Professional Documents
Culture Documents
SECTION 1.
Scope. In accordance with the provisions of Sections 4
(I) and 338 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, the following regulations affecting Sections 19 to 84 of the same Code
relating to the income tax are hereby promulgated to supersede all circulars,
precedents, rulings, and regulations heretofore published on the same subject, and
they shall be known as Revenue Regulations No. 2, or the Income Tax Regulations:
(Only the section numbers of the Code are given below as their texts will be
found in the same Code. They serve as captions of the pertinent provisions of the
Regulations.)
(Section 20 of the Code)
SECTION 2.
Application of title. Section 20 provides that the
provisions of Title II of the National Internal Revenue Code shall apply only to
income received from January 1, 1939.
(Section 21 of the Code)
SECTION 3.
Persons considered citizens of the Philippines. The
following shall be considered citizens of the Philippines:
(1) Those who were citizens of the Philippines at the time of the adoption of
the Constitution of the Philippines.
(2) Those born in the Philippines of foreign parents who, before the adoption
of the Constitution, had been elected to public office in the Philippines.
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Not
Exceeding
P2,000
4,000
6,000
8,000
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
3
Bracket
2,000
2,000
2,000
2,000
2,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
4
Rate
of Tax
3%
6%
9%
16%
20%
24%
30%
36%
40%
42%
44%
46%
48%
50%
5
6
Tax on Each Cumulative
Bracket Amount of Tax
P60
P60
120
180
180
360
320
680
400
1,080
2,400
3,480
3,000
6,480
3,600
10,080
4,000
14,080
4,200
18,280
4,400
22,680
4,600
27,280
4,800
32,080
5,000
37,080
100,000
120,000
140,000
160,000
200,000
250,000
300,000
400,000
500,000
120,000
140,000
160,000
200,000
250,000
300,000
400,000
500,000
-
20,000
20,000
20,000
40,000
50,000
50,000
100,000
100,000
-
52%
53%
54%
55%
56%
57%
58%
59%
60%
10,400
10,600
10,800
22,000
28,000
28,500
58,000
59,000
-
47,480
58,080
68,880
90,880
118,880
147,380
205,380
264,380
-
SECTION 10.
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person claiming additional exemption is a head of family. The children with respect to
whom additional exemption is claimed must be wholly dependent upon the taxpayer
for support. (Conforms with amendments by R A. 2343, effv. June 20, 1959.)
SECTION 13.
Change of status. If the status of the taxpayer, insofar as
it affects the personal and additional exemptions, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, in accordance with the number of months before and after such change.
For the purpose of such apportionment, a fractional part of a month shall be
disregarded unless it amounts to more than half a month in which case it shall be
considered as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22,
1950.)
SECTION 14.
Personal exemption of non-resident aliens. A
non-resident alien is entitled to a personal exemption in an amount equal to the
exemptions allowed by the income tax law in the country of which he is a citizen or
subject to citizens of the Philippines. The exemption allowed to non-resident aliens is
a reciprocal one; that is, it is only allowed if the country of said non-resident aliens
allows similar exemptions to Filipinos not residing in such country but deriving
income from sources therein. If the country of which the non-resident alien is a citizen
or subject does not have any income tax law, such non-resident alien will not be
entitled to personal exemption.
(Section 24 of the Code)
SECTION 15.
Income tax on corporations. The law imposes an annual
income tax of 22 per centum upon that portion of the net income of every corporation
not in excess of P100,000 and 30 per cent on the excess. The term "corporation"
includes partnership no matter how created or organized, joint-stock companies,
joint-account (cuentas en participacion), association, or insurance companies but does
not include duly registered general co-partnership (companias colectivas). The tax is
upon net income, which is undetermined by subtracting from the gross income, as
defined in the law, the allowable deductions. (Conforms with amendments by R.A.
2343, effv. June 20, 1959.)
SECTION 16.
Corporations liable to tax. Every corporation, domestic
or foreign, not otherwise exempt from tax under Title II or any other law, is liable to
tax. A domestic corporation is taxed on its income from sources within and without
the Philippines, but a foreign corporation is taxed only on its income form sources
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Foreign life insurance companies not doing business in the Philippines are
subject to the normal income tax on their income received from sources within the
Philippines. They are subject to tax at the rate of 30% like any other foreign
corporation.
Domestic life insurance companies and foreign life insurance companies doing
business in the Philippines are not allowed to deduct from their gross income the net
additions, if any, required by law to be made within the year to reserve funds and the
sums other than dividends paid within the year on policy and annuity contracts.
(Proposed by the BIR. If adopted, this will supersede Sec. 124 of existing
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regulations.)
(Section 25 of the Code)
SECTION 18.
Taxation of corporation formed or utilized for avoidance of
tax. Section 25 imposes for each year, in addition to the tax imposed by Section 24
a tax of 25 per cent on the undistributed portion of the profits or surplus of a
corporation which is formed or availed of for the purpose of preventing the imposition
of the tax upon its shareholders or members or the shareholders or members of any
other corporation through the medium of permitting gains or profits to accumulate
instead of dividing or distributing them. However, banks, insurance companies,
personal holding companies and foreign personal holding companies as defined in
Chapter VIII, are excepted from taxation under Section 25. The tax imposed by
Section 25 applies whether the avoidance was accomplished through the formation or
use of only one corporation or a chain of corporations. For example, if the capital
stock of the M Corporation is held by the N Corporation so that the dividend
distributions of the M Corporation would not be returned as income subject to the tax
on individuals until distributed in turn by the N Corporation to its individual
shareholders, nevertheless the tax imposed by Section 25 applies to the M
Corporation, if that corporation is formed or availed of for the purpose of preventing
the imposition of the tax upon the individual shareholders of the N Corporation. A
foreign corporation, whether resident or non-resident, is subject to the tax provided
for under Section 25 in the same manner and under the same circumstances as a
domestic corporation.
SECTION 19.
Purpose to avoid tax; evidence; burden of proof; definitions
of holding or investment company. The Collector of Internal Revenue's
determination that a corporation was formed or availed of for the purpose of avoiding
the tax on its shareholders or members is subject to disproof by competent evidence.
The existence or non-existence of the purpose may be indicated by circumstances
other than the evidence specified in Section 25(b), and whether or not such purpose
was present depends upon the particular circumstances of each case. In other words, a
corporation is subject to taxation under Section 25 if it is formed or availed of for the
purpose of preventing the imposition of the progressive rates of tax upon shareholders
through the medium of permitting earnings or profits to accumulate, even though the
corporation is not a mere holding or investment company 50 per cent or more of the
outstanding stock of which is owned directly or indirectly by one person, and does not
have an unreasonable accumulation of earnings or profits; and on the other hand, the
fact that a corporation is such a company or has an accumulation is not absolutely
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conclusive against it if, by clear and convincing evidence, the taxpayer satisfies the
Commissioner of Internal Revenue that the corporation was neither formed nor
availed of for the purpose of avoiding the tax on individuals. All the other
circumstances which might be construed as evidence of the purpose to avoid the tax
on shareholders cannot be outlined, but among other things the following will be
considered: (1) Dealings between the corporation and its shareholders, such as
withdrawal by the shareholders as personal loans or the expenditure of funds by
corporation for the personal benefit of the shareholders, and (2) the investment by the
corporation of undistributed earnings in assets having no reasonable connection with
the business. The mere fact that the corporation distributed a large part of its earnings
for the year in question does not necessarily prove that earnings were not permitted to
accumulate beyond reasonable needs or that the corporation was not formed or availed
of to avoid the tax upon shareholders.
If the Commissioner of Internal Revenue determined that the corporation was
formed or availed of for the purpose of avoiding the progressive rates of tax on
individuals through the medium of permitting earnings or profits to accumulate, and
the taxpayer contests such determination of fact by litigation, the burden of proving
the determination wrong by a preponderance of evidence, together with the
corresponding burden of first going forward with evidence, is on the taxpayer under
principles applicable to income tax cases generally, and this is so even though the
corporation is not a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits. However, if the corporation is a
mere holding or investment company, then the law gives further weight to the
presumption of correctness already arising from the Commissioner of Internal
Revenue's determination by expressly providing an additional presumption of the
existence of a purpose to avoid the tax upon shareholders, while if earnings or profits
are permitted to accumulate beyond the reasonable needs of the business then the law
adds still more weight to the Commissioner of Internal Revenue's determination by
providing that irrespective of whether or not the corporation is a mere holding or
investment company, the existence of such an accumulation is determinative of the
purpose to avoid the tax upon shareholders unless the taxpayer proves the contrary by
such a clear preponderance of all the evidence that the absence of such a purpose is
unmistakable.
SECTION 20.
Holding and investment companies. A corporation
having practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company within the
meaning of Section 25. If the activities further include, or consist substantially of,
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buying and selling stocks, securities, real estate, or other investment property (whether
upon an outright or a marginal basis) so that the income is derived not only from the
investment yield but also from profits upon market fluctuations, the corporation shall
be considered an investment company within the meaning of Section 25.
SECTION 21.
Unreasonable accumulation of profits. An accumulation
of earnings or profits (including the undistributed earnings or profits of prior years) is
unreasonable if it is not required for the purposes of the business, considering all the
circumstances of the case. It is not intended, however, to prevent accumulations of
surplus for the reasonable needs of the business if the purpose is not to prevent the
imposition of the tax upon shareholders. No attempt is here made to enumerate all the
ways in which earnings or profits of a corporation may be accumulated for the
reasonable needs of the business. Undistributed income is properly accumulated if
retained for working capital needed by the business; or if invested in additions to plant
reasonably required by the business; or if in accordance with contract obligations
placed to the credit of a sinking fund for the purpose of retiring bonds issued by the
corporation. The nature of the investment of earnings or profits is immaterial if they
are not in fact needed in the business. Among other things, the nature of the business,
the financial condition of the corporation at the close of the taxable year, and the use
of the undistributed earnings or profits will be considered in determining the
reasonableness of the accumulations.
The business of a corporation is not merely that which it has previously carried
on, but includes in general any line of business which it may undertake. However, a
radical change of business when a considerable surplus has been accumulated may
afford evidence of a purpose to avoid the tax. If one corporation owns the stock of
another corporation in the same or a related line of business and in effect operates the
other corporation, the business of the latter may be considered in substance although
not in legal form the business of the first corporation. Earnings or profits of the first
corporation put into the second through the purchase of stock or otherwise may,
therefore, if a subsidiary relationship is established, constitute employment of the
income in its own business. Investment by a corporation of its income in stock and
securities of another corporation is not of itself to be regarded as employment of the
income in its business. The business of one corporation may not be regarded as
including the business of another unless the other corporation is a mere
instrumentality of the first; to establish this it is ordinarily essential that the first
corporation own all or substantially all of the stock of the second.
The Commissioner of Internal Revenue may require any corporation to furnish
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a statement of its accumulated earnings and profits, the name and address of, and
number of share held by each of its shareholders or members, and the amounts that
would be payable to each, if the income of the corporation were distributed.
(Section 26 of the Code)
SECTION 22.
General co-partnerships. General co-partnerships, when
duly registered, are not subject to income tax, but are required to file returns of their
income on B.I.R. Form No. 17.04 for the purpose of furnishing information as to the
share in the gains or profits which each partner shall include in his individual return.
Individuals carrying on business in general co-partnership are, however, taxable upon
their distributive shares of the net income of such partnership, whether distributed or
not, and are required to include such distributive shares in their individual returns. The
returns of duly registered general co-partnerships should be rendered on or before
April 15 of each year or within sixty days after the end of their fiscal year depending
on whether their books are kept on the calendar or on the fiscal year basis. (Conforms
with amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 23.
Distributive shares of partners. The distributive share of
the net profit of a general co-partnership must be included in the individual returns of
the partners. But where the result of partnership operation is a loss, the loss will be
divisible by the partners in the same proportion as the net income would have been
divisible (or, if the partnership agreement provides for the division of a loss in a
manner different from the division of a gain, in the manner so provided) and may be
taken by the individual partners in their respective returns of income.
(Section 27 of the Code)
SECTION 24.
Proof of exemption. In order to establish its exemption,
and thus be relieved of the duty of filing returns of income and paying the tax, it is
necessary that every organization claiming exemption file an affidavit with the
Commissioner of Internal Revenue, showing the character of the organization, the
purpose for which it was organized, its actual activities, the sources of its income and
its disposition, whether or not any of its income is credited to surplus or inures or may
inure to the benefit of any private shareholder or individual, and in general, all facts
relating to its operations which affect its right to exemption. To such affidavit should
be attached a copy of the charter or articles of incorporation, the by-laws of the
organization, and the latest financial statement showing the assets, liabilities, receipts,
and disbursement of the organization.
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Upon receipt of the affidavit and other papers by the Commissioner of Internal
Revenue, the organization will be informed whether or not it is exempt. When an
organization has established its right to exemption, it need not thereafter make and file
a return of income as required under Section 46 of the Tax Code. However, the
organization should file on or before April 15 of each year, an annual information
return under oath, stating its gross income and expenses incurred during the preceding
year, and a certificate showing that there has not been any substantial change in its
By-Laws, Articles of Incorporation, manner of operation and activities as well as
sources and disposition of income. (As amended by Revenue Regulations No. 7-64,
approved November 25, 1964.)
SECTION 25.
Agricultural and horticultural organizations. The
organizations contemplated by subsection (a) of Section 27 of the Code as entitled to
exemption from income taxation are those which (1) have no net income inuring to
the benefit of any member; (2) are educational or instructive in character; and (3) have
as their objects the betterment of the conditions of those engaged in such pursuits, the
improvement of the grade of their products, and the development of a higher degree of
efficiency in their respective occupations. Organizations such as provincial fairs and
like associations of a quasi-public character, which are designed to encourage the
development of better agricultural and horticultural products through a system of
awards, prizes, or premiums, and whose income derived from gate receipts, entry fees,
donations, etc., is used exclusively to meet the necessary expenses of upkeep and
operation, are thus exempt. On the other hand, associations which have for their
purpose, for example, the holding of periodical race meets, the profits from which
may inure to the benefit of their shareholders, are not exempt. Similarly, corporations
engaged in growing agricultural or horticultural products or raising live stock or
similar products for profits are not exempt from tax under this paragraph.
ITScHa
SECTION 26.
Mutual savings bank. In order that a corporation may be
entitled to exemption as a mutual savings bank, it must appear that it is an
organization (1) which has no capital stock represented by shares, and (2) whose
earnings less only the expenses of operation, are distributable wholly among the
depositors. If it appears that the organization has shareholders who participate in the
profits, the organization will not be exempt from income tax.
SECTION 27.
Fraternal beneficiary societies. A fraternal beneficiary
society is exempt from tax only if operated under the "lodge system", or for the
exclusive benefit of the members of a society so operating. "Operating under the lodge
system" means carrying on its activities under a form of organization that comprises
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Income not derived from their properties, real or personal, are exempt. For
example, in the case of a religious corporation, income from the conduct of strictly
religious activities, such as fees received for administering baptismals, solemnizing
marriages, attending burials, holding masses, and other like income, is exempt. In the
case of an educational corporation, income from the holding of an educational fair or
exhibit is exempt. However, if such exempt income is invested by the corporation, the
income from such investment, as interests from the capital where the capital has been
loaned or dividends on stock where the capital has been invested in shares of stock,
will constitute taxable income. Donations and other similar contributions received by
such corporation from other persons are exempt.
The clause "except income expressly exempt by this Title" appearing in
subsection (e) of Section 27 refers to those classes of income which, in accordance
with subsection (b) of Section 29, are exempt from taxation under Title II.
Charitable corporations include an association for the relief of the families of
clergymen, even though the latter make a contribution to the fund established for this
purpose; or for furnishing the services of trained nurses to persons unable to pay for
them; or for aiding the general body of litigants by improving the efficient
administration of justice. Educational corporations may include associations whose
sole purpose is the instruction of the public. But associations formed to disseminate
controversial or partisan propaganda are not educational within the meaning of the
law. Scientific corporations include an association for the scientific study of law with
a view to improving its administration.
It does not prevent exemption that private individuals, for whose benefit a
charity is organized, receive the income of the corporation or association. The law
refers to individuals having a personal and private interest in the activities of the
corporation, such as stockholders. If, however, a corporation issues "voting shares",
which entitle the holders upon the dissolution of the corporation to receive the
proceeds of its property, including accumulated income, the right to exemption ceases
to exist, even though the by-laws provide that the shareholders shall not receive any
dividend or other return upon their shares.
SECTION 31.
Business leagues. A business league is an association of
persons having some common business interest, which limits its activities to work for
such common interest and does not engage in a regular business of a kind ordinarily
carried on for profit. Its work need not be similar to that of a chamber of commerce or
board of trade. If it engages in a regular business of a kind ordinarily carried on for
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profit, the fact that the business is conducted on a cooperative basis or produces only
sufficient income to be self-sustaining, is not ground for exemption. An association
engaged in furnishing information to prospective investors, to enable them to make
sound investments, is not exempt, since its members have no common business
interest, even though all of its income is devoted to the purpose stated. A clearing
house association, not organized for profit, no part of the net income of which inures
to any private shareholder or individual, is exempt provided its activities are limited to
the exchange of checks, and similar work for the common benefit of its members. An
association of persons who are engaged in the transportation business, whether by
land or water, which is designed to promote the legitimate objects of such business,
and all of the income of which is derived from membership dues and is expended for
office expenses is exempt from tax.
DSITEH
SECTION 32.
Civic leagues. Civic leagues entitled to exemption
comprise those not organized for profit but operated exclusively for purposes
beneficial to the community as a whole. In general, organizations engaged in
promoting the welfare of mankind are exempt from tax.
SECTION 33.
Social clubs. The exemption applies to practically all
social and recreation clubs which are supported by membership fees, dues, and
assessments. If a club, by reason of the comprehensive powers granted in the charter,
engages in business or in agriculture or horticulture, for profit, such club is not
organized and operated exclusively for pleasure, recreation, or social purposes, and
any profit realized from such activities is subject to tax.
SECTION 34.
Mutual insurance companies and like organizations. It is
necessary to exemption that the income of the company be derived solely from
assessments, dues, and fees collected from members. If income is received from other
sources, the corporation is not exempt. Income, however, from sources other than
those specified does not prevent exemption where its receipt is a mere incident of the
business of the company. Thus the receipt of interest upon a working bank balance, or
of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the
exemption. The same is true of the receipt of interest upon Government bonds, where
they were purchased and were afterwards sold. Where, however, such bonds are
bought as a permanent investment, the receipt of the interest destroys the exemption.
The receipt of what is, in substance, an entrance fee, charged by a mutual fire
insurance company as a condition of membership, does not render the company
taxable, although this fee is called a premium. If an organization issues policies for
stipulated cash premiums, or if it requires advance deposits to cover the cost of the
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insurance and maintains investments from which income is derived, it is not entitled
to exemption. On the other hand, an organization may be entitled to exemption,
although it makes advance assessment for the sole purpose of meeting future losses
and expenses, provided that the balance of such assessments remaining on hand at the
end of the year is retained to meet losses and expenses or is returned to members. An
organization of a purely local character is one whose business activities are confined
to a particular community, place, or district, irrespective, however, of political
subdivisions.
SECTION 35.
Farmers' cooperative marketing and purchasing
association. Cooperative associations, acting as sales agents for farmers or others,
in order to come within the exemption must establish that for their own account they
have no net income. Cooperative dairy companies, which are engaged in collecting
milk and disposing of it or the products thereof and distributing the proceeds, less
necessary operating expenses, among their members upon the basis of the quantity of
milk or of butter fat in the milk furnished by such members are exempt from the tax.
If the proceeds of the business are distributed in any other way than on such a
proportionate basis, the company will be subject to tax. A farmers' association is not
exempt from taxation where in accounting to farmers furnishing produce for the
proceeds of sales it deducts more than the necessary selling expenses incurred.
Cooperative associations acting as purchasing agents are not expressly exempt from
tax, but rebates made to purchasers, whether or not members of the association, in
proportion to their purchases may be excluded from gross income in computing the
net income subject to tax. Any profits made from non-members and distributed to
members in the guise of rebates are, of course, subject to tax.
Cooperative marketing associations duly incorporated under Act No. 3425,
known as the Cooperative Marketing Law are exempt from income tax. (See also R.A.
702 exempting cooperative marketing associations.)
(Section 28 of the Code)
SECTION 36.
Meaning of net income. The tax imposed by law is upon
income. In the computation of the tax, various classes of income must be considered:
(a) Income, in the broad sense, meaning all wealth which flows into the tax-payer
other than as a mere return of capital. It includes the forms of income specifically
described as gains and profits, including gains derived from the sale or other
disposition of capital assets. Income cannot be determined merely by reckoning cash
receipts, for the statute recognizes as income determining factor other items, among
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which are inventories, accounts receivable, property exhaustion, and accounts payable
for expenses incurred. (b) Gross income, meaning income (in the broad sense) less
income which is by statutory provision or otherwise exempt from the tax imposed by
law. (c) Net income, meaning gross income less statutory deductions. The statutory
deductions are, in general, though not exclusively, expenditures other than capital
expenditures, connected with production of income. (d) In the case of a taxpayer other
than a corporation as defined in Section 84 (b) of the Code, net income means gross
income less exemptions. Ordinarily the net income is to be computed in accordance
with the method of accounting regularly employed in keeping the books of the
taxpayer.
