges of PLDT on the overseas calls
of the guests of petitioner paid to PLDT and which respondent claims should form part of the petitioner's
taxable base for VAT. Petitioner disagrees with the respondent and opines that only the handling fees
(the amount which actually accrued in favor of petitioner) should be the proper tax base for VAT
purposes since the handling fees represent the actual gross receipts of the petitioner, and it should not

include the amount that the petitioner pays to PLDT for the usage of its telephone lines because such
amount pertains to revenues of PLDT and not petitioner's. Respondent, on the other hand, theorizes that
the VAT is based on gross sales or gross revenue, thus, It should include the handling fees, the gross
profit from petitioner's telephone service plus the toll fees due to PLDT.
ISSUE 1: Whether or not the amount that petitioner paid to PLDT should form part of the gross .
(receipts subject to the 10% VAT. Section 102 of the Tax Code which served as the ( , ) basis of the
10% VAT on the sale of services provides as follows:
Sec. 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall be levied, assessed
and collected a value-added tax equivalent to 10% of gross receipts derived by any person engaged in
the sale of services. The phrase 'sale of services' means the performance of all kinds of services for
others for a fee, remuneration or consideration, including those performed or rendered by construction
and service contractors; stock, real estate commercial, customs and immigration brokers; lessors of
personal property; lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; and similar services regardless of whether or
not the performance thereof calls for the exercise or use of the physical or mental faculties: xxx. X X X
X X X X X X. 'Gross receipts' means the total amount of money or its equivalent representing the
contract price, compensation or service fee, including the amount charged for materials supplied with
the services and deposits or advance payments actually or constructively received during the taxable
quarter for the services performed or to be performed for another person, excluding value-added tax.
The above cited provision speaks of gross receipts as basis of the 10% VAT.
The definition of gross receipts refers to the amount of money actually or constructively received by the
taxpayer. The facts show that the amount paid by the petitioner to PLDT as tolling charges for the
overseas calls made by its guests were not actually nor constructively received by the petitioner as
service fees but were instead charges of PLDT so there is no reason why the respondent should include
these as part of petitioner's gross receipts.
in the Manila Jockey Club case quoted earlier, thus: "As demonstrated In the above-mentioned case,
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 gross receipts under the Tax Code."

Petitioner is engaged in the hotel business and not in the business of transporting passengers. On the
occasion when the petitioner extends transport services like providing limousine service and the like, It
does so only for its hotel guests and not to the public in general.
The petitioner does not fall within any of the aforequoted definitions and It was erroneous on Its part to
subject Its gross receipts resulting from the transport service to percentage tax under Section 115 of the
Tax Code. Respondent is correct in subjecting these revenues to the VAT in accordance with Section
102 of the Tax Code.
ISSUE 3: The third item of VAT assailed by the petitioner relates to its disposal of assets which
respondent subjected to the 10% VAT pursuant to Section 100 of the Tax Code.
The disposal of these assets were assessed to be subject to the 10% VAT.
Respondent, on the other hand, subscribes to the theory that the sale of property and equipment Is
considered sale of personal property subject to 10% VAT. of This Court believes that the petitioner's
disposal its property and equipment after taking into consideration the manner for its disposal is not
subject to the 10% VAT. The demolition of the civil works in the building of petitioner paving the way
for a renovation thereof per se cannot be considered subject to the VAT. The same is true with the
retirement of the operating equipment (silverwares, etc. > because the reason for their retirement was
due to loss or obsolescence but not the sale f1/lf' thereof subject to the VAT. Now with respect / to the
sale of transportation equipment it is noteworthy to point that the asset sold has been fully depreciated
and is connected with the catering business of petitioner. Considering further, that the catering business
is already subject to the caterer's tax under the other percentage taxes In Title V of the Tax Code, the
same should not be subject to the VAT.
The Supreme Court in the case entitled Standard Vacuum 011 Co. vs. Antigua, etc. , et al., No. l-6931,
Apr II 30, 1955 (96 Ph II. 909), ru I ed: "In conclusion, we hold that when a person or company Is
already taxed on Its main business, it may not be further taxed for doing something or engaging In an
activity or work which is merely a part of, Incidental to and is necessary to Its main business. "
This Court had the occasion to rule: "We have had occasion to express the same view. xxx. Where the
law taxes a business, it Is presumed to be the legislative intent not to separately tax every activity which
is merely incidental or necessary to the conduct of said business. (p. 7, supra.)"
Moreover, pursuant to Section 99 of the Tax Code, as amended, quoted hereunder:

ISSUE 2: Respondent's imposition of VAT on the gross receipts of petitioner stemming from the amount
received on the transportation services extended by the petitioner to the guests of the hotel. Petitioner
argues that the revenues It received from this type of service are already subject to the 3% tax on
common carriers under Section 115 of the Tax Code hence, these should no longer be subject to VAT
as clearly provided in Section 103(j) of the Tax Code which mentions that services rendered by persons
subject to percentage tax under Title V are exempt from the payment of VAT.

