Income Tax Regulations

Copyright 2015 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2014 1

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February 10, 1940

REVENUE REGULATIONS NO. 02-40

INCOME TAX REGULATIONS

SECTION 1. Scope. — In accordance with the provisions of Sections 4(I) and 338 of Commonwealth Act No. 466, otherwise known as the National InternalRevenue Code, the following regulations affecting Sections 19 to 84 of the sameCode relating to the income tax are hereby promulgated to supersede all circulars,precedents, rulings, and regulations heretofore published on the same subject, andthey shall be known as Revenue Regulations No. 2, or the Income Tax Regulations:

(Only the section numbers of the Code are given below as their texts will befound in the same Code. They serve as captions of the pertinent provisions of theRegulations.)

(Section 20 of the Code)

SECTION 2. Application of title. — Section 20 provides that theprovisions of Title II of the National Internal Revenue Code shall apply only toincome received from January 1, 1939.


SECTION 3. Persons considered citizens of the Philippines. — Thefollowing shall be considered citizens of the Philippines:

(1) Those who were citizens of the Philippines at the time of the adoption ofthe Constitution of the Philippines.

(2) Those born in the Philippines of foreign parents who, before the adoptionof the Constitution, had been elected to public office in the Philippines.


(3) Those whose fathers are citizens of the Philippines.

(4) Those whose mothers are citizens of the Philippines and, upon reachingthe age of majority, elect Philippine citizenship.

(5) Those who are naturalized in accordance with law. (Sec. 1, Article IV,Constitution of the Philippines.)

Philippine citizenship may be lost or reacquired in the manner provided bylaw. A foreigner who has come to reside in the Philippines and has filed his petitionto acquire Philippine citizenship but has not yet received the requisite naturalizationcertificate still remains an alien.

SECTION 4. Tax on citizens and residents. — Section 21 imposesprogressive rates of income taxes on citizens and residents, starting from 3 per centupon the amount by which the net income does not exceed P2,000 and risinggradually to 60 per cent upon the amount by which the net income exceeds P500,000.(Conforms with amendments by R.A. 2343, effective June 20, 1959.)

The following is a table, showing the rates of income tax under Section 21, asamended by Section 1 of R.A. No. 2343, applicable to income received from Jan. 1,1959 and for fiscal periods ending after June 30, 1959: 1 2 3 4 5 6 Exceeding Not Bracket Rate Tax on Each Cumulative Exceeding of Tax Bracket Amount of Tax P - P2,000 2,000 3% P60 P60 2,000 4,000 2,000 6% 120 180 4,000 6,000 2,000 9% 180 360 6,000 8,000 2,000 16% 320 680 8,000 10,000 2,000 20% 400 1,080 10,000 20,000 10,000 24% 2,400 3,480 20,000 30,000 10,000 30% 3,000 6,480 30,000 40,000 10,000 36% 3,600 10,080 40,000 50,000 10,000 40% 4,000 14,080 50,000 60,000 10,000 42% 4,200 18,280 60,000 70,000 10,000 44% 4,400 22,680 70,000 80,000 10,000 46% 4,600 27,280 80,000 90,000 10,000 48% 4,800 32,080 90,000 100,000 10,000 50% 5,000 37,080 100,000 120,000 20,000 52% 10,400 47,480


120,000 140,000 20,000 53% 10,600 58,080 140,000 160,000 20,000 54% 10,800 68,880 160,000 200,000 40,000 55% 22,000 90,880 200,000 250,000 50,000 56% 28,000 118,880 250,000 300,000 50,000 57% 28,500 147,380 300,000 400,000 100,000 58% 58,000 205,380 400,000 500,000 100,000 59% 59,000 264,380 500,000 - - 60% - -

Note: Taxable income is arrived at after deducting personal and additionalexemptions to which taxpayer is entitled. IcEaST


SECTION 5. Definition. — A "non-resident alien individual" means anindividual —

(a) Whose residence is not within the Philippines; and

(b) Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient orsojourner is a resident of the Philippines for purposes of the income tax. Whether heis a transient or not is determined by his intentions with regard to the length andnature of his stay. A mere floating intention indefinite as to time, to return to anothercountry is not sufficient to constitute him a transient. If he lives in the Philippines andhas no definite intention as to his stay, he is a resident. One who comes to thePhilippines for a definite purpose which in its nature may be promptly accomplishedis a transient. But if his purpose is of such a nature that an extended stay may benecessary for its accomplishment, and to that end the alien makes his hometemporarily in the Philippines, he becomes a resident, though it may be his intentionat all times to return to his domicile abroad when the purpose for which he came hasbeen consummated or abandoned.

SECTION 6. Loss of residence by alien. — An alien who has acquiredresidence in the Philippines retains his status as a resident until he abandons the sameand actually departs from the Philippines. An intention to change his residence doesnot change his status as a resident alien to that of a nonresident alien. Thus an alienwho has acquired a residence in the Philippines is taxable as a resident for theremainder of his stay in the Philippines.


SECTION 7. Taxation of aliens in general. — For purposes of incometax, alien individuals are divided generally into two classes, namely, resident aliensand non-resident aliens. Resident aliens are taxable in the same manner as citizens ofthe Philippines, that is, a resident alien is taxable on income derived from all sourcesincluding sources without the Philippines. Non-resident aliens are taxable only onincome from sources within the Philippines.

SECTION 8. Taxation of non-resident aliens; classification. —Non-resident alien individuals are divided into two classes: (1) Those engaged intrade or business within the Philippines, and (2) those not engaged in trade orbusiness within the Philippines. Non-resident aliens falling within the first class aresubject to the graduated rates established in Section 21 with respect to their netincome from sources within the Philippines. Non-resident aliens falling within thesecond class are subject to a flat rate of 20 per cent on their total income from sourceswithin the Philippines, if such total income does not exceed P23,800, otherwise, thegraduated rates established in Section 21 will apply to the total income if it exceedsP23,800. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)

The phrase "engaged in trade or business within the Philippines" includes theperformance of personal services within the Philippines. Whether a non-resident alienhas an "office or place of business," however, implies a place for the regulartransaction of business and does not include a place where casual or incidentaltransactions might be, or are, effected. Neither the beneficiary nor the grantor of atrust, whether revocable or irrevocable, is deemed to be engaged in trade or businessin the Philippines or to have an office or place of business therein, merely because thetrustee is engaged in trade or business in the Philippines or has an office or place ofbusiness therein. (Test of "office or place of business" was deleted by R.A. 2343.)


SECTION 9. Personal exemption. — Personal exemption is an arbitraryamount allowed for personal, living, or family expenses of the taxpayer. It is allowedto citizens of the Philippines, to resident aliens, and to non-resident aliens in certaincases. The procedure of arriving at the tax due after giving effect to the exemptionsallowable is set forth in Section 4 of these regulations. EHcaDT

SECTION 10. Personal exemption of single individuals. — A singleindividual is entitled to a personal exemption of P1,800.

SECTION 11. Personal exemption of married persons and heads of


family. — A married person is entitled to a personal exemption of P3,000. Only oneexemption of P3,000 is allowed with respect to the aggregate income of both husbandand wife. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)

A head of family is an individual who actually supports and maintains in onehousehold one or more individuals, who are closely connected with him by bloodrelationship, relationship by marriage, or by adoption, and whose right to exercisefamily control and provide for these dependent individuals is based upon some moralor legal obligation. In the absence of continuous actual residence together, whether ornot a person with dependent relatives is a head of a family within the meaning of thestatute must depend on the character of the separation. If a father is absent onbusiness, or a child or other dependent is away at school or on a visit, the commonhome being still maintained, the additional exemption applies. If, moreover, throughforce of circumstances a parent is obliged to maintain his dependent children withrelatives or in a boarding house while he lives elsewhere, the additional exemptionmay still apply. If, however, without necessity, the dependent continuously makes hishome elsewhere, his benefactor is not the head of a family, irrespective of thequestion of support. A resident alien with children abroad is not thereby entitled tocredit as the head of a family. Chief support means principal or main support. Partialsupport not amounting to chief support will not entitle the taxpayer to claimexemption as a head of a family.

Under the law the following persons are entitled to P3,000 exemption: (a) amarried man; (b) a married woman; and (c) an unmarried man or woman with one orboth parents, or one or more brothers or sisters, or one or more legitimate, recognizednatural, or adopted children living with and dependent upon him or her for their chiefsupport, where such brothers, sisters, or children are not more than 23 years of age,unmarried and not gainfully employed or where such children are incapable ofself-support because mentally or physically defective. (Conforms with amendmentsby R.A. 2343, effv. June 20, 1959.)

SECTION 12. Additional exemption for dependents. — The taxpayer isentitled to an additional exemption of P1,000 for each legitimate, recognized natural,or adopted child wholly dependent upon and living with such person, if suchdependent is not more than 23 years of age, unmarried and not gainfully employed orincapable of self-support because mentally or physically defective, provided that theperson claiming additional exemption is a head of family. The children with respect towhom additional exemption is claimed must be wholly dependent upon the taxpayerfor support. (Conforms with amendments by R A. 2343, effv. June 20, 1959.)


SECTION 13. Change of status. — If the status of the taxpayer, insofar asit affects the personal and additional exemptions, changes during the taxable year byreason of his death, the amount of the personal and additional exemptions shall beapportioned, in accordance with the number of months before and after such change.For the purpose of such apportionment, a fractional part of a month shall bedisregarded unless it amounts to more than half a month in which case it shall beconsidered as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22,1950.)

SECTION 14. Personal exemption of non-resident aliens. — Anon-resident alien is entitled to a personal exemption in an amount equal to theexemptions allowed by the income tax law in the country of which he is a citizen orsubject to citizens of the Philippines. The exemption allowed to non-resident aliens isa reciprocal one; that is, it is only allowed if the country of said non-resident aliensallows similar exemptions to Filipinos not residing in such country but derivingincome from sources therein. If the country of which the non-resident alien is acitizen or subject does not have any income tax law, such non-resident alien will notbe entitled to personal exemption.


SECTION 15. Income tax on corporations. — The law imposes an annualincome tax of 22 per centum upon that portion of the net income of every corporationnot in excess of P100,000 and 30 per cent on the excess. The term "corporation"includes partnership no matter how created or organized, joint-stock companies,joint-account (cuentas en participacion), association, or insurance companies butdoes not include duly registered general co-partnership (companias colectivas). Thetax is upon net income, which is undetermined by subtracting from the gross income,as defined in the law, the allowable deductions. (Conforms with amendments by R.A.2343, effv. June 20, 1959.)

SECTION 16. Corporations liable to tax. — Every corporation, domesticor foreign, not otherwise exempt from tax under Title II or any other law, is liable totax. A domestic corporation is taxed on its income from sources within and withoutthe Philippines, but a foreign corporation is taxed only on its income form sourceswithin the Philippines.

The tax imposed by law on corporations is not imposed only upon suchcorporations as are organized and operated for profit. Any corporation, firm orassociation, no matter how created or organized, or what the purpose of its


organization may be, is subject to the tax, except as provided in Section 27, relative toexemptions from tax on corporations. A corporation is not exempt simply and onlybecause it is primarily not organized and operated for profit.

SECTION 17. Dividends received by a corporation from a domesticcorporation. — Dividends received by a domestic or resident foreign corporationfrom a domestic corporation subject to tax are taxable only to the extent of 25 per centthereof. All other classes of income (except net capital gains, Section 34) ofcorporations are taxable in full. Likewise dividends from a foreign corporation,whether resident or non-resident, are taxable in full. (See Sections 250 to 256 of theseregulations relative to taxation of dividends and other distributions.)

SECTION 17-A. Tax on life insurance companies. — Every life insurancecompany organized in or existing under the laws of the Philippines, or foreign lifeinsurance company authorized to carry on business in the Philippines are taxable ontheir total net investment income derived from interest, dividends and rents from allsources whether within or without the Philippines, to the flat rate of 6-1/2%.However, purely cooperative insurance companies or associations which areconducted by the members thereof with the money collected from among themselvesand solely for their own protection and not for profit are exempt from income tax.

The total net investment income of domestic life insurance companies meansthe gross investment income received during the taxable year from rents, dividendsand interest less deductions for real estate expenses, depreciation, interest paid withinthe taxable year on its indebtedness except on indebtedness incurred to purchase orcarry obligation the interest upon which is wholly exempt from taxation underexisting laws, and such investment expenses paid during the taxable year as areordinary and necessary in the conduct of its investment. The total net investmentincome of foreign life insurance companies doing business here is that portion of theirgross world investment income which bears the same ratio to such income as theirtotal Philippines reserve (whether kept in the Philippines or abroad) bears to theirtotal world reserve less that portion of their total world investment expenses whichbears the same ratio to such expenses as their total Philippine investment incomebears to their total world investment income. The following equation simplifies thisformula:

PGI = PR/WR x WGI

PIE = PGI/WGI x WIE


PGI - PIE = PNI

Legend:

PGI is Philippine Gross Investment Income

PNI is Philippine Net Investment Income

PR is Total Philippine Reserve

WR is Total World Reserve

WGI is World Gross Investment Income

PGI is Philippine Gross Investment Income

WIE is Total World Investment Expenses

PIE is Philippine Investment Expense

In both cases, the deductible expenses must be connected with the investmentincome subjected to tax. For the proper determination of the income tax liability ofresident foreign life insurance companies, they should submit the necessary financialstatement reflecting the nature of the investment income and corresponding expenses.These financial statements must be duly certified by an independent certified publicaccountant and authenticated by a Philippine consular official. STcHDC

Foreign life insurance companies not doing business in the Philippines aresubject to the normal income tax on their income received from sources within thePhilippines. They are subject to tax at the rate of 30% like any other foreigncorporation.

Domestic life insurance companies and foreign life insurance companies doingbusiness in the Philippines are not allowed to deduct from their gross income the netadditions, if any, required by law to be made within the year to reserve funds and thesums other than dividends paid within the year on policy and annuity contracts.(Proposed by the BIR. If adopted, this will supersede Sec. 124 of existingregulations.)


SECTION 18. Taxation of corporation formed or utilized for avoidance of


tax. — Section 25 imposes for each year, in addition to the tax imposed by Section 24a tax of 25 per cent on the undistributed portion of the profits or surplus of acorporation which is formed or availed of for the purpose of preventing theimposition of the tax upon its shareholders or members or the shareholders ormembers of any other corporation through the medium of permitting gains or profitsto accumulate instead of dividing or distributing them. However, banks, insurancecompanies, personal holding companies and foreign personal holding companies asdefined in Chapter VIII, are excepted from taxation under Section 25. The taximposed by Section 25 applies whether the avoidance was accomplished through theformation or use of only one corporation or a chain of corporations. For example, ifthe capital stock of the M Corporation is held by the N Corporation so that thedividend distributions of the M Corporation would not be returned as income subjectto the tax on individuals until distributed in turn by the N Corporation to its individualshareholders, nevertheless the tax imposed by Section 25 applies to the MCorporation, if that corporation is formed or availed of for the purpose of preventingthe imposition of the tax upon the individual shareholders of the N Corporation. Aforeign corporation, whether resident or non-resident, is subject to the tax providedfor under Section 25 in the same manner and under the same circumstances as adomestic corporation.

SECTION 19. Purpose to avoid tax; evidence; burden of proof; definitionsof holding or investment company. — The Collector of Internal Revenue'sdetermination that a corporation was formed or availed of for the purpose of avoidingthe tax on its shareholders or members is subject to disproof by competent evidence.The existence or non-existence of the purpose may be indicated by circumstancesother than the evidence specified in Section 25(b), and whether or not such purposewas present depends upon the particular circumstances of each case. In other words, acorporation is subject to taxation under Section 25 if it is formed or availed of for thepurpose of preventing the imposition of the progressive rates of tax upon shareholdersthrough the medium of permitting earnings or profits to accumulate, even though thecorporation is not a mere holding or investment company 50 per cent or more of theoutstanding stock of which is owned directly or indirectly by one person, and doesnot have an unreasonable accumulation of earnings or profits; and on the other hand,the fact that a corporation is such a company or has an accumulation is not absolutelyconclusive against it if, by clear and convincing evidence, the taxpayer satisfies theCommissioner of Internal Revenue that the corporation was neither formed noravailed of for the purpose of avoiding the tax on individuals. All the othercircumstances which might be construed as evidence of the purpose to avoid the taxon shareholders cannot be outlined, but among other things the following will be


considered: (1) Dealings between the corporation and its shareholders, such aswithdrawal by the shareholders as personal loans or the expenditure of funds bycorporation for the personal benefit of the shareholders, and (2) the investment by thecorporation of undistributed earnings in assets having no reasonable connection withthe business. The mere fact that the corporation distributed a large part of its earningsfor the year in question does not necessarily prove that earnings were not permitted toaccumulate beyond reasonable needs or that the corporation was not formed oravailed of to avoid the tax upon shareholders.

If the Commissioner of Internal Revenue determined that the corporation wasformed or availed of for the purpose of avoiding the progressive rates of tax onindividuals through the medium of permitting earnings or profits to accumulate, andthe taxpayer contests such determination of fact by litigation, the burden of provingthe determination wrong by a preponderance of evidence, together with thecorresponding burden of first going forward with evidence, is on the taxpayer underprinciples applicable to income tax cases generally, and this is so even though thecorporation is not a mere holding or investment company and does not have anunreasonable accumulation of earnings or profits. However, if the corporation is amere holding or investment company, then the law gives further weight to thepresumption of correctness already arising from the Commissioner of InternalRevenue's determination by expressly providing an additional presumption of theexistence of a purpose to avoid the tax upon shareholders, while if earnings or profitsare permitted to accumulate beyond the reasonable needs of the business then the lawadds still more weight to the Commissioner of Internal Revenue's determination byproviding that irrespective of whether or not the corporation is a mere holding orinvestment company, the existence of such an accumulation is determinative of thepurpose to avoid the tax upon shareholders unless the taxpayer proves the contrary bysuch a clear preponderance of all the evidence that the absence of such a purpose isunmistakable.

SECTION 20. Holding and investment companies. — A corporationhaving practically no activities except holding property, and collecting the incometherefrom or investing therein, shall be considered a holding company within themeaning of Section 25. If the activities further include, or consist substantially of,buying and selling stocks, securities, real estate, or other investment property(whether upon an outright or a marginal basis) so that the income is derived not onlyfrom the investment yield but also from profits upon market fluctuations, thecorporation shall be considered an investment company within the meaning ofSection 25.


SECTION 21. Unreasonable accumulation of profits. — An accumulationof earnings or profits (including the undistributed earnings or profits of prior years) isunreasonable if it is not required for the purposes of the business, considering all thecircumstances of the case. It is not intended, however, to prevent accumulations ofsurplus for the reasonable needs of the business if the purpose is not to prevent theimposition of the tax upon shareholders. No attempt is here made to enumerate all theways in which earnings or profits of a corporation may be accumulated for thereasonable needs of the business. Undistributed income is properly accumulated ifretained for working capital needed by the business; or if invested in additions toplant reasonably required by the business; or if in accordance with contractobligations placed to the credit of a sinking fund for the purpose of retiring bondsissued by the corporation. The nature of the investment of earnings or profits isimmaterial if they are not in fact needed in the business. Among other things, thenature of the business, the financial condition of the corporation at the close of thetaxable year, and the use of the undistributed earnings or profits will be considered indetermining the reasonableness of the accumulations.

The business of a corporation is not merely that which it has previously carriedon, but includes in general any line of business which it may undertake. However, aradical change of business when a considerable surplus has been accumulated mayafford evidence of a purpose to avoid the tax. If one corporation owns the stock ofanother corporation in the same or a related line of business and in effect operates theother corporation, the business of the latter may be considered in substance althoughnot in legal form the business of the first corporation. Earnings or profits of the firstcorporation put into the second through the purchase of stock or otherwise may,therefore, if a subsidiary relationship is established, constitute employment of theincome in its own business. Investment by a corporation of its income in stock andsecurities of another corporation is not of itself to be regarded as employment of theincome in its business. The business of one corporation may not be regarded asincluding the business of another unless the other corporation is a mereinstrumentality of the first; to establish this it is ordinarily essential that the firstcorporation own all or substantially all of the stock of the second.

The Commissioner of Internal Revenue may require any corporation to furnisha statement of its accumulated earnings and profits, the name and address of, andnumber of share held by each of its shareholders or members, and the amounts thatwould be payable to each, if the income of the corporation were distributed.



SECTION 22. General co-partnerships. — General co-partnerships, whenduly registered, are not subject to income tax, but are required to file returns of theirincome on B.I.R. Form No. 17.04 for the purpose of furnishing information as to theshare in the gains or profits which each partner shall include in his individual return.Individuals carrying on business in general co-partnership are, however, taxable upontheir distributive shares of the net income of such partnership, whether distributed ornot, and are required to include such distributive shares in their individual returns.The returns of duly registered general co-partnerships should be rendered on or beforeApril 15 of each year or within sixty days after the end of their fiscal year dependingon whether their books are kept on the calendar or on the fiscal year basis. (Conformswith amendments by R.A. 2343, effv. June 20, 1959.)

SECTION 23. Distributive shares of partners. — The distributive share ofthe net profit of a general co-partnership must be included in the individual returns ofthe partners. But where the result of partnership operation is a loss, the loss will bedivisible by the partners in the same proportion as the net income would have beendivisible (or, if the partnership agreement provides for the division of a loss in amanner different from the division of a gain, in the manner so provided) and may betaken by the individual partners in their respective returns of income.


SECTION 24. Proof of exemption. — In order to establish its exemption,and thus be relieved of the duty of filing returns of income and paying the tax, it isnecessary that every organization claiming exemption file an affidavit with theCommissioner of Internal Revenue, showing the character of the organization, thepurpose for which it was organized, its actual activities, the sources of its income andits disposition, whether or not any of its income is credited to surplus or inures or mayinure to the benefit of any private shareholder or individual, and in general, all factsrelating to its operations which affect its right to exemption. To such affidavit shouldbe attached a copy of the charter or articles of incorporation, the by-laws of theorganization, and the latest financial statement showing the assets, liabilities, receipts,and disbursement of the organization.

Upon receipt of the affidavit and other papers by the Commissioner of InternalRevenue, the organization will be informed whether or not it is exempt. When anorganization has established its right to exemption, it need not thereafter make andfile a return of income as required under Section 46 of the Tax Code. However, theorganization should file on or before April 15 of each year, an annual information


return under oath, stating its gross income and expenses incurred during the precedingyear, and a certificate showing that there has not been any substantial change in itsBy-Laws, Articles of Incorporation, manner of operation and activities as well assources and disposition of income. (As amended by Revenue Regulations No. 7-64,approved November 25, 1964.)

SECTION 25. Agricultural and horticultural organizations. — Theorganizations contemplated by subsection (a) of Section 27 of the Code as entitled toexemption from income taxation are those which (1) have no net income inuring tothe benefit of any member; (2) are educational or instructive in character; and (3)have as their objects the betterment of the conditions of those engaged in suchpursuits, the improvement of the grade of their products, and the development of ahigher degree of efficiency in their respective occupations. Organizations such asprovincial fairs and like associations of a quasi-public character, which are designedto encourage the development of better agricultural and horticultural products througha system of awards, prizes, or premiums, and whose income derived from gatereceipts, entry fees, donations, etc., is used exclusively to meet the necessaryexpenses of upkeep and operation, are thus exempt. On the other hand, associationswhich have for their purpose, for example, the holding of periodical race meets, theprofits from which may inure to the benefit of their shareholders, are not exempt.Similarly, corporations engaged in growing agricultural or horticultural products orraising live stock or similar products for profits are not exempt from tax under thisparagraph. ITScHa

SECTION 26. Mutual savings bank. — In order that a corporation may beentitled to exemption as a mutual savings bank, it must appear that it is anorganization (1) which has no capital stock represented by shares, and (2) whoseearnings less only the expenses of operation, are distributable wholly among thedepositors. If it appears that the organization has shareholders who participate in theprofits, the organization will not be exempt from income tax.

SECTION 27. Fraternal beneficiary societies. — A fraternal beneficiarysociety is exempt from tax only if operated under the "lodge system", or for theexclusive benefit of the members of a society so operating. "Operating under thelodge system" means carrying on its activities under a form of organization thatcomprises local branches, chartered by a parent organization and largelyself-governing, called lodges, chapters, or the like. In order to be exempt, it is alsonecessary that the society should have an established system for payment to itsmembers or their dependents of life, sick, accident, or other benefits.


SECTION 28. Building and loan associations. — (Now subject to tax, asamended by Sec. 4, R.A. 82.)

SECTION 29. Cemetery companies. — A cemetery company may beentitled to exemption, (1) if it is owned by and operated exclusively for the benefit ofits lot owners, or (2) if it is not operated for profit. Any cemetery corporationchartered solely for burial purposes and not permitted by its charter to engage in anybusiness not necessarily incident to that purpose, is exempt from income tax,provided that no part of its net earnings inures to the benefit of any privateshareholder or individual. A cemetery company which fulfills the other requirementof the statute may be exempt, even though it issues preferred stock entitling theholders to dividend at a fixed rate, provided that its articles of incorporation require(a) that the preferred stock shall be retired at par as soon as sufficient funds arerealized from sales, and (b) that all funds not required for the payment of dividendsupon or for the retirement of preferred stock shall be used by the company for the careand improvement of the cemetery property.

A cemetery company having a capital stock represented by shares, or which isoperated for profit or for the benefit of persons other than its members, does not comewithin the exempted class.

SECTION 30. Religious, charitable, scientific, athletic, cultural, andeducational corporations. — A corporation falling among those enumerated insubsection (e) of Section 27 is exempt from tax on its income (other than income ofwhatever kind and character from its properties, real or personal) if such corporationmeets two tests: (a) It must be organized and operated for one or more of the specifiedpurposes; and (b) no part of its net income must inure to the benefit of privatestockholders or individuals.

The income of such corporation which is considered as income from theirproperties, real or personal, generally consists of income from corporate dividends,rentals received from their properties, interests received from such capital loaned toother persons, income from agricultural lands owned by such corporations, profitsfrom the sale of property, real or personal, and other similar income.

Income not derived from their properties, real or personal, are exempt. Forexample, in the case of a religious corporation, income from the conduct of strictlyreligious activities, such as fees received for administering baptismals, solemnizingmarriages, attending burials, holding masses, and other like income, is exempt. In thecase of an educational corporation, income from the holding of an educational fair or


exhibit is exempt. However, if such exempt income is invested by the corporation, theincome from such investment, as interests from the capital where the capital has beenloaned or dividends on stock where the capital has been invested in shares of stock,will constitute taxable income. Donations and other similar contributions received bysuch corporation from other persons are exempt.

The clause "except income expressly exempt by this Title" appearing insubsection (e) of Section 27 refers to those classes of income which, in accordancewith subsection (b) of Section 29, are exempt from taxation under Title II.

Charitable corporations include an association for the relief of the families ofclergymen, even though the latter make a contribution to the fund established for thispurpose; or for furnishing the services of trained nurses to persons unable to pay forthem; or for aiding the general body of litigants by improving the efficientadministration of justice. Educational corporations may include associations whosesole purpose is the instruction of the public. But associations formed to disseminatecontroversial or partisan propaganda are not educational within the meaning of thelaw. Scientific corporations include an association for the scientific study of law witha view to improving its administration.

It does not prevent exemption that private individuals, for whose benefit acharity is organized, receive the income of the corporation or association. The lawrefers to individuals having a personal and private interest in the activities of thecorporation, such as stockholders. If, however, a corporation issues "voting shares",which entitle the holders upon the dissolution of the corporation to receive theproceeds of its property, including accumulated income, the right to exemption ceasesto exist, even though the by-laws provide that the shareholders shall not receive anydividend or other return upon their shares.

SECTION 31. Business leagues. — A business league is an association ofpersons having some common business interest, which limits its activities to work forsuch common interest and does not engage in a regular business of a kind ordinarilycarried on for profit. Its work need not be similar to that of a chamber of commerce orboard of trade. If it engages in a regular business of a kind ordinarily carried on forprofit, the fact that the business is conducted on a cooperative basis or produces onlysufficient income to be self-sustaining, is not ground for exemption. An associationengaged in furnishing information to prospective investors, to enable them to makesound investments, is not exempt, since its members have no common businessinterest, even though all of its income is devoted to the purpose stated. A clearinghouse association, not organized for profit, no part of the net income of which inures


to any private shareholder or individual, is exempt provided its activities are limitedto the exchange of checks, and similar work for the common benefit of its members.An association of persons who are engaged in the transportation business, whether byland or water, which is designed to promote the legitimate objects of such business,and all of the income of which is derived from membership dues and is expended foroffice expenses is exempt from tax. DSITEH

SECTION 32. Civic leagues. — Civic leagues entitled to exemptioncomprise those not organized for profit but operated exclusively for purposesbeneficial to the community as a whole. In general, organizations engaged inpromoting the welfare of mankind are exempt from tax.

SECTION 33. Social clubs. — The exemption applies to practically allsocial and recreation clubs which are supported by membership fees, dues, andassessments. If a club, by reason of the comprehensive powers granted in the charter,engages in business or in agriculture or horticulture, for profit, such club is notorganized and operated exclusively for pleasure, recreation, or social purposes, andany profit realized from such activities is subject to tax.

SECTION 34. Mutual insurance companies and like organizations. — It isnecessary to exemption that the income of the company be derived solely fromassessments, dues, and fees collected from members. If income is received from othersources, the corporation is not exempt. Income, however, from sources other thanthose specified does not prevent exemption where its receipt is a mere incident of thebusiness of the company. Thus the receipt of interest upon a working bank balance, orof the proceeds of the sale of badges, office supplies, or equipment, will not defeat theexemption. The same is true of the receipt of interest upon Government bonds, wherethey were purchased and were afterwards sold. Where, however, such bonds arebought as a permanent investment, the receipt of the interest destroys the exemption.The receipt of what is, in substance, an entrance fee, charged by a mutual fireinsurance company as a condition of membership, does not render the companytaxable, although this fee is called a premium. If an organization issues policies forstipulated cash premiums, or if it requires advance deposits to cover the cost of theinsurance and maintains investments from which income is derived, it is not entitledto exemption. On the other hand, an organization may be entitled to exemption,although it makes advance assessment for the sole purpose of meeting future lossesand expenses, provided that the balance of such assessments remaining on hand at theend of the year is retained to meet losses and expenses or is returned to members. Anorganization of a purely local character is one whose business activities are confinedto a particular community, place, or district, irrespective, however, of political


subdivisions.