SECTION 37.
Computation of net income. Net income must be
computed with respect to a fixed period. That period is twelve months ending
December 31st of every year except in the case of a corporation filing returns on a
fiscal year basis in which case net income will be computed on the basis of such fiscal
year. Items of income and of expenditures, which as gross income and deductions, are
elements in the computation of net income, need not be in the form of cash. It is
sufficient that such items may be appraised in terms of money. The time as of which
any item of gross income or any deduction is to be accounted for must be determined
in the light of the fundamental rule that the computation shall be made in such a
manner as would clearly reflect the taxpayer's income. If the method of accounting
regularly employed by him in keeping his books clearly reflects his income, it is to be
followed with respect to the time as of which items of gross income and deductions
are to be accounted for, otherwise the computation of net income shall be made in
such manner as in the opinion of the Commissioner of Internal Revenue would clearly
reflect it.
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
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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.)
(Section 29(a) of the Code)
SECTION 39.
What gross income includes. Gross income includes, in
general, compensation for personal and professional services, business income, profits
from sales of and dealings in property, interests, rents, dividends, and gains, profits,
and income derived from any source whatever, unless exempt from tax by law. In
general, income is 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. Profit of citizens, resident aliens, or domestic corporations derived from
sales in foreign commerce must be included in their gross income. Income may be in
the form of cash or of property.
IHDCcT
For the treatment of dividends for purposes of the tax, see Sections 250 to 256
of these regulations. For the treatment of capital gains, see Sections 132 to 135 of
these regulations.
SECTION 40.
Compensation for personal services. Where no
determination of compensation is had until the completion of the services, the amount
received is ordinarily income for the taxable year of its determination, if the return is
rendered on the accrual basis; or, for the taxable year in which received, if the return
is rendered on a receipts and disbursements basis. Commissions paid salesman,
compensation for services on the basis of a percentage of profits, commissions on
insurance premiums, tips, and pensions or retiring allowances paid by private persons
or by the Government of the United States or of the Philippines (except pensions
exempt by law from tax) are income to the recipients; as are also marriage fees,
baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelists, or religious worker for services rendered.
However, so-called pensions awarded by one to whom no services have been rendered
are mere gifts or gratuities and are not taxable.
SECTION 41.
Compensation paid other than in cash. Where services
are paid for with something other than money, the fair market value of the thing taken
in payment is the amount to be included as income. If the services were rendered at a
stipulated price, in the absence of evidence to the contrary, such price will be
presumed to be the fair value of the compensation received. Compensation paid an
employee of a corporation in its stock is to be treated as if the corporation sold the
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stock for its market value and paid the employee in cash. When living quarters are
furnished in addition to cash salary, the rental value of such quarters should be
reported as income.
SECTION 42.
Compensation paid in promissory notes. Promissory
notes or other evidence of indebtedness received in payment for services, and not
merely as security for such payment, constitute income to the amount of their fair
market value. A taxpayer receiving as compensation a note regarded as good for its
face value at maturity, but not bearing interest, shall treat as income as of the time of
receipt the fair discounted value of the note at that time. Thus, if it appears that such a
note is or could be discounted on a 6 per cent basis, the recipient shall include such
note in his gross income to the amount of its face value less discount computed at the
prevailing rate for such transactions.
If the payment due on a note so accounted for are met as they become due,
there should be included as income in respect of each such payment so much thereof
as represents recovery for the discount originally deducted.
SECTION 43.
Gross income from business. In the case of a
manufacturing, merchandising, or mining business, "gross income" means the total
sales, less the cost of goods sold, plus any income from investments and from
incidental or outside operations or sources. In determining the gross income,
subtractions should not be made for depreciation, depletion, selling expenses or
losses, or for items not ordinarily used in computing the cost of goods sold.
SECTION 44.
Long term contracts. Income from long-term contracts is
taxable for the period in which the income is determined, such determination
depending upon the nature and terms of the particular contract. As used herein the
term "long-term" contracts means building, installation, or construction contracts
covering a period in excess of one year. Persons whose income is derived in whole or
in par from such contracts may, as to such income, prepare their returns upon the
following bases:
(a) Gross income derived from such contracts may be reported upon the basis
of percentage of completion. In such case there should accompany the 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
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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 of Internal Revenue may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is
finally completed and accepted if the taxpayer elects as a consistent practice to so treat
such income, provided such method clearly reflects the net income. If this method is
adopted there should be deducted from gross income all expenditures during the life
of the contract which are properly allocated thereto, taking into consideration any
material and supplies charged to the work under the contract but remaining on hand at
the time of the completion.
Where a taxpayer has filed his return in accordance with the method of
accounting regularly employed by him in keeping his books and such method clearly
reflects the income, he will not be required to change to either of the methods above
set forth. If a taxpayer desires to change his method of accounting in accordance with
paragraphs (a) and (b) above, a statement showing the composition of all items
appearing upon his balance sheet and used in connection with the method of
accounting formerly employed by him, should accompany his return.
SECTION 45.
Gross income of farmers. A farmer reporting on the basis
of receipts and disbursements (in which no inventory to determine profits is used)
shall include in his gross income for the taxable year (1) the amount of cash or the
value of merchandise or other property received from the sale of live stock and
produce which were raised during the taxable year or prior years, (2) the profit from
the sale of any live stock or other items which were purchased, and (3) gross income
from all other sources. The profit from the sale of live stock or other items which were
purchased is to be ascertained by deducting the cost from the sales price in the year in
which the sale occurs, except that in the case of the sale of animals purchased as draft
or work animals, or solely for breeding or dairy purposes and not for resale, the profit
shall be the amount of any excess of the sales prices over the amount representing the
difference between the cost and the depreciation theretofore sustained and allowed as
a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is
used to determine profits), his gross profits are ascertained by adding to the inventory
value of live stock and products on hand at the end of the year the amount received
from the sale of live stock products, and miscellaneous receipts for hire of teams,
machinery, and the like, during the year, and deducting from this sum the inventory
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value of live stock and products on hand at the beginning of the year and the cost of
live stock and products purchased during the year. In such cases all live stock raised
or purchased for sale shall be included in the inventory at their proper valuation
determined in accordance with the method authorized and adopted for the purpose.
Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may
be included in the inventory, instead of being treated as capital assets subject to
depreciation, provided such practice is followed consistently by the taxpayer. In case
of the sale of any live stock included in an inventory their cost must not be taken as an
additional deduction in the return of income, as such deduction will be reflected in the
inventory.
In every case of the sale of machinery, farm equipment, or other capital assets
(which are not to be included in an inventory if one is used to determine profits) any
excess over the cost thereof less the amount of depreciation theretofore sustained and
allowed as a deduction in computing net income, shall be included as gross income.
Where farm produce is exchanged for merchandise, groceries, or the like, the market
value of the article received in exchange is to be included in gross income. Rents
received in crop shares shall be returned as of the year in which the crop shares are
reduced to money or a money equivalent. Proceeds of insurance, such as fire and
typhoon insurance on growing crops, should be included in gross income to the
amount received in cash or its equivalent for the crop injured or destroyed. If a farmer
is engaged in producing crops which take more than a year from the time of planting
to the time of gathering and disposing, the income therefrom may be computed upon
the crop basis; but in any such cases the entire cost of producing the crop must be
taken as a deduction in the year in which the gross income from the crop is realized.
EaICAD
As herein used the term "farm" embrace the farm in the ordinarily accepted
sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations,
ranches, and all land used for farming operations. All individuals, partnerships, or
corporations that cultivate, operate, or manage farms for gain or profit either as
owners, or tenants, are designated farmers. A person cultivating or operating a farm
for recreation or pleasure, the result of which is a continual loss from year to year, is
not regarded as a farmer.
SECTION 46.
Sale of patents and copyrights. A taxpayer disposing of
patents or copyrights by sale should determine the profit or loss arising therefrom by
computing the difference between the selling price and the cost. The taxable income
in the case of patents or copyrights acquired prior to March 1, 1913, should be
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ascertained in accordance with the provisions of section 136 of these regulations. The
profit or loss thus ascertained should be increased or decreased, as the case may be, by
the amounts deducted on account of depreciation of such patent or copyrights since
March 1, 1913, or since the date of acquisition if subsequent thereto.
SECTION 47.
Sale of goodwill. Gain or loss from a sale of goodwill
results only when the business, or a part of it, to which the goodwill attaches is sold,
in which case the gain or loss will be determined by comparing the sale price with the
cost or other basis of the assets, including goodwill. If specific payment was not made
for goodwill acquired after March 1, 1913, there can be no deductible loss with
respect thereto, but gain may be realized from the sale of goodwill built up through
expenditures which have been currently deducted. It is immaterial that goodwill may
never have been carried on the books as an asset but the burden of proof is on the
taxpayer to establish the cost or fair market value on March 1, 1913, of the goodwill
sold.
SECTION 48.
Annuities and insurance policies. Annuities paid by
religious, charitable, and educational corporations under an annuity contract are
subject to tax to the extent that the aggregate amount of the payments to the annuitant
exceeds the amounts paid by him as consideration for the contract. An annuity
charged upon devised land is taxable to a donee-annuitant, whether paid by the
devisee out of the rents of the land or from other sources. The devisee is not required
to return as gross income the amount of rent paid to the annuitant, and he is not
entitled to deduct from his gross income any sums paid to the annuitant. Amounts
received by an insured as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, such as the so-called "dividends" of a mutual
insurance company, which may be credited against the current premium, are not
subject to tax. Distributions on paid-up policies which are made out of earnings of the
insurance company subject to tax are in the nature of corporate dividends and should
be included in the taxable income of the individual, without any credit for the amount
of tax paid by the corporation at source.
SECTION 49.
Improvements by lessees. When buildings are erected or
improvements made by a lessee in pursuance of an agreement with the lessor, and
such buildings or improvements are not subject to removal by the lessee, the lessor
may at his option report the income therefrom upon either of the following bases;
(a) The lessor may report as income at the time when such buildings or
improvements are completed the fair market value of such buildings or improvements
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on a judgment therefore in a later year, income is realized in that year, assuming that
the money or property would have been income in the earlier year if then received.
This is true of a recovery for patent infringement. Bad debts or accounts charged off
subsequent to March 1, 1913, because of the fact that they were determined to be
worthless, which are subsequently recovered, whether or not by suit, constitute
income for the year in which recovered, regardless of the date when amounts were
charged off.
SECTION 52.
Income constructively received. 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. To constitute receipt in such a case the
income must be credited to the taxpayer without any substantial limitation or
restriction as to the time or manner of payment or condition upon which payment is to
be made. A book entry, if made, should indicate an absolute transfer from one account
to another. If the income is not credited, but is set apart, such income must be
unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently
credits its employees with bonus stock, but the stock is not available to such
employees until some future date, the mere crediting on the books of the corporation
does not constitute receipt.
SECTION 53.
Examples of constructive receipt. When interest coupons
have matured and are payable, but have not been cashed, such interest payment
though not collected when due and payable, is nevertheless available to the taxpayer
and should therefore be included in his gross income for the year during which the
coupons matured. This is true if the coupons are exchanged for other property instead
of eventually being cashed. Defaulted coupons are income for the year in which paid.
The distributive share of the profits of a partner in a general co-partnership duly
registered is regarded as received by him, although not distributed. Interest credited on
savings bank deposits, even though the bank nominally has a rule, seldom or never
enforced, that it may require so many days' notice in advance of cashing depositors'
checks, is income to the depositor when credited. An amount credited to shareholders
of a building and loan association, when such credit passes without restriction to the
shareholder, has taxable status as income for the year of the credit. When the amount
of such accumulations has not become available to the shareholder until the maturity
of a share, the amount of any share in excess of the aggregate amount paid in by the
shareholder is income for the year of maturity of the share.
TaSEHC
SECTION 54.
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order solely to secure payment of its bonds or other indebtedness, places property in
trust, or sets aside certain amounts in a sinking fund under the control of a trustee who
may be authorized to invest and reinvest such sums from time to time, the property or
fund thus set aside by the corporation and held by the trustee is an asset of the
corporation, and any gain arising therefrom is income of the corporation and shall be
included as such in its annual return.
SECTION 55.
Acquisition or disposition by a corporation of its own
capital stock. Whether the acquisition or disposition by a corporation of share of its
own capital stock gives rise to taxable gain or deductible loss depends upon the real
nature of the transaction, which is to be ascertained from all its facts and
circumstances. The receipt by a corporation of the subscription price of shares of its
capital stock upon their original issuance gives rise to neither taxable gain nor
deductible loss, whether the subscription or issue price be in excess of, or less than,
the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another
corporation, the resulting gain or loss is to be computed in the same manner as though
the corporation were dealing in the shares of another. So also if the corporation
receives its own stock as consideration upon the sale of property by it, or in
satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the
same manner as though the payment had been made in any other property. Any gain
derived from such transaction is subject to tax, and any loss sustained is allowable as
deduction where permitted by the provisions of Title II.
SECTION 56.
Contributions by shareholders. Where a corporation
requires additional funds for conducting its business and obtains such needed money
through voluntary pro rata payments by its shareholders, the amounts so received
being credited to its surplus account or to a special capital account, will not be
considered income, although there is no increase in the outstanding shares of stock of
the corporation. The payments in such circumstances are in the nature of voluntary
assessments upon, and represent an additional price paid for, in shares of stock held
by the individual shareholders, and will be treated as an addition to and as a part of the
operating capital of the company.
SECTION 57.
Sale and retirement of corporate bonds. (1) (a) If bonds
are issued by a corporation at their face value, the corporation realizes no gain or loss.
(b) If thereafter the corporation purchases and retires any of such bonds at a price in
excess of the issuing price or face value, the excess of the purchase price over the
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issuing price or face value is a deductible expense for the taxable year. (c) If,
however, the corporation purchases and retires any of such bonds at a price less than
the issuing price or face value, the excess of the issuing price or face value over the
purchase price is gain or income for the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of
such premium is gain or income which should be prorated or amortized over the life
of the bond. (b) If thereafter the corporation purchases and retires any of such bonds
at a price in excess of the issuing price minus any amount of premium already
returned as income, the excess of the purchase price over the issuing price minus any
amount of premium already returned as income (or over the face value plus any
amount of premiums not yet returned as income) is a deductible expenses for the
taxable year. (c) If, however, the corporation purchases and retires any of such bonds
at a price less than the issuing price minus any amount of premium already returned as
income, the excess of the issuing price minus any amount of premium already
returned as income (or of the face value plus any amount of premium not yet returned
as income) over the purchase price is gain or income for the taxable year.
(3) (a) If bonds are issued by a corporation at a discount, the net amount of
such discount is deductible and should be prorated or amortized over the life of the
bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a
price in excess of the issuing price plus any amount of discount already deducted, the
excess of the purchase price over the issuing price plus any amount of discount
already deducted (or over the face value minus any amount of discount not yet
deducted), is a deductible expense for the taxable year. (c) If, however, the
corporation purchases and retires any of such bonds at a price less than the issuing
price plus any amount of discount already deducted, the excess of the issuing price
plus any amount of discount already deducted (or of the face value minus any amount
of discount not yet deducted) over the purchase price is gain or income for the taxable
year.
SECTION 58.
Income of corporation from leased property. Where a
corporation has leased its property in consideration that the lessee shall pay in lieu of
other rental an amount equivalent to a certain rate of dividend on the lessor's capital
stock or the interest on the lessor's outstanding indebtedness, together with taxes,
insurance or other fixed charges, such payments shall be considered rental payments
and shall be returned by the lessor corporation as income, notwithstanding the fact
that the dividends and interest are paid by the lessee directly to the shareholders and
bondholders of the lessor. The fact that a corporation has conveyed or let its property
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and has parted with its management and control, or has ceased to engage in the
business for which it was originally organized, will not relieve it from liability to the
tax. While the payments made by the lessee directly to the bondholders or
shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in
one case and rentals received in the other), to the bondholders and the shareholders,
such amounts are interest and dividend payments received as from the lessor and as
such shall be accounted for in their returns.
SECTION 59.
Gross income of a corporation in liquidation. When a
corporation is dissolved, its affairs are usually wound up by a receiver or trustee in
dissolution. The corporate existence is continued for the purpose of liquidating the
assets and paying the debts, and such receiver or trustee stands in the stead of the
corporation for such purposes. Any sales of property by them are to be treated as if
made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60.
Gross income of foreign corporations. The gross income
of a foreign corporation subject to tax consists of its gross income from sources within
the Philippines. Gross income from sources within the Philippines, as applied to
foreign corporations, shall include interest received on bonds, notes, or other
interest-bearing obligations issued by residents, corporate or otherwise, as well as
income derived from dividends on the capital stock or from the net earnings of
domestic or resident foreign corporations, joint stock companies, associations, or
insurance companies, dividends from other foreign corporations to the extent provided
in Section 37 of the Code, and likewise income from rentals and royalties from all
sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61.
Exclusions from gross income. The term "gross income"
as used in the Act does not include those items of income exempted by statute or by
fundamental law. Such tax-free income should not be included in the income tax
return unless information regarding it is specifically called for. The exclusion of such
income should not be confused with the reduction of gross income by the application
of allowable deductions.
SECTION 62.
Proceeds of insurance. The proceeds of life-insurance
policies, paid by reason of the death of an insured to his estate or to any beneficiary
(individual, partnership, or corporation, but not a transferee for a valuable
consideration), directly or in trust, are excluded from the gross income of the
beneficiary. It is immaterial whether the proceeds are received in a single sum or in
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installments. If, however, such proceeds are held by the insurer under an agreement to
pay interest thereon, the interest payments must be included in gross income. Amounts
received (other than amounts paid by reason of the death of the insured and interest
payments on such amounts) under a life insurance, endowment, or annuity contract are
excluded from gross income but, if such amounts (when added to amounts received
before the taxable year under such contract) exceed the aggregate premiums or
consideration paid (whether or not paid during the taxable year) then the excess shall
be included in gross income. However, in the case of a transfer for a valuable
consideration, by assignment or otherwise, of a life insurance, endowment, or annuity
contract, or any interest therein, only the actual value of such consideration and the
amount of the premiums and other sums subsequently paid by the transferee are
exempt from taxation.
SECTION 63.
Amounts received as compensation for injuries or sickness.
The amounts received by an insured or his estate or beneficiaries through accident
or health insurance or under workmen's compensation acts as compensation for
personal injuries or sickness are excluded from the gross income of the insured, his
estate, and other beneficiaries. Any damages recovered by suit or agreement on
account of such injuries or sickness are similarly excluded from the gross income of
the individual injured or sick, if living, or of his estate or other beneficiaries entitled to
receive such damages, if dead.
SECTION 64.
Gifts and bequests. Property received as a gift or
received under a will or testament or through legal succession, is exempt from the
income tax, although the income therefrom or income derived from its investment,
sale, or otherwise is not. An amount of principal paid under a marriage settlement is a
gift. Neither alimony nor an allowance based on a separation agreement is taxable
income.
(Section 30(a) of the Code)
SECTION 65.
Business expenses. Business expenses deductible from
gross income include the ordinary and necessary expenditures directly connected with
or pertaining to the taxpayer's trade or business. The cost of goods purchased for
resale, with proper adjustment for opening and closing inventories, is deducted from
gross sales is computing gross income. Among the items included in business
expenses are management expenses, commissions, labor, supplies, incidental repairs,
operating expenses of transportation, equipment used in the trade or business,
traveling expenses while away from home solely in the pursuit of a trade or business,
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advertising and other selling expenses, together with insurance premiums against fire,
storm, theft, accident, or other similar losses in the case of a business, and rental for
the use of business property. A taxpayer is entitled to deduct the necessary expenses
paid in carrying on his business from his gross income from whatever source.
SECTION 66.
Traveling expenses. Traveling expenses as ordinarily
understood, include transportation expenses and meals and lodging. If the trip is
undertaken for other than business purposes, the transportation expenses are personal
expenses, and the meals and lodging are living expenses, and therefore, not
deductible. If the trip is solely on business, the reasonable and necessary traveling
expenses, including transportation expenses, meals and lodging, become business
instead of personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a
salary as full compensation for his services, without reimbursement for traveling
expenses, or is employed on a commission basis with no expense allowance, his
traveling expenses, including the entire amount expended far meals and lodging, are
deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may deduct such
expenses.
aDcHIC
(c) If an individual receives a salary and also an allowance for meals and
lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the
allowance should be included in gross income and the cost of such meals and lodging
may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a
business expense. Only such expenses as are reasonable and necessary in the conduct
of the business and directly attributable to it may be deducted. A taxpayer claiming the
benefit of the deductions referred to herein must attach to his return a statement
showing (1) the nature of the business in which he is engaged; (2) the number of days
away from home during the taxable year on account of business; (3) the total amount
of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to travel and
claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when
required by the Commissioner of Internal Revenue by record showing in detail the
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SECTION 70.
