MIDTERMS TAX REVIEWER

1. a. What is the meaning of income

CONWI v CTA: Income was defined as an amount of money coming to a
person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. It can also be thought of as a flow of the fruits
of ones labor.
b. Income v Capital
CIR v COAC: Income refers to the flow of wealth while capital is a fund.
Madrigal v Rafferty: Capital is wealth while income is the service of wealth.
2. a. Are stock dividends taxable? NO.
Fisher v Trinidad: NO. A stock dividend when declared, is merely a certificate
of stock which evidences the interest of stockholder in the increased capital
of the corporation. The property being declared by the stock dividend is the
property of the corporation and not of the stockholder. If the ownership of
the property represented by a stock dividend is still in the corporation and
not to the holder of such stock, certainly such stock cannot be regarded as
income to the stockholder. The stockholder received nothing but a
representation of an interest in the property of the corporation.
Nielson v LCM: NO. When a corporation issues stock dividends, it shows that
the corporations accumulated profits have been capitalized instead of
distributed to the stockholders or retained as surplus. It is not a realization of
profits for the stockholder. It tends rather, to postpone said realization, in,
that the fund represented by the new stock has been transferred from
surplus to assets and no longer available for actual distribution. A stock
dividend really adds nothing to the interest of the stockholder; the
proportional interest of each stock holder remains the same.
b. Is there an exception? YES.
CIR v Manning: Where corporate earnings are used to purchase outstanding
stock treated as treasury stock as a technical, but, prohibited device, to
avoid effects of income taxation, distribution of said corporate earnings in
the form of stock dividends will subject stockholders, receiving them to
income tax. All these amounts are consequently subject to income tax as
being, in truth and fact, a flow of cash benefits to the stockholders.
3. When is there constructive receipt of income?
Limpan v CIR: There is a constructive receipt of income when the taxpayer
has the constructive control of the income. In this case, the rental income
was deposited in the court because the corporation refused to accept the
same. In this case, the SC ruled that such rentals were constructively
received such rental income and should have been reported in that taxable
year. (not sure)
4. Is goodwill subject to income tax?
Anderson v Posadas: YES. Goodwill is the good reputation of the business
and if acquired in the course of its management and operation, it does not
form part of the capital with which it was established. It is an intangible
moral profit, susceptible of valuation in money. The goodwill created by a an
incorporator in the course of the business of a corporation and appraised to
pay the unpaid price of shares subscribed to by said incorporator is a profit
and is subject to income tax.
5. When is the increase in net worth taxable?
Hermanos v CIR: When the company would somehow realized some
proceeds from the equipment and such proceed would later be distributed to
its stockholders, the amount so received by the taxpayer would then
properly be reportable as income of the taxpayer on the year it is received.
The underlying principle in the taxability of an increase in the net worth of a
taxpayer rests on the theory that such an increase in net worth, if unreported
and not explained by the taxpayer, comes from income derived from a
taxable source.
Increases in the taxpayer's net worth are not taxable increases in net
worth if they are not the result of the receipt by it unreported or unexplained
taxable income, but are shown to be merely the result of the correction of
errors in its entries in its books relating to its indebtednesses to certain
creditors, which had been erroneously overstated or listed as outstanding
when they had in fact been duly paid.
6. What is income from whatever source?
CIR v BOAC: It disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws.
7. What is the liability for taxes on the offshore portion of a turnkey project?
CIR v Marubeni: Services for the design, fabrication, engineering, and
manufacture of the materials and equipment made in other country, not
outside the taxing jurisdiction of the Philippines, are not subject to
contractors tax. A contractors tax is in the nature of an excise tax on the
exercise of a privilege for selling products and is directly collectible from the
person exercising the privilege. It can be levied by the taxing authority only
when the acts, privileges or business are done or performed within the
jurisdiction of said authority.
8. What is the four fold test of employer-employee relationship?
Blum v Zamora:
(1) Whether or not the contractor is carrying on an independent business;
the nature and extent of the work; the skill required;
(2) The term and duration of the relationship; the right to assign the
performance of a specified piece of work;
(3) The control and supervision of the work to another; the employers
power with respect to the hiring, firing, and payment of the contractors
workers; the control of the premises;
(4) The duty to supply the premises tools, appliances, materials and
laborer; and the mode, manner, and terms of payment.
