I.

GROSS INCOME AND EXCLUSIONS

A. Income from Whatever Source
Secs. 31-32, NIRC
SEC. 31. Taxable Income Defined. -The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other special laws.
SEC. 32. Gross Income. - (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source,
including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this Title:
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if
such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as
gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.
(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by
such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of
the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions,
private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.
(7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest
on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and
(iii) international or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only
if:
(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.
(d) Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in
the Philippines or abroad and sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion
under this subparagraph shall not exceed eighty-two thousand pesos (P82,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, That every three (3) years after the effectivity of this Act, the President of the
Philippines shall adjust the amount herein stated to its present value using the Consumer Price Index (CPI), as published by the National Statistics Office.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in
Section 22 (BB) of this Code.
Sec 61, Revenue Regulations No. 2 - 40
Notes from Atty. Kadil: Gross income does not include items of income exempted by the statute or any fundamental law and that exclusions are different from
deductions
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
Gutierrez v Collector, 101 Phil 713
Notes from Atty. Kadil: Government expropriated a certain property and then the owner of the property excluded the amount paid as just compensation from the income.
Inassess siya. Kinontest niya yun. Is the just compensation an income even though it is not a sale? The Court ruled that included pa rin siya kasi income from whatever
source (and walang law na nag eexclude sa kanya) does not exclude just compensation paid by the Government.
FACTS:

Maria Morales, married to Gutierrez, was the owner of an agricultural land. The U.S. Gov (pursuant to Military Bases Agreement) wanted to expropriate the
land of Morales to expand the Clark Field Air Base.

The Republic was the plaintiff, and deposited a sum of Php 152k to be able to take immediate possession. The spouses wanted consequential damages but
instead settled with a compromise agreement. In the compromise agreement, the parties agreed to keep the value of Php 2,500 per hectare, except to some
particular lot which would be at Php 3,000 per hectare.

In an assessment notice, CIR demanded payment of Php 8k for deficiency of income tax for the year 1950.

ISSUE:

The spouses contend that the expropriation was not taxable because it is not "income derived from sale, dealing or disposition of property. The spouses
further contend that they did not realize any profit in the said transaction. CIR did not agree.
The spouses appealed to the CTA. The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed an answer that the profit
realized by petitioners from the sale of the land in question was subject to income tax, that the full compensation received by petitioners should be included
in the income received in 1950, same having been paid in 1950 by the Government. CTA favored SolGen but disregarded the penalty charged.
Both parties appealed to the SC.
Whether or not that for income tax purposes, the expropriation should be deemed as income from sale and any profit derived therefrom is subject to income
taxes capital gain?

RULING:

Yes. It is subject to income tax. The acquisition by the Government of private properties through the exercise of the power of eminent domain is embraced
within the meaning of the term "sale" "disposition of property", and the proceeds from said transaction clearly fall within the definition of gross income

