Sababan Magic Notes

7/30/2019 Sababan Magic Notes

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- Atty. Francis J. Sababan -

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3. Input tax on Vat4. Creditable w/holding tax system under NIT5. Tax credit certificate.

Q: Who are allowed to claim it?A: RC and DC only.

Q: suppose you paid the 100K NIT to US, canyou claim as a deduction the whole 100K?what is the formula?

"same procedure for (1) income tax paid toforeign country; (2) estate tax paid to foreigncountry; and (3) Donors tax paid to foreigncountry.

A: Formula:

STEP 1

GI from sources w/inNIT: _____________________

GI from entire world

STEP 2

Quotient x RATE = amount w/c can beclaimed as a deduction

A: you cannot claim the whole 100K, you canonly claim the product of the quotient times

the rate

TAKE NOTE: deduct at the bottom of theformula ( sa computation ng GI)

Q: Suppose you are a RC, you pay NIT to US,will you be able to claim it as a taxdeduction?

A: 1. generally, you can claim it as tax credit.2. you can claim under Sec. 34 C (1) b

"if the taxpayer did not signify in his returnhis intention to avail himself of the benefit oftax credit for taxes paid to foreign country."taxes incurred not related to the trade orbusiness, you have the option to:

a. claim it as tax credit; orb. claim it as a deduction

"law gives you this privilege.

Q: When is taxes not allowed as a deduction?A: Sec. 34 C (1)

1. Income tax;2. Income tax imposed by authority ofany foreign country;3. Estate and Donor tax; and

4. taxes assessed against local benefits ofa kind tending to increase the value ofthe property.

Q: Who are not allowed to claim deductions?A: Under 34 C (3) - NRC, NRA; and N/RFC

TAKE NOTE:1. NRAE and NFC allowed deduction only ifand to the extent that they are connectedwith income from sources within the Phils.2. Taxes that had been allowed as deductionbut are later in refunded should be treated aspart of the gross income during the year thatit is received (34 1 last paragraph)

Q: Which would you choose? Tax credit ordeduction?

A: tax credit because it is deducted from thetaxable income while deductions arededucted from the GI.

FORMULA: GI-DEDUCTION = NET INCOME xRATE = TAXABLE NET INCOME TAX CREDIT)

34 D LOSSES

Q: Is always a requirement that it is incurred

in pursuit of trade, bus. or profession?A: No. Sec. 34 D(1) provides for 2 kinds oflosses:

a. incurred in pursuit of trade, bus. orprofession;b. property connected with t,b,p, if theloss arises from fire, storms, shipwrecksor other casualties or from robbery, theftor embezzlement (arising from naturalcalamity).

Q: What is the requirement?A:

1. Loss actually sustained during thetaxable year2. Not compensated for by insurance orother forms of indemnity.3. Not claimed as a deduction for estatetax purposes.

Q: This is your itemized deduction which canbe claimed as a deduction from?

A: Gross income

TAKE NOTE:


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" The itemized deduction of losses,however, is not confined to section 34B. it isalso found under section 86A (1) (e) which

also pertains to deductions available underthe estate tax law."Losses within six (6) months after thedeath of the decedent can be claimed asitemized deduction of losses under Section34B. However, may be claimed as deductionunder estate tax return provided that thesame are not claimed as itemized deductionof losses under Section 34B.

Q: How many carry-overs do we have underthe Code?A: 3. Namely:

1. Section 27 E (32) Carry forward of

excess minimum Tax2. Section 39 D Net Capital Loss Carry-over3. Section 39 D 3 Net Operating LossCarry-Over.

KINDS OF LOSSES AND THEIR CARRY-OVERS:

A. ORDINARY LOSS NOLCO( #3 above)

Q: Why is there a need for a carry over underSec. 34 D # when you can claim the loss from

both capital and ordinary loss?A: if the loss exceeds the income for thetaxable year, you cannot deduct the entireamount of loss from your income for thatyear so the excess may be deducted for thetaxable year following the loss.

B. CAPITAL LOSS NET CAPITAL LOSSCARRY OVER ( # 2 above)

NET CAPITAL LOSSCARRY-OVER

NET OPERATINGLOSS CARRY-OVER

1. taxpayers is anindividual only notcorporation.

2. involves netcapital loss

3. carry-over as lossfrom sale of capitalasset in the nextsucceeding year

4. can only bededucted from

capital gains.

1. taxpayer may bean individual orcorp;

2. losses incurredor connected with Tor B;

3. Business lossesnot previously off-set as a deductionfrom the GI carriedover as such for thenext 3 consecutiveyears;4. can be deductedfrom capital gains

and/or ordinarygains.

NET OPERATING LOSS CARRYREQUIREMENTS:1.Net operating loss of the business orenterprise incurred w/in the taxable year2. not previously off-set as a deduction fromthe GI3. carried over as a deduction from the GI forthe next 3 consecutive taxable yearsimmediately following the year of such loss.

Q: Can the period be extended?A: yes, for mines other than oil and gas well.

1. net operating loss w/out the benefitincentives provided by law;2. incurred in any of the first 10 years ofoperation.3. carried over as a deduction from the GIfor the next 5 years following such loss.4. no substantial change in the ownershipof the business or enterprise.

Q: What is the limit?

A: 75% of the nominal value of outstandingshares is held by or on behalf of the samepersons/ corporation

" individual no problem, problem lies withcorporations or enterprises.

ABANDONMENT LOSSES

1. contract area where petroleum operationsare undertaken is partially or whollyabandoned;


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" all (1) accumulated exploration and (2)development expenditures pertaining theretoshall be allowed as a deduction.

2. a producing well is subsequentlyabandoned:"unamortized cost and undepreciated costof equipment directly used therein shall beallowed as a deduction in the years it wasabandoned.

TAKE NOTE:1. if abandoned well is reentered andproduction is resumed; or2. if equipment or facilities are restored intoservice in the year of resumption orrestoration and shall amortized or

depreciated.

Q: What is the Tax benefit rule?A: Last Par. of Sec. 34 E (1): recovery of baddebts previously allowed as deduction in thepreceding year shall be included as part ofthe gross income in the year of recovery tothe extent of the income tax benefits of saiddeduction.

Q: What is a Bad Debt?A: Bad debts shall refer to those debtsresulting from the worthlessness or

incollectibility in whole or in part of amountsdue the taxpayer by others, arising frommoney lent or from uncollectible amounts ofincome from goods sold and servicesrendered.

CHINA BANK VS. CA" bad debts can only be claimed if pursuantto a contract of loan- no bad debts for loss of instruments.

Q: Who claims it?A: a. creditor

b.money lender

Q: What year can it be claimed?A: can be claimed in the year it was actuallysit ascertained to be worthless and chargedoff, meaning cancelled in the books ofaccount.

Q: Do you need to file an action before youcan claim?A: No, all you have to do is prove that you didexert effort to claim or recover the same.

Q: What cannot be deducted as bad debts?

A:1. debts not incurred in connection withthe trade, business and profession of

taxpayer.2. transactions, mered into betweenparties mentioned under Section 36 (B)namely.

a)between members of the familyb)between an individual who ownsmore than 30% of outstandingcapital stock of a corporation andthat corporationc)between two (2) corporations morethat 50% of the outstanding capitalstock of which is owned by or for thesame individuald)between a grantor and fiduciary ofany truste)between two (2) fiduciaries of two (2)

trusts who has the same grantorf) between a fiduciary of a trust andabove fiduciary of such trust

SECURITIES BECOMING WORTHLESS1. ascertained to be worthless andcharged off within the taxable year2. capital asset3. taxpayer, other than a Bank or trustcompany incorporated under Phil. Laws4. substantial part of business is thereceipt of deposit5. considered as a loss from the sale ofcapital assets on the last day of suchtaxable year

34 F DEPRECIATION

Q: What is depreciation?A: It is the gradual dimension in the serviceor useful value of tangible property due fromexhaustion, wear and tear and normalobsolescence.

Q: What kind of property is involved?A: 1. Real property except parcel of land

2. Personal Property

REQUISITES:1. depreciation deduction must bereasonable2. for the exhaustion, wear and tear,including reasonable allowance forobsolescence3. property used in the trade of business


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Q: What do you mean by reasonableallowance?A: it shall include, but not limited to, an

allowance computed in accordance with rulesand regulations prescribed by the Secretaryof Finance, upon recommendation of theCommissioner, under any of the followingmethods:

1.Straight-line method2.Declining balance method3.Sum-of-the-year-digital method; and4.any other method which may beprescribed by the Secretary of Financeupon recommendation of theCommissioner

DEPRECIATION OF PROPERTIES USED IN

PETROLEUM OPERATIONS

1. properties directly related to productionof petroleum

2. allowed under (1) straight line or (2)declining balance method

3. useful life of properties used or relatedto production of petroleum shall be ten(10) years or such shorter life asmay be permitted by theCommissioner.

4. for property not used directly in theproduction of petroleum (1) depreciated

under the straight line method, anduseful life is only five (5) years

DEPRECIATION OF PROPERTIES USED INMINING OPERATIONS

ALLOWANCE FOR DEPRECIATION:1.all properties used in mining operationsother than petroleum operations shall becomputed as follows:

a. if the expected life is ten (10) years orless normal rate of depreciation

b. if the expected life is more than ten (10)years depreciated over any number of yearsbetween five (5) years and the expected life.

REQUIREMENTS:1. depreciation is allowed as a deduction

from 61; and2. contractor notifies the Commissioner at

the beginning of the depreciation periodwhich depreciation rate shall be used.