9. Are salaries of justices and judges subject to income tax on their
compensation income?
Polo v Commissioner: YES. The salaries of justices and judges are properly
subject to a general income tax law applicable to all income earners and that
the payment of such income tax by Justices and Judges does not fall within
the constitutional protection against decrease of their salaries during their
continuance in office. The ratio behind this law is to give substance to
equality among the three branches of the government.
10. Are quarters and meals furnished for the convenience of the
employer part of the employees income subject to tax?
Henderson v CIR: NO. Such benefits given to the employee shall be
considered managers residential expense and should not form part of the
ratable value subject to income tax. In this case, CTA and SC took into
consideration the nature of the employees work as the president of the
corporation. They took into consideration that in line of the highly socialized
work such employee undertook, The benefits given by the employer to the
employee did not exceed what they actually needed because of his line of
work.
11. What is the definition of engaged in trade or business
CIR v BOAC: There is no specific criterion as to what constitutes doing or
engaging in business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a:
(1)Continuity of commercial dealing and arrangements
(2) Contemplates performance of acts or works or the exercise of some of
the function normally incident to and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization.
12. Is compensation paid by the government for property expropriated
income?
Gutierrez v CIR: YES. The compensation or income derived from the
expropriation located in the Philippines is an income from sources within the
Philippines and subject to the taxing jurisdiction of the place. The acquisition
by the Government of private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is embraced
within the meaning of the term sale or disposition of property and the
proceeds derived therefrom is subject to income tax as capital gain.
13. Is liquidating dividend taxable subject to ordinary income tax rates?
Wise v Meer: YES. Payments for surrendered or relinquished stock in a
corporation in complete liquidation, sometimes called liquidating dividends
are taxable income under Income Tax Law. Liquidating dividend involves the
distribution of assets by a corporation to its stockholders upon dissolution. It
is taxable because there is a gain realized by the stockholders from the
 distribution of the assets in liquidation. It is as if they had sold their stock to
third persons. Under Section 25(a) of the aforementioned law, such dividend
is taxable so long as gain is realized, it will be a taxable income whether the
distribution comes from the earnings or profits of the corporation or from the
sale of all its assets in general so long as the distribution is made in complete
dissolution.
14. Is income from property donated subject to tax?
Pirovano v CIR: YES. A donation made out of gratitude for his past services is
subject to donees gift tax.
15. a. What should a person claiming a deduction prove?
Western Minolco v CIR:
(1)The expense must be ordinary and necessary
-Necessary: Appropriate, useful in the development of the taxpayers
business; proper for realizing profit or minimizing a loss.
-Ordinary-Normal; Not extraordinary
(2)It must be paid or incurred during the taxable year
-When should it be realized? all event test
o Fixing a right to the income or liability to pay- Seller demand such
expense.
o Reasonably accurate
(3)It must be paid or incurred in carrying out trade or business
Add: (4) Supported by adequate invoices receipt
(5)Not contrary to law, public morals or public policy
(6) Tax required to be withheld on the expense paid or payable remitted to
the BIR on time.
- When is the obligation to without on time; Whichever comes first:
o At the time the income is paid
o Payable
o Accrue or recorded in the books.

b. If the exemption is not expressly stated in the law, what is the

minimum requirement that needs to be satisfied?
o CIR v Phil. Acetylene: An exemption will not be considered conferred unless
the terms under which it is granted clearly and distinctly show that such was
the intention of the parties.
c. When does the rule on strict construction not apply?
o CIR v ACS; The rule on strict construction will not apply if the taxpayer is
exempted by clear legislative intent. There should be an express mention
that the taxpayer falls within the purview of the exemption by clear
legislative intent.
d. Can a person claim exemption on the ground that another person
situated in the same circumstances has not been required to pay?
o BPI v Trinidad: NO. The fact that the one person may not have paid or
required to pay his taxes does not exempt another from the payment of his
legal taxes, or legally entitle him to a refund of any of the taxes which he has
paid.
16. What is the consequence if deductions for bonuses given to top
officers of a corporation are reasonable?
o Kuenzle v CIR: As a general rule bonuses to employees made as additional
compensation are deductible provided such payments, when added to the
stipulated salaries do not exceed a reasonable compensation for the services
rendered. The test of reasonableness depends on the amount and quality of
the services performed in relation to the business. If it is found out that the
bonuses are not reasonable, the CIR will order the taxpayer to pay the tax
due plus 5% surcharge and 1& monthly interest until paid.
o CM Hoskins v CIR: Additional from above penalty: If the deficiency tax is not
paid within 30 days from the date the decision becomes final, the delinquent
tax payer will be ordered to pay surcharge and interest under Section 51 of
the Tax Code.