SECTION 35. Farmers' cooperative marketing and purchasingassociation. — Cooperative associations, acting as sales agents for farmers or others,in order to come within the exemption must establish that for their own account theyhave no net income. Cooperative dairy companies, which are engaged in collectingmilk and disposing of it or the products thereof and distributing the proceeds, lessnecessary operating expenses, among their members upon the basis of the quantity ofmilk or of butter fat in the milk furnished by such members are exempt from the tax.If the proceeds of the business are distributed in any other way than on such aproportionate basis, the company will be subject to tax. A farmers' association is notexempt from taxation where in accounting to farmers furnishing produce for theproceeds of sales it deducts more than the necessary selling expenses incurred.Cooperative associations acting as purchasing agents are not expressly exempt fromtax, but rebates made to purchasers, whether or not members of the association, inproportion to their purchases may be excluded from gross income in computing thenet income subject to tax. Any profits made from non-members and distributed tomembers in the guise of rebates are, of course, subject to tax.

Cooperative marketing associations duly incorporated under Act No. 3425,known as the Cooperative Marketing Law are exempt from income tax. (See alsoR.A. 702 exempting cooperative marketing associations.)


SECTION 36. Meaning of net income. — The tax imposed by law is uponincome. In the computation of the tax, various classes of income must be considered:(a) Income, in the broad sense, meaning all wealth which flows into the tax-payerother than as a mere return of capital. It includes the forms of income specificallydescribed as gains and profits, including gains derived from the sale or otherdisposition of capital assets. Income cannot be determined merely by reckoning cashreceipts, for the statute recognizes as income determining factor other items, amongwhich are inventories, accounts receivable, property exhaustion, and accounts payablefor expenses incurred. (b) Gross income, meaning income (in the broad sense) lessincome which is by statutory provision or otherwise exempt from the tax imposed bylaw. (c) Net income, meaning gross income less statutory deductions. The statutorydeductions are, in general, though not exclusively, expenditures other than capitalexpenditures, connected with production of income. (d) In the case of a taxpayer otherthan a corporation as defined in Section 84 (b) of the Code, net income means grossincome less exemptions. Ordinarily the net income is to be computed in accordance


with the method of accounting regularly employed in keeping the books of thetaxpayer.

SECTION 37. Computation of net income. — Net income must becomputed with respect to a fixed period. That period is twelve months endingDecember 31st of every year except in the case of a corporation filing returns on afiscal year basis in which case net income will be computed on the basis of such fiscalyear. Items of income and of expenditures, which as gross income and deductions, areelements in the computation of net income, need not be in the form of cash. It issufficient that such items may be appraised in terms of money. The time as of whichany item of gross income or any deduction is to be accounted for must be determinedin the light of the fundamental rule that the computation shall be made in such amanner as would clearly reflect the taxpayer's income. If the method of accountingregularly employed by him in keeping his books clearly reflects his income, it is to befollowed with respect to the time as of which items of gross income and deductionsare to be accounted for, otherwise the computation of net income shall be made insuch manner as in the opinion of the Commissioner of Internal Revenue would clearlyreflect it.

SECTION 38. Bases of computation. — Approved standard methods ofaccounting will be ordinarily regarded as clearly reflecting income. A method ofaccounting will not, however, be regarded as clearly reflecting income unless allitems of gross income and all deductions are treated with reasonable consistency. Allitems of gross income shall be included in the gross income for the taxable year inwhich they are received by the taxpayer and deductions taken accordingly, unless inorder clearly to reflect income such amounts are to be properly accounted for as of adifferent period. For instance, in any case in which it is necessary to use an inventory,no accounting in regard to purchases and sales will correctly reflect income except anaccrual method. A taxpayer is deemed to have received items of gross income whichhave been credited to or set apart for him without restriction. On the other hand,appreciation in value of property is not even an accrual of income to a taxpayer priorto the realization of such appreciation through sale or conversion of the property. (Formethods of accounting and determination of accounting period, see Sections 166 to169 of these regulations.)

(Section 29(a) of the Code)

SECTION 39. What gross income includes. — Gross income includes, ingeneral, compensation for personal and professional services, business income, profitsfrom sales of and dealings in property, interests, rents, dividends, and gains, profits,


and income derived from any source whatever, unless exempt from tax by law. Ingeneral, income is the gain derived from capital, from labor, or from both combined,provided it be understood to include profit gained through a sale or conversion ofcapital assets. Profit of citizens, resident aliens, or domestic corporations derived fromsales in foreign commerce must be included in their gross income. Income may be inthe form of cash or of property. IHDCcT

For the treatment of dividends for purposes of the tax, see Sections 250 to 256of these regulations. For the treatment of capital gains, see Sections 132 to 135 ofthese regulations.

SECTION 40. Compensation for personal services. — Where nodetermination of compensation is had until the completion of the services, the amountreceived is ordinarily income for the taxable year of its determination, if the return isrendered on the accrual basis; or, for the taxable year in which received, if the returnis rendered on a receipts and disbursements basis. Commissions paid salesman,compensation for services on the basis of a percentage of profits, commissions oninsurance premiums, tips, and pensions or retiring allowances paid by private personsor by the Government of the United States or of the Philippines (except pensionsexempt by law from tax) are income to the recipients; as are also marriage fees,baptismal offerings, sums paid for saying masses for the dead, and other contributionsreceived by a clergyman, evangelists, or religious worker for services rendered.However, so-called pensions awarded by one to whom no services have beenrendered are mere gifts or gratuities and are not taxable.

SECTION 41. Compensation paid other than in cash. — Where servicesare paid for with something other than money, the fair market value of the thing takenin payment is the amount to be included as income. If the services were rendered at astipulated price, in the absence of evidence to the contrary, such price will bepresumed to be the fair value of the compensation received. Compensation paid anemployee of a corporation in its stock is to be treated as if the corporation sold thestock for its market value and paid the employee in cash. When living quarters arefurnished in addition to cash salary, the rental value of such quarters should bereported as income.

SECTION 42. Compensation paid in promissory notes. — Promissorynotes or other evidence of indebtedness received in payment for services, and notmerely as security for such payment, constitute income to the amount of their fairmarket value. A taxpayer receiving as compensation a note regarded as good for itsface value at maturity, but not bearing interest, shall treat as income as of the time of


receipt the fair discounted value of the note at that time. Thus, if it appears that such anote is or could be discounted on a 6 per cent basis, the recipient shall include suchnote in his gross income to the amount of its face value less discount computed at theprevailing rate for such transactions.

If the payment due on a note so accounted for are met as they become due,there should be included as income in respect of each such payment so much thereofas represents recovery for the discount originally deducted.

SECTION 43. Gross income from business. — In the case of amanufacturing, merchandising, or mining business, "gross income" means the totalsales, less the cost of goods sold, plus any income from investments and fromincidental or outside operations or sources. In determining the gross income,subtractions should not be made for depreciation, depletion, selling expenses orlosses, or for items not ordinarily used in computing the cost of goods sold.

SECTION 44. Long term contracts. — Income from long-term contracts istaxable for the period in which the income is determined, such determinationdepending upon the nature and terms of the particular contract. As used herein theterm "long-term" contracts means building, installation, or construction contractscovering a period in excess of one year. Persons whose income is derived in whole orin par from such contracts may, as to such income, prepare their returns upon thefollowing bases:

(a) Gross income derived from such contracts may be reported upon the basisof percentage of completion. In such case there should accompany the returncertificate of architects, or engineers showing the percentage of completion during thetaxable year of the entire work performed under contract. There should be deductedfrom such gross income all expenditures made during the taxable year on account ofthe contract, account being taken of the material and supplies on hand at thebeginning and end of the taxable period for use in connection with the work under thecontract but not yet so applied. If upon completion of a contract, it is found that thetaxable net income arising thereunder has not been clearly reflected for any year oryears, the Commissioner of Internal Revenue may permit or require an amendedreturn.

(b) Gross income may be reported in the taxable year in which the contract isfinally completed and accepted if the taxpayer elects as a consistent practice to sotreat such income, provided such method clearly reflects the net income. If thismethod is adopted there should be deducted from gross income all expenditures


during the life of the contract which are properly allocated thereto, taking intoconsideration any material and supplies charged to the work under the contract butremaining on hand at the time of the completion.

Where a taxpayer has filed his return in accordance with the method ofaccounting regularly employed by him in keeping his books and such method clearlyreflects the income, he will not be required to change to either of the methods aboveset forth. If a taxpayer desires to change his method of accounting in accordance withparagraphs (a) and (b) above, a statement showing the composition of all itemsappearing upon his balance sheet and used in connection with the method ofaccounting formerly employed by him, should accompany his return.

SECTION 45. Gross income of farmers. — A farmer reporting on the basisof receipts and disbursements (in which no inventory to determine profits is used)shall include in his gross income for the taxable year (1) the amount of cash or thevalue of merchandise or other property received from the sale of live stock andproduce which were raised during the taxable year or prior years, (2) the profit fromthe sale of any live stock or other items which were purchased, and (3) gross incomefrom all other sources. The profit from the sale of live stock or other items whichwere purchased is to be ascertained by deducting the cost from the sales price in theyear in which the sale occurs, except that in the case of the sale of animals purchasedas draft or work animals, or solely for breeding or dairy purposes and not for resale,the profit shall be the amount of any excess of the sales prices over the amountrepresenting the difference between the cost and the depreciation theretoforesustained and allowed as a deduction in computing net income.

In the case of a farmer reporting on the accrual basis (in which an inventory isused to determine profits), his gross profits are ascertained by adding to the inventoryvalue of live stock and products on hand at the end of the year the amount receivedfrom the sale of live stock products, and miscellaneous receipts for hire of teams,machinery, and the like, during the year, and deducting from this sum the inventoryvalue of live stock and products on hand at the beginning of the year and the cost oflive stock and products purchased during the year. In such cases all live stock raisedor purchased for sale shall be included in the inventory at their proper valuationdetermined in accordance with the method authorized and adopted for the purpose.Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale maybe included in the inventory, instead of being treated as capital assets subject todepreciation, provided such practice is followed consistently by the taxpayer. In caseof the sale of any live stock included in an inventory their cost must not be taken asan additional deduction in the return of income, as such deduction will be reflected in


the inventory.

In every case of the sale of machinery, farm equipment, or other capital assets(which are not to be included in an inventory if one is used to determine profits) anyexcess over the cost thereof less the amount of depreciation theretofore sustained andallowed as a deduction in computing net income, shall be included as gross income.Where farm produce is exchanged for merchandise, groceries, or the like, the marketvalue of the article received in exchange is to be included in gross income. Rentsreceived in crop shares shall be returned as of the year in which the crop shares arereduced to money or a money equivalent. Proceeds of insurance, such as fire andtyphoon insurance on growing crops, should be included in gross income to theamount received in cash or its equivalent for the crop injured or destroyed. If a farmeris engaged in producing crops which take more than a year from the time of plantingto the time of gathering and disposing, the income therefrom may be computed uponthe crop basis; but in any such cases the entire cost of producing the crop must betaken as a deduction in the year in which the gross income from the crop is realized.EaICAD

As herein used the term "farm" embrace the farm in the ordinarily acceptedsense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations,ranches, and all land used for farming operations. All individuals, partnerships, orcorporations that cultivate, operate, or manage farms for gain or profit either asowners, or tenants, are designated farmers. A person cultivating or operating a farmfor recreation or pleasure, the result of which is a continual loss from year to year, isnot regarded as a farmer.

SECTION 46. Sale of patents and copyrights. — A taxpayer disposing ofpatents or copyrights by sale should determine the profit or loss arising therefrom bycomputing the difference between the selling price and the cost. The taxable incomein the case of patents or copyrights acquired prior to March 1, 1913, should beascertained in accordance with the provisions of section 136 of these regulations. Theprofit or loss thus ascertained should be increased or decreased, as the case may be,by the amounts deducted on account of depreciation of such patent or copyrightssince March 1, 1913, or since the date of acquisition if subsequent thereto.

SECTION 47. Sale of goodwill. — Gain or loss from a sale of goodwillresults only when the business, or a part of it, to which the goodwill attaches is sold,in which case the gain or loss will be determined by comparing the sale price with thecost or other basis of the assets, including goodwill. If specific payment was not madefor goodwill acquired after March 1, 1913, there can be no deductible loss with


respect thereto, but gain may be realized from the sale of goodwill built up throughexpenditures which have been currently deducted. It is immaterial that goodwill maynever have been carried on the books as an asset but the burden of proof is on thetaxpayer to establish the cost or fair market value on March 1, 1913, of the goodwillsold.

SECTION 48. Annuities and insurance policies. — Annuities paid byreligious, charitable, and educational corporations under an annuity contract aresubject to tax to the extent that the aggregate amount of the payments to the annuitantexceeds the amounts paid by him as consideration for the contract. An annuitycharged upon devised land is taxable to a donee-annuitant, whether paid by thedevisee out of the rents of the land or from other sources. The devisee is not requiredto return as gross income the amount of rent paid to the annuitant, and he is notentitled to deduct from his gross income any sums paid to the annuitant. Amountsreceived by an insured as a return of premiums paid by him under life insurance,endowment, or annuity contracts, such as the so-called "dividends" of a mutualinsurance company, which may be credited against the current premium, are notsubject to tax. Distributions on paid-up policies which are made out of earnings of theinsurance company subject to tax are in the nature of corporate dividends and shouldbe included in the taxable income of the individual, without any credit for the amountof tax paid by the corporation at source.

SECTION 49. Improvements by lessees. — When buildings are erected orimprovements made by a lessee in pursuance of an agreement with the lessor, andsuch buildings or improvements are not subject to removal by the lessee, the lessormay at his option report the income therefrom upon either of the following bases;

(a) The lessor may report as income at the time when such buildings orimprovements are completed the fair market value of such buildings or improvementssubject to the lease.

(b) The lessor may spread over the life of the lease the estimated depreciatedvalue of such buildings or improvements at the termination of the lease and report asincome for each year of the lease an aliquot part thereof.

If for any other reason than a bona fide purchase from the lessee by the lessorthe lease is terminated, so that the lessor comes into possession or control of theproperty prior to the time originally fixed for the termination of the lease, the lessorreceives additional income for the year in which the lease is so terminated to theextent that the value of such buildings or improvements when he became entitled to


such possession exceeds the amount already reported as income on account of theerection of such buildings or improvements. No appreciation in value due to causesother than the premature termination of the lease shall be included. Conversely, if thebuilding or improvements are destroyed prior to the expiration of the lease, the lessoris entitled to deduct as a loss for the year when such destruction takes place theamount previously reported as income because of the erection of such buildings orimprovements, less any salvage value subject to the lease to the extent that such losswas not compensated for by insurance. If the buildings or improvements destroyedwere acquired prior to March 1, 1913, the deduction shall be based on the cost or thevalue subject to the lease to the extent that such loss was not compensated for byinsurance.

SECTION 50. Forgiveness of indebtedness. — The cancellation andforgiveness of indebtedness may amount to a payment of income, to a gift, or to acapital transaction, dependent upon the circumstances. If, for example, an individualperforms services for a creditor, who, in consideration thereof cancels the debt,income to that amount is realized by the debtor as compensation for his services. If,however, a creditor merely desires to benefit a debtor and without any considerationtherefor cancels the debt, the amount of the debt is a gift from the creditor to thedebtor and need not be included in the latter's gross income. If a corporation to whicha stockholder is indebted forgives the debt, the transaction has the effect of thepayment of a dividend.

SECTION 51. When income is to be reported. — Gains, profits, andincome are to be included in the gross income for the taxable year in which they arereceived by the taxpayer, unless they are included when they accrue to him inaccordance with the approved method of accounting followed by him. If a personsues in one year on a pecuniary claim or for property, and money or property isrecovered on a judgment therefore in a later year, income is realized in that year,assuming that the money or property would have been income in the earlier year ifthen received. This is true of a recovery for patent infringement. Bad debts oraccounts charged off subsequent to March 1, 1913, because of the fact that they weredetermined to be worthless, which are subsequently recovered, whether or not by suit,constitute income for the year in which recovered, regardless of the date whenamounts were charged off.

SECTION 52. Income constructively received. — Income which iscredited to the account of or set apart for a taxpayer and which may be drawn upon byhim at any time is subject to tax for the year during which so credited or set apart,although not then actually reduced to possession. To constitute receipt in such a case


the income must be credited to the taxpayer without any substantial limitation orrestriction as to the time or manner of payment or condition upon which payment is tobe made. A book entry, if made, should indicate an absolute transfer from oneaccount to another. If the income is not credited, but is set apart, such income must beunqualifiedly subject to the demand of the taxpayer. Where a corporationcontingently credits its employees with bonus stock, but the stock is not available tosuch employees until some future date, the mere crediting on the books of thecorporation does not constitute receipt.

SECTION 53. Examples of constructive receipt. — When interest couponshave matured and are payable, but have not been cashed, such interest paymentthough not collected when due and payable, is nevertheless available to the taxpayerand should therefore be included in his gross income for the year during which thecoupons matured. This is true if the coupons are exchanged for other property insteadof eventually being cashed. Defaulted coupons are income for the year in which paid.The distributive share of the profits of a partner in a general co-partnership dulyregistered is regarded as received by him, although not distributed. Interest creditedon savings bank deposits, even though the bank nominally has a rule, seldom or neverenforced, that it may require so many days' notice in advance of cashing depositors'checks, is income to the depositor when credited. An amount credited to shareholdersof a building and loan association, when such credit passes without restriction to theshareholder, has taxable status as income for the year of the credit. When the amountof such accumulations has not become available to the shareholder until the maturityof a share, the amount of any share in excess of the aggregate amount paid in by theshareholder is income for the year of maturity of the share. TaSEHC

SECTION 54. Creation of corporate sinking fund. — If a corporation inorder solely to secure payment of its bonds or other indebtedness, places property intrust, or sets aside certain amounts in a sinking fund under the control of a trustee whomay be authorized to invest and reinvest such sums from time to time, the property orfund thus set aside by the corporation and held by the trustee is an asset of thecorporation, and any gain arising therefrom is income of the corporation and shall beincluded as such in its annual return.

SECTION 55. Acquisition or disposition by a corporation of its owncapital stock. — Whether the acquisition or disposition by a corporation of share ofits own capital stock gives rise to taxable gain or deductible loss depends upon thereal nature of the transaction, which is to be ascertained from all its facts andcircumstances. The receipt by a corporation of the subscription price of shares of itscapital stock upon their original issuance gives rise to neither taxable gain nor


deductible loss, whether the subscription or issue price be in excess of, or less than,the par or stated value of such stock.

But if a corporation deals in its own shares as it might in the shares of anothercorporation, the resulting gain or loss is to be computed in the same manner as thoughthe corporation were dealing in the shares of another. So also if the corporationreceives its own stock as consideration upon the sale of property by it, or insatisfaction of indebtedness to it, the gain or loss resulting is to be computed in thesame manner as though the payment had been made in any other property. Any gainderived from such transaction is subject to tax, and any loss sustained is allowable asdeduction where permitted by the provisions of Title II.

SECTION 56. Contributions by shareholders. — Where a corporationrequires additional funds for conducting its business and obtains such needed moneythrough voluntary pro rata payments by its shareholders, the amounts so receivedbeing credited to its surplus account or to a special capital account, will not beconsidered income, although there is no increase in the outstanding shares of stock ofthe corporation. The payments in such circumstances are in the nature of voluntaryassessments upon, and represent an additional price paid for, in shares of stock heldby the individual shareholders, and will be treated as an addition to and as a part ofthe operating capital of the company.

SECTION 57. Sale and retirement of corporate bonds. — (1) (a) If bondsare issued by a corporation at their face value, the corporation realizes no gain or loss.(b) If thereafter the corporation purchases and retires any of such bonds at a price inexcess of the issuing price or face value, the excess of the purchase price over theissuing price or face value is a deductible expense for the taxable year. (c) If,however, the corporation purchases and retires any of such bonds at a price less thanthe issuing price or face value, the excess of the issuing price or face value over thepurchase price is gain or income for the taxable year.

(2) (a) If bonds are issued by a corporation at a premium, the net amount ofsuch premium is gain or income which should be prorated or amortized over the lifeof the bond. (b) If thereafter the corporation purchases and retires any of such bondsat a price in excess of the issuing price minus any amount of premium alreadyreturned as income, the excess of the purchase price over the issuing price minus anyamount of premium already returned as income (or over the face value plus anyamount of premiums not yet returned as income) is a deductible expenses for thetaxable year. (c) If, however, the corporation purchases and retires any of such bondsat a price less than the issuing price minus any amount of premium already returned


as income, the excess of the issuing price minus any amount of premium alreadyreturned as income (or of the face value plus any amount of premium not yet returnedas income) over the purchase price is gain or income for the taxable year.

(3) (a) If bonds are issued by a corporation at a discount, the net amount ofsuch discount is deductible and should be prorated or amortized over the life of thebonds. (b) If thereafter the corporation purchases and retires any of such bonds at aprice in excess of the issuing price plus any amount of discount already deducted, theexcess of the purchase price over the issuing price plus any amount of discountalready deducted (or over the face value minus any amount of discount not yetdeducted), is a deductible expense for the taxable year. (c) If, however, thecorporation purchases and retires any of such bonds at a price less than the issuingprice plus any amount of discount already deducted, the excess of the issuing priceplus any amount of discount already deducted (or of the face value minus any amountof discount not yet deducted) over the purchase price is gain or income for the taxableyear.

SECTION 58. Income of corporation from leased property. — Where acorporation has leased its property in consideration that the lessee shall pay in lieu ofother rental an amount equivalent to a certain rate of dividend on the lessor's capitalstock or the interest on the lessor's outstanding indebtedness, together with taxes,insurance or other fixed charges, such payments shall be considered rental paymentsand shall be returned by the lessor corporation as income, notwithstanding the factthat the dividends and interest are paid by the lessee directly to the shareholders andbondholders of the lessor. The fact that a corporation has conveyed or let its propertyand has parted with its management and control, or has ceased to engage in thebusiness for which it was originally organized, will not relieve it from liability to thetax. While the payments made by the lessee directly to the bondholders orshareholders of the lessor are rentals as to both the lessee and lessor (rentals paid inone case and rentals received in the other), to the bondholders and the shareholders,such amounts are interest and dividend payments received as from the lessor and assuch shall be accounted for in their returns.

SECTION 59. Gross income of a corporation in liquidation. — When acorporation is dissolved, its affairs are usually wound up by a receiver or trustee indissolution. The corporate existence is continued for the purpose of liquidating theassets and paying the debts, and such receiver or trustee stands in the stead of thecorporation for such purposes. Any sales of property by them are to be treated as ifmade by the corporation for the purpose of ascertaining the gain or loss.


SECTION 60. Gross income of foreign corporations. — The gross incomeof a foreign corporation subject to tax consists of its gross income from sourceswithin the Philippines. Gross income from sources within the Philippines, as appliedto foreign corporations, shall include interest received on bonds, notes, or otherinterest-bearing obligations issued by residents, corporate or otherwise, as well asincome derived from dividends on the capital stock or from the net earnings ofdomestic or resident foreign corporations, joint stock companies, associations, orinsurance companies, dividends from other foreign corporations to the extentprovided in Section 37 of the Code, and likewise income from rentals and royaltiesfrom all sources within the Philippines.

(Section 29(b) of the Code)

SECTION 61. Exclusions from gross income. — The term "gross income"as used in the Act does not include those items of income exempted by statute or byfundamental law. Such tax-free income should not be included in the income taxreturn unless information regarding it is specifically called for. The exclusion of suchincome should not be confused with the reduction of gross income by the applicationof allowable deductions.

SECTION 62. Proceeds of insurance. — The proceeds of life-insurancepolicies, paid by reason of the death of an insured to his estate or to any beneficiary(individual, partnership, or corporation, but not a transferee for a valuableconsideration), directly or in trust, are excluded from the gross income of thebeneficiary. It is immaterial whether the proceeds are received in a single sum or ininstallments. If, however, such proceeds are held by the insurer under an agreement topay interest thereon, the interest payments must be included in gross income.Amounts received (other than amounts paid by reason of the death of the insured andinterest payments on such amounts) under a life insurance, endowment, or annuitycontract are excluded from gross income but, if such amounts (when added toamounts received before the taxable year under such contract) exceed the aggregatepremiums or consideration paid (whether or not paid during the taxable year) then theexcess shall be included in gross income. However, in the case of a transfer for avaluable consideration, by assignment or otherwise, of a life insurance, endowment,or annuity contract, or any interest therein, only the actual value of such considerationand the amount of the premiums and other sums subsequently paid by the transfereeare exempt from taxation.

SECTION 63. Amounts received as compensation for injuries or sickness.


— The amounts received by an insured or his estate or beneficiaries through accidentor health insurance or under workmen's compensation acts as compensation forpersonal injuries or sickness are excluded from the gross income of the insured, hisestate, and other beneficiaries. Any damages recovered by suit or agreement onaccount of such injuries or sickness are similarly excluded from the gross income ofthe individual injured or sick, if living, or of his estate or other beneficiaries entitledto receive such damages, if dead.

SECTION 64. Gifts and bequests. — Property received as a gift orreceived under a will or testament or through legal succession, is exempt from theincome tax, although the income therefrom or income derived from its investment,sale, or otherwise is not. An amount of principal paid under a marriage settlement is agift. Neither alimony nor an allowance based on a separation agreement is taxableincome.

(Section 30(a) of the Code)

SECTION 65. Business expenses. — Business expenses deductible fromgross income include the ordinary and necessary expenditures directly connected withor pertaining to the taxpayer's trade or business. The cost of goods purchased forresale, with proper adjustment for opening and closing inventories, is deducted fromgross sales is computing gross income. Among the items included in businessexpenses are management expenses, commissions, labor, supplies, incidental repairs,operating expenses of transportation, equipment used in the trade or business,traveling expenses while away from home solely in the pursuit of a trade or business,advertising and other selling expenses, together with insurance premiums against fire,storm, theft, accident, or other similar losses in the case of a business, and rental forthe use of business property. A taxpayer is entitled to deduct the necessary expensespaid in carrying on his business from his gross income from whatever source.

SECTION 66. Traveling expenses. — Traveling expenses as ordinarilyunderstood, include transportation expenses and meals and lodging. If the trip isundertaken for other than business purposes, the transportation expenses are personalexpenses, and the meals and lodging are living expenses, and therefore, notdeductible. If the trip is solely on business, the reasonable and necessary travelingexpenses, including transportation expenses, meals and lodging, become businessinstead of personal expenses.

(a) If, then, an individual, whose business requires him to travel receives asalary as full compensation for his services, without reimbursement for traveling


expenses, or is employed on a commission basis with no expense allowance, histraveling expenses, including the entire amount expended far meals and lodging, aredeductible from gross income.

(b) If an individual receives a salary and is also repaid his actual travelingexpenses, he shall include in gross income, the amount so repaid and may deduct suchexpenses. aDcHIC

(c) If an individual receives a salary and also an allowance for meals andlodging, as for example, a per diem allowance in lieu of subsistence, the amount ofthe allowance should be included in gross income and the cost of such meals andlodging may be deducted therefrom.

A payment for the use of a sample room at a hotel for the display of goods is abusiness expense. Only such expenses as are reasonable and necessary in the conductof the business and directly attributable to it may be deducted. A taxpayer claimingthe benefit of the deductions referred to herein must attach to his return a statementshowing (1) the nature of the business in which he is engaged; (2) the number of daysaway from home during the taxable year on account of business; (3) the total amountof expenses incident to meals and lodging while absent from home and businessduring the taxable year; (4) the total amount of other expenses incident to travel andclaimed as a deduction.

Claim for the deductions referred to herein must be substantiated, whenrequired by the Commissioner of Internal Revenue by record showing in detail theamount and nature of the expenses incurred.

SECTION 67. Cost of materials. — Taxpayers carrying materials andsupplies on hand should include in expenses the charges for materials and suppliesonly to the amount that they are actually consumed and used in operation during theyear for which the return is made, provided that the cost of such materials andsupplies has not been deducted in determining the net income for any previous year.If a taxpayer carries incidental materials or supplies on hand for which no record ofconsumption is kept or of which physical inventories at the beginning and end of theyear are not taken, it will be permissible for the taxpayer to include in his expensesand deduct from gross income the total cost of such supplies and materials as werepurchased during the year for which the return is made, provided the net income isclearly reflected by this method.

SECTION 68. Repairs. — The cost of incidental repairs which neither


materially add to the value of the property nor appreciably prolong its life, but keep itin an ordinarily efficient operating condition, may be deducted as expense, providedthe plant or property account is not increased by the amount of such expenditure.Repairs in the nature of replacement, to the extent that they arrest deterioration andappreciably prolong the life of the property should be charged against thedepreciation reserves if such account is kept.

SECTION 69. Professional expenses. — A professional may claim asdeductions the cost of supplies used by him in the practice of his profession, expensespaid in the operation and repair of transportation equipment used in makingprofessional calls, dues to professional societies and subscriptions to professionaljournals, the rent paid for office rooms, the expenses of the fuel, light, water,telephone, etc.; used in such offices, and the hire of office assistants. Amountscurrently expended for books, furnitures, and professional instruments andequipment, the useful life of which is short, may be deducted. But amounts expendedfor books, furniture, and professional instruments and equipment of a permanentcharacter are not allowable as deductions. SEHTIc

SECTION 70. Compensation for personal services. — Among theordinary and necessary expenses paid or incurred in carrying on any trade or businessmay be included a reasonable allowance for salaries or other compensation forpersonal services actually rendered. The test of deductibility in the case ofcompensation payments is whether they are reasonable and are, in fact, paymentspurely for service. This test and its practical application may be further stated andillustrated as follows:

(1) Any amount paid in the form of compensation, but not in fact as thepurchase price of services, is not deductible. (a) An ostensible salary paid by acorporation may be a distribution of dividend on stock. This is likely to occur in thecase of a corporation having few shareholders, practically all of whom draw salaries.If in such a case the salaries are in excess of those ordinarily paid for similar services,and the excessive payment correspond or bear a close relationship to thestockholdings of the officers or employees, it would seem likely that the salaries arenot paid wholly for services rendered, but that the excessive payments are adistribution of earnings upon the stock. (b) An ostensible salary may be in partpayment for property. This may occur, for example, where a partnership sells out to acorporation, the former partners agreeing to continue in the service of the corporation.In such a case it may be found that the salaries of the former partners are not merelyfor services, but in part constitute payment for the transfers of their business.


(2) The form or method of fixing compensation is not decisive as todeductibility. While any form of contingent compensation invites scrutiny as apossible distribution of earnings of the enterprise, it does not follow that payments ona contingent basis are to be treated fundamentally on any basis different from thatapplying to compensation at a flat rate. Generally speaking, if contingentcompensation is paid pursuant to a free bargain between the employer and theindividual made before the services are rendered, not influenced by any considerationon the part of the employer other than that of securing on fair and advantageous termsthe services of the individual, it should be allowed as a deduction even though in theactual working out of the contract it may prove to be greater than the amount whichwould ordinarily be paid.

(3) In any event the allowance for compensation paid may not exceed what isreasonable in all the circumstances. It is in general just to assume that reasonable andtrue compensation is only such amount as would ordinarily be paid for like servicesby like enterprises in like circumstances. The circumstances to be taken intoconsideration are those existing at the date when the contract for services was made,not those existing at the date when the contract is questioned.