DEPRECIATION DEDUCTIBLE BY NRAETB ORRFC

" reasonable allowance for the deteriorationof property

1.

arising out of its use or employment2. or non-use in the business, trade orprofession

3. property is located in the Philippines34 G DEPLETION OF OIL and GAS WELLSand MINES" only deduction which is a not selfexecuting deduction

Q: What is depletion?A: the exhaustion wear and tear of naturalresources as in mines, oil, and gas wells"the natural resources called wasting

assets

DEPRECIATION vs DEPLETION

1.involves property 1. involves naturalresources

2. ordinary wearand tear ofequipments

2. ordinary wearand tear of naturalresources

TAKE NOTE:"Equipment used in mining operation isdeductible in depreciation

Q: Method for computing depletion?A: cost depletion method

Q: to whom allowed?A: only mining entities owning economicinterest in mineral deposits"Economic interest: capital investments inmineral deposits

34H CHARITABLE & OTHERCONTRIBUTIONS

TAKE NOTE:1.unique because deducted from the taxablenet income and not from the gross income"second step of the formula deduction

Q: Who is claiming the deduction?A: the donor

Q: Who are the Donees?A: 1.Government of the Philippines or any of

its agencies or any political subdivisionthereof exclusively for public purpose


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2. Accredited Domestic corporation orassociation organized and operatedexclusively for religions, lion, charitable,

scientific, youth and sports development,cultural or educational purposes or forthe rehabilitation of veterans, orto social welfare institution, or to nongovernment organization and no part ofits net income inures to the benefit ofany private stock holder or individual

Q: How many kinds of deduction?A: Two (2) kinds:

1.partial deduction"10% of taxable income in case of anindividual"5% of taxable income in case of

corporations2. full /total deduction

Q: Which of the two kinds is the GeneralRule?

A: General Rule: Partial deductionException: Total /Full deduction

Q: Suppose Mr. A made a cash donation ofP1M. How much can he claim as adeduction?A: First determine the taxable income of Mr Asince he is an individual, he can only deduct

10% of his taxable income.

Q: What if the Donee is not one of thosementioned under the law, can he claim adeduction?A: No.

TAKE NOTE: Donee is never an individual.

Q: If the Donor is a pure compensationincome earner and he donates P100,000 tothe church, can he claim it as a deduction?A: No. pure compensation income earner canonly claim a deduction under Sec 34 M

Q: If Donee is the Philippine Government,what is the requirement?A: it must be made exclusively for publicpurposes

Q: What if the Donee is a province?A: there must be a qualification that it is forpublic purpose

Q: If the Donee is a Domestic Corporation,what is the requirement?

A: no part of its income inures to the benefitof any private shareholder or individual

Q: What are those contributions which can bedeductible in full?A: 1.Donations to the Government no

conflict with partial (differentrequirement)"Partial donated for exclusively publicpurposes"Full, used in undertaking priorityactivities of NEDA

2.Donations to certain ForeignInstitutions or International Organizations"in compliance with agreement, treatiesor commitment entered into by the

Philippine Government and such donees

3.Donations to Accredited Nongovernment organizations Nongovernment organization, non profitdomestic corporation

REQUIREMENTS:1. organized and operated exclusively forscientific, research, educational, characterbuilding and youth and sport development,health, social welfare, cultural or charitablepurposes or a combination thereof

2. no part of the net income of which inuresto the benefit of any private individual3. uses the contributions directly for theactive conduct of the activities constitutingthe purpose or function for which it isorganized and operated

4. annual administrative expense does notexceed 30% of the total expenses and

5. in case of dissolution, the assets of whichwould be distributed to:

a) another non profit domesticcorporation organized for similar purposeor purposesb) to the state for public purposec) distributed by the court to anotherorganization to be used in such a mannerwhich would accomplish the generalpurpose for within the dissolveorganization was organized

34I RESEARCH AND DEVELOPMENT

"In the old law, this is not allowed as adeduction. To remedy this, they felt that


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those should be a separate deduction forresearch and development.

REQUISITES:"tax payer may treat research anddevelopment expenditures as ordinary andnecessary expenses provided:1. it is paid or incurred during the taxableyear2. incurred in connection with trade, businessor profession; and3. not chargeable to capital account.

Q: Treated as such when?A: during the taxable year it is paid orincurred

AMORTIZATION OF CERTAIN RESEARCH ANDDEVELOPMENT EXPENDITURES

"at the election of the taxpayer, thefollowing shall or may be treated as deferredexpenses:

a. paid or incurred by the taxpayer inconnection with his trade, business orprofession;b. not treated as expenses under par 1 andc. chargeable to capital account but notchargeable to property of a character whichis subject to depreciation or depletion

Q: How to compute taxable income:A: deferred expenses shall be allowed asdeduction ratably distributed over a period ofnot less than 10 months as may be electedby the taxpayer (beginning with the monththe

taxpayer first realizes benefits fromexpenditures.)

"the election or option may be exercised forany taxable year after the effectivity of thecode but not later than the time prescribedby law for filing the return for such taxableyear.

LIMITATION ON DEDUCTIONQ: When not deductible?A: 1.Any expenditure for the

(1) acquisition or improvement of land or(2) for the improvement of property to beused in connection with research anddevelopment of a character which issubject to depreciation and depletion andoffice site

2. Any expenditure paid or incurred forthe purpose of undermining theexistence, location, extent or quality of

any deposit of one or other mineralincluding oil or gas." not for mineral exploration

34 J PENSION TRUST

Q: Claimed by Whom?A: the employer

Q; What is a Pension Trust contribution?A: a deduction applicable only to employeron account of its contribution to a privatepension plan for the benefit of its employeededuction is purely business in character.

Q: Requisites?A:1.the employer must have established apension or retirement plan to provide for thepayment or reasonable pension of hisemployees2. pension plan must be reasonable andactually sound;3. it must be funded by the employer4. the amount contributed must no longer besubject to his control or disposition5. the amount has not yet been allowed as a

deduction and6. the amount has or is apportioned in equalparts over a period of 10 consecutive yearsbeginning with the year in which the transferor payment is made.

34 K ADDITIONAL REQUIREMENTS FORDEDUCTIBILITY OF CERTAIN PAYMENTS

"allowed as a deduction only if shown thatthe tax required to be deducted and withheldthere from has been paid to the BIR inaccordance with Section 58 and Section 81

34 L OPTIONAL STANDARD DEDUCTION

KINDS OF DEDUCTIONS:1.Itemized deduction2.Optional Standard Deduction3.Personal /Additional Deduction

OPTIONAL STANDARD DEDUCTION:"can be availed of by an individual who mayelect a standard deduction in an amount notexceeding 10% of his gross income" may apply in lieu of the other deductionsunder Section 34


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"the taxpayer must signify in his return hisintention to elect the optional standarddeduction, otherwise, he shall be considered

as having availed of the itemized deduction.

Q: Who can claim this deduction?A: all individual taxpayers except nonresident alien not engaged in trade orbusiness (NRANETB)Reason: he is not liable to pay by way of theNIT, thus, follows he cannot claim thisdeduction because he is liable to pay by wayof GIT.

TAKE NOTE:"can co-exist with personal and / oradditional exemption

34 M PREMIUM PAYMENTS ON HEALTHAND /OR HOSPITALIZATION INSURANCEOF AN INDIVIDUAL TAXPAYER" for (1) Health and /insurance

(2) Hospitalization

REQUIREMENTS:1. amount of premiums, paid by taxpayer

for himself and members of his family,2. amount of premiums should not exceed

(1) P2,400 per family or (2) P200 amonth

3. gross income of the family for thetaxable year is not more than P250,000

Q: Who can avail of this deduction?A: 1.individual taxpayer earning purely

compensation income during the year;2. individual taxpayer availing itemized oroptional standard deduction; and3. individual taxpayer earning bothcompensation income and income frombusiness

SECTION 35 ALLOWANCE FOR PERSONALEXEMPTION FOR INDIVIDUAL TAXPAYER

Q: When do we apply this?A: apply if individual taxpayer is paying byway of NIT

Q; Who are taxpayer?A: those mentioned under Section 24 (A)

1. RC2. NRC3. OCW4. RA

"all can claim both personal and additionalexemption

Q: Why not include NRAETB? Can the latterclaim any exemption?A: NRAETB is not included because Section 35A refers to Section 24 A"NRAETB can claim personal deductions butnot additional exemptions pursuant to Sec 35D

REQUIREMENTS:1.NRAETB should file a true and accuratereturn2. the amount to be claimed as personalexemptions should not exceed the amountprovided for under Philippine Laws

TAKE NOTE:AEMOP: can be a RA or NRAETB

BASIC PERSONAL EXEMPTIONS:

1. Single individual; or individual judiciallydecreed as legally separated with no qualifieddependents." 20, 000

2. For head of the family can be single orlegally separated with qualified dependents.

" 25, 000

3. For each married individual if only oneof the spouse, earns or derives gross income,only such spouse can claim the personalexemption."32, 000

Q: Who is the head of the family?A: 1.unmarried or legally separated man or

woman2. With (1) one or both parties or

(2) With one or more brothers and

sisters(3) with one or more legitimate,recognized, natural or legally adoptedchildren

3. living with and dependents upon himfor their chief support

4. whose such brother or sisters orchildren are

(1) not more than 11 years old and(2) not gainfully employed,(3) unmarried

5. OR, regardless of age, the same areincapable of self support because ofmental or physical defect.


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Q: Why do we have to determine who thehead of the family is?

