Income Taxation 7

8/4/2019 Income Taxation 7

1/21

7


2/21

Income tax has been defined as a tax on all yearly profitsarising from property, profession, trade or business, or asa tax on persons income, emoluments, profits and thelike.

It is generally regarded as an excise tax. It is not leviedupon persons, property, funds or

profits but upon the right of a person to receive income orprofits.


3/21

1.To provide large amounts of revenues.

2.To offset regressive sales and consumption taxes.

3.Together with estate tax, to mitigate the evils arising from

the inequalities in the distribution of income and wealth,which are considered deterrents to social progress, byimposing a progressive scheme of taxation.


4/21

1. There must be gain or profit;

2. That the gain or profit is realized or received, actually orconstructively.

3. It is not exempted by law or treaty from income tax.

[CIR v. CA 301 SCRA 152


5/21

Income in tax laws is an amount of money coming to a personwithin a specified time whether as payment for services,interest or profit form investment. It means cash oritsequivalent. It is gain derived and severed from capital, fromlabor or from both combined.

Stock dividends issued by the corporation are consideredunrealized gain and cannot be subjected to income tax untilthat gain has been realized. Before the realization, stockdividends are nothing but a representation of an interest in thecorporate properties. As capital, it is not yet subject to income

tax. Capital is wealth or fund whereas income is profit or gainor the flow of wealth. The determining factor for the impositionof income tax is whether any gain or profit was derived from atransaction, [Commissioner of Internal

Revenue v. CA 301 SCRA 15


6/21

Income in its broad sense, means all wealth which flows into the taxpayer other

than as a mere return of capital.[ Sec. 36, RR 2]. Income means accession to wealth, gain of flow of wealth. Conwi v. CTA [213 SCRA 83]: Income may be 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. CIR v. BOAC [ 149 SCRA 395] : Income means cash received oritsequivalent. It is the amount of money coming to a person within a specified time.It is distinct from capital for, while the latter is a fund, income is a flow. As used inour laws, income is flow of wealth. The source of an income is the property,activity or service that produces the income. For the source of income to beconsidered as coming from the Philippines, it is sufficient that income is derivedfrom activity within the Philippines. In BOACs case, the sale of tickets in the

Philippines is the activity that produces the income. Fisher v. Trinidad [43 Phil 973] : Stock dividends is not an income. It merely

evidences the interest of the stockholder in the increased capital of thecorporation. An income may be defined as the amount of money coming to aperson or corporation within a specified time, whether as payment for services,interest, or profit for investment. A mere advance in the value of property of aperson or corporation in no sense constitutes the income specified in the

revenue law. Such advance constitutes and can be treated as merely anincrease of capital. An income means cash received or its equivalent. It does notmean choses in action or unrealized increments in the value of ro ert .


7/21

gains derived from:

1. Capital

2. Labor

3. both labor and capital Including gains derived from the sale or exchange of

capital assets.


8/21

Capital is a fund or property existing at one distinct pointof time while income denotes a flow of wealth during adefinite period of time.

The essential difference between capital and income isthat capital is a fund or property existing at one distinctpoint of time; income is a flow of services rendered bythat capital by the payment of money from it or any otherbenefit rendered by a fund of capital in relation to such

fund through a period of time. Capital is wealth, income isthe service of wealth, [Madrigal v. Rafferty, 38 Phil 414].

Capital is the tree, and income the fruits


9/21

The term source of income is not necessarily a place but may alsobe the property, activity or service that produced the income. In thecase of income derived from labor, it is the place where the labor isperformed; in the case of income from the use of capital, it is theplace where the capital is employed; and in the case of profits from

the sale or exchange of capital assets, it is the place where the saleor transaction occurs.

CIR v. BOAC: The source of income is the property, activity orservice that produces the income. For the source of income to beconsidered as coming from the Philippines, it is sufficient that theincome is derived from activity within the Philippines. In BOACs

case, the sale of tickets in the Philippines is the activity that producesthe income. The tickets exchanged hands here and payments forfares were also made in Philippine currency. The site of the source ofincome is the Philippines and the flow of wealth proceeded from andoccurred in Philippine territory, enjoying the protection accorded bythe Philippine government. Thus, said flow of wealth should share

the burden of supporting the government.