Compensation for personal services. Among the ordinary
and necessary expenses paid or incurred in carrying on any trade or business may be
included a reasonable allowance for salaries or other compensation for personal
services actually rendered. The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service.
This test and its practical application may be further stated and illustrated as follows:
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(1) Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of dividend on stock. This is likely to occur in the
case of a corporation having few shareholders, practically all of whom draw salaries.
If in such a case the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers or employees, it would seem likely that the salaries are
not paid wholly for services rendered, but that the excessive payments are a
distribution of earnings upon the stock. (b) An ostensible salary may be in part
payment for property. This may occur, for example, where a partnership sells out to a
corporation, the former partners agreeing to continue in the service of the corporation.
In such a case it may be found that the salaries of the former partners are not merely
for services, but in part constitute payment for the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to
deductibility. While any form of contingent compensation invites scrutiny as a
possible distribution of earnings of the enterprise, it does not follow that payments on
a contingent basis are to be treated fundamentally on any basis different from that
applying to compensation at a flat rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the
individual made before the services are rendered, not influenced by any consideration
on the part of the employer other than that of securing on fair and advantageous terms
the services of the individual, it should be allowed as a deduction even though in the
actual working out of the contract it may prove to be greater than the amount which
would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is
reasonable in all the circumstances. It is in general just to assume that reasonable and
true compensation is only such amount as would ordinarily be paid for like services by
like enterprises in like circumstances. The circumstances to be taken into
consideration are those existing at the date when the contract for services was made,
not those existing at the date when the contract is questioned.
SECTION 71.
Treatment of excessive compensation. The income tax
liability of the recipient in respect of an amount ostensibly paid to him as
compensation, but not allowed to be deducted as such by the payer, will depend upon
the circumstances of each case. Thus, in the case of excessive payments by
corporations, if such payments correspond or bear a close relationship to
stockholdings, and are found to be distribution of earnings or profits, the excessive
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SECTION 72.
Bonuses to employees. Bonuses to employees will
constitute allowable deductions from gross income when such payments are made in
good faith and as additional compensation for the services actually rendered by the
employees, provided such payment, when added to the stipulated salaries, do not
exceed a reasonable compensation for the service rendered. It is immaterial whether
such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations
made to employees and others, which do not have in them the element of
compensation or are in excess of reasonable compensation for services, are not
deductible from gross income.
SECTION 73.
Pensions, compensation for injuries. Amounts paid for
pensions to retired employees or to their families or others dependent upon them, or
on account of injuries received by employees, and lump-sum amounts paid or accrued
as compensation for injuries, are proper deductions as ordinary and necessary
expenses. Such deductions are limited to the amount not compensated for by
insurance or otherwise. When the amount of the salary of an officer or employee is
paid for a limited period after his death to his widow or heirs, in recognition of the
services rendered by the individual, such payments may be deducted. Salaries paid by
employers to employees who are absent in the military, naval or other service of the
Government, but who intend to return at the conclusion of such service, are allowable
deductions. (See Section 118 of these regulations, relative to pension trust.)
SECTION 74.
Rentals. Where a leasehold is acquired for business
purposes for a specified sum, the purchaser may take as a deduction in his return an
aliquot part of such sum each year, based on the number of years the lease has to run.
Taxes paid by a tenant to or for a landlord for business property are additional rent
and constitute a deductible item to the tenant and taxable income to the landlord, the
amount of the tax being deductible by the latter. The cost borne by a lessee in erecting
buildings or making permanent improvements on ground of which he is lessee is held
to be a capital investment and not deductible as a business expense. In order to return
to such taxpayer his investment of capital, an annual deduction may be made from
gross income of an amount equal to the cost of such improvements divided by the
number of years remaining of the term of lease, and such deduction shall be in lieu of
a deduction for depreciation. If the remainder of the term of lease is greater than the
probable life of the buildings erected, or of the improvements made, this deduction
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year deduct certain of his expenses, losses, interests, taxes, or other charges, he can
not deduct them from the income of the next or any succeeding year. If it is
recognized, however, that particularly in a going business of any magnitude there are
certain overlapping items both of income and deduction, and so long as these
overlapping items do not materially distort the income, they may be included in the
year in which the taxpayer, pursuant to a consistent policy, takes them into his
accounts. Judgments or other binding judicial adjudication, on account of damages for
patent infringement, personal injuries, or other cause, are deductible from gross
income when the claim is so adjudicated or paid, unless taken under other methods of
accounting which clearly reflect the correct deduction, less any amount of such
damages as may have been compensated for by insurance or otherwise: If subsequent
to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained
during a prior taxable year which has not been deducted from gross income, he may
render an amended return for such preceding taxable year including such amount of
loss in the deduction from gross income and may in proper cases file a claim for
refund of the excess tax paid by reason of the failure to deduct such loss in the
original return. A loss from theft or embezzlement occurring in one year and
discovered in another is ordinarily deductible for the year in which sustained.
SECTION 77.
Expenses allowable to non-resident aliens and foreign
corporations. The expenses allowable to a non-resident alien or a foreign
corporation consist of only such expenses as are incurred in carrying on any business
or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78.
Interest. Interest paid or accrued within the taxable year
on indebtedness may be deducted from gross income, except that interest on
indebtedness incurred or continued to purchase bonds and other securities, the interest
upon which is exempt from tax, is not deductible. Interest paid by the taxpayer on a
mortgage upon real estate of which he is the legal or equitable owner, even though the
taxpayer is not directly liable upon the bond or not secured by such mortgage, may be
deducted as interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, the
allowable deduction will be the proportion of such interest which the amount of gross
income from sources within the Philippines bears to the amount of gross income from
all sources within and without this country; however, to avail of this deduction, such
non-resident alien individual or foreign corporation shall include in the return all the
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any ground.
SECTION 81.
Income tax imposed by the Government of the Philippines.
The law does not permit the deduction of the income tax paid to or accrued in
favor of the Government of the Philippines, and in no case may the taxpayer avail of
such deduction.
SECTION 82.
Income, war-profits, and excess-profits taxes imposed by the
authority of a foreign country. Income, war-profits, and excess-profits taxes
imposed by the authority of a foreign country (including the United States and
possessions thereof) are allowed as deductions only if the taxpayer does not signify in
his return his desire to have to any extent the benefits of the provisions of law
allowing credits against the tax for taxes of foreign countries. In the case of a citizen
of a foreign country residing in the Philippines whose income from sources within
such foreign country is not subject to income tax, only that portion of the taxes paid to
such foreign country which corresponds to his net income subject to the Philippine
income tax shall be allowed as deduction.
SECTION 83.
Estate, inheritance, and gift taxes: taxes assessed against
local benefits. Estate, inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local benefits, such as
street, sidewalk, and other like improvements, imposed because of and measured by
some benefit inuring directly to the property against which the assessment is levied,
do not constitute an allowable deduction from gross income. A tax is considered
assessed against local benefits when the property subject to the tax is limited to the
property benefited. Special assessments are not deductible, even though an incidental
benefit may inure to the public welfare. The taxes deductible are those levied for the
general public welfare, by the proper taxing authorities at a like rate against all
property in the territory over which such authorities have jurisdiction. When
assessments are made for the purpose of maintenance or repair of local benefits, the
taxpayer may deduct assessments paid as an expense incurred in business, if the
payment of such assessments is necessary to the conduct of his business. When the
assessments are made for the purpose of constructing local benefits, the payments by
the taxpayer are in the nature of capital expenditures and are not deductible. Where
assessments are made for the purpose of both construction and maintenance or repairs,
the burden is on the taxpayer to show the allocation of the amounts assessed to the
different purposes. If the allocation can not be made, none of the amounts so paid is
deductible.
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SECTION 84.
Analysis of credit for taxes: If the taxpayer signifies in
his return his desire to claim a credit for taxes, the basis of such credit, in the case of a
citizen of the Philippines, whether resident or non-resident, and in the case of a
domestic corporation, is as follows: (a) The amount of any income, war-profits, and
excess-profits taxes paid or accrued during the taxable year to any foreign country;
and (b) an individual's proportionate share of any such taxes of which he is a partner
or of an estate or trust of which he is a beneficiary paid or accrued during the taxable
year to a foreign country if his distributive share of the income of such partnership or
trust is reported for taxation under Title II of the Code.
In the case of an alien resident of the Philippines who signifies in his return his
desire to claim a credit for such taxes the basis of the credit is as follows: (a) The
amount of any such taxes paid or accrued during the taxable year to any foreign
country if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country; and (b) his proportionate share of any such taxes of a partnership of
which he is a partner or an estate or trust of which he is a beneficiary paid or accrued
during the taxable year to any foreign country if his distributive share of the net
income of such partnership or trust is reported for taxation under Title II of the Code,
and if the foreign country of which such alien resident is a citizen or subject, in
imposing such taxes, allows a similar credit to citizens of the Philippines residing in
such country.
If a taxpayer signifies in his return his desire to claim credit for taxes, such
action will be considered to apply to income, war-profits, and excess-profits taxes
paid to all foreign countries (including the United States and possessions thereof), and
no portion of any such taxes shall be allowed as a deduction from gross income.
SECTION 85.
Meaning of terms. The "amount of any income,
war-profits, and excess-profits taxes paid or accrued during the taxable year" means
taxes proper (no credit being given for amounts representing interest or penalties) paid
or accrued during the taxable year on behalf of the taxpayer claiming credit. "Foreign
country" means any foreign state or political subdivision thereof, or any foreign
political entity, which levies and collects income, war-profits, or excess-profits taxes,
and includes the United States or any political subdivision thereof.
SECTION 86.
Conditions of allowance of credits. If the taxpayer
signifies in his return his desire to claim credit for income, war-profits, or
excess-profits taxes paid other than to the Philippines, the income tax return must be
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refunded in whole or in part, the taxpayer shall immediately notify the Commissioner
of Internal Revenue. The Commissioner of Internal Revenue will thereupon
redetermine the amount of the tax of such taxpayer for the year or years for which
such incorrect credit was granted. The amount of tax, if any, due upon such
redetermination shall be paid by the taxpayer upon notice and demand by the
Commissioner of Internal Revenue. The amount of tax, if any, shown by such
redetermination to have been overpaid shall be credited or refunded to the taxpayer in
accordance with the provisions of Section 309 of the Code.
SECTION 88.
Countries which do or do not satisfy the similar credit
requirements. A country satisfies the similar credit requirement of Section
30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens of the
Philippines residing in such country a credit for the amount of income taxes paid to
the Philippines. A country does not satisfy the similar credit requirement of Section
(30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines residing in
such country for the amount of income taxes paid to the Philippines, or if such country
does not impose any income taxes. If the country of which a resident alien is a citizen
or subject does not allow to a Filipino citizen residing in such country a credit for
taxes paid by such citizen to another foreign country, no credit is allowed to such
resident alien for taxes paid by him to such foreign country.
SECTION 89.
When credit for taxes may be taken. The credit for taxes
provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return for
the year in which the taxes accrued or in which the taxes were paid, dependent upon
whether the accounts of the taxpayer are kept and his returns filed upon the accrual
basis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows the
taxpayer, at his option and irrespective of the method of accounting employed in
keeping his books, to take such credit for taxes as may be allowable in the return for
the year in which the taxes accrued. An election thus made must be followed in
returns for all subsequent years, and no portion of any such taxes will be allowed as a
deduction from gross income.
SECTION 90.
Domestic corporation owning a majority of the stock of
foreign corporation. In the case of a domestic corporation which owns a majority
of the voting stock of a foreign corporation from which it receives dividends in any
taxable rear, the credit for foreign taxes includes not only the income, war profits and
excess-profits taxes paid or accrued during the taxable year to any foreign country by
such domestic corporation, but also income, war-profits and excess-profits taxes
deemed to have been paid determined by taking the same proportion of any income,
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SECTION 97.
Voluntary removal of buildings. Loss due to the
voluntary removal or demolition of old buildings, the scrapping of old machinery,
equipment, etc., incident to renewals and replacements will be deductible from gross
income. When a taxpayer buys real estate upon which is located a building, which he
proceeds to raze with a view to erecting thereon another building, it will be considered
that the taxpayer has sustained no deductible expense on account of the cost of such
removal, the value of the real estate, exclusive of old improvements, being
presumably equal to the purchase price of the land and building plus the cost of
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animals that were raised on the farm, except as such loss is reflected in an inventory if
used. If livestock has been purchased after March 1, 1913, for any purpose, and
afterwards dies from disease, exposure, or injury, or is killed by order of the
authorities, the actual purchase price of such stock, less any depreciation allowable as
a deduction in computing net income, with respect to such perished, livestock, and
also any insurance or indemnity recovered, may be deducted as a loss. The actual cost
of other property (with proper adjustment for depreciation), which is destroyed by
order of the authorities, may in like manner be claimed as a loss; but if reimbursement
is made in whole or in part on account of stock killed or property destroyed, the
amount received shall be reported as income for the year in which reimbursement is
made. The cost of any feed, pasturage, or care which has been deducted as an expense
of operation shall not be included as part of the cost of the stock for the purpose of
ascertaining the amount of a deductible loss. If gross income is ascertained by
inventories, no deduction can be made for livestock or products lost during the year,
whether purchased for resale, produced on the farm, as such losses will be reflected in
the inventory by reducing the amount of livestock or products on hand at the close of
the year. If an individual owns and operates a farm, in addition to being engaged in
another trade, business or calling, and sustains a loss from such operation of the farm,
then the amount of loss sustained may be deducted from gross income received from
all sources, provided the farm is not operated for recreation or pleasure.
SECTION 101. Capital losses; losses on wash sales of stock or securities.
Losses on sales or exchanges of capital assets are allowed to the extent provided in
section 34 of the Code. If any securities which are capital assets become worthless
during the taxable year, the loss resulting therefrom shall be considered as a loss from
the sale or exchange, on the last day of such taxable year, of capital assets. Losses on
"wash sales" of stock or securities are treated in section 33 of the Code.
(Section 30 (e) of the Code)
SECTION 102. Bad debts. Where all the surrounding circumstances
indicate that a debt is worthless, and the debt is charged off on the books of the
taxpayer within the year, the same may be allowed as a deduction in computing net
income. There should accompany the return a statement showing the propriety of any
deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt,
he must ascertain and be able to demonstrate, with a reasonable degree of certainty,
the uncollectibility of the debt. Any amount subsequently received on account of a bad
debt previously charged off and allowed as a deduction for income tax purposes, must
he included in gross income for the taxable year in which received. In determining
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whether a debt is worthless the Commissioner of Internal Revenue will consider all
pertinent evidence, including the value of the collateral, if any, securing the debt and
the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and
uncollectible and that legal action to enforce payment would in all pro-ability not
result in the satisfaction of execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the purpose of deduction.
Bankruptcy is generally an indication of the worthlessness of at least a part of an
unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy
is sometimes possible before and at other times only when a settlement in bankruptcy
shall have been had. Where a taxpayer ascertained a debt to be worthless and charged
it off in one year, the mere fact that bankruptcy proceedings instituted against the
debtor are terminated in a later year, confirming the conclusion that the debt is
worthless, will not authorize shifting the deduction to such later year. If a taxpayer
computes his income upon the basis of valuing his notes or accounts receivable at
their fair market value when received, which may be less than their face value, the
amount deductible for bad debts in any case is limited to such original valuation.
SECTION 103. Examples of bad debts. Worthless debts arising from
unpaid wages, salaries, rents, and similar items of taxable income will not be allowed
as a deduction unless the income such items represent has been included in the return
of income for the year in which the deduction as a bad debt is sought to be made or in
a previous year. Only the difference between the amount received in distribution of
the assets of a bankrupt and the amount of the claim may be deducted as a bad debt.
The difference between the amount received by a creditor of a decedent in distribution
of the assets of the decedent's estate and the amount of his claim may be considered a
worthless debt. A purchaser of accounts receivable which can not be collected and are
consequently charged off the hooks as bad debt is entitled to deduct them, the amount
of deduction to be based upon the price he paid for them and not upon their face
value.
Where under foreclosure of a mortgage, the mortgagee buys the mortgaged
property and credits the indebtedness with the purchase price, the difference between
the purchase price and the indebtedness will not be allowable as a deduction for a bad
debt, for the property which was security for the debt stands in the place of the debt.
The determination of loss in such case is deferred until the disposal of the property.
SECTION 104.
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are capital assets are ascertained to be worthless and charged off within the taxable
year, the loss resulting therefrom shall, except in the case of a bank or trust company
incorporated under the laws of the Philippines or of the United States a substantial
part of whose business is the receipt of deposits, be considered as a loss from the sale
or exchange, on the last day of such taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105. Depreciation. A reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in the trade or business
may be deducted from gross income. For convenience such an allowance will usually
be referred to as depreciation, excluding from the term any idea of a mere reduction in
market value not resulting from exhaustion, wear and tear, or obsolescence. The
proper allowance for such depreciation of any property used in the trade or business is
that amount which should be set aside for the taxable year in accordance with a
reasonable consistent plan whereby the aggregate of the amount so set aside, plus the
salvage value, will, at the end of the useful life of the property in business, equal the
basis of the property. Due regard must also be given to expenditures for current
upkeep.
cDCSTA
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depreciation allowances should be spread over the remaining useful life of the
property as reestimated in the light of the subsequent facts, and depreciation
deductions taken accordingly.
SECTION 110. Obsolescence. With respect to physical property the
whole or any portion of which is clearly shown by the taxpayer as being affected by
economic conditions that will result in its being abandoned at a future date prior to the
end of its normal useful life, so that depreciation deductions alone are insufficient to
return the cost (or other basis) at the end of its economic term of usefulness, a
reasonable deduction for obsolescence, in addition to depreciation, may be allowed in
accordance with the facts obtaining with respect to each item of property concerning
which a claim for obsolescence is made. No deductions for obsolescence will be
permitted merely because, in the opinion of a taxpayer, the property may become
obsolete at some later date. This allowance will be confined to such portion of the
property on which obsolescence is definitely shown to be sustained and can not be
held applicable to an entire property unless all portions thereof are affected by the
conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. In computing
depreciation allowance in the case of a patent or copyright, the capital sum to be
replaced is the cost or other basis of the patent or copyright. The allowance should be
computed by an apportionment of the cost or other basis of the patent or copyright
over the life of the patent or copyright since its grant, or since its acquisition by the
taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was
acquired from the Government, its cost consists of the various Government fees, cost
of drawings, experimental models, attorney's fees, development or experimental
expenses, etc., actually paid. Depreciation of a patent can be taken on the basis of the
fair market value as of March 1, 1913, only when affirmative and satisfactory
evidence of such value is offered. Such evidence should whenever practicable be
submitted with the return. If the patent becomes obsolete prior to its expiration, such
proportion of the amount on which its depreciation may be based as the number of
years of its remaining life bears to the whole number of years intervening between the
basic date when it legally expires may be deducted, if permission to do so is
specifically secured from the Commissioner of Internal Revenue. Owing to the
difficulty of allocating to a particular year the obsolescence of a patent, such
permission will be granted only if affirmative and satisfactory evidence that the patent
became obsolete in the year for which the return is made is submitted to the
Commissioner of Internal Revenue. The fact that depreciation has not been taken in
prior years does not entitle the taxpayer to deduct in any taxable year a greater amount
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AcDHCS
49
March 1, 1913, if acquired prior to that date, the rate of charge, amount previously
deducted, and the amount claimed in the return. These data must agree with those
appearing in the books of the taxpayer.
TDESCa
(1)
P100.00
27.50
50.00
25.00
25.00
(2)
P100.00
27.50
70.00
35.00
27.50
Under column (1) P25.00 is the allowance depletion because the allowable
percentage cannot exceed 50% of the net profit or net income. Under column (2), the
allowable depletion is P27.50 because it does not exceed 50% of either the net income
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or net profit.
SECTION 115-A-3.
Definition of terms. For purposes of the depletion
allowance for oil and gas wells and mines, the following terms and phrases shall have
the meaning indicated:
(a) Gross income. Gross income means the "gross income from the
property". The gross income in the case of gas and oil wells is the amount for which
the taxpayer sells the oil and gas in the immediate vicinity of the well. If the oil and
gas are not sold on the property but are manufactured or converted into a refined
product prior to sale, the gross income from the property shall be assumed to be
equivalent to the representative market or field price (as of the date of sale) of the oil
and gas before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross
income from mining. The gross income from mining consists of the proceeds from the
sales of ores or minerals extracted from the mining property. Where ores are sent
abroad where the ordinary treatment processes are applied or where they are refined
and where they are sold, the actual cost of ocean freight as well as insurance, should
be deducted from the actual selling price for gross income purposes. Also where
minerals or mineral products are sold or consigned abroad by the lessee or owner of
the mine under C.I.F. terms, the actual cost of ocean freight and insurance should be
deducted.