A: only legally separated individuals canclaim additional exemptions if they havequalified dependents.

TAKE NOTE:"R.A. 7432 and RR 2-98: a senior citizen canalso be a dependent.

Q: Can a widower claim exemptions?A: exemptions must be strictly construed,

widower not included in the list underSection 35 A but can claim under sec35B

"widower, married or used to be married

MARRIED INDIVIDUALS"each legally married individuals can claimthe personal exemption. Husband and wife =P64,000

Q: Who are allowed to claim?A: Normally , it is the husband who claims

unless he executes a waiver that the wifewill claim the same (RR2-98)

Additional Exemptions: (35B)

-additional exemption of P8,000 for eachdependent not execeeding four (4)

Q: Who can claim the same?A: 1.Married couples: only one of the

spouses can claim it;2.legally separated individuals: can beclaimed by the spouse who has custodyof the child or children"the additional exemption claimed by bothshall not exceed the maximum additionalexemption herein allowed.

Q: Define dependentsA: legitimate, illegitimate or legally adopted

child chiefly dependent upon and livingwith the taxpayer if such dependent is (1)not more than 21 years of age, (2)unmarried, and (3) not gainfully employedor (4) if such dependent, regardless of ageis incapable of self support because ofmental or physical defect.

Q: What if widower has illegitimate children,can claim additional exemption?

A: can claim, can be considered as head ofthe family w/ dependent

Q: What if the children are temporarily awayfrom the parents?

A: still considered living with parents, canclaim exemption

CHANGE OF STATUS: (SEC 35 C)Q: Reckoning Period?A: end of the year or close of such year when

such change of status occurred.

TAKE NOTE:"always choose the higher amount ofexemption if you are filing a return coveringthe period within which the change of statusoccurred

1. if the taxpayer should (1) marry or (2) haveadditional dependents during the taxableyear, he may claim the correspondingexemption in full for the year.

Illustration:1.Single Jan 1, 20052.Married June 1, 2005 on April 15, 2006 status: legally married can claim P 32,000

2. if the taxpayer should die during thetaxable year, estate can claim personalexemption.

Illustration1.Jan. 25, 2005 taxpayer married w/ onechildcan claim on April 15, 2006

P32,000+P8,000

" In this case, as if the change of statusoccurred at the close of taxable year. Iftaxpayers spouse or child dies within thetaxable year or the dependents became (1)gainfully employed (2) got married or (3)became 21 as if the change as statusoccurred at the close of taxable year.Illustration:1. Taxpayers tragic story wife died Jan. 25,2005 and child died the next day thenanother child eloped and get married.2. Taxpayer despite the tragedy can claim tonof money on April 15, 2006.

P 32,000P 16,000 (8,000 per child)48,000

Section 36. Items not Deductible

} P40,000


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36 A.General Rule: In computing net income,no deduction shall be allowed:(1) Personal, living or family expenses not

related to trade or business(2) Section 36 A (2) and Section 36 A (3)General Rule: No deductions allowed for

1. Any amount paid out for new buildingsor for permanent improvements, orbetterments, made to increase the value ofany property or estate2. Any amount expanded in restoringproperty or in making good the exhaustionthereof for which an allowance is or hasbeen made.

Exceptions:1. Option granted to Private Educational

Institution to deduct the same as

capital outlays.TAKE NOTE:"Amount paid for new buildings, can bededucted if it involves intangible drilling anddevelopment cost incurred in petroleumoperations (Sec 34 6 (A)

PREMIUMS PAID ON LIFE INSURANCEPOLICY :

1. covering the life of any officer oremployee or any person financiallyinvested in any trade of business

carried on by the taxpayer.2. taxpayer is directly or indirectly the

beneficiary under such policy.

LOSSES FROM SALES OR EXCHANGES OFPROPERTY (between related parties)

1) between family members

Q: Who is considered the family of thetaxpayer?A: a. brothers and sister (whole is ! blood)

b. spousesc. ancestorsd. lineal descendants

Q: are uncles or nieces included?A: no

IN DONORS TAX"Relatives includes relatives byconsanguinity within the 4th civil code.Nephew is a stranger and relative angnephew.

2) individual and corporations

Gen. Rule: NO DEDUCTIONExcept: distribution in liquidation orless than 50% of the outstanding

capital stock

3) Two corporations4) Grantor or Fiduciary5) Two fiduciaries of two trust6) Fiduciary and beneficiary of trust

Sec. 37 Special provisions regardingdeductions of insurance companies.

Codal ProvisionsSection 38: Losses From Wash Sales of Stockor Securities

Q: What is a wash sale?A: It is a sales or other disposition of stocksecurities where substantially identicalsecurities are purchased within 61 days,beginning 30 days before the sale andending 30 days after the sale.

Q: What period?A: 61 day period beginning 30 days before

and ending 30 days after the saleQ: Jan 20 you purchased share of stock, and

disposed of the same on Feb 5, 2005. Isthis a wash sale?

A: No

Q: If it is a loss in wash sale, happens?A:General Rule: (Sec 131 RR No. 2)gains from wash sale are taxable butlosses are non-deductibleException:"unless claim is made by a dealer in stock orsecurities and with respect to a transactionmade in the ordinary course of the businessof such dealer

Q: Reason why losses in wash sale cannot bededucted?

A: 1. to avoid too much speculationin the market2. taxpayer not telling the truth,because he may say he incurred

a loss instead of a gain

Section 40. Determination of Amount andRecognition of Gain or Loss

GENERAL RULE: This is totally irrelevantif the income is subject to fit. In fit gain ispresumed.


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EXCEPT: sale of shares of stock whereyou have to determine actual gain or loss

Q: When is there a gain?A: excess of the amount realized over thebasis or adjusted basis for determininggain. (amount realized from the sale orother disposition of property)

Q: When is there a loss?A: the amount realized is not in excess of Bor AB

Illustration: 1987 Bar (Juan dela Cruzsold jewelry for 300,000 ) contract of sale"amount realized is 300,000

Q: What will be the basis of the gain?

A: Sec. 40 B (1), property was acquired bypurchase"Cost: purchase price + expenses

Q: If there is a gain, is the whole gain subjectto income tax?

A: it depends"if ordinary asset = 100% is subject toincome tax"if capital assetsa. short term(less than 12 months) :

100% taxableb. long term (more than 12 months):

50% taxable

Q: suppose property sold is a parcel of landwill the rule be the same?

A: No, and it depends"ordinary asset: apply the cost"capital asset: 6% FMV or selling pricewhich ever is higher

Q: Do we apply the holding period?A: No, holding period does not apply to the

sale of real property. This is an absoluterule:

"

If realty is ordinary holding perioddoes not apply."If realty is capital asset 6% FMV orselling price applies.

"Holding period applies only to sale ofpersonal property which is a capital assetexcept sale of shares of stocks.

"Holding period also do not apply tocorporations.

Q: If the property is acquired throughinheritance, what is the basis?

A: Sec 40 B (2) fair market value or price as

of the date of acquisition.

Q: Suppose it was a sale of personal property,do we apply the same principles?

A: No.Q: What if it involves a sale of real property?A: Apply the same principles

Suppose it was a result of swindling, theft,robbery or estafa, do we apply thesame principles?

A: Law is silent, take note of the old CIAruling on this one

Q: Feb 14, 2006, your GG gave you a jewelryin Sept your GG breaks up with you. GGrequest the jewelry be returned but youalready sold it for P200,000. Will theentire P200,000 be included in grossincome?

A: Basis: (1) same as if it would be in thehands of the Donor (FMV as of date ofacquisition); or (2) last owner who did notacquire the same by gift (cost)

Q: If it involves a parcel of land?

A: apply the same rules Section 40 B (4)what is the basis?

1. Property was acquired for lessthan an adequate consideration inmoney or moneys worth: the basiswould be the amount paid by thetransferee for the property.

Q: Section 40 B (5) what is the basis? A: 40 C(5)" if the property was acquired in atransaction where gain or loss is notrecognized (pursuant to a merger orconsolidation plan)

a. corporation, party to a merger orconsolidation, exchanges propertysolely for stocks in anothercorporation, also a party to themerger or consolidation

b. is a party to the merger orconsolidation, solely for the stocks ofanother corporation also a party tothe merger or consolidation, or

c. Security holder of a corporation,party to a merger or consolidation,exchanges his securities solely forstock or security in another


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corporation, also a party to themerger or consolidation. persontransfers property to corporation to

gain control

40 C EXCHANGE OF PROPERTY

GENERAL RULE: In sale or exchange ofproperty, the control amount of gain or lossshall be recognized.

1. gain is taxable2. losses are deductibleException: If permanent to a merger orconsolidation plan, no gain or loss shallbe recognized

1. gain is exempt2. losses are not deductible

REQUISITES:1. the transaction involves a contract of

exchange2. the parties are members of the

merger or consolidation

3. the subject matter is only limited orconfined with the one provided for bylaw

"Merger and Consolidation in corporationcode and tax code are not the same."Sec 40 (2) (a)

"a corporation which is a party to amerger or consolidation, exchangesproperty solely for stock in a corporationwhich is a party to the merger orconsolidation

Illustration:Transferor gives 1MTransferee gives 700,000 = nottaxble gain P300,000

"If other property received by transferee (40C (3) (a) TRANSFEREE"if the party receives not just the subjectmatter permitted to be received: lie if theparty receives money and /or property,the gain, if any, but not the loss, shall berecognized (meaning taxable) but in anamount not in excess of the sum of themoney and the FMV of such otherproperty received.

