WEEK FOUR

V. CONSTRUCTION OF TAX LAWS

A. General Rules of Construction of Tax Laws

General rule:
 No person or property is subject to taxation unless within the terms or plain
import of a taxing statute.
 In case of doubt, tax statutes are construed strictly against the government and
liberally in favor of the taxpayer.
 Taxes being burdens, they are not to be presumed beyond what the statute
expressly and clearly declares.
 Tax statutes offering rewards are liberally construed in favor of informers. (2)

i. CASES:
1. Stevedoring v Trinidad, G.R. No. L-18316, September 23, 1922, 43
Phil. 803
2. Lorenzo v. Posada, G.R. No. L-43082, June 18, 1937, 64 Phil 353
3. Umali v. Estanislao, G.R. No. 104037, May 29, 1992, 209 SCRA
446
4. CIR v. Solidbank, G.R. No. 148191, Nov. 25, 2003
5. Collector v. La Tondena, G.R. No. L-10431, April 30, 1964, 5
SCRA 665

B. Mandatory vs. Directory Provisions

i. CASES:
1. Serafica v Treasurer of Ormoc City, G.R. No. L-24813, April 28,
1969, 27 SCRA 110
2. Roxas v. Rafferty, G.R. No. 12182, March 27, 1918, 37 Phil 958
3. Pecson v. CA, G.R. No. 115814, May 26, 1995, 222 SCRA 580
C. Application of Tax Laws
i. Art. 2, Civil Code

ARTICLE 2. Laws shall take effect after fifteen days following the

completion of their publication either in the Official Gazette or in a
newspaper of general circulation in the Philippines, unless it is otherwise
provided
 ii. CASES:
1. CIR v. CA, G.R. No. 119761, August 29, 1996
2. CIR v. Michel Lhuillier, G.R. No. 150947, July 25, 2003
3. CIR v. Benguet Corp., G.R. No. 134587, July 8, 2005

VI. EXEMPTIONS FROM TAXATION

A. In General

Exception:

 The rule of strict construction as against the government is not applicable where the
language of the tax statute is plain and there is no doubt as to the legislative intent. In
such case, the words employed are to be given their ordinary meaning.
 Tax statutes are to receive a reasonable construction with a view to carrying out their
purpose and intent. They should not be construed as to permit the taxpayer to easily
evade the payment of tax. Thus, good faith of the taxpayer is not a sufficient justification
for exemption from the payment of surcharges imposed by the law for failing to pay tax
within the period required.
 A tax statute should be construed to avoid the possibilities of tax evasion.

i. CASES:
1. Greenfield v. Meer, G.R. No. 156, Sept 27, 1946, 77 Phil 394
2. Basco v. PAGCOR, G.R. No. 91649, May 14, 1991, 196 SCRA 52
3. CIR v Botelho Shipping Corp., G.R. Nos. L-216334-34m June 29,
1967, 20 SCRA 487
4. Phil. Acetylene v CIR, G.R. No. L-19707, August 17, 1967, 20
SCRA 1056
5. PLDT v. Davao City, G.R. No. 143867, August 22, 2001
B. Compared with Other Terms
i. Tax Remission/Condonation

Condonation or remission of debt is a mode of extinguishing an obligation.

 It is an act of liberality, by virtue of which the creditor, without receiving any
equivalent, renounces the enforcement of the obligation (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines). It
simply means that by a generous act of a person who, for instance, lends
money to another with an obligation to re-pay, the borrower is released
from such obligation. In estate taxation, indebtedness is an allowable
deduction in the tax computation.

1. CASE:
a. Surigao Con. Min. v. Collector, G.R. No. L-14878,
December 26, 1963, 9 SCRA 728
ii. Compromise and Tax Amnesty

Compromise
 Compromises are generally allowed and enforceable when the
subject matter thereof is not prohibited from being compromised and
the person entering such compromise is duly authorized to do so.
 The law allows the ff: persons to do compromise in behalf of the
government:

i. BIR Commissioner as expressly authorized by the NIRC

subject to certain conditions [Sec. 204, NIRC];
ii. Collector of Customs with respect to customs duties limited
to cases where the legitimate authority is specifically granted
such as in the remission of duties [Sec. 709, TCC]; and
iii. Customs Commissioner subject to the approval of the
Secretary of Finance, in cases involving the imposition of
fines, surcharges, and forfeitures [Sec. 2316, TCC].

Tax Amnesty

a. Meaning – It is the general or intentional overlooking by the State of its

authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law. It partakes of an absolute forgiveness
or waiver of the Government of its right to collect.
b. It is a way to give tax evaders, who wish to relent & are willing to reform
a chance to do so.

1. RA 9480 / RA 11213
2. CASES:
a. CIR v. CA, G.R. No. 119761, August 29, 1996, 240
SCRA 368
b. CIR v. Marubeni, G.R. No. 137377, December 18,
2001
iii. Exclusion/Deduction
 1. Sec. 32(B), NIRC
2. Sec. 34, NIRC
C. Construction of Tax Exemptions

General rule:
 Exemptions are not favored and are construed strictissimi juris [by the most
strict right or law] against the taxpayer.
 An exemption from the common burden cannot be permitted to exist upon
vague implication or inference
 The fundamental theory is that all taxable property should bear its share of
the cost and expense of government.
 Applying the rule of strict construction to statutory provisions granting tax
exemptions [or deductions] would minimize differenti
 al treatment and foster fairness and equality of treatment among taxpayers.
Taxation is the rule and exemption, the exception.
 Therefore, whoever claims exemption must be able to justify his claim or
right thereto, by a grant expressed in terms “too plain to be mistaken and
too categorical to be misinterpreted.”
 If not expressly mentioned by law, it must at least be within its purview by
clear legislative intent.
 Claims for refund partake of the nature of tax exemptions and will not be
allowed unless granted in the most explicit and categorical language. (2)