(b) Mining. The term "mining" includes not merely the extraction of the
ores or minerals from the ground but also the ordinary treatment process normally
applied by mine owners or operators in order to obtain the commercially marketable
mineral product or products, and so much of the transportation of ores or minerals
(whether or not by common carrier) from the point of extraction from the ground to
the plants or mills in which the ordinary treatment processes are applied thereto as is
not in excess of 50 miles unless the Commissioner of Internal Revenue finds that the
physical and other requirements are such that the ore or mineral must be transported a
greater distance to such plants or mills.
(c) Extraction of the ores or minerals from the ground. The term
"extraction of the ores or minerals from the ground" includes the extraction by mine
owners or operators of ores or minerals from the waste or residue of prior mining.
Thus income derived from the working over of tailings, piles or culm banks is
included in determining "gross income from the property". The length of time
between the prior mining and extraction of ores or minerals from the waste or residue
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of such mining is immaterial. Whether the waste or residue results from the
application of ordinary treatment processes or from the process of removal from the
ground, income derived therefrom is within the term "gross income from the
property". To be included in "gross income from the property", income derived from
the extraction of ores or minerals from the waste or residue of prior mining must come
from such extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. The term "ordinary treatment
processes" includes the following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to
prevent freezing, and loading for shipment;
(2) In the case of sulfur recovered by the Frasch process pumping to vats,
cooling, breaking, and loading for shipment;
(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and
minerals which are customarily sold in the form of a crude mineral product
sorting, concentrating; and sintering to bring to shipping grade and form, and loading
for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash,
and ores which are not customarily sold in the form of the crude mineral
product-crushing, grinding, and beneficiation by concentration (gravity, flotation,
amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization,
precipitation (but not including as an ordinary treatment process electrolytic
deposition, roasting, thermal or electric smelting, or refining), or by substantially
equivalent processes, or extraction of the product or products from the ore, including
the furnacing of quicksilver ores; and
(5) The pulverization of talc, the burning of magnesite, and the sintering and
modulizing of phosphate rock.
(e) Net income or net profit. "Net income" or "net profit" means the
taxpayer's taxable income from the property. Net income or net profit (computed
without allowance for depletion) means the "gross income from the property" less the
allowable deductions attributable to the mineral property upon which the depletion is
claimed and the allowable deductions attributable to the treatment processes insofar as
they relate to the product of such property, including overhead and operating
expenses, development costs properly charged to expense, depreciation, taxes, losses
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(f) Property. For the purpose of computing the depletion allowance in the
case of mines and wells, the term "property" means each separate interest owned by
the taxpayer in each mineral deposit in each separate tract or parcel of land.
If a taxpayer owns two or more separate operating mineral interests which
constitute part or all of an operating unit, he may elect to form (a) one aggregation of,
and to treat as one property, any two or more of such interests and (b) to treat as a
separate property each such interest which he does not elect to include within the
aggregation referred to in (a). Separate operating mineral interests which constitute
part or all of an operating unit may be aggregated whether or not they are included in
contiguous tracts or parcels. A taxpayer may not elect to form more than one
aggregation of operating mineral interests within any one operating unit. Such election
may be made by the taxpayer by the giving of notice of such election to the
Commissioner of Internal Revenue not later than the time prescribed for filing of the
return and any such election so made shall be binding upon the taxpayer for all
subsequent taxable years, except that the Commissioner of Internal Revenue may
consent to a different treatment of the interest with respect to which the election has
been made.
SECTION 115-A-4.
Depletion deductible by non-resident aliens or
foreign corporations. A non-resident alien individual or a foreign corporation is
entitled to an allowance for depletion of oil and gas wells or mines located in the
Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by R.A.
2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts may be deducted.
Contributions or gifts within the taxable year are deductible to an aggregate amount
not in excess of 6 per centum, in the case of an individual, and 3 per centum, in the
case of a corporation, of the taxpayer's taxable net income, if actually paid or made to
or for the use of the Government of the Philippines or any political subdivision thereof
for exclusively public purposes or to domestic corporations or associations organized
and operated exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes, or to societies for the prevention of cruelty to children or
animals, provided that no part of the net income of which inures to the benefit of any
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part of the house for his office, such portion of the rent as is properly attributable to
such office is deductible. Where the father is legally entitled to the services of his
minor children, any allowances which he gives them, whether said to be in
consideration of services or otherwise, are not allowable deductions in his return of
income. Alimony, and an allowance paid under a separation agreement are not
deductible from gross income.
SECTION 120. Capital expenditures. No deduction from gross income
may be made for any amounts paid out for new buildings or for permanent
improvements or betterments made to increase the value of the taxpayer's property, or
for any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance for depreciation or depletion or other allowance is or
has been made. Amounts expended for securing a copyright and plates, which remain
the property of the person making the payments, are investments of capital. The cost
of defending or perfecting title to property constitutes a part of the cost of the property
and is not a deductible expense. The amount expended for architect's services is part
of the cost of the building. Commissions paid in purchasing securities are a part of the
cost of such securities. Commissions paid in selling securities are an offset against the
selling price. Expenses of the administration of an estate, such as court costs,
attorney's fees, and executor's commissions, are chargeable against the "corpus" of the
estate and are not allowable deductions. Amounts to be assessed and paid under an
agreement between bondholders or shareholders of a corporation, to be used in a
reorganization of the corporation, are investments of capital and not deductible for
any purpose in return of income.
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with the taxable year on policy and annuity contracts. "Paid" includes "accrued" or
"incurred" (construed according to the method of accounting upon the basis of which
the net income is computed) during the taxable year, but does not include any estimate
for losses incurred but not reported during the taxable year. As payments on policies
there should be reported all death, disability and other policy claims (other than
dividends as above specified) paid within the year, including fire, accident and
liability losses, matured endowments, annuities, payments on installment policies and
surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies.
Mutual insurance companies (other than mutual life and mutual marine insurance
companies), which require their members to make premium deposits to provide for
losses and expenses, are allowed to deduct from gross income the aggregate amount
of premium deposits returned to their policyholders or retained for the payment of
losses, expenses, and reinsurance reserves. In determining the amount of premium
deposits retained by a mutual fire or mutual casualty insurance company for the
payment of losses, expenses, and reinsurance reserves, it will be presumed that losses
and expenses have been paid out of earnings and profits other than premiums to the
extent of such earnings and profits. If, however, any portion of such amount is applied
during. the taxable year to the payment of losses, expenses, or reinsurance reserves, or
which a separate allowance is taken, then such portion is not deductible; and if any
portion of such amount for which an allowance is taken is subsequently applied to the
payment of expenses, losses, or reinsurance reserves, then such payment can not be
separately deducted. The amount of premium deposits retained for the payment of
expenses and losses and the amount of such expenses and losses, may not both be
deducted. A company which invests part of the premium deposits so retained by it in
interest-bearing securities may, nevertheless, deduct such part, but not the interest
received on such securities. A mutual fire insurance company which has a guaranty
capital is taxed like other mutual fire insurance companies. A stock fire insurance
company operated on the mutual plan to the extent of paying dividends to certain
classes of policyholders, may make a return on the same basis as a mutual fire
insurance company with respect to its business conducted on the mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance
companies. Mutual marine insurance companies should include in gross income
the gross premiums collected and received by them less amounts paid for reinsurance.
They may deduct from gross income amounts repaid to policyholders on account of
premiums previously paid by them together with the interest actually paid upon such
amounts between the date of ascertainment and the date of payment thereof. The
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remainder of the premiums accordingly forms part of the net income of the company,
except to the extent that it is subject to then deductions allowed such insurance
companies and other corporations.
SECTION 129. Net addition to reserve funds. All policy premiums on
which net addition to reserve is computed, must be included in gross income.
Insurance companies may deduct from gross income the net addition required by law
to be made within the taxable year to reserve funds. When the reserve at the end of the
year is less than at the beginning of the year there is a "released reserve", and the
amount so released must be included in gross income. In the case of assessment
insurance companies, whether domestic or foreign, the actual deposit of sums with the
officers of the Government of the Philippines, pursuant to law, as addition to guaranty
or reserve funds shall be treated as being payments required by law to reserve funds.
In the case of life insurance companies, the net addition to the "reinsurance reserve"
and the "reserve for supplementary contracts", and in the case of fire, marine,
accident, liability, and other insurance companies, the net addition to the "unearned
premium reserves", and only such other reserves as are specifically required by the
statute will be allowed as deductions.
SECTION 130. Copy of report to Insurance Commissioner to be furnished
the Commissioner of Internal Revenue. To facilitate the auditing of income tax
returns, insurance companies shall submit to the Commissioner of Internal Revenue
together with returns of income, wherever possible a copy of their annual report to the
Insurance Commissioner.
(Section 33 of the Code)
SECTION 131. Losses from wash sales of stock or securities. (a) A
taxpayer cannot deduct any loss claimed to have been sustained from the sale or other
disposition of stock or securities, if, within a period beginning thirty days before the
date of such sale or disposition and ending thirty days after such date (referred to in
this section as the sixty-one-day period), he has acquired (by purchase or by an
exchange upon which the entire amount of gain or loss was recognized by law), or has
entered into a contract or option so to acquire, substantially identical stock or
securities. However, this prohibition does not apply in the case of a dealer in stock or
securities if the sale or other disposition of stock or securities is made in the ordinary
course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the
taxable year from the sale or other disposition of stock or securities, the provisions of
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this section shall be applied to the losses in the order in which the stock or securities
the disposition of which resulted in the respective losses were disposed of (beginning
with the earliest disposition). If the order of disposition of stock or securities disposed
of at a loss on the same day cannot be determined, the stock or securities will be
considered to have been disposed of in the order in which they were originally
acquired (beginning with earliest acquisition).
(c) Where the amount of stock or securities acquired within the sixty-one day
period is less than the amount of stock or securities sold or otherwise disposed of,
then the particular shares of stock or securities the loss from the sale or other
disposition of which is not deductible shall be those with which the stock or securities
acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the order
of their acquisition (beginning with the earliest acquisition) with an equal number of
the shares of stock or securities sold or otherwise disposed of.
(d) Where the amount of stock or securities acquired within the sixtyone-day period is not less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities the acquisition of which
resulted in the nondeductibility of the loss shall be those with which the stock or
securities disposed of are matched in accordance with the following rule:
The stock or securities sold or otherwise disposed of will be matched with an
equal number of the shares of stock or securities acquired in accordance with the
order of acquisition (beginning with the earliest acquisition) of the stock or securities
acquired.
(e) The acquisition of any security which results in the non-deductibility of a
loss under the provisions of this section shall be disregarded in determining the
deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by purchase
or by an exchange upon which the entire amount of gain or loss was recognized by
law, and comprehends cases where the taxpayer has entered into a contract or option
within the sixty-one-day period to acquire by purchase or by such an exchange.
EXAMPLE (1): A, whose taxable year is the calendar year, on December 1,
1939, purchased 100 shares of common stock in the M Company for P10,000 and on
December 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940,
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he sold the 100 shares purchased on December 1, 1939, for P9,000. Because of the
provisions of Section 33 no loss from the sale is allowable as a deduction.
EXAMPLE (2): A, whose taxable year is the calendar year, on September 21,
1939, purchased 100 shares of the common stock of the M Company for P5,000. On
December 21, 1939, he purchased 50 shares of substantially identical stock for
P2,750, and on December 26, 1939, he purchased 25 additional shares of such stock
for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased on
September 21, 1939. There is an indicated loss of P1,000 on the sale of the 100
shares. Since within the sixty-one-day period A purchased 75 shares of substantially
identical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750) is
not allowable as a deduction because of the provisions of Section 33. The loss on the
sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject to
the limitations provided in Sections 31(b) and 34. The basis of the 50 shares
purchased December 21, 1939, the acquisition of which resulted in the
non-deductibility of the loss (P500) sustained on 50 of the 100 shares sold on January
2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750
[the difference between the purchase price of the 50 shares acquired on December 21,
1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940
(P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26,
1939, the acquisition of which resulted in the nondeductibility of the loss (P250)
sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375.
(See Section 143 of these regulations.)
EXAMPLE (3): A, whose taxable year is the calendar year, on September 15,
1938, purchased 100 shares of the stock of the M Company for P5,000. He sold these
shares on February 1, 1940, for P4,000. On each of the four days from February 15,
1940, to February 18, 1940, he purchased 50 shares of substantially identical stock for
P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on
February 1, 1940, but since within the sixty-one-day period A purchased not less than
100 shares of substantially identical stock, the loss is not deductible. The particular
shares of stock the purchase of which resulted in the nondeductibility of the loss are
the first 100 shares purchased within such period, that is, the 50 shares purchased on
February 15, 1940, and the 50 shares purchased on February 16, 1940.
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not connected with his trade or business), but does not include stock in trade of the
taxpayer or other 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, or property held
by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property, used in the trade or business, of a character which is subject to
the allowance for depreciation provided in subsection (f) of Section 30 of the Code.
The term "capital asset" includes all classes of property not specifically excluded by
Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or
business of a taxpayer of a character which is subject to the allowance for depreciation
provided in Section 30(f) of the Code is limited to property used by the taxpayer in the
trade or business at the time of the sale or exchange. It has no application to gains or
losses arising from the sale of real property used in the trade or business to the extent
that such gain or loss is allocable to the land, as distinguished from depreciable
improvements upon the land. To such gain or loss allocable to the land, the limitations
of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real
estate, but, if so, it is because he holds the land primarily for sale to customers in the
ordinary course of his trade or business, not because land is subject to a depreciation
allowance). Gains or losses from the sale or exchange of property used in the trade or
business of the taxpayer of a character which is subject to the allowance for
depreciation provided in Section 30(f) of the Code, will not be subject to the
percentage provisions of Section 34(b) and losses from such transactions will not be
subject to the limitation of losses provided in Section 30(c). (Real property used in
taxpayer's trade or business is no longer capital asset per Am. R.A. 82.)
SECTION 133. Percentage taken into account. In computing net income,
only 50 per cent of the gain or loss recognized upon the sale or exchange for a capital
asset shall be taken into account. Thus, in the case of a merchandising concern which
has an "ordinary net income" (net income exclusive of net gains from the sale or
exchange of capital assets) of P10,000 and a net capital gain of P5,000, the net income
subject to tax will be P10,000 plus P2,500 (50 % of P5,000), of P12,500.
SECTION 134. Limitation on capital losses. Losses from sales or
exchanges of capital assets are allowed only to the extent of the gains from such sales
or exchanges. If the dealings of the taxpayer in capital assets during the year result in
a net capital loss, such loss cannot be deducted from his ordinary income, inasmuch as
capital losses are allowable only to the extent of capital gains. In the case, for
example, of a taxpayer, engaged in buying and selling goods, having an ordinary net
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income of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable
net income is computed as follows:
Ordinary net income
Gains from sales of capital assets
(as stocks or securities)
50% of such gains
Losses from sales of capital assets
50% of such losses
Net taxable capital gains
P20,000
P5,000
P2,500
P3,000
P1,500
1,000
P21,000
=======
P20,000
P7,000
P3,500
2,000
1,000
P2,500
P20,000
======
(The net capital loss of P2,500 is not deductible in arriving at the taxable net
income inasmuch as capital losses are allowed only to the extent of capital gains.)
SECTION 134-A. Capital loss carry-over-Illustration. A, an individual has
the following incomes and losses:
1946
1947
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1,000
750
500
5,000
10,000
2,000
200
5,000
64
P2,250
P5,000
10,000
(P5,000)
P2,250
P2,200
P5,000
One-half
P2,500
2,250
250
P2,450
======
# The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is
reduced to P2,250 for the reason that the net income from business and other sources
(not including capital gain), for the year 1946 is only P2,250.
If a bank or trust company incorporated under the laws of the Philippines or of
the United States, a substantial part of whose business is the receipt of deposits, sells
any bond, debenture, note, or certificate or other evidence of indebtedness issued by
any corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting from such sale
shall not be subject to the limitation contained in Section 34(c) and shall not be
included in determining the applicability of such limitation to other losses.
SECTION 135. Gains and losses from short sales. For income tax
purposes, a short sale is not deemed to be consummated until the delivery of property
to cover the short sale. If the short sale is made through a broker and the broker
borrows property to make delivery, the short sale is not deemed to be consummated
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until the obligation of the seller created by the short sale is finally discharged by
delivery of property to the brokers to replace the property borrowed by such broker.
(Section 35 of the Code)
SECTION 136. Basis for determining gain or loss from sale of property.
For the purpose of ascertaining the gain or loss from the sale or exchange of property,
the basis is the cost of such property, or in the case of property which should be
included in the inventory, its latest inventory value. But in the case of property
acquired before March 1, 1913, when its fair market value as of that date is in excess
of its cost, the gain to be included in gross income is the excess of the amount realized
therefor over such fair market value. (See illustration I, Section 137 of these
regulations). Also in the case of property acquired before March 1, 1913, when its fair
market value as of that date is lower than its cost the deductible loss is the excess of
such fair market value over the amount realized therefor. (See Illustration II, Id.). No
gain or loss is recognized in the case of property sold or exchanged (a) at more than
cost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.), or
(b) at less than cost but at more than its fair market value as of March 1, 1913. (See
Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing
gain or loss from the exchange or sale of property for any depreciation or depletion
sustained and allowable as deduction in computing net income; the amount of
depreciation previously charged off by the taxpayer shall be deemed to be true
depreciation sustained unless shown by clear and convincing evidence to be incorrect.
What the fair market value of property was as of March 1, 1913, is a question of fact
to be established by evidence which will reasonably and adequately make it appear.
The nature and extent of the sales and the circumstances under which they were made
should be considered. Prices received at forced sales or for small lots of property may
be and often are no real indication of the value of the amount of property in question.
For instance, sales from time to time of a small number of shares of stock is little
indication of the value of a large or controlling interest in the corporation. If the
taxpayer can not determine the cost of securities purchased prior to March 1, 1913,
because of the loss, destruction, or failure to keep records, the value of the securities
at the date of approximate date of acquisition may be used in determining the cost
basis for purposes of computing the gain or loss from the sale of the securities. When
the date or approximate date of acquisition is unknown, no general rule can be stated
for determining the cost value of such securities. Each case must be considered
separately upon its own facts.
SECTION 137.
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Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P40,000
P10,000
Excess of amount realized over fair
market value as of March 1, 1913.
Gain attributed to the period prior
to March 1, 1913 not taxable.
In the case of property acquired before March 1, 1913, when its fair market
value as of that date is lower than its cost, the deductible loss is the excess of such fair
market value over the amount realized therefor.
ILLUSTRATION II
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P6,000
P4,000
Excess of fair market value over
amount realized. Loss attributable to
the period prior to March 1, 1913, not
deductible.
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Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
67
P20,000
P60,000
P40,000
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P6,000
P10,000
Where the cost is equal to or greater than the fair market value as of March 1,
1913, and the selling price exceeds the cost, the gain to be included in gross income is
the excess of the selling price over the cost.
ILLUSTRATION V
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P10,000
P40,000
P20,000
Reason: Gain on whole transaction,
all of which is attributable to period
subsequent to March 1, 1913.
Where the fair market value as of March 1, 1913, is equal to or greater than the
cost and the selling price is less than the cost, the deductible loss is the amount by
which the cost exceeds the selling price.
ILLUSTRATION VI
Cost
Fair Market
Value
Mar. 1, 1913
Sale Price
Taxable gain
P20,000
P30,000
P10,000
P10,000
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certificate, no income is realized. The term "market value" means the fair value of the
property in money as between one who wishes to purchase and one who wishes to
sell. It is not, however, what can be obtained for the property when the owner is under
peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value
which an owner could not reasonably expect to obtain for the property although he
might possibly be fortunate enough to do so. "Market value" is the price at which a
seller willing to sell at a fair price and a buyer willing to buy at a fair price, both
having reasonable knowledge of the facts, will trade. Evidence as to the assets and
liabilities of a corporation and as to its earnings may furnish definite indications of the
market value of its stock.
SECTION 141. Determination of gain or loss from the exchange of
property. The amount of income derived or loss sustained from an exchange of
property is the difference between the market value at the time of the exchange of the
property received in exchange and the original cost, or other basis, of the property
exchange. If the property exchanged was acquired prior to March 1, 1913, see
Sections 136 and 137 of these regulations.
SECTION 142. Readjustment of interest in a registered copartnership.
When a partner retires from a duly registered copartnership, or the partnership is
dissolved, he realizes a gain or loss measured by the difference between the price
received for his interest and the cost to him of his interest in the partnership including
in such cost the amount of his share in any undistributed partnership net income
earned since he became a partner on which the income tax has been paid. However, if
such interest in the partnership was acquired prior to March 1, 1913, both the cost as
hereinbefore provided and the amount of such interest as of date, plus the amount of
the shares in any undistributed partnership net income earned since March 1, 1913, on
which the income tax has been paid, shall be ascertained and the taxable gain derived
or the deductible loss sustained shall be computed as provided in Sections 136 and
137 of these regulations. If the partnership distributes its assets in kind and not in
cash, the partner realizes gain or suffers loss according to the market value of the
property received in liquidation. Whenever a new partner is admitted, to a partnership,
or any existing partnership is reorganized, the facts as to such change or
reorganization should be fully set forth in the next return of income, in order that the
Commissioner of Internal Revenue may determine whether any gain or loss has been
realized by any partner.