"SEC. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who imports goods shall be
subject to the value-added tax (VAT) imposed In Sections 100 to 102 of this Code. (As added by EO
273)" VAT shall be imposed only if the sale of goods is "in the course of trade or business of the
taxpayer".

Under the realization principle, revenue is generally recognized when both of the following conditions
are met: (a) the earning process is complete or virtually complete, and (b) an exchange has taken place.
This principle requires that revenue must be earned before It is recorded. Thus, the amounts received in
advance are not treated as revenue of the period in which they are received but as revenue of the future
period or periods in which they are earned. These amounts are carried as unearned revenue, that is,
liabilities to transfer goods or future unt I I the earning render services in the process is complete.

Compare with BIR Ruling No. 049-98 dated February 10, 1998
Treatment of Advance Rental/Deposit
In reply, please be informed that in BIR Ruling No. 69-011 dated October 3, 1969, this Office
citing US precedents, held that if the advance payment is, in fact, prepaid rental, then such payment is
taxable to the lessor in the year when received, even though the lessor is on the accrual or cash method
of accounting. On the part of the lessee, such prepaid rental is to be treated as capital expenditure and
he cannot deduct in the year of payment the full amount of the prepaid rent as business expense but must
spread them over the entire remaining term of the lease.
Accordingly, and in line with the said BIR ruling which is still being enforced by this Office to
date, Mr. A (lessor) is required to declare the entire amount of P24,000.00 as his taxable income for the
year 1997 when he received the same. On the other hand, X company (lessee) cannot deduct the entire
amount of P24,000.00 as deductible expense in its income tax return for the year 1997 but must amortize
the same over the entire period of the lease.
For the same reason, the advance rental payment is reportable as income in the year of receipt
even if there is a stipulation that same is to be applied or credited as rentals for the last two years of the
contract, i.e., for October 1, 2006 to September 30, 2007.
A security deposit is an advanced payment received by the Lessor from the Lessee, as security
for the lessee's performance of his obligations under the lease. It is not income to the Lessor when
received, as the lessor is required to return this deposit at the end of the lease period upon fulfilment of
all the obligations of the lessee. In this respect, a security deposit is somewhat analogous to a loan and
the lessor has no income and the lessee no deduction when the deposit is made with the lessor, and the
lessor has no deduction and the lessee no income when it is repaid. This rule applies even when the
lessor has the right to commingle and use the security deposit for his own purposes without interest
during the term of the lease . . . ." (Morten's, Chapter 12 pp. 165-166)
And in BIR Ruling No. 144-88 dated April 18, 1988, this Office ruled as follows:
"In reply, please be informed that if the advance payment made pursuant to a Lease Contract is in the
nature of a security deposit for the faithful performance of certain obligation of the lessee, the lessor
realizes no taxable income in the year the advance payment is received. However, if the advance
payment is a security deposit and the conditions which make the security deposit the property of the
lessor occur; then the lessor realizes a taxable income to the extent of the security deposit and the lessee
is entitled to a deduction to that same extent. (Estate of George E. Baker, 13 BTA 562 in BIR Ruling

No. 011-69 dated October 3, 1969)". In short, the answer to the question of whether or not the amount
of P15,000.00 will be declared as income on the part of Lessor B and correspondingly deductible
expense on the part of lessee ABC will depend on the nature of said security deposit.
ii.

Claim of Right Doctrine

BIR Ruling No. C-168) 519-08 dated December 12, 2008
Return of Liquidated Damages
The payment by LHC of the sum of US$14.0 million to the Contractor, which
sum LHC previously reported as part of its taxable income, is an allowable
deduction from the gross income of LHC in 2008, whether such payment is
viewed as a return of previously reported income or as a settlement payment
under an out-of-court compromise.
Generally, the tax treatment of the return of previously-recognized income is
dependent on the tax treatment of the income previously reported. If the
taxpayer received an income and reported the same as part of taxable gross
income, but later on was made to return the said income, the taxpayer is allowed
a deduction for the amount returned against the gross income. The deduction
must be made at the time of the return. This treatment follows the rationale
behind allowing sales return as a deduction from gross sales not only for income
tax but also for value-added tax ("VAT") purposes.
This ruling followed the doctrine laid down in North American Oil
Consolidated v. Burnet, 5(5) where the US Supreme Court enunciated the socalled "claim-of-right" doctrine. This doctrine provides that if a taxpayer
receives earnings under a claim of right and without restriction as to its
disposition, he has received income even though one may claim he is not
entitled to the money. Should it later appear that the taxpayer was not entitled
to keep the money, the taxpayer would be entitled to a deduction in the year of
repayment.
In BIR Ruling No. DA-400-2004 dated July 22, 2004, the BIR held that a
taxpayer may claim as deductions from its gross income payments made under
a court-approved compromise agreement for the full and final settlement of the
Arbitration Case and the Court Case which the parties filed against each other.
The Tax Code is clear that only those expenses which are "paid or accrued" or
"paid or incurred" during the taxable year are deductible for tax purposes. Mere
provisions or estimates are not deductible for tax purposes because they are
neither "paid or accrued" or "paid or incurred" during the taxable year.