Exception:

 When the law itself expressly provides for a liberal construction, that is, in case of doubt,
it shall be resolved in favor of exemption
 When the exemption is in favor of the government itself or its agencies because the gen.
rule is that they are exempt from tax.
 When the exemption refers to religious, charitable and educational institutions.
 If there is an express mention or if the taxpayer falls within the purview of the exemption
by clear legislative intent, the rule on strict construction does not apply.

i. CASES :
1. CIR v CA & YMCA, G.R. No. 124043, October 14, 1998, 298
SCRA 83
2. Misamis Oriental Asso. V. DOF, G.R. No. 108524, November 10,
1994, 238 SCRA 63
3. Nestle Phils. v. CA, G.R. No. 134114, July 6, 2001
4. Maceda v. Macaraig, G.R. No. 88291, May 31, 1991, 196 SCRA
771
5. Maceda v. Macaraig, G.R. No. 88291, Jun 8, 1993, 223 SCRA 217
VII. OTHER DOCTRINES IN TAXATION
A. Prospectivity of Tax Laws
i. Sec. 246, NIRC
any revocation, modification, or reversal of any of the rules and
regulations shall be not be given retroactive application if such will be
prejudicial to the taxpayers

Non-retroactive application to taxpayers

 The (tax) law cannot be given retroactive effect. It is established
that tax laws are prospective in application, unless it is expressly
provided to apply retroactively. Carmelino F. Pansacola v. CIR,
[G.R. No. 159991, November 16, 2006]
 A tax law should not be given retroactive application when it would
be harsh and oppressive, for in such case, the constitutional
limitation of due process would be violated.
 Sec. 246 of the NIRC provides that any revocation, modification or
reversal of any of the rules and regulations promulgated in
accordance with Secs. 244 and 255 or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be
prejudicial to the taxpayers.

Exceptions:
 While it is not favored, a statute may nevertheless operate
retroactively provided it is expressly declared or is clearly the
legislative intent. For instance: the universal practice of
increasing taxes on income already earned.
 The rules and regulations promulgated by the CIR shall be
retroactive in the following cases:

i. Where the taxpayer deliberately misstates or omits

material facts from his return or any document required
of him by the Bureau of Internal Revenue;
ii. Where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the
facts on which the ruling is based; or
iii. Where the taxpayer acted in bad faith.

ii. CASES:
1. San Miguel Corporation v. CIR, CTA Case Nos. 7052 and 7053,
Oct. 18, 2011
2. CIR v. CA and Alhambra Industries, Inc., G.R. No. 117982.
February 6, 1997
3. Republic v. Fernandez, G.R. No. L-9141 (1956)
4. Central Azucarera v. CTA, G.R. No. L-23236 (1967)
B. Imprescriptibility of Taxes
Prospectivity of tax laws

 This principle provides that a tax bill must only be applicable and operative
after becoming a law.

 As a general rule, taxing authorities must be applied prospectively, except

by express provision of the law.

 Ex post facto is not applicable for tax purposes. However when it comes to
civil penalties like fines and forfeiture (except interest), tax laws may be
applied retroactively unless it produces harsh and oppressive
consequences w/c violate the taxpayer’s constitutional rights regarding
equity and due process Fernandez v. Fernandez, [99 Phil. 934];
Commissioner v. Filipinas Cia de Seguros, [107 Phil. 1055].

Imprescriptibility
 Unless otherwise provided by the tax law itself, taxes in general are not
cancelable Commissioner v. Ayala Securities Corporation, [101 SCRA
231].
 Although the NIRC provides for the limitation in the assessment and
collection of taxes imposed, such prescriptive period will only be applicable
to those taxes that were returnable. The prescriptive period shall start from
the time the taxpayer files the tax return and declares his liability Collector
v. Bisaya Land Transportation Co., [1958]
 As to IAET, the court held that there is no time limit on the right of the BIR
Commissioner to assess this type of tax [Sec. 25, NIRC].
 The law on prescription being a remedial measure should be interpreted
liberally in order to protect the taxpayer. Republic vs. Ablaza, [108 Phil
1105]

DOCTRINE OF IMPRESCRIPTIBILTY
As a rule, taxes are imprescriptible as they are the lifeblood of the government.
However, tax statutes may provide for statute of limitations.

The rules that have been adopted are as follows:

a.) National Internal Revenue Code The statute of limitation for assessment of tax if
a return is filed is within three (3) years from the last day prescribed by law for the
filling of the return or if filed after the last day, within three years from date of actual
filling. If no return is filed or the return filed is false or fraudulent, the period to
assess is within ten years from discovery of the omission, fraud or falsity. The
period to collect tax is within three years from date of assessment. In the case,
however, of omission to file or if the return filed is false or fraudulent, the period to
collect is within ten years from discovery without need of an assessment.

b.) Tariff and customs code It does not express any general statute of limitation; it
provided, however, that ‘’ when articles have entered and passed free of duty or
final adjustment of duties made, with subsequent delivery, such entry and passage
free of duty or settlement of duties will, after the expiration of one (1) year, from the
date of the final payment of duties, in the absence of fraud or protest, be final and
conclusive upon all parties, unless the liquidation of import entry was merely
tentative.” (Sec 1603,TCC)

c.) Local Government Code Local Taxes, fees, or charges shall be assessed within
five (5) years from the date they became due. In case of fraud or intent to evade
the payment of taxes, fees or charges the same may be assessed within ten (10)
years from discovery of the fraud or intent to evade payment. They shall also be
collected either by administrative or judicial action within five (5) years from date of
assessment (Sec. 194. LGC)