SECTION 71. Treatment of excessive compensation. — The income taxliability of the recipient in respect of an amount ostensibly paid to him ascompensation, but not allowed to be deducted as such by the payer, will depend uponthe circumstances of each case. Thus, in the case of excessive payments bycorporations, if such payments correspond or bear a close relationship tostockholdings, and are found to be distribution of earnings or profits, the excessivepayments will be treated as dividend. If such payments constitute payment forproperty, they should be treated by the payer as a capital expenditure and by therecipient as part of the purchase price. HSCcTD

SECTION 72. Bonuses to employees. — Bonuses to employees willconstitute allowable deductions from gross income when such payments are made ingood faith and as additional compensation for the services actually rendered by theemployees, provided such payment, when added to the stipulated salaries, do notexceed a reasonable compensation for the service rendered. It is immaterial whethersuch bonuses are paid in cash or in kind or partly in cash and partly in kind.Donations made to employees and others, which do not have in them the element ofcompensation or are in excess of reasonable compensation for services, are notdeductible from gross income.


SECTION 73. Pensions, compensation for injuries. — Amounts paid forpensions to retired employees or to their families or others dependent upon them, oron account of injuries received by employees, and lump-sum amounts paid or accruedas compensation for injuries, are proper deductions as ordinary and necessaryexpenses. Such deductions are limited to the amount not compensated for byinsurance or otherwise. When the amount of the salary of an officer or employee ispaid for a limited period after his death to his widow or heirs, in recognition of theservices rendered by the individual, such payments may be deducted. Salaries paid byemployers to employees who are absent in the military, naval or other service of theGovernment, but who intend to return at the conclusion of such service, are allowabledeductions. (See Section 118 of these regulations, relative to pension trust.)

SECTION 74. Rentals. — Where a leasehold is acquired for businesspurposes for a specified sum, the purchaser may take as a deduction in his return analiquot part of such sum each year, based on the number of years the lease has to run.Taxes paid by a tenant to or for a landlord for business property are additional rentand constitute a deductible item to the tenant and taxable income to the landlord, theamount of the tax being deductible by the latter. The cost borne by a lessee in erectingbuildings or making permanent improvements on ground of which he is lessee is heldto be a capital investment and not deductible as a business expense. In order to returnto such taxpayer his investment of capital, an annual deduction may be made fromgross income of an amount equal to the cost of such improvements divided by thenumber of years remaining of the term of lease, and such deduction shall be in lieu ofa deduction for depreciation. If the remainder of the term of lease is greater than theprobable life of the buildings erected, or of the improvements made, this deductionshall take the form of an allowance for depreciation.

SECTION 75. Expenses of farmers. — A farmer who operates a farm forprofit is entitled to deduct from gross income as necessary expenses all amountsactually expended in the carrying on of the business of farming. The cost of ordinarytools of short life or small cost, such as hand tools, including shovels, rakes, etc., maybe included. The cost of feeding and raising livestock may be treated as an expensededuction, in so far as such cost represents actual outlay, but not including the valueof farm produce grown upon the farm or the labor of the taxpayer. Where a farmer isengaged in producing crops which take more than a year from the time of planting tothe process of gathering and disposal, expenses deducted may be determined upon thecrop basis, and such deductions must be taken in the year in which the gross incomefrom the crop has been realized. The cost of farm machinery, equipment, and farmbuildings represents a capital investment and is not an allowable deduction as an item


of expense. Amounts expended in the development of farms, orchards, and ranches,prior to the time when the productive state is reached may be regarded as investmentsof capital. Amounts expended in purchasing work, breeding or dairy animals areregarded as investments of capital, and may be depreciated unless such animals areincluded in an inventory in accordance with Section 149 of these regulations. Thepurchase price of transportation equipment even when wholly used in carrying onfarm operations, is not deductible but is regarded as an investment of capital. The costof gasoline or fuel, repairs, and upkeep of the transportation equipment if used whollyin the business of farming is deductible as an expense; if used partly for businesspurposes and partly for the pleasure or convenience of the taxpayer or his family,such cost may be apportioned according to the extent of the use for purposes ofbusiness and pleasure or convenience, and only the proportion of such cost justlyattributable to business purposes is deductible as a necessary expense. If a farm isoperated for recreation or pleasure and not on a commercial basis, and if the expensesincurred in connection with the farm are in excess of the receipt therefrom, the entirereceipts from the sale of products may be ignored in rendering a return of income, andthe expenses incurred, being regarded as personal expenses, will not constituteallowable deduction.

SECTION 76. When charges are deductible. — Each year's return, so faras practicable, both as to gross income and deductions therefrom, should be completein itself, and taxpayers are expected to make every reasonable effort to ascertain thefacts necessary to make a correct return. The expenses, liabilities, or deficit of oneyear cannot be used to reduce the income of a subsequent year. A taxpayer has theright to deduct all authorized allowances and it follows that if he does not within anyyear deduct certain of his expenses, losses, interests, taxes, or other charges, he cannot deduct them from the income of the next or any succeeding year. If it isrecognized, however, that particularly in a going business of any magnitude there arecertain overlapping items both of income and deduction, and so long as theseoverlapping items do not materially distort the income, they may be included in theyear in which the taxpayer, pursuant to a consistent policy, takes them into hisaccounts. Judgments or other binding judicial adjudication, on account of damages forpatent infringement, personal injuries, or other cause, are deductible from grossincome when the claim is so adjudicated or paid, unless taken under other methods ofaccounting which clearly reflect the correct deduction, less any amount of suchdamages as may have been compensated for by insurance or otherwise: If subsequentto its occurrence, however, a taxpayer first ascertains the amount of a loss sustainedduring a prior taxable year which has not been deducted from gross income, he mayrender an amended return for such preceding taxable year including such amount of


loss in the deduction from gross income and may in proper cases file a claim forrefund of the excess tax paid by reason of the failure to deduct such loss in theoriginal return. A loss from theft or embezzlement occurring in one year anddiscovered in another is ordinarily deductible for the year in which sustained.

SECTION 77. Expenses allowable to non-resident aliens and foreigncorporations. — The expenses allowable to a non-resident alien or a foreigncorporation consist of only such expenses as are incurred in carrying on any businessor trade conducted within the Philippines exclusively.

(Section 30(b) of the Code)

SECTION 78. Interest. — Interest paid or accrued within the taxable yearon indebtedness may be deducted from gross income, except that interest onindebtedness incurred or continued to purchase bonds and other securities, the interestupon which is exempt from tax, is not deductible. Interest paid by the taxpayer on amortgage upon real estate of which he is the legal or equitable owner, even though thetaxpayer is not directly liable upon the bond or not secured by such mortgage, may bededucted as interest on his indebtedness.

In the case of a non-resident alien individual or foreign corporation, theallowable deduction will be the proportion of such interest which the amount of grossincome from sources within the Philippines bears to the amount of gross income fromall sources within and without this country; however, to avail of this deduction, suchnon-resident alien individual or foreign corporation shall include in the return all theinformation necessary for its calculation.

Interest paid by a corporation on scrip dividends is an allowable deduction.So-called interest on preferred stock, which is in reality a dividend thereon, can not bededucted in computing net income. In the case of banks and loan or trust companies,interest paid within the year on deposits or on moneys received for investment andsecured by interest-bearing certificates of indebted issued by such hank or loan ortrust company may be deducted from gross income.

SECTION 79. Interest on capital. — Interest calculated for cost-keepingor other purposes on account of capital or surplus invested in the business, which doesnot represent a charge arising under an interest-bearing obligation, is not allowablededuction from gross income.

(Section 30(c) of the Code)


SECTION 80. Taxes in general. — As a general rule, taxes are deductiblewith the exception of those with respect to which the law does not permit deduction.However, in the case of a non-resident alien individual and a foreign corporation,deduction is allowed only if and to the extent that the taxes for which deduction isclaimed are connected with income from sources within the Philippines.

Import duties paid to the proper customs officers, and business, occupation,license, privilege, excise and stamp taxes and any other taxes of every name or naturepaid directly to the Government of the Philippines or to any political subdivisionthereof, are deductible. The word "taxes" means taxes proper and no deductionsshould be allowed for amounts representing interest, surcharge, or penalties incidentto delinquency. Postage is not a tax. Automobile registration fees are consideredtaxes. Taxes are deductible as such only by the person upon whom they are imposed.Thus the merchants' sales tax imposed by law upon sales is not deductible by theindividual purchaser even though the tax may be billed to him as a separate item. DHECac

In computing the net income of an individual no deduction is allowed for thetaxes imposed upon his interest as shareholder of a bank or other corporation, whichare paid by the corporation without reimbursement from the taxpayer. The amount sopaid should not be included in the income of the shareholder.

In the case of corporate bonds or other obligations containing a tax-freecovenant clause the corporation paying a tax or any part of it, for someone elsepursuant to its agreement is not entitled to deduct such payment from gross income onany ground.

SECTION 81. Income tax imposed by the Government of the Philippines.— The law does not permit the deduction of the income tax paid to or accrued infavor of the Government of the Philippines, and in no case may the taxpayer avail ofsuch deduction.

SECTION 82. Income, war-profits, and excess-profits taxes imposed bythe authority of a foreign country. — Income, war-profits, and excess-profits taxesimposed by the authority of a foreign country (including the United States andpossessions thereof) are allowed as deductions only if the taxpayer does not signify inhis return his desire to have to any extent the benefits of the provisions of lawallowing credits against the tax for taxes of foreign countries. In the case of a citizenof a foreign country residing in the Philippines whose income from sources withinsuch foreign country is not subject to income tax, only that portion of the taxes paid tosuch foreign country which corresponds to his net income subject to the Philippine


income tax shall be allowed as deduction.

SECTION 83. Estate, inheritance, and gift taxes: taxes assessed againstlocal benefits. — Estate, inheritance, and gift taxes are not deductible.

So-called taxes, more properly assessments, paid for local benefits, such asstreet, sidewalk, and other like improvements, imposed because of and measured bysome benefit inuring directly to the property against which the assessment is levied,do not constitute an allowable deduction from gross income. A tax is consideredassessed against local benefits when the property subject to the tax is limited to theproperty benefited. Special assessments are not deductible, even though an incidentalbenefit may inure to the public welfare. The taxes deductible are those levied for thegeneral public welfare, by the proper taxing authorities at a like rate against allproperty in the territory over which such authorities have jurisdiction. Whenassessments are made for the purpose of maintenance or repair of local benefits, thetaxpayer may deduct assessments paid as an expense incurred in business, if thepayment of such assessments is necessary to the conduct of his business. When theassessments are made for the purpose of constructing local benefits, the payments bythe taxpayer are in the nature of capital expenditures and are not deductible. Whereassessments are made for the purpose of both construction and maintenance orrepairs, the burden is on the taxpayer to show the allocation of the amounts assessedto the different purposes. If the allocation can not be made, none of the amounts sopaid is deductible.

SECTION 84. Analysis of credit for taxes: — If the taxpayer signifies inhis return his desire to claim a credit for taxes, the basis of such credit, in the case of acitizen of the Philippines, whether resident or non-resident, and in the case of adomestic corporation, is as follows: (a) The amount of any income, war-profits, andexcess-profits taxes paid or accrued during the taxable year to any foreign country;and (b) an individual's proportionate share of any such taxes of which he is a partneror of an estate or trust of which he is a beneficiary paid or accrued during the taxableyear to a foreign country if his distributive share of the income of such partnership ortrust is reported for taxation under Title II of the Code.

In the case of an alien resident of the Philippines who signifies in his return hisdesire to claim a credit for such taxes the basis of the credit is as follows: (a) Theamount of any such taxes paid or accrued during the taxable year to any foreigncountry if the foreign country of which such alien resident is a citizen or subject, inimposing such taxes, allows a similar credit to citizens of the Philippines residing insuch country; and (b) his proportionate share of any such taxes of a partnership of


which he is a partner or an estate or trust of which he is a beneficiary paid or accruedduring the taxable year to any foreign country if his distributive share of the netincome of such partnership or trust is reported for taxation under Title II of the Code,and if the foreign country of which such alien resident is a citizen or subject, inimposing such taxes, allows a similar credit to citizens of the Philippines residing insuch country.

If a taxpayer signifies in his return his desire to claim credit for taxes, suchaction will be considered to apply to income, war-profits, and excess-profits taxespaid to all foreign countries (including the United States and possessions thereof), andno portion of any such taxes shall be allowed as a deduction from gross income.

SECTION 85. Meaning of terms. — The "amount of any income,war-profits, and excess-profits taxes paid or accrued during the taxable year" meanstaxes proper (no credit being given for amounts representing interest or penalties)paid or accrued during the taxable year on behalf of the taxpayer claiming credit."Foreign country" means any foreign state or political subdivision thereof, or anyforeign political entity, which levies and collects income, war-profits, orexcess-profits taxes, and includes the United States or any political subdivisionthereof.

SECTION 86. Conditions of allowance of credits. — If the taxpayersignifies in his return his desire to claim credit for income, war-profits, orexcess-profits taxes paid other than to the Philippines, the income tax return must beaccompanied by the appropriate form prescribed by the Commissioner of InternalRevenue. The form must be carefully filled in with all the information there called forand with the calculations of credits there indicated, and must be duly signed andsworn to or affirmed. If credit is sought for taxes already paid the form must haveattached to it the receipt for each such tax payment. If credit is sought for taxesaccrued, the form must have attached to it the return on which each such accrued taxwas based. This receipt or return so attached must be either the original, a duplicateoriginal, a duly certified or authenticated copy, or a sworn copy. In case only a sworncopy of a receipt or return is attached, there must be kept readily available forcomparison on request the original, a duplicate original, or a duly certified orauthenticated copy. If the receipt of the return is in a foreign language, a certifiedtranslation thereof must be furnished by the taxpayer. Any additional informationnecessary for the determination of the amount of income derived from sourceswithout the Philippines and from each foreign country shall, upon the request of theCommissioner of Internal Revenue, be furnished by the taxpayer.


In the case of a credit sought for a tax accrued but not paid, the Commissionerof Internal Revenue may in addition require as a condition precedent to the allowanceof credit a bond from the taxpayer. It shall be in such sum as the Commissioner ofInternal Revenue may prescribe, and shall be conditioned for the payment by thetaxpayer of any amount of tax found due upon any redetermination of the tax madenecessary by such credit proving incorrect, with such further conditions as theCommissioner of Internal Revenue may require. This bond shall be executed by thetaxpayer, or the agent or representative of the taxpayer, as principal, and by suretiessatisfactory to and approved by the Commissioner of Internal Revenue. aEcADH

If it is the desire of the taxpayer to claim as a credit and not as a deductionaccrued income, war-profits, and excess profits taxes imposed by the authority of anyforeign country or possession of the United States but at the time the return is made itis impossible to estimate the amount of such taxes that may have accrued for theperiod for which the return is made, the form required under this section may be filedat a later date but a credit cannot be allowed for such taxes unless the taxpayersignifies in his return his desire to have to any extent the benefits of Section 30(c) (3)to (9).

SECTION 87. Redetermination of tax when credit proves incorrect. — Incase credit has been given for taxes accrued, or a proportionate share thereof, and theamount that is actually paid on account of such taxes, or a proportionate share thereof,is not the same as the amount of such credit, or in case any tax payment credited isrefunded in whole or in part, the taxpayer shall immediately notify the Commissionerof Internal Revenue. The Commissioner of Internal Revenue will thereuponredetermine the amount of the tax of such taxpayer for the year or years for whichsuch incorrect credit was granted. The amount of tax, if any, due upon suchredetermination shall be paid by the taxpayer upon notice and demand by theCommissioner of Internal Revenue. The amount of tax, if any, shown by suchredetermination to have been overpaid shall be credited or refunded to the taxpayer inaccordance with the provisions of Section 309 of the Code.

SECTION 88. Countries which do or do not satisfy the similar creditrequirements. — A country satisfies the similar credit requirement of Section30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens ofthe Philippines residing in such country a credit for the amount of income taxes paidto the Philippines. A country does not satisfy the similar credit requirement of Section(30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines residing insuch country for the amount of income taxes paid to the Philippines, or if such


country does not impose any income taxes. If the country of which a resident alien isa citizen or subject does not allow to a Filipino citizen residing in such country acredit for taxes paid by such citizen to another foreign country, no credit is allowed tosuch resident alien for taxes paid by him to such foreign country.

SECTION 89. When credit for taxes may be taken. — The credit for taxesprovided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return forthe year in which the taxes accrued or in which the taxes were paid, dependent uponwhether the accounts of the taxpayer are kept and his returns filed upon the accrualbasis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows thetaxpayer, at his option and irrespective of the method of accounting employed inkeeping his books, to take such credit for taxes as may be allowable in the return forthe year in which the taxes accrued. An election thus made must be followed inreturns for all subsequent years, and no portion of any such taxes will be allowed as adeduction from gross income.

SECTION 90. Domestic corporation owning a majority of the stock offoreign corporation. — In the case of a domestic corporation which owns a majorityof the voting stock of a foreign corporation from which it receives dividends in anytaxable rear, the credit for foreign taxes includes not only the income, war profits andexcess-profits taxes paid or accrued during the taxable year to any foreign country bysuch domestic corporation, but also income, war-profits and excess-profits taxesdeemed to have been paid determined by taking the same proportion of any income,war-profits, and excess-profits taxes paid or accrued by such controlled foreigncorporation to any foreign country upon or with respect to the accumulated profits ofsuch foreign corporation from which such dividends were paid, which the amount ofany such dividends received bears to the amount of such accumulated profits. Theamount of taxes deemed to have been paid is limited, however, to an amount of thetax against which the credit for foreign taxes is taken, which the amount of suchdividends bears to the amount of the entire net income of the domestic corporation inwhich such dividends are included. If dividends are received from more than onecontrolled foreign corporation, the limitation is to be computed separately for thedividends received from each controlled foreign corporation. If the credit for foreigntaxes includes taxes deemed to have been paid, the taxpayer must furnish the sameinformation with respect to the taxes deemed to have been paid as it is required tofurnish with respect to the taxes actually paid or accrued by it. Taxes paid or accruedby a controlled foreign corporation are deemed to have been paid by the domesticcorporation for purposes of credit only.

SECTION 91. Non-resident aliens and foreign corporations not allowed


credits against the tax. — Non-resident aliens and foreign corporations may not claimcredits against the tax from taxes of foreign countries.

SECTION 92. Limitation on credit for foreign taxes. — The amount ofcredit for foreign taxes shall be subject to the following limitations:

(a) The amount of the credit in respect to the tax paid or accrued to anycountry shall not exceed the same proportion of the tax against which such credit istaken, which the taxpayer's net income from sources within such country taxableunder Title II bears to his entire net income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of thetax against which such credit is taken, which the taxpayer's net income from sourceswithout the Philippines taxable under Title II bears to his entire net income for thesame taxable year.

(Section 30(d) of the Code)

SECTION 93. Losses by individuals. — Losses sustained by individualsduring the year not compensated for by insurance or otherwise are fully deductible(except by non-resident aliens) —

(a) If incurred in a taxpayer's trade; or

(b) If incurred in any transaction entered into for profits; or

(c) Of property not connected with the trade or business if arising from fires,storm, shipwreck, or other casualty, or from robbery, theft or embezzlement. No lossshall, however, be allowed as a deduction if at the time of filing of the return, suchloss has been claimed as deduction for estate or inheritance tax purposes in the estateor inheritance tax return.

SECTION 94. Losses by corporations. — Domestic corporations maydeduct losses actually sustained and charged off within the year and not compensatedfor by insurance or otherwise.

SECTION 95. Losses by non-resident alien and foreign corporation. —Non-resident aliens and foreign corporations are allowed only losses sustained inbusiness or trade conducted within the Philippines, losses of property within thePhilippines arising from fires, storms, shipwreck, or other casualty and from robbery,theft, or embezzlement, and losses actually sustained in transactions entered into for


profit in the Philippines, although not connected with their trade or business, notcompensated by insurance or otherwise.

SECTION 96. Losses generally. — Losses must usually be evidenced byclosed and completed transactions. Proper adjustment must be made in each case forexpenditures or items of loss properly chargeable to capital account, and fordepreciation, obsolescence, amortization, or depletion. Moreover, the amount of theloss must be reduced by the amount of any insurance or other compensation received,and by the salvage value, if any, of the property. A loss on the sale of residentialproperty is not deductible unless the property was purchased or constructed by thetaxpayer with a view to its subsequent sale for pecuniary profit. No loss is sustainedby the transfer of property by gift or death. Losses sustained in illegal transactions arenot deductible. EAISDH

SECTION 97. Voluntary removal of buildings. — Loss due to thevoluntary removal or demolition of old buildings, the scrapping of old machinery,equipment, etc., incident to renewals and replacements will be deductible from grossincome. When a taxpayer buys real estate upon which is located a building, which heproceeds to raze with a view to erecting thereon another building, it will beconsidered that the taxpayer has sustained no deductible expense on account of thecost of such removal, the value of the real estate, exclusive of old improvements,being presumably equal to the purchase price of the land and building plus the cost ofremoving the useless building.

SECTION 98. Loss of useful value. — When through some change inbusiness conditions, the usefulness in the business of some or all of the capital assetsis suddenly terminated, so that the taxpayer discontinues the business or discards suchassets permanently from use of such business, he may claim as deduction the actualloss sustained. In determinating the amount of the loss, adjustment must be made,however, for improvements, depreciation and the salvage value of the property. Thisexception to the rule requiring a sale or other disposition of property in order toestablish a loss requires proof of some unforeseen cause by reason of which theproperty has been prematurely discarded, as, for example, where an increase in thecost or change in the manufacture of any product makes it necessary to abandon suchmanufacture, to which special machinery is exclusively devoted, or where newlegislation directly or indirectly makes the continued profitable use of the propertyimpossible. This exception does not extend to a case where the useful life of propertyterminates solely as a result of those gradual processes for which depreciationallowance are authorized. It does not apply to inventories or to other than capitalassets. The exception applies to buildings only when they are permanently abandoned


or permanently devoted to a radically different use, and to machinery only when itsuse as such is permanently abandoned. Any loss to be deductible under this exceptionmust be charged off in the books and fully explained in returns of income.

SECTION 99. Shrinkage in value of stocks. — A person possessing stockof a corporation can not deduct from gross income any amount claimed as a lossmerely on account of shrinkage in value of such stock through fluctuation of themarket or otherwise. The loss allowable in such case is that actually suffered whenthe stock is disposed of. If stock of a corporation becomes worthless, its cost or otherbasis determined in accordance with these regulations may be deducted by the ownerin the taxable year in which the stock became worthless, provided a satisfactoryshowing of its worthlessness be made, as in the case of bad debts.

SECTION 100. Losses of farmers. — Losses incurred in the operation offarms as business enterprises are deductible from gross income. If farm products areheld for favorable markets, no deduction on account of shrinkage in weight orphysical value or by deterioration in storage shall be allowed, except as suchshrinkage may be reflected in an inventory if used to determine profits. The total lossby storm, flood, or fire of a prospective crop is not a deductible loss in computing netincome. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., isnot entitled to claim as a loss the value of animals that perish from among thoseanimals that were raised on the farm, except as such loss is reflected in an inventory ifused. If livestock has been purchased after March 1, 1913, for any purpose, andafterwards dies from disease, exposure, or injury, or is killed by order of theauthorities, the actual purchase price of such stock, less any depreciation allowable asa deduction in computing net income, with respect to such perished, livestock, andalso any insurance or indemnity recovered, may be deducted as a loss. The actual costof other property (with proper adjustment for depreciation), which is destroyed byorder of the authorities, may in like manner be claimed as a loss; but if reimbursementis made in whole or in part on account of stock killed or property destroyed, theamount received shall be reported as income for the year in which reimbursement ismade. The cost of any feed, pasturage, or care which has been deducted as an expenseof operation shall not be included as part of the cost of the stock for the purpose ofascertaining the amount of a deductible loss. If gross income is ascertained byinventories, no deduction can be made for livestock or products lost during the year,whether purchased for resale, produced on the farm, as such losses will be reflected inthe inventory by reducing the amount of livestock or products on hand at the close ofthe year. If an individual owns and operates a farm, in addition to being engaged inanother trade, business or calling, and sustains a loss from such operation of the farm,


then the amount of loss sustained may be deducted from gross income received fromall sources, provided the farm is not operated for recreation or pleasure.

SECTION 101. Capital losses; losses on wash sales of stock or securities.— Losses on sales or exchanges of capital assets are allowed to the extent provided insection 34 of the Code. If any securities which are capital assets become worthlessduring the taxable year, the loss resulting therefrom shall be considered as a loss fromthe sale or exchange, on the last day of such taxable year, of capital assets. Losses on"wash sales" of stock or securities are treated in section 33 of the Code.

(Section 30 (e) of the Code)

SECTION 102. Bad debts. — Where all the surrounding circumstancesindicate that a debt is worthless, and the debt is charged off on the books of thetaxpayer within the year, the same may be allowed as a deduction in computing netincome. There should accompany the return a statement showing the propriety of anydeduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt,he must ascertain and be able to demonstrate, with a reasonable degree of certainty,the uncollectibility of the debt. Any amount subsequently received on account of abad debt previously charged off and allowed as a deduction for income tax purposes,must he included in gross income for the taxable year in which received. Indetermining whether a debt is worthless the Commissioner of Internal Revenue willconsider all pertinent evidence, including the value of the collateral, if any, securingthe debt and the financial condition of the debtor.

Where the surrounding circumstances indicate that a debt is worthless anduncollectible and that legal action to enforce payment would in all pro-ability notresult in the satisfaction of execution on a judgment, a showing of those facts will besufficient evidence of the worthlessness of the debt for the purpose of deduction.Bankruptcy is generally an indication of the worthlessness of at least a part of anunsecured and unpreferred debt. Actual determination of worthlessness in bankruptcyis sometimes possible before and at other times only when a settlement in bankruptcyshall have been had. Where a taxpayer ascertained a debt to be worthless and chargedit off in one year, the mere fact that bankruptcy proceedings instituted against thedebtor are terminated in a later year, confirming the conclusion that the debt isworthless, will not authorize shifting the deduction to such later year. If a taxpayercomputes his income upon the basis of valuing his notes or accounts receivable attheir fair market value when received, which may be less than their face value, theamount deductible for bad debts in any case is limited to such original valuation.


SECTION 103. Examples of bad debts. — Worthless debts arising fromunpaid wages, salaries, rents, and similar items of taxable income will not be allowedas a deduction unless the income such items represent has been included in the returnof income for the year in which the deduction as a bad debt is sought to be made or ina previous year. Only the difference between the amount received in distribution ofthe assets of a bankrupt and the amount of the claim may be deducted as a bad debt.The difference between the amount received by a creditor of a decedent indistribution of the assets of the decedent's estate and the amount of his claim may beconsidered a worthless debt. A purchaser of accounts receivable which can not becollected and are consequently charged off the hooks as bad debt is entitled to deductthem, the amount of deduction to be based upon the price he paid for them and notupon their face value.

Where under foreclosure of a mortgage, the mortgagee buys the mortgagedproperty and credits the indebtedness with the purchase price, the difference betweenthe purchase price and the indebtedness will not be allowable as a deduction for a baddebt, for the property which was security for the debt stands in the place of the debt.The determination of loss in such case is deferred until the disposal of the property.

SECTION 104. Securities becoming worthless. — If any securities whichare capital assets are ascertained to be worthless and charged off within the taxableyear, the loss resulting therefrom shall, except in the case of a bank or trust companyincorporated under the laws of the Philippines or of the United States a substantialpart of whose business is the receipt of deposits, be considered as a loss from the saleor exchange, on the last day of such taxable year, of capital assets.

(Section 30(f) of the Code)

SECTION 105. Depreciation. — A reasonable allowance for theexhaustion, wear and tear, and obsolescence of property used in the trade or businessmay be deducted from gross income. For convenience such an allowance will usuallybe referred to as depreciation, excluding from the term any idea of a mere reduction inmarket value not resulting from exhaustion, wear and tear, or obsolescence. Theproper allowance for such depreciation of any property used in the trade or business isthat amount which should be set aside for the taxable year in accordance with areasonable consistent plan whereby the aggregate of the amount so set aside, plus thesalvage value, will, at the end of the useful life of the property in business, equal thebasis of the property. Due regard must also be given to expenditures for currentupkeep. cDCSTA


SECTION 106. Depreciable property. — The necessity for a depreciationallowance arises from the fact that certain property used in the business graduallyapproaches a point where its usefulness is exhausted. The allowances should beconfined to property of this nature. In the case of tangible property, it applies to thatwhich is subject to wear and tear, to decay or decline from natural causes, toexhaustion and to obsolescence due to the normal progress of the art, as wheremachinery or other property must be replaced by a new invention, or due to theinadequacy of the property to the growing needs of the business. It does not apply toinventories or to stock in trade, nor to land apart from the improvements or physicaldevelopment added to it. It does not apply to bodies of minerals which through theprocess of removal suffer depletion. Property kept in repair may, nevertheless, be thesubject of a depreciation allowance. The deduction of an allowance for depreciation islimited to property used in the taxpayer's trade or business. No such allowance maybe made in respect to automobiles or other transportation equipment used solely forthe pleasure, a building used by the taxpayer solely as his residence, nor in respect offurniture or furnishings therein, personal effects, or clothing; but properties andcostumes used exclusively in a business, such as theatrical business, may be thesubject of a depreciation allowance.

SECTION 107. Depreciation of intangible property. — Intangibles, the useof which in the trade or business is definitely limited in duration, may be the subjectof a depreciation allowance. Examples are patents, copyrights, and franchises.Intangibles, the use of which in the business or trade is not so limited, will not usuallybe a proper subject of such an allowance. If however, an intangible asset acquiredthrough capital outlay is known from experience to be of value in the business foronly a limited period, the length of which can be estimated from experience withreasonable certainty, such intangible asset may be the subject of a depreciationallowance, provided the facts are fully shown in the return or prior thereto to thesatisfaction of the Commissioner of Internal Revenue.

SECTION 108. Capital sum recoverable through depreciation allowances.— The capital sum to be replaced by depreciation allowances is the cost or other basisof the property in respect of which the allowance is made. To this amount should beadded from time to time the cost of improvements, additions, and betterment andfrom it should be deducted from time to time the amount of any definite loss ordamage sustained by the property through casualty, as distinguished from the gradualexhaustion of its utility which is the basis of the depreciation allowance. Where thelessee of real property erects buildings, or makes permanent improvements whichbecome part of the realty and income has been returned by the lessor as a result


thereof, as provided in Section 49 of these regulations, the capital sum to be replacedby depreciation allowance is the same as though no such buildings had been erectedor such improvements made. No depreciation deduction will be allowed in the case ofproperty which has been amortized to its scrap value and is no longer in use.