17. a. What are the requisites for deductibility for expenses for
salaries?
(1)Must be reasonable
o Payment must be purely for services
(2)There must be service rendered
 b. If commissions and directors fees are fees based on the certain
percentage of profits to controlling stockholders, what is the tax
implication?
o Alahambra Cigar v CIR: Such fees are considered to be in the nature of
dividend distributions. As a dividend distribution, it cannot be considered as
deductions. If there is a dividend distribution, gain is realized by the
stockholder or the person receiving the same, thus, it is taxable income.
18. When is bonus deductible?
o Aguinaldo Industries v CIR: As a general rule, bonus given to corporate
officers out of sale of corporate land not deductible as an ordinary business
expense, UNLESS, it can be shown what role said officers performed to
effectuate such sale. It should be shown that such bonus is deemed
reasonable and necessary.
19. What items can a Philippine branch deduct with respect to expenses
incurred in producing Philippine-derived income and expenses of its
parent company?
o CIR v SmirkLine: Where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations, that expense can be
deducted from the gross income acquired in the Philippines without resorting
to apportionment. (Example are: Salaries and Rental Expense). However, the
overhead expenses incurred by the parent company in connection with
finance, administration and research and development, all of which directly
benefit is branches all over the world, including the PH, cannot be deducted
for it cannot be identified with the operations of the PH branch.
20. a. Is income tax an operating expense?
o Republic v Meralco: NO. Income tax should not be included in the
computation of Operating Expenses of a public utility. Income tax paid by a
public utility is inconsistent with the nature of operating expenses. Operating
expenses are those which are reasonably incurred in connection with
business operations to yield revenue or income. These items should be
attributable to the production of income or revenue. By its nature, income
tax are not expenses which contribute to or are incurred in connection with
the production of profit or public utility. Income tax is imposed on an
idibidual or entity as a form of excise tax on the privilege of earning income.
b. When is a tax considered an indebtness?
o Commissioner v Prieto: The term indebtness as used in the Tax Code has
been defined as an unconditional and legally enforceable obligation for the
payment of money. Within the meaning of that definition, a tax may be
considered as an indebtness. Although taxes already due have not, strictly
speaking, the same concept as debts, they are however obligations that may
be considered as such. Where statute imposes a personal liability for a tax,
the tax becomes at least in broad sense, a debt. A tax is debt for which a
creditors bill may be brought in a proper case. For example, interest paid for
late payment of donors tax is deductible from gross income under Section
30 (b) (1) of the Tax Code.
o CIR v Palanca: Same as above; Prieto was cited.
21. Is good faith enough to warrant a deduction for bad debts?
o CIR v Goodrich: NO. The requirement of ascertainment of worthlessness
requires proof of two facts:
(1) That the taxpayer did in fact ascertain the debt to be worthless in the
year for which the deduction was sought
(2) He acted in good faith.
-However, Good faith is not enough. He must also show that he had
reasonably investigated the relevant facts and had drawn a reasonable
inference from the information thus obtained by him.
o REQUISITES:
a. Existing indebtedness
b. Legally binding and demandable
c. Connected with T/B/P
d. Officially charged or written off in the BOA during the taxable year
e. Actually ascertained to be worthless.
22. a. What is the limitation on the deductibility of depreciation?
o Basilan v CIR: Section 30 (f) (1) of the Tax Code allows a deduction from
gross income for depreciation but limits the recovery to the capital invested
in the asset being depreciated. The law does not authorize the depreciation
of an asset beyond its acquisition cost. A deduction over and above cost
 cannot be claimed and allowed. To allow the same will be absurd. The
taxpayer would not be only be recovering the acquisition cost but will realize
some profit.
b. Is depreciation a question of fact?
o Limpan v CIR: YES. Depreciation is a question of fact and is not measured by
a theoretical yardstick. It should be determined by consideration of actual
facts and the findings of the Tax Court in this respect should not be disturbed
when not shown to be arbitrary or in abuse of discretion.