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DLSU-FEU MBA-JD Dual Degree Program

Course Outline Atty. Terence Conrad H. Bello Tax Law Review Baniqued & Baniqued 1st Term 633-9418 (Office); 633-1911 (Fax) Academic Year – 2013 - 2014 [email protected] www.baniquedlaw.com

INCOME TAX

I. MEANING OF INCOME AND THE REALIZATION PRINCIPLE Sec. 32(A), NIRC Sec. 36, Rev. Regs. 2 A. What is Income (A Definitional Concept)?

Eisner v. Macomber, 252 U.S. 189 (1920) CIR v. Glenshaw Glass Co., 348 U.S. 426 (1955) James v. U.S., 366 U.S. 213 (1961)

B. Realization Requirement Sec. 38, Rev. Regs. 2 Cottage Sav. Ass’n v. CIR, 499 U.S. 554 (1991) Helvering v. Horst, 311 U.S. 112 (1940)

C. Other Relevant Concepts 1. Tax-Free Imputed Income v. Taxable Barter 2. Tax-Free Return of Capital 3. Windfall Receipts 4. Tax Benefit Principle – Recovery of Deducted Items 5. Indirect Receipts – Cancellation of Indebtedness and Discharge by 3rd

Parties 6. Constructive Receipt

II. GROSS INCOME

A. Inclusions Sec. 32(A), NIRC 1. Compensation: Special Problems on “In-Kind” Compensation

Sec. 2.78.1(A) and (A)(1), Rev. Regs. 2-98 (April 17, 1998) a. Forced Consumption: “Convenience 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 B.T.A. 838 (1937)

b. De Minimis Benefits Sec. 2.78.1(A)(3), Rev. Regs. 2-98 (April 17, 1998)

c. Travel and Entertainment Rudolph v. U.S., 370 U.S. 269 (1962)

Tax Law Review Outline

Atty. Terence Conrad H. Bello

2. Business Income 3. Gains 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions 11. Share in GPP’s Income

B. Exclusions Sec. 32(B), NIRC 1. Gifts, Bequests and Devises

Sec. 32(B)(3), NIRC CIR v. Duberstein, 363 U.S. 278 (1960)

2. Compensation for Injuries or Sickness Sec. 32(B)(4), NIRC

O’Gilvie v. U.S., 519 U.S. 79 (1996) Murphy v. U.S., 460 F.3d 79 (D.C. Cir. 2006) Murphy v. U.S., No. 05-5139 (D.C. Cir. July 3, 2007) (on rehearing)

3. Income Exempt Under Treaty Sec. 32(B)(5), NIRC

4. Retirement Benefits, Pensions, Gratuities, etc. Sec. 32(B)(6) and (7)(e)

5. Income Derived by Foreign Government Sec. 32(B)(7)(a), NIRC

CIR v. Mitsubishi Metal Corp. (Jan. 22, 1990) 6. Gains from the Sale of Bonds, Debentures or Other Certificates of

Indebtedness Sec. 32(B)(7)(g), NIRC

III. DEDUCTIONS Sec. 34, NIRC Sec. 36, NIRC Secs. 119 to 120, Rev. Regs. 2

A. Expenses 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. 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) 3. Ordinary and Necessary

Welch v. Helvering, 290 U.S. 111 (1933) Atlas Consolidated Mining & Dev’t Corp. v. CIR (Jan. 27, 1981)

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

B. Interest Paper Ind. Corp. of the Phil. v. CA (Dec. 1, 1995) CIR v. Vda. de Prieto (Sept. 30, 1960)

C. Taxes D. Losses

1. Casualty Losses 2. NOLCO

Paper Ind. Corp. of the Phil. v. CA, supra E. Bad Debts F. Depreciation G. Depletion H. Charitable and Other Contributions I. Research and Development J. Pension Trusts K. Additional Requirements for Deductibility L. Optional Standard Deduction

IV. TAXABLE INCOME Sec. 31, NIRC V. GENERAL PRINCIPLES OF INCOME TAXATION

Sec. 23, NIRC VI. INCOME TAX ON INDIVIDUALS

A. Definitions 1. Resident Citizens and Resident Aliens

Sec. 22(F), NIRC Sec. 5, Rev. Regs. 2 Garrison v. CA (July 19, 1990)

2. Non-Resident Citizens Sec. 22(E), NIRC Rev. Regs. 1-79 (Jan. 8, 1979)

BIR Rul. No. 33-00 (Sept. 5, 2000) 3. Non-Resident Aliens Engaged/not Engaged in Trade or Business in the