SECTION 109. Method of computing depreciation allowance. — Thecapital sum to be replaced should be charged off over the useful life of the property,either in equal annual installments or in accordance with any other recognized tradepractice, such as an apportionment of the capital sum over units of production.Whatever plan or method of apportionment is adopted must be reasonable and musthave due regard to operating conditions during the taxable period. While the burdenof proof must rest upon the taxpayer to sustain the deductions taken by him, suchdeductions must not be disallowed unless shown by clear and convincing evidence tobe unreasonable. The reasonableness of any claim for depreciation shall bedetermined upon the conditions known to exist at the end of the period for which thereturn is made. If it develops that the useful life of the property will be longer orshorter than the useful life as originally estimated under all the then known facts, theportion of the cost or other basis of the property not already provided for throughdepreciation allowances should be spread over the remaining useful life of theproperty as reestimated in the light of the subsequent facts, and depreciationdeductions taken accordingly.

SECTION 110. Obsolescence. — With respect to physical property thewhole or any portion of which is clearly shown by the taxpayer as being affected byeconomic conditions that will result in its being abandoned at a future date prior to theend of its normal useful life, so that depreciation deductions alone are insufficient toreturn the cost (or other basis) at the end of its economic term of usefulness, areasonable deduction for obsolescence, in addition to depreciation, may be allowed inaccordance with the facts obtaining with respect to each item of property concerningwhich a claim for obsolescence is made. No deductions for obsolescence will bepermitted merely because, in the opinion of a taxpayer, the property may becomeobsolete at some later date. This allowance will be confined to such portion of theproperty on which obsolescence is definitely shown to be sustained and can not beheld applicable to an entire property unless all portions thereof are affected by theconditions to which obsolescence is found to be due.

SECTION 111. Depreciation of patent or copyright. — In computingdepreciation allowance in the case of a patent or copyright, the capital sum to bereplaced is the cost or other basis of the patent or copyright. The allowance should becomputed by an apportionment of the cost or other basis of the patent or copyright


over the life of the patent or copyright since its grant, or since its acquisition by thetaxpayer, or since March 1, 1913, as the case may be. If the patent or copyright wasacquired from the Government, its cost consists of the various Government fees, costof drawings, experimental models, attorney's fees, development or experimentalexpenses, etc., actually paid. Depreciation of a patent can be taken on the basis of thefair market value as of March 1, 1913, only when affirmative and satisfactoryevidence of such value is offered. Such evidence should whenever practicable besubmitted with the return. If the patent becomes obsolete prior to its expiration, suchproportion of the amount on which its depreciation may be based as the number ofyears of its remaining life bears to the whole number of years intervening between thebasic date when it legally expires may be deducted, if permission to do so isspecifically secured from the Commissioner of Internal Revenue. Owing to thedifficulty of allocating to a particular year the obsolescence of a patent, suchpermission will be granted only if affirmative and satisfactory evidence that the patentbecame obsolete in the year for which the return is made is submitted to theCommissioner of Internal Revenue. The fact that depreciation has not been taken inprior years does not entitle the taxpayer to deduct in any taxable year a greateramount for depreciation than would otherwise be allowable. AcDHCS

SECTION 112. Depreciation of drawings and models. — Where a taxpayerhas incurred expenditures in his business for designs, drawings, patterns, models, orwork of an experimental nature calculated to result in improvement of his facilities orhis product, if the period of usefulness of any such asset may be estimated fromexperience with reasonable accuracy, it may be the subject of depreciation allowancesspread over such estimated period of usefulness. The facts must be fully shown in thereturn or prior thereto to the satisfaction of the Commissioner of Internal Revenue.Except for such depreciation allowances no deduction shall be made by the taxpayeragainst any sum so set up as an asset except on the sale or other disposition of suchasset at a loss or on proof of a total loss thereof.

SECTION 113. Charging off depreciation. — A depreciation allowance, inorder to constitute an allowable deduction from gross income, must be charged off.The particular manner in which it shall be charged off is not material, except that theamount measuring a reasonable allowance for depreciation must be either deducteddirectly from the book value of the assets or preferably credited to a depreciationreserve account, which must be reflected in the annual balance sheet. The allowancesshould be computed and charged off with express reference to specific items, units, orgroups of property, each item or unit being considered separately or specificallyincluded in a group with others to which the same factors apply. The taxpayer should


keep such records to each item or unit of depreciable property as will permit the readyverification of the factors used in computing the allowance for each year for eachitem, unit, or group.

SECTION 114. Depreciation in the case of farmers. — A reasonableallowance for depreciation may be claimed on farm buildings (other than a dwellingoccupied by the owner), farm machinery, and other physical property. A reasonableallowance for depreciation may also be claimed on live stock acquired for work,breeding, or dairy purposes, unless they are included in an inventory used todetermine profits in accordance with these regulations. Such depreciation should bebased on the cost or other basis and the estimated life of the live stock. If such livestock be included in an inventory no depreciation thereof will be allowed, as thecorresponding reduction in their value will be reflected in the inventory.

SECTION 115. Statement to be attached to return. — To each return inwhich depreciation charges are claimed, there should be attached a statement showingthe item, unit, or group of depreciable property, the cost price or its market value as ofMarch 1, 1913, if acquired prior to that date, the rate of charge, amount previouslydeducted, and the amount claimed in the return. These data must agree with thoseappearing in the books of the taxpayer. TDESCa

(Section 30(g) of the Code)

SECTION 115-A-1. General Circular V-332, January 6, 1961 — Who isentitled to deduct depletion. — In order to be entitled to percentage depletionallowance, the taxpayer must have an economic interest in the property. To acquire aneconomic interest, the taxpayer must have a capital investment in the property and nota mere economic advantage. The taxpayer must have acquired at least, by investment,any interest in oil or gas or mineral in place, and secures, by any form of legalrelationship, income derived from the extraction of the oil, gas or mineral, to whichhe must look for a return of his capital. Thus the parties entitled to share in oil ormineral extracted, or the gross proceeds therefrom (including the parties to a leaseproviding for royalty payments of stated amounts per unit mined) have economicinterests in the oil or minerals in place. That is, they, as owners of the rights in oil orother mineral in place, share the income from production, and the depletionallowances thereon are regarded as designed to permit tax-free recovery of at leasttheir capital investments in such property rights.

SECTION 115-A-2. Basis for depletion. — On oil or gas wells thepercentage depletion allowance is fixed at 27 1/2% of gross income while on mines,


the percentage depletion allowance varies in accordance with the class of minerals.The gross income basis is the amount remaining after deducting therefrom rents orroyalties paid or incurred by the taxpayer in respect to the property. In both cases, thetotal percentage depletion allowance shall in no case exceed 50% of the net income orprofit. IllustrationSubject: Oil and gas wells (1) (2)Gross income after deducting rents and royalties P100.00 P100.0027 1/2% thereof 27.50 27.50Net income or net profit 50.00 70.0050°/ of net income or net profit 25.00 35.00Allowance depletion 25.00 27.50

Under column (1) P25.00 is the allowance depletion because the allowablepercentage cannot exceed 50% of the net profit or net income. Under column (2), theallowable depletion is P27.50 because it does not exceed 50% of either the net incomeor net profit.

SECTION 115-A-3. Definition of terms. — For purposes of the depletionallowance for oil and gas wells and mines, the following terms and phrases shall havethe meaning indicated:

(a) Gross income. — Gross income means the "gross income from theproperty". The gross income in the case of gas and oil wells is the amount for whichthe taxpayer sells the oil and gas in the immediate vicinity of the well. If the oil andgas are not sold on the property but are manufactured or converted into a refinedproduct prior to sale, the gross income from the property shall be assumed to beequivalent to the representative market or field price (as of the date of sale) of the oiland gas before conversion or transportation.

"Gross income from the property" means, in the case of mines, the grossincome from mining. The gross income from mining consists of the proceeds from thesales of ores or minerals extracted from the mining property. Where ores are sentabroad where the ordinary treatment processes are applied or where they are refinedand where they are sold, the actual cost of ocean freight as well as insurance, shouldbe deducted from the actual selling price for gross income purposes. Also whereminerals or mineral products are sold or consigned abroad by the lessee or owner ofthe mine under C.I.F. terms, the actual cost of ocean freight and insurance should bededucted.


(b) Mining. — The term "mining" includes not merely the extraction of theores or minerals from the ground but also the ordinary treatment process normallyapplied by mine owners or operators in order to obtain the commercially marketablemineral product or products, and so much of the transportation of ores or minerals(whether or not by common carrier) from the point of extraction from the ground tothe plants or mills in which the ordinary treatment processes are applied thereto as isnot in excess of 50 miles unless the Commissioner of Internal Revenue finds that thephysical and other requirements are such that the ore or mineral must be transported agreater distance to such plants or mills.

(c) Extraction of the ores or minerals from the ground. — The term"extraction of the ores or minerals from the ground" includes the extraction by mineowners or operators of ores or minerals from the waste or residue of prior mining.Thus income derived from the working over of tailings, piles or culm banks isincluded in determining "gross income from the property". The length of timebetween the prior mining and extraction of ores or minerals from the waste or residueof such mining is immaterial. Whether the waste or residue results from theapplication of ordinary treatment processes or from the process of removal from theground, income derived therefrom is within the term "gross income from theproperty". To be included in "gross income from the property", income derived fromthe extraction of ores or minerals from the waste or residue of prior mining mustcome from such extraction by the mine owner or operator himself.

(d) Ordinary treatment processes. — The term "ordinary treatmentprocesses" includes the following:

(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating toprevent freezing, and loading for shipment;

(2) In the case of sulfur recovered by the Frasch process — pumping to vats,cooling, breaking, and loading for shipment;

(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, andminerals which are customarily sold in the form of a crude mineral product —sorting, concentrating; and sintering to bring to shipping grade and form, and loadingfor shipment;

(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash,and ores which are not customarily sold in the form of the crude mineralproduct-crushing, grinding, and beneficiation by concentration (gravity, flotation,


amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization,precipitation (but not including as an ordinary treatment process electrolyticdeposition, roasting, thermal or electric smelting, or refining), or by substantiallyequivalent processes, or extraction of the product or products from the ore, includingthe furnacing of quicksilver ores; and

(5) The pulverization of talc, the burning of magnesite, and the sintering andmodulizing of phosphate rock.

(e) Net income or net profit. — "Net income" or "net profit" means thetaxpayer's taxable income from the property. Net income or net profit (computedwithout allowance for depletion) means the "gross income from the property" less theallowable deductions attributable to the mineral property upon which the depletion isclaimed and the allowable deductions attributable to the treatment processes insofaras they relate to the product of such property, including overhead and operatingexpenses, development costs properly charged to expense, depreciation, taxes, lossessustained, etc. Deductions not directly attributable to particular properties orprocesses shall be fairly allocated. ASaTHc

(f) Property. — For the purpose of computing the depletion allowance in thecase of mines and wells, the term "property" means each separate interest owned bythe taxpayer in each mineral deposit in each separate tract or parcel of land.

If a taxpayer owns two or more separate operating mineral interests whichconstitute part or all of an operating unit, he may elect to form (a) one aggregation of,and to treat as one property, any two or more of such interests and (b) to treat as aseparate property each such interest which he does not elect to include within theaggregation referred to in (a). Separate operating mineral interests which constitutepart or all of an operating unit may be aggregated whether or not they are included incontiguous tracts or parcels. A taxpayer may not elect to form more than oneaggregation of operating mineral interests within any one operating unit. Suchelection may be made by the taxpayer by the giving of notice of such election to theCommissioner of Internal Revenue not later than the time prescribed for filing of thereturn and any such election so made shall be binding upon the taxpayer for allsubsequent taxable years, except that the Commissioner of Internal Revenue mayconsent to a different treatment of the interest with respect to which the election hasbeen made.

SECTION 115-A-4. Depletion deductible by non-resident aliens orforeign corporations. — A non-resident alien individual or a foreign corporation is


entitled to an allowance for depletion of oil and gas wells or mines located in thePhilippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by R.A.2698)

(Section 30(h) of the Code)

SECTION 116. When contributions or gifts may be deducted. —Contributions or gifts within the taxable year are deductible to an aggregate amountnot in excess of 6 per centum, in the case of an individual, and 3 per centum, in thecase of a corporation, of the taxpayer's taxable net income, if actually paid or made toor for the use of the Government of the Philippines or any political subdivisionthereof for exclusively public purposes or to domestic corporations or associationsorganized and operated exclusively for religious, charitable, scientific, athletic,cultural or educational purposes, or to societies for the prevention of cruelty tochildren or animals, provided that no part of the net income of which inures to thebenefit of any private stockholders or individual.

In connection with claims for deductions, there shall be stated on returns ofincome the name and address of each organization to which a gift was made and theapproximate date and the amount of the gift in each case. Where the gift is other thanmoney, the basis for calculation of the amount thereof shall be the fair market valueof the property at the time of the gift. Contributions or gifts paid or made tocorporations or associations specified in the law will only be allowed as deductionwhen the taxpayer attaches to his return the receipt duly signed by the responsibleofficer of the corporations or associations to which the contributions or gifts has beenpaid or made. If desired, said receipt will be returned to the taxpayer after they haveserved their purpose.

(Section 30(i) of the Code)

SECTION 117. Allowance of deductions and credits. — Unless anon-resident alien individual shall file or cause to be filed with the Commissioner ofInternal Revenue, a true and accurate return of income from all sources, corporate, orotherwise, within the Philippines, regardless of amount, the tax shall be collected onthe basis of the gross income (not the net income) from sources within thePhilippines. In case of failure to file such return, the Commissioner of InternalRevenue will cause a return of income to be made and include therein the income ofsuch non-resident alien from all source concerning which he has information, and hewill assess the tax and collect it from one or more of the sources of income of suchnon-resident alien within the Philippines, without allowance for deductions or credit.


(Cf. effect of Sec. 22(b) as amended by R.A. 2343.)

(Section 30(j) of the Code)

SECTION 118. Payments to employees' pension trusts. — An employerwho adopts or has adopted a reasonable pension plan, actuarially sound, and whoestablishes, or has established, and maintains a pension trust for the payment ofreasonable pensions to his employees shall be allowed to deduct from gross incomereasonable amounts paid to such trust, in accordance with the pension plan (includingany reasonable amendment thereof), as follows:

(a) If the plan contemplates the payment to the trust, in advance of the timewhen pensions are granted, of amounts to provide for future pensions payments, then(1) reasonable amounts paid to the trust during the taxable year representing thepension liability applicable to such year, determined in accordance with the plan, shallbe allowed as a deduction for such year as an ordinary and necessary businessexpense, and in addition (2) one-tenth of a reasonable amount transferred or paid tothe trust during the taxable year to cover in whole or in part the pension liabilityapplicable to the years prior to the taxable year, or so transferred or paid to place thetrust on a sound financial basis, shall be allowed as a deduction for the taxable yearand for each of the nine succeeding taxable years.

(b) If the plan does not contemplate the payment to the trust, in advance ofthe time when pensions are granted, of amounts to provide for future pensionpayments, then (1) reasonable amounts paid to the trust during the taxable yearrepresenting the present value of the expected future payments in respect of pensionsgranted to employees retired during the taxable year shall be allowed as deduction forsuch year as an ordinary and necessary business expense, and in addition (2) one tenthof a reasonable amount transferred or paid to the trust during the taxable year to coverin whole or in part the present value of the expected future payments in respect ofpensions granted to employees retired prior to the taxable year, or so transferred orpaid to place the trust on a sound financial basis, shall be allowed as a deduction forthe taxable year and for each of the nine succeeding taxable years.

(Section 30(k) of the Code)

SECTION 118-A. Optional standard deduction. — In lieu of the deductionsallowed under this section an individual, other than a non-resident alien, may elect astandard deduction. Such optional standard deduction shall be in the amount of onethousand pesos or in an amount equal to ten per centum of his gross income,


whichever is the lesser. Unless the taxpayer signifies in his return his intention toelect the optional standard deduction he shall be considered as having availed himselfof the deductions allowed in the preceding subsection. The Secretary of Finance shallprescribe the manner of the election. Such election when made in the return shall beirrevocable for the taxable year for which the return is made.


SECTION 119. Personal, living, and family expenses. — Personal, living,and family expenses are not deductible. Insurance paid on a dwelling owned andoccupied by a taxpayer is a personal expense and not deductible. Premiums paid forlife insurance by the insured are not deductible. In the case of a professional man whorents a property for residential purposes, but incidentally receives his clients, patients,or callers in connection with his professional work (his place of business beingelsewhere), no part of the rent is deductible as a business expense. If however, he usespart of the house for his office, such portion of the rent as is properly attributable tosuch office is deductible. Where the father is legally entitled to the services of hisminor children, any allowances which he gives them, whether said to be inconsideration of services or otherwise, are not allowable deductions in his return ofincome. Alimony, and an allowance paid under a separation agreement are notdeductible from gross income.

SECTION 120. Capital expenditures. — No deduction from gross incomemay be made for any amounts paid out for new buildings or for permanentimprovements or betterments made to increase the value of the taxpayer's property, orfor any amount expended in restoring property or in making good the exhaustionthereof for which an allowance for depreciation or depletion or other allowance is orhas been made. Amounts expended for securing a copyright and plates, which remainthe property of the person making the payments, are investments of capital. The costof defending or perfecting title to property constitutes a part of the cost of theproperty and is not a deductible expense. The amount expended for architect'sservices is part of the cost of the building. Commissions paid in purchasing securitiesare a part of the cost of such securities. Commissions paid in selling securities are anoffset against the selling price. Expenses of the administration of an estate, such ascourt costs, attorney's fees, and executor's commissions, are chargeable against the"corpus" of the estate and are not allowable deductions. Amounts to be assessed andpaid under an agreement between bondholders or shareholders of a corporation, to beused in a reorganization of the corporation, are investments of capital and notdeductible for any purpose in return of income. DaACIH


In the case of a corporation, expenses for organization, such as incorporationfees, attorney's fees and accountants' charges, are ordinarily capital expenditures; butwhere such expenditures are limited to purely incidental expenses, a taxpayer maycharge such items against income in the year in which they are incurred. A holdingcompany which guarantees dividends at a specified rate on the stock of a subsidiarycorporation for the purpose of securing new capital for the subsidiary and increasingthe value of its stockholdings in the subsidiary may not deduct amounts paid incarrying out this guaranty in computing its net income, but such payments may beadded to the cost of its stock in the subsidiary.

SECTION 121. Premiums on life insurance of employees. — Any amountspaid for premiums on any life insurance policy covering the life of an officer oremployee or of any person financially interested in the business of the taxpayer whenthe taxpayer is directly or indirectly a beneficiary under such policy are notdeductible.

SECTION 122. Losses from sales or exchanges of property. — Nodeduction is allowed in respect of losses from sales or exchanges of property, directlyor indirectly —

(a) Between members of a family. As used in Section 31, the family of anindividual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants;

(b) Except in the case of distributions in liquidation, between an individualand a corporation more than fifty per centum in value of the outstanding stock ofwhich is owned, directly or indirectly, by or for such individual;

(c) Except in the case of distributions in liquidation, between twocorporations more than 50 per cent in value of the outstanding stock of each of whichis owned, directly or indirectly, by or for the same individual, if either one of suchcorporations with respect to the taxable year of the corporation preceding the date ofthe sale or exchange was, under the law applicable to such taxable year, a personalholding company or a foreign personal holding company;

(d) Between a grantor and a fiduciary of any trust;

(e) Between the fiduciary of a trust and the fiduciary of another trust, if thesame person is a grantor with respect to each trust; or


(f) Between a fiduciary of a trust and a beneficiary of such trust.


SECTION 123. Gross income of insurance companies. — In general, thegross income of insurance companies consists of their total revenue from theoperation of the business and of their income from all other sources within the taxableyear, except as otherwise provided by the statute. Gross income includes netpremiums (that is, gross premium less returned premiums on policies not taken),investment income, profits from the sale of assets, and all gains, profits, and incomereported to the Insurance Commissioner, except income specifically exempt from tax.A net decrease in reserve funds required by law within the taxable year must beincluded in the gross income to the extent that such funds are released to the generaluses of the company and increase its free assets. Any net decrease in reserves shall beadded to the gross income, unless the company shall show that such decrease resultedfrom the application of reserves to the purposes for which they were established.

SECTION 124. Gross income of life insurance companies. — A lifeinsurance company shall not include in gross income such portion of any actualpremiums received from any individual policyholder as is paid back or credited to ortreated as an abatement of premium of such policyholder within the taxable year. (a)"Paid back" means paid in cash. (b) "Credited to" means held to the credit of,including dividends applied to pay renewal premiums, to purchase additional paid-upinsurance or annuities, or to shorten the endowment or premium-paying period. Itdoes not include dividends provisionally ascertained and apportioned upon deferreddividends policies. Dividends provisionally ascertained, apportioned, or credited ondeferred dividends policies can not be excluded or deducted from gross income forthe reason that the assured has no vested or enforceable right in them and can not atthe time of the ascertainment, apportionment, or credit, not until the maturity of thepolicy, avail himself of such dividends; and in the event of the death of the assuredprior to the expiration of the deferred dividend period, the amount so ascertained,apportioned, or credited lapses. (c) "Treated as an abatement of premium" means ofthe premium for the taxable year. Where the dividend paid back is in excess of thepremium received from the policyholder within the taxable year there may beexcluded from gross income only the amount of such premium received, and whereno premium is received from the policyholder within the taxable year the company isnot entitled to exclude from its premiums received from other policyholders anamount in respect to such dividend payment. (See changes in Sec. 24(b), Tax Code.)


SECTION 125. Gross income of mutual insurance companies. — The grossincome of mutual insurance companies (other than life) consists of their total revenuefrom the operation of the business and of their income from all other sources withinthe taxable year, except as otherwise provided by the statute. Premiums received bymutual marine insurance companies which are paid out for reinsurance should beeliminated from gross income and the payments for reinsurance, from disbursement.Deposit premiums on perpetual risks received and returned by mutual fire insurancecompanies should be treated in the same manner, as no reserve will be recognizedcovering liability for such deposits. The earnings on such deposits, including suchportion, if any, of the premium deposits as are not returned to the policyholders uponcancellation of the policies, must be included in the gross income.

SECTION 126. Deductions allowed insurance companies. — Insurancecompanies are entitled to the same deductions from gross income as othercorporations, and also to the deduction of the net addition required by law to be madewithin the taxable year to reserve funds and of the sums other than dividends paidwith the taxable year on policy and annuity contracts. "Paid" includes "accrued" or"incurred" (construed according to the method of accounting upon the basis of whichthe net income is computed) during the taxable year, but does not include anyestimate for losses incurred but not reported during the taxable year. As payments onpolicies there should be reported all death, disability and other policy claims (otherthan dividends as above specified) paid within the year, including fire, accident andliability losses, matured endowments, annuities, payments on installment policies andsurrender values actually paid.

SECTION 127. Special deductions allowed mutual insurance companies.— Mutual insurance companies (other than mutual life and mutual marine insurancecompanies), which require their members to make premium deposits to provide forlosses and expenses, are allowed to deduct from gross income the aggregate amountof premium deposits returned to their policyholders or retained for the payment oflosses, expenses, and reinsurance reserves. In determining the amount of premiumdeposits retained by a mutual fire or mutual casualty insurance company for thepayment of losses, expenses, and reinsurance reserves, it will be presumed that lossesand expenses have been paid out of earnings and profits other than premiums to theextent of such earnings and profits. If, however, any portion of such amount is appliedduring. the taxable year to the payment of losses, expenses, or reinsurance reserves, orwhich a separate allowance is taken, then such portion is not deductible; and if anyportion of such amount for which an allowance is taken is subsequently applied to thepayment of expenses, losses, or reinsurance reserves, then such payment can not be


separately deducted. The amount of premium deposits retained for the payment ofexpenses and losses and the amount of such expenses and losses, may not both bededucted. A company which invests part of the premium deposits so retained by it ininterest-bearing securities may, nevertheless, deduct such part, but not the interestreceived on such securities. A mutual fire insurance company which has a guarantycapital is taxed like other mutual fire insurance companies. A stock fire insurancecompany operated on the mutual plan to the extent of paying dividends to certainclasses of policyholders, may make a return on the same basis as a mutual fireinsurance company with respect to its business conducted on the mutual plan.

SECTION 128. Special deductions allowed mutual marine insurancecompanies. — Mutual marine insurance companies should include in gross incomethe gross premiums collected and received by them less amounts paid for reinsurance.They may deduct from gross income amounts repaid to policyholders on account ofpremiums previously paid by them together with the interest actually paid upon suchamounts between the date of ascertainment and the date of payment thereof. Theremainder of the premiums accordingly forms part of the net income of the company,except to the extent that it is subject to then deductions allowed such insurancecompanies and other corporations.

SECTION 129. Net addition to reserve funds. — All policy premiums onwhich net addition to reserve is computed, must be included in gross income.Insurance companies may deduct from gross income the net addition required by lawto be made within the taxable year to reserve funds. When the reserve at the end ofthe year is less than at the beginning of the year there is a "released reserve", and theamount so released must be included in gross income. In the case of assessmentinsurance companies, whether domestic or foreign, the actual deposit of sums with theofficers of the Government of the Philippines, pursuant to law, as addition to guarantyor reserve funds shall be treated as being payments required by law to reserve funds.In the case of life insurance companies, the net addition to the "reinsurance reserve"and the "reserve for supplementary contracts", and in the case of fire, marine,accident, liability, and other insurance companies, the net addition to the "unearnedpremium reserves", and only such other reserves as are specifically required by thestatute will be allowed as deductions.

SECTION 130. Copy of report to Insurance Commissioner to be furnishedthe Commissioner of Internal Revenue. — To facilitate the auditing of income taxreturns, insurance companies shall submit to the Commissioner of Internal Revenuetogether with returns of income, wherever possible a copy of their annual report to the


Insurance Commissioner.


SECTION 131. Losses from wash sales of stock or securities. — (a) Ataxpayer cannot deduct any loss claimed to have been sustained from the sale or otherdisposition of stock or securities, if, within a period beginning thirty days before thedate of such sale or disposition and ending thirty days after such date (referred to inthis section as the sixty-one-day period), he has acquired (by purchase or by anexchange upon which the entire amount of gain or loss was recognized by law), orhas entered into a contract or option so to acquire, substantially identical stock orsecurities. However, this prohibition does not apply in the case of a dealer in stock orsecurities if the sale or other disposition of stock or securities is made in the ordinarycourse of its business as such dealer.

(b) Where more than one loss is claimed to have been sustained within thetaxable year from the sale or other disposition of stock or securities, the provisions ofthis section shall be applied to the losses in the order in which the stock or securitiesthe disposition of which resulted in the respective losses were disposed of (beginningwith the earliest disposition). If the order of disposition of stock or securities disposedof at a loss on the same day cannot be determined, the stock or securities will beconsidered to have been disposed of in the order in which they were originallyacquired (beginning with earliest acquisition).

(c) Where the amount of stock or securities acquired within the sixty-one dayperiod is less than the amount of stock or securities sold or otherwise disposed of,then the particular shares of stock or securities the loss from the sale or otherdisposition of which is not deductible shall be those with which the stock or securitiesacquired are matched in accordance with the following rule:

The stock or securities acquired will be matched in accordance with the orderof their acquisition (beginning with the earliest acquisition) with an equal number ofthe shares of stock or securities sold or otherwise disposed of.

(d) Where the amount of stock or securities acquired within the sixty-one-day period is not less than the amount of stock or securities sold or otherwisedisposed of, then the particular shares of stock or securities the acquisition of whichresulted in the nondeductibility of the loss shall be those with which the stock orsecurities disposed of are matched in accordance with the following rule:

The stock or securities sold or otherwise disposed of will be matched with an


equal number of the shares of stock or securities acquired in accordance with theorder of acquisition (beginning with the earliest acquisition) of the stock or securitiesacquired.

(e) The acquisition of any security which results in the non-deductibility of aloss under the provisions of this section shall be disregarded in determining thedeductibility of any other loss.

(f) The word "acquired" as used in this section means acquired by purchaseor by an exchange upon which the entire amount of gain or loss was recognized bylaw, and comprehends cases where the taxpayer has entered into a contract or optionwithin the sixty-one-day period to acquire by purchase or by such an exchange.

EXAMPLE (1): A, whose taxable year is the calendar year, on December 1,1939, purchased 100 shares of common stock in the M Company for P10,000 and onDecember 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940,he sold the 100 shares purchased on December 1, 1939, for P9,000. Because of theprovisions of Section 33 no loss from the sale is allowable as a deduction.

EXAMPLE (2): A, whose taxable year is the calendar year, on September 21,1939, purchased 100 shares of the common stock of the M Company for P5,000. OnDecember 21, 1939, he purchased 50 shares of substantially identical stock forP2,750, and on December 26, 1939, he purchased 25 additional shares of such stockfor P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased onSeptember 21, 1939. There is an indicated loss of P1,000 on the sale of the 100shares. Since within the sixty-one-day period A purchased 75 shares of substantiallyidentical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750)is not allowable as a deduction because of the provisions of Section 33. The loss onthe sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subjectto the limitations provided in Sections 31(b) and 34. The basis of the 50 sharespurchased December 21, 1939, the acquisition of which resulted in thenon-deductibility of the loss (P500) sustained on 50 of the 100 shares sold on January2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750[the difference between the purchase price of the 50 shares acquired on December 21,1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940(P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26,1939, the acquisition of which resulted in the nondeductibility of the loss (P250)sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375.(See Section 143 of these regulations.)


EXAMPLE (3): A, whose taxable year is the calendar year, on September 15,1938, purchased 100 shares of the stock of the M Company for P5,000. He sold theseshares on February 1, 1940, for P4,000. On each of the four days from February 15,1940, to February 18, 1940, he purchased 50 shares of substantially identical stock forP2,000. There is an indicated loss of P1,000 from the sale of the 100 shares onFebruary 1, 1940, but since within the sixty-one-day period A purchased not less than100 shares of substantially identical stock, the loss is not deductible. The particularshares of stock the purchase of which resulted in the nondeductibility of the loss arethe first 100 shares purchased within such period, that is, the 50 shares purchased onFebruary 15, 1940, and the 50 shares purchased on February 16, 1940. AScTaD


SECTION 132. Definition of "capital assets." — The law provides that theterm "capital assets" shall be held to mean property held by the taxpayer (whether ornot connected with his trade or business), but does not include stock in trade of thetaxpayer or other property of a kind which would properly be included in theinventory of the taxpayer if on hand at the close of the taxable year, or property heldby the taxpayer primarily for sale to customers in the ordinary course of his trade orbusiness, or property, used in the trade or business, of a character which is subject tothe allowance for depreciation provided in subsection (f) of Section 30 of the Code.The term "capital asset" includes all classes of property not specifically excluded bySection 30(a).

