1. Ans.
Even so, it must be emphasized that for income tax purposes, a taxpayer is free to deduct from its
gross income a lesser amount, or not claim any deduction at all. What is prohibited by the income tax
law is to claim a deduction beyond the amount authorized therein. 51 Hence, even granting that there is
an unaccounted expense, such as those pertaining to payments for salaries, wages and other benefits,
the same is not prohibited by law. Bearing in mind that an unaccounted expense is not prohibited by
law, it goes without saying that petitioner can exercise its discretion on whether or not it will declare a
lesser amount of deductions or none at all.
Furthermore, it is worthy to note that the imputation of alleged undeclared income is based on a
mere presumption that since there were undeclared expenses, there were corresponding undeclared
income. Even if these alleged unaccounted expenses are to be treated as unaccounted sources of
income, the same will be offset by recording the equivalent payments as expenses. As such, no taxable
income will result from the said transactions.
2. Ans. C
3. Ans. D
Basis: Ability to pay theory which states that taxpayers are taxed according to generate income.
Benefits received theory states
4. Ans. D
Constructive receipt of income has no actual receipt of income but the taxpayer benefits from it.
Actual receipt is the
5. Ans. D
6. Ans. C
7. Ans. B
8. Ans. D
Indemnity received is not subject to taxation because it is a return of capital. There is no income
because there was no capital invested to begin with.
These are not realized benefits that’s why they are not taxable.
9. Ans. A
Rewards for excellent performance is taxable because increased the net worth and has been
realized because there’s an exchange (excellent services was exchanged with payment of loan)
The third item is a donation
The last item is an excess and if not returned to the employer should be subject to tax.
10. Ans. C
The expected income is 400,000. The insurance company paid the insurance proceeds of
300,000 since there was a rare frost. Recovery of lost profits increases the net worth. Recovery
of lost capital merely maintains the net worth. 300,000 is a recovery of lost profit because it
instead of receiving 400,000 (considered a lost profit) and 300,000 was considered a recovery.
Cases
1. P2, 000 excess is considered an income because it is gain, received and not exempted from any
law. It benefited the employee and is considered a compensation income.
2.
3. Global tax system vs. Schedular tax system.
Schedular – deductions are not allowed from the gross income; rates will depend on the nature
of the income but normally it is 20%
Global – uses progressive tax rate; it is called global because it accumulates all types of income
except those subject to final tax.
4. A. Yes, because the services rendered, his liability was extinguished and still realized a gain. It is
a constructive receipt.
B. No, because there’s no income realized but there’s
Condonation is a form of donation and is not subject income tax but transfer tax.
5. None, because the 60,000 is just a mere return of capital. The return of capital merely maintains
the net worth of a company.
Return of capital – capital invested is returned
Return on capital – difference between the capital invested and the money returned