Rules on Prescription

1. When the tax law itself is silent on prescription, the tax is imprescriptible

2. When no return is required, tax is imprescriptible

NOTE: Remedy of taxpayer is to file a return a. Prescriptive period for assessment

GENERAL RULE – 3 years after the date the return is due or filed, whichever is
later (Sec 203)

Note:
A return filed before the last day prescribed by law for filing shall be considered as
filed on the last day. - False, fraudulent, and non-filing of returns

EXCEPTIONS:
1. Failure to file return: 10 years from date of discovery of the omission to file the
return (Sec. 222A)
2. False or fraudulent return with intention to evade the tax: 10 years from the date
of the discovery of the falsity or fraud (Sec 222A)
a. Nothing in Sec 222A shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the provisions of
any tax amnesty law or decree.

c. Fraud must be alleged and proved as a fact. It must be the product of a

deliberate intent to evade taxes. It may be established by the:

– intentional and substantial understatement of the tax liability by the

taxpayer (substantial under declaration of income; >30% of that declared
[Sec. 248])

– intentional and substantial overstatement of deductions of exemptions

(>30% of the actual deductions [Sec. 248])

c. Falsity constitutes a deviation from the truth due to mistake, carelessness or

ignorance.
 NOTE:
1. Agreement in writing to the extension of the period to assess between the CIR
and the taxpayer before the expiration of the 3 year period. “Section 222 (b) of the
NIRC provides that the period to assess and collect taxes may only be extended
upon a written agreement between the CIR and the taxpayer executed before the
expiration of the three-year period... The waiver must be signed by the taxpayer
himself or his duly authorized representative. In the case of a corporation, the
waiver must be signed by any of its responsible officials. In case the authority is
delegated by the taxpayer to a representative, such delegation should be in writing
and duly notarized. The waiver should be duly notarized.“ CIR v. Kudos Metal
Corp. [G.R. 178087, May 5, 2010]

2. Notice of the assessment must be released, mailed or sent to the taxpayer within
the 3 year period. It is not required that the notice be received by the taxpayer
within the prescribed period. But the sending of the notice must clearly be proven.
Basilan Estate v. CIR, [G.R. No. L-22492, September 5, 1967]

i. CASES:
1. CIR v. Ayala Securities Corp., G.R. No. L-29485, November 21,
1980, 189 Phil 159-168
2. Commissioner v. Standard Chartered Bank, G.R. No. 192173 (2015)

C. Double Taxation

Double Taxation (DT)

a. Direct Duplicate Taxation (Strict sense) –

To constitute double taxation in the objectionable or prohibited sense: The

same property must be taxed twice when it should be taxed once;
Both taxes must be imposed:
 On the same property or subject matter;
 ii. For the same purpose;
 iii. By the same State Government or taxing authority;
 iv. Within the same jurisdiction or taxing district;
 v. during the same period; and vi. they must be the same kind
or character of tax Villanueva v. City of Iloilo, [26 SCRA 578]

b. Indirect Duplicate Taxation (Broad sense) – It means indirect duplicate

taxation. It extends to all cases in w/c there are two or more pecuniary
impositions. The Constitution does not prohibit the imposition of double taxation
in the broad sense

c. Constitutionality of DT – The SC held that there is no constitutional prohibition

against double taxation in the Phils. Villanueva v. City of Iloilo, [26 SCRA 578],
therefore it is not a valid defense against the validity of a tax measure Pepsi Cola
 v. Tanauan, [69 SCRA 460].
 There is no double taxation in the following cases:
 By taxing corporate income and stockholders’ dividends from the
same corporation
 ii. Tax imposed by the State and the local government upon the
same occupation, calling or activity
 iii. Real estate tax and income tax collected on the same real
estate property leased for earning purposes. Villanueva vs. City
of Iloilo, [26 SCRA 578]
 iv. Taxes are imposed on taxpayer’s final product and the
storage of raw materials used in the production of the final
product. Procter and Gamble Philippines vs. Municipality of Jana,
[94 SCRA 894]

Modes of eliminating DT

(1) Provide for exemptions or allowance of deduction or tax credit for foreign taxes
(2) Enter into treaties with other states [like the former Phil-Am Military Bases
Agreements as to income tax]
(3) Application of the Principle of Reciprocity

i. CASES:
1. Procter & Gamble Co. v Mun of Jagna, G.R. No. L-24265,
December 28, 1979, 94 SCRA 894
2. Punzalan v Mun Board of Manila, G.R. No. L-4817, May 26, 1954,
95 Phil. 46
3. CIR v. SC Johnson & Sons, Inc., G.R. No. 127105, June 25, 1999,
309 SCRA 87

D. Power to Tax Involves the Power to Destroy

i. CASES:
1. Sison v. Ancheta, G.R. No. 59431, July 25, 1984, 130 SCRA 654
2. Roxas v. CTA, G.R. No. L-25043, April 26, 1968, 23 SCRA 276

E. Doctrine of Equitable Recoupment

DOCTRINE OF EQUITABLE RECOUPMENT NOT FOLLOWED IN THE

PHILIPPINES A tax presently being assessed against a taxpayer which has
prescribed may not be recouped or set-off against an overpaid tax the refund of
which is also barred by prescription. It is against public policy since both parties are
guilty of negligence.