The exclusion from the term "capital assets" of property used in the trade orbusiness of a taxpayer of a character which is subject to the allowance fordepreciation provided in Section 30(f) of the Code is limited to property used by thetaxpayer in the trade or business at the time of the sale or exchange. It has noapplication to gains or losses arising from the sale of real property used in the trade orbusiness to the extent that such gain or loss is allocable to the land, as distinguishedfrom depreciable improvements upon the land. To such gain or loss allocable to theland, the limitations of Section 34(b) and (c) apply (such limitation may beinapplicable to a dealer in real estate, but, if so, it is because he holds the landprimarily for sale to customers in the ordinary course of his trade or business, notbecause land is subject to a depreciation allowance). Gains or losses from the sale orexchange of property used in the trade or business of the taxpayer of a characterwhich is subject to the allowance for depreciation provided in Section 30(f) of theCode, will not be subject to the percentage provisions of Section 34(b) and lossesfrom such transactions will not be subject to the limitation of losses provided in


Section 30(c). (Real property used in taxpayer's trade or business is no longer capitalasset per Am. R.A. 82.)

SECTION 133. Percentage taken into account. — In computing netincome, only 50 per cent of the gain or loss recognized upon the sale or exchange fora capital asset shall be taken into account. Thus, in the case of a merchandisingconcern which has an "ordinary net income" (net income exclusive of net gains fromthe sale or exchange of capital assets) of P10,000 and a net capital gain of P5,000, thenet income subject to tax will be P10,000 plus P2,500 (50 % of P5,000), of P12,500.

SECTION 134. Limitation on capital losses. — Losses from sales orexchanges of capital assets are allowed only to the extent of the gains from such salesor exchanges. If the dealings of the taxpayer in capital assets during the year result ina net capital loss, such loss cannot be deducted from his ordinary income, inasmuchas capital losses are allowable only to the extent of capital gains. In the case, forexample, of a taxpayer, engaged in buying and selling goods, having an ordinary netincome of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxablenet income is computed as follows:Ordinary net income P20,000Gains from sales of capital assets (as stocks or securities) P5,00050% of such gains P2,500Losses from sales of capital assets P3,00050% of such losses P1,500Net taxable capital gains 1,000 ————Taxable net income P21,000 =======

If such taxpayer had an ordinary net income of P20,000, capital gains ofP2,000 and capital losses of P7,000, the taxable net income would be computed asfollows:Ordinary net income P20,000Losses from sales of capital assets (as stocks or securities) P7,00050% of such losses P3,500Gains from sales of capital assets 2,00050% of such gains 1,000 ———Net capital losses P2,500


Taxable net income P20,000 ======

(The net capital loss of P2,500 is not deductible in arriving at the taxable netincome inasmuch as capital losses are allowed only to the extent of capital gains.)

SECTION 134-A. Capital loss carry-over-Illustration. — A, an individual hasthe following incomes and losses:

1946 — Net income from business 1,000 Dividends received 750 Interest earned 500 Capital gains — on capital assets held for 8 months 5,000 Capital losses — on capital assets held for 9 months 10,0001947 — Net income from business 2,000 Interest earned 200 Capital gains — on capital assets held for 15 months 5,000

In 1946, his taxable income is computed as follows:Income from business, dividends and interest P2,250Capital gains and losses:Capital gains P5,000Less-Capital losses 10,000 ——— Net loss carried over to 1947 (P5,000) ———Net income subject to tax P2,250

In 1947, his taxable income is computed as follows: Income from business and interest P2,200

Capital gains and losses: Capital gains P5,000 ——— One-half P2,500 ——— Less-Capital loss carried over (#) 2,250 Net capital gain 250 ——— Net income subject to tax P2,450 ======

# The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is


reduced to P2,250 for the reason that the net income from business and other sources(not including capital gain), for the year 1946 is only P2,250.

If a bank or trust company incorporated under the laws of the Philippines or ofthe United States, a substantial part of whose business is the receipt of deposits, sellsany bond, debenture, note, or certificate or other evidence of indebtedness issued byany corporation (including one issued by a government or political subdivisionthereof), with interest coupons or in registered form, any loss resulting from such saleshall not be subject to the limitation contained in Section 34(c) and shall not beincluded in determining the applicability of such limitation to other losses.

SECTION 135. Gains and losses from short sales. — For income taxpurposes, a short sale is not deemed to be consummated until the delivery of propertyto cover the short sale. If the short sale is made through a broker and the brokerborrows property to make delivery, the short sale is not deemed to be consummateduntil the obligation of the seller created by the short sale is finally discharged bydelivery of property to the brokers to replace the property borrowed by such broker.


SECTION 136. Basis for determining gain or loss from sale of property. —For the purpose of ascertaining the gain or loss from the sale or exchange of property,the basis is the cost of such property, or in the case of property which should beincluded in the inventory, its latest inventory value. But in the case of propertyacquired before March 1, 1913, when its fair market value as of that date is in excessof its cost, the gain to be included in gross income is the excess of the amount realizedtherefor over such fair market value. (See illustration I, Section 137 of theseregulations). Also in the case of property acquired before March 1, 1913, when its fairmarket value as of that date is lower than its cost the deductible loss is the excess ofsuch fair market value over the amount realized therefor. (See Illustration II, Id.). Nogain or loss is recognized in the case of property sold or exchanged (a) at more thancost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.),or (b) at less than cost but at more than its fair market value as of March 1, 1913. (SeeIllustration IV, Id., Id., Id.) In any case proper adjustment must be made in computinggain or loss from the exchange or sale of property for any depreciation or depletionsustained and allowable as deduction in computing net income; the amount ofdepreciation previously charged off by the taxpayer shall be deemed to be truedepreciation sustained unless shown by clear and convincing evidence to be incorrect.What the fair market value of property was as of March 1, 1913, is a question of factto be established by evidence which will reasonably and adequately make it appear.


The nature and extent of the sales and the circumstances under which they were madeshould be considered. Prices received at forced sales or for small lots of property maybe and often are no real indication of the value of the amount of property in question.For instance, sales from time to time of a small number of shares of stock is littleindication of the value of a large or controlling interest in the corporation. If thetaxpayer can not determine the cost of securities purchased prior to March 1, 1913,because of the loss, destruction, or failure to keep records, the value of the securitiesat the date of approximate date of acquisition may be used in determining the costbasis for purposes of computing the gain or loss from the sale of the securities. Whenthe date or approximate date of acquisition is unknown, no general rule can be statedfor determining the cost value of such securities. Each case must be consideredseparately upon its own facts.

SECTION 137. Illustrations of the computation of gain or loss from the saleor exchange of property acquired prior to March 1, 1913. — To avoid complexity noadjustment has been made in these examples for depreciation or depletion.

In the case of property acquired before March 1, 1913, when its fair marketvalue as of that date is in excess of its cost, the taxable gain is the excess of theamount realized therefor over such fair market value.

ILLUSTRATION I

Fair Market Cost Value Sale Price Taxable gain Mar. 1, 1913

P20,000 P30,000 P40,000 P10,000

Excess of amount realized over fair market value as of March 1, 1913. Gain attributed to the period prior to March 1, 1913 not taxable.

In the case of property acquired before March 1, 1913, when its fair marketvalue as of that date is lower than its cost, the deductible loss is the excess of such fairmarket value over the amount realized therefor.

ILLUSTRATION II


P20,000 P10,000 P6,000 P4,000


Excess of fair market value over amount realized. Loss attributable to the period prior to March 1, 1913, not deductible.

No gain or loss is recognized in the case of property acquired before March 1,1913, and sold or disposed of at more than cost but at less than its fair market value asof that date.

ILLUSTRATION III


P20,000 P60,000 P40,000 No taxable gain or deductible loss. Reason: A gain on whole transaction, which gain is attributed to period prior to March 1,1913.

No gain or loss is recognized in the case of property acquired before March 1,1913, and sold or disposed of at less than cost but at more than its fair market value asof that date.

ILLUSTRATION IV


P20,000 P6,000 P10,000 No taxable gain or deductible loss. Reason: A loss on whole transaction, which loss is attributable to period prior to March 1, 1913.

Where the cost is equal to or greater than the fair market value as of March 1,1913, and the selling price exceeds the cost, the gain to be included in gross income isthe excess of the selling price over the cost.

ILLUSTRATION V


P20,000 P10,000 P40,000 P20,000


Reason: Gain on whole transaction, all of which is attributable to period subsequent to March 1, 1913.

Where the fair market value as of March 1, 1913, is equal to or greater than thecost and the selling price is less than the cost, the deductible loss is the amount bywhich the cost exceeds the selling price.

ILLUSTRATION VI


P20,000 P30,000 P10,000 P10,000

Reason: Loss on whole transaction, all of which is attributable to period subsequent to March 1, 1913. Only actual loss sustained deductible.

SECTION 138. Sale of property acquired by gift. — In computing the gainor loss from the sale or other disposition of property acquired by gift, the basis shallbe the selling price and the fair market value of the property at the time the gift wasmade, or its fair market value as of March 1, 1913, if acquired prior thereto,determined in accordance with the next two preceding sections. In the case of giftsmade on or after July 1, 1939, the value taken as a basis for gift tax purposes shall beconsidered as the fair market value in computing gain or loss from the sale or otherdisposition of the property.

SECTION 139. Sale of property acquired by devise, bequests, orinheritance. — In computing the gain or loss from the sale or other disposition ofproperty acquired by devise, bequest, or inheritance, the basis shall be the fair marketprice or value of such property at the time of the death of the decedent. The term"property acquired by bequest, devise, or inheritance" as used herein includes (a) suchproperty interests as the taxpayer has received as the result of a transfer, or creation ofa trust, in contemplation of or intended to take effect in possession or enjoyment at orafter death, and (b) such property interest as the taxpayer has received as the result ofthe exercise by a person of a general power of appointment (1) by will, or (2) by deedexecuted in contemplation of or intended to take effect in possession or enjoyment ator after death. In the case of property acquired by gift, bequest, devise, or inheritance,prior to March 1, 1913, the taxable gain or deductible loss from the sale or otherdisposition thereof shall be computed in accordance with sections 136 and 137 of


these regulations. In the case of property acquired by bequest, devise or inheritance,its value as appraised for the purpose of the inheritance tax shall be deemed to be itsfair market value when acquired. DaIACS

SECTION 140. Exchange of property. — Gain or loss arising from theacquisition and subsequent disposition of property is realized only when as the resultof a transaction between the owner and another person the property is converted intoother property (a) that is essentially different from the property disposed of, and (b)that has a market value. The requirement that the property received in exchange mustbe "essentially different from the property disposed of" implies that there must be achange in substance and not merely a change in form. By way of illustration, if ataxpayer owning ten shares of stock exchanges his stock certificate for a voting trustcertificate, no income is realized. The term "market value" means the fair value of theproperty in money as between one who wishes to purchase and one who wishes tosell. It is not, however, what can be obtained for the property when the owner is underpeculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative valuewhich an owner could not reasonably expect to obtain for the property although hemight possibly be fortunate enough to do so. "Market value" is the price at which aseller willing to sell at a fair price and a buyer willing to buy at a fair price, bothhaving reasonable knowledge of the facts, will trade. Evidence as to the assets andliabilities of a corporation and as to its earnings may furnish definite indications of themarket value of its stock.

SECTION 141. Determination of gain or loss from the exchange ofproperty. — The amount of income derived or loss sustained from an exchange ofproperty is the difference between the market value at the time of the exchange of theproperty received in exchange and the original cost, or other basis, of the propertyexchange. If the property exchanged was acquired prior to March 1, 1913, seeSections 136 and 137 of these regulations.

SECTION 142. Readjustment of interest in a registered copartnership. —When a partner retires from a duly registered copartnership, or the partnership isdissolved, he realizes a gain or loss measured by the difference between the pricereceived for his interest and the cost to him of his interest in the partnership includingin such cost the amount of his share in any undistributed partnership net incomeearned since he became a partner on which the income tax has been paid. However, ifsuch interest in the partnership was acquired prior to March 1, 1913, both the cost ashereinbefore provided and the amount of such interest as of date, plus the amount ofthe shares in any undistributed partnership net income earned since March 1, 1913, onwhich the income tax has been paid, shall be ascertained and the taxable gain derived


or the deductible loss sustained shall be computed as provided in Sections 136 and137 of these regulations. If the partnership distributes its assets in kind and not incash, the partner realizes gain or suffers loss according to the market value of theproperty received in liquidation. Whenever a new partner is admitted, to apartnership, or any existing partnership is reorganized, the facts as to such change orreorganization should be fully set forth in the next return of income, in order that theCommissioner of Internal Revenue may determine whether any gain or loss has beenrealized by any partner.

SECTION 143. Basis of stock or securities acquired in "wash sales". — Inthe sale or other disposition of stocks or securities the acquisition of which (or thecontract or option to acquire which) resulted in the non deductibility of the loss fromthe sale or other disposition of substantially identical stock or securities the basis shallbe the basis of the substantially identical stock so sold or disposed of, increased ordecreased, as the case may be, by the difference, if any, between the price at whichthe stock or securities was acquired and the price at which such substantially identicalstock or securities were sold or otherwise disposed of. The application of this rulemay be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporationfor P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1, 1940,he purchased a share of common stock of the same corporation for P90.00. No lossfrom the sale is recognized under Section 33 of the Code. The basis of the new shareis P110; that is, the basis of the old share (P100) increased by P10, excess of the priceat which the new share was acquired (P90) over the price at which the old share wassold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation forP100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, hepurchased a share of common stock of the same corporation for P70. No loss from thesale is recognized under Section 33 of the Code. The basis of the new share is P90;that is, the basis of the old share (P100) decreased by P10, the excess of the price atwhich the old share was sold (P80) over the price at which the new share wasacquired (P70). (See Section 131 of these regulations).

SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253publishing Republic Act No. 1921 amending Section 35 of the Code, particularlysubsection (c) thereof:

Features of the Amendment


1. Before and after the amendment. — Under the provisions of subsection(c) of Section 35 of the National Internal Revenue Code, before its amendment byRepublic Act No. 1921, when property is exchanged for another property, theproperty received in exchange shall, for the purpose of determining gain or loss, betreated as the equivalent of cash to the amount of its fair market value.

Paragraph 1 of subsection (c) of section 35 of the Tax Code after theamendment states the general rule that upon the sale or exchange of property, theentire amount of gain or loss as the case may be, is recognized, while paragraphs 2and 3 give the exceptions where gain or loss is not recognized, or gain is recognizedonly in part.

2. Exceptions to the rule recognizing gain or loss in exchanges of propertysolely in kind. — Under paragraph 2 of subsection (c) of Section 35 of the Tax Codeafter its amendment by Republic Act No. 1921, no gain or loss shall be recognized inthe following cases of exchanges made in pursuance of a plan of merger orconsolidation:

(a) By a corporation: If a corporation, a party to a merger or consolidation,in pursuance of such plan of merger or consolidation, exchangesproperty solely for stock in another corporation, a party to the merger orconsolidation.

(b) By a shareholder: A shareholder who exchanges his stock in acorporation which is a party to the merger or consolidation solely forstock of another corporation, also a party to the merger or consolidation.

(c) By a security holder: A security holder of a corporation which is a partyto the merger or consolidation, who exchanges his securities in suchcorporation solely for stock or securities in another corporation, a partyto the merger or consolidation.

3. Recognition of gain in part but not loss, where exchanges are not solelyin kind.

(a) By a shareholder or security holder. — If in connection with anexchange made by a shareholder or security holder described in theabove exceptions, he receives not only stock or securities, permitted tobe received without recognition of loss or gain, but also money and/orother property, then the gain, if any, to the recipient shall be recognized,


but in an amount not in excess of the sum of money and the fair marketvalue of such other property. The loss, if any, to the shareholder orsecurity holder from such an exchange is not to be recognized to anyextent. However, if the distribution of such other property and/or moneyto a shareholder in the course of a merger or consolidation has the effectof the distribution of a taxable dividend, there shall be taxed to thedistributee as a taxable dividend such an amount of the gain recognizedon the exchange as is not in excess of the distributee's ratable share ofthe undistributed earnings and profits of the corporation, and as a capitalgain, the remainder, if any, of the gain so recognized.

Example: A, in connection with a merger or consolidation in 1957exchanges a share of stock in the X Corporation (a party to the mergeror consolidation) purchased in 1939 at a cost of P100 for a share ofstock of the Y Corporation (also a party to the merger or consolidation),which has a fair market value of P90, plus P20 in cash. The gain fromthe transaction is P10 and is recognized and taxed as a gain from theexchange of property. However, if the share of stock received had a fairmarket value of P70, the loss from the transaction of P10 would not berecognized.

(b) By a corporation. — If, in pursuance of a plan of merger orconsolidation above described, the transferor corporation receives notonly stock permitted to be received without the recognition of gain orloss, but also money and/or other property, then, if such money and/orother property received by the corporation is distributed by it pursuantto the plan of merger or consolidation, no gain to the said corporationwill be recognized. If the other property and/or money received by thecorporation is not distributed by it pursuant to the plan of merger andconsolidation, the gain, if any, to the corporation from the exchange willbe recognized in an amount not in excess of the sum of money and thefair market value of the other property so received which is notdistributed. In either case no loss from the exchange will be recognized.

4. Assumption of liability. — Where upon an exchange described in theforegoing exceptions, a taxpayer receives stock or securities which would bepermitted to be received without the recognition of gain if it were the soleconsideration, and as part of the consideration, another party to the exchange assumesa liability of the taxpayer, or acquires from the taxpayer property subject to a liability,such assumption or acquisition shall not be considered as money and/or other


property, and shall not prevent the exchange from being within the exceptions.Accordingly, the assumption of the aforesaid liabilities is not to be treated as otherproperty or money for the purpose of determining the amount of realized gain.

5. Basis of stock or securities for the purpose of determining gain or lossupon subsequent sale.

(a) By the transferor corporation, or its shareholder or security holder. —The basis of the stock or securities received by the transferor corporation or itsshareholder or security holder upon the exchange specified in the above exceptionsshall be the same as the basis of the property, stock or securities exchanged decreasedby the money received and the fair market value of the other property received, andincreased by the amount treated as dividend of the shareholder and the amount of anygain that was recognized on the exchange. The other property or "boot" received inexchange shall have as basis its fair market value.

Examples: 1. A purchased a share of stock in the X Corporation in 1939 forP100. Pursuant to a plan of merger or consolidation, A in 1957 exchanged his sharefor one share in the Y Corporation, worth P90 and P30 in cash. A realized a gain ofP20 upon the exchange. The basis of the share of stock in the Y Corporation is P90,that is, the basis of the share in the X Corporation (P100) less the amount of moneyreceived by A (P30) plus the amount of the gain recognized on the exchange (P20).

2. A purchased a share of stock in the X Corporation in 1939 for P100.Upon a merger or consolidation of the X Corporation in 1957, A received in place ofhis stock in the X Corporation a share of stock in the Y Corporation worth P60, aTreasury Bond worth P50, and in addition P20 in cash. A realized a gain of P30 uponthe exchange. The basis of the property received in exchange is the basis of the oldstock decreased in the amount of money received (P20) and increased in the amountof gain that was recognized (P30), which results in a basis for the property received ofP110. This basis of P110 is apportioned between the Treasury Bond and the share ofstock, the basis of the Treasury Bond being its fair market value at the date of theexchange, P50, and of the share of stock, the remainder, P60.

(b) By the transferee. — The basis of the property transferred in the hands ofthe transferee shall be the same as it would be in the hands of the transferor, increasedby the amount of the gain recognized to the transferor on the transfer.

(c) If corporation shareholder or security holder received several kinds ofstock or securities. — When securities of a single class were exchanged for new


securities of different classes where no gain or loss was recognized, the propermethod of apportionment is to allocate to each class of new securities that proportionof the original basis which the market value of the particular class bears to the marketvalue of all securities received on the date of the exchange, for purposes ofdetermining the gain or loss on the subsequent sale of any of the new securities. Forexample, if 100 shares of common stock par value P100, are exchanged for 50 sharesof preferred and 50 shares of common each of P100 par value, and the cost of the oldstock was P250 per share, or P25,000, but the market value of the preferred stock onthe date of the exchange was P110 per share, or P5,500 for the 50 shares, and themarket value of the common was P440 per share or P22,000 for the 50 shares ofcommon, one-fifth of the original cost, or P5,000, would be regarded as the cost ofthe preferred and four-fifths, or P20,000 as the cost of the common.

As previously shown cash "boot" operates in the first instance to reduce basis.Then to this result must be added the gain recognized. The remainder is to beallocated between the several types of stock and securities permitted to be receivedwithout the recognition of gain or loss. To illustrate: The taxpayer in a nontaxableexchange trades A stock which cost P100 for one share of common stock and oneshare of preferred stock of B corporation, together worth P100 (P100 each), and P50cash. The basis for the share of B common stock will therefore be P50 (1/2 of P100)and the B preferred stock will likewise take a P50 basis.

6. Definitions:

(a) The term "securities" means bonds and debentures but not "notes" ofwhatever class or duration.

(b) The term "merger" or "consolidation" shall be understood to mean theordinary merger or consolidation, or the acquisition by one corporation of all orsubstantially all the properties of another corporation solely for stock. In order that atransaction may be regarded as a merger or consolidation within the purview of theamendment, it must be undertaken for a bona fide business purpose and not solely forthe purpose of escaping the burden on taxation. In determining whether a bona fidebusiness purpose exists, each and every step of the transaction shall be considered andthe whole transaction or series of transactions shall be treated as a single unit. Theterm "property" shall be taken to include the cash assets of the transferor for purposeof determining whether the property transferred constitutes a substantial portion of theproperty of the transferor. "Substantially all" as used under this amendment means theacquisition by one corporation of at least 80% of the assets, including cash, of anothercorporation, which has the element of permanence and not merely momentary


holding.


SECTION 144. Need of inventories. — In order to reflect the net incomecorrectly, inventories at the beginning and end of each year are necessary in everycase in which the production, purchase or sale of merchandise is an income producingfactor. The inventory should include raw materials and supplies on hand that havebeen acquired for sale, consumption, or use in productive processes together with allfinished or partly finished goods. Only merchandise title to which is vested in thetaxpayer should be included in his inventory. Accordingly the seller should include inhis inventory goods under contract for sale but not yet segregated and applied to thecontract and goods out upon consignment, but should exclude from inventory goodssold, title to which has passed to the purchaser. A purchaser should include ininventory merchandise purchased, title to which has passed to him although suchmerchandise is in transit or for other reasons has not been reduced to physicalpossession, but should not include goods ordered for future delivery transfer of title towhich has not yet been effected.

SECTION 145. Valuation of inventories. — The law provides two tests towhich each inventory must conform. — (1) It must conform as nearly as possible tothe best accounting practice in the trade or business, and (2) it must clearly reflect theincome. It follows, therefore, that inventory rules can not be uniform but must giveeffect to trade customs which come within the scope of the best accounting practice inthe particular trade or business. In order to clearly reflect income, the inventorypractice of a taxpayer should be consistent from year to year, and greater weight is tobe given to consistency than to any particular method of inventory or basis ofvaluation, as long as the method or basis used is substantially in accord with theseregulations. An inventory that can be used under the best accounting practice in abalance sheet showing the financial position of the taxpayer is, as a general rule,regarded as clearly reflecting his income.

The bases of valuation most commonly used by business concerns and whichmeet the requirements of the Income Tax Law are (a) cost price or (b) cost or marketprice, whichever is the lower. Any goods in an inventory which are unsalable atnormal prices or unusable in the normal way because of damage, imperfections, shopwear, changes of style, odd or broken lots, or other similar causes, including secondhand goods taken in exchange, should be valued at "bona fide" selling prices whetherbasis (a) or (b) is used, or if such goods consist of raw materials or partly finishedgoods held for use or consumption, they should be valued upon a reasonable basis,


taking into consideration the usability and the condition of the goods, but in no caseshall such value be less than the scrap value. "Bona fide" selling price means actualofferings of goods during a period ending not later than thirty days after inventorydate. The burden of proof will rest upon the taxpayer to show that such exceptionalgoods as are valued upon such selling bases come within the classifications indicatedabove, and he shall maintain such records of the disposition of the goods as willenable a verification of the inventory to be made. aHTDAc

In respect to normal goods, whichever basis (a) or (b) is adopted must beapplied with reasonable consistency to the entire inventory. Taxpayers were given theoption to adopt either basis (a) or (b) for their 1921 inventories, and the basis adoptedfor that year is controlling and a change can now be made after permission is securedfrom the Commissioner of Internal Revenue. Goods taken in the inventory whichhave been so intermingled that they can not be identified with specific invoices willbe deemed to be either (a) the goods most recently purchased or produced and thecost thereof will be the actual cost of the goods purchased or produced during theperiod in which the quantity of goods in the inventory has been acquired, or (b) wherethe taxpayer maintains book inventories in accordance with a sound accountingsystem in which the respective inventory accounts are charged with the actual cost ofthe goods purchased or produced and credited with the value of the goods used,transferred, or sold, calculated upon the basis of the actual cost of the goods acquiredduring the taxable year (including the inventory at the beginning of the year) the netvalue as shown by such inventory accounts will be deemed to be the cost of the goodson hand. The balances shown by such inventories should be verified by physicalinventories at reasonable intervals and adjusted to conform therewith.

Inventories should be recorded in a legible manner, properly computed andsummarized, and should be preserved as a part of the accounting record of thetaxpayer. The inventories of taxpayers on whatever basis taken will be subject toinvestigation by the Commissioner of Internal Revenue and the taxpayer must satisfythe Commissioner of Internal Revenue of the correctness of the price adopted.

The following methods, among others, that are sometimes used in taking orvaluing inventories, are not in accord with these regulations and therefore their usefor income tax purposes is prohibited, viz.:

(1) Deducting from the inventory a reserve for price changes, or an estimateddepreciation in the value thereof.

(2) Taking work in process, or other parts of the inventory, at a nominal price


or at less than its proper value.

(3) Omitting portions of the stock on hand.

(4) Using a constant price or nominal value for a so called normal quantity ofmaterials or goods in stock.

(5) Including stock in transit, either shipped to or from the taxpayer, the titleto which is not vested in the taxpayer.

SECTION 146. Inventories at cost price. — Cost means: (1) In the case ofmerchandise on hand at the beginning of the taxable year, the inventory price of suchgoods.

(2) In the case of merchandise purchased since the beginning of the taxableyear, the invoice price less trade or other discounts, except strictly cash discounts,approximating a fair interest rate, which may be deducted or not at the option of thetaxpayer, provided a consistent course is followed. To this net invoice price should beadded transportation or other necessary charges incurred in acquiring possession ofthe goods.

(3) In the case of merchandise produced by the taxpayer since the beginningof the taxable year, (a) the cost of raw materials and supplies entering into orconsumed in connection with the products; (b) expenditures for direct labor; (c)indirect expenses incident to and necessary for the production of the particular article,including therein a reasonable proportion of management expenses, but not includingany cost of selling or return on capital whether by way of interest or profit.

(4) In any industry in which the usual rules for computation of cost ofproduction are inapplicable, costs may be approximated upon such basis as may bereasonable and in conformity with established trade practice in the particular industry.Among such cases are: (a) Farmers and raisers of livestock; (b) miners andmanufacturers who by a single process or uniform series of processes derive a productof two or more kinds, size or grade, the unit cost of which is substantially alike; and(c) retail merchants who use what is known as the "retail method" in ascertainingapproximate cost.

SECTION 147. Inventories at market price. — Under ordinarycircumstances, and for normal goods in an inventory "market price" means the currentbid price prevailing at the date of the inventory for the particular merchandise in thevolume in which usually purchased by the taxpayer and is applicable in the cases (a)


of goods purchased and on hand, and (b) of basic elements of cost (materials, labor,and burden) in goods in process of manufacture and in finished goods on hand;exclusive, however, of goods on hand or in process of manufacture for delivery uponfirm sales contracts (i.e., those not legally subject to cancellation by either party) atfixed prices entered into before the date of the inventory, which goods must beinventoried at cost. Where no open market exists or where quotations are nominal dueto stagnant market condition, the taxpayer must use such evidence of a fair marketprice at the date or dates nearest the inventory as may be available, such as specificpurchase or sales by the taxpayer or others in reasonable volume and made in goodfaith, or compensation paid for cancellation of contracts for purchase commitments.Where the taxpayer in the regular course of business has offered for sale suchmerchandise at prices lower than the current price as above defined, the inventorymay be value at such prices and the correctness of prices will be determined byreference to the actual sales of the taxpayer for a reasonable period before and afterthe date of the inventory. Prices which vary materially from the actual prices soascertained will not be accepted as reflecting the market price.

SECTION 148. Inventories by dealers in securities. — A dealer in securitieswho in his books of account regularly inventories unsold securities on hand either —

(a) At cost;

(b) At, cost or market, whichever is lower; or

(c) At market value.

may make his return upon the basis upon which his accounts are kept;provided that a description of the method employed shall be included in or attached tothe return, that all the securities must be inventoried by the same method, and thatsuch method must be adhered to in subsequent years, unless another method beauthorized by the Commissioner of Internal Revenue. A dealer in securities in whosebooks of accounts separate computations of the gain or loss from the sale of thevarious lots of securities sold are made on the basis of the cost of each lot shall beregarded, for the purposes of this section, as regularly inventorying his securities atcost. For the purposes of this rule a dealer in securities is a merchant of securities,whether an individual, partnership; or corporation, with an established place ofbusiness, regularly engaged in the purchase of securities and their resale to customers;that is, one who as a merchant buys securities and sells them to customers with a viewto the gains and profits that may be derived therefrom. If such business is simply abranch of the activities carried on by such person, the securities inventoried as here


provided may include only those held for purposes of resale and not for investment.Taxpayers who buy and sell or hold securities for investment or speculation,irrespective of whether such buying or selling constitutes the carrying on of a trade orbusiness, and officers of corporations and members of partnerships who in theirindividual capacities buy and sell securities, are not dealers in securities within themeaning of this rule.

SECTION 149. Inventories of livestock raisers and other farmers. — (1)Farmers may change the basis of their returns from that of receipts and disbursementsto that of an inventory basis, which necessitates the use of opening and closinginventories for the year in which the change is made. There should be included in theopening inventory all farm products (including livestock) purchased or raised whichwere on hand at the date of the inventory, but inventories must not include real estate,buildings, permanent improvements, or any other fixed assets. DEICTS

(2) Because of the difficulty of ascertaining actual cost of livestock and otherfarm products, farmers who render their returns upon an inventory basis may at theiroption value their inventories for the current taxable year according to the "farm-pricemethod" which provides for the valuation of inventories at market price less cost ofmarketing. If the use of the "farm-price method" of valuing inventories for anytaxable year involves a change in method of pricing inventories from that employedin prior years, the opening inventory for the taxable year in which the change is madeshould be brought in at the same value as the closing inventory for the precedingtaxable year. If such valuation of the opening inventory for the taxable year in whichthe change is made results in an abnormally large income for that year, there may besubmitted with the return for such taxable year an adjustment statement for thepreceding year based on the "farm-price method" of valuing inventories; upon theamount of which adjustments the tax, if any be due, shall be assessed and paid at therate of tax in effect for such preceding year.