Philippines Sec. 22(G), NIRC Secs. 5 and 6, Rev. Regs. 2

4. Dependent



Sec. 35(B), NIRC, as amended by Rep. Act No. 9504 5. Minimum Wage Earner

Sec. 22(HH), NIRC, as inserted by Rep. Act No. 9504 B. Income Tax on Citizens and Resident Aliens

1. Income Tax Rate and Base, In General Sec. 24(A), NIRC Sec. 31, NIRC

2. Special Exemption of Minimum Wage Earners Section 24(A), proviso

3. Income Tax Rate and Base on Certain Types of Income a. Final Income Tax on Interests, Royalties, Prizes, and Other Winnings Sec. 24(B)(1) NIRC Sec. 22(Y), NIRC Sec. 22(FF), NIRC Rev. Regs. 10-98 (Aug. 25, 1998) b. Final Income Tax on Cash and/or Property Dividends

Sec. 24(B)(2), NIRC Sec. 73, NIRC

c. Capital Gains Tax on Sale of Shares Sec. 24(C), NIRC Sec. 22(L), NIRC Sec. 22(U), NIRC

Rev. Regs. 2-82 (March 29, 1982) d. Capital Gains Tax on Sale of Realty

Sec. 24(D), NIRC 4. Personal and Additional Exemptions

Sec. 35(A) & (B), NIRC, as amended by Rep. Act No. 9504 5. Change of Status

Sec. 35(C), NIRC 6. Optional Standard Deduction

Sec. 34(L), NIRC, as amended by Rep. Act No. 9504 7. Premium Payments on Health and/or Hospitalization Insurance

Sec. 34(M), NIRC C. Income Tax on Nonresident Aliens Engaged in Trade or Business in the

Philippines 1. Meaning of “Engaged in Trade or Business”

Sec. 8, Rev. Regs. 2 Sec. 25(A)(1), NIRC

2. Income Tax Rate and Tax Base, In General Sec. 25(A)(1), NIRC Sec. 31, NIRC

3. Income Tax Rate and Base on Certain Types of Income a. Cash and/or Property Dividends from a Domestic Corporation or

Joint Stock Company, or Insurance or Mutual Fund Co., or ROHQ, or



Share in the Distributable Net Income of a Taxable Partnership, Interests, Royalties, Prizes, and Other Winnings Sec. 25(A)(2), NIRC

b. Capital Gains on the Sale of Shares and Realty Sec. 25(A)(3), NIRC

4. Personal Exemption Allowable to Nonresident Alien Individuals Engaged in Trade or Business in the Philippines

Sec. 35(D), NIRC D. Nonresident Aliens not Engaged in Trade or Business in the Philippines

Sec. 25(B), NIRC CIR v. Wodehouse, 337 U.S. 369 (1949)

E. Special Aliens Sec. 25(C), (D), (E), NIRC

VII. INCOME TAX ON DOMESTIC CORPORATIONS

A. Definition of Domestic Corporation Sec. 22(B), (C), NIRC AFISCO Insurance Corp. v. CA (Jan. 25, 1999) Pascual v. CIR (Oct. 18, 1988) Obillos v. CIR (Oct. 29, 1985) Ona v. CIR (May 25, 1972)

B. Income Tax Rate and Tax Base, In General Sec. 27(A), NIRC Sec. 31, NIRC

C. Proprietary Educational Institutions and Hospitals Sec. 27(B), NIRC

D. GOCCs Sec. 27(C), NIRC

E. Passive Income Sec. 27(D), NIRC 1. Interest, Deposit Substitutes, Royalties

Sec. 22 (Y), NIRC 2. Sale of Shares 3. FCDU 4. Intercorporate Dividends 5. Sale of Realty