The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in
carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.
Revenue Audit Memorandum Order (RAMO) No. 1-2000, provides that under
the accrual method of accounting, expenses not being claimed as deductions by
a taxpayer in the current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayer's right to receive amounts
or its obligation to pay them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting.
Withholding tax
The return of the US$14 million to the Contractor, as payee, does not
constitute an income payment subject to any kind of withholding tax.
Considering that the payment or return of the liquidated damages previously
received and recognized as income is not among those listed in RR No. 2-98,
as amended, the same is not subject to any withholding tax.
However, since the payment does not pertain to a payment for the supply of
goods or services, but rather, as a return of liquidated damages erroneously
claimed and received, the above provision should not apply.
In view thereof, this Office confirms your opinion that:
(a) The return or repayment by LHC in 2008 of the liquidated damages in the
amount of US$14.0 million, which was part of the sum previously reported as
gross income of LHC in the years 2000 and 2001, is an allowable deduction
from LHC's gross income for tax purposes in the year 2008, the year of return
or repayment.
(b) The adjusting entry made in LHC's books for the difference between the
amount recognized as a provision of US$24.533 million and the actual amount
paid of US$14.0 million has no tax implications since adjusting entries for
excess provisions are not recognized for tax purposes. These are treated as
reconciling items in the ITR.
(c) The payment for the return of the liquidated damages in the amount of
US$14.0 million to the Contractor is not subject to creditable withholding tax

since it is not among those items enumerated in the withholding tax regulations
and it does not constitute an income payment for goods or services.

Manila Electric Company vs. CIR, CTA Case No 7242 dated December 6, 2010
In the claim-of-right doctrine, a taxpayer who previously claimed as income the amount he
subsequently repays, is to claim it as deduction from income in the year of repayment.
iii.

All events test

CIR vs. Isabela Cultural Corporation, GR. 172231 dated February 12, 2007
Facts: Isabela Cultural Corporation (ICC), a domestic corporation received
an assessment notice for deficiency income tax and expanded withholding tax from BIR. It
arose from the disallowance of ICCs claimed expense for professional and security services
paid by ICC; as well as the alleged understatement of interest income on the three promissory
notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly
due to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security
services.
ICC sought a reconsideration of the assessments. Having received a final notice of assessment,
it brought the case to CTA, which held that it is unappealable, since the final notice is not a
decision. CTAs ruling was reversed by CA, which was sustained by SC, and case was remanded
to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional
and security services were properly claimed, it said that even if services were rendered in 1984
or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986.
It likewise found that it is the BIR which overstate the interest income, when it applied
compounding absent any stipulation.
Petitioner appealed to CA, which affirmed CTA, hence the petition.
Issue: Whether or not the expenses for professional and security services are deductible.
Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that
it must have been paid or incurred during the taxable year. This requisite is dependent on the
method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method
of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a
Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being
claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed in the succeeding year.

The accrual of income and expense is permitted when the all-events test has been met. This test requires:
1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate
determination of such income or liability. The test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at its disposal the information necessary to
compute the amount with reasonable accuracy.
From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an
excuse the delayed billing, since it could have inquired into the amount of their obligation and
reasonably determine the amount.
------------------------------------------The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
The accrual of income and expense is permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The allevents test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year.

CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer, but if no such method of
accounting has been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the Commissioner
clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as
defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or
if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included.- The amount of all items of gross income
shall be included in the gross income for the taxable year in which received by the taxpayer, unless,
under methods of accounting permitted under Section 43, any such amounts are to be properly accounted
for as of a different period. In the case of the death of a taxpayer, there shall be included in computing
taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date
of his death if not otherwise properly includible in respect of such period or a prior period.
SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title
shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the
method of accounting upon the basis of which the net income is computed, unless in order to clearly
reflect the income, the deductions should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period
or a prior period.
SEC. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the approval of the Commissioner, be computed on the basis
of such new accounting period, subject to the provisions of Section 47.
SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months. (A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other
than an individual, with the approval of the Commissioner, changes the basis of computing net income
from fiscal year to calendar year, a separate final or adjustment return shall be made for the period
between the close of the last fiscal year for which return was made and the following December 31. If
the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for
the period between the close of the last calendar year for which return was made and the date designated