(3) Where returns have been made in which the taxable net income has beencomputed upon incomplete inventories, the abnormality should be corrected bysubmitting with the return for the current taxable year a statement for the precedingyear in which such adjustments shall be made as are necessary to bring the closinginventory for the preceding year into agreement with opening complete inventory forthe current taxable year.

SECTION 150. Inventories of miners and manufacturers. — A taxpayerengaged in mining or manufacturing who by a single process or uniform series ofprocesses derives a product of two or more kinds, sizes or grades, the unit cost of


which is substantially alike, and who in conformity to a recognized trade practiceallocates an amount of cost to each kind, size, or grade of product which in theaggregate will absorb the total cost of production, may use such allocated cost a thebasis for pricing inventories, provided such allocation bears a reasonable relation tothe respective selling values of the different kinds of products.

SECTION 151. Inventories of retail merchants. — Retail merchants whoemploy what is known as the "retail method" of pricing inventories may make theirreturns upon that basis, provided that the use of such method, is designated upon thereturns, that accurate accounts are kept and that such method is consistently adheredto unless a change is authorized by the Commissioner of Internal Revenue. Under thismethod the goods in the inventory are ordinarily priced at the selling prices and thetotal retail value of the goods in each department or of each class of goods is reducedto approximate cost by deducting the percentage which represents the differencebetween the retail selling value and the purchase price. This percentage is determinedby departments of a store or by classes of goods, and should represent as accurately asmay be the amounts added to the cost prices of the goods to cover selling and otherexpenses of doing business and for the margin of profit. In computing the percentageabove mentioned, proper adjustment should be made for all mark-ups andmark-downs.

A taxpayer maintaining more than one department in his store or dealing inclasses of goods carrying different percentages of gross profit should not use apercentage of profit based upon an average of his entire business but should computeand use in valuing his inventory the proper percentages for the respective departmentsor classes of goods.


SECTION 152. Income from sources within the Philippines. — The lawdivides the income of taxpayers into three classes:

(1) Income which is derived in full from sources within the Philippines;

(2) Income which is derived in full from sources without the Philippines; and

(3) Income which is derived partly from sources within and partly fromsources without the Philippines.

Non-resident alien individuals and foreign corporations are taxable only uponincome from sources within the Philippines. Citizens and residents of the Philippines


and domestic corporations are taxable upon income derived from sources both withinand without the Philippines.

The taxable income from sources within the Philippines includes that derivedin full from sources within the Philippines and that portion of the income which isderived partly from sources within and partly from sources without the Philippineswhich is allocated or apportioned to sources within the Philippines.

SECTION 153. Interest. — Interest on bonds or notes or other interestbearing obligations of residents, corporate or otherwise, constitutes income fromsources within the Philippines.

SECTION 154. Dividends. — Gross income from sources within thePhilippines includes dividends, as defined by Section 83 of the Code:

(a) From a domestic corporation; and

(b) From a foreign corporation unless less than 50 per cent of its grossincome for the three-year period ending with the close of its taxable year precedingthe declaration of such dividends, or for such part of such period as it has been inexistence, was derived from sources within the Philippines; but only in an amountwhich bears the same ratio to such dividends as the gross income of the corporationfor such period derived from sources within the Philippines bears to its gross incomefrom all sources.

Dividends will be treated as an income from sources within the Philippinesunless the taxpayer submits sufficient data to establish to the satisfaction of theCommissioner of Internal Revenue that they should be excluded from gross incomeunder Section 37(a)(2)(B).

SECTION 155. Compensation for labor or personal services. — Grossincome from sources within the Philippines includes compensation for labor orpersonal services performed within the Philippines regardless of the residence of thepayor, of the place in which the contract for service was made, or of the place ofpayment. If a specific amount is paid for labor or personal services performed in thePhilippines, such amount shall be included in the gross income. If no accurateallocation or segregation of compensation for labor or personal services performed inthe Philippines can be made, or when such labor or service is performed partly withinand partly without the Philippines, the amount to be included in the gross incomeshall be determined by an apportionment of the time basis, i.e., there shall be includedin the gross income an amount which bears the same relation to the total


compensation as the number of days of performance of the labor or services withinthe Philippines bears to the total number of days performance of labor or services forwhich the payment is made. Wages received for services rendered inside theterritorial limits of the Philippines and wages of an alien seaman earned on acoastwise vessel are to be regarded as from sources within the Philippines.

SECTION 156. Rentals and royalties. — Gross income from sources withinthe Philippines includes rentals or royalties from property located within thePhilippines or from any interest in such property, including rentals or royalties for theuse of or the privilege of using in the Philippines, patents, copyrights, secret processesand formulas, goodwill, trademarks, trade brands, franchises, and other like property.The income arising from the rental of property whether tangible or intangible locatedwithin the Philippines, or from the use of property, whether tangible or intangible,located within the Philippines, is from sources within the Philippines.

SECTION 157. Sale of real property. — Gross income from sources withinthe Philippines includes gain, computed under the provisions of Section 35, derivedfrom the sale or other disposition of real property located in the Philippines. For thetreatment of capital gains and losses, see Sections 132 to 135 of these regulations.

SECTION 158. Income from sources without the Philippines. — Grossincome from sources without the Philippines includes:

(1) Interest other than that specified in Section 37(a)(1), as being derivedfrom sources within the Philippines;

(2) Dividends other than those derived from sources within the Philippines asprovided in Section 37(a)(2);

(3) Compensation for labor or personal services performed without thePhilippines;

(4) Rentals or royalties derived from property without the Philippines or fromany interest in such property, including rentals or royalties for the use of or for theprivilege of using without the Philippines, patents, copyrights, secret processes andformulas, goodwill, trade-marks, trade brands, franchises, and other like property; and

(5) Gain derived from the sale of real property located without thePhilippines.

SECTION 159. Sale of personal property. — Income derived from the


purchase and sale of personal property shall be treated as derived entirely from thecountry in which sold. The world "sold" includes "exchanged". The "country in whichsold" ordinarily means the place where the property is marketed. This section doesnot apply to income from the sale of personal property produced (in whole or in part)by the taxpayer within and sold without the Philippines or produced (in whole or inpart) by the taxpayer without and sold within the Philippines. (See Section 162 ofthese regulations.)

SECTION 160. Apportionment of deductions. — From the items specifiedin Section 37(a) as being derived specifically from sources within the Philippinesthere shall be deducted the expenses, losses, and other deductions properlyapportioned or allocated thereto and a ratable part of any other expenses, losses ordeductions which can not definitely be allocated to some item or class of grossincome. The remainder shall be included in full as net income from sources within thePhilippines. The ratable part is based upon the ratio of gross income from sourceswithin the Philippines to the total gross income.

EXAMPLE: A non-resident alien individual whose taxable year is the calendaryear, derived gross income from all sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic corporation P9,000Dividends on stock of domestic corporation 4,000Royalty for the use of patents within the Philippines 12,000Gain from sale of real property located within the Philippines 11,000 ———— Total P36,000

that is, one-fifth of the total gross income was from sources within the Philippines.The remainder of the gross income was from sources without the Philippines,determined under Section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of theseexpenses the amount of P8,000 is properly allocated to income from sources withinthe Philippines and the amount of P40,000 is properly allocated to income fromsources without the Philippines.

The remainder of the expense, P30,000, cannot be definitely allocated to anyclass of income. A ratable part thereof, based upon the relation of gross income fromsources within the Philippines to the total gross income, shall be deducted incomputing net income from sources within the Philippines. Thus, there are deductedfrom the P36,000 of gross income from sources within the Philippines expenses


amounting to P14,000 (representing P8,000 properly apportioned to the income fromsources within the Philippines and P6,000, a ratable part (one-fifth) of the expenseswhich could not be allocated to any item or class of gross income). The remainder,P22,000, is the net income from sources within the Philippines.

SECTION 161. Other income from sources within the Philippines. — Itemsof gross income other than those specified in Section 37(a) and (c) shall be allocatedor apportioned to sources within or without the Philippines, as provided in Section(37)(e).

The income derived from the ownership or operation of any farm, mine, oil orgas well, other natural deposit, or timber, located within the Philippines, and from thesale by the producer of the products thereof within or without the Philippines, shallordinarily be included in gross income from sources within the Philippines. If,however, it is shown to the satisfaction of the Commissioner of Internal Revenue thatdue to the peculiar conditions of productions and sale in a specific case or for otherreasons all of such gross income should not be allocated to sources within thePhilippines and to sources without the Philippines shall be made as provided inSection 162 of these regulations.

Where items of gross income are separately allocated to sources within thePhilippines, there shall be deducted therefrom, in computing net income, theexpenses, losses, and other deductions properly apportioned or allocated thereto and aratable part of other expenses, losses, or other deductions which cannot definitely beallocated to some item or class of gross income.

SECTION 162. Income from the sale of personal property derived fromsources partly within and partly without the Philippines. — Items of gross income notallocated by Sections 152 to 159 or 161 of these regulations to sources from within orwithout the Philippines shall (unless unmistakably from a source within or a sourcewithout the Philippines) be treated as derived from sources partly within and partlywithout the Philippines. EcICSA

The portion of such income derived from sources partly within the Philippinesand partly within a foreign country which is attributable to sources within thePhilippines shall be determined according to the following rules and cases:

PERSONAL PROPERTY PRODUCED AND SOLD: — Gross incomederived from the sale of personal property produced (in whole or in part) by thetaxpayer within the Philippines and sold within a foreign country, or produced (in


whole or in part) by the taxpayer within a foreign country and sold within thePhilippines shall be treated as derived partly from sources within the Philippines andpartly from sources within a foreign country under one of the cases below. As usedherein the word "produced" includes created, fabricated, manufactured, extracted,processed, cured, or aged.

CASE 1. Where the manufacturer or producer regularly sells a part of hisoutput to wholly independent distributors or other selling concerns in such a way as toestablish fairly an independent factory or production price — or shows to thesatisfaction of the Commissioner of Internal Revenue that such an independentfactory or production price has been otherwise established — unaffected byconsiderations of tax liability, and the selling or distributing branch or department ofthe business is located in a different country from that in which the factory is locatedor the production carried on, the net income attributable to sources within thePhilippines shall be computed by an accounting which treats the products as sold bythe factory or productive department of the business to the distributing or sellingdepartment at the independent factory price as established. In all such cases the basisof the accounting shall be fully explained in a statement attached to the return.

CASE 2. Where an independent factory or production price has not beenestablished as provided under Case 1, the net income shall first be computed bydeducting from the gross income derived from the sale of personal property produced(in whole or in part) by the taxpayer within the Philippines and sold within a foreigncountry or produced (in whole or in part) by the taxpayer within a foreign country andsold within the Philippines, the expenses, losses, or other deductions properlyapportioned or allocated thereto and a ratable part of any expenses, losses, or otherdeductions which can not definitely be allocated to some item or class of grossincome. Of the amount of net income so determined, one-half shall be apportioned inaccordance with the value of the taxpayer's property within the Philippines and withinthe foreign country, the portion attributable to sources within the Philippines beingdetermined by multiplying such one half by a fraction the numerator of whichconsists of the value of the taxpayer's property within the Philippines, and thedenominator of which consists of the value of the taxpayer's property both within thePhilippines and within the foreign country. The remaining one-half of such netincome shall be apportioned in accordance with the gross sales of the taxpayer withinthe Philippines and within the foreign country, the portion attributable to sourceswithin the Philippines being determined by multiplying such one-half by a fractionthe numerator of which consists of the taxpayer's gross sales for the taxable year orperiod within the Philippines, and the denominator of which consists of the taxpayer's


gross sales for the taxable year, or period both within the Philippines and within theforeign country. The "gross sales of the taxpayer within the Philippines" means thegross sales made during the taxable year which were principally secured, negotiated,or effected by employees, agents, offices, or branches of the taxpayer's businessresident or located in the Philippines. The term "gross sales" as used in this paragraphrefers only to the sales of personal property produced (in whole or in part) by thetaxpayer within the Philippines and sold within a foreign country or produced (inwhole or in part) by the taxpayer within a foreign country and sold within thePhilippines, and the term "property" includes only the property held or used toproduce income which is derived from such sales. Such property should be taken atits actual value, which in the case of property valued or appraised for purposes ofinventory, depreciation, depletion, or other purposes of taxation shall be the highestamount at which so valued or appraised, and which in other cases shall be deemed tobe its book value in the absence of affirmative evidence showing such value to begreater or less than the actual value. The average value during the taxable year orperiod shall be employed. The average value of property as above prescribed at thebeginning and end of the taxable year or period ordinarily may be used, unless byreason of material changes during the taxable year or period such average does notfairly represent the average for such year or period, in which event the average shallbe determined upon a monthly or daily basis. Bills and accounts receivable shall(unless satisfactory reason for a different treatment is shown) be assigned or allocatedto the Philippines when the debtor resides in the Philippines.

CASE 3. Applications for permission to base the return upon the taxpayer'sbooks of account will be considered by the Commissioner of Internal Revenue in thecase of any taxpayer who, in good faith and unaffected by considerations of taxliability, regularly employs in his books of account a detailed allocation of receiptsand expenditures which reflects more clearly than the processes or formulas hereinprescribed, the income derived from sources within the Philippines.

SECTION 163. Foreign steamship companies. — The returns of foreignsteamship companies whose vessels touch ports of the Philippines should include asgross income, the total receipts of all out-going business whether freight orpassengers. With the gross income thus ascertained, the ratio existing between it andthe gross income from all parts, both within and without the Philippines of all vessels,whether touching ports of the Philippines or not, should be determined as the basisupon which allowable deductions may be computed, the principle being thatallowable deductions shall be computed upon a basis which recognizes that theincome arising and accruing from business done if any from this country shall bear its


share, and no more, of expense, incident to the earning or creation of such income, inthe ratio that the gross income arising in and from this country bears to the entiregross income arising from business done both within and without this country. Inother words, the net income of a foreign steamship company doing business in orfrom this country is ascertained for the purpose of the income tax, by deducting fromthe gross receipts from outgoing business such a portion of the aggregate expenses,losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels,including in each case incoming of a nonshipping character but incidental, to theshipping business such as dividends from investments, interests on deposits, etc. Forexample —

Given

(a) Gross receipts from outgoing freights and passengersfrom P.I. ports P20,000

(b) Gross receipts from outgoing freights and passengersfrom all ports other than those of P. I 200,000

(c) Interests and other nonshipping income received by P.I.office 5,000

(d) Interests, dividends, and other nonshipping income receivedby all offices other than those in P.I. 50,000

(e) Total expenses and deductions of the company as a whole,including those incurred by P.I. office 150,000

Computation of P.I. Net Income

(f) P.I. Gross Income: Freights and passengers P20,000 Interest and other income 5,000 ——— Total 25,000(g) P.I. expenses:

P.I. gross income —————————— x World's expenses, or World's gross income

20,000 plus 5,000 —————————————————— x 150,000, or 200,000 plus 20,000 plus 50,000 plus 5,000

25,000 ————— x 150,000 = 13,636 275,000


(h) P.I. net income:

P.I. gross income less P.I. expenses, or P25,000 less P13,636 = P11,364

SECTION 164. Telegraph and cable service. — A foreign corporationcarrying on the business of transmission of telegraph or cable messages betweenpoints in the Philippines and points outside the Philippines derives income partlyfrom sources within and partly from sources without the Philippines.

(1) GROSS INCOME. — The gross income from sources within thePhilippines derived from such services shall be determined by adding (a) its grossrevenues derived from messages originating in the Philippines and (b) amountscollected abroad on collect messages originating in the Philippines and deductingfrom such sum amounts paid or accrued for transmission of messages beyond thecompany's own circuit. Amounts received by the company in the Philippines withrespect to collect messages originating without the Philippines shall be excluded fromgross income.

(2) NET INCOME. — In computing net income from sources within thePhilippines there shall be allowed as deductions from gross income determined inaccordance with paragraph (1): (a) all expenses incurred in the Philippines (notincluding any general overhead expenses), incident to the carrying on of the businessin the Philippines; (b) all direct expenses incurred abroad in the transmission ofmessages originating in the Philippines (not including any general overhead expensesor maintenance, repairs, and depreciation of cable and not including any amountalready deducted in computing gross income); (c) depreciation of property (other thancables) located in the Philippines and used in the trade or business therein; and (d) aproportionate part of the general overhead expenses [not including any items incurredabroad corresponding to those enumerated in (a), (b), and (c)], and of maintenance,repairs, and depreciation of cables of the entire cable system of the enterprise basedon the ratio which the number of words originating in the Philippines bears to thetotal words transmitted by the enterprise.

SECTION 165. Computation of income. — If a taxpayer has gross incomefrom sources within or without the Philippines as defined by Section 37 (a) or (c)together with gross income derived partly from sources within and partly fromsources without the Philippines, the amounts thereof, together with the expenses andinvestment applicable thereto, shall be segregated, and the net income from sourceswithin the Philippines shall be separately computed therefrom. TcHCIS



SECTION 166. General rule. — The method of accounting regularlyemployed by the taxpayer in keeping his books, if such method clearly reflects hisincome is to be followed with respect to the time as of which items of gross incomeand deductions are to be accounted for. If the taxpayer does not regularly employ amethod of accounting which clearly reflects his income, the computation shall bemade in such manner as in the opinion of the Commissioner of Internal Revenueclearly reflects it. (See Section 137 of these regulations for computation of netincome, and Section 38 for bases of computation. For the use of inventories, seeSections 144 to 151 of these regulations.)

SECTION 167. Methods of accounting. — It is recognized that no uniformmethod of accounting can be prescribed for all taxpayers, and the law contemplatesthat each taxpayer shall adopt such forms and systems of accounting as are in hisjudgment best suited to his purpose. Each taxpayer is required by law to make areturn of his true income. He must, therefore, maintain such accounting records aswill enable him to do so. Any approved standard method of accounting which reflectstaxpayer's income may be adopted. Among the essentials are the following:

(1) In all cases in which the production, purchase, or sale of merchandise ofany kind is an income producing factor, inventories of the merchandise on hand(including finished goods, work in process, raw materials, and supplies) should betaken at the beginning and end of the year and used in computing the net income ofthe year in accordance with Sections 144 to 151 of these regulations;

(2) Expenditures made during the year should be properly classified asbetween capital and income; that is to say, expenditures for items of plant, equipment,etc., which have a useful life extending substantially beyond the year should becharged to a capital account and not to an expense account; and

(3) In any case in which the cost of capital assets is being recovered throughdeductions for wear and tear, depletion, or obsolescence, any expenditure (other thanordinary repairs) made to restore the property or prolong its useful life should beadded to the property account or charged against the appropriate reserve and not tocurrent expenses.

SECTION 168. Changes in accounting methods. — The true income,computed under the law shall in all cases be entered in the return. If for any reason thebasis of reporting income subject to tax is changed, the taxpayer shall attach to his


return a separate statement setting forth for the taxable year and for the preceding yearthe classes of items differently treated under the two systems, specifying in particularall amounts duplicated or entirely omitted as the result of such change.

A taxpayer who changes the method of accounting employed in keeping hisbook shall, before computing his income upon such new method for purposes oftaxation, secure the consent of the Commissioner of Internal Revenue. For thepurposes of this action, a change in the method of accounting employed in keepingbooks means any change in the accounting treatment of items of income ordeductions, such as a change from cash receipts and disbursements method to theaccrual method, or vice versa; a change involving the basis of valuation employed inthe computation of inventories (see Sections 144 to 151 of these regulations); achange from the cash or accrual method to the long-term contract method, or viceversa; a change in the long-term contract method from the percentage of completionbasis to the completed contract basis or vice versa (see Section 44 of theseregulations); or a change involving the adoption of, or a change in the use of, anyother specialized basis of computing net income such as the crop basis. Applicationfor permission to change the method of accounting employed and the basis uponwhich the return is made shall be filed within 90 days after the beginning of thetaxable year to be covered by the return. The application shall be accompanied by astatement specifying all amounts which would be duplicated or entirely omitted as aresult of the proposed change. Permission to change the method of accounting willnot be granted unless the taxpayer and the Commissioner of Internal Revenue agree tothe terms and conditions under which the change will be effected.

SECTION 169. Accounting period. — Income tax returns, whether forindividuals or for corporations, associations, or partnerships, are required to be madeand their income computed for each calendar year ending on December 31st of everyyear. However, corporations, associations, or partnerships may with the approval ofthe Commissioner of Internal Revenue first secured, file their returns and computetheir income on the basis of a fiscal year which means an accounting period of twelvemonths ending on the last day of any month other than December. But in no instanceshall individual taxpayers be authorized to establish a fiscal year as basis for filingtheir returns and computing their income. (For authority to file on fiscal year basis seeSection 172 of these regulations.)


SECTION 170. When included in gross income. — Except as otherwiseprovided in Section 39 in the case of the death of a taxpayer, gains, profits, and


income are to be included in the gross income for the taxable year in which they arereceived by the taxpayer, unless they are included as of a different period inaccordance with the approved method of accounting followed by him. If a taxpayerhas died there shall also be included in computing net income for the taxable period inwhich he died amounts accrued up to the date of his death if not otherwise properlyincludible in respect of such period or a prior period, regardless of the fact that thedecedent may have kept his books and made his returns on the basis of cash receiptsand disbursements.

(For income not reduced to possession but considered as constructivelyreceived and for examples of constructive receipt, see Sections 52 and 53 of theseregulations. For the treatment of income from long-term contracts, see Section 44 ofthese regulations.)


SECTION 171. "Paid or incurred" and "paid or accrued". — (a) The terms"paid or incurred" and "paid or accrued" will be construed according to the method ofaccounting upon the basis of which the net income is computed by the taxpayer. Thedeductions and credits must be taken for the taxable year in which "paid or accrued"or "paid or incurred", unless in order clearly to reflect the income such deductions orcredits should be taken as of a different period. If a taxpayer desires to claim adeduction or a credit as of a period other than the period in which it was "paid oraccrued" or "paid or incurred", he shall attach to his return a statement setting forthhis request for consideration of the case by the Commissioner of Internal Revenuetogether with a complete statement of the facts upon which he relies. However, in hisincome tax return he shall take the deduction or credit only for the taxable period inwhich it was actually "paid or incurred", or "paid or accrued", as the case may be.Upon the audit of the return, the Commissioner of Internal Revenue will decidewhether the case is within the exception provided by the law, and the taxpayer will beadvised as to the period for which the deduction or credit is properly allowable.

(b) The provisions of paragraph (a) of this section in general are notapplicable with respect to the taxable period during which the taxpayer dies. In suchcase there shall also be allowed as deductions and credits for such taxable periodamounts accrued up to the date of his death if not otherwise allowable with respect tosuch period or a prior period, regardless of the fact that the decedent was required tokeep his books and make his returns on the basis of cash receipts and disbursements.(See also Section 76 of these regulations.)



SECTION 172. Change of accounting period. — If a corporation, includinga duly registered general co-partnership, desires to change its accounting period fromfiscal year to calendar year or from calendar year to fiscal year, or from one fiscalyear to another, it shall at any time not less than thirty days prior to the date fixed inSection 46(b) of the Code for the filing of its return on the basis of its originalaccounting period submit a written application to the Commissioner of InternalRevenue designating the proposed date for the closing of its new taxable year,together with a statement of the date on which the books of account were opened andclosed each year for the past three years, the date on which the taxable year began andended as shown on the returns filed for the past three years, and the reasons why thechange in accounting period is desired. (See also Section 46(d) of the Code.)


SECTION 173. Returns for periods of less than twelve months. — No returncan be made for a period of more than twelve months. A separate return for afractional part of a year is therefore required whenever there is a change, with theapproval of the Commissioner of Internal Revenue, in the basis of computing netincome from one taxable year to another taxable year. The periods to be covered bysuch separate returns in the several cases are stated in Section 42(a). The requirementswith respect to the filing of a separate return and the payment of tax for a part of ayear are the same as for the filing of a return and the payment of tax for a full taxableyear closing at the same time. DAETcC


SECTION 174. Sale of personal property on installment plan. — Dealers inpersonal property ordinarily sell either for cash or on the personal credit of thepurchaser or on the installment plan. Dealers who sell on the installment plan usuallyadopt one of four ways of protecting themselves in case of default —

(a) By an agreement that title is to remain in the vendor until the purchaserhas completely performed his part of the transaction;

(b) By a form of contract in which title is conveyed to the purchaserimmediately, but subject to a lien for the unpaid portion of the selling price;

(c) By a present transfer of title to the purchaser, who at the same time


executes a reconveyance in the form of a chattel mortgage to the vendor; or

(d) By conveyance to a trustee pending performance of the contract andsubject to its provisions.

The general purpose and effect being the same in all of these cases, the samerule is uniformly applicable. The general rule prescribed is that a person whoregularly sells or otherwise disposes of personal property on the installment plan,whether or not title remains in the vendor until the property is fully paid for, mayreturn as income therefrom in any taxable year that proportion of the installmentpayments actually received in that year which the total or gross profit (that is, salesless cost of goods sold) realized or to be realized when the property is paid for, bearsto the total contract price. Thus the income of a dealer in personal property on theinstallment plan may be ascertained by taking as income that proportion of the totalpayments received in the taxable year from installment sales (such payments beingallocated to the year against the sales of which they apply) which the total or grossprofit realized or to be realized on the total installment sales made during each yearbears to the total contract price of all such sales made during that respective year. Nopayments received in the taxable year shall be excluded in computing the amount ofincome to be returned on the ground that they were received under a sale the totalprofit from which was returned as income during a taxable year or years prior to thechange by the taxpayer to the installment basis of returning income. Deductible itemsare not to be allocated to the years in which the profits from the sales of a particularyear are to be returned as income, but must be deducted for the taxable year in whichthe items are "paid or incurred" or "paid or accrued", as provided by Section 40 and84(q) of the Code. A dealer who desires to compute his income on the installmentbasis shall maintain books of account in such a manner as to enable an accuratecomputation to be made on such basis in accordance with the provisions of thissection.

The income from a casual sale or other casual disposition of personal property(other than property of a kind which should properly be included in inventory) maybe reported on the installment basis only if (1) the sale price exceeds P1,000 and (2)the initial payments do not exceed 25 per cent of the selling price.

If for any reason the purchaser defaults in any of his payments, and the vendorreturning income on the installment basis repossesses the property sold whether titlethereto had been retained by the vendor or transferred to the purchaser, gain or lossfor the year in which the repossession occurs is to be computed upon any installmentobligations of the purchaser which are satisfied or discharged upon the repossession


or are applied by the vendor to the purchase or bid price of the property. Such gain orloss is to be measured by the difference between the fair market value of the propertyrepossessed and the basis in the hands of the vendor of the obligations of thepurchaser which are so satisfied, discharged, or applied, with proper adjustment forany other amounts realized or costs incurred in connection with the repossession. Thebasis in the hands of the vendor of the obligations of the purchaser satisfied,discharged, or applied upon the repossession of the property shall be the excess of theface value of such obligations over an amount equal to the income which would bereturnable were the obligations paid in full. No deduction for a bad debt shall in anycase be taken on account of any portion of the obligations of the purchaser which aretreated by the vendor as not having been satisfied, discharged, or applied upon therepossession, unless it is clearly shown that after the property was repossessed thepurchaser remained liable for such portion; and in no event shall the amount of thededuction exceed the basis in the hands of the vendor of the portion of the obligationswith respect to which the purchaser remained liable after the repossession. If theproperty repossessed is bid in by the vendor at a lawful public auction or judicial sale,the fair market value of the property shall be presumed to be the purchase or bid pricethereof in the absence of clear and convincing proof to the contrary. The propertyrepossessed shall be carried on the books of the vendor at its fair market value at thetime of the repossession.

If the vendor chooses as a matter of consistent practice to return the incomefrom installment sales on the straight accrual or cash receipts and disbursement basis,such a course is permissible.

SECTION 175. Sale of real property involving deferred payments. —Under Section 43 deferred-payment sales of real property include (a) agreements topurchase and sale which contemplate that a conveyance is not to be made at theoutset, but only after all or a substantial portion of the selling price has been paid, and(b) sales in which there is an immediate transfer of title, the vendor being protected bya mortgage or other lien as to deferred payments. Such sales either under (a) or (b),fall into two classes when considered with respect to the terms of sale, as follows:

(1) Sales of property on the installment plan, that is, sales in which thepayments received in cash or property other than evidences of indebtedness of thepurchaser during the taxable year in which the sale is made do not exceed 25 per centof the selling price.

(2) Deferred-payment sales not on the installment plan, that is sales in whichthe payments received in cash or property other than evidences of indebtedness of the


purchaser during the taxable year in which the sale is made exceed 25 per cent of theselling price.

In the sale of mortgaged property the amount of the mortgage, whether theproperty is merely taken subject to the mortgage or whether the mortgage is assumedby the purchaser, shall be included as a part of the "selling price" but the amount ofthe mortgage, to the extent that it does not exceed the basis to the vendor of theproperty sold, shall not be considered as a part of the "initial payments" or of the"total contract price", as those terms are used in Section 43 of the Code, in Sections174 and 176 of these regulations, and in this section. The term "initial payments" doesnot include amounts received by the vendor in the year of sale from the disposition toa third person of notes given by the vendee as part of the purchase price which aredue and payable in subsequent years. Commissions and other selling expenses paid orincurred by the vendor are not to be deducted or taken into account in determining theamount of the "initial payments," the "total contract price", or "the selling price". Theterm "initial payments" contemplates at least one other payment in addition to theinitial payment. If the entire purchase price is to be paid in a lump sum in a later year,there being no payment during the first year, the income may not be returned on theinstallment basis. Income may not be returned on the installment basis where nopayment in cash or property, other than evidences of indebtedness of the purchaser, isreceived during the first year, the purchaser having promised to make two or morepayments, in later years.