SECTION 143. Basis of stock or securities acquired in "wash sales". In
the sale or other disposition of stocks or securities the acquisition of which (or the
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contract or option to acquire which) resulted in the non deductibility of the loss from
the sale or other disposition of substantially identical stock or securities the basis shall
be the basis of the substantially identical stock so sold or disposed of, increased or
decreased, as the case may be, by the difference, if any, between the price at which the
stock or securities was acquired and the price at which such substantially identical
stock or securities were sold or otherwise disposed of. The application of this rule
may be illustrated by the following examples:
EXAMPLE (1): A purchased a share of common stock of the X Corporation
for P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1, 1940,
he purchased a share of common stock of the same corporation for P90.00. No loss
from the sale is recognized under Section 33 of the Code. The basis of the new share
is P110; that is, the basis of the old share (P100) increased by P10, excess of the price
at which the new share was acquired (P90) over the price at which the old share was
sold (P80).
EXAMPLE (2): A purchased a share of common stock of the X corporation for
P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he
purchased a share of common stock of the same corporation for P70. No loss from the
sale is recognized under Section 33 of the Code. The basis of the new share is P90;
that is, the basis of the old share (P100) decreased by P10, the excess of the price at
which the old share was sold (P80) over the price at which the new share was acquired
(P70). (See Section 131 of these regulations).
SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253 publishing
Republic Act No. 1921 amending Section 35 of the Code, particularly subsection (c)
thereof:
Features of the Amendment
1. Before and after the amendment. Under the provisions of subsection
(c) of Section 35 of the National Internal Revenue Code, before its amendment by
Republic Act No. 1921, when property is exchanged for another property, the property
received in exchange shall, for the purpose of determining gain or loss, be treated as
the equivalent of cash to the amount of its fair market value.
Paragraph 1 of subsection (c) of section 35 of the Tax Code after the
amendment states the general rule that upon the sale or exchange of property, the
entire amount of gain or loss as the case may be, is recognized, while paragraphs 2
and 3 give the exceptions where gain or loss is not recognized, or gain is recognized
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only in part.
2. Exceptions to the rule recognizing gain or loss in exchanges of property
solely in kind. Under paragraph 2 of subsection (c) of Section 35 of the Tax Code
after its amendment by Republic Act No. 1921, no gain or loss shall be recognized in
the following cases of exchanges made in pursuance of a plan of merger or
consolidation:
(a)
(b)
(c)
3.
Recognition of gain in part but not loss, where exchanges are not solely in
kind.
(a)
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shareholder or security holder upon the exchange specified in the above exceptions
shall be the same as the basis of the property, stock or securities exchanged decreased
by the money received and the fair market value of the other property received, and
increased by the amount treated as dividend of the shareholder and the amount of any
gain that was recognized on the exchange. The other property or "boot" received in
exchange shall have as basis its fair market value.
Examples: 1. A purchased a share of stock in the X Corporation in 1939 for
P100. Pursuant to a plan of merger or consolidation, A in 1957 exchanged his share
for one share in the Y Corporation, worth P90 and P30 in cash. A realized a gain of
P20 upon the exchange. The basis of the share of stock in the Y Corporation is P90,
that is, the basis of the share in the X Corporation (P100) less the amount of money
received by A (P30) plus the amount of the gain recognized on the exchange (P20).
2. A purchased a share of stock in the X Corporation in 1939 for P100. Upon
a merger or consolidation of the X Corporation in 1957, A received in place of his
stock in the X Corporation a share of stock in the Y Corporation worth P60, a
Treasury Bond worth P50, and in addition P20 in cash. A realized a gain of P30 upon
the exchange. The basis of the property received in exchange is the basis of the old
stock decreased in the amount of money received (P20) and increased in the amount
of gain that was recognized (P30), which results in a basis for the property received of
P110. This basis of P110 is apportioned between the Treasury Bond and the share of
stock, the basis of the Treasury Bond being its fair market value at the date of the
exchange, P50, and of the share of stock, the remainder, P60.
(b) By the transferee. The basis of the property transferred in the hands of
the transferee shall be the same as it would be in the hands of the transferor, increased
by the amount of the gain recognized to the transferor on the transfer.
(c) If corporation shareholder or security holder received several kinds of
stock or securities. When securities of a single class were exchanged for new
securities of different classes where no gain or loss was recognized, the proper
method of apportionment is to allocate to each class of new securities that proportion
of the original basis which the market value of the particular class bears to the market
value of all securities received on the date of the exchange, for purposes of
determining the gain or loss on the subsequent sale of any of the new securities. For
example, if 100 shares of common stock par value P100, are exchanged for 50 shares
of preferred and 50 shares of common each of P100 par value, and the cost of the old
stock was P250 per share, or P25,000, but the market value of the preferred stock on
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the date of the exchange was P110 per share, or P5,500 for the 50 shares, and the
market value of the common was P440 per share or P22,000 for the 50 shares of
common, one-fifth of the original cost, or P5,000, would be regarded as the cost of the
preferred and four-fifths, or P20,000 as the cost of the common.
As previously shown cash "boot" operates in the first instance to reduce basis.
Then to this result must be added the gain recognized. The remainder is to be
allocated between the several types of stock and securities permitted to be received
without the recognition of gain or loss. To illustrate: The taxpayer in a nontaxable
exchange trades A stock which cost P100 for one share of common stock and one
share of preferred stock of B corporation, together worth P100 (P100 each), and P50
cash. The basis for the share of B common stock will therefore be P50 (1/2 of P100)
and the B preferred stock will likewise take a P50 basis.
6.
Definitions:
(a) The term "securities" means bonds and debentures but not "notes" of
whatever class or duration.
(b) The term "merger" or "consolidation" shall be understood to mean the
ordinary merger or consolidation, or the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock. In order that a
transaction may be regarded as a merger or consolidation within the purview of the
amendment, it must be undertaken for a bona fide business purpose and not solely for
the purpose of escaping the burden on taxation. In determining whether a bona fide
business purpose exists, each and every step of the transaction shall be considered and
the whole transaction or series of transactions shall be treated as a single unit. The
term "property" shall be taken to include the cash assets of the transferor for purpose
of determining whether the property transferred constitutes a substantial portion of the
property of the transferor. "Substantially all" as used under this amendment means the
acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation, which has the element of permanence and not merely momentary
holding.
(Section 36 of the Code)
SECTION 144. Need of inventories. In order to reflect the net income
correctly, inventories at the beginning and end of each year are necessary in every
case in which the production, purchase or sale of merchandise is an income producing
factor. The inventory should include raw materials and supplies on hand that have
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been acquired for sale, consumption, or use in productive processes together with all
finished or partly finished goods. Only merchandise title to which is vested in the
taxpayer should be included in his inventory. Accordingly the seller should include in
his inventory goods under contract for sale but not yet segregated and applied to the
contract and goods out upon consignment, but should exclude from inventory goods
sold, title to which has passed to the purchaser. A purchaser should include in
inventory merchandise purchased, title to which has passed to him although such
merchandise is in transit or for other reasons has not been reduced to physical
possession, but should not include goods ordered for future delivery transfer of title to
which has not yet been effected.
SECTION 145. Valuation of inventories. The law provides two tests to
which each inventory must conform. (1) It must conform as nearly as possible to
the best accounting practice in the trade or business, and (2) it must clearly reflect the
income. It follows, therefore, that inventory rules can not be uniform but must give
effect to trade customs which come within the scope of the best accounting practice in
the particular trade or business. In order to clearly reflect income, the inventory
practice of a taxpayer should be consistent from year to year, and greater weight is to
be given to consistency than to any particular method of inventory or basis of
valuation, as long as the method or basis used is substantially in accord with these
regulations. An inventory that can be used under the best accounting practice in a
balance sheet showing the financial position of the taxpayer is, as a general rule,
regarded as clearly reflecting his income.
The bases of valuation most commonly used by business concerns and which
meet the requirements of the Income Tax Law are (a) cost price or (b) cost or market
price, whichever is the lower. Any goods in an inventory which are unsalable at
normal prices or unusable in the normal way because of damage, imperfections, shop
wear, changes of style, odd or broken lots, or other similar causes, including second
hand goods taken in exchange, should be valued at "bona fide" selling prices whether
basis (a) or (b) is used, or if such goods consist of raw materials or partly finished
goods held for use or consumption, they should be valued upon a reasonable basis,
taking into consideration the usability and the condition of the goods, but in no case
shall such value be less than the scrap value. "Bona fide" selling price means actual
offerings of goods during a period ending not later than thirty days after inventory
date. The burden of proof will rest upon the taxpayer to show that such exceptional
goods as are valued upon such selling bases come within the classifications indicated
above, and he shall maintain such records of the disposition of the goods as will
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77
(5) Including stock in transit, either shipped to or from the taxpayer, the title
to which is not vested in the taxpayer.
SECTION 146. Inventories at cost price. Cost means: (1) In the case of
merchandise on hand at the beginning of the taxable year, the inventory price of such
goods.
(2) In the case of merchandise purchased since the beginning of the taxable
year, the invoice price less trade or other discounts, except strictly cash discounts,
approximating a fair interest rate, which may be deducted or not at the option of the
taxpayer, provided a consistent course is followed. To this net invoice price should be
added transportation or other necessary charges incurred in acquiring possession of
the goods.
(3) In the case of merchandise produced by the taxpayer since the beginning
of the taxable year, (a) the cost of raw materials and supplies entering into or
consumed in connection with the products; (b) expenditures for direct labor; (c)
indirect expenses incident to and necessary for the production of the particular article,
including therein a reasonable proportion of management expenses, but not including
any cost of selling or return on capital whether by way of interest or profit.
(4) In any industry in which the usual rules for computation of cost of
production are inapplicable, costs may be approximated upon such basis as may be
reasonable and in conformity with established trade practice in the particular industry.
Among such cases are: (a) Farmers and raisers of livestock; (b) miners and
manufacturers who by a single process or uniform series of processes derive a product
of two or more kinds, size or grade, the unit cost of which is substantially alike; and
(c) retail merchants who use what is known as the "retail method" in ascertaining
approximate cost.
SECTION 147. Inventories at market price. Under ordinary
circumstances, and for normal goods in an inventory "market price" means the current
bid price prevailing at the date of the inventory for the particular merchandise in the
volume in which usually purchased by the taxpayer and is applicable in the cases (a)
of goods purchased and on hand, and (b) of basic elements of cost (materials, labor,
and burden) in goods in process of manufacture and in finished goods on hand;
exclusive, however, of goods on hand or in process of manufacture for delivery upon
firm sales contracts (i.e., those not legally subject to cancellation by either party) at
fixed prices entered into before the date of the inventory, which goods must be
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inventoried at cost. Where no open market exists or where quotations are nominal due
to stagnant market condition, the taxpayer must use such evidence of a fair market
price at the date or dates nearest the inventory as may be available, such as specific
purchase or sales by the taxpayer or others in reasonable volume and made in good
faith, or compensation paid for cancellation of contracts for purchase commitments.
Where the taxpayer in the regular course of business has offered for sale such
merchandise at prices lower than the current price as above defined, the inventory may
be value at such prices and the correctness of prices will be determined by reference
to the actual sales of the taxpayer for a reasonable period before and after the date of
the inventory. Prices which vary materially from the actual prices so ascertained will
not be accepted as reflecting the market price.
SECTION 148. Inventories by dealers in securities. A dealer in securities
who in his books of account regularly inventories unsold securities on hand either
(a) At cost;
(b) At, cost or market, whichever is lower; or
(c) At market value.
may make his return upon the basis upon which his accounts are kept; provided
that a description of the method employed shall be included in or attached to the
return, that all the securities must be inventoried by the same method, and that such
method must be adhered to in subsequent years, unless another method be authorized
by the Commissioner of Internal Revenue. A dealer in securities in whose books of
accounts separate computations of the gain or loss from the sale of the various lots of
securities sold are made on the basis of the cost of each lot shall be regarded, for the
purposes of this section, as regularly inventorying his securities at cost. For the
purposes of this rule a dealer in securities is a merchant of securities, whether an
individual, partnership; or corporation, with an established place of business, regularly
engaged in the purchase of securities and their resale to customers; that is, one who as
a merchant buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom. If such business is simply a branch of the
activities carried on by such person, the securities inventoried as here provided may
include only those held for purposes of resale and not for investment. Taxpayers who
buy and sell or hold securities for investment or speculation, irrespective of whether
such buying or selling constitutes the carrying on of a trade or business, and officers
of corporations and members of partnerships who in their individual capacities buy
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and sell securities, are not dealers in securities within the meaning of this rule.
SECTION 149. Inventories of livestock raisers and other farmers. (1)
Farmers may change the basis of their returns from that of receipts and disbursements
to that of an inventory basis, which necessitates the use of opening and closing
inventories for the year in which the change is made. There should be included in the
opening inventory all farm products (including livestock) purchased or raised which
were on hand at the date of the inventory, but inventories must not include real estate,
buildings, permanent improvements, or any other fixed assets.
DEICTS
(2) Because of the difficulty of ascertaining actual cost of livestock and other
farm products, farmers who render their returns upon an inventory basis may at their
option value their inventories for the current taxable year according to the "farm-price
method" which provides for the valuation of inventories at market price less cost of
marketing. If the use of the "farm-price method" of valuing inventories for any taxable
year involves a change in method of pricing inventories from that employed in prior
years, the opening inventory for the taxable year in which the change is made should
be brought in at the same value as the closing inventory for the preceding taxable year.
If such valuation of the opening inventory for the taxable year in which the change is
made results in an abnormally large income for that year, there may be submitted with
the return for such taxable year an adjustment statement for the preceding year based
on the "farm-price method" of valuing inventories; upon the amount of which
adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in effect
for such preceding year.
(3) Where returns have been made in which the taxable net income has been
computed upon incomplete inventories, the abnormality should be corrected by
submitting with the return for the current taxable year a statement for the preceding
year in which such adjustments shall be made as are necessary to bring the closing
inventory for the preceding year into agreement with opening complete inventory for
the current taxable year.
SECTION 150. Inventories of miners and manufacturers. A taxpayer
engaged in mining or manufacturing who by a single process or uniform series of
processes derives a product of two or more kinds, sizes or grades, the unit cost of
which is substantially alike, and who in conformity to a recognized trade practice
allocates an amount of cost to each kind, size, or grade of product which in the
aggregate will absorb the total cost of production, may use such allocated cost a the
basis for pricing inventories, provided such allocation bears a reasonable relation to
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in full from sources within the Philippines and that portion of the income which is
derived partly from sources within and partly from sources without the Philippines
which is allocated or apportioned to sources within the Philippines.
SECTION 153. Interest. Interest on bonds or notes or other interest
bearing obligations of residents, corporate or otherwise, constitutes income from
sources within the Philippines.
SECTION 154. Dividends. Gross income from sources within the
Philippines includes dividends, as defined by Section 83 of the Code:
(a) From a domestic corporation; and
(b) From a foreign corporation unless less than 50 per cent of its gross
income for the three-year period ending with the close of its taxable year preceding
the declaration of such dividends, or for such part of such period as it has been in
existence, was derived from sources within the Philippines; but only in an amount
which bears the same ratio to such dividends as the gross income of the corporation
for such period derived from sources within the Philippines bears to its gross income
from all sources.
Dividends will be treated as an income from sources within the Philippines
unless the taxpayer submits sufficient data to establish to the satisfaction of the
Commissioner of Internal Revenue that they should be excluded from gross income
under Section 37(a)(2)(B).
SECTION 155. Compensation for labor or personal services. Gross
income from sources within the Philippines includes compensation for labor or
personal services performed within the Philippines regardless of the residence of the
payor, of the place in which the contract for service was made, or of the place of
payment. If a specific amount is paid for labor or personal services performed in the
Philippines, such amount shall be included in the gross income. If no accurate
allocation or segregation of compensation for labor or personal services performed in
the Philippines can be made, or when such labor or service is performed partly within
and partly without the Philippines, the amount to be included in the gross income shall
be determined by an apportionment of the time basis, i.e., there shall be included in
the gross income an amount which bears the same relation to the total compensation
as the number of days of performance of the labor or services within the Philippines
bears to the total number of days performance of labor or services for which the
payment is made. Wages received for services rendered inside the territorial limits of
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the Philippines and wages of an alien seaman earned on a coastwise vessel are to be
regarded as from sources within the Philippines.
SECTION 156. Rentals and royalties. Gross income from sources within
the Philippines includes rentals or royalties from property located within the
Philippines or from any interest in such property, including rentals or royalties for the
use of or the privilege of using in the Philippines, patents, copyrights, secret processes
and formulas, goodwill, trademarks, trade brands, franchises, and other like property.
The income arising from the rental of property whether tangible or intangible located
within the Philippines, or from the use of property, whether tangible or intangible,
located within the Philippines, is from sources within the Philippines.
SECTION 157. Sale of real property. Gross income from sources within
the Philippines includes gain, computed under the provisions of Section 35, derived
from the sale or other disposition of real property located in the Philippines. For the
treatment of capital gains and losses, see Sections 132 to 135 of these regulations.
SECTION 158. Income from sources without the Philippines. Gross
income from sources without the Philippines includes:
(1) Interest other than that specified in Section 37(a)(1), as being derived
from sources within the Philippines;
(2) Dividends other than those derived from sources within the Philippines as
provided in Section 37(a)(2);
(3) Compensation for labor or personal services performed without the
Philippines;
(4) Rentals or royalties derived from property without the Philippines or from
any interest in such property, including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trade-marks, trade brands, franchises, and other like property; and
(5) Gain derived from the sale of real property located without the
Philippines.
SECTION 159. Sale of personal property. Income derived from the
purchase and sale of personal property shall be treated as derived entirely from the
country in which sold. The world "sold" includes "exchanged". The "country in which
sold" ordinarily means the place where the property is marketed. This section does not
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apply to income from the sale of personal property produced (in whole or in part) by
the taxpayer within and sold without the Philippines or produced (in whole or in part)
by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations.)
SECTION 160. Apportionment of deductions. From the items specified
in Section 37(a) as being derived specifically from sources within the Philippines
there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any other expenses, losses or
deductions which can not definitely be allocated to some item or class of gross
income. The remainder shall be included in full as net income from sources within the
Philippines. The ratable part is based upon the ratio of gross income from sources
within the Philippines to the total gross income.
EXAMPLE: A non-resident alien individual whose taxable year is the calendar
year, derived gross income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation
Dividends on stock of domestic corporation
Royalty for the use of patents within the Philippines
Gain from sale of real property located within the Philippines
Total
P9,000
4,000
12,000
11,000
P36,000
that is, one-fifth of the total gross income was from sources within the Philippines.
The remainder of the gross income was from sources without the Philippines,
determined under Section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources within
the Philippines and the amount of P40,000 is properly allocated to income from
sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross income from
sources within the Philippines to the total gross income, shall be deducted in
computing net income from sources within the Philippines. Thus, there are deducted
from the P36,000 of gross income from sources within the Philippines expenses
amounting to P14,000 (representing P8,000 properly apportioned to the income from
sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses
which could not be allocated to any item or class of gross income). The remainder,
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The portion of such income derived from sources partly within the Philippines
and partly within a foreign country which is attributable to sources within the
Philippines shall be determined according to the following rules and cases:
PERSONAL PROPERTY PRODUCED AND SOLD: Gross income
derived from the sale of personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold within a foreign country, or produced (in
whole or in part) by the taxpayer within a foreign country and sold within the
Philippines shall be treated as derived partly from sources within the Philippines and
partly from sources within a foreign country under one of the cases below. As used
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net income of a foreign steamship company doing business in or from this country is
ascertained for the purpose of the income tax, by deducting from the gross receipts
from outgoing business such a portion of the aggregate expenses, losses, etc., as such
receipts bear to the aggregate receipts from all ports of all vessels, including in each
case incoming of a nonshipping character but incidental, to the shipping business such
as dividends from investments, interests on deposits, etc. For example
Given
(a)
(b)
(c)
(d)
(e)
P20,000
200,000
5,000
50,000
150,000
P20,000
5,000
25,000
Total
P.I. expenses:
(g)
World's expenses, or
(h)
25,000
x
275,000
P.I. net income:
150,000, or
150,000 = 13,636
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employed by the taxpayer in keeping his books, if such method clearly reflects his
income is to be followed with respect to the time as of which items of gross income
and deductions are to be accounted for. If the taxpayer does not regularly employ a
method of accounting which clearly reflects his income, the computation shall be
made in such manner as in the opinion of the Commissioner of Internal Revenue
clearly reflects it. (See Section 137 of these regulations for computation of net
income, and Section 38 for bases of computation. For the use of inventories, see
Sections 144 to 151 of these regulations.)