(40 C (3) (b) TRANSFEROR

1.Transferor corporation receives money and/ or property, distributes it pursuant to themerger or consolidation plan

"no gain to the corporation shall berecognized2. Transferor corporation receives money and

/ or property, does not distribute it pursuantto the merger or consolidation plan"the gain shall be recognized but in anamount not in excess of the sum of suchmoney and the FMV of such other property soreceived.

Q: What is the rule?A: 40 C (3) (a)

1. gain taxable2. loss not deductible"40 C (3) (b)

It depends on how distributed:1. pursuant to the merger or

consolidation plan:"gain exempt"loss not deductible

2. not pursuant to merger orconsolidation plan:"gain taxable"loss not deductible.

Sec 40 C (1) (b)"a shareholder exchanges stock in acorporation which is a party to a mergeror consolidation, solely for the stock ofanother corporation which is a party to

the merger or consolidation

Sec 40 C (2) (c)" a security holder of a corporationwhich is a party to the merger orconsolidation, exchanges his securities insuch corporation, solely for stocksecurities in another corporation.

"The rule is similar in 40 C (3), (a), (b) and(c) although different property are involve,that is why the last paragraph of 40 C is aseparate paragraph.

"Therefore, Sec 40 C (3) (a,b,c) the rule is1. gain exempt2. loss not deductible

40c last paragraph" the transferee becomes a stockholder,parties are not members of the merger

"the individual wants to be ashareholder but does not want topurchase shares but willing to give up


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property as a result of the exchange , theperson gains control of the corporation

"The rule is:a. gain is exempt

b. loss not deductibleRequisites:

1. There is A contract of exchangewhere property was transferred bythe person in exchange of stockor unit of participation in acorporation.

2. As a result, the person alone ortogether with others (notexceeding of 4 persons) gainscontrol of the corporation.

Q: What is control?A: ownership of stocks in a corporation

possessing at least 51% of total votingpower.

Sec 40 B (5)"non applicability of income tax is onlytemporary

Reason : Basis will be 40 C (5)1. 40 C (5) (a) Transferor"basis of stock or securities received bythe transferor: same as the basis of the

property, stock or securities exchanged:"decreased by the (1) money and (2)

FMV of the property received; and"increased by (a) amount treated as

dividend and (b) amount of gainrecognized

2. 40 C (5) (b) Transferee"as it would be in the hands oftransferor increased by the amount ofgain recognized.

Sec 40 (c) (4) Assumption of Liability

1.

Taxpayer, in connection with theexchanges described receivessecurities or stocks permitted (nogains recognized) it is soleconsideration of the same the otherparty assumes liability of the same the acquisition of liability not treatedas money and / or other property the exchange still falls within theexceptions.

2. If amount of liabilities assumed +amount of liabilities to whichproperty is subjected to exceeds -adjusted basis of the property

transferred the excess shall beconsidered a gain from the sale of acapital asset or of property which is

not a capital asset, as the case maybe.

SECTION 41 INVENTORIES

Purpose: Change of inventory to determineclearly the income of any taxpayer/ to reflectthe true income.

Limitation:1. once every 3 years2. approval of the secretary of finance

Section 43 Accounting Periods

1. Fiscal year2. use of calendar yeara. no annual accountingb. does not keep books of accountc. individuals

"Use of method as in the opinion of thecommissioner clearly reflects the income:

1. no accounting method has beenemployed

2. the method does not clearly reflectthe income

Sec 44 Period in which items of GrossIncome included and Sec 45 Period forwhich Deductions and Credit Taken"Under Sec 44 amount of all items ofgross income shall be included in thegross income for the taxable year inwhich they are received by the taxpayer"Under Sec 45 deductions shall be takenfor the taxable year in which paid oraccrued or paid or incurred.

"Sec 44 and Sec 45 are mentioned in thecode because of the death of the person.

Illustration:Facts: taxpayer dies in the middle of theyearJanuary 1, 2006 June 15, 2006"June 26, 2006 to Dec 31, 2006 theestate is the taxpayer"So the income and deductions from Jan1 to June 25,, included in thecomputation

Section 46 Change of Accounting PeriodQ: Who is the taxpayer?


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A: corporation (taxpayer other thanindividual)

Q: What kinds of accounting period?A: 1.fiscal year2. calendar year

Q: Changes contemplated?

A: 1. fiscal to calendar2. calendar to fiscal3. fiscal to another fiscal

"with the approval of the Commissioner,net income shall be computed on thebasis of the new accounting period.

Q: Calendar to calendar, correct?A: not correct statement

Section 47 (A)Taxpayer: Corporation

1. Fiscal to calendar" separate final or adjusted return shallbe made for the period between the soclose of the last fiscal year for which thereturn was made and (2) the followingDec 31.

2. Calendar to Fiscal"separate final or adjusted return shallbe made for the period between the closeof the last calendar year and the datedesignated as the close of the fiscal year.

3. Fiscal to fiscal"separate final or adjusted return shallbe made for the period between the closeof the former fiscal year and the datedesignated as the close of the new fiscalyear."File return indicating the change inaccounting method

Section 48 Accounting for Long TermContracts

Q: Who are the professionals involved?A: applies to architects and engineers

Q: What is a long term contract?A: it means building, installation orconstruction contracts covering a period inexcess of one (1) year.

Q: Basis of income?

A: a. persons whose gross income is derivedin whole or in part from such contractshall report such income upon the basis

of percentage of consumption.

b. the return shall be accompanied by acertificate of architects or engineersshowing the percentage of completion

c. deduction of expenditures made duringthe taxable year, on account of thecontract is allowed

Section 49 Installment Basis"contemplates a seller of the property

Q: Is it important to know if the property is

personal or real?A: Yes

Q: Sale of Real Property is it important toknow if it is a casual sale or regular sale?

A: No

Requirement: The initial payments do notexceed 25% of the selling price.

Q: If the initial payment exceeds 25% what doyou call it?

A: called deferred sale

Q: Consequence?A: you must pay the whole amount of the tax

Q: Sale of Personal Property, is it important toknow if it is a casual or regular sale?

A: Yes

Casual Sale has Requirements:1. selling price exceeds P1,0002. initial payment not exceeding 25%

selling price

"Regular sale no requirementsCase of Baas

1. subject matter2. sold by way3. agreement4. cash deposit5. post dated promissory notes

(installments)3. 1st installment promissory note was

disconnected4. 2nd installment exchanged with cash -

these two exceeds the selling price5. you only compute cash


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H: Initial payment exceeds 25% installmentbasis is not applicable

RR 2; Section 175: In payment by way ofinstallment promissory note, bills ofexchange and checks will not be consideredin computing the 25% initial downpayment.

Section 50 Allocation of Income andDeductions"tremendous power of theCommissioner to allocate the income anddeduction of several corporations havingthe same interest.

Q: Same interest?A: stockholders substantially the same

Q: Limitations?A: None"That is why it is a great source ofcorruption

Section 51 Individual ReturnsWho are required to file? (ITR)

1. RC2. NRC3. RA4. NRAETB sources within

Q: Who is not mentioned in Sec 51 but liableto pay by way of NIT?

A: OCW/ seaman

Exception:RC OR ALIENS: engaged in trade or practiceof profession in Phil. Shall file ITR regardlessof the amount of gross income.

Q: If OFW is exempt from filing a return, whatis he required to file?

A: Information Return

Q: who are not required to file a return?A:

a. an individual whose gross incomedoes not exceed his total personaland additional exemptions fordependents

b. worker (compensation incomeearners) regardless of the amount ofcompensation shall not required tofile ITR because the management filesit. (RR 3-2002)

c. individuals whose sole income issubject to FIT

d. individuals who are exempt fromincome tax

Exception: IT1. the management files an incorrectreturn

2. the employee has two or moreemployer

51 A (3)

A: not required to file ITR may be required tofile information return

51 B - Where to file?1. authorized agent bank2. revenue district officer

3. collection agent4. duly authorized treasurer of the city ormunicipality where taxpayer resides orhas principal place of business5. office of commissioner if no legalresidence or place of business in Phil

51 CQ: When to file?A: filed on or before the 15th day of April

each year

51 C (1) NIT Payers using CY

"two days provided (calendar)1. on April 15; or2. before April 15 (January, Feb or March)" not December because the calendar year isnot yet over

Fiscal year: 15th day of the 4th monthfollowing the close of the fiscal year.

51 C (2) individuals subject to tax oncapital gainsException: General Rules Sec 581. Sale of shares of stocks"return filed within 30 days after eachtransaction and"Final consolidated return on or beforeApril 15

2.Sale of Real Property"return filed within 30 days following eachsale

51 D Husband and Wife1. Pure compensation income earner separate return RR 3-2000 purecompensation income earner regardless ofamount of income not file ITR.2. Not pure compensation: joint return


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51 E. Return of Parent to Include Income ofChildren

" unmarried minor receives income fromproperty received from living parent included in the parents ITR.Exception:

1.Donors tax has been paid2.Property exempt from donors tax

51 F. Persons Under Disability

Q: Who makes the return?A:

1.duly authorized agent2. duly authorized representatives

3. guardians4.other persons charged with the care ofhis person or property"both incapacitated taxpayer and agentwill be liable for:

1.erroneous return2. false or fraudulent return

51 G Signature Presumed Correct" prima facie evidence the return wasactually signed by the taxpayer

Section 52 Corporation Return

"go back to Sec 51 A (2)

General Rule: Sec 58 Final IncomeTax"return and creditable withholding taxreturn is filed monthly

Exception: Sale of Shares of Stocks(Sec 51 A (2)) Sale of Real Property"RR -17-2003: Sale of Real Propertysubject to final withholding tax, the buyeris deemed the agent.

Sale of Shares of StocksQ: Reasons for filing Final Income tax or FinalConsolidated Return?

A: Reasons:1. FIT whose actual determination of

gain or loss2. in connection with Sec 24 C the

basis of the tax is not the grossincome but the net capital gainsrealized.

In connection with Sec 40:"actual determination of loss or gain

"file a return within 30 days from date oftransaction

TAKE NOTE: In all other income subject toFIT, the gains are presumed

INCOME OF MINORSQ: Minor below 18: Will it be included in theMinors ITR?A: it depends

1. income from property received fromparents" included in parents ITR

Except:a.Donors tax paidb.Property exempt from donors tax

2. income from minors own industry"Minors ITR accomplished by guardianor parents

Q: if the individual is exempt from incometax, can be required to file a return?A: General Rule: NoExceptions:

1.engaged in trade or business; or2.exercise of profession Sec 51 A (2)

SEC 52 CORPORATION RETURNSA.Requirements

Taxpayer: DC or RFC (except NRFC)

ITR Filed: 1. TRUE AND ACCURATEa. quarterly income tax returnb. final or adjusted income tax return

Filed by:1.President;2.Vice President

3. Other principal officer"ITR must be sworn by such officer and thetreasurer or assistant treasurer

B. Taxable Year1. fiscal; or 2. calendar

" corporation cannot change accountingmethod employed without the approval orprior approval of the commissioner (Sec 47)

C. Return of Corporation ContemplatoryDissolution or Recognition1.Within 30 days after:

a. the adoption by the corporation of aresolution or plan for its dissolution; orb. liquidation of the whole or any part ofits capital stock, including a corporationwhich has been notified of possibleinvoluntary dissolution by the SEC; orc. for its reorganization


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2.Render a correct return verified under oathsetting form:

a. forms of the resolution or plan;b. such other information prescribed

3.Secure a tax clearance from the BIR and fileit with the SEC

4.Thereafter, SEC issued a Certificate ofDissolution or Reorganization.

D. Sale of Stocks ITRlook at the previous notes about it

Section 53 Extension of Time to File

Returns

Q: To whom granted?A: CorporationsGrounds: Meritorious case"subject to the provisions of Sec 56Time Extension

Section 54 Returns or Receivers, Trusteesin Bankruptcy or Assignees"the aforementioned persons shall makereturns of net income as and for suchcorporation in the same manner and form

as such organization is required to make.

Section 55 Returns of General ProfessionalPartnership" file a return of its income setting forth

1. items of gross income and ofdeductions allowed by this title (TitleII Tax on Income)

2. Names of partners3. Taxpayer identification number (TIN)4. address of partners5. shares of each partners

"GPP is exempt from corporate income tax

Q: Why is the GPP obliged to file a return?A: to determine the shares of each partners

Section 56 Payment and Assessment ofIncome Tax for Individuals andCorporations

A. Payment of Tax

Q:Who pays the tax of tramp vessels?A: 1.the shipping agents and or the

husbanding agent

2.in their absence, the captains thereof"those people are required to file a returnand pay the tax due before departure

Q: What is the effect of failure to file thereturn and pay the tax due?A: 1.Bureau of Customs may hold the vessel

and prevent its departure until:a. proof of payment of tax is presented;orb. a sufficient bond is filed to answerfor the tax due.

Installment PaymentsTax due: more than P2,000Taxpayer: individuals only (other than

corporation)

Elect to pay the tax in two (2) equalinstallments

a. 1st installment: paid at the time thereturn is filed

b. 2nd installment on or before July 15following the close of the calendaryear

Q: What is the effect of non payment on thedate fixed?

A: The whole amount of tax unpaid becomesdue and demandable together with the

delinquency penalties.

Payment of capital gains tax :Q: Paid when?A: on the date the return is filed

Avail exemption for capital gains:a.no payments shall be required;b. if you fail to qualify for exemption

tax due shall immediately becomedue and payable and subject topenalties

c.seller pays tax submit intention orproof of intent within six (6) monthsfrom the registration of documenttransferring

Q: when is the real property entitled torefund?

A: upon verification of compliance withthe requirements for exemption.

"Report gains on installments under Sec49 tax due from each installmentpayment shall be paid within 30 daysfrom the receipt of such payments."No registration of documenttransferring real property


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1. without a certification fromcommissioner or his duly authorizerepresentative that

a.

transfer has been reportedb. tax has been paidB. Assessment and Payment of Deficiency Tax" Return is filed, the commissioner examinerand assess the correct amount of tax"tax deficiency discovered shall be paidupon notice and demand from thecommissioner.

3 INSTANCES CONTEMPLATED1. file the return and pay the tax2. file the return but not pay the tax3. not file the return and not pay the tax

Section 57 Withholding of Tax at Source

A. Withholding of Taxes"subject to the Rules and Regulations theSection of Finance may promulgate, uponrecommendation of commissioner: Requirethe filing up of certain income tax return bycertain income payees.

Q: Enumeration is all about what?A; Enumer ation about Final Income TaxExcept: Gross Income Tax

1. 25 B (NRANETB)2. 28 B (NRFC)B. Withholding of Creditable Tax at Source

"The Sec. of Finance, uponrecommendation of the commissionerrequire the withholding of a tax on theitems of income payable to natural orjuridical persons, residing in the Phil, bypayor-corporation/ person the sameshall be credited against the income taxliability of the taxpayer for the taxableyear. At the rate of not less than 1% butnot more than 32% thereof.

Q: What is the maximum?A: Maximum: now 35% pursuant to RA 9337Q: When will you allow withholding beyond

15%?A:

For NIT 15% is the maximum1. FIT the amount of withholding is

totally2. GIT - equal to the amount of tax

Tax Free Covenant Bond

"the bonds, mortgages, deeds of trust orother similar obligations of

DC or RFC"contains a contract or provision where theobligor (debtor) agrees to pay the taximposed herein"normally between the creditor and debtor

Q: Who pays the tax?A: Creditor pays the tax by virtue of anagreement the debtor assumes the liabilityand the creditor is now free from payment oftax before it can transfer the property to thebuyer.

Section 58 Returns and Payment of Taxes

Withheld at Source

A. Quarterly Returns and Payment of TaxesWithheld at Source1. covered by a return and paid to:

a. authorized agent bankb. revenue district officerc. collection agentd. duly authorized treasurer of city ormunicipality where withholding agenthas:

1. his legal residence; or2. principal place of business; or3. if corporation , where principaloffice is located

2.Tax deducted and withheld"held as a special fund in trust for thegovernment until paid to the collectingofficers.

3.Return for final withholding tax"filed and paid within 25 days from theclose of each calendar quarter

4.Return for Creditable withholding taxes"

filed and paid not later than last day of themonth following the close of the quarterduring which withholding was made

5. Commissioner, with approval of SecFinance" require withholding agents to pay ordeposit taxes at more frequent intervalswhere necessary to protect the interest of thegovernment

B. Statement of Income Payments Made andTaxes Withheld


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"Withholding agent shall furnish payee awritten statement showing:

1. income or other payments made by

WHA during such quarter or year and2. amount of tax deducted and withheld" statement given simultaneously uponpayment at the request of the payee.

Creditable withholding taxes1. corporate payee not later than the

20th day following the close of thequarter

2. individuals payee not later thanMarch 1 of the following year

Final Withholding taxes"the statement should be given to the

payee on or before January 31 of thesucceeding year.

C. Annual Information Return"Withholding agent shall submit to thecommissioner an annual information returncontaining :

1. the list of payees and income required2. amount of taxes withheld from eachpayees3. other pertinent information required

Final Withholding Tax: AIR

"filed on or before January 31 of thesucceeding year

Creditable withholding tax: AIR"not later than March 1 of the year followingthe year for which the annual report is beingsubmitted"Commissioner may grant WHA reasonableextension of time to furnish and submit thereturn required herein.

D. Income of Recipient1. Income upon which any creditable taxis required to be withheld at sourceshall be included in the return of itsrecipient.

2. the excess of the amount of tax sowithheld over the tax due on hisreturn shall be refunded

3. income tax collected at source is lessthan the tax due on his return difference shall be paid

4. all taxes withheld1. considered trust fund2. maintained in separate account

3. not commingled with other fundsof WHA

E. Registration with Register of Deeds"No registration of any documenttransferring real property shall beeffected by the Register of Deeds unlessthe commissioner or his duly authorizerepresentative has certified that thetransfer (1) has been reported and (2) taxdue has been paid"Register of Deeds requires payment oftax before transfer of property

Section 59 Tax on Profits Collectible fromOwner of other Persons

"Tax imposed under this title upon gains,profits and income not falling under theforegoing and not returned and paid byvirtue of the foregoingshall be assessed by personal return

Intent and Purpose of this Title1. All gains, profits and income of a

taxable class shall be charged andassessed with the corresponding tax.

2. Said tax be paid by the owner of thegains, profit or income or the personhaving the receipt, custody, control or

disposal of the same

Determination of Ownership:"determined as of the year for which areturn is required to be filed

CHAPTER X: ESTATES AND TRUSTS

Section 60: Imposition of Tax1. Estate " property of the decedent

created by an agreement, trust or bylast will and testament

2. Trust "agreement, contract or lastwill and testament

Status:1. Estate: same status as decedent2. Trust: same status as the grantor

Income taxpayer is the Estate:"income of the estate pending partitionor no partition at all:

Three kinds of partition:1. judicial2. extra judicial partition3. or no partition at all


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During partition Estate earns income:1. individual income tax2. corporation corporate income

tax3. estate (Taxpayer = TP)a.Impose Income as if TP is individualb.Impose income as if TP is corporationc.Impose income as if estate itself

"depends whether there is a (1) judicial(2)extra judicial partition or (3) no partition atall

When there is a judicial settlement which isfinal and executory but no partition:Two possibilities:1.Creation of unregistered partnership"Income of the Estate: corporate income tax

2.Creation of Co-ownership"Income of the Estate: Income tax onindividual-co-owner liable in their individual company

Ponce Case:H: After finality heirs did not divide theproperty, the applicable income tax iscorporate income tax because theycontributed money to engage in real estate.

SECTION 61 TAXABLE INCOME (Important)

Taxable income of the estate or trust shallbe computed in the same manner and on thesame basis as ill the use of an individual.

Section 62: Applies during Pendency ofExtra Judicial Settlement

Personal Exemption (P20,000)Individual " it will depend whether

he/she is classified as single, head ofthe family or married

Estate "regardless

Special deductions:Income distributed to the

heirs"if you distribute nothing you cannotclaim this special deductions"if there is a distribution, the heir shallbe liable to pay whether individualcapacity"if there is no distribution, heirs are notliable to pay anything

"Special deduction not apply if individual taxis paid by the Estate itself.

Payment: made by executor, administrator,to creditor to preserve the estate

Sec. 61 and Sec 62"does not apply if estate is subject to

income or corporate income tax"it applies if the estate pays itself duringthe pendency of the judicial settlement

Basis: Sec 60 Cduring the period of administration orsettlement of the estate.

Taxpayer is a Trust:Q; When liable to pay income tax?A: If the trust is revocable (if revocable, Sec61 and 62 also apply)

Parties:

1.Grantor /creator /trustor2.fiduciary / trustee3.beneficiary / Les Qui trust

Q: Who is liable to pay tax:A: If trust revocable:" obligation of the trustee"liability of trust itself and not personal

Liability of trustee:If trust irrevocable"obligation of the grantor"personal liability of the grantor as an

individual

TWO WAYS OF REPORTING INCOME:PURSUANT TO RR2 (1949)

1. report only once(building paid once)

2. after the span of 25 years(payment of building divided per year)

ESTATE TAX:1.Sec 602.Real Estate Tax3. Estate Tax"

transfer tax impose on the Net Estatefor the transfer of property to the heirs orbeneficiary whether real, personal,tangible or intangible

3 KINDS OF TRANSFER TAX:1.Estate Tax2. Donors Tax3. Sec 135 of LGU Transfer of RealProperty

Q: We dont have inheritance tax and doneestax, why?A: 1973 Marcos issued P.D. 69


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Explain: Sec 84, rate is max of 20% of netbefore the rate is 60% plus additionalamount."

resulted to many gimiks through taxavoidance scheme, like creating a familycorporation (only taxable is the stockholderswhich is exempt)"Congress enacted RA 7449 decreased 60%to 35% and then RA 8424 35% to 20%Q: Now is it safe to create a family

corporation?A: No more.

Q: Now: Iba na ang scheme which is bettersale or donation?A:

1.Sale of RP considered capital assets"6% to 1.5% doc. Tax 7.5 % better2.Sale of RP considered ordinary asset"5% to 52% as per use may be3.Donation if given to all compulsory heir" relative lower than 20% which is 15%" stranger: 30% so go with 20%

Q: Who are the taxpayers?A: Sec 104 Estate and Donors1.Estate

a. RCb.NRCc. RA

d. NRA2. Donors Tax

a. RCb.NRCc. RAd. NRAe. DCf. FC

"A corporation cannot die of a naturaldeath.Q: What is the reason for classifying thetaxpayers?

A: 1. NRA and Estate2. NRA and FC Donors = property

outside Phil exempt3. all, other than these 3 taxable w in

and w/outQ: Is Section 104 relevant to all taxpayers?A: No, material only to NRA and FCSection 104 speaks of intangible personalproperty located in the Philippines.

1.Franchise which must be exercised inthe Philippines;2.S.O.B. issued by a Domesticcorporation;

3.S.O.B. issued by foreign corporation atleast 85% of the business of which islocated in the Philippines. do not

confuse with 42 (2

nd

par)4.S.O.B. of foreign corporation whichacquired a business situs in Phil5.S.R. in business, partnership or industryestablished in the Phils

Q: NRA, German donates SOS of FG toFilipina gf, is it subject to donors tax?

A: it depends (you must qualify)1.Subject to donors tax if:

1.S.O.B. FG at least 85% of businesslocated in the Phil

2.S.O.B. FG which acquired a businesssitus in Phil

2.Exempt1.personal property outside of Phil; or2.intangible personal property net taxableif following requisites concern:

A decedent at the time of his death or thedonor at the time of donation was a citizenand resident.

1.of a foreign country which at the time ofhis death or donation did not impose atransfer tax of any manner, in respect ofintangible personal property of citizens ofPhilippines not residing in that foreign

country; or

2. the laws of the foreign country allowsa similar exemption from transfer ordeath taxes of every character ordescription in respect of intangiblepersonal property owned by citizens ofthe Philippines not residing in thatforeign country.

Q: What if citizen of one country and residentof another country will the exemptionapply?

A: No, law requires that he must be a citizenand resident of the foreign country.

Campos Rueda Case:F: NRA died married to Moroccan man, so

she was a Moroccan resident.

Donated SS in DC administrator claimsexemption, ground: In Morocco,intangible personal property of Filipinosnot residing therein is exempt fromtransfer tax.BIR contends: Morocco is not a countrybut a colony of Spain.


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H: claim granted even if it is not a fullpledged state, or its a mere colony, whatmatter is that the foreign law provides for

an exception.

SECTION 84 RATES OF ESTATE TAX

Q: What is the formula for Estate tax?A: Gross Estate (Sec 85)

- Deductions (Sec 86)--------------Net Estatex Rate-------------Taxable net income- Tax credit

---------------------

Tax dueGross estate (define) Sec 104"gross estate include real and personalproperty, whether tangible or intangible,or mixed, wherever situatedNRA: Decedent / Donor propertysituated outside of Philippines notincluded on the gross estate

Section 85 Gross Estate (inclusion)A.Decedents interest

"includes property (1) owned at the time of

death and (2) property not owned at the timeof deathClassic example: Usufruct

Q: if terminated by the death of usufructuary,is it subject to estate tax?

A: Not subject to estate tax

Reason: Exempt Transmission underSec 87 (a)"merger of the usufruct in the owner of

the naked title

Q: is there a conflict between Sec 88 a andSec 87 a? How do you reconcile?

A: No conflict1.Section 87 a contemplates a situationwhere the usufruct is terminated.2.Section 88a contemplates a usufruct fora fixed period. Ex contract of lease

Q: How do you determine the value ofusufruct?

A: Sec. 88 a provides to determine the valueof the right of usufruct, take into accountthe probable life of the beneficiary.

Q: Why definition of gross estate is longerthan definition of gross gift?

A: transfer occurring after death. estate tax

absolute

Transfer during the life time"Normally Donors taxHowever there are exceptions:

1.transfer in contemplation of death (85B)2.revocable transfer (85 C)3.transfer for insufficient consideration

B. Transfer in contemplation of deathRoces case:

F: during lifetime, the following documentwere instituted or executed simultaneously1.will and 2. donation

The heirs insisted to pay Donors tax,Posados the collector tried to collectinheritance tax.unique thing: Donees were also the heirs inthe last will and testamentDonees wanted to pay donors tax becauseit is always lower than the estate tax exceptwhen the donee is a stranger

H: this is a transfer in contemplation of death

Dizon Case:F: Deed of Donation was executed

Dizon died several days thereafter

son claims Donors taxH:Transfers in contemplation of death

Q: What are transfers deemed incontemplation of death?

A: 1.Property was transferred during thelifetime but the decedent:

a. retains possession or receive incomeor fruits of property; orb.retains the right to designate personswho will possess the property or theright to receive fruits or incomec.Revocable Transfers

1.revocable transfers are included in thegross estate

Reason: the decedent retains tremendouspower and control over the property

2.Irrevocable transfers are not included inthe gross estate: exempt

Reason: the decedent losses control overthe property

Notice Not Required because the person hasthe control over the property

D. Property passing under general power ofappointment


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" same with fidel commissary substitution3 parties:1.testator / decedent

2.1

st

heir3.2nd heir

TAKE NOTE: To determine whether includedin Estate or not, know who has the choice todesignate the 2nd heir:"if decedent instructs the 1st heir that he cantransfer the property to whomever he wantsincluded in gross estate"1st heir choice included in gross estate

E. Proceed of Life Insurance1.Beneficiary is the estate"included in gross estate whether

designation is revocable or not

2.Beneficiary is 3rd person" revocable included"irrevocable not included

F. Prior Interest"important only due to the codification ofthe tax code B,C,E, included whether beforeor after the effectivity of the code

G. Transfer for insufficient consideration

Q: Similar provision in Sec 100 (Donors tax)can you apply the two (2) provisionssimultaneously?

A: No, alternative application, one or theother but not both.The application will depend on the time oftransfer or motive:

1.If transferred because of impendingdeath" estate tax2.If transfer because of generosity"Donors tax

Q: Parcel of land was sold for less thanadequate consideration (adequate) torelative for P600,000 when FMV is 1million pesos. Is this subject to transfertax? Is it subject to Donors tax?

A: No, Sec 100 provides the property shouldbe other than real property referred to inSection 24 (D)"Not subject to Donors tax, theapplicable tax is 6% FIT

Q: Will your answer be the same if SOS aresold?

A: No, answer not the same, SOS not propertycontemplated in Sec 24 D (1)"in this case, the amount by which the

FMV of prop exceeds the value of theconsideration shall be deemed a gift andincluded in the computation of the grossgift: subject to Donors Tax

Q: What is the subject matter in 85 G?A: paragraphs 85 B, 85 C, 85 D

Sale in good faith as a defense:1.under Section 100 is not a defense

2. under Section 85 G, it is a defense

H. Capital of Surviving Spouse"correlate with Sec 86 C"both speak of legally married individual"pertains to the separate property ofspouse who survived"capital used in its generic sense"surviving spouse may be man or woman

Section 86 (c)"to determine the limitations of

1. Funeral Expense2. Whether written notice is required3. to determine whether gross value is

at least P200,000 (Sec 90)4.to determine if gross value is at least

42 M

Q: Who are the taxpayers under 86 A?A: 1.RC

2.NRC3.RA

Q: Who is the taxpayer under 86 B?A: NRA

Q: Why do we need to know this?A: NRA cannot avail of the following

deductions:

1.family income2.standard deduction3.hospitalization4.retirement pay under RA 4917

A. Deductions Allowed to the Estate of aCitizen or Resident

1.ELIT (expenses, losses, indebtedness andtaxes)

a) 1.Actual Funeral Expenses; or2.amount equal to 5% of gross estate"apply whichever is lower

Limitation:


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a)amount equal to 5% of gross estateshould not exceed P200,000 (basis isthe gross value)

b) Judicial Expenses"no limitation

Pajonar vs CommissionerI: Whether or not extra-judicial expenses

may be allowed as a deductionH: This law has been copied from U.S. In US,

expenses to be claimed as a deductionboth judicial and extra judicial expenses.

Claims against the estate"Estate is the debtor

Requirements:1.at the time the indebtedness wasincurred the debt instrument was dulynotarized;2.loan contracted within 3 days beforedeath;3.the administrator or executor shallsubmit a statement showing thedisposition of the proceeds of the loan

Claims of the deceased against insolventperson

"Estate is the creditor

Requirement:"the only requirement is that the (only)amount of loan is included in the grossestate"notarization and certification notrequired

Unpaid Mortgage, taxes and lossesQ: In unpaid mortgage who is the

mortgagor?"decedent mortgagor

1. Unpaid mortgage1.value of the decedents interest in theproperty is undiminished by suchmortgage;2.included in the value of the grossestate;

Illustration:1 million FMV but mortgage is only600,000 you include 1 million

2.Estate tax3.Losses

Requirements:

1.losses incurred during the settlement ofthe estate;2.arising from fire, storms, shipwreck or

other casualties, or from robbery, theft orunbezzlement3.losses not compensated by insurance4.losses not been claimed as a deductionfor income as purpose5. losses incurred not better than the lastday for the payment of the estate tax

Property Previously Taxed"Vanishing Deduction ReturnRequirement:

1.person acquires the property by virtue ofdonation or inheritance

Q: What if acquired through purchase?

A: Not apply, the property must be acquiredby inheritance or donation

2.Estate tax or Donors tax already paid bythe Estate of the Decedent (1st par)3.Any person who died within five (5) yearsprior to the death of the decedent

Q: What are the amounts?A: Prior Decedent died within:

1.5years 20%2.4years 40%3.3 years -60%

4. 2years 80%

5. 1 year -100%

Q: Suppose the person died within 1 year andit was inherited by son, suppose the sonalso died within 1 year or may be 2 years,should we apply the vanishingdeductions?

A: No more (last par Sec 86 A2)

Transfer for Public Use"amount of all bequest, legacies, devisesor transfersRecipient:government or any political

subdivision"exclusively for public purposeTake Note: 30% of which not used foradministrative purpose is not arequirement

FAMILY HOME"amount equivalent to the current FMV ofthe Family Home of decedent.Limit: FMV should not exceeds 1 millionotherwise the excess will be subject toestate tax.Requirements: (RR 2-2003)


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1.Person is legally marriedGR: if single not allowed to claimExcept: if head of the family

2.Family Home actual residence of thedecedent3.Certification of Barangay Captain oflocality

STANDARD DEDUCTIONS"automatic: RR 2-2003 no requirementprovided the decedent is the one in 86 (A)(RC, NRC, RA)

MEDICAL EXPENSESRequirements:

1.amount not exceeding P500,0002.medical expenses incurred by the

decedent within one (1) year prior to hisdeath.

"must be duly substantiated with receipt

RETIREMENT PAY UNDER RA 4917(RETIREMENT PAY WITH PRIVATE PLAN)

Requirements:1.plan duly approved by the BIR2.person at least 50 years old3. 10 years in service4. avail only once

TAKE NOTE: This is a deduction in the nature

of exemption, all other retirement plan isexcluded

B. Deductions Allowed to Non residentEstates

1.ELIT2.Property Previously taxed3.Transfers for public use

C. Shares in the Conjugal Property

D. Miscellaneous ProvisionsFor NRA: No deduction allowed unlessinclude in the return the value at the timeof his death that part of his gross estatenot situated in the Philippines. For properdeduction must include E. below

E. Tax Credit for Estate Tax Paid to ForeignCountry

SECTION 87 EXEMPTION OF CERTAINACQUISITION AND TRANSMISSIONS1. Merger of usufruct in the owner of the

naked title;

2. transmission or delivery of theinheritance or legacy by the fiduciary heiror legatee to the fideicommissary;

3. transmission from the first heir, legateeor legacy donee in favor of anotherbeneficiary, in accordance with the desireof the predecessor;

4. All bequest, devises, legacies or transfersto (1) social welfare (2) cultural and (3)charitable institution

Requirements:1.no part of the net income insures to thebenefit of any individual;2.not more than 30% of donation (BDL)shall be used by such institutions foradministration purposes.

SECTION 88 DETERMINATION OF THEVALUE OF THE ESTATEA.Usufruct1.Determine value of right of usufruct:"consider the probable life of thebeneficiary based on the latest BasicStandard Mortality Table

B.Properties"fair market value of the Estate at the timeof death

1.FMV determined by Commissioner2.FMV schedule of values fixed by the

Provincial or City Assessors

SECTION 89 NOTICE OF DEATH TO BEFILED

Q: What is the Basis?A: the gross estate of the person

Q:When is the notice required to be filed?A: 1.all cases of transfer subject to tax

2.although exempt, when gross values ofthe estate exceeds P200,000

Q: When filed?A: within two (2) months

1. after decedents death2.same period after qualifying as executoror administrator"give a written notice

Q: If the Net Estate is at least P16,000 willyou in form the commissioner?

A: yes, the gross is at least 3-4 million

SECTION 90 ESTATES TAX RETURNSQ: When required to file return?A: 1.all cases of transfer subject to tax


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2.even though exempt, gross valueof the estate exceeds P200,0003.regardless of gross value of the

estate, when the same consists ofregistered or registrable prop such as:a.real propertyb.motor vehiclec. shares of stocksd. other similar property whereclearance from BIR necessary fortransfer of ownership in the name ofthe transferee

"return must set forth the following:1.value of the gross estate at time of death2.deductions allowed3.information necessary to establish correct

taxes

Q: What if Estate is exempt, is it required tofile a return?

A: General Rule: NoException:

a. gross value exceeds P200,000b.estate contains registrable property

Q: if the estate or gross estate exceeds 2million, what is the requirement?

A: return must be duly certified by a CPA

B. Time of Filing

"filed within 6 months from decedentsdeath"within 30 days for filing the return"within 30 days after promulgation of suchorder

1.certified copy of the schedule of partitionand2.order of court approving the same

C. Extension of TimeTime: 30 daysGrounds: meritorious casesWho grants: Commissioner

D. Place of filing:"return shall be filed with:

1.authorized agent bank2.revenue district officer3. collection officer4. duly authorized treasurer"city or municipality in which decedentwas domiciled at the time of his death

Q: What if non resident?

A: NR with no legal residence here, with theoffice of the commissioner.

Q: Let us say there are 3 compulsory heirs,namely A, B, and C. A renounces hisinheritance coming from the parents, but Arenounces his inheritance in favor of his 2siblings, brother and sister B and C. Is thissubject to donors tax?A: NO. It is exempt.

Q: But if in the given example, A said I amrenouncing my inheritance, but I am giving itto my sister B, is this subject to donors tax?A: YES. Renunciation is to the disadvantageof the brother.

TAXATION UNDER THE LOCAL GOVERNMENTCODE:

1. Local Tax2. Real Property Tax

LOCAL TAXATION (186, 187, then go to151, 128 down)

Q: Mayor Binay of Makati ordered thecollection of elevator tax (for elevator in thecity hall). Is the order of Mayor Binay legallytenable?A: NO. There should always be a tax

ordinance after conducting a public hearing.(186)

tax ordinance

Q: Can BIR collect the tax even in theabsence of a revenue regulation?A: YES.

Q: Can a province, city, municipality orbarangay collect the tax if there is no taxordinance?A: NO.

Q: Why is it that there should be a taxordinance as required by 186?A: The rationale is not mentioned in 186,but if you read the other provisions of theLGC, you will come to set of conclusions ofthe reason why there must be a taxordinance.

In most of these provisions, it always say:one-half if the town or municipality shallcollect a tax of not exceeding 1% of the grossreceipt.


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TAKE NOTE: There is no exact amount;hence, it is the tax ordinance which will fixthe exact amount.

public hearing

In Congress, the requirement is notabsolute (by discretion only). Under localtaxation (last phrase of 186), therequirement is ABSOLUTE.

REYES vs. SECRETARY (320 SCRA 486)F: In the municipality of San Juan (just

beside Mandaluyong) there was a tax

ordinance passed. Reyes, a resident,claims that there was no public hearingconducted, he maintains that under 186last phrase, there should always be apublic hearing.

H: The SC said: yes, that requirement is anabsolute one, but since the petitionerfailed to produce evidence to support hisallegation, if there is no proof presentedother than his own statement, we herebyrule that the ordinance was passed inaccordance to the procedure mandatedby law. While it is true that a public

hearing is an absolute requirement, hewho alleges, must prove the same.

Q: If you dont agree with the validity or theconstitutionality of the tax ordinance, whatwill be your remedy?A: Within 30 days from the effectivity of theordinance, the taxpayer should file an appealwith the office of the Secretary of the DOJ(187)

REYES vs. SECRETARY (320 SCRA 486)F: Reyes asserted the validity and

constitutionality of the tax ordinance onlyafter the lapse of thirty (30) days(perhaps his lawyer was thinking that anordinary statute may be contestedanytime with the RTC, CA or SC).

H: With regard to a tax ordinance, w have aspecific rule, failure to assail the validitywith the specific period of time, is fatal tothe taxpayer. Since it was filed beyondthe 30day period, we do not disturb thevalidity of the ordinance.

Q: Within what period should the Sec. ofJustice decide?

A: Within 60 days from the time the appealwas filed. Failure to decide within this time,the taxpayer has the remedy to file an action

with the regular courts.

If the decision was made within the 60day period, and receives the decision, hisremedy is to file an appeal within 30daysform the receipt of the decision to court ofcompetent jurisdiction ! RTC.

Beginning April 23, 2004, from the rulingof the RTC, pursuant to RA 9282 (the lawuplifting the standards of the CTA), theruling of RTC on local tax cases, isappealable to the CTA en banc.

TWO APPEALS DECIDED BY THE CTA EN BANC:1. decisions of RTC involving local tax

cases2. decision of the Central Board of

Assessment Appeals.

From CTA en banc, the appeal must befile with the SC within 15days.

Go to 151:The city could impose the tax already

imposed by the province of by themunicipality.

Q: What are the numerous taxes imposableby the province which a city now allowed toimpose?A: Those enumerated in 135 to 141 of theLGC

Reasons why a municipality wanted to beconverted into a city:

1. 1512. 233 (real estate tax)

In addition, the law says that the citycould increase the rate of the tax by notmore than 50% of the maximum EXCEPTthose enumerated in 139:

a) professional taxb) amusement tax

A. General Principles(128-130)

" reiteration of the constitutional taxprovisions

" notice that the constitutional limitationson taxation do not only apply to the nationalgovernment but also to local governmentunits.


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B. Definitions (132)

Local Taxing Authority (132)! for a province, it is the provincial

board or the provincial council(sangguniang panlalawigan)

! for a city, we have the city council(sangguniang panlusod)

! for the municipality, we have themunicipal council (sangguniangpangbayan)

! for the barangay or barrio, we havethe barangay council.

C. Common limitations on the taxing

power of the LGUs (133)

Under the old law this was 5 of the LocalTax Code.

Q: Why common?A: Because the limitations or prohibitionsapply to all LGUs, the provinces, cities,municipalities and barangays.

Two Common Crimes (under 133)1. absolute prohibition2. relative prohibition

It shall be unlawful for the LGUs to collect:I. Income Tax EXCEPT when levied on banksand other financing institutions (133(A))

the term other financing institutionshall include money changer, lendinginvestor, pawnshop (131(E)) rate of tax: does not mention rate oftax, so long as it is fair, just andreasonable It cannot be prohibited taxation,because the element of imposed by thesame taxing power is not present. One isimposed by the national government andthe other is by the LGU.

II. Documentary Stamp Tax (133(B)) absolute prohibition

III. Estate tax, inheritance, donations intervivos, donations mortis causa EXCEPT in135 (133(C))

transfer tax on the transfer of realtyto be imposed by provinces and cities(135)

NOTE: this is not a real estate tax,this is a local tax.

IV. Custom duties, charges or fees for theregistration of vessels or ships, wharfages

fees and wharage dues EXCEPT if the wharfhad been established, maintained andoperated by the locality (133(D))

wharfage due is a custom feeimposed on the weight of the cargoes. wharf a pier special levy on public works (240) allows provinces cities andmunicipalities to impose a special realestate tax known as special levy orpublic works let us say the municipality establisheda pier for a minimal value of P10M; outof P10M, under 240, 60% of this may berecovered; the other 40% may berecovered by warfage due.

v. Tax, fee or charge for goods or

commodities coming out or passing throughthe territorial jurisdiction even if in the guiseof a toll or a fee (133(E))

an absolute prohibition commodities marketed in a publicmarket, lets say in the city of Pasig,where the commodities came fromLaguna then to Tanay, Cainta, Taytay; justimagine if each of the towns will impse1peso for every head of a chicken or50cents for every bundle of vegetable.

PALMA DEVT CORP v. MALANGASZAMBOANGA DEL SUR (113 SCRA 572)

F: Municipal council passed a tax ordinanceentitled police surveillance fee whichprovide that ALL motor vehicle passingthrough a particular street in the townproper of Malangas which will lead to thepier or wharf will pay a certain sum ofmoney whether it is camote, copra,palay,or rice. One of the owners of themotor vehicle is Palma Devt Corp.carrying copra, banana and coconut to beloaded in a ship docked at pier ofMalangas. The lawyer of petitionerassailed the validity of the ordinancestating that it is a clear violation of133(E).

H: It is not the title of the ordinance which iscontrolling but it is the essence of thesubstance of the tax ordinance. The taxordinance clearly violated 133(E),therefore, the SC had no option but todeclare the tax ordinance null and voidfor being in violation of the law.

VI. Taxes, fees or charges on agriculturaland aquatic products when sold by marginalfarmers or fishermen (133(F))

Q: Don Antonio Florendo, a personcoming from Pampanga who settled in


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Davao City, employed thousands ofworkers in the different bananaplantation. Can the LGU impose tax on

the agricultural product which is abanana?A: YES. The LGU can impose becauseDon Antonio is not a marginal farmer. Itis only prohibited if it is sold by amarginal farmer. Marginal Farmer a farmer or afisherman for subsistence only, whoseimmediate members are the immediatemembers of the family (131(P))

VII. Tax, fee or charge on pioneer and non-pioneer enterprise duly registered with theboard of investments for a period of 6yrs and4yrs respectively (133(G))

relative prohibition because after theperiod, the LGU concerned may nowimpose the tax.

VIII. Excise tax on articles and tax, fees andcharges on petroleum products (133(G))

relative prohibition since under143(H), it says there that taxes whichare prohibited such as excise tax,percentage tax and value added taxnonetheless, the LGU may impose a taxnot exceeding 2% of the gross receipt (forcities 3%). My former student an assistant in the

city legal attorney in a city in MetroManila, received a summon from the RTC(on complaint of a supermarket in MetroManila) questioning the validity of the taxordinance under 143(H) since the rateimposed was 3%

I said, ineng, una file kayo ng motionto dismiss. Nak ng puta, absent ka nanaman ata eh, you invoke 151 statingthat a city can impose a tax higher thanthe rate provided for by law not morethan 50% of the maximum (50% of themaximum of 2% is 1, therefore, 2+1 is3%)

BULACAN v. CA (299 SCRA 442)*first case decide by the SC which interpretedboth the LGC and the NIRC.F: The then governor, Obet Panganiban

together with his provincial councilpassed an ordinance imposing tax onquarrying under the provision of 138 ofthe LGC. The problem is that theordinance applies to ALL entitiesquarrying in the province. One of thetaxpayers, Republic Cement obliged topay the tax, argued that under 138 ofthe LGC, the tax on quarrying on which

the province may be allowed shall only bewith regard to quarrying private land, andnot only that but under 133(H), there is

a prohibition to impose excise tax andtax on quarrying under the IRC is anexcise tax.

H: The tax on quarrying allowed toprovincial governments shall only be withregard to lands which are public lands,and since this is a private tax onquarrying refers to a lot without anydistinction. Hence, if the LGC made aqualification as to the kind of land (whereit says it should be public land), byimplication, it should refer to private landunder 151 (although the law did notdistinguish); and since it is a tax by the

national government, it should becollected by the BIR (not the LGU), andalso the SC agreed that it is an excise taxwhere LGUs are prohibited fromcollecting; thus, the SC declared the taxordinance null and void for beingcontrary to law. Sir, why is it a problem when the lawis clear that under 138, it shall onlyapply to public land?

Perhaps the pr

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