SECTION 176. Sale of real property on installment plan. — In transactionsincluded in class (1) in the preceding section the vendor may return as income fromsuch transactions in any taxable year that proportion of the installment paymentsactually received in that year which the total profit realized or to be realized when theproperty is paid for bears to the total contract price. DAaHET

If the purchaser defaults in any of his payments, and the vendor returningincome on the installment basis reacquires the property sold, whether title thereto hadbeen retained by the vendor or transferred to the purchaser, gain or loss for the year inwhich the reacquisition occurs is to be computed upon any installment obligations ofthe purchaser which are satisfied or discharged upon the reacquisition or are appliedby the vendor to the purchase or bid price of the property. Such gain or loss is to bemeasured by the difference between the fair market value of the property acquired(including the fair market value of any fixed improvements placed on the property bythe purchaser) and the basis in the hands of the vendor of the obligations of thepurchaser which are so satisfied, discharged, or applied, with proper adjustment forany other amounts realized or costs incurred in connection with the reacquisition. The


basis in the hands of the vendor of the obligations of the purchaser satisfied,discharged, or applied upon the reacquisition of the property will be the excess of theface value of such obligations over an amount equal to the income which would bereturnable were the obligations paid in full. No deduction for a bad debt shall in anycase be taken on account of any portion of the obligations of the purchaser which aretreated by the vendor as not having been satisfied, discharged, or applied upon thereacquisition of the property, unless it is clearly shown that after the property wasreacquired the purchaser remained liable for such portion; and in no event shall theamount of the deduction exceed the basis in the hands of the vendor of the portion ofthe obligations with respect to which the purchaser remained liable after theacquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, thefair market value of the property shall be presumed to be the purchase or bid pricethereof in the absence of clear and convincing proof to the contrary. If the propertyreacquired is subsequently sold, the basis for determining gain or loss is the fairmarket value of the property at the date of reacquisition (including the fair marketvalue of any fixed improvements placed on the property by the purchaser).

If the vendor chooses as a matter of consistent practice to turn the income frominstallment sales on the straight accrual or cash receipts and disbursements basis, sucha course is permissible, and the sales will be treated as deferred-payment sales not onthe installment plan.

SECTION 177. Deferred-payment sale of real property not on installmentplan. — In transactions included in class (2) in Section 175 of these regulations, theobligations of the purchaser received by the vendor are to be considered as theequivalent of cash.

If the vendor has retained title to the property and the purchaser defaults in anyof his payments, and the vendor repossesses the property, the difference between (1)the entire amount of the payments actually received on the contract and retained bythe vendor plus the fair-market value at the time of repossession of fixedimprovements placed on the property by the purchaser and (2) the sum of the profitspreviously returned as income in connection therewith and an amount representingwhat would have been a proper adjustment for exhaustion, wear and tear,obsolescence, amortization, and depletion of the property during the period theproperty was in the hands of the purchaser had the sale not been made will constitutegain or loss, as the case may be to the vendor for the year in which the property isrepossessed, and the basis of the property in the hands of the vendor will be theoriginal basis at the time of the sale plus the fair market value at the time ofrepossession, of fixed improvements placed on the property by the purchaser. If the


vendor has previously transferred title to the purchaser, and the purchaser defaults inany of his payments and the vendor reacquired the property, such reacquisition shallbe regarded as a transfer by the vendor, in exchange for the property for such of thepurchaser's obligations as are applied by the vendor to the purchase or bid price ofthe property. Such an exchange will be regarded as having resulted in the realizationby the vendor of gain or loss, as the case may be for the year of reacquisition,measured by the difference between the fair market value of the property includingfixed improvements placed by the purchaser on the property, and the amount of theobligations of the purchaser which were applied by the vendor to the purchase or bidprice of the property. The fair market value of the property reacquired shall bepresumed to be the amount for which it is bid in by the vendor in the absence of clearand convincing proof to the contrary. If the property reacquired is subsequently soldthe basis for determining gain or loss is the fair market value of the property at thedate of reacquisition including the fair market value of the fixed improvements placedon the property by the purchaser.

SECTION 178. Sale of real estate in lots. — Where a tract of land ispurchased with a view to dividing it into lots or parcels of ground to be sold as such,the entire fair market value as of March 1, 1913, or the cost, if acquired subsequentlyto that date, shall be equitably apportioned to the several lots or parcels and made amatter of record on the books of the taxpayer, to the end that any gain derived fromthe sale of any such lots or parcels may be returned as income for the year in whichthe sale was made. This rule contemplates that there will be a measure of gain or losson every lot or parcel sold, and not that the capital invested in the entire tract shall beextinguished before any taxable income shall be returned. The sale of each lot orparcel will be treated as a separate transaction and the gain or loss will be accountedfor accordingly.

SECTION 178(a). In all cases where a taxpayer sells during the year real orpersonal property on the installment basis, there should be attached to the income taxreturn a statement of each sale made during the year containing the followinginformation:

(a) Name of buyer

(b) Address of buyer

(c) Date of sale

(d) Selling price


(e) Payments received during the year corresponding to each sale.

(This new section has been inserted in Revenue Regulations No. 2 by RevenueRegulations No. 8-65 dated June 1, 1965. Took effect upon their promulgation in theOfficial Gazette on September 27, 1965).


SECTION 179. Determination of the taxable net income of a controlledtaxpayer. — (A) DEFINITIONS. — When used in this section —

(1) The term "organization" includes any organization of any kind, whether itbe a sole proprietorship, a partnership, a trust, an estate, or a corporation orassociation, irrespective of the place where organized, where operated, or where itstrade or business is conducted, and regardless of whether domestic or foreign,whether exempt or taxable, or whether affiliated or not.

(2) The terms "trade" or "business" include any trade or business activity ofany kind, regardless of whether or where organized, whether owned individually orotherwise, and regardless of the place where carried on.

(3) The term "controlled" includes any kind of control, direct or indirect,whether legally enforceable, and however exercisable or exercised. It is the reality ofthe control which is decisive, not its form or the mode of its exercise. A presumptionof control arises if income or deductions have been arbitrarily shifted.

(4) The term "controlled taxpayer" means any one of two or moreorganizations, trades, or businesses owned or controlled directly or indirectly by thesame interests. aCHDST

(5) The terms "group" and "group of controlled taxpayers" mean theorganizations, trades, or businesses owned or controlled by the same interests.

(6) The term "true net income" means, in the case of a controlled taxpayer,the net income (or, as the case may be, any item or element affecting net income)which would have resulted to the controlled taxpayer, had it in the conduct of itsaffairs (or, as the case may be, in the particular contract, transaction, arrangement, orother act) dealt with the other member or members of the group at arm's length. Itdoes not mean the income, the deductions, or the item or element of either, resultingto the controlled taxpayer by reason of the particular contract, transaction, orarrangement, the controlled taxpayer, or the interests controlling it, chose to make


(even though such contract, transaction, or arrangement be legally binding upon theparties thereto).

(b) SCOPE AND PURPOSE. — The purpose of Section 44 is to place acontrolled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,according to the standard of an uncontrolled taxpayer, the true net income from theproperty and business of a controlled taxpayer. The interests controlling a group ofcontrolled taxpayers are assumed to have complete power to cause each controlledtaxpayer so to conduct its affairs that its transactions and accounting record trulyreflect the net income from the property and business of each of the controlledtaxpayers. If, however, this has not been done, and the taxable net incomes arethereby understated, the statute contemplates that the Commissioner of InternalRevenue shall intervene, and, by making such distributions, apportionments, orallocations as he may deem necessary of gross income or deductions, or of any itemor element affecting net income, between/or among the controlled taxpayersconstituting the group, shall determine the true net income of each controlled taxpayerdealing at arm's length with another uncontrolled taxpayer. The standard to be appliedin every case is that of an uncontrolled taxpayer. Section 44 grants no right to acontrolled taxpayer to apply its provisions at will, nor does it grant any right tocompel the Commissioner of Internal Revenue to apply such provisions.

(c) APPLICATION. — Transactions between the controlled taxpayer andanother will be subjected to special scrutiny to ascertain whether the common controlis being used to reduce, avoid, or escape taxes. In determining the true net income ofa controlled taxpayer, the Commissioner of Internal Revenue is not restricted to thecase of improper accounting, to the case of a fraudulent, colorable, or shamtransaction, or to the case of a device designed to reduce or avoid tax by shifting ordistorting income or deductions. The authority to determine true net income extendsto any case in which either by inadvertence or design the taxable net income in wholeor in part, of a controlled taxpayer, is other than it would have been had the taxpayerin the conduct of his affairs been an uncontrolled taxpayer dealing at arm's lengthwith another uncontrolled taxpayer.


SECTION 180. Individual returns. — Returns, in duplicate, are required of:(a) Every citizen or resident alien having a gross income of P1,800 or more for thetaxable year; (b) every non-resident alien having income from sources within thePhilippines irrespective of amount; and (c) guardians, trustees, executors,administrators, receivers, conservators, and all others acting in any fiduciary capacity,


when, for the taxable year, the gross income of the person, trust, or estate for whom orwhich they act reaches P1,800. (See Section 214 of these regulations.)

For each calendar year, every person whether married or single, having a grossincome from all sources of P1,800 or over, including dividends, excepting stockdividends, must make a return of income although the tax has been paid at source andthe return shows no tax liability. Whether or not an individual is the head of a familyor has dependents is immaterial in determining his liability to render a return. Thehusband shall include in his return the income derived not only from his services,labor, or industry or the income derived from the conjugal partnership but also theincome of the wife derived from her industry or labor as well as that derived from herseparate, data, or paraphernal property. Where, however, the filing of oneconsolidated return is impracticable, married persons may file separate returns but theincomes declared in such returns will be consolidated and the tax computed on suchconsolidated income.

The law requires that the income of unmarried minors derived from propertyreceived from a living parent shall be included in the return of the parent, except (1)when the gift tax imposed under Chapter II of Title III of the Code has been paid onsuch property, or (2) where the transfer of such property is exempt from the gift tax.

A signature affixed to a return is presumed to be genuine.

SECTION 181. When and where to file individual returns. — The returnmust be filed with the Commissioner of Internal Revenue, provincial revenue agent,or treasurer of the province, city or municipality in which the taxpayer has his legalresidence or principal place of business, on or before April 15th of the year followingthat for which the return is filed.

When the last due date for filing return falls on Sunday or a legal holiday, thelast due date will be held to be the day following such Sunday or legal holiday, or ifplaced on the mails, it should be posted in ample time to reach the Commissioner ofInternal Revenue, provincial revenue agent or treasurer of the province, city, ormunicipality in which the taxpayer has his legal residence or principal place ofbusiness, under ordinary handling of mail, on or before the date on which the return isrequired to be filed. When question is raised as to whether or not the return wasposted in ample time to reach the proper official, the envelope in which the return wastransmitted and the return should be submitted to the Commissioner of InternalRevenue with such comment and recommendation as the receiving officer mayconsider proper to make. aHSCcE


SECTION 182. Persons under disability. — If the taxpayer is unable tomake his own return, on account of minority, illness, absence or non-residence, thereturn may be made by his duly authorized agent or representative or by the guardianor other person charged with the care of his person or property, the principal and hisrepresentative or guardian assuming the responsibility of making the return andincurring penalties provided for erroneous, false, or fraudulent returns.

SECTION 183. Form of return. — Individual returns shall be prepared onB.I.R. Form No. 17.01. The forms may be had from the office of the Commissioner ofInternal Revenue in Manila, or in the office of the provincial treasurers or theirdeputies.

A taxpayer will not be excused from making a return by the fact that no returnform has been furnished him. Taxpayers not supplied with the proper forms shouldmake application therefor to the Commissioner of Internal Revenue or to theprovincial treasurers, or their deputies in ample time to have their returns prepared,verified, and filed with the proper official on or before the due date. Each taxpayershould carefully prepare his return so as to fully and clearly set forth the data thereincalled for. Imperfect or incorrect returns will not be accepted as meeting therequirements of the statute. (There are now BIR Provincial Revenue Officers.)


SECTION 184. Corporation returns. — Corporations are required to makereturns of income in duplicate, regardless of the amount of their net income.

A corporation claiming exemption from tax and from the filing of returns mustestablish its right to exemption in accordance with the procedure set forth in Section24 of these regulations, otherwise it will be amenable to the penalties for failure to filereturns.

In the case of ordinary corporations, partnerships, and joint accounts (cuentasen participacion), the return shall be on the form prescribed for corporations (B.I.RForm No. 17.02), and the returns of insurance companies, on the prescribed form(B.I.R. Form No. 17.03). A corporation having an existence during any portion of ataxable year is required to make a return. A corporation which has received a charter,but has never perfected its organization, and which has transacted no business andhad no income from any source, may upon presentation of the facts to theCommissioner of Internal Revenue be relieved from the necessity of making a returnso long as it remains in an unorganized condition. In the absence of a proper showing


to the Commissioner of Internal Revenue such corporation must file the necessaryreturn.

A corporation desiring to change its accounting period from calendar year tofiscal year must comply with the procedure set forth in Section 172 of theseregulations relative to the change in accounting period of corporations.

SECTION 185. Returns of insurance companies. — Insurance companiestransacting business in the Philippines or deriving income from sources therein arerequired to file returns of income. The return shall be made on the prescribed form(B.I.R. Form No. 17.03).

SECTION 186. Returns of foreign corporations. — Every foreigncorporation having income from sources within the Philippines must make a return ofincome on the form prescribed for corporation (B.I.R. Form No. 17.02). If such acorporation has no office or place of business in this country, but has a resident agenttherein, the latter shall make the return. Although the foreign corporation is notengaged in business in this country and has no office, branch, or agency in thePhilippines, it is required to make a return if it has received income from sourceswithin the Philippines.

SECTION 187. Time and place for filing corporate returns. — Returns ofcorporations, associations, or partnerships must be filed on or before the fifteenth dayof April in each year or on or before the 15th day of the fourth month following theclose of a duly designated fiscal year. The return, if placed in the mails, should beposted in ample time to reach the Commissioner of Internal Revenue, provincial,revenue agent, or treasurer of the province, city or municipality in which is locatedthe principal office of the corporation where its books of account and other data arekept, on or before the last due date for the filing of the return. When the last due datefalls on Sunday or a legal holiday, the returns may be filed without penalty on thenext succeeding business day. (Conforms with Am. by R.A. 2343.)


SECTION 188. Extension of time for filing returns. — The Commissionerof Internal Revenue may, in meritorious cases, grant a reasonable extension of timefor filing returns of income. Requests for such extension of time must be submittedbefore the last day of the period for filing returns. Absence or sickness is consideredas reasonable cause, whereas, inability to close the books or to gather informationrequired due to various circumstances will be subject to careful investigations before


the request for extension is favorably considered. DEScaT


SECTION 189. Returns by receiver. — Receivers, trustees in dissolution,trustees in bankruptcy, and assignees, operating the property or business ofcorporations, partnerships, or associations must make returns of income for suchcorporations, partnerships or associations covering each year or part of the yearduring which they are in control. Notwithstanding that the powers and functions of acorporation are suspended and that the property and business are for the time being inthe custody of the receiver, trustee, or assignee, subject to the order of the court, suchreceiver, trustee, or assignee stands in the place of the corporate officers and isrequired to perform all the duties and assume all the liabilities which would devolveupon the officers of the corporation were they in control. A receiver in charge of onlypart of the property of a corporation, however, as a receiver in mortgage foreclosureproceedings involving merely a small portion of its property, need not make a returnof income.


SECTION 190. Returns of duly registered general co-partnerships. — Dulyregistered general copartnerships are required to render, in duplicate, a return of theirearnings, profits and income, setting forth the items of the gross income and thedeductions allowable, and the names and addresses of the individuals who would beentitled to the net earnings, profits, and income, if distributed. (See sections 22 and 23of these regulations.)


SECTION 191. Verification of returns. — All income tax returns must beverified by the oath or affirmation of the person rendering them. Oath may be takenbefore any officer authorized to administer oaths or if desired, before theCommissioner of Internal Revenue or any internal-revenue officer especiallydeputized by him or authorized by law to administer oaths, free of charge.

SECTION 192. Discovery of understatement of income. — If the amount ofincome declared in a return has been found to be understated, the Commissioner ofInternal Revenue or any internal-revenue officer shall notify the taxpayer of such fact,and the taxpayer may, if he so desires, under a sworn statement, present testimony tothe contrary and disprove the findings made.



SECTION 193. Assessment of tax. — All income tax returns filed with theprovincial revenue agents or with the treasurers of provinces, cities, or municipalitiesmust be stamped with the date of their receipt and immediately forwarded to theCommissioner of Internal Revenue. All assessments of income tax shall be made bythe Commissioner of Internal Revenue and all taxpayers shall be notified of theamount for which they are respectively liable on or before the first day of May ofeach successive year. In the case of a corporation filing returns on the basis of a fiscalyear, it shall be notified of the amount for which it is liable on or before the first dayof the fifth month following the close of its fiscal year. (See changes made by R.A.2343, effv. June 20, 1959, introducing here self assessment.)

SECTION 194. Payment of tax. — The total amount of tax assessed shall bepaid on or before the fifteenth day of April following the close of the calendar year bythe person subject to tax, and in the case of a corporation, by the president,vice-president, or other responsible officer thereof. In the case of corporations filingreturns on the basis of a fiscal year, the total amount of tax shall be paid on or beforethe fifteenth day of the fourth month following the close of the fiscal year. (Conformswith amendments by R.A. 2343, effv. June 20, 1959.)

Where the tax assessed against the taxpayer is in excess of P500, the taxpayermay elect to pay the tax in two equal installments. The first installment shall be paidon or before the date prescribed in section 51 (a) and the second installment on orbefore the fifteenth day of July following the close of the calendar year or on orbefore the fifteenth day of the seventh month following the close of the fiscal year, asthe case may be. Upon failure to pay any installment on the date fixed for its payment,the whole amount of the tax unpaid becomes due and payable, together with thedelinquency penalties. (Conforms with amendments by R.A. 2343, effv. June 20,1959.)

SECTION 195. Commissioner's authority to make returns. — In caseswherein taxpayers have neglected or refused to make return, and in cases whereinreturns are found, upon examination or otherwise, to be erroneous, false, orfraudulent, the Commissioner of Internal Revenue shall upon discovery thereof, makea return upon the best evidence obtainable, and the tax so discovered to be due,together with the penalties prescribed, shall be assessed and the amount thereof shallbe paid immediately upon notice and demand. aIcHSC

SECTION 196. Surcharge and interest in case of delinquency. — Upon


failure to pay any tax or installment thereof, of any deficiency tax, when the same isdue, a penalty of 5 per cent of the amount of tax unpaid, and interest at the rate of 1per cent per month upon the said tax from the time the same became due until paid,shall be added to the amount of such tax. (See Sec. 51(b) to (e) as amended by R.A.2343, effv. June 20, 1959.)


SECTION 197. Receipts for income tax payments. — It shall be the duty ofthe collecting officer to acknowledge the receipt of the payment of income tax duefrom each taxpayer by issuing the requisite Revenue Official Receipt (B.I.R. FormNo. 25.24).


SECTION 198. Withholding tax at source. — Withholding is required (a) ofa tax of 20 per centum in the case of fixed or determinable annual or periodicalincome, including dividends or net gains or net profits received from corporations,partnerships or associations, payable to non-resident alien individuals not engaged intrade or business and not having an office or place of business in the Philippines; and(b) of a tax of 20 per centum in the case of interest upon bonds, obligations orsecurities issued by domestic or resident foreign corporations, containing a so-calledtax-free covenant clause, payable either to citizens or aliens, residents ornon-residents, where the owner of such interest income does not file with thewithholding agent a signed notice on B.I.R. Form No. 17.13 claiming the benefit ofpersonal exemption. Subject to the exception just mentioned, withholding taxes takesplace in all cases of payments of interest upon tax-free covenant bonds or othersecurities regardless of the place where such bonds or securities are issued ormarketed and the interest thereupon paid. Bonds issued under a trust deed containinga tax-free covenant are treated as if they contain such a covenant.

SECTION 199. Fixed or determinable annual or periodical income. —Only fixed or determinable annual or periodical income is subject to withholding. Thestatute specifically includes in such income, interests, dividends, rents, salaries,wages, premiums, annuities, compensations, remunerations, and emoluments, butother kinds of income may be included, as for instance, royalties.

Income is fixed when it is to be paid in amounts definitely pre-determined. Onthe other hand, it is determinable whenever there is a basis of calculation by which theamount to be paid may be ascertained.


The income need not be paid annually if it is paid periodically; that is to say,from time to time, whether or not at regular intervals. That the length of time duringwhich the payments are to be made may be increased or diminished in accordancewith some one's will or with the happening of an event does not make the paymentsany the less determinable or periodical. A salesman working by the month for acommission on sales which is paid or credited monthly receives determinableperiodical income. The income derived from the sale in the Philippines of propertywhether real or personal, is not fixed or determinable annual or periodical income.

Dividends from every domestic corporation are subject to the withholdingprovisions of the law. Dividends from a foreign corporation are subject towithholding if (1) such foreign corporation is engaged in trade or business within thePhilippines or has an office or place of business therein, and (2) more than 85 per centof its gross income for the three-year period ending with the close of its taxable yearpreceding the declaration of such dividends (or for such part of such period as thecorporation has been in existence) was derived from sources within the Philippines. Incase the owners of any securities are not known to the withholding agent, the lattershould deduct and withhold a tax of 20 per cent on the interest on such securities.

SECTION 200. Payments to non-resident alien individuals. — The lawrequires withholding of the tax on income payable to a non-resident alien individualnot engaged in trade or business in the Philippines and not having an office or placeof business therein. A non-resident alien individual is presumed not to be engaged intrade or business in the Philippines and not to have an office or place of businesstherein, unless the withholding agent has definite knowledge that such resident isengaged in trade or business in the Philippines and of the name and address of hisresident agent in this country, or unless the withholding agent definitely knows thatsuch non-resident has an office or place of business in the Philippines and of thelocation of such office or place of business. An individual whose address is withoutthe Philippines is presumed to be a non-resident alien, unless the withholding agenthas definite knowledge that such person is either a citizen or a resident of thePhilippines. An individual whose address is within the Philippines, may be presumedto be a resident of the Philippines, unless the withholding agent has reason to believethat such individual, not being a citizen of the Philippines, has not establishedresidence in this country.

In case of doubt, a withholding agent may always protect himself bywithholding the tax due, and promptly causing a query to be addressed to theCommissioner of Internal Revenue for the determination of whether or not the


income paid to an individual is not subject to withholding. In case the Commissionerof Internal Revenue decides that the income paid to an individual is not subject towithholding the withholding agent may thereupon remit the amount of tax withheld.

SECTION 201. Exception from withholding. — Withholding of a tax oninterests upon bonds or other obligations containing a tax-free covenant clause shallnot be required in the case of a citizen or resident alien individual if he files with thewithholding agent when presenting interest coupons for payment, not later thanFebruary 1 following the taxable year, an ownership and exemption certificate on therequisite form (B.I.R. Form No. 17.13) claiming a personal exemption or credits fordependents. The withholding agent shall forward such certificate to the Commissionerof Internal Revenue with a letter of transmittal. The income of domestic and residentforeign corporations is free from withholding.

SECTION 202. Ownership certificates for interest coupons. — The owners,except domestic and resident foreign corporations, of bonds or other obligationscontaining a tax-free covenants clause, issued by a domestic or resident foreigncorporation, when presenting interest coupons for payment, shall file a certificate ofownership on B.I.R. Form No. 17.13, for each issue of bonds, showing the name andaddress of the debtor corporation, the name and address of the owner of the bonds, thenature of the obligations, the amount of interest and its due date, and the amount ofany tax withheld. In the case of corporate bonds or similar obligations not containinga tax-free covenant clause, no ownership certificates are required. But ownershipcertificates are required in the case of such bonds if the owner is unknown to thewithholding agent. Ownership certificates need not be filed in the case of interestpayments on bond or similar obligations of the United States or of the Government ofthe Philippines or of any political subdivision thereof.

Where in connection with the sale of its property payment of the bonds orother obligations of a corporation is assumed by the assignee, such assignee, whetheran individual, partnership, corporation, province, city or municipality, must deductand withhold such taxes as would have been required to be withheld by the assignorhad not such sales and transfer been made.

SECTION 203. Return and payment of tax withheld. — (a) Everywithholding agent shall make an annual return in duplicate, on B.I.R. Form No. 17.43of the tax withheld from interest on corporate bonds or other obligations on or beforethe 15th day of April of each year for the preceding calendar year. (b) Every personrequired to deduct and withhold any tax from income other than such bond interestshall make an annual return thereon, in duplicate, on B.I.R. Form No. 17.43 on or


before April 15 of each year for each non-resident alien individual not engaged intrade or business within the Philippines and not having any office or place of businesstherein, to whom income other than bond interest was paid during the previoustaxable year. The entire amount of the income from which the tax was withheld shallbe included in gross income without deduction for such payment of the tax.(Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

The tax due on withholding income tax returns are payable at the same timeand in the same manner as taxes due on individual returns.

SECTION 204. Income of recipient. — Income upon which the tax isrequired to be withheld at source shall nevertheless be included in the return of therecipient of such income. However, the amount of tax withheld shall be creditedagainst the amount of income tax due on such return, and the amount, if any, bywhich the tax withheld at source exceeds the tax due on the return shall be refundedin accordance with the provisions of Section 309 of the Code. TaCSAD


SECTION 205. Withholding of tax on income of nonresident foreigncorporations, firms, etc. — All persons, corporations, partnerships, and associations,having the control, receipt, custody, disposal, or payment of interest, dividends, rents,salaries, wages, premiums, annuities, compensations, remunerations, emoluments, orother fixed or determinable annual or periodical gains, profits, and income received orobtained from sources within the Philippines by a non-resident alien firm,copartnership, corporation, association, trust company, trustee, and insurancecompany, not engaged in business or trade within the Philippines and not having anoffice or place of business therein, are required to withhold a tax of 30 per centthereon, file the requisite withholding return on the prescribed form (B.I.R. Form No.17.43), and pay the tax withheld, in accordance with the provisions of sections 198 to204 of these regulations. The withholding provisions of the law are likewiseapplicable to the income derived from interest upon bonds, mortgages, or deeds oftrust, or other interest-bearing obligations of a domestic or resident foreigncorporation, firm or association, whether or not the bonds and other such obligations,or securities contain the so-called tax-free covenant clause, and regardless of the placewhere such bonds, obligations, or securities are issued, negotiated, or marketed andthe interest thereon paid, in case where such interest-income is received or obtainedby, or paid to, a non-resident alien firm, corporation, association, trust company, ortrustee, not engaged in business or trade within the Philippines and not having anoffice or place of business therein. (Conforms with amendments by R.A. 2343, effv.


June 20, 1959.)

A foreign corporation is presumed not to be engaged in trade or businesswithin the Philippines and not to have office or place of business therein, unless thewithholding agent has definite knowledge that such foreign corporation is in factengaged in trade or business in the Philippines and of the name and address of itsresident agent, or unless the withholding agent has definite knowledge that suchforeign corporation has a branch office or business in this country and of the locationof such branch office or place of business.


SECTION 206. Income tax not otherwise collectible from taxpayerchargeable to his representative. — It is the intent and purpose of the law to chargeand collect income tax imposed under Title II of the Code on all gains, profits, andincome of a taxable class, and the tax is required to be paid by the owner of suchgains, profits. and income or by the proper representative having the receipt, custody,control, or disposal of the same. Thus, where a non-resident has charged a resident,under a power of attorney, to sell in his behalf property, real or personal in thePhilippines, the proper tax due may be collected from the owner of the gains orprofits or from the representative who had the receipt, custody, control or disposal ofsuch gains, profits, or income, as the personal liability of such representative.

(Sections 56 to 60 of the Code)

SECTION 207. Estates and trusts. — "Fiduciary" is a term which applies toall persons or corporations that occupy positions of peculiar confidence towardsothers, such as trustees, executors, or administrators; and a fiduciary, for income taxpurposes, is any person or corporation that holds in trust an estate of another personor persons. In order that a fiduciary relationship may exist, it is necessary that a legaltrust be created.

In general, the income of a trust for the taxable year which is to be distributedto the beneficiaries must be returned by and will be taxed to the respectivebeneficiaries, but the income of a trust which is to be accumulated or held for futuredistribution, whether consisting of ordinary income or gain from the sale of assetsincluded in the corpus of the trust, must be returned by and will be taxed to thetrustee. Three exceptions to this general rule are found in the law: (1) in the case ofrevocable trust (Section 59); (2) in the case of a trust the income of which, in whole orin part, may be held or distributed for the benefit of the grantor (Section 60); and (3)


in the case of a trust administered in a foreign country [Section 57(c)]. In the firstcase, the income from such part of the trust estate title to which may be revested inthe grantor should be included in the grantor's return. In the second case, part of theincome of the trust, which may be held or distributed for the benefit of the grantor,should be included in the grantor's return. In the third case, the trustee is not entitledto the deductions mentioned in subsections (a) and (b) of Section 57 and the netincome of the trust undiminished by any amounts distributed, paid or credited tobeneficiaries will be taxed to the trustees; however, the income included in the returnof the trustees is not to be included in computing the income of the beneficiaries.

SECTION 208. Consolidation of incomes of two or more trusts. — Section56(b)(2) expressly requires the consolidation of the income of two or more trustswhere the creator of the trust in each instance is the same person and the beneficiaryin each instance is the same. The tax due on the consolidated income will be collectedfrom the trustees in proportion to the net income of the respective trusts. (See Section215 of these regulations.)

SECTION 209. Estates and trusts taxed to fiduciary. — In the case of adecedent's estate the settlement of which is the object of testamentary or intestateproceedings, the fiduciary, executor, or administrator is required to file an annualreturn for the estate up to the final settlement thereof. In the same manner, thefiduciary is required to file a yearly return covering the income of a trust, whethercreated by will or deed, for accumulation of income, whether for unascertainedpersons or persons with contingent interests or otherwise. In both cases the income ofthe estate or trust is taxed to the fiduciary. Where under the terms of a will or deed,the trustee, may in his discretion, distribute the income or accumulate it, the income istaxed to the trustee, irrespective of the exercise of his discretion. The imposition ofthe tax is not affected by the fact that an ultimate beneficiary may be a person exemptfrom tax.

SECTION 210. Estate and trust taxed to beneficiaries. — In the case of (a)a trust the income of which is to be distributed annually or regularly; (b) an estate of adecedent the settlement of which is not the object of judicial testamentary or intestateproceedings; and (c) properties held under a co-ownership or tenancy in common, theincome is taxable directly to the beneficiary or beneficiaries. Each beneficiary mustinclude in his return his distributive share of the net income of the trust, estate, orco-ownership. In the case of trusts which are in whole or in part subject to revocationby the grantor, or which are for the benefit of the grantor, the income of the trust is tobe included in computing the net income of the grantor. aITECD


SECTION 211. Decedent's estate administration. — The "period ofadministration or settlement of the estate" is the period required by the executor oradministrator to perform the ordinary duties pertaining to administration, in particular,the collection of assets and the payment of debts and legacies. Estates during theperiod of administration have but one beneficiary and that beneficiary is the estate.

No taxable income is realized from the passage of property to the executor oradministrator on the death of the decedent, even though it may have appreciated invalue since the decedent acquired it. In the event of delivery of property in kind to alegatee or distributee, no income is realized. Where, however, prior to the settlementof the estate, the executor or administrator sells property of a decedent's estate formore than the appraised value placed upon it at the death of the decedent, the excessis income, taxable to the estate. Where property is sold after the settlement of theestate by the devisee, legatee or heir at a price greater than the appraised value placedupon it at the time he inherited the property from the decedent, he is taxableindividually on any profit derived. An allowance paid a widow or heir out of thecorpus of the estate is not deductible from gross income.