F. Minimum Corporate Income Tax (MCIT) Sec. 27(E), NIRC The Manila Banking Corp. v. CIR (Aug. 28, 2006)

VIII. INCOME TAX ON RESIDENT FOREIGN CORPORATIONS

A. Definition Sec. 22(B), (C), (D), (H), NIRC



B. Meaning of “Engaged in Trade or Business” Sec. 3(d), Rep. Act No. 7042 (Foreign Investments Act of 1991), as

implemented by Sec. 1(f), FIA 91 IRR C. Income Tax Rate and Tax Base, In General

Sec. 28(A)(1), NIRC Sec. 31, NIRC

D. Special Resident Foreign Corporations 1. International Carriers

Sec. 28(A)(3), NIRC 2. OBUs/FCDUs

Sec. 28(A)(4), NIRC 3. RHQs and ROHQs

Sec. 22(DD) & (EE), NIRC Sec. 28(A)(6), NIRC

E. Branch Profit Remittance Tax Sec. 28(A)(5), NIRC RMC 55-80 (Dec. 3, 1980) BIR Rul. 157-81 (July 13, 1981)

F. MCIT Sec. 28(A)(2), NIRC

G. Tax on Certain Incomes of Resident Foreign Corporations Sec. 28(A)(7), NIRC 1. Interest, Yields, Royalties 2. FCDU Income 3. Capital Gain from Sale of Shares 4. Intercorporate dividends

IX. INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS Sec. 28(B), NIRC

A. Income Tax Rate and Tax Base, In General Sec. 28(B)(1), NIRC Marubeni Corp. v. CIR (Sept. 14, 1989) N.V. Reederij “Amsterdam” and Royal Interocean Lines v. CIR (June 23,

1988) B. Special Non-Resident Foreign Corporations

1. Non-Resident Cinematographic Film Owner, Lessor or Distributor Sec. 28(B)(2), NIRC

2. Non-Resident Owner or Lessor of Vessels Chartered by Philippine Nationals Sec. 28(B)(3), NIRC

3. Non-Resident Owner or Lessor of Aircraft, Machinery and Other Equipment Sec. 28(B)(4), NIRC



C. Tax on Certain Incomes of Non-resident Foreign Corporations Sec. 28(B)(5) 1. Interest on Foreign Loans 2. Intercorporate Dividends BIR Rul. 8-00 (Jan. 5, 2000) 3. Capital Gain from Sale of Shares 4. Income Covered by Tax Treaties

X. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) Sec. 29, NIRC

The Manila Wine Merchants, Inc. v. CIR (Feb. 20, 1984) CIR v. Tuason (May 15, 1989) Rev. Regs. 2-01 (Feb. 12, 2001)

BIR Rul. 25-02 (June 25, 2002)

XI. TAX-EXEMPT CORPORATIONS Sec. 30, NIRC

CIR v. CA, CTA and Young Men’s Christian Assoc. of the Phil., Inc. (Oct. 14, 1998)

XII. FRINGE BENEFITS TAX (FBT) Sec. 33, NIRC XIII. CAPITAL GAINS AND LOSSES

A. Capital Assets Sec. 39, NIRC Sec. 132, Rev. Regs. 2 Corn Products Refining Co. v. CIR, 350 U.S. 46 (1955) Arkansas Best Corp. v. CIR, 485 U.S. 212 (1988) Calasanz v. CIR (Oct. 9, 1986)

B. Ordinary income Sec. 22(Z), NIRC Tuason v. Lingad (July 31, 1974)

C. Net Capital Gain, Net Capital Loss D. Percentage Taken into Account E. Limitation on Capital Loss

China Banking Corporation vs. Court of Appeals (July 19, 2000)

XIV. DETERMINATION OF GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY Sec. 40, NIRC Sec. 136-143, Rev. Regs. 2 A. Computation of Gain or Loss

Sec. 40(A), NIRC B. Amount Realized



Sec. 40(A), NIRC C. Cost or Basis for Determining Gain or Loss

Sec. 40(B), NIRC Philadelphia Park Amusement Co. v. U.S., 126 F. Supp. 184 (1954)

D. Exchange of Property 1. General Rule – Gain Recognition

Sec. 40(C)(1), NIRC 2. Exception – Non-Recognition Transactions (Tax-Free Exchange)

a. Transfer of Property to a Controlled Corporation Sec. 40(C)(6)(c), NIRC Sec. 40(C)(2), last par., NIRC

Delpher Trades Corp. v. IAC (Jan. 26, 1988) b. Statutory Merger or Consolidation

Sec. 40(C)(6)(a), (b), NIRC Sec. 40(C)(2)(a), (b), (c), NIRC

CIR v. Rufino (Feb. 27, 1987) c. Transfer of “Substantially All” the Assets (De Facto Merger)

Sec. 40(C)(6)(a), (b), NIRC Sec. 40(C)(2)(a), (b), (c), NIRC

3. Basis of Stock/Securities Received and Property Transferred in Non-Recognition Transactions a. Basis of Stock/Securities Received by Transferor

Sec. 40(C)(5)(a), NIRC b. Basis of Property Transferred in the Hands of Transferee