i. CASE:
1. Collector v. Univ of Sto. Tomas, G.R. No. 11274, 104 Phil. 1062
F. Taxpayer’s Suit

Not every action filed by a taxpayer can qualify to challenge the legality of official
acts done by the government. A taxpayer's suit can prosper only if the
governmental acts being questioned involve disbursement of public funds upon the
theory that the expenditure of public funds by an officer of the state for the purpose
of administering an unconstitutional act constitutes a misapplication of such funds,
which may be enjoined at the request of a taxpayer. [Dean Jose Coya v. PCCG
G.R. No. 96541, August 24, 1993]

A taxpayer’s suit is properly brought only when there is an exercise of the spending
or taxing power of Congress. Automotive Industry Workers Alliance v. Romulo
[G.R. No. 157509. January 18, 2005]

DISTINGUISHED FROM CITIZEN’S SUIT

Taxpayers are allowed to sue, for example, where there is a claim of illegal
disbursement of public funds or where a tax measure is assailed as
unconstitutional. Voters are allowed to question the validity of election laws
because of their obvious interest in the validity of such laws. Concerned citizens
can bring suits if the constitutional question they raise is of "transcendental
importance" which must be settled early. Legislators are allowed to sue to question
the validity of any official action which they claim infringes their prerogatives qua
legislators. KILOSBAYAN v. Morato, [G.R. No. 118910, November 16, 1995]
 i. CASE:
1. Bagatsing v. San Juan, GR No. 97787, Aug 1, 1996, 329 Phil. 8-15
G. Escape from Taxation; Tax Evasion; Tax Avoidance

i. Sec. 254, NIRC

SEC. 254. Attempt to Evade or Defeat Tax.  - Any person who willfully

attempts in any manner to evade or defeat any tax imposed under this
Code or the payment thereof shall, in addition to other penalties provided
by law, upon conviction thereof, be punished by a fine not less than
Thirty thousand (P30,000) but not more than One hunderd thousand
pesos (P100,000) and suffer imprisonment of not less than two (2) years
but not more than four (4) years: Provided, That the conviction or
acquittal obtained under this Section shall not be a bar to the filing of a
civil suit for the collection of taxes.

ii. CASES:
1. Republic v. Gonzales, G.R. No. L-17962, April 30, 1965, 13 SCRA
633
2. Delpher Traders v. IAC, G.R. No. L-69259, January 26, 1988, 157
SCRA 349
3. CIR v. Lincoln Philippine Life, G.R. No. 119176, Mar. 19, 2002
H. Shifting of Tax Burden
i. Tax shift or Tax swap
ii. Impact of Tax
 iii. Tax Incidence

VIII. FUNCTIONS OF THE BIR; JURISDICTION OF THE COURT OF

TAX APPEALS A. Powers and Duties of the BIR; Interpret Tax Laws and
Decide Tax Cases i. Sections 2-18, 21, 244-246, NIRC
ii. CASES:
1. CIR v. CA, CTA, and Fortune Tobacco Corporation, 261 SCRA 236
(1996),
2. Marcos v CA, 339 Phil 253, 271-273 (1997)
3. Philippine Bank of Communications v. CIR, 203 SCRA 241 (1999)
4. Secretary of Finance v La Suerte Cigar, GR No. 166498, June 11,
2009
5. ABS-CBN Broadcasting Corporation v. CTA, 108 SCRA 142
6. CIR v. Hedcor Sibulan, Inc. - G.R. No. 209306 (2017)
7. Mitsubishi Cor-Manila Br. V CIR, GR No. 175772, Jun 5, 2017
8. Oceanic Wireless Network v. CIR - G.R. No. 148380 (2005)
B. Chief Officials of the BIR
i. Section 3, NIRC
C. The Court of Tax Appeals
i. Composition
1. Section 1, RA No. 1125 (June 16, 1954), as amended by RA Nos.
9282 (March 30, 2004) and 9503 (June 12, 2008)
2. Section 2, RA No. 1125, as amended by RA Nos. 9282 and 9503
ii. Jurisdiction:
1. Sections 7, 11, 18, and 19, RA No. 1125, as amended by RA No.
9282

PART B: INCOME TAXATION

Intended Learning Outcomes
Upon completion of Part B of the syllabus, students of this course must
understand and be able to apply the following concepts of income taxation:
Meaning of income; gross revenue, Capital asset and ordinary asset;
gross income, exclusion from gross ordinary income, capital gains, and
income; (net) taxable income; passive income; taxation of capital
realization of income; income versus gains
capital
Classification of taxpayers; concept of Capital expenditure and revenue
corporation under taxation law versus expenditure; allowable deductions
corporation law, partnership; from gross income; allowable
residence; situs deductions per class of taxpayer;

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 14

of income; worldwide versus limitations and requirements for
territorial taxation deductibility of expenses; deduction
and tax credit.
Income taxation of the various types Special types of income taxes:
of taxpayers based on types of improperly accumulated earnings tax,
income; income tax systems; factors fringe benefits tax, minimum
that affect taxation; tax deferment corporate income tax
(tax-free exchange)
Purpose and types of withholding Income taxation of trusts
taxes
Relevant income tax periods Basic income tax compliance
requirements
Timeline: Weeks Five to Sixteen