SECTION 212. Liability for tax on estate or trusts. — Liability for paymentof the tax attaches to the person of an executor or administrator up to and after hisdischarge, where prior to distribution and discharge he had notice of his taxobligations or failed to exercise due diligence in determining whether or not suchobligations existed. Liability for the tax also follows the estate itself, and when theestate has been distributed, the heirs, devisees, legatees, and distributors may berequired to discharge the amount of the tax due and unpaid, to the extent of and inproportion to any share received. The same consideration apply to other trusts. Wherethe tax has been paid on the net income of an estate or trust by the fiduciary, the netincome on which the tax is paid is free from tax when distributed to the beneficiaries.

SECTION 213. Exemption allowed to estate or trusts. — An estate or atrust is allowed a personal exemption of P1,800. Each beneficiary is entitled to butone personal exemption, no matter from how many trusts he may receive income.


SECTION 214. Fiduciary returns. — Fiduciaries are required to makereturns of income on B.I.R. Form No. 17.01, in duplicate, when the gross income ofthe person, trust, or estate for whom or which they act amounts to P1,800 or more andwill be subject to all the provisions of law which apply to individuals. A fiduciarymaking return shall make oath that he has sufficient knowledge of the affairs of the


person trust, or estate for whom or which he acts to enable him to make such return,and that the same is, to the best of his knowledge and belief, true and correct. A returnby one of two or more joint fiduciaries in the form prescribed filed in the municipalityor city in which such fiduciary resides shall be sufficient compliance with therequirement for fiduciary returns.

A fiduciary acting as the guardian of a minor or other incapacitated personmust make a return for such minor or incapacitated person and pay the tax, unlesssuch minor or incapacitated person himself makes a return or cause it to be made. Theparent is held to be the natural guardian of a minor child.

SECTION 215. Returns in case of two or more trusts. — Where, in the caseof more than one trust, the creator of the trust in each instance is the same person andthe trustee in each instance is the same but the beneficiaries are different, the trusteeshould make a separate return for each of the trusts in his hands. When a trustee holdstrust created by different persons for the benefit of the same beneficiary, he shouldalso make a return for each trust separately. But where a person creates two or moretrusts in favor of the same beneficiary [Section 56(b) (2)] appointing two or moretrustees, the latter should each make a separate return for each trust but in such casethe Commissioner of Internal Revenue will consolidate the net incomes of thedifferent trusts and compute the tax on such consolidated income, allowing only oneabsolute exemption of 1,800.

SECTION 216. Return by receiver. — A receiver who stands in the place ofan individual or corporation must render a return of income and pay the tax for histrust, but a receiver of only part of the property of an individual or corporation neednot. If the receiver acts for an individual the return shall be on B.I.R. Form No. 17.01.When acting for a corporation a receiver is not treated as a fiduciary, and in such casethe return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.


SECTION 217. Fiduciaries indemnified against claims for taxes paid. —Fiduciaries are indemnified against the claims or demands of every beneficiary for allpayments of taxes which they shall be required to make and they shall have credit forsuch payments in any accounting which they make as such fiduciaries.


SECTION 218. Tax on personal holding companies. — Section 63 imposesfor such taxable year beginning after December 31, 1938 (in addition to the tax


imposed by Section 24 of the Code), a tax upon corporations classified as personalholding companies. Corporations so classified are exempt from the additional tax oncorporation improperly accumulating surplus imposed by Section 25, but are notexempt from the other taxes imposed by Title II of the Code. Unlike the tax imposedby Section 25, the tax imposed by Section 63 applies to all personal holdingcompanies defined as such in Section 64, regardless of whether or not they wereformed or availed of to accumulate earnings or profits for the purpose of avoiding thetax upon shareholders. The tax imposed by Section 63 is 45 per cent of the amount ofthe undistributed net income.

A foreign corporation, whether resident or non-resident, which is classified asa personal holding company under Section 64 (not including a foreign personalholding company as defined in Section 67) is subject to the tax imposed by Section63 with respect to its income from sources within the Philippines. The term "personalholding company" as used in Chapter VIII of Title II of the Code does not include aforeign corporation if (1) its gross income from sources within the Philippines for theperiod specified in Section 37(a) (2) (B) is less than 50 per cent of its total grossincome from all sources and (2) all of its stock outstanding during the last half of thetaxable year is owned by nonresident alien individuals, whether directly or indirectlythrough other foreign corporations. ESDHCa


SECTION 219. Definition of personal holding company. — A personalholding company is any corporation (other than a corporation specified in section64(b) which for the taxable year meets (a) the gross income requirement specified inSection 220 of these regulations, and (b) the stock ownership requirement specified inSection 221 of these regulations. Both requirements must be satisfied and both mustbe met with respect to each taxable year.

SECTION 220. Gross income requirement. — To meet the gross incomerequirement, it is necessary that either of the following percentages of gross incomeof the corporation for the taxable year be personal holding company income asdefined in Section 65:

(a) Eighty per cent or more; or

(b) Seventy per cent or more if the corporation has been classified as apersonal holding company for any taxable year beginning after December 31, 1938,unless —


(1) A taxable year has intervened since the last taxable year for which it wasso classified, during no part of the last half of which the stock ownership requirementspecified in Section 64(a) (2) exists; or

(2) Three consecutive years have intervened since the last taxable year forwhich it was so classified, during each of which its personal holding company incomewas less than 70 per cent of its gross income.

In determining whether the personal holding company income is equal to therequired percentage of the total gross income, the determination must not be madeupon the basis of gross receipts, since gross income is not synonymous with grossreceipts. For a further discussion of what constitutes "gross income", see Section 29of the Code and the regulations prescribed under that section.

SECTION 221. Stock ownership requirements. — To meet the stockownership requirement, it is necessary that at some time during the last half of thetaxable year more than 50 per cent it value of the outstanding stock of the corporationbe owned, directly or indirectly, by or for not more than five individuals: For suchpurpose, the ownership of the stock must be determined as provided in Section 66.

In the event of any change in the stock outstanding during the last half of thetaxable year, whether in the number of shares or classes of stock, or whether in theownership thereof, the conditions existing immediately prior .and subsequent to eachchange must be taken into consideration.

In determining whether the statutory conditions with respect to stockownership are present at any time during the last half of the taxable year, the phrase"in value" shall, in the light of all the circumstances, be deemed the value of thecorporate stock outstanding at such time (not including treasury stock). This valuemay be determined upon the basis of the company's net worth, earning and dividendpaying capacity, appreciation of assets, together with such other factors as have abearing upon the value of the stock. If the value of the stock is greatly at variancewith that reflected by the corporate books the evidence of such value should be filedwith the return. In any case where there are two or more classes of stock outstanding,the total value of the stock should be allocated among the different classes accordingto the relative value of each class therein.

The rules stated in the last two preceding paragraphs are equally applicable indetermining the stock ownership requirement specified in Section 65(e); relating topersonal service contracts and Section 65(f), relating to the use of corporation


property by a shareholder. The stock ownership requirement specified in thesesections relates, however, to the stock outstanding at anytime during the entire taxableyear and not merely during the last half thereof.


SECTION 222. Personal holding company income. — The term "personalholding company income" means the portion of the gross income which consists ofthe following:

(1) DIVIDENDS. — The term "dividends" includes dividends as defined inSection 83 (a), and amounts required to be included in gross income under Section 69(b) of this Code. It does not include stock dividends (to the extent that they do notconstitute income to the shareholders with the meaning of Section 83(b) of the Code)and liquidating dividends.

(2) INTEREST (other than interest constituting rent). — The term "interest"means any amount, includible in gross income, received for the use of money loanedexcept that it does not include interest constituting rent [see subparagraph (1)].

(3) ROYALTIES (other than mineral, oil, or gas royalties). — The term"royalties" include amounts received for the privilege of using patents, copyrights,secret processes and formulas, good will, trade marks, trade brands, franchises, andother like property. It does not include rents, or overriding royalties received by anoperating company. As used in this paragraph the term "overriding royalties" meansamounts received from the sublease by the operating company which originallyleased and developed the natural resources property in respect of which suchoverriding royalties are paid.

(4) ANNUITIES. — The term "annuities" includes annuities only to theextent includible in the computation of gross income. [See Section 29(b) (2)].

(5) GAINS FROM THE SALE OR EXCHANGE OF STOCK ORSECURITIES. — The term "gains from the sale or exchange of stock or securities" asused in Section 65(b) applies to all gains (including gains from liquidation dividendsand other distributions from capital) from the sale or exchange of stock or securitiesincludible in gross income. The term "stock or securities" as used in Section 65(b)includes shares or certificates of stock, or interest in any corporation (including anyjoint stock company, insurance, company association, or other organization classifiedas a corporation under Title II) certificates of interest or participation in mineralroyalty, or leave, collateral trust certificates, voting trust certificates, stock rights or


warrants, bonds, debentures, certificates of indebtedness, notes, car trusts certificates,bills of exchange, obligations issued by or on behalf of a Government, State,Territory, or political subdivision thereof. In the case of "regular dealers in stock orsecurities" the term does not include gains derived from the sale or exchange of stockor securities made in the normal course of business. The term "regular dealer in stockor securities" means corporations with an established place of business regularlyengaged in the purchases of stock or securities and their resale to customers, but suchcorporations are not dealers with respect to stock or securities held for speculation orinvestment.

(6) GAINS FROM FUTURES TRANSACTIONS IN COMMODITIES. —Gains from futures transactions in commodities include gains from futurestransactions in any commodity on or subject to the rules of a board of trade orcommodity exchange, but do not include gains from cash transactions or gains by aproducer, processor, merchant, or handler of the commodity, which arise out ofbonafide hedging transactions reasonably necessary to the conduct of its business inthe manner in which such business is customarily and usually conducted by others. Ingeneral, personal holding company income includes gains on futures contracts whichare speculative. Futures contracts representing true hedges against price fluctuationsin spot goods are not speculative transactions, though not concurrent with spottransactions. Futures contracts which are not hedges against spot transactions arespeculative unless they are hedges against concurrent futures or forward sales orpurchases.

(7) INCOME FROM ESTATES AND TRUSTS. — The income from estatesand trusts which is to be included in personal holding company income consists of theincome from estates and trusts which is required to be included in the gross income ofthe corporation under Section 29 in relation to Section 56 of the Code, together withthe gains derived by the corporation from the sale or other disposition of any interestin an estate or trust.

(8) AMOUNTS RECEIVED UNDER PERSONAL SERVICECONTRACTS. — Amounts includible in personal holding company income asamount received under personal service contracts consist of amounts receivedpursuant to a contract under which the corporation is to furnish personal services, andamounts received from a sale or other disposition of such a contract, if —

(a) Some person other than the corporation has the right to designate (byname or by description) the individual who is to perform the services or if theindividual who is to perform the services is designated (by name or by description) in


the contract; and

(b) At some time during the taxable year 25 per cent or more in value of theoutstanding stock of the corporation is owned, directly or indirectly, by or for theindividual who has performed, is to perform, or may be designated (by name or bydescription), as the one to perform such services. For this purpose the stockownership must be determined as provided in Section 66 of the Code.

The application of Section 65(e) may be illustrated by the following examples:

Example (1): A, whose profession is that of an actor, owns all of theoutstanding capital stock of the M Corporation. The Corporation entered into acontract with A under which A was to perform personal services for the person orpersons whom the M Corporation might designate, in consideration of which A wasto receive P10,000 a year from the M Corporation. The M Corporation entered into acontract with the O Corporation in which A was designated to perform personalservices for the O Corporation in consideration of which the O Corporation was topay the M Corporation P500,000 a year. The P500,000 received by the MCorporation from the O Corporation constitutes a personal holding company income.

Example (2): The N Corporation, the entire outstanding capital stock of whichis owned by four individuals, is engaged in engineering. The N Corporation enteredinto a contract with the O Corporation to perform engineering services for the OCorporation, in consideration of which the O Corporation was to pay the NCorporation P50,000. The individual who was to perform the services was notdesignated (by name or by description) in the contract and no one but the NCorporation had the right to designate (by name or by description) such individual.The P50,000 received by the N Corporation from the O Corporation does notconstitute personal holding company income. HTaIAC

(9) COMPENSATION FOR USE OF PROPERTY. — The compensation forthe use of, or the right to use, the property of the corporation which is to be includedin personal holding company income consists of amounts received as compensation(however designated and from whomsoever received) for the use of, or the right touse, property of the corporation in any case in which, at any time during the taxableyear 25 per cent or more in value of the outstanding stock of the corporation isowned, directly or indirectly, by or for an individual entitled to the use of theproperty, whether such right is obtained directly from the corporation or by means ofa sublease or other arrangement. The property may consist of a yacht, a cityresidence, a country house, or any other kind of property.


(10) RENTS (including interest constituting rent). — The rents which are tobe included in personal holding company income consist of compensation, however,designated including charter fees, etc., for the use of, or the right to use, real property,or any other kind of property and the interest on debts bowed to the corporation, tothe extent such debts represent the price for which real property held primarily forsale to customers in the ordinary course of its trade or business was sold or exchangedby the corporation, but do not include amounts constituting personal holdingcompany income under Section 65(f) and paragraph (9) of this section. However,rents do not constitute personal holding company income if constituting 50 per cent ormore of the gross income of the corporation.

(II) MINERAL, OIL, OR GAS ROYALTIES. — The income from mineral,oil, or gas royalties is to be included as personal holding company income, unless (A)the aggregate amount of such royalties constitutes 50 percent or more of the grossincome of the corporation for the taxable year and (B) the aggregate amount ofdeductions allowable for expenses under Section 30 (a) of the Code (other thancompensation for personal services rendered by the shareholders of the corporation)equals 15 per cent or more of the gross income of the corporation for the taxable year.

The term "mineral, oil, or gas royalties" means all royalties, except "overridingroyalties", received from any interest in mineral, oil, or gas royalties. As used in thisparagraph the term "overriding royalties" means amounts received from the subleaseby the operating company which originally leased and developed the naturalresources property in respect of which such overriding royalties are bid.


SECTION 223. Stock ownership. — For the purpose of determiningwhether —

(a) A corporation is a personal holding company in so far as suchdetermination is based on the stock ownership requirement specified in Section 64(a)(2), or

(b) Amounts received under a personal service contract or from the sale ofsuch a contract constitute personal holding company income in so far as suchdetermination is based on the stock ownership requirement specified in Section 65(e), or

(c) Compensation for the use of property constitutes personal holding


company income in so far as such determination is based on the stock owner-shiprequirement specified in Section 65(f), stock owned by an individual includes stockconstructively owned by him as provided in Section 66. All forms and classes ofstock, however denominated, which represent the interests of shareholders, members,or beneficiaries in the corporation shall be taken into consideration.

SECTION 224. Stock not owned by individual. — In determining theownership of stock for any of the purposes set forth in the preceding section, stockowned, directly or indirectly, by or for a corporation, partnership, estate, or trust shallbe considered as being owned proportionately by its shareholders, partners, orbeneficiaries. For example, if A and B, two individuals, are the exclusive and equalbeneficiaries of a trust or estate, and if such trust or estate owns the entire capitalstock of the M Corporation, and if the M Corporation in turn owns the entire capitalstock of the N Corporation, then the stock of both the M Corporation and the NCorporation shall be considered as being owned equally by A and B as the individualsowning the beneficial interest therein.

SECTION 225. Family and partnership ownership. — In determining theownership of stock for any of the purposes set forth in Section 223 of theseregulations, an individual shall be considered as owning the stock owned, directly orindirectly, by or for his family or by or for his partner. For the purposes of suchdetermination the family of an individual includes only his brothers and sisters(whether by the whole or half blood), spouse, ancestors, and lineal descendants.

The application of the family and partnership rule in determining theownership of stock for the purpose set forth in (a) of Section 223 of these regulationsis illustrated by the following example:

Example: The M Corporation at some time during the last half of the taxableyear had 1,800 shares of outstanding stock, 450 of which were held by variousindividuals having no relationship to one another and none of whom were partners,and the remaining 1,350 were held by 51 shareholders as follows:Relationship Shares Shares Shares Shares Shares

An individual A 100 B 20 C 20 D 20 E 20His father AF 10 BF 10 CF 10 DF 10 EF 10His wife AW 10 BW 40 CW 40 DW 40 EW 40His brother AB 10 BB 10 CB 10 DB 10 EB 10His son AS 10 BS 40 CS 40 DS 40 ES 40His daughter byformer marriage


(son's half sister) ASHS 10 BSHS 40 CSHS 40 DSHS 40 ESHS 40His brother's wife ABW 10 BBW 10 CBW 10 DBW 160 EBW 10His wife's father AWF 10 BWF 10 CWF 110 DWF 10 EWF 10His wife's brother AWB 10 BWB 10 CWB 10 DWB 10 EWB 10His wife's brother'swife AWBW 10 BWBW 10 CWBW 10 DWBW 10 EWBW 110Individual's partner AP 10 - - - - - - - -

By applying the statutory rule provided in Section 66(a) five individuals ownmore than 50 per cent of the outstanding stock as follows:A (including AF, AW, AB, AS, ASHS, AP) 160B (including BF, BW, BB, BS, BSHS) 160CW (including C, CS, CWF, CWB) 220DB (including D, DF, DBW) 200EWB (including EW, EWF, EWBW) 170 ——Total, or more than 30 per cent 910

Individual A represents the obvious case where the head of the family ownsthe bulk of the family stock and naturally is the head of the group. A's partner owns toshares of the stock. Individual B represents the case where he is still head of the groupbecause of the ownership of stock by his immediate family. Individuals C and Drepresent cases where the individuals fall in groups headed in C's case by his wife andin D's case by his brother because of the preponderance of holdings on the part ofrelatives by marriage. Individual E represents the case where the preponderantholding of others eliminate that individual from the group.

The method of applying the family and partnership rule as illustrated in theforegoing example also applies in determining the ownership of stock for thepurposes stated in (b) and (c) of Section 223 of these regulations.

SECTION 226. Options. — In determining the ownership of stock for anyof the purposes set forth in Section 223 of these regulations if any person has anoption to acquire stock, such stock may be considered as owned by person. The term"option" as used in this section includes an option to acquire such an option and eachone of a series of such options, so that the person who has an option on an option toacquire stock may be considered as the owner of the stock.


SECTION 227. Definition of foreign personal holding company. — A


foreign personal holding company is any foreign corporation (other than acorporation exempt from taxation under Section 27 of the Code) which for the taxableyear meets (a) the gross income requirements specified in Section 67 (a) (1), and (b)the stock ownership requirement specified in Section 67(a) (2). Both requirementsmust be satisfied and both must be met with respect to each taxable year.

A foreign corporation which comes within the classification of a foreignpersonal holding company for any taxable year beginning after December 31, 1938, isnot subject to taxation for such taxable year under Section 25 of the Code but may besubject to taxation under that section for other taxable years. The fact that a foreigncorporation is a foreign personal holding company does not relieve the corporationfrom liability for the tax imposed generally under Section 24 upon foreigncorporations, since such tax applies regardless of the classification of the foreigncorporation as a-foreign personal holding company.

SECTION 228. Gross income requirement. — To meet the gross incomerequirement, it is necessary that either of the following percentages of gross incomeof the corporation for the taxable year be foreign personal holding company incomein accordance with Section 68 in relation to Section 65 of the Code:

(a) Sixty per cent of more; or

(b) Fifty per cent or more if the foreign corporation has been classified as aforeign personal holding company for the taxable year ending after December 31,1938, unless —

(1) A taxable year has intervened since the last taxable year for which it wasso classified, during no part of which the stock ownership requirement specified inSection 67 (a) (z) exist; or

(2) Three consecutive years have intervened since the last taxable year forwhich it was so classified, during each of which its foreign personal holding companyincome was less than 50 per cent of its gross income.

In determining whether the foreign personal holding company income is equalto the required percentage of the total gauss income, the determination must not bemade on the basis of gross receipts since gross income is not synonymous with grossreceipts. For a further discussion on what constitutes "gross income," see Section29(n) and the regulations prescribed under that section.

SECTION 229. Stock ownership requirement. — To meet the stock


ownership requirement it is necessary that at some time in the taxable year more than50 per cent in value of the outstanding stock of the foreign corporation be owned,directly or indirectly, by or for not more than five individuals who are citizens orresidents of the Philippines.

In the event of any change in the stock outstanding during the taxable year,whether in the number of shares or classes of stock, or whether in the ownershipthereof, the conditions existing immediately prior and subsequent to each changemust be taken into consideration, since a corporation comes within the classificationif the statutory conditions with respect to stock ownership are present at any timeduring the taxable year.

In determining whether the statutory conditions with respect to stockownership are present at any time during the taxable year, the phrase "in value" shall,in the light of all the circumstances, be deemed the value of the corporate stockoutstanding at such time (not including treasury stock). This value may be determinedupon the basis of the company's net worth, earning and dividend paying capacity,appreciation of assets, together with such other factors as have a bearing upon thevalue of the stock. If the value of the stock which is used is greatly at variance withthat reflected by the corporate books, the evidence of such value should be filed withthe return. In any case where there are two or more classes of stock outstanding, thetotal value of all the stock should be allocated among the different classes accordingto the relative value of each lass therein. DIcSHE


SECTION 230. Gross income and stock ownership requirements of foreignpersonal holding companies. — For the purpose of determining whether a foreigncorporation satisfies the gross income requirement prescribed under Section 67(a)(1),the same items of income classified under Section 65 as personal holding companyincome shall, if received by a foreign corporation, be considered as foreign personalholding company income. In determining whether a foreign corporation satisfies thestock ownership requirement prescribed under Section 67(a) (2) the rules establishedin Section 66 shall apply.


SECTION 231. Income of foreign personal holding companies taxed toPhilippine shareholders. — (a) General rule. — Section 69 does not impose a tax onforeign personal holding companies. The undistributed net income (from all sources),


of such companies, however, must be included in the manner and to the extent setforth in this section, in the gross income of their "Philippine shareholders", that is, theshareholders who are individual citizens or residents of the Philippines.

(b) AMOUNT INCLUDIBLE IN GROSS INCOME. — Each Philippineshareholder, who was a shareholder on the day in the taxable year of the, foreignpersonal holding company which was the last day on which the stockholderssatisfying the stock ownership requirement of Section 67(a)(2), hereinafter referred toas the "Philippines group", existed with respect to the company, shall include in hisgross income a dividend, for the taxable year in which or with which the taxable yearof the company ends, the amount he would have received as a dividend if on such lastday there has been distributed by the company and received by the shareholders anamount which bears the same ratio to the net income of the company for the taxableyear as the portion of such taxable year up to and including such last day bears to theentire taxable year.

The undistributed net income of the foreign personal holding company isincludible only in the gross income of the Philippine shareholders who wereshareholders in the company on the last day of its taxable year on which thePhilippine groups existed with respect to the company. Such Philippine shareholders,accordingly, are determined by the stock holdings as of such specified time. Thisapplies to every Philippine shareholder who was a shareholder in the company at thespecified time regardless of whether the Philippine shareholder is included with thePhilippine group.

The Philippine shareholders must include in their gross income theirdistributive shares of that proportion of the undistributed net income for thetaxable-year of the company which is equal in ratio to that which the portion of thetaxable year up to and including the last day on which the Philippine group withrespect to the company existed bears to the entire taxable year. Thus if the last day inthe taxable year on which the required Philippine group existed was also the end ofthe taxable year, the portion of the taxable year up to and including such last daywould be equal to 100 per cent and in such case, the Philippine shareholders would berequired to return their distributive shares in the entire undistributed net income. Butif the last day on which the required Philippine group existed was September 30, andthe taxable year was a calendar year, the portion of the taxable year up to andincluding such last day would be equal to nine-twelfths of the undistributed netincome.

The amount which each Philippine shareholder must return is that amount


which he would have received as a dividend if the above specified portion of theundistributed net income had in fact been distributed by the foreign personal holdingcompany as a dividend on the last day of its taxable year on which the requiredPhilippine group existed. Such amount is determined, therefore, by the interest of thePhilippine shareholder in the foreign personal holding company, that is, by thenumber of shares of stock owned by the Philippine shareholder and the relative rightsof his class of stock, if there are several classes of stock outstanding. Thus, if aforeign personal holding company has both common and preferred stock outstandingand the preferred shareholders are entitled to a specific dividend before anydistribution may be made to the common shareholders, then the assumed distributionof the stated portion of the undistributed net income must first be treated as a paymentof the specified dividend on the preferred stock before any part may be allocated as adividend on the common stock.

The assumed distribution of the required portion of the undistributed netincome must be returned as dividend income by the Philippine shareholders for theirrespective taxable years in which or with which the taxable year of the foreignpersonal holding company ends. In applying this rule, the date as of which thePhilippine group last existed with respect to the company is immaterial.


SECTION 232. Information returns by officers and directors of certainforeign corporations. — (a) REQUIREMENT FOR FILING RETURNS. — (1)General. — Under Section 70 (a), on the 15th day of each month which begins afterJuly 1, 1939, each individual who on such 15th day is an officer or, a director of aforeign corporation which, with respect to its taxable year preceding the taxable yearin which such month occurs, was a foreign personal holding company, is required tofile with the Commissioner of Internal Revenue a monthly information return asprovided in Section 70(a). The Commissioner of Internal Revenue may authorize thefiling of returns covering periods longer than a month.

(2) RETURNS JOINTLY MADE. — If two or more officers or directors of aforeign corporation are required to file information returns for any period underSection 70(a), any two or more of such officers or directors may, in lieu of filingseparate returns for such period, jointly execute and file one return.

(b) FORM OF RETURN. — The return under Section 70(x). of the Code andthis section shall be made on the form prescribed by the Commissioner of InternalRevenue. Each officer or director should carefully prepare his return so as to set forth


fully and clearly the information called for therein and by the applicable regulations.Returns which have not been so prepared will not be considered as meeting therequirements of the law.

(c) CONTENTS OF RETURN. — The return shall, in accordance withprovisions of this section and the instructions on the form, set forth with respect to thepreceding period the following information:

(1) Name and address of corporation;

(2) Kind of business in which the corporation is engaged;

(3) Date of incorporation;

(4) The country under the laws of which the corporation is incorporated;

(5) Number of shares and par value of common stock of the corporationoutstanding as of the beginning and end of the period;

(6) Number of shares and par value of preferred stock of the corporationoutstanding as of the beginning and end of the period, the rate ofdividend on such stock and whether such dividend is cumulative ornoncumulative;

(7) A description of the convertible securities issued by the corporation,including a statement of the face value of, and rate of interest on, suchsecurities:

(8) The name and address of each shareholder, the class and number ofshares held by each, together with any changes in stock holdings duringsuch period;

(9) The name and address of each holder of securities convertible into stockof the corporation, the class, number and face value of the securitiesheld by each, together with any changes in the holding of suchsecurities during the period;

(10) A certified copy of any resolution or plan, and any amendments thereofor supplements thereto, for or in respect of the dissolution of thecorporation of the liquidation of the whole or any part of its capitalstock; and


(11) Such other information as may be required by the return form.

If a person is required to file a return under Section 70(a) of the Codeand this section with respect to more than one foreign corporation, aseparate return must be filed with respect to each foreign corporation.

(d) VERIFICATION OF RETURNS. — All returns required by Section70(a) and this section shall be verified under oath or affirmation of the partiesrendering the same.

SECTION 233. Annual information returns by officers and directors ofcertain foreign corporations. — (a) Requirement for filing returns.

(1) GENERAL. — Under Section 70(b), on the sixtieth day after the close ofthe taxable year of a foreign personal holding company each individual who on suchsixtieth day is an officer or director of the corporation shall file with theCommissioner of Internal Revenue an annual information return as provided in thatsection of the Code and this section.

(2) RETURNS JOINTLY MADE. — If two or more officers or directors of aforeign corporation are required to file annual information returns under Section 70(b)for any taxable year of the corporation any two or more of such officers or directorsmay in lieu of filing separate annual returns for such taxable year, jointly execute andfile one annual return.

(b) FORM OF RETURN. — The return under Section 70(b) and this sectionshall be made on the form prescribed by the Commissioner of Internal Revenue. Eachofficer or director should carefully prepare his returns so as to set forth fully andclearly the information called for therein and by the applicable regulations. Returnswhich have not been so prepared will not he considered as meeting the requirementsof the law.

(c) CONTENTS OF RETURN. — The return shall, in accordance with theprovisions of this section and the instructions on the form, set forth with respect to thetaxable year of the foreign personal holding company the following information:

(1) The gross income, deductions and credits, net income, and undistributednet income of the foreign personal holding company for such taxableyear, in complete detail;

(2) The same information with respect to such taxable year which is


required by Section 70(a) and paragraph (c) of the preceding section,except that if all the required returns with respect to such year have beenfiled under Section 70(a) and the preceding section, no informationunder Section 70(b) (2) and this paragraph need be set forth in suchannual return; and

(3) Such other information as may be required by the return form.

(d) VERIFICATION OF RETURNS. — All returns required by Section70(b) and this section shall be verified under oath or affirmation of the partiesrendering the same.


SECTION 234. Information returns by shareholders of certain foreigncorporations. — (a) REQUIREMENT FOR FILING RETURNS.

(1) General. — On the 15th day of each month which begins after July 1,1939 each Philippine shareholder, by or for whom 50 per cent or more in value of theoutstanding stock of a foreign corporation is owned, directly or indirectly [including,in the case of an individual, stock owned by members of his family as defined inSection 66(b)], if such foreign corporation with respect to its taxable year precedingthe taxable year in which such month occurs was a foreign personal holdingcompany, shall file with the Commissioner of Internal Revenue an information, returnas provided in Section 71(a). The Commissioner of Internal Revenue may authorizethe filing of returns covering period longer than a month.

(2) Duplicate returns. — If a shareholder in a foreign corporation files, as anofficer or director in such corporation, the returns required by Section 70(b), suchreturns shall be considered as returns filed under Section 71(a).

(b) FORM OF RETURN. — The return under Section 71(a) shall be made onthe form prescribed by the Commissioner of Internal Revenue. Each shareholdershould carefully prepare his return so as to set forth fully and clearly the informationcalled for therein and by the applicable regulations. Returns which have not been soprepared will not be considered as meeting the requirements of the law.

(c) CONTENTS OF RETURN. — The return shall, in accordance with theprovisions of this section and the instructions on the form, set forth with respect to thepreceding period the same information as required, to be shown on that form by


Section 70(a) and paragraph (c) of Section 232 of these regulations.

If a person is required to file a return under Section 71(a) of the Code and thissection with respect to more than one foreign corporation, a separate return must hefiled with respect to each foreign corporation.

(d) VERIFICATION OF RETURNS. — All returns required by Section71(a) of the Code and this section shall be verified under oath or affirmation of theparties rendering the same.

SECTION 235. Annual information returns by shareholders of certainforeign corporations. — (a) REQUIREMENT FOR FILING RETURNS.

(1) General. — Under Section 71(b) of