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NOTES ON INCOME TAXATION 1. Define Income All wealth which flows into the taxpayers 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. (Revenue Regulation No. 2, Sec. 36) 2. Upon which is income tax based? I don’t understand the question? Net income and gross income ang answer? 3. What is the nature of income tax? Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege, the privilege to earn yearly profits from various sources. It is a system that does not provide for the taxation of property. (Domondon, p. 395-396) 4. Basis of the right of government to tax income? (Not Sure) It is generally conceded that the main objective of tax laws, including income tax laws, is the revenue purpose (life blood doctrine) and a host of non-revenue purpose such as police power and the compensatory purposes. (Domondon, p. 397) 5. Define Income Ibid. 6. Distinguish Capital from Income Suggested Answer Bar 1965: a. Capital is wealth or fund; while income is profit or gain from the flow of wealth. (CIR V. CA) b. Capital is a fund of property existing at an instant of time; while income is that flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. c. Capital is wealth; while income is the service of wealth. d. Capital is the tree; while income is the fruit. (Madrigal V. Rafferty) 7. Requisites for taxable income Personal Notes according to dean and UP Notes; a. There must be income b. Received or realized c. Not exempted under the law Sec. 31 of the ICR – 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. 8. When is income considered received? 1. If actually or physically received by the taxpayer; or 2. If constructively received by the taxpayer. (Revenue Regulation No. 2, Sec 52.) 9. Examples of Constructive Receipt a. Deposits in banks which are made available to the seller or service without restriction b. Issuance by the debtor of a notice of offset any debt or obligation and acceptance thereof by the seller as payment. c. Transfer of the amounts retained by the payor to the account of the contractor. (RR. 16-2005, Sec 4) d. Interest in coupons that have matured and are payable but have not been cashed. e. Undistributed share of a partner in the profits of a gen. partnership. f. It was once held that there was constructive receipt of income where the income was applied in payment of debt legally demandable and chargeable. (Republic V. De la Rama et. Al) g. Dividends set off against valid debts in favor of the corporation, but not if the debt are not valid or are controversial (ibid case above) 10. Purpose of doctrine of constructive receipt? For Financial accounting. BUT I DON’T WHY? Please help. 11. A taxpayer received through mistake an amount which is not due. Is the excess taxable income? Bar question 2013. In 2010, Mr. Plation sent his sister helen One Thousand Dollars (1000) via telegraphic transfer through Bank of PI. The bank’s clerk made a mistake and credited helen with One Million Dollars (1,000,000) which she promptly withdrew. The bank demanded for the excess but helen refused. The BIR entered the investigated Helen. Would the BIR be correct if determines that helen earned taxable income under these facts? a. No, she had no income because she had no right to the mistakenly credited funds. b. Yes, the income is income regardless of the source. c. No, it was not her fault that the funds in excess of the 1, 000 were credited to her. d. No, the funds in excess of 1,000 in effect was donated to her. SUGGESTED ANSWER (B) 12. When is co ownership subject to tax? 13. When is co ownership not subject to tax? UP NOTES: When Co-ownership is not subject to tax: When the co- ownership’s activities are limited merely to the preservation of the co-owned property and to the collection of the income from the property. The income derived by a co-owner from the property shall be reported in his individual tax return regardless of whether such income is actually or constructively received. When Co-ownership is subject to tax: The following circumstances would render a co-ownership subject to a corporate income tax: (a) When a co-ownership is formed or established voluntarily, or upon agreement of the parties; (b) When the individual co-owner reinvested his share in the co-ownership to produce another income-generating activity, and (c) When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide to same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership. Automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived from them are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. [Ona v. CIR, May, 25 1972] 14. Are allowances part of the gross compensation income? UP NOTES: Income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. (Sec. 78(A)). It includes, but is not limited to salaries and wages, commissions, tips, allowances , bonuses, Fringe Benefits of rank and file EEs and other forms of compensation. 15. Employer’s convenience rule UP NOTES: If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation (Henderson v. Collector). 16. Cancellation or forgiveness of indebtedness amount to payment of income? The cancellation and forgiveness of indebtedness may amount to payment of income, to a gift, or to a capital transaction depending upon the circumstance; a. When cancellation of debt is INCOME: If an individual performs services for a creditor, who in consideration thereof, cancels the debt, it is income to the extent of the amount realized by the debtor as compensation for his services. b. When cancellation of debt is GIFT. If a creditor merely desires to benefit a debtor and without any consideration thereof cancels the amount of the debt is a gift from the creditor and need not be included in the income. 17. Gross income from farming include: a. The amount of cash or value of merchandise or other property received from the sale of livestock, produce which were raised during the taxable year or prior years. b. The profit from the sale of any livestock or other items which were purchases; and c. The gross income from all other sources. (Revenue Regulation 2, Sec. 45) 18. Life insurance proceeds received by the corporate employer that took the insurance policy subject to income tax? 19. Are stock dividends subject to income tax? Suggested Answer Bar 1997 NO, Stock dividends are unrealized gains and cannot be subject to income tax until