WEEK FIVE

I. BASIC STRUCTURAL AND DEFINITIONAL CONCEPTS

A. Income
i. Meaning of Income
1. Sec. 32(A), NIRC
2. Sec. 36, Revenue Regulations No. 02-40
3. CASES:
a. Madrigal v. Rafferty, 38 Phil. 414
ii. Flow of Wealth
a. Conwi v. CTA, 213 SCRA 83
b. CIR v. Manila Jockey Club, Inc., G.R. Nos. L-13887 & L
13890, June 30, 1960
c. Association of Non-Profit Clubs, Inc. v. Bureau of Internal
 Revenue, G.R. No. 228539 (2019)
d. CIR v. BOAC, 149 SCRA 395
e. CIR v. Tours Specialist, 183 SCRA 402
iii. Severance or Realization / Substantial Alteration Tests
1. Sec. 38, RR No. 02-40
2. CASE:
a. CIR v. CA, CTA & Anscor, 301 SCRA 152 (1999)
iv. Command or Control of Income; Imputed Income
1. Section 41, RR No. 02-40
v. Recovery of Capital Investment
1. Sec. 40(A), NIRC
2. Section 36, Rev. Regs. No. 2
vi. Windfall Receipts
1. CASE:
a. Javier v. Ancheta, CTA Case No. 3393, July 27, 1983
vii. Recovery of Deducted Items: Tax Benefit Principles
1. Section 34(C)(1), NIRC
2. Section 34(D)(7), NIRC
3. Section (E)(1), NIRC

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 15

viii. Indirect Receipts; Cancellation of Indebtedness and Discharge
by Third Parties
1. Section 50, RR No. 02-40
ix. Income from Unlawful Activities; Amounts Received Under
Claim of Right 1. CASE:
a. CIR v. Manila Electric Company, CTA EB No. 773,
November 13, 2012
x. Case studies on taxability of ill-gotten wealth forfeited by the
government: 1. CASES:
a. Republic v. Sandiganbayan, GR. No. 152154, July 15, 2003;
b. Republic v. Marcos, Sandiganbayan Case No 0141, Dec 19,
2019.
B. When is Income Taxable?
i. Secs. 43 - 44, NIRC
ii. Secs. 51 - 53, RR No. 02-40
iii. CASES:
1. Republic v. Dela Rama, 18 SCRA 861
2. CIR v. Javier, 199 SCRA 824
 C. Capital Gain; Ordinary Gain; Presumed Gain
i. Capital Gain
ii. Ordinary Gain
1. Business Income
2. Income from Trade/Practice of Profession
3. Passive Income
4. Other Forms
iii. Presumed Gain
1. Sec. 24(D), NIRC
D. Income Tax Systems
i. Global Tax System
ii. Schedular Tax System
1. CASE:
a. Sison v. Ancheta, GR L-59431, July 25, 1984
iii. Semi-Schedular or Semi-Global Tax System
E. Criteria in Imposing Philippine Income Tax
i. Sec. 23, NIRC
1. Nationality/Citizenship
2. Residence
3. Source
F. Tax Treaties – Effect of Tax Treaties
WEEK SIX

II. GROSS INCOME: INCLUSIONS AND EXCLUSIONS

A. In General
i. Income from Whatever Source

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 16

1. Secs. 31 - 32, NIRC
2. Sec. 61, RR No. 02-40
3. CASE:
a. Gutierrez v. Collector, G.R. Nos. L-9738 & L-9771, May 31,
1957 101 Phil 713
ii. Situs of Income
1. Sec. 42, NIRC
2. Secs. 152 - 165, RR No. 02-40
iii. From Sources Within the Philippines
 1. Sec. 42 (A) and (B), NIRC
2. CASES:
a. CIR v. BOAC, G.R. No. L-65773-74, April 30, 1987, 149
SCRA 395
b. NDC v. CIR, G.R. No. L-53961, June 30, 1987, 151 SCRA
472
c. Air Canada v. CIR, CTA EB No. 86. Aug. 26, 2005
d. CIR v. CTA, G.R. No. 81446, August 18, 1988, 127 SCRA
9
e. CIR v. Marubeni, G.R. No. 137377, December 18, 2001
f. CIR v. Baier-Nickel, G.R. No. 165793, August 29, 2006
g. Manila Electric v. Yatco, G.R. No. 45697, November 1,
1939 69 Phil 89
h. Phil. Guaranty v. CIR, G.R. No. L-22074, Apr. 30, 1965
iv. From Sources Without the Philippines
1. Sec. 42(C), NIRC
v. Partly Within/Without the Philippines
1. Sec. 42(E), NIRC
B. Compensation Income
i. In General
1. Sec. 32(A), NIRC
2. Rep. Act No. 10963 (TRAIN Law), Dec. 19, 2017
3. Revenue Regulations No. 11-2018, Jan. 31, 2018, as
amended by RR 14-18
4. Revenue Memorandum Circular No. 050-18, May 11, 2018
5. Sec. 2.78.1(A), Revenue Regulations No. 2-98
6. Sec. 2.83.5, Revenue Regulations No. 10-2008
7. Sec. 2.83.6, Revenue Regulations No. 2-98
8. Revenue Memorandum Circular No. 34-2008
9. CASES:
a. Henderson v. Collector, 1 SCRA 649;
b. CIR v. Castaneda, G.R. No. 96016, October 17, 1991, 203
SCRA 72
c. Polo v. CIR, G.R. No. L-78780, July 23, 1987
d. Endencia v. David, G.R. No. L-6355-56, July 23, 1987, 93
Phil 696