as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final
or adjustment return shall be made for the period between the close of the former fiscal year and the
date designated as the close of the new fiscal year.
(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made
under Subsection (A) on account of a change in the accounting period, and in all other cases where a
separate final or adjustment return is required or permitted by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a
year, then the income shall be computed on the basis of the period for which separate final or adjustment
return is made.
SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported
for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts'
means building, installation or construction contracts covering a period in excess of one (1) year. Persons
whose gross income is derived in whole or in part from such contracts shall report such income upon
the basis of percentage of completion. The return should be accompanied by a return certificate of
architects or engineers showing the percentage of completion during the taxable year of the entire work
performed under contract. There should be deducted from such gross income all expenditures made
during the taxable year on account of the contract, account being taken of the material and supplies on
hand at the beginning and end of the taxable period for use in connection with the work under the
contract but not yet so applied. If upon completion of a contract, it is found that the taxable [net] income
arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or
require an amended return.
SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise
disposes of personal property on the installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually received in that year, which the gross profit
realized or to be realized when payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual
disposition of personal property (other than property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand
pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments
do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be
returned on the basis and in the manner above prescribed in this Section. As used in this Section, the
term 'initial payments' means the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or
disposes of real property, considered as capital asset, and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations
to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection
(A) elects for any taxable year to report his taxable income on the installment basis, then in computing
his income for the year of change or any subsequent year, amounts actually received during any such
year on account of sales or other dispositions of property made in any prior year shall not be excluded.
SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or among such organization, trade or business,
if he determined that such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization, trade or business.
E. Individual Income Taxation
1. Kinds of Individuals (Sec 22)
i. Resident Citizens
ii. Resident Aliens
1. Sec. 5 of RR No. 2-40
SECTION 5. Definition. A "non-resident alien individual" means an individual
(a) Whose residence is not within the Philippines; and
(b) Who is not a citizen of the Philippines.
An alien actually present in the Philippines who is not a mere transient or sojourner is
a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and nature of his stay. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute him a
transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident.
One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient. But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been consummated or abandoned.
iii. Non-resident citizen
1. Overseas Contract Workers
a. Sec 23 of NIRC
b.

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources
within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in international trade shall be treated
as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines.

Section 23 (C) of the NIRC of 1997 as amended states that an individual citizen
of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be
treated as an overseas contract worker. Thus, an OCW or OFWs income
arising out of his overseas employment is exempt from income tax.

2. Meaning of most of the time

a. BIR Ruling on No. 033-00 dated September 5, 2000
Section 23(C) of the Tax Code of 1997 which took effect on January 1, 1998,
provides as follows:
"(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract workers is taxable only on
income from sources within the Philippines. . . " (Emphasis supplied)

c. Sec 2 and 3 (A) of RR No. 1-11 dated February 24, 2011

SECTION 2. Definition of an OCW
OCW refer to Filipino citizens employed in foreign countries, commonly
referred to as OFWs, who are physically present in a foreign country as a
consequence of their employment thereat. Their salaries and wages are paid by an
employer abroad and is not borne by any entity or person in the Philippines. To be
considered as an OCW or OFW, they must be duly registered as such with the
Philippine Overseas Employment Administration (POEA) with a valid Overseas
Employment Certificate (OEC).
Seafarers of seamen are Filipino citizens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade. To be considered as an OCW of OFW they must be duly
registered as such with the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate (OEC) with a valid
Seafarers Identification Record Book (SIRB) or Seamans Book issued by the
Maritime Industry Authority (MARINA).
SECTION 3. Tax Treatment
A) Income Taxes:

Corollary thereto, Section 22(E)(3) of the same Code provides one of the definitions
of the term 'non-resident citizen' of the Philippines, viz.:
"(3) 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."
Thus, for purposes of exemption from income tax, a citizen must be deriving
foreign-sources income for being a non-resident citizen or for being an overseas
contract worker (OCW). All your employees whose services are rendered abroad
for being seconded or assigned overseas for at least 183 days may fall under the
first category and are therefore exempt from payment of Philippine income tax. In
this connection, the phrase "most of the time" which is used in determining when a
citizen's physical presence abroad will qualify him as non-resident, shall mean that
the said citizen shall have stayed abroad for at least 183 days in a taxable year.
The same exemption applies to an overseas contract worker but as such worker,
the time spent abroad is not material for tax exemption purposes. All that is required
is for the worker's employment contract to pass through and be registered with the
Philippine Overseas Employment Agency (POEA).

iv. Non-resident alien engaged in trade or business

1. Sec. 25(A)(1)of the NIRC
SEC. 25. Tax on Nonresident Alien Individual. -

This Office holds that the phrase "any calendar year" in the aforesaid Section of the
Tax Code should be interpreted to mean that when an expatriate stays in the Philippines
for more than 180 days in any calendar year, he would already be taxed at the graduated
rates of 5% to 32% not only during the year that he exceeds the 180-day period, but also
during the other years of assignment, even if such stay did not exceed 180 days.