The taking of property by condemnation and the, payment of just compensation therefore is a "sale" or "exchange" and profits from that transaction is capital
gain.
CIR v BOAC
Notes from Atty. Kadil: Even if the BOAC has no landing rights in the Philippines. Nagbebenta lang siya ng tickets. Included pa rin ang income na na-earn nila from the
sale of tickets kasi the sale of tickets ginawa sa Philippines.
Eisner v Macomber, 252 US 189
Notes from Atty. Kadil: US case. Stock dividends vs. Cash dividends; Stock dividends kelangan ba include sa income? The court ruled that no, kasi hindi naman siya
nag income; The stock dividends are not realization of income by the taxpayer. Lumaki lang yung capital nya pero walang income na na-realize; Stock dividends are not
income. Cash dividends included sa income
Helvering v Bruun, 309 US 461
Notes from Atty. Kadil: The gain in cash derived from the sale of an asset. May lease agreement. Tapos yung nagle-lease gumawa siya ng improvement. At the end of
the lease kasi nila, papunta ulit sa kanya yung property. So hindi nya nireport yung increase ng price ng lot as income. The Court ruled na dapat nya e report yun as
income kasi ang rule is income from whatever source. Hindi necessary na may nareceive siya na cash. Basta may gain from that transaction, income from whatever
source. Realization does not require that the gain be cash
CIR v Javier, 199 SCRA 824
Notes from Atty. Kadil: May na-transmit sa kanya na amount, imbes na 1,000, nagging 1M yung nasa kanya. The court ruled that even if on error yun, although hindi
siya liable for fraud, the money received from abroad even if it was an error, is still subject to tax
B. Compensation Income
Sec. 32(A), NIRC
SEC. 32. Gross Income. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source,
including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
Sec 2.78.1(A), Revenue Regulations No. 2-98
SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined. In general, the term "compensation" means all
remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g.
transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation;
taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other
income of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of
piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.
Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made
between the person in whose employ the services had been performed and the individual who performed them.
(1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property.
If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to
withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the
remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such
remuneration is the fair market value of the stock at the time the services were rendered.
(2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the
value to such person of the quarters and meals so furnished shall be added to the remuneration paid for the purpose of determining the amount of compensation subject
to withholding. However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of
compensation income.
(3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts
on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges
are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees.
Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld
is available for payment to the Commissioner.
(4) Tips and gratuities. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer
are considered as taxable income but not subject to withholding.
(5) Pensions, retirement and separation pay. Pensions, retirement and separation pay constitute compensation subject to withholding, except those provided under
Subsection B of this section.
(6) Fixed or variable transportation, representation and other allowances
(a) IN GENERAL, fixed or variable transportation, representation and other allowances which are received by a public officer or employee or officer or employee of a
private entity, in addition to the regular compensation fixed for his position or office, is compensation subject to withholding.
(b) Any amount paid specifically, either as advances or reimbursements for travelling, representation and other bonafide ordinary and necessary expenses incurred or
reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to withholding, if the following conditions are
satisfied:
(i) It is for ordinary and necessary travelling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the trade, business or
profession; and
(ii) The employee is required to account/liquidate for the foregoing expenses in accordance with the specific requirements of substantiation for each category of
expenses pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the

employer. Reasonable amounts of reimbursements/ advances for travelling and entertainment expenses which are pre-computed on a daily basis and are paid to an
employee while he is on an assignment or duty need not be subject to the requirement of substantiation and to withholding.
(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave credits" which are paid to an employee constitute compensation. Thus, the
salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of
unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax.
(8) Deductions made by employer from compensation of employee. Any amount which is required by law to be deducted by the employer from the compensation of
an employee including the withheld tax is considered as part of the employee's compensation and is deemed to be paid to the employee as compensation at the time the
deduction is made.
(9) Remuneration for services as employee of a nonresident alien individual or foreign entity. The term "compensation" includes remuneration for services
performed by an employee of a nonresident alien individual, foreign partnership or foreign corporation, whether or not such alien individual or foreign entity is engaged
in trade or business within the Philippines. Any person paying compensation on behalf of a non-resident alien individual, foreign partnership, or foreign corporation
which is not engaged in trade or business within the Philippines is subject to all provisions of law and regulations applicable to an employer.
(10) Compensation for services performed outside the Philippines. Remuneration for services performed outside the Philippines by a resident citizen for a domestic
or a resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-resident individual not engaged in trade or business in the
Philippines shall be treated as compensation which is subject to tax.
A non-resident citizen as defined in these regulations is taxable only on income derived from sources within the Philippines. In general, the situs of the income whether
within or without the Philippines, is determined by the place where the service is rendered.
Revenue Regulations No. 3-98