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 17

 e. Kuenzle v. CIR, G.R. No. L-18840, May 29, 1969, 28 SCRA
365
ii. Fringe Benefits
1. Sec 33, NIRC
2. Revenue Regulations Nos. 3-98, 8-2000, 10-2000, 05-
2008, 05- 2011
3. Revenue Regulations No. 11-2018
4. Revenue Memorandum Circular No. 88-2012,
December 27, 2012 iii. Exclusions:
1. Compensation for Injuries or Sickness
a. Sec. 32(B)(4), NIRC
2. 13th Month Pay and Other benefits
a. Sec. 32 (7)(e), NIRC
b. CASE:
i. CIR v. Castaneda, G.R. No. 96016, October 17,
1991, 203 SCRA 72
3. Income Exempt Under Treaty
a. Sec. 32(B)(5), NIRC
b. CASE:
i. Reagan v. CIR, G.R. No. L-26379, December 27,
1969, 30 SCRA 968
C. Pensions/Retirement Benefits/Separation Pay
i. In General
1. Sec. 32(A)(10), NIRC
ii. Exclusions:
1. Sec. 32(6)(a-f), NIRC
2. Sec. 2.78.1(B)(1-12), RR No. 02-98
3. RA 4917
4. RA 7641
5. CASES:
a. CIR v. CA, G.R. No. 96016, Oct 17, 1991, 203 SCRA 72
b. CIR v. GCI Retirement, G.R. No. 95022, March 23, 1992,
207 SCRA 487
c. In re Zialcita, AM No. 90-6-015-SC, Oct. 18, 1990
D. Gains Derived from Dealings in Property
i. In General
1. Sec. 32(A)(3), NIRC
2. Sec 39 (A)(1), NIRC
3. Sec 40 (A), (B), and (C), NIRC
4. RR No. 06-08, April 22, 2008, as amended by RR No.
 16-12, RR No. 06-13. and RR No. 20-20
5. RR No. 07-03
6. RMC No. 35-17
ii. Exclusion:
1. Shares of Stocks Traded in PSE
a. Sec. 127, NIRC

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 18

b. RR No. 23-20
WEEK SEVEN

E. Business Income/ Income from Exercise of Profession

i. In General
1. Sec 32(A)(2), NIRC
2. Sec 27 (E)(4), NIRC
3. Sec 22(CC), NIRC
4. Secs. 36-38, 43-47, RR No. 02-40
ii. Exclusions:
1. Income Exempt Under a Treaty
2. Income Derived by Governmental/Political Subdivision from
Exercise of Essential Government Function
F. Other Items of Gross Income
i. Interest Income
1. In General
a. Sec. 32(A)(4), NIRC
b. RMO No. 63-99 (see BIR Ruling DA 701-07, Dec. 28, 2007)
c. RR No. 14-2012; RMC No. 77-2012; RMC No. 81-2012
d. CASE:
i. CIR v. Filinvest Development Corporation, G.R. No.
163653, July 19, 2011
2. Exclusions:
a. Sec. 32(B)(7)(a), NIRC
b. CASES:
i. CIR v. Mitsubishi Metal, G.R. No. L-54908, January
22, 1990, 181 SCRA 214
ii. NDC v. CIR, G.R. No. L-53961, June 30, 1987
 ii. Rentals/Leases
1. Sec. 32(A5), NIRC
2. Secs. 74, 49 and 58, Revenue Regulations No. 2
3. Revenue Regulations 19-86
4. CASE:
a. Limpan v. CIR, G.R. No. L-21570, July 26, 1966, 17 SCRA
70
iii. Royalties
1. Sec. 32(A)(6), NIRC
2. Sec 42(A)(4)(a) to (g)
3. CASE:
a. CIR v. SC Johnson, G.R. No. 127105, June 25, 1999
iv. Dividends
1. In General
a. Sec. 32(A)(7), NIRC
b. Secs. 57 and 71, 250-253, RR No. 02-40

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 19

c. Revenue Memorandum Circular No. 31-90
d. Sec. 73(C,D), NIRC
e. CASES:
i. CIR v. Manning, G.R. No. L-28398, August 6, 1975,
66 SCRA 14
ii. CIR v. CA, G.R. No. 108576, Jan. 20, 1999
2. Exclusions:
a. Income Exempt Under Tax Treaty
b. Passive Income of Foreign Government
i. BIR Ruling No. 103-2012, February 21, 2012
v. Annuities and Insurance Proceeds
1. In General
a. Sec. 32(A)(8), NIRC
b. Sec. 48, RR No. 02-40
2. Exclusions:
a. Proceeds from Life Insurance
i. Sec. 32(B)(1), NIRC
ii. Sec. 62, RR No. 02-40
iii. CASE:
1. Oriente Fabrica v. Posadas, G.R. No. 34774,
September 21,1931 56 Phil 147
 b. Return of Premium Paid
i. Sec. 32(B)(2), NIRC
ii. Sec. 48, RR No. 02-40
c. Compensation for Injuries or Sickness
i. Sec. 32(B)(4), NIRC
ii. Sec. 63, RR No. 02-40
vi. Prizes and Winnings/Awards/Rewards
1. In General
a. Sec. 32(A)(9), NIRC
b. Sec. 282, NIRC
c. Revenue Memorandum Order No. 12-93
d. RR No. 016-10
e. RMO No. 046-11
f. BIR Ruling DA-013-04
g. CASE:
i. CIR v. COA, G.R. No. 101976, Jan. 29, 1993
2. Exclusions:
a. Sec. 24(B)(1), NIRC
b. 32(B)(7)(c), NIRC
c. Sec 32(B)(7)(d). NIRC
vii. Other Types of Income
1. Found Treasure
2. Tax Refund
a. RMC No. 13-80;
b. RR No. 14-11