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. (1) In General. - A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual citizen
and a resident alien individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a 'nonresident alien doing business in the Philippines'.
Section 22 (G) of this Code notwithstanding.
2. Sec. 8 of RR No. 240
SECTION 8. Taxation of non-resident aliens; classification. Non-resident alien
individuals are divided into two classes: (1) Those engaged in trade or business within the
Philippines, and (2) those not engaged in trade or business within the Philippines. Nonresident aliens falling within the first class are subject to the graduated rates established in
Section 21 with respect to their net income from sources within the Philippines. Nonresident aliens falling within the second class are subject to a flat rate of 20 per cent on their
total income from sources within the Philippines, if such total income does not exceed
P23,800, otherwise, the graduated rates established in Section 21 will apply to the total
income if it exceeds P23,800. (Conforms with amendments by R.A. 2343, effective June
20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the performance
of personal services within the Philippines. Whether a non-resident alien has an "office or
place of business," however, implies a place for the regular transaction of business and does
not include a place where casual or incidental transactions might be, or are, effected. Neither
the beneficiary nor the grantor of a trust, whether revocable or irrevocable, is deemed to be
engaged in trade or business in the Philippines or to have an office or place of business
therein, merely because the trustee is engaged in trade or business in the Philippines or has
an office or place of business therein. (Test of "office or place of business" was deleted by
R.A. 2343.)
3. "any calendar year"
a. BIR Ruling No. DA-05645 dated February 16,2005

v. Non-resident aliens not engaged in trade or business

1. Sec.25(B) ofthe NIRC
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. - There shall be levied, collected and paid for each taxable year upon the entire
income received from all sources within the Philippines by every nonresident alien individual
not engaged in trade or business within the Philippines as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and
income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not engaged in trade or business in the
Philippines from the sale of shares of stock in any domestic corporation and real property shall
be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

vi. Others
1. Minimum Wage Earners
a. Sec.22(HH)
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid
the statutory minimum wage or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned.
b. Sec. 1 of RR No. 10-08 dated July 8,2008 (DE MINIMIS BENEFITS;
WITHHOLDING TAX)
List of De Minimis Benefits which are exempt from income and fringe benefits
tax:
a) Monetized unused vacation leave credits of private employees not exceeding ten
(10) days during the year and the monetized value of leave credits paid to government
officials and employees;
b) Monetized value of vacation and sick leave credits paid to government officials and
employees;
c) Medical cash allowance to dependents of employees not exceeding Php750 per
employee per semester or Php125 per month;

d) Rice subsidy of Php1,500 or one (1) sack of 50-kg. rice per month amounting to not
more than Php1,500;
e) Uniform and clothing allowance not exceeding Php5,000 per annum;
f) Actual yearly medical benefits not exceeding Php10,000 per annum;
g) Laundry allowance not exceeding Php300 per month;
h) Employee achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding Php10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;
i) Gifts given during Christmas and major anniversary celebrations not exceeding
Php5,000 per employee per annum;
j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of
the basic minimum wage; and,
k) Benefits received by an employee by virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes provided that the total annual monetary
value received from both CBA and productivity incentive schemes combined do not
exceed ten thousand pesos (Php10,000.00) per employee per taxable year.
All other benefits given not included in the enumeration above shall not be considered de minimis
benefits and shall be subject to withholding tax on compensation income. (Enumeration now exclusive)
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered
in determining the P82,000.00 ceiling of 'other benefits' excluded from gross income under Section 32
(b) (7) (e) of the Code. Provided that, the excess of the de minimis benefits over their respective
ceilings prescribed by these regulations shall be considered as part of other benefits and the employee
receiving it will be subject to tax only on the excess over the P82,000.00 ceiling. Provided, further, that
MWEs receiving 'other benefits' exceeding the P82,000.00 limit shall be taxable on the excess benefits,
as well as on his salaries, wages and allowances, just like an employee receiving compensation income
beyond the SMW. (Revenue Regulations 5-2011, as amended)
2. Estates and trusts taxed as individuals (Sec. 60 to 66 of the NIRC) -to be
discussed under Part O of the syllabus.