Issued June 4, 1998 implements Section 33 of the National Internal Revenue Code (NIRC), as amended by RA No. 8424, relative to the special treatment of
fringe benefits granted or paid by the employer to employees, except rank and file employees, beginning January 1, 1998. The definition of fringe benefits as
well as the determination of the amount subject to the fringe benefits tax are specified in the Regulations.
SEC. 33 (NIRC). Special Treatment of Fringe Benefit. - (A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent
(33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the
fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or
advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this
Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%)
effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter
Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any
good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file
employee as defined in these regulations) such as, but not limited to the following:
(1)
Housing;
(2)
Expense account;
(3)
Vehicle of any kind;
(4)
Household personnel, such as maid, driver and others;
(5)
Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;
(6)
Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
(7)
Expenses for foreign travel;
(8)
Holiday and vacation expenses;
(9)
Educational assistance to the employee or his dependents; and
(10)
Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.
Nature of FBT
Final tax imposed on the grossed-up monetary value of fringe benefit furnished/granted to the EE by the ER, whether an individual or corp. (payable by the employer)
Fringe benefit is an income of the employee subject to Fringe Benefit Tax but is payable by the Employer. Er can deduct FBT from its taxable income.
Fringe benefits are only for corporate officers/management. For rank and file, it is called an allowance. Allowances (benefits to rank and file) are
not subject to FBT.
Fringe Benefits not subject to FBT:
(a) FB authorized & exempted from tax under special laws
(b) Contributions of ER for the benefit of the employee to retirement, insurance & hospitalizations benefit plan
(c) Benefits given to the rank & file employees, whether granted under a CBA or not
(d) De minimis benefits - refers to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.
RAMO 1-97
Sec. 7, Revenue Regulations No. 1-82
Henderson v Collector, 1 SCRA 649; Convenience of the Employer Rule
CIR v Castaneda, 203 SCRA 72
Polo v CIR, GR L-78780, July 23, 1987
Endencia v David, 93 Phil 696
Endencia and Jugo vs. David (CIR)
FACTS:

Section 13, RA 590, says that "no salary wherever received by any public officer of the Republic (including a judicial officer) shall be considered as exempt
from the income tax

CFI declared section 13 of RA 590 unconstitutional, and ordered David to re-fund to Justice Endencia the income tax collected on his salary as Associate
Justice of the CA, and to Justice Jugo the income tax collected on his salary as Presiding Justice of the CA, and later as Associate Justice of the SC
o
RA 590 was declared unconstitutional as it violates section 9, Article VIII of the Constitution which states: The members of the Supreme Court
and all judges of inferior courts shall hold office during good behavior, until they reach the age of seventy years, or become incapacitated to
discharge the duties of their office. They shall receive such compensation as may be fixed by law, which shall not be diminished during their
continuance in office
ISSUE:

Whether the collection of income tax on the salary of a judicial officer violates the Constitution
RULING:

Yes, the collection of income tax on the salary of a judicial officer is a diminution thereof and so violates the Constitution.

Judicial officers are exempt from the payment of income tax on their salaries, because the collection thereof by the Government was a decrease or
diminution of their salaries during their continuance in office, a thing which is expressly prohibited by the Constitution.

When a judicial officer assumed office, he does not exactly ask for exemption from payment of income tax on his salary, as a privilege. It is already attached
to his office, provided and secured by the fundamental law, not primarily for his benefit, but based on public interest, to secure and preserve his
independence of judicial thought and action.
C. Inclusions
Sec. 32 (A)
1.
Compensation:Special Problems on In-Kind Compensation
Sec. 2.78.1 (A) and (1), Revenue Regulation 2-98 (April 17, 1998)
a. Limited Choice and Restricted Property

US v Drescher, 179 F.2d 863 (2ndcir. 1950)

BIR Rul. 9-04 (Sept. 13, 2004)
FACTS:

ISSUE:

ANZ Bank was organized under the laws of Australia. Its shares are listed and traded in the Australian Stock exchange.
In order to increase employee motivation and to create a stronger link between increasing shareholder value and its employee reward system, ANZ Bank has
established the ANZ Employee Share Acquisition Plan (ESAP) to provide employees with the opportunity to participate in the growth of the Bank
The following plan features are common to both the general and the incentive schemes:
o
There is a trading lock preventing employees from disposing the shares; until the earlier of (a) a period of three years from the date the shares are
awarded, or (b) termination of employment with ANZ in the case of the general scheme and a period of three years from the date the shares are
awarded in the case of the incentive scheme.
o
During the trading lock, a Trustee will hold the shares on behalf of the employees.
o
Dividends accruing to the employees during the trading lock are required to be reinvested in ANZ shares under the compulsory participation
requirement of the Dividend Reinvestment Plan (DRP). As such, employees cannot receive cash dividends; the cash dividends will be received in
the form of additional ANZ shares. The additional shares will be released from restriction at the same time the participant's plan shares are
released
Whether the shares granted under the ANZ ESAP Plan which are subject to disposal restriction and forfeiture clause at the time of grant shall not be taxed
until the disposal restriction is lifted

RULING:

The shares granted pursuant to an employer-employee relationship under the ANZ ESAP Plan which are subject to disposal restriction and forfeiture clause
at the time of grant shall not be taxed until the disposal restriction is lifted, as this will only be taxable when actually or constructively received.

Stock dividends whether of the same class or different are not income. The reason is that there is no distribution of the assets of the corporation. The stock
dividends create only a change in the composition of the stockholders' equity, that is, a transfer from retained earnings to capital stock
o
Thus, dividends from ANZ ESAP shares which are mandatorily reinvested through the ANZ Dividend Reinvestment Plan, with the same disposal
restrictions and/or forfeiture clauses as the original shares, shall not also be taxed until the disposal restriction is lifted.
b. Forced Consumption: Conveniene of the Employer Rule
Sec. 2.78.1 (A)(2), Rev. Regs. 2-98 (April 17, 1998)
Sec. 2, Rev. Audit Mem. Order 1-87 (April 23, 1987)
Benaglia v CIR, 36 BTA 838 (1937)
c. De Minimis Benefits
Sec. 2.78.1 (A)(3), Rev. Regs. 2-98 (April 17, 1998)
BIR Rul. 23-02 (June 21, 2002)
d. Travel and Entertainment
Rudolph v US, 370 US 269 (1962)
2.
3.
4.
5.
6.

Business Income
Gains
Interests
Rents
Royalties

7.

Dividends
Sec. 73
Sec. 250-256, Rev. Regs. 2
Wise & Co., Inc. v Meer (June 30, 1947)
CIR v CA (Jan. 20, 1999)
CIR v Manning (Aug. 6, 1975)
BIR Rul. 39-02 (Nov. 11, 2002)

8.
9.
10.
11.

Annuities
Prizes and Winnings
Pensions
Share in GPPs income
Sec. 26

D. Exclusions
Sec. 32(B)
1.

Gifts, Bequests and Devises

Sec. 32(B)(3)
CIR v Duberstein, 363 US 278 (1960)
Hornung v CIR, supra

FACTS

Petitioner taxpayer challenged the finding of respondent Internal Revenue Service of a deficiency in his income tax payment for the taxable year 1962.
Hornung was selected as the most valuable player in a championship game played on December 31, 1961, in Wisconsin.
Following the game, he learned that he had won a Corvette automobile which was available to him in New York City.
He actually received the car three days later at a luncheon in New York.
Hornung failed to report the award as gross income in any year and consequently received a notice of deficiency concerning it for 1962, the year of
actual receipt.
At trial, he maintained alternatively that the award was an excludable "gift" and that it was constructively received in 1961 (which by then was apparently a
closed year).
Taxpayer contended that the value of a Corvette he won for his performance in a professional football game, the value of the use of other automobiles
furnished to him by an automobile company, and the value of a fur stole received by his mother from his employer should not be included in his gross
income for the taxable year 1962.

ISSUES:

Whether the value of a 1962 Corvette automobile which was won by petitioner for his performance in a professional football game should be
included in his gross income for the taxable year 1962 (PERTINENT)

Whether the value of the use of 1962 Thunderbird automobiles furnished to the petitioner by the Ford Motor Co. should be included in his gross income for
the taxable year 1962
o
RULING: Yes, the taxpayer's free use of the other automobiles constituted income within the meaning of I.R.C. as he received a valuable benefit
that was fully realized by him in a business context as a result of his implied endorsement of the vehicles.