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 20

3. Recovery of Bad Debt Previously Deducted
a. Sec. 50, RR No. 02-40
4. Damages
a. CASE:
i. Ramnani v. CTA, CA-GR SP No. 42873, January 8,
1998
5. Informer’s Reward
a. CASE:
i. Penid v. Virata, G.R. No. L-44004, March 25, 1983
G. Partner’s Distributive Share of the Gross Income of General
Professional Partnerships
 i. Sec. 32(A)(11), NIRC
ii. Sec 26, NIRC
iii. Sec 22(B), NIRC
H. Exclusions under Special Laws
i. RA 9040
WEEK EIGHT

III. TAXPAYERS
A. General Principles
i. Sec. 23, NIRC
B. Scope of Income Taxation
i. Definition of a Taxpayer; Classification of Taxpayers
1. Sec. 22(N), NIRC
ii. Definition of a Person
1. Sec. 22(A), NIRC
C. Who is a “Person liable to tax”?
i. Sec 22 (K)
D. CASES:
i. CIR v. Procter & Gamble, GR No. 66838, December 2, 1991
ii. SilkAir (Singapore) Pte. Ltd. v. CIR, G.R. No. 184398, February 25, 2010

IV. INDIVIDUALS: CLASSIFICATIONS, BASES, AND RATES

A. In General
i. Citizens
1. Sec. 23(A-D), NIRC
2. Secs. 1 and 2, Art. IV, 1987 Constitution
ii. Resident Citizens
iii. Non-Resident Citizens
1. Sec. 22(E), Sec 23(B), NIRC
2. Overseas Filipino Workers
a. Sec. 23(C), NIRC
iv. Resident Alien
1. Sec. 22(F), Sec 24(B), NIRC

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 21

2. Sec. 5, RR No. 02-40
v. Non-Resident Alien Engaged in Trade or Business
 1. Sec. 22(G), Sec 25(A), NIRC
vi. Non-Resident Alien Not Engaged in Trade or Business
1. Sec. 25(B), NIRC
vii. Special Aliens
1. Secs. 25(C), (D) and (E), NIRC
2. Sec 22(DD-EE), NIRC
3. Veto Message on RA 10963
4. RR No. 08-18
B. Resident Citizens and Resident Aliens; taxation
i. In General
1. Sec 24 (A)
2. RR No. 01-20
3. RR No.01-19
4. RR No. 14-18
5. RR No. 11-18
6. RR No. 15-18
7. RR No. 08-18
8. RMC No. 51-18, amending RMC No. 69-17
9. RMC No. 24-19
10. RMC No. 50-18
11. RMO No. 23-18
12. RMC No. 37-19
13. RMC No. 17-19
14. RMC No. 32-18
ii. Classification of Individuals as to Income Earning
1. Compensation Earners
a. Minimum Wage Earner
i. Sec. 22(GG), NIRC
ii. Sec 22(HH), NIRC
iii. Sec 24(A)(2)(a) last paragraph, NIRC
iv. Coverage of exemption
1. RR No. 10-08
2. RR No. 08-18
v. CASE:
1. Soriano v. Secretary of Finance, G.R. No.
184450, January 24, 2017
vi. Taxation
1. Sec 24(A)(2)(a), NIRC
b. Rank and File Employee
i. Sec 22(AA), NIRC
 c. Managerial/Supervisory Employee
i. Sec 33, NIRC
ii. RR No. 03-98, as amended by RR Nos. 08-00, 05-
08, 05-11, 08-12, 01-15, 11-18

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 22

iii. Section 2.57.1(G) Revenue Regulation No. 02-98, as
amended by RR No. 11-18
2. Self-Employed and/or Professionals (SEPs)
a. Section 2(n) Revenue Regulation 08-18
b. Taxation
i. Sec 24(A)(2)(b), NIRC
3. Mixed income earner
a. Section 2(j), Revenue Regulation 08-18
b. Taxation
i. Sec 24(A)(2)(c), NIRC
4. Gross Income Taxation
a. Sec 24(A)(2)(b) and (c), NIRC
b. Qualified to opt for 8% gross taxation
c. Not qualified to opt for 8% gross taxation
d. Regular Graduated Rate vs. 8% Option
iii. Passive Income
1. In General
a. Section 2.57.1 (A), RR No. 02-98, as amended by RR Nos.
08-98, 06-01, 17-03, 11-18
2. Interest, Royalties, Prizes and Other Winnings
a. Secs. 24(B)(1), Sec 22 (T), Sec 22 (Y), Sec 22 (FF), NIRC
b. RR No. 10-98
c. RR No. 14-12
d. RR No. 01-19
e. RR No. 08-18
f. RR No. 11-18
WEEK NINE

3. Dividends
a. Sec. 24(B)(2), NIRC
 b. Sec. 73, NIRC
4. Capital Gains on Shares of Stocks
a. Sec. 24(C), NIRC
b. RR No. 06-08, as amended by RR Nos. 6-2013 and 20-20
c. CASE:
i. Benguet Corporation v. CIR, CTA Case No. 5324,
July 2, 1998
5. Capital Gains on Real Property
a. In General
i. Art. 415, New Civil Code
ii. Sec. 24(D), NIRC
iii. RR No. 07-03
iv. Section 2.57.1(A)(6), RR No. 02-98, as amended RR
Nos. 08-98, 06-01, 17-03, 11-18