operating headquarters established in the Philippines by multinational companies

as salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, from such regional or area headquarters and
regional operating headquarters, a tax equal to fifteen percent (15%) of such gross
income: Provided, however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens employed by these
multinational companies. For purposes of this Chapter, the term 'multinational
company' means a foreign firm or entity engaged in international trade with
affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other
foreign markets.
b. Same tax treatment to Filipinos occupying Technical and
Managerial Positions
i. Sec. 2.57.1 (D) of RR No. 2-98 dated April 17, 1998
(D) Income Derived by Alien Individuals Employed by Regional or Area
Headquarters and Regional Operating Headquarters of Multinational
Companies. A final withholding tax equivalent to fifteen percent (15%) shall
be withheld by the withholding agent from the gross income received by every
alien individual occupying managerial and technical positions in regional or
area headquarters and regional operating headquarters and representative
offices established in the Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration, and other emoluments, such as
honoraria and allowances, except income which is subject to the fringe benefits
tax, from such regional or area headquarters and regional operating
headquarters.
The same tax treatment shall apply to Filipinos employed and
occupying the same as those of alien employed by these multinational
companies.
The term "multinational company" means a foreign firm or entity
engaged in international trade with its affiliates or subsidiaries or branch offices
in the Asia Pacific Region and other foreign markets.
ii. Secs. 1 to 4 of RR 11-2010 dated October 26,2010

3. Aliens employed by Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Companies
a. Sec.25 (C)of the NIRC
(C) Alien Individual Employed by Regional or Area Headquarters and
Regional Operating Headquarters of Multinational Companies. - There shall
be levied, collected and paid for each taxable year upon the gross income received
by every alien individual employed by regional or area headquarters and regional

4. Aliens employed by Offshore Banking Units

a. Sec. 25 (D) of the NIRC
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied,
collected and paid for each taxable year upon the gross income received by every alien
individual employed by offshore banking units established in the Philippines as salaries,
wages, annuities, compensation, remuneration and other emoluments, such as honoraria

and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%)
of such gross income: Provided, however, That the same tax treatment shall apply to
Filipinos employed and occupying the same positions as those of aliens employed by
these offshore banking units.

payment of the tax rests primarily on the payor as a withholding agent. Thus, in
case of his failure to withhold the tax or in case of under withholding, the deficiency
tax shall be collected from the payor/withholding agent. The payee is not required
to file an income tax return for the particular income.

b. Same tax treatment to Filipinos

The finality of the withholding tax is limited only to the payee's income tax liability
on the particular income. It does not extend to the payee's other tax liability on said
income, such as when the said income is further subject to a percentage tax.

5. Aliens employed by Petroleum Service Contractor and Subcontractor

a. Sec.25 (E) ofthe NIRC
(E) Alien Individual Employed by Petroleum Service Contractor and
Subcontractor. [14] - An Alien individual who is a permanent resident of a foreign
country but who is employed and assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in the
Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria and
allowances, received from such contractor or subcontractor: Provided, however, That
the same tax treatment shall apply to a Filipino employed and occupying the same
position as an alien employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees
referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent
income tax, as the case may be, imposed under this Code.

b. Same tax treatment to Filipinos

2. General Principles of lncome Taxation
i. Sec.23 of the NIRC
3. Kinds of lncome
i. lncome subject to ordinary income tax
1. Business/Profession income
2. Compensation income

ii. lncome subject to final tax

1. Sec.2.57(A) of RR No.2-98
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount
of income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability for

For example, if a bank receives income subject to final withholding tax, the same
shall be subject to a percentage tax.
2. Secs. 24 and 25 of the NIRC
4. Personal and additional exemptions
i. Sec. 35 of the NIRC
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. [33]
In the case of married individuals 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 (P25,000) for each dependent not exceeding four (4). [34]
The additional exemption for dependent 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.
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or
as if such dependents married, became twenty-one (21) years old or became gainfully employed
at the close of such year.
(D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien
individual engaged in trade, business or in the exercise of a profession in the Philippines shall
be entitled to a personal exemption in the amount equal to the exemptions allowed in the income
tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not
residing in such country, not to exceed the amount fixed in this Section as exemption for citizens
or resident of the Philippines: Provided, That said nonresident alien should file a true and
accurate return of the total income received by him from all sources in the Philippines, as
required by this Title.
ii. Senior Citizens
1. Secs. 2(a), 2{c) and 11 of RR No. 7-10 dated July 20, 2010
iii. Persons with Disability
1. Sec. 33 of RA7277 as amended by RA 10754
5. Premium payments on health and/or hospitalization insurance
i. Sec. 34(M)of the NIRC
(M) 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.
Notwithstanding the provision of the preceding Subsections, The Secretary of Finance,
upon recommendation of the Commissioner, after a public hearing shall have been held for this
purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized
deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of
determining such ceilings or limitations, the Secretary of Finance shall consider the following
factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each
particular industry; and (2)effects of inflation on expenditure levels: Provided, further, That no
ceilings shall further be imposed on items of expense already subject to ceilings under present
law.
F. Corporate lncome Taxation