Sec. 40(C)(5)(b), NIRC 4. Losses from Wash Sales of Stocks or Securities

Sec. 38, NIRC Sec. 131, Rev. Regs. 2 XV. SITUS OF TAXATION Sec. 42, NIRC

A. Gross Income from Sources Within and Without the Phils. Sec. 42(A) and (C), NIRC 1. Interest

Sec. 42(A)(1) and (C)(1), NIRC 2. Dividends

Sec. 42(A)(2) and (C)(2), NIRC 3. Compensation for Personal Services

Sec. 42(A)(3) and (C)(3), NIRC CIR v. Marubeni Corp. (Dec. 18, 2001) CIR v. British Overseas Airways Corp. (April 30, 1987); read dissenting

opinion of Feliciano, J. Howden & Co., Ltd. v. Collector (April 14, 1965)

4. Rentals and Royalties Sec. 42(A)(4) and (C)(4), NIRC



a. Compensation for Personal Services or Royalty? Karrer v. U.S., 152 F. Supp. 66 (1957)

Boulez v. CIR, 83 T.C. 584 (1984) 5. Sale or Real Property

Sec. 42(A)(5) and (C)(5), NIRC 6. Sale of Personal Property

Sec. 42(A)(6) and (E), NIRC a. Sale by Producer or Manufacturer of Personal Property b. Purchase and Sale of Personal Property c. Sale of Shares of Stock in a Domestic Corporation d. Outright Sale or Assignment of Intangibles

B. Income from Sources Partly Within or Without the Philippines CIR v. CTA and Smith Kline & French Overseas (Jan. 17, 1984)

XVI. ACCOUNTING PERIODS AND METHODS

Secs. 43-50, NIRC Secs. 166-177, Rev. Regs. 2 Secs. 51-53, Rev. Regs. 2

A. Accounting Method - cash (actual or constructive) or accrual B. Hybrid Method

Consolidated Mines, Inc. v. CTA (Aug. 29, 1974) C. Percentage of Completion Method

Sec. 48, NIRC Sec. 44, Rev. Regs. 2

D. Change of Accounting Period E. Installment Basis F. Allocation of Income and Deductions

XVII. RETURNS AND PAYMENT OF TAXES

A. Individual Return Secs. 51 & 56, NIRC 1. Who are Required to File 2. Those not Required to File 3. Where to File 4. When to File 5. Where to Pay 6. Capital Gains on Shares of Stocks and Real Estate 7. Quarterly Declaration of Income Tax

Sec. 74, NIRC B. Corporation Returns

Sec. 52, 53 & 56, NIRC 1. Quarterly Income Tax

Sec. 75, NIRC 2. Final Adjustment Return

Sec. 76, NIRC



Philam Asset Mgt., Inc. v. CIR (Dec. 14, 2005) 3. Where to File 4. When to File

Sec. 77, NIRC 5. When to Pay 6. Capital Gains on Shares of Stock 7. Return of Corporations Contemplating Dissolution/Reorganization

Sec. 52(C), NIRC Sec. 244, Rev. Regs. 2

8. Returns of GPPs Sec. 55, NIRC XVIII. WITHHOLDING TAX

A. Final Withholding Tax at Source Sec. 57(A), NIRC Sec. 2.57(A) & 2.57.1, Rev. Regs. 2-98 (April 17, 1998)

B. Creditable Withholding Tax Sec. 57(B), NIRC Filipinas Synthetic Fiber Corporation v. CA (Oct. 12, 1999) Sec. 2.57(B) & 2.57.2, Rev. Regs. 2-98 (April 17, 1998)

C. Return and Payment of Tax Sec. 58, NIRC

D. Withholding on Wages Sec. 78 – 83, NIRC Sec. 2.78, Rev. Regs. 2-98 (April 17, 1998)

E. Withholding Tax by Government Agencies Sec. 2.57.2(N), Rev. Regs. 2-98 (April 17, 1998)

XIX. ESTATES AND TRUSTS Sec. 60-66, NIRC Sec. 207-213, Rev. Regs. 2

A. General Rule on Taxability: Fiduciary or Beneficiary B. Personal Exemption Allowed C. Decedent’s Estate Administration D. Revocable Trusts E. Income for Benefit of Grantor



WEEK 1 – I to II WEEK 2 – III to V WEEK 3 – VI to VII WEEK 4 – VIII to IX WEEK 5 – X to XIII WEEK 6 – XIV to XV (XVII to XVIII, if time permits) WEEK 7 – Midterms

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