TAXATION

One who derives illegal income is more often than not also guilty of tax evasion.
There can be a situation where a person
o A bought shares of stock for 1 million, by end of 2007, his stocks appreciated in
value from 1 to 1.2 million.
o Is there economic gain?
yes
o Is the economic gain subject to income tax?
not yet, because there is no realization yet
o When can that economic gain be subject to income tax?
when taxpayer sells the shares
Realization Requirement
o Accession to wealth
will be taxed only upon the realization of such economic wealth or gain
taxpayer has complete dominion or control
o What if realization requirement is not present, what are the effects or problems
problem of valuation of the shares
problem of liquidity
force liquidation
o When does realization occur?
taxpayer enjoyed the benefits of the gain
no need to be in exchange of money or cash
Return of Capital
o Taxpayer purchases shares of stock for 1M in 2005, in 2007, the shares appreciated
to 1.2M, so the taxpayer sold the shares for 1.2
o Can the BIR tax the whole 1.2M?
only the 200K , which represents the gain or accession to
the 1M represents the nontaxable return of capital
Windfall Receipts
o income out of mere fortune, i.e. prizes
o it is an accession to wealth thus can be realized and taxed
o gain without pain is taxable income
o examples
lost and found property
unclaimed deposits or uncashed checks
prizes and winnings
finder of a gold rolex
Is this taxable income?
o yes, there is economic gain and It is realized
a person was on a business trip in Paris. He went to a free market that
specializes on artwork. The taxpayer is a resident citizen of the Philippines
bought an artwork. When he returned in Philippines he wanted to restore
 the painting. The painting belongs to Juan Luna, which is valued at 1M. Is
there taxable income?
no taxable income, because the taxpayer has not yet realized the
income Tax
Indirect Receipts
o cancellation of indebtedness
o condoned debts
Is there taxable income?
generally yes
there is economic gain liability f
o discharge by third parties
there is a liability of one person but another person answers for that liability,
in that case, the former has economic gain

GROSS INCOME (Section 32)

A. Inclusions
1. In-kind Compensation
compensation for personal service in whatever form paid
o not necessarily cash
a lawyer advised the farmer of his rights, because of such advice, the farmer was
able to acquire the land he was tilling
the farmer paid 15 chickens
Is there taxable income of the part of the lawyer?
o yes
Belo paid Mrs. Pacquiao 5M for Mrs. P to be Belos model. To compensate Mrs. P for
her services, Belo proposed to exchange Belos products instead of paying her in
cash.
o sale of belo
o income in the hands of Mrs. Pacquiao, representing in-kind compensation
Forced consumption
o convenience of the employer
o did he derive any benefit?
yes, because the board and lodging is for free
o was that benefit subject to income tax?
no, because whatever benefits the taxpayer gained was only
incidental.
o was the benefit taxable?
no the board and lodging was not meant to compensate A for services
rendered, even taxpayer derives benefit from the compensation
not meant to be compensation.
De minimis benefits
o exempt from income taxation
 o will not form part of taxable income
o unused vacation leave converted to cash
first 10 days is exempt from taxable income
o sick leave credits
always form part of taxable compensation
o more than 82k abuloy
taxable income
o travel and entertainment
all-expenses paid trip to attend a convention
it constitutes taxable income
court looked into dominant motive of employer
it is in the nature of a bonus, reward, etc
o a manager of a company was sent to US to attend a meeting to negotiate in a
contract; all expenses are paid
is there taxable income?
no, the travel was not meant to compensate the employee
the trip was in connection and purely for the business of the
employer
did the employee derive a benefit?
yes, but these benefits are only incidental
determine whether or not the trips were meant for compensation or
benefit of the employees
B. Exclusions
Life Insurance Proceeds
o return of premium is exempt
o proceeds of life insurance that insurers pay to beneficiaries are exempt
Gifts, Bequests & Devices
o Gift
mere absence of a legal or moral obligation not make such a payment
does not mean it is a gift
if the payment proceeds primarily from the constraining force of any
moral or legal duty or from the incentive of anticipated benefit of an
economic natures it is not a gift
Compensation For Injuries Or Sickness
o damages received
o whether by suit or agreement
o on account of; and
o personal injuries or sickness
o examples
compensatory damages excluded
moral damages excluded
punitive included
exemplary excluded
o if damages substitutes something not usually taxed
substitute will not be taxed as well