1. Definition - Sec. 22lBl of the NIRC

(B) The term 'corporation' shall include partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participacion), association, or insurance companies,
but does not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government. 'General professional partnerships' are partnerships formed by
persons for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
2. Partnerships taxed as a corporation
i. Joint Ventures engaged in construction projects
1. Secs. 2 and 3 of RR No. 10-12 dated June 1,2012
Section 2. BACKGROUND. Pursuant to Section 22(B) of the NIRC of 1997, as
amended, the term corporation shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract
with the Government.
The tax exemption of joint ventures formed for the purpose of construction
projects was pursuant to Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist
local contractors in achieving competitiveness with foreign contractors by pooling their
resources in undertaking big construction projects.
Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS.
A joint venture or consortium formed for the purpose of undertaking
construction projects not considered as corporation under Sec 22 of the NIRC of 1997
as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that is,
licensed as general contractor by the Philippine Contractors Accreditation Board
(PCAB) of the Department of Trade and Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and Industry
(DTI)

Joint ventures involving foreign contractors may also be treated as a nontaxable corporation only if the member foreign contractor is covered by a special license
as contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI); and the construction project is certified by the
appropriate Tendering Agency (government office) that the project is a foreign
financed/ internationally-funded project and that international bidding is allowed under
the Bilateral Agreement entered into by and between the Philippine Government and
the foreign / international financing institution pursuant to the implementing rules and
regulations of Republic Act No. 4566 otherwise known as Contractors License Law.
Absent any one the aforesaid requirements, the joint venture or consortium
formed for the purpose of undertaking construction projects shall be considered as
taxable corporations.
In addition, the tax-exempt joint venture or consortium as herein defined shall
not include those who are mere suppliers of goods, services or capital to a construction
project.
The member to a Joint Venture not taxable as corporation shall each be
responsible in reporting and paying appropriate income taxes on their respective share
to the joint ventures profit.
CIR vs. Batangas Transportation Co., GR No. L-9692 doted January 6, 1958 (take note of the
discussion of the Evangelista Case)
When the Tax Code includes "partnerships" among the entities subject to the tax on
corporations, it must refer to organizations which are not necessarily partnerships in the technical sense
of the term, and that furthermore, said law defined the term "corporation" as including partnerships no
matter how created or organized, thereby indicating that "a joint venture need not be undertaken in any
of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporations"; that besides, said section
84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and
"associations", none of which has a legal personality independent of that of its members.
Ona vs. CIR, GR No. L-79342 dated Moy 25,1972
Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A
civil case was instituted for the settlement of her state, in which Oa was appointed administrator and
later on the guardian of the three heirs who were still minors when the project for partition was approved.
This shows that the heirs have undivided interest in 10 parcels of land, 6 houses and money from the
War Damage Commission.
Although the project of partition was approved by the Court, no attempt was made to divide the
properties and they remained under the management of Oa who used said properties in business by
leasing or selling them and investing the income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result, petitioners properties and investments gradually

increased. Petitioners returned for income tax purposes their shares in the net income but they did not
actually receive their shares because this left with Oa who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore,
subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for
reconsideration, which was denied hence this petition for review from CTAs decision.
Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax
Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the
deceased among themselves pursuant to the project of partition, the heirs allowed their properties to
remain under the management of Oa and let him use their shares as part of the common fund for their
ventures, even as they paid corresponding income taxes on their respective shares.
Yes. For tax purposes, 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. The reason is
simple. From the moment of such partition, the heirs are entitled already to their respective definite
shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for
all taxes in connection therewith. If after such partition, he allows his share to be held in common with
his co-heirs under a single management to be used with the intent of making profit thereby in proportion
to his share, there can be no doubt that, even if no document or instrument were executed, for the
purpose, for tax purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships
The term partnership includes a syndicate, group, pool, joint venture or other unincorporated
organization, through or by means of which any business, financial operation, or venture is carried
on (8 Mertens Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships within the purview of the term
corporation. It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar
as said Code is concerned, and are subject to the income tax for corporations. Judgment affirmed.

Obillos vs. ClR, GR No. L-68118 dated October 29, 7985

FACTS:
Petitioners sold the lots they inherited from their father and derived a total profit of P33,584 for each of
them. They treated the profit as capital gain and paid an income tax thereof. The CIR required petitioners
to pay corporate income tax on their shares, .20% tax fraud surcharge and 42% accumulated interest.
Deficiency tax was assessed on the theory that they had formed an unregistered partnership or joint
venture.
ISSUE:
Whether or not partnership was formed by the siblings thus be assessed of the corporate tax.

partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable for corporate income tax,
as the respondent commissioner proposes.