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 23

v. Section 2.57.2 (J) [now F], RR No. 02-98, as
amended by RR Nos. 08-98, 06-01, 17-03, and 11-18
b. Disposal of Principal Residence
i. RR No. 13-99 and 14-00
c. Disposal in favor of the Government
i. RR No. 8-98
d. Foreclosed Properties
i. RR No. 4-99
ii. RMC 55-2011
e. Socialized Housing
i. Secs. 3(r), 19, 20, 32, RA 7279, as amended by RA
10884
ii. RR No. 17-01
iii. RMC No. 42-01
iv. RMC No. 36-11
v. RMC No. 35-14
C. Non-Resident Citizens
i. Sec. 22(E), NIRC
ii. Revenue Regulation No. 01-11
D. Non-resident Alien
i. Engaged in trade or business
1. Sec. 25(A), NIRC
2. Taxable Income Taxation
 3. Gross Income Taxation
4. Passive Income
a. Sec 2.57.1 (B) RR No. 02-98, as amended by RR Nos. 08-
98, 06-01, 30-03, 11-18
5. Capital Gains
a. Sec. 25(3). NIRC
ii. Not engaged in trade or business
1. Sec. 25(B), NIRC
2. Sec. 25(B)
3. Sec 2.57.1 (C), RR No. 02-98, as amended by RR Nos. 08-98, 06-
01, 30-03, 11-18
E. Special Aliens
i. Sec. 25(C), (D) and (E), NIRC
ii. Sec. 25 (F), NIRC
iii. Veto Message on RA 10963
iv. RR 08-18
F. Members of General Professional Partnership
i. Sec. 26, NIRC

V. TAX ON CORPORATIONS: BASES AND RATES

A. Partnerships
i. Arts. 1767-1769, New Civil Code
ii. CASES:

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 24

1. Lorenzo Ona v. CIR, G.R. No. L-19342, May 25, 1972
2. Evangelista v. Collector, [Link]. L-9996, October 15, 1957
3. Afisco Insurance Corp. v. CIR, [Link]. 112675, Jan. 25, 1999
4. CIR v. Batangas Tayabas Bus Co., 102 Phil 822
B. Co-ownerhsip
i. Art. 484, Civil Code
ii. CASES:
1. Obillos v. CIR, L-68118, Oct. 29, 1985
2. Reyes v. Commissioner, 24 SCRA 198
3. Gatchalian v. Collector, 67 Phil 666
4. Pascual v. CIR, 166 SCRA 560
5. Solidbank v. CIR, CTA Case No. 4868, June 19, 1997
C. General Professional Partnership
i. Secs. 22(B), 26, 73(D), NIRC
 ii. Revenue Memorandum Circular No. 003-12, January 11, 2012
iii. Revenue Memorandum Circular No. 89-12, December 27, 2012
iv. CASE:
1. Tan v. Del Rosario and CIR, [Link]. L-109289, October 3, 1994
D. Joint Venture; Exempt v. Taxable
i. RR No. 10-12, June 1, 2012
WEEK TEN

E. Domestic Corporations
i. Taxable Income
1. Sec. 27(A), NIRC
ii. Passive Income:
1. In General
a. Sec 2.57.1 (D) [formerly G], RR No. 02-98. as amended by
RR Nos. 08-98, 06-01, 17-03, 11-18
2. Interest, Royalties
a. Sec. 27(D)(1, 3), NIRC
3. Dividends
a. Sec. 27(4), NIRC
4. Capital Gains
a. Sec. 27(D)(2, 5), NIRC
5. Revenue Memorandum Circular 50-2003
F. Resident Foreign Corporations
i. Taxable Income
1. Sec. 28(A)(1), NIRC
2. Secs. 22(B), (D), (H), NIRC
ii. Meaning of “Engaged in Trade or Business”
1. Section 3(d), RA No. 7042 (Foreign Investments Act of 1991)
2. CASES:

2021 Tax 1 Syllabus [Atty. Marissa O. Cabreros, CPA] Page 25

a. Island Power Corporation v. CIR, CTA EB No.
26, March 6, 2006
b. NV Reederij v. CIR, G.R. No. 46029, June 23,
1988, 162 SCRA 487
c. B. Van Zuiden Bros. Ltd. vs. GTVL
 Manufacturing Industries, Inc., G.R. No.
147905, 28 May 2007
iii. Special Resident Foreign Corporations
1. International Carriers
a. RA 10378, March 7, 2013
b. RR 15-2013
c. CASES:
i. CIR v. British Overseas Airways Corporation, G.R.
No. L-65773, April 30, 1987
ii. South African Airways v. CIR, G.R. No. 180356,
February 16, 2010
2. Offshore Banking Units (OBUs)/Foreign Currency
Deposit Units (FCDUs)
a. Sec.28(A)(4), NIRC
b. RR No. 10-98
3. Regional or Area Headquarters (RHQ) and Regional
Operating Headquarters (ROHQ)
a. Sec. 22(DD), (EE), NIRC
b. Sec. 28(A)(6), NIRC
4. Passive Income
a. Sec. 28(A)(7), NIRC
b. Sec 2.57.1 (E) [formerly H] RR No. 02-98. as
amended by RR Nos. 08-98, 06-01, 17-03, 11-
18
c. Interest, Yields, Royalties, Shares of Stock, Dividends
i. Sec. 28(A)(7)(a-d), NIRC
iv. Subsidiary v. Branch of a Foreign Corporation
v. Branch Profit Remittance Tax (BPRT)
1. Sec. 28(A)(5), NIRC
2. RMC No. 55-80
3. CASES:
a. Bank of America v. CIR, GR 10392, July 21,
1994, 234 SCRA 302
b. Marubeni v. CIR, 177 SCRA 500
c. Campania General de Tabacos, CTA 4451, Aug
23, 1993 d. Shinko Electric Industries Co. Ltd. v.
CIR, CTA Case 8213, February 10, 2014
e. CIR v. United Parcel Service Co. (Phil. Branch),
CTA Case No. 721, May 16, 2012