Whether petitioner's gross income for 1962 should include the value of a fur stole received by petitioner's mother from his employer.
o
RULING: No, because the taxpayer's mother actually received the stole in 1961, it did not constitute income to taxpayer in 1962.
RULING:

Yes. The Corvette was not an exempted award under I.R.C. and should have been included in the taxpayer's gross income for 1962.

The Tax Court found that constructive receipt means unfettered control and petitioner failed to show that he met this standard. He could not have obtained
the car on the day (Sunday when the dealership in possession was closed) of the award. The editor of Sports Magazine did not have the keys or title to
transfer to him that day and the dealership, which was several states away (Wisconsin to New York City)
The tax court found that taxpayer did not demonstrate that he possessed control over the Corvette before 1962 and that it was not the result of disinterested
generosity but an award for the taxpayer's performance in a football game.

2.

Compensation for Injuries or Sickness

Sec. 32 (B)(4)
OGilvie v US, 519 US 79 (1996)
Murphy v US, No. 05-5139 (DC Cir. Aug. 22, 2006)
Murphy v US, No. 05-5139 (DC Cir. Jul. 3, 2007) (on rehearing)
BIR Rul. 57-83 (April 12, 1983)

3.

Retirement Benefits, Pensions, Gratuities, etc.

Sec. 32(B)(6) and (7)(e)
CIR v. CA (March 23, 1992)
CIR v. CA (Oct. 17, 1991)
In Re: Atty. Bernardo Zialcita, A.M. No. 90-6-015-SC (Oct. 18, 1990)
BIR Rul. 1-95 (Jan. 6, 1995)
Rep. Act No. 4917 (June 17, 1967)
Rep. Act No. 7833 (Dec. 8, 1994)
Rev. Regs. 2-95 (Jan. 3, 1995)
RMC 36-94 (Dec. 14, 1994)

4.

Income Derived by Foreign Government

Sec. 32(B)(7)(a)
CIR v. Mitsubishi Metal Corp. (Jan. 22, 1990)

5.

Gains from the Sale of Bonds, Debentures or Other Certificates of

Indebtedness
Sec. 32(B)(7)(g)
Nippon Life Ins. Co., Inc. v. CIR, CTA Case No. 6142 (Feb. 4, 2002)

E. DEDUCTIONS
Sec. 34
Sec. 36(A)
Secs.119 to 120, Rev. Regs. 2
A. Expenses
Sec. 34(A)
1.

Non-Deductible Personal Expenses v. Deductible Business Expenses

Smith v. CIR, 40 B.T.A. 1038 (1939)
Pevsner v. CIR, 628 F.2d 467 (5th Cir. 1980)
Rudolph v. U.S., supra
Schultz v. CIR, 16 T.C. 401 (1951)

2.

Travel Expenses While Away from Home

CIR v. Flowers, 326 U.S. 465 (1946)
Hantzis v. CIR, 638 F.2d 248 (1st Cir. 1981)

3.

Deductible Current Expenses v. Non-Deductible Capital Expenditures

Mt. Morris Drive-In Theatre Co. v. CIR, 25 T.C. 272 (1955)
Midland Empire Packing Co. v. CIR, 14 T.C. 635 (1950)
INDOPCO, Inc. v. CIR, 503 U.S. 79 (1992)
CIR v. General Foods (Phil.), Inc. (April 24, 2003)

4.

Ordinary and Necessary

Welch v. Helvering, 290 U.S. 111 (1933)
Atlas Consolidated Mining &Devt Corp. v. CIR (Jan. 27, 1981)

5.

Reasonable Compensation
C.M. Hoskins & Co., Inc. v. CIR (Nov. 28, 1969)
Kuenzle&Streiff, Inc. v. Collector (Oct. 20, 1959)

6.

Period for Which Deductions and Credits Taken

Sec. 45
CIR v. Isabela Cultural Corp. (Feb. 12, 2007)