RULING:
Petitioners were co-owners and to consider them partners would obliterate the distinction between coownership and partnership. The petitioners were not engaged in any joint venture by reason of that
isolated transaction.
Art 1769 the sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived. There must be an unmistakable intention to form partnership or joint venture

It is error to consider the petitioners as having formed a partnership under article 1767 of the
Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same
and divided the profit among themselves.

AFISCO Insurance Corporation vs. CA, 6R No. 772675 dated January 25, 1999

Pascual vs. ClR, GR No.78133 doted Octaber 78, 7988

The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for
machines. The petitioners in 1965 entered into a Quota Share Reinsurance Treaty and a Surplus
Reinsurance Treaty with the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a
non-resident foreign insurance corporation. The reinsurance treaties required petitioners to form a pool,
which they complied with.

FACTS: The petitioners bought 5 parcels of land. The first 2 parcels were sold by the petitioners in
1968 and the 3 parcels of land were sold in 1970. Capital gains tax was paid by the petitioners in 1973
and 1974 by availing of the tax amnesties granted in the said years. In 1979, the respondent
Commissioner informed petitioners that they have formed an unregistered partnership and should be
subject to corporate income tax. The CTA affirmed the decision.
ISSUE: Whether the petitioners should be deemed to have formed an unregistered partnership subject
to corporate income tax.
HELD: No. In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the profits
among themselves.
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must be a clear intent to form a

FACTS:

In 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return
of Organization Exempt from Income Tax for 1975. On the basis of this, the CIR assessed a deficiency
of P1,843,273.60, and withholding taxes in the amount of P1,768,799.39 and P89,438.68 on dividends
paid to Munich and to the petitioners, respectively.
The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.
The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that
the latters collection of premiums on behalf of its members, the ceding companies, was taxable income.
ISSUE/S:
1.
Whether or not the pool is taxable as a corporation.
2.
Whether or not there is double taxation.

HELD:
1) Yes: Pool taxable as a corporation
Argument of Petitioner: The reinsurance policies were written by them individually and separately,
and that their liability was limited to the extent of their allocated share in the original risks thus reinsured.
Hence, the pool did not act or earn income as a reinsurer. Its role was limited to its principal function of
allocating and distributing the risk(s) arising from the original insurance among the signatories to the
treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.
Argument of SC: According to Section 24 of the NIRC of 1975:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or
organized, but not including duly registered general co-partnership (compaias colectivas), general
professional partnerships, private educational institutions, and building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Interestingly, the NIRCs inclusion
of such entities in the tax on corporations was made even clearer by the Tax Reform Act of 1997 Sec.
27 read together with Sec. 22 reads:
SEC. 27. Rates of Income Tax on Domestic Corporations. -(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code, and
taxable under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:
xxx xxx
xxx
(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does
not include general professional partnerships [or] a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these
unregistered partnerships and even associations or joint accounts, which had no legal personalities apart
from their individual members.
Furthermore, Pool Agreement or an association that would handle all the insurance businesses covered
under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich may be considered
a partnership because it contains the following elements: (1) The pool has a common fund, consisting
of money and other valuables that are deposited in the name and credit of the pool. This common fund
pays for the administration and operation expenses of the pool. (2) The pool functions through an
executive board, which resembles the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) While, the pool itself is not a reinsurer and does not
issue any policies; its work is indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have received their premiums pursuant
to the agreement with Munich. Profit motive or business is, therefore, the primordial reason for the
pools formation.
2) No: There is no double taxation.
Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. Imposing a tax would be tantamount to an illegal double taxation, as it would result in
taxing the same premium income twice in the hands of the same taxpayer. Furthermore, even if such
remittances were treated as dividends, they would have been exempt under tSections 24 (b) (I) and 263
of the 1977 NIRC , as well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West
German Tax Treaty.
Argument of Supreme Court: Double taxation means taxing the same person twice by the same
jurisdiction for the same thing. In the instant case, the insurance pool is a taxable entity distince from
the individual corporate entities of the ceding companies. The tax on its income is obviously different
from the tax on the dividends received by the companies. There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax exemption
construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on foreign corporations; hence,
it cannot be claimed by the ceding companies which are domestic corporations. Nor can Munich, a
foreign corporation, be granted exemption based solely on this provision of the Tax Code because the
same subsection specifically taxes dividends, the type of remittances forwarded to it by the pool. The
foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must be expressed in a language too
plain to be mistaken.
ii. lncome of partners in a regular partnership - Sec. 73(D)

(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The

taxable income declared by a partnership for a taxable year which is subject to tax under Section
27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed
to have been actually or constructively received by the partners in the same taxable year and
shall be taxed to them in their individual capacity, whether actually distributed or not.