SECTION 167. Methods of accounting. It is recognized that no uniform
method of accounting can be prescribed for all taxpayers, and the law contemplates
that each taxpayer shall adopt such forms and systems of accounting as are in his
judgment best suited to his purpose. Each taxpayer is required by law to make a return
of his true income. He must, therefore, maintain such accounting records as will
enable him to do so. Any approved standard method of accounting which reflects
taxpayer's income may be adopted. Among the essentials are the following:
(1) In all cases in which the production, purchase, or sale of merchandise of
any kind is an income producing factor, inventories of the merchandise on hand
(including finished goods, work in process, raw materials, and supplies) should be
taken at the beginning and end of the year and used in computing the net income of
the year in accordance with Sections 144 to 151 of these regulations;
(2) Expenditures made during the year should be properly classified as
between capital and income; that is to say, expenditures for items of plant, equipment,
etc., which have a useful life extending substantially beyond the year should be
charged to a capital account and not to an expense account; and
(3) In any case in which the cost of capital assets is being recovered through
deductions for wear and tear, depletion, or obsolescence, any expenditure (other than
ordinary repairs) made to restore the property or prolong its useful life should be
added to the property account or charged against the appropriate reserve and not to
current expenses.
SECTION 168. Changes in accounting methods. The true income,
computed under the law shall in all cases be entered in the return. If for any reason the
basis of reporting income subject to tax is changed, the taxpayer shall attach to his
return a separate statement setting forth for the taxable year and for the preceding year
the classes of items differently treated under the two systems, specifying in particular
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or are applied by the vendor to the purchase or bid price of the property. Such gain or
loss is to be measured by the difference between the fair market value of the property
repossessed and the basis in the hands of the vendor of the obligations of the
purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the repossession. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
discharged, or applied upon the repossession of the property shall be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
repossession, unless it is clearly shown that after the property was repossessed the
purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the obligations
with respect to which the purchaser remained liable after the repossession. If the
property repossessed is bid in by the vendor at a lawful public auction or judicial sale,
the fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. The property
repossessed shall be carried on the books of the vendor at its fair market value at the
time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income
from installment sales on the straight accrual or cash receipts and disbursement basis,
such a course is permissible.
SECTION 175. Sale of real property involving deferred payments. Under
Section 43 deferred-payment sales of real property include (a) agreements to purchase
and sale which contemplate that a conveyance is not to be made at the outset, but only
after all or a substantial portion of the selling price has been paid, and (b) sales in
which there is an immediate transfer of title, the vendor being protected by a mortgage
or other lien as to deferred payments. Such sales either under (a) or (b), fall into two
classes when considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable year in which the sale is made do not exceed 25 per cent
of the selling price.
(2) Deferred-payment sales not on the installment plan, that is sales in which
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the payments received in cash or property other than evidences of indebtedness of the
purchaser during the taxable year in which the sale is made exceed 25 per cent of the
selling price.
In the sale of mortgaged property the amount of the mortgage, whether the
property is merely taken subject to the mortgage or whether the mortgage is assumed
by the purchaser, shall be included as a part of the "selling price" but the amount of
the mortgage, to the extent that it does not exceed the basis to the vendor of the
property sold, shall not be considered as a part of the "initial payments" or of the
"total contract price", as those terms are used in Section 43 of the Code, in Sections
174 and 176 of these regulations, and in this section. The term "initial payments" does
not include amounts received by the vendor in the year of sale from the disposition to
a third person of notes given by the vendee as part of the purchase price which are due
and payable in subsequent years. Commissions and other selling expenses paid or
incurred by the vendor are not to be deducted or taken into account in determining the
amount of the "initial payments," the "total contract price", or "the selling price". The
term "initial payments" contemplates at least one other payment in addition to the
initial payment. If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the first year, the income may not be returned on the
installment basis. Income may not be returned on the installment basis where no
payment in cash or property, other than evidences of indebtedness of the purchaser, is
received during the first year, the purchaser having promised to make two or more
payments, in later years.
SECTION 176. Sale of real property on installment plan. In transactions
included in class (1) in the preceding section the vendor may return as income from
such transactions in any taxable year that proportion of the installment payments
actually received in that year which the total profit realized or to be realized when the
property is paid for bears to the total contract price.
DAaHET
If the purchaser defaults in any of his payments, and the vendor returning
income on the installment basis reacquires the property sold, whether title thereto had
been retained by the vendor or transferred to the purchaser, gain or loss for the year in
which the reacquisition occurs is to be computed upon any installment obligations of
the purchaser which are satisfied or discharged upon the reacquisition or are applied
by the vendor to the purchase or bid price of the property. Such gain or loss is to be
measured by the difference between the fair market value of the property acquired
(including the fair market value of any fixed improvements placed on the property by
the purchaser) and the basis in the hands of the vendor of the obligations of the
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purchaser which are so satisfied, discharged, or applied, with proper adjustment for
any other amounts realized or costs incurred in connection with the reacquisition. The
basis in the hands of the vendor of the obligations of the purchaser satisfied,
discharged, or applied upon the reacquisition of the property will be the excess of the
face value of such obligations over an amount equal to the income which would be
returnable were the obligations paid in full. No deduction for a bad debt shall in any
case be taken on account of any portion of the obligations of the purchaser which are
treated by the vendor as not having been satisfied, discharged, or applied upon the
reacquisition of the property, unless it is clearly shown that after the property was
reacquired the purchaser remained liable for such portion; and in no event shall the
amount of the deduction exceed the basis in the hands of the vendor of the portion of
the obligations with respect to which the purchaser remained liable after the
acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the
fair market value of the property shall be presumed to be the purchase or bid price
thereof in the absence of clear and convincing proof to the contrary. If the property
reacquired is subsequently sold, the basis for determining gain or loss is the fair
market value of the property at the date of reacquisition (including the fair market
value of any fixed improvements placed on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income from
installment sales on the straight accrual or cash receipts and disbursements basis, such
a course is permissible, and the sales will be treated as deferred-payment sales not on
the installment plan.
SECTION 177. Deferred-payment sale of real property not on installment
plan. In transactions included in class (2) in Section 175 of these regulations, the
obligations of the purchaser received by the vendor are to be considered as the
equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in any
of his payments, and the vendor repossesses the property, the difference between (1)
the entire amount of the payments actually received on the contract and retained by
the vendor plus the fair-market value at the time of repossession of fixed
improvements placed on the property by the purchaser and (2) the sum of the profits
previously returned as income in connection therewith and an amount representing
what would have been a proper adjustment for exhaustion, wear and tear,
obsolescence, amortization, and depletion of the property during the period the
property was in the hands of the purchaser had the sale not been made will constitute
gain or loss, as the case may be to the vendor for the year in which the property is
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repossessed, and the basis of the property in the hands of the vendor will be the
original basis at the time of the sale plus the fair market value at the time of
repossession, of fixed improvements placed on the property by the purchaser. If the
vendor has previously transferred title to the purchaser, and the purchaser defaults in
any of his payments and the vendor reacquired the property, such reacquisition shall
be regarded as a transfer by the vendor, in exchange for the property for such of the
purchaser's obligations as are applied by the vendor to the purchase or bid price of the
property. Such an exchange will be regarded as having resulted in the realization by
the vendor of gain or loss, as the case may be for the year of reacquisition, measured
by the difference between the fair market value of the property including fixed
improvements placed by the purchaser on the property, and the amount of the
obligations of the purchaser which were applied by the vendor to the purchase or bid
price of the property. The fair market value of the property reacquired shall be
presumed to be the amount for which it is bid in by the vendor in the absence of clear
and convincing proof to the contrary. If the property reacquired is subsequently sold
the basis for determining gain or loss is the fair market value of the property at the
date of reacquisition including the fair market value of the fixed improvements placed
on the property by the purchaser.
SECTION 178. Sale of real estate in lots. Where a tract of land is
purchased with a view to dividing it into lots or parcels of ground to be sold as such,
the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently
to that date, shall be equitably apportioned to the several lots or parcels and made a
matter of record on the books of the taxpayer, to the end that any gain derived from
the sale of any such lots or parcels may be returned as income for the year in which
the sale was made. This rule contemplates that there will be a measure of gain or loss
on every lot or parcel sold, and not that the capital invested in the entire tract shall be
extinguished before any taxable income shall be returned. The sale of each lot or
parcel will be treated as a separate transaction and the gain or loss will be accounted
for accordingly.
SECTION 178(a). In all cases where a taxpayer sells during the year real or
personal property on the installment basis, there should be attached to the income tax
return a statement of each sale made during the year containing the following
information:
(a) Name of buyer
(b) Address of buyer
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(5) The terms "group" and "group of controlled taxpayers" mean the
organizations, trades, or businesses owned or controlled by the same interests.
(6) The term "true net income" means, in the case of a controlled taxpayer,
the net income (or, as the case may be, any item or element affecting net income)
which would have resulted to the controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, in the particular contract, transaction, arrangement, or
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other act) dealt with the other member or members of the group at arm's length. It
does not mean the income, the deductions, or the item or element of either, resulting
to the controlled taxpayer by reason of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the interests controlling it, chose to make
(even though such contract, transaction, or arrangement be legally binding upon the
parties thereto).
(b) SCOPE AND PURPOSE. The purpose of Section 44 is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. The interests controlling a group of
controlled taxpayers are assumed to have complete power to cause each controlled
taxpayer so to conduct its affairs that its transactions and accounting record truly
reflect the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done, and the taxable net incomes are thereby
understated, the statute contemplates that the Commissioner of Internal Revenue shall
intervene, and, by making such distributions, apportionments, or allocations as he may
deem necessary of gross income or deductions, or of any item or element affecting net
income, between/or among the controlled taxpayers constituting the group, shall
determine the true net income of each controlled taxpayer dealing at arm's length with
another uncontrolled taxpayer. The standard to be applied in every case is that of an
uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its
provisions at will, nor does it grant any right to compel the Commissioner of Internal
Revenue to apply such provisions.
(c) APPLICATION. Transactions between the controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the common control
is being used to reduce, avoid, or escape taxes. In determining the true net income of a
controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case
of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or
to the case of a device designed to reduce or avoid tax by shifting or distorting income
or deductions. The authority to determine true net income extends to any case in
which either by inadvertence or design the taxable net income in whole or in part, of a
controlled taxpayer, is other than it would have been had the taxpayer in the conduct
of his affairs been an uncontrolled taxpayer dealing at arm's length with another
uncontrolled taxpayer.
(Section 45 of the Code)
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business, under ordinary handling of mail, on or before the date on which the return is
required to be filed. When question is raised as to whether or not the return was
posted in ample time to reach the proper official, the envelope in which the return was
transmitted and the return should be submitted to the Commissioner of Internal
Revenue with such comment and recommendation as the receiving officer may
consider proper to make.
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Form No. 17.02), and the returns of insurance companies, on the prescribed form
(B.I.R. Form No. 17.03). A corporation having an existence during any portion of a
taxable year is required to make a return. A corporation which has received a charter,
but has never perfected its organization, and which has transacted no business and had
no income from any source, may upon presentation of the facts to the Commissioner
of Internal Revenue be relieved from the necessity of making a return so long as it
remains in an unorganized condition. In the absence of a proper showing to the
Commissioner of Internal Revenue such corporation must file the necessary return.
A corporation desiring to change its accounting period from calendar year to
fiscal year must comply with the procedure set forth in Section 172 of these
regulations relative to the change in accounting period of corporations.
SECTION 185. Returns of insurance companies. Insurance companies
transacting business in the Philippines or deriving income from sources therein are
required to file returns of income. The return shall be made on the prescribed form
(B.I.R. Form No. 17.03).
SECTION 186. Returns of foreign corporations. Every foreign
corporation having income from sources within the Philippines must make a return of
income on the form prescribed for corporation (B.I.R. Form No. 17.02). If such a
corporation has no office or place of business in this country, but has a resident agent
therein, the latter shall make the return. Although the foreign corporation is not
engaged in business in this country and has no office, branch, or agency in the
Philippines, it is required to make a return if it has received income from sources
within the Philippines.
SECTION 187. Time and place for filing corporate returns. Returns of
corporations, associations, or partnerships must be filed on or before the fifteenth day
of April in each year or on or before the 15th day of the fourth month following the
close of a duly designated fiscal year. The return, if placed in the mails, should be
posted in ample time to reach the Commissioner of Internal Revenue, provincial,
revenue agent, or treasurer of the province, city or municipality in which is located the
principal office of the corporation where its books of account and other data are kept,
on or before the last due date for the filing of the return. When the last due date falls
on Sunday or a legal holiday, the returns may be filed without penalty on the next
succeeding business day. (Conforms with Am. by R.A. 2343.)
(Section 47 of the Code)
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wherein taxpayers have neglected or refused to make return, and in cases wherein
returns are found, upon examination or otherwise, to be erroneous, false, or
fraudulent, the Commissioner of Internal Revenue shall upon discovery thereof, make
a return upon the best evidence obtainable, and the tax so discovered to be due,
together with the penalties prescribed, shall be assessed and the amount thereof shall
be paid immediately upon notice and demand.
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has definite knowledge that such person is either a citizen or a resident of the
Philippines. An individual whose address is within the Philippines, may be presumed
to be a resident of the Philippines, unless the withholding agent has reason to believe
that such individual, not being a citizen of the Philippines, has not established
residence in this country.
In case of doubt, a withholding agent may always protect himself by
withholding the tax due, and promptly causing a query to be addressed to the
Commissioner of Internal Revenue for the determination of whether or not the income
paid to an individual is not subject to withholding. In case the Commissioner of
Internal Revenue decides that the income paid to an individual is not subject to
withholding the withholding agent may thereupon remit the amount of tax withheld.
SECTION 201. Exception from withholding. Withholding of a tax on
interests upon bonds or other obligations containing a tax-free covenant clause shall
not be required in the case of a citizen or resident alien individual if he files with the
withholding agent when presenting interest coupons for payment, not later than
February 1 following the taxable year, an ownership and exemption certificate on the
requisite form (B.I.R. Form No. 17.13) claiming a personal exemption or credits for
dependents. The withholding agent shall forward such certificate to the Commissioner
of Internal Revenue with a letter of transmittal. The income of domestic and resident
foreign corporations is free from withholding.
SECTION 202. Ownership certificates for interest coupons. The owners,
except domestic and resident foreign corporations, of bonds or other obligations
containing a tax-free covenants clause, issued by a domestic or resident foreign
corporation, when presenting interest coupons for payment, shall file a certificate of
ownership on B.I.R. Form No. 17.13, for each issue of bonds, showing the name and
address of the debtor corporation, the name and address of the owner of the bonds, the
nature of the obligations, the amount of interest and its due date, and the amount of
any tax withheld. In the case of corporate bonds or similar obligations not containing a
tax-free covenant clause, no ownership certificates are required. But ownership
certificates are required in the case of such bonds if the owner is unknown to the
withholding agent. Ownership certificates need not be filed in the case of interest
payments on bond or similar obligations of the United States or of the Government of
the Philippines or of any political subdivision thereof.
Where in connection with the sale of its property payment of the bonds or other
obligations of a corporation is assumed by the assignee, such assignee, whether an
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204 of these regulations. The withholding provisions of the law are likewise
applicable to the income derived from interest upon bonds, mortgages, or deeds of
trust, or other interest-bearing obligations of a domestic or resident foreign
corporation, firm or association, whether or not the bonds and other such obligations,
or securities contain the so-called tax-free covenant clause, and regardless of the place
where such bonds, obligations, or securities are issued, negotiated, or marketed and
the interest thereon paid, in case where such interest-income is received or obtained
by, or paid to, a non-resident alien firm, corporation, association, trust company, or
trustee, not engaged in business or trade within the Philippines and not having an
office or place of business therein. (Conforms with amendments by R.A. 2343, effv.
June 20, 1959.)
A foreign corporation is presumed not to be engaged in trade or business
within the Philippines and not to have office or place of business therein, unless the
withholding agent has definite knowledge that such foreign corporation is in fact
engaged in trade or business in the Philippines and of the name and address of its
resident agent, or unless the withholding agent has definite knowledge that such
foreign corporation has a branch office or business in this country and of the location
of such branch office or place of business.
(Section 55 of the Code)
SECTION 206. Income tax not otherwise collectible from taxpayer
chargeable to his representative. It is the intent and purpose of the law to charge
and collect income tax imposed under Title II of the Code on all gains, profits, and
income of a taxable class, and the tax is required to be paid by the owner of such
gains, profits. and income or by the proper representative having the receipt, custody,
control, or disposal of the same. Thus, where a non-resident has charged a resident,
under a power of attorney, to sell in his behalf property, real or personal in the
Philippines, the proper tax due may be collected from the owner of the gains or profits
or from the representative who had the receipt, custody, control or disposal of such
gains, profits, or income, as the personal liability of such representative.
(Sections 56 to 60 of the Code)
SECTION 207. Estates and trusts. "Fiduciary" is a term which applies to
all persons or corporations that occupy positions of peculiar confidence towards
others, such as trustees, executors, or administrators; and a fiduciary, for income tax
purposes, is any person or corporation that holds in trust an estate of another person or
persons. In order that a fiduciary relationship may exist, it is necessary that a legal
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trust be created.
In general, the income of a trust for the taxable year which is to be distributed
to the beneficiaries must be returned by and will be taxed to the respective
beneficiaries, but the income of a trust which is to be accumulated or held for future
distribution, whether consisting of ordinary income or gain from the sale of assets
included in the corpus of the trust, must be returned by and will be taxed to the trustee.
Three exceptions to this general rule are found in the law: (1) in the case of revocable
trust (Section 59); (2) in the case of a trust the income of which, in whole or in part,
may be held or distributed for the benefit of the grantor (Section 60); and (3) in the
case of a trust administered in a foreign country [Section 57(c)]. In the first case, the
income from such part of the trust estate title to which may be revested in the grantor
should be included in the grantor's return. In the second case, part of the income of the
trust, which may be held or distributed for the benefit of the grantor, should be
included in the grantor's return. In the third case, the trustee is not entitled to the
deductions mentioned in subsections (a) and (b) of Section 57 and the net income of
the trust undiminished by any amounts distributed, paid or credited to beneficiaries
will be taxed to the trustees; however, the income included in the return of the trustees
is not to be included in computing the income of the beneficiaries.
SECTION 208. Consolidation of incomes of two or more trusts. Section
56(b)(2) expressly requires the consolidation of the income of two or more trusts
where the creator of the trust in each instance is the same person and the beneficiary
in each instance is the same. The tax due on the consolidated income will be collected
from the trustees in proportion to the net income of the respective trusts. (See Section
215 of these regulations.)
SECTION 209. Estates and trusts taxed to fiduciary. In the case of a
decedent's estate the settlement of which is the object of testamentary or intestate
proceedings, the fiduciary, executor, or administrator is required to file an annual
return for the estate up to the final settlement thereof. In the same manner, the
fiduciary is required to file a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained
persons or persons with contingent interests or otherwise. In both cases the income of
the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed,
the trustee, may in his discretion, distribute the income or accumulate it, the income is
taxed to the trustee, irrespective of the exercise of his discretion. The imposition of
the tax is not affected by the fact that an ultimate beneficiary may be a person exempt
from tax.
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SECTION 210. Estate and trust taxed to beneficiaries. In the case of (a)
a trust the income of which is to be distributed annually or regularly; (b) an estate of a
decedent the settlement of which is not the object of judicial testamentary or intestate
proceedings; and (c) properties held under a co-ownership or tenancy in common, the
income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must
include in his return his distributive share of the net income of the trust, estate, or
co-ownership. In the case of trusts which are in whole or in part subject to revocation
by the grantor, or which are for the benefit of the grantor, the income of the trust is to
be included in computing the net income of the grantor.
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the return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.
(Section 62 of the Code)
SECTION 217. Fiduciaries indemnified against claims for taxes paid.
Fiduciaries are indemnified against the claims or demands of every beneficiary for all
payments of taxes which they shall be required to make and they shall have credit for
such payments in any accounting which they make as such fiduciaries.
(Section 63 of the Code)
SECTION 218. Tax on personal holding companies. Section 63 imposes
for such taxable year beginning after December 31, 1938 (in addition to the tax
imposed by Section 24 of the Code), a tax upon corporations classified as personal
holding companies. Corporations so classified are exempt from the additional tax on
corporation improperly accumulating surplus imposed by Section 25, but are not
exempt from the other taxes imposed by Title II of the Code. Unlike the tax imposed
by Section 25, the tax imposed by Section 63 applies to all personal holding
companies defined as such in Section 64, regardless of whether or not they were
formed or availed of to accumulate earnings or profits for the purpose of avoiding the
tax upon shareholders. The tax imposed by Section 63 is 45 per cent of the amount of
the undistributed net income.
A foreign corporation, whether resident or non-resident, which is classified as a
personal holding company under Section 64 (not including a foreign personal holding
company as defined in Section 67) is subject to the tax imposed by Section 63 with
respect to its income from sources within the Philippines. The term "personal holding
company" as used in Chapter VIII of Title II of the Code does not include a foreign
corporation if (1) its gross income from sources within the Philippines for the period
specified in Section 37(a) (2) (B) is less than 50 per cent of its total gross income from
all sources and (2) all of its stock outstanding during the last half of the taxable year is
owned by nonresident alien individuals, whether directly or indirectly through other
foreign corporations.
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Section 221 of these regulations. Both requirements must be satisfied and both must
be met with respect to each taxable year.
SECTION 220. Gross income requirement. To meet the gross income
requirement, it is necessary that either of the following percentages of gross income of
the corporation for the taxable year be personal holding company income as defined in
Section 65:
(a) Eighty per cent or more; or
(b) Seventy per cent or more if the corporation has been classified as a
personal holding company for any taxable year beginning after December 31, 1938,
unless
(1) A taxable year has intervened since the last taxable year for which it was
so classified, during no part of the last half of which the stock ownership requirement
specified in Section 64(a) (2) exists; or
(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its personal holding company income
was less than 70 per cent of its gross income.
In determining whether the personal holding company income is equal to the
required percentage of the total gross income, the determination must not be made
upon the basis of gross receipts, since gross income is not synonymous with gross
receipts. For a further discussion of what constitutes "gross income", see Section 29 of
the Code and the regulations prescribed under that section.
SECTION 221. Stock ownership requirements. To meet the stock
ownership requirement, it is necessary that at some time during the last half of the
taxable year more than 50 per cent it value of the outstanding stock of the corporation
be owned, directly or indirectly, by or for not more than five individuals: For such
purpose, the ownership of the stock must be determined as provided in Section 66.
In the event of any change in the stock outstanding during the last half of the
taxable year, whether in the number of shares or classes of stock, or whether in the
ownership thereof, the conditions existing immediately prior .and subsequent to each
change must be taken into consideration.
In determining whether the statutory conditions with respect to stock
ownership are present at any time during the last half of the taxable year, the phrase
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"in value" shall, in the light of all the circumstances, be deemed the value of the
corporate stock outstanding at such time (not including treasury stock). This value
may be determined upon the basis of the company's net worth, earning and dividend
paying capacity, appreciation of assets, together with such other factors as have a
bearing upon the value of the stock. If the value of the stock is greatly at variance with
that reflected by the corporate books the evidence of such value should be filed with
the return. In any case where there are two or more classes of stock outstanding, the
total value of the stock should be allocated among the different classes according to
the relative value of each class therein.
The rules stated in the last two preceding paragraphs are equally applicable in
determining the stock ownership requirement specified in Section 65(e); relating to
personal service contracts and Section 65(f), relating to the use of corporation
property by a shareholder. The stock ownership requirement specified in these
sections relates, however, to the stock outstanding at anytime during the entire taxable
year and not merely during the last half thereof.
(Section 65 of the Code)
SECTION 222. Personal holding company income. The term "personal
holding company income" means the portion of the gross income which consists of
the following:
(1) DIVIDENDS. The term "dividends" includes dividends as defined in
Section 83 (a), and amounts required to be included in gross income under Section 69
(b) of this Code. It does not include stock dividends (to the extent that they do not
constitute income to the shareholders with the meaning of Section 83(b) of the Code)
and liquidating dividends.
(2) INTEREST (other than interest constituting rent). The term "interest"
means any amount, includible in gross income, received for the use of money loaned
except that it does not include interest constituting rent [see subparagraph (1)].
(3) ROYALTIES (other than mineral, oil, or gas royalties). The term
"royalties" include amounts received for the privilege of using patents, copyrights,
secret processes and formulas, good will, trade marks, trade brands, franchises, and
other like property. It does not include rents, or overriding royalties received by an
operating company. As used in this paragraph the term "overriding royalties" means
amounts received from the sublease by the operating company which originally leased
and developed the natural resources property in respect of which such overriding
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and trusts which is to be included in personal holding company income consists of the
income from estates and trusts which is required to be included in the gross income of
the corporation under Section 29 in relation to Section 56 of the Code, together with
the gains derived by the corporation from the sale or other disposition of any interest
in an estate or trust.
(8) AMOUNTS
RECEIVED
UNDER
PERSONAL
SERVICE
CONTRACTS. Amounts includible in personal holding company income as
amount received under personal service contracts consist of amounts received
pursuant to a contract under which the corporation is to furnish personal services, and
amounts received from a sale or other disposition of such a contract, if
(a) Some person other than the corporation has the right to designate (by
name or by description) the individual who is to perform the services or if the
individual who is to perform the services is designated (by name or by description) in
the contract; and
(b) At some time during the taxable year 25 per cent or more in value of the
outstanding stock of the corporation is owned, directly or indirectly, by or for the
individual who has performed, is to perform, or may be designated (by name or by
description), as the one to perform such services. For this purpose the stock ownership
must be determined as provided in Section 66 of the Code.
The application of Section 65(e) may be illustrated by the following examples:
Example (1): A, whose profession is that of an actor, owns all of the
outstanding capital stock of the M Corporation. The Corporation entered into a
contract with A under which A was to perform personal services for the person or
persons whom the M Corporation might designate, in consideration of which A was to
receive P10,000 a year from the M Corporation. The M Corporation entered into a
contract with the O Corporation in which A was designated to perform personal
services for the O Corporation in consideration of which the O Corporation was to pay
the M Corporation P500,000 a year. The P500,000 received by the M Corporation
from the O Corporation constitutes a personal holding company income.
Example (2): The N Corporation, the entire outstanding capital stock of which
is owned by four individuals, is engaged in engineering. The N Corporation entered
into a contract with the O Corporation to perform engineering services for the O
Corporation, in consideration of which the O Corporation was to pay the N
Corporation P50,000. The individual who was to perform the services was not
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designated (by name or by description) in the contract and no one but the N
Corporation had the right to designate (by name or by description) such individual.
The P50,000 received by the N Corporation from the O Corporation does not
constitute personal holding company income.
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The application of the family and partnership rule in determining the ownership
of stock for the purpose set forth in (a) of Section 223 of these regulations is
illustrated by the following example:
Example: The M Corporation at some time during the last half of the taxable
year had 1,800 shares of outstanding stock, 450 of which were held by various
individuals having no relationship to one another and none of whom were partners,
and the remaining 1,350 were held by 51 shareholders as follows:
Relationship
Shares
Shares
An individual
100
20
20
20
20
His father
AF
10
BF
10
CF
10
DF
10
EF
10
His wife
AW
10
BW
40
CW
40
DW
40
EW
40
His brother
AB
10
BB
10
CB
10
DB
10
EB
10
His son
His daughter by
former marriage
(son's half sister)
AS
10
BS
40
CS
40
DS
40
ES
40
ASHS
10
BSHS
40
CSHS
40
DSHS
40
ESHS
40
ABW
10
BBW
10
CBW
10
DBW
160
EBW
10
AWF
10
BWF
10
CWF
110
DWF
10
EWF
10
BWB
10
CWB
10
DWB
10
EWB
10
BWBW 10
CWBW 10
DWBW 10
EWBW 110
Individual's partner AP
10
Shares
Shares
Shares
By applying the statutory rule provided in Section 66(a) five individuals own
more than 50 per cent of the outstanding stock as follows:
A
B
CW
DB
EWB
160
160
220
200
170
910
Individual A represents the obvious case where the head of the family owns the
bulk of the family stock and naturally is the head of the group. A's partner owns to
shares of the stock. Individual B represents the case where he is still head of the group
because of the ownership of stock by his immediate family. Individuals C and D
represent cases where the individuals fall in groups headed in C's case by his wife and
in D's case by his brother because of the preponderance of holdings on the part of
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relatives by marriage. Individual E represents the case where the preponderant holding
of others eliminate that individual from the group.
The method of applying the family and partnership rule as illustrated in the
foregoing example also applies in determining the ownership of stock for the purposes
stated in (b) and (c) of Section 223 of these regulations.
SECTION 226. Options. In determining the ownership of stock for any
of the purposes set forth in Section 223 of these regulations if any person has an
option to acquire stock, such stock may be considered as owned by person. The term
"option" as used in this section includes an option to acquire such an option and each
one of a series of such options, so that the person who has an option on an option to
acquire stock may be considered as the owner of the stock.
(Section 67 of the Code)
SECTION 227.
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foreign personal holding company for the taxable year ending after December 31,
1938, unless
(1) A taxable year has intervened since the last taxable year for which it was
so classified, during no part of which the stock ownership requirement specified in
Section 67 (a) (z) exist; or
(2) Three consecutive years have intervened since the last taxable year for
which it was so classified, during each of which its foreign personal holding company
income was less than 50 per cent of its gross income.
In determining whether the foreign personal holding company income is equal
to the required percentage of the total gauss income, the determination must not be
made on the basis of gross receipts since gross income is not synonymous with gross
receipts. For a further discussion on what constitutes "gross income," see Section
29(n) and the regulations prescribed under that section.
SECTION 229. Stock ownership requirement. To meet the stock
ownership requirement it is necessary that at some time in the taxable year more than
50 per cent in value of the outstanding stock of the foreign corporation be owned,
directly or indirectly, by or for not more than five individuals who are citizens or
residents of the Philippines.
In the event of any change in the stock outstanding during the taxable year,
whether in the number of shares or classes of stock, or whether in the ownership
thereof, the conditions existing immediately prior and subsequent to each change must
be taken into consideration, since a corporation comes within the classification if the
statutory conditions with respect to stock ownership are present at any time during the
taxable year.
In determining whether the statutory conditions with respect to stock
ownership are present at any time during the taxable year, the phrase "in value" shall,
in the light of all the circumstances, be deemed the value of the corporate stock
outstanding at such time (not including treasury stock). This value may be determined
upon the basis of the company's net worth, earning and dividend paying capacity,
appreciation of assets, together with such other factors as have a bearing upon the
value of the stock. If the value of the stock which is used is greatly at variance with
that reflected by the corporate books, the evidence of such value should be filed with
the return. In any case where there are two or more classes of stock outstanding, the
total value of all the stock should be allocated among the different classes according
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specified time regardless of whether the Philippine shareholder is included with the
Philippine group.
The Philippine shareholders must include in their gross income their
distributive shares of that proportion of the undistributed net income for the
taxable-year of the company which is equal in ratio to that which the portion of the
taxable year up to and including the last day on which the Philippine group with
respect to the company existed bears to the entire taxable year. Thus if the last day in
the taxable year on which the required Philippine group existed was also the end of
the taxable year, the portion of the taxable year up to and including such last day
would be equal to 100 per cent and in such case, the Philippine shareholders would be
required to return their distributive shares in the entire undistributed net income. But if
the last day on which the required Philippine group existed was September 30, and the
taxable year was a calendar year, the portion of the taxable year up to and including
such last day would be equal to nine-twelfths of the undistributed net income.
The amount which each Philippine shareholder must return is that amount
which he would have received as a dividend if the above specified portion of the
undistributed net income had in fact been distributed by the foreign personal holding
company as a dividend on the last day of its taxable year on which the required
Philippine group existed. Such amount is determined, therefore, by the interest of the
Philippine shareholder in the foreign personal holding company, that is, by the number
of shares of stock owned by the Philippine shareholder and the relative rights of his
class of stock, if there are several classes of stock outstanding. Thus, if a foreign
personal holding company has both common and preferred stock outstanding and the
preferred shareholders are entitled to a specific dividend before any distribution may
be made to the common shareholders, then the assumed distribution of the stated
portion of the undistributed net income must first be treated as a payment of the
specified dividend on the preferred stock before any part may be allocated as a
dividend on the common stock.
The assumed distribution of the required portion of the undistributed net
income must be returned as dividend income by the Philippine shareholders for their
respective taxable years in which or with which the taxable year of the foreign
personal holding company ends. In applying this rule, the date as of which the
Philippine group last existed with respect to the company is immaterial.
(Section 70 of the Code)
SECTION 232.
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(1)
(2)
(3)
Date of incorporation;
(4)
(5)
(6)
126
(7)
(8)
The name and address of each shareholder, the class and number of
shares held by each, together with any changes in stock holdings during
such period;
(9)
The name and address of each holder of securities convertible into stock
of the corporation, the class, number and face value of the securities
held by each, together with any changes in the holding of such securities
during the period;
(10)
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127
may in lieu of filing separate annual returns for such taxable year, jointly execute and
file one annual return.
(b) FORM OF RETURN. The return under Section 70(b) and this section
shall be made on the form prescribed by the Commissioner of Internal Revenue. Each
officer or director should carefully prepare his returns so as to set forth fully and
clearly the information called for therein and by the applicable regulations. Returns
which have not been so prepared will not he considered as meeting the requirements
of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with the
provisions of this section and the instructions on the form, set forth with respect to the
taxable year of the foreign personal holding company the following information:
(1)
The gross income, deductions and credits, net income, and undistributed
net income of the foreign personal holding company for such taxable
year, in complete detail;
(2)
(3)
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the taxable year in which such month occurs was a foreign personal holding company,
shall file with the Commissioner of Internal Revenue an information, return as
provided in Section 71(a). The Commissioner of Internal Revenue may authorize the
filing of returns covering period longer than a month.
(2) Duplicate returns. If a shareholder in a foreign corporation files, as an
officer or director in such corporation, the returns required by Section 70(b), such
returns shall be considered as returns filed under Section 71(a).
(b) FORM OF RETURN. The return under Section 71(a) shall be made on
the form prescribed by the Commissioner of Internal Revenue. Each shareholder
should carefully prepare his return so as to set forth fully and clearly the information
called for therein and by the applicable regulations. Returns which have not been so
prepared will not be considered as meeting the requirements of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with the
provisions of this section and the instructions on the form, set forth with respect to the
preceding period the same information as required, to be shown on that form by
Section 70(a) and paragraph (c) of Section 232 of these regulations.
If a person is required to file a return under Section 71(a) of the Code and this
section with respect to more than one foreign corporation, a separate return must he
filed with respect to each foreign corporation.
(d) VERIFICATION OF RETURNS. All returns required by Section 71(a)
of the Code and this section shall be verified under oath or affirmation of the parties
rendering the same.
SECTION 235. Annual information returns by shareholders of certain
foreign corporations. (a) REQUIREMENT FOR FILING RETURNS.
(1) General. Under Section 71(b) of the Code, on the sixtieth day after the
close of the taxable year of a foreign personal holding company, each Philippine
shareholder, by or for whom on such sixtieth day 50 per cent or more in value of the
outstanding stock of the company is owned, directly or indirectly [including the case
of an individual stock owned by members of his family as defined in Section 66(b)],
shall file with the Commissioner of Internal Revenue an information returns as
provided in that section and this section.
(2) Duplicate returns. If a shareholder in a foreign corporation files as an
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officer or director in such corporation, the return required by Section 70(b), such
returns shall be considered as returns filed under Section 71(b).
(b) FORM OF RETURN. The return under Section 71(b) shall be made on
the form prescribed by the Commissioner of Internal Revenue. Each shareholder
should carefully prepare his return so as to set forth fully and clearly the information
called for therein and by the applicable regulations. Returns which have not been so
prepared will not be considered as meeting the requirements of the law.
(c) CONTENTS OF RETURN. The return shall, in accordance with the
provisions of this section and the instructions on the form, set forth with respect to the
taxable year of the foreign personal holding company the same information which is
required under Section 71(a), paragraph (c) of Section 232 of these regulations and
paragraph (c) of the preceding section, except that if all the required returns with
respect to such year have been filed under Section 71(a), no return under Section
71(b) is required.
If a person is required to file an annual return under Section 71(b) with respect
to more than one foreign personal holding company, a separate return must be filed
with respect to each foreign personal holding company.
(d) VERIFICATION OF RETURNS. All returns required by Section
71(b) and this section shall be verified under oath or affirmation of the parties
rendering the same.
(Section 72 of the Code)
SECTION 236. Ad valorem penalty for failure to file return. In case of a
failure to make and file a return or list within the time prescribed by law, not due to
willful neglect, where such return or list is voluntarily filed by the taxpayer without
notice from the Commissioner of Internal Revenue or other officer and it is shown
that the failure to file it in due time was due to a reasonable cause, no surcharge will
be added to the amount of tax due on the return. In such cases, in order to avoid the
imposition of the surcharge, the taxpayer must make a statement showing all the facts
alleged as a reasonable cause for failure to file the return on time in the form of an
affidavit which should be attached to the return. If the Commissioner of Internal
Revenue is satisfied that the delinquency was due to a reasonable cause, no surcharge
will be added to the tax due on the return. Whether or not reasonable cause exists will
depend upon the circumstances of each case. As a general rule, if the taxpayer
exercised ordinary business care and prudence and was nevertheless unable to file the
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return within the prescribed time, the delay will be considered as being due to a
reasonable cause.
In case of a failure to make and file a return or list within the time prescribed
by law, not due to willful neglect, where the taxpayer voluntarily files the return
without notice from the Commissioner of Internal Revenue or other officer and
attaches to such return the affidavit mentioned in the preceding paragraph but where
the Commissioner of Internal Revenue is not satisfied as to the reasonableness of the
cause of the delinquency, a surcharge of 25 per cent will be added to the amount of
tax due on the return.
In case the failure to make and file a return or list within the time prescribed by
law is due to willful neglect a surcharge of 50 per cent will be added to the amount of
tax due on the return. There is willful neglect in the case of a taxpayer who, being
liable to file a return, knowingly delays the filing of such return. Where the filing of
the return has been delayed for a considerable length of time, the delinquency will be
presumed to be due to willful neglect.
DHIcET
The amount of surcharge so added to the tax due on the return shall be
collected at the same time and in the same manner and as part of the tax unless the tax
has been paid before the discovery of the cause giving rise to the imposition of the
surcharge, in which case the amount so added shall be collected in the same manner as
the tax.
SECTION 237. Ad valorem penalty for false or fraudulent return. In case
a false or fraudulent return or list is made, the Commissioner of Internal Revenue
shall add to the tax ascertained to be due on the true net income of the taxpayer a
surcharged of 50 per cent of the amount of such tax. If payment has been made on the
basis of such false or fraudulent return before the discovery of the falsity or fraud, the
basis of the surcharge of 50 per cent will be the amount of the tax due on the true net
income less the amount so paid.
(Section 73 of the Code)
SECTION 238. Penalty for failure to file return or to pay tax. Any
person liable to pay the tax, to make a return or to supply information required under
Title II of the Code, who refuses or neglects to pay such tax, to make such return or to
supply such information at the time or times specified in each case shall be punished
by a fine of not more than P2,000 or by imprisonment for not more than six months,
or both. In case of a corporation failing to file its, return or pay the tax, the penalty
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prescribed under the first paragraph of Section 73 will be imposed upon the president,
vice-resident, or other responsible officer required to file the return of the corporation
or pay the tax due from the same, in accordance with the provisions of Section 46(a)
and 51(b) of the Code. In the case of a duly registered general copartnership, failing to
file the return required under Section 49 of the Code, the penalty prescribed under the
first paragraph of Section 73 will be imposed upon the managing partner or other
responsible officer of such partnership.
SECTION 239. Penalty imposed upon person causing a false or fraudulent
corporate return to be filed. If a false or fraudulent return is filed for a corporation
or duly registered general copartnership, the individual or any officer thereof causing
such return to be filed shall be punished by a fine not exceeding P4,000 or by
imprisonment for not more than one year, or both.
(Section 74 of the Code)
SECTION 240. Penalty on corporation refusing or neglecting to make
return. A corporation or duly registered general copartnership, refusing or
neglecting to make a return required under Title II of the Code, or, rendering a false or
fraudulent return, will be liable to a fine of not exceeding P20,000. The fine imposed
under Section 74 will be paid by the corporation or duly registered general
copartnership as an entity, and is in addition to the penalty which may be imposed
under Section 73 of the Code upon the president, vice-president, or other responsible
officer of a corporation or duly registered general copartnership.
(Section 75 of the Code)
SECTION 241. Return of information as to payments of dividends. Every
domestic resident foreign corporation is hereby required to render a return, in
duplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of its
payments of profits or dividends to stock holders for the taxable year or period
covered by the return, stating the name and address of each stockholder, the number
and class of shares owned by him, the date and amount of such dividend paid him, and
when the surplus out of which it was paid was accumulated. Such return should be
verified by the oath or affirmation of the person rendering the same.
aHcACT
132
133
Revenue Code.
(2)
(3)
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(b)
(c)
134
The value and a description of, the assets received in liquidation by each
shareholder;
(e)
135
day of such period: If, in a particular case, the aid, assistance, counsel, or advice given
by any person extends over a period of more than thirty days, such person may file a
return at the end of each thirty days included within such period and at the end of the
fractional part of a thirty day period, if any, extending beyond the last full thirty days.
In each such case, the return must disclose all the required information which was not
reported on a prior return.
(b) SPECIAL PROVISIONS. (1) Employers. In the case of aid,
assistance, counsel, or advice in, or with respect to, the formation, organization, or
reorganization of a foreign corporation given by a person in whole or in part through
the medium of subordinates or employees (including in the case of a corporation the
officers thereof), the return of the employer must set forth to the full extent all
information prescribed by these regulations, including that which, as an incident to
such employment, is within the possession or knowledge or under the control of such
subordinates or employees.
(2) EMPLOYEES. The obligation of a subordinate or employee (including
in the case of a corporation the officers thereof) to file a return with respect to any aid,
assistance, counsel, or advice in, or with respect to, the formation, organization, or
reorganization of a foreign corporation, given as an incident to his employment, will
be satisfied if a complete and adequate return as prescribed by these regulations is
duly filed by the employer setting forth all of the information within the possession or
knowledge or under the control of such subordinate or employee.
Clerks, stenographers, and other subordinates or employees, rendering aid or
assistance solely of a clerical or mechanical character in, or with respect to, the
formation, organization or reorganization of a foreign corporation are not required to
file returns by reason of such services.
(3) RETURNS JOINTLY MADE. If two or more persons aid, assist,
counsel, or advise in, or with respect to, the formation, organization, or reorganization
of a particular foreign corporation, any two or more of such persons may, in lieu of
filing several returns jointly execute and file one return.
(c) PENALTIES. For criminal penalties for failure to file the return
required by Section 80, see Section 73 of the Code.
(d) CONTENTS OF RETURNS. The return shall set forth the following
information to the full extent such information is within the knowledge or possession
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(1)
The name and address of the person (or persons) to whom and the
person (or persons) for whom or on whose behalf the aid, assistance,
counsel, or advice was given;
(2)
(3)
Name and address of the foreign corporation and the country under the
laws of which it was formed, organized, or reorganized;
(4)
The months and year when the foreign corporation was formed,
organized, or reorganized;
(5)
(6)
(7)
(8)
(9)
The name and address of the person (or persons) having custody of the
books of account and records of the foreign corporation;
(10)
(11)
137
must so state and must contain a complete statement of the nature and
the circumstances of the communication on which a decision as to the
propriety of the claim of privilege may be reached.
If a person aids, assists, counsels, or advises in or with respect to, the
formation, organization, or reorganization of more than one foreign corporation, a
separate return must be filed with respect to each foreign corporation.
(e) VERIFICATION OF RETURN. All returns required by Section 80 and
this section shall be verified under oath or affirmation.
(Section 81 of the Code)
SECTION 247. Disposition of income tax returns. All income tax returns
filed with the Commissioner of Internal Revenue constitute public records which shall
be open to inspection under rules and regulations prescribed by the Secretary of
Finance with the approval of the President of the Philippines. The circumstances
under which income tax returns may be inspected by interested parties are dealt with
under separate regulations.
SECTION 248. Publication of list of persons filing returns and paying
taxes. The second paragraph of Section 81 expressly authorizes the Commissioner
of Internal Revenue, with the approval of the Secretary of Finance, to cause to be
prepared and published in any newspaper or made available to public inspection
through other means, lists containing the names and addresses of persons who have
filed income tax returns, or lists of those who paid income taxes, or both such kinds of
lists.
(Section 82 of the Code)
SECTION 249. Recovery of tax. A suit or proceeding may be maintained
for the recovery of any internal-revenue tax alleged to have been erroneously or
illegally assessed and collected, in accordance with Section 306 of the Code.
However, where the Commissioner of Internal Revenue believes that a return is false
or fraudulent or contains any understatement or undervaluation and proceeds to assess
and collect the tax due, no portion of the tax so collected shall be recovered by any
suit unless it is proved that the return was not in fact false or fraudulent and did not
contain any understatement or undervaluation, except with respect to return is made in
good faith regarding annual depreciation of oil or gas wells and mines.
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139
corporation, setting aside the stock to be so distributed and notifying the stockholders
of its action, the income arising to the recipients of such stock is its market value at
the time the dividend becomes payable. Scrip dividends are subject to tax in the year
in which the warrants are issued.
SECTION 252. Stock dividends. A stock dividend which represents the
transfer of surplus to capital account is not subject to income tax. However a dividend
in stock may constitute taxable income to the recipients thereof notwithstanding the
fact that the officers or directors of the corporation (as defined in Section 84) choose
to call such distribution as a stock dividend. The distinction between a stock dividend
which does not, and one which does, constitute income taxable to the shareholder is
the distinction between a stock dividend which works no change in the corporate
entity, the same interest in the same corporation being represented after the
distribution by more shares of precisely the same character, and a stock dividend
where there either has been a change of corporate identity or a change in the nature of
the shares issued as dividends whereby the proportional interest of the shareholders
after the distribution is essentially different from his former interests. A stock
dividend constitutes income if it gives the shareholder an interest different from that
which his former stock holdings represented. A stock dividend does not constitute
income if the new shares confer no different rights or interests than did the old the
new certificates plus the old representing the same proportionate interest in the net
assets of the corporation as did the old.
SECTION 253. Sale of stock received as dividends. Stock issued by a
corporation, as a dividend, does not constitute taxable income to a stockholder in such
corporation, but gain may be derived or loss sustained by the stockholder, whether
individual or corporate, from the sale of such stock, which gain or loss will be treated
as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.)
The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance
with the following rules:
(a) Where the stock issued as dividend is all or substantially the same
character or preference as the stock upon which the stock dividend is paid, the cost of
each share (or when acquired prior to March 1, 1913, the fair market value as of such
date) will be the quotient of the cost (or such fair market value) of the old shares of
stock divided by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a character
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140
or preference materially different from the stock upon which the stock dividend is
paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of
such date) of the old shares of stock shall be divided between such old stock and the
new stock, in proportion, as nearly as may be, to the respective value of each class of
stock, old and new, at the time the new shares of stock are issued, and the cost (or
when acquired prior to March 1, 1913, the fair market value as of such date) of each
share of stock will be the quotient of the cost (or such fair market value as of March 1,
1913) of the class to which such share belongs divided by the number of shares in that
class.
(c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity of the lots can. not
be determined, any sale of the original stock, will be charged to the earliest purchases
of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was
purchased at different times and at different prices, and the dividend stock issued with
respect to such stock can not be identified as having been issued with respect to any
particular lot of such stock, then any sale of such dividend stock will be presumed to
have been made from the stock issued with respect to the earliest purchased stock, to
the amount of the stock dividend chargeable to such stock.
SECTION 254. Declaration and subsequent redemption of a stock dividend.
A true stock dividend is not subject to tax on its receipt in the hands of the
recipient. Nevertheless, if a corporation, after the distribution of a stock dividend,
proceeds to cancel or redeem its stock at such time and in such manner as to make the
distribution and cancellation or redemption essentially equivalent to the distribution of
a taxable dividend, the amount received in redemption or cancellation of the stocks
shall be treated as a taxable dividend to the extent of the earnings or profits
accumulated by such corporation since March 1, 1913.
SECTION 255. Sources of distribution. For the purpose of income
taxation every distribution made by a corporation is made out of earnings or profits to
the extent thereof and from the most recently accumulated earnings or profits. In
determining the source of a distribution, consideration should be given first, to the
earnings or profits of the taxable year; second, to the earnings or profits accumulated
since February 28, 1913, only in the case where, and to the extent that, the distribution
Copyright 2014
141
made during the taxable year are not regarded as out of the earnings or profits of the
taxable year and all the earnings or profits accumulated since February 28, 1913, have
been distributed; and, fourth, to sources other than earnings or profits only after the
earnings or profits have been distributed.
SECTION 256. Distribution in liquidation. In all cases where a
corporation (as defined in Section 84) distributes all of its property or assets in
complete liquidation or dissolution, the gain realized from the transaction by the
stockholder, whether individual or corporate, is taxable to the extent recognized in
Section 34(b) of the Code. For this purpose, the term "complete liquidation" includes
any one of a series of distributions made by a corporation in complete cancellation or
redemption of all of its stock in accordance with a bona fide plan of liquidation under
which the transfer of all the assets under liquidation is to be complete within a
reasonable time from the date of the first distribution, usually not to exceed one year
from the time of such first distribution. If the amount received by the stockholder in
liquidation is less than the cost or other basis of the stock, the loss in the transaction is
deductible to the extent allowed in Section 34(c) of the Code.
(Section 84 of the Code)
SECTION 257. Income and deductions of American citizens residing in the
Philippines. Under subsection (u) of Section 84, a citizen of the United States
residing in the Philippines, is taxable on income from sources both within and without
the Philippines, except income from sources within the United States. Accordingly,
items of deductions allocable to income of such taxpayer from sources within the
United States are not deductible from his income subject to Philippine income tax.
(Deemed repealed since our independence).
SECTION 258. Effective date. These regulations shall take effect upon
their promulgation in the Official Gazette.
(Promulgated February 11, 1941, XXXIX Off. Gaz., No. 18, page 325)
Recommended by:
BIBIANO L. MEER
Collector of Internal Revenue
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142
MANUEL ROXAS
Secretary of Finance
SUPPLEMENT A WITHHOLDING ON WAGES
(Articles 1 to 9 will be found after Section 84 of the Code)
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143
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144
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146
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147
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148
APPENDIX CCC
Subject
The Law
SEC. 1.
Incentives Act."
SEC. 9.
All donations and grants to the Commission shall be tax-exempt
and deductible in full from the donor's income tax returns when evidenced by a certificate
duly issued by the Commissioner. Any person who evades or defeats, or attempts to evade or
defeat in any manner any tax imposed by law by availing himself of the provisions of this
section through fraud or misrepresentation shall be punished by a fine of not more than five
thousand pesos or imprisonment not exceeding one year or both, in the discretion of the
court. In case the violator is a corporation or association, the president or general manager
thereof shall be criminally liable without prejudice to the criminal responsibility of the
member, officer or employee thereof committing such violation.
SEC. 10.
To promote and encourage the manufacture of local inventions, they
shall be exempted from all kinds of taxes, licenses and permits during the first five years
from the date of the grant of the letters of patent: Provided, That their capitalization does not
exceed fifty thousand pesos: And provided, further, That their manufacture is carried out by
the inventor himself as a home industry.
SEC. 15.
The Law
SEC. 1.
Any provision of law to the contrary notwithstanding, any
person, partnership, company or corporation engaged or which shall engage in the
manufacture of chemical products, including the direct reduction of iron ore shall be entitled
to exemption from the payment of special import tax, specific tax, fees, dues, customs duties
and all other taxes of whatever nature or description, payable by such person, partnership,
company or corporation in respect to their local purchase and importation of naphtha when
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149
used as a feedstock or raw material in chemical industries and the direct reduction of iron ore
and only when, in the course of such manufacture, its chemical structure is changed:
Provided, however, That naphtha when used as a fuel, solvent, lubricant, feedstock for
petroleum refineries or for other purposes, is subject to the corresponding taxes, dues and
customs duties: Provided, further, That the exemption from the special import tax, specific
tax, fees, dues and customs duties and all other taxes of whatever nature and description on
such naphtha shall be made only when the Department of Finance, after investigation, finds
that the following concur:
(a)
60 to 88
80 to 450
0.01 to 0.2
trace to 1.0
trace to 30
(b) It will be used directly and exclusively as feedstock or raw material and that, in
the course of manufacture, its chemical structure is changed.
(c) It will be stored separately and such storage shall be provided with facilities to
measure or record the quantity of naphtha used as raw material or feedstock.
(d) The shipping and other supporting documents covering the local purchase or
importation are in the name of the tax-exempt firm to whom the goods shall be delivered
directly.
SEC. 2.
Any person, partnership, company or corporation eligible to tax
exemption privileges under the preceding section and enjoying tax exemption privileges on
its local purchase and importations of raw materials under other existing laws, shall not enjoy
tax exemption privileges under this Act without relinquishing its tax exemption privileges
under other existing laws insofar as its local purchase and importations of naphtha are
concerned.
SEC. 3.
The Department of Finance shall promulgate the rules and regulations
necessary for the implementation of this Act: Provided, That any violation of this Act or of
the rules and regulations issued in accordance with this section, and any misrepresentation of
any essential fact required by said rules, shall subject the offender to cancellation of his
exemption privilege and to the payment of double the duties and taxes involved; and to
imprisonment of not less than two nor more than four years and a fine of not less than ten
thousand pesos nor more than twenty thousand pesos. Where the offender is a partnership,
corporation or other entity, the president, manager or person in charge thereof shall be
criminally responsible therefor and, in the case of an alien, he shall be ordered deported.
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150
SEC. 4.
All existing laws, executive orders, and administrative rules and
regulations or parts thereof, which are inconsistent with the provisions of this Act are hereby
repealed or modified accordingly.
SEC. 5.
This Act shall be effective for a period of five years beginning January
first, nineteen hundred sixty-five to December thirty-first, nineteen hundred sixty-nine.
Approved, June 18, 1964.
APPENDIX EEE
Subject
The Law
SEC. 2.
Period of non-payment of duties and taxes. Any person, partnership,
company or corporation covered by this Act shall be excluded from the payment of duties
and taxes as follows:
(a) One hundred per centum of the taxes and duties due during the period from the
date of the approval of this Act up to December thirty-first, nineteen hundred sixty-six;
(b) Seventy-five per centum of the taxes and duties due during the period from
January first, nineteen hundred sixty-eight;
(c) Fifty per centum of the taxes and duties due during the period from January first
to December thirty-first, nineteen hundred seventy;
(e) On or after January first, nineteen hundred seventy-one all taxes and duties shall
be paid in full.
SEC. 4.
All textile manufacturers who register under this Act shall, in lieu of the
taxes herein exempted, be assessed and shall pay a special tax of one per centum of their
gross sales as defined by the National Internal Revenue Code, to be paid in the same manner
and at the same time and subject to the same penalties and surcharges as the sales-tax, which
shall constitute a Special Textile Research Fund, to be disposed of and disbursed by the
National Science Development Board for research, experiment and study in such projects as,
in its judgment, will contribute to the local growth, production or manufacture of raw
materials needed by the industry; and to the improvement or invention of machinery
equipment processes or production methods for the industry.
SEC. 5.
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151
exemption privileges under this Act and enjoying tax exemption under other existing laws
shall not enjoy tax exemption privileges under this Act.
SEC. 8.
The Law
SEC. 1.
SEC. 10.
All existing private development banks shall be totally exempted from
the payment of income and gross receipts taxes for a period of three (3) years after the
effectivity of this Act. Thereafter, they shall be taxed on a gradually increasing basis of
twenty-five percent (25%) per year for the next succeeding four (4) years after the end of
which period they shall pay all taxes in full. Those banks that may be established within three
(3) years from the date of effectivity of this Act, shall be totally exempted from income and
gross receipts taxes for three years from the date off their organization. Thereafter they shall
be taxed on a gradually increasing basis of twenty-five per cent (25%)) per year for the next
succeeding four (4) years after the end of which period they shall pay all such taxes in full.
SEC. 19.
The Law
SEC. 4.
Importation of foreign leaf tobacco only for blending purposes. .
. . : Provided, further, That no other tariff or taxes shall be imposed on high grade foreign
leaf tobacco so imported except an amount equivalent to one hundred per centum; of its
landed cost.
SEC. 10.
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152
(3)
Sections of
(1)
Sections of
Sections of the
the Code
the Report 2
Adm. Code 3
1420
1421
1423
1424,
1425
1426
1427
1428
1429
10
1430
11
10
1431
12
11
1432
13
12
1433
14
13
1434
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(4)
Other Sources or Patterns
153
15
14
1435,
16
15
1436
17
16
1437
18
17
1438,
19 to 84
18 to 83
85
84
86
85
1536,
87
86
1541
88
87
89
88
1538
90
89
1543
91
90
1542
92
91
93
92
94
93
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No citation
as amended by SEC. 10, Act No. 2835, sec. 1
Act No. 3031; and sec. 1, Commonwealth
Act No. 106
No citation
1544
No citation
154
95
94
96
95
No citation
97
96
No citation
98
97
No citation
99
98
No citation
100
99
No citation
101
100
No citation
102
101
No citation
103
102
1546
104
103
1547
105
104
1548
106
105
1537,
107
106
2739
108 to 122
1545
107 to 121
No citation
123
122
1478
124
123
1479
125
124
1480
126
125
1482
127
126
1483
128
127
1484
128-A
No citation
129
128
1485,
130
129
1488
131
130
1489
132
131
1491,
133
132
1481,
134
133
1486,
135
134
1487,
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136
135
1490
137
137
1492
138
138
1493,
139
139
No citation
140
140
No citation
141
142
1494
142
143
1495
143
144
1496
144
145
No citation
145
146
No citation
146
147
1497
147
148
1498
148
149
1498-A
149
151
1553
150
152
1554
151
153
1555
152
154
1556
153
155
1557
154
156
1558
155
157
1559
156
158
1560
157
159
1561
158
160
1562
159
161
1563
160
162
1564
161
163
1565
162
164
1566
163
165
1567
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156
164
166
1568
165
167
1569
166
168
1470
167
169
1571
168
170
1572
169
171
1573
170
172
2721
171
173
2724
172
174
2725
173
175
2726
174
176
2727
175
177
2728,
176
178
2730
177
179
2736
178
180
1453
179
181
1454
180
182
1455
181
183
1456
182
184
1457,
183
185
1458
184
186
1459
185
191
No citation
185-A
No citation
186
No citation
186-A
No citation
187
No citation
188
No citation
189
No citation
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190
189
191
193
1462
192
194
1463
193
195
1464
194
196
1465
195
197
1466
196
198
1468
197
199
1469
198
200
1470
199
201
1471
200
202
1472
201
203
1473
202
204
1474
203
205
1449
204
206
205
207
1550
206
208
1551
207
209
1552
208
210
2722
209
211
2723
210
212
1449
211
213
1449 (a)
212
124
1449 (b)
213
215
1449 (c)
214
216
1449 (d)
215
127
1949 (e)
216
218
1449 (f)
217
219
1449 (g)
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158
218
220
1449 (h)
219
221
1449 (i)
220
222
1449 (j)
221
223
1449 (k)
222
224
1449 (l)
223
225
1449 (m)
224
226
1449 (n)
225
227
1449 (o)
226
228
1449 (p)
227
229
1449 (q)
228
230
1449 (s)
229
231
1449 (t)
230
232
1449 (u)
231
233
1449 (v)
232
234
1449 (w)
233
235
1449 (x)
234
236
1449 (y)
235
237
1449 (z)
236
238
1450
237
239
1451,
238
240
1452,
239
241
2721
240
242
2720
241
243
No citation
242
244
243
245
No citation
244
246
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159
245
247
No citation
246
248
No citation
247
249
No citation
248
250
No citation
249
251
1499,
250
252
1500
251
253
1501
252
254
1502
253
255
1503
254
256
1504
255
257
1505
256
258
1506
257
259
1507
258
260
259
261
260
262
260-A
No citation
260-B
No citation
260-C
No citation
261
263
262
264
1509
263
265
1510
264
266
1511
265
267
1512
266
268
1513
267
269
1514
268
270
1515
269
271
1516
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270
272
1517
271
273
1518
272
274
1519
273
275
1520
274
276
1521
275
277
1522
276
278
1523
277
279
1524
278
280
1525
279
281
1526
280
282
1527
281
283
1528
282
284
1529
283
285
1530
284
286
1531
285
287
1532
286
288
1533
287
289
2732
298
290
2733
289
291
2734
290
292
291
293
292
294
293
295
294
296
295
297
296
298
297
299
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300
299
301
300
302
301
303
302
304
303
305
304
306
305
307
1578
306
308
1579
307
309
1580
308
310
1581
309
311
1582
310
312
1583
311
313
1584
312
314
1585
313
315
1586
314
316
1587
315
317
1588
316
318
1589
317
319
318
320
1590
319
321
1591
320
322
1591
321
323
1592
322
324
1593
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No citation
162
323
325
1594
324
326
1595
325
327
1596
326
328
1597
327
329
1598
328
330
1599
329
331
1600
330
332
1601
331
333
332
334
333
335
334
336
335
337
336
338
337
339
338
340
No citation
339
341
1574
340
342
1575
341
343
1576
342
344
1577
343
345
No citation
344
346
No citation
345
347
2714
346
348
2715
347
349
2716
348
350
2717
349
351
2731
350
352
Copyright 2014
No citation
163
351
353
No citation
352
354
353
355
No citation
354
356
355
357
No citation
356
358
2738
357
359
485
358
360
486
359
361
488
360
362
389,
361
363
1495
362
364
490
363
365
491
364
366
492
365
367
494
366
368
495
367
369
498
368
370
497
369
371
Laws repealed
370
372
371
373
Effective date
2741
Copyright 2014
164
Endnotes
1 (Popup - Popup)
Appendix CCC
Appendix DDD
Appendix EEE
Appendix FFF
Appendix GGG
Appendix HHH
Copyright 2014
165