10/21

1. Sources within the Philippines;

2. Sources without (outside of) the Philippines;

3. Sources partly within and partly without the Philippines


11/21

The term taxable income means the pertinent items of

gross income specified in the NIRC, less deductionsand/or personal and additional exemptions, if any,authorized by such types of income by the NIRC or other

special laws.

Taxable income, however, does not include itemsreceived which do not add to the taxpayers net worth ordoes not redound to his benefit, such as amounts merely

deposited or entrusted to him.


12/21

1. There must be gain or profit.

2. The gain must be realized or received.

3. The gain must not be excluded by law or treaty from

taxation

Gain must be realized or received

This implies that not all economic gains constitute taxable

income. Thus, a mere increase in the value of property isnot income, but merely an unrealized increase in capital


13/21

1. Actual receipt;

2. Constructive receipt


14/21

Income which is credited to the account of set apart for ataxpayer which may be drawn upon by him at any time issubject to tax for the year during which so credited or setapart, although not then actually reduced to possession.

To constitute receipt in such a case, the income must becredited to the taxpayer without any substantial limitationor restriction as to the time or manner of payment ofcondition upon which payment is to be made, [Sec. 52,RR 2].

Limpan Investment Co. was deemed to haveconstructively received rental payments in 1957, whenthey were deposited in court due to its refusal to receivethem. [Limpan v CIR, 17 SCRA 703].


15/21

1. Interest coupons which have matured and are payable,but have not been cashed.

2. Defaulted coupons are income for the year in whichpaid.

3. Partners distributive share in the profits of a generalpartnership is regarded as received by the partner,although not yet distributed.


16/21

Under the Accrual basis method of accounting, income isreportable when all the events have occurred that fix thetaxpayers right to receive the income, and the amount can bedetermined with reasonable accuracy. Thus, it is the right toreceive income, and not the actual receipt that determines

when to include the amount in gross income. Gleanable fromthis notion are the following requisites of accrual method ofaccounting:

1.That the right to receive the amount must be valid,unconditional and enforceable, i.e. not contingent upon future

time;

2.The amount must be reasonably susceptible of accurateestimate; and

3.There must be a reasonable expectation that the amount willbe paid in due course


17/21

Found treasure Award of punitive damages Award of damages for breach of

promise or alienation of affection Worthless debts subsequently

collected

Tax refund

Non-cash benefits

Income from illegal sources Psychological benefits of work Give away prizes Scholarships/fellowships Stock dividends

YES YES YES

YES

Generally NO, but, YES, if the taxwas previously allowed as adeduction and subsequentlyrefunded or credited, as benefitaccrued to the taxpayer;

YES

YES NO YES YES NO


18/21

1. Severance test

2. Substantial alteration of interest test

3. Flow of wealth test


19/21

As capital or investment is not subject to tax, the gain orprofit derived from the exchange or transaction of saidcapital by the taxpayer for his separate use, benefit anddisposal is income subject to tax.


20/21

Income is earned when there is a substantial alteration of the interestof a taxpayer, i.e. increase in proportionate share of a stockholder ina corporation.

Income to be subject to taxation, must be fully and completelyrealized. Where there is no separation of gain or profit, or separationof increase in value from capital, there is no income subject to tax.

Thus, stock dividends are not income subject to tax on the part of theshareholder for he had the same proportionate interest in the assetsof the corporation as he had before, and the stockholder was noricher and the corporation no poorer after the declaration of thedividend. However, the pre-existing proportionate interest of the issubstantially altered, the income is considered derived to the extent

of the benefit received Moreover, if as a result of an exchange of stocks, the person

received something of value which are essentially and fundamentallydifferent from what he had before the exchange, income is realizedwithin the meaning of the revenue law.


21/21

The essential difference between capital and income isthat capital is a fund whereas income is the flow of wealthcoming from such fund, capital is the tree, income thefruit. Income is the flow of wealth other than as a mere

return of capital. Hence, any proceeds from the use ofcapital, beyond the amount of the capital is considered asincome.

Income Taxation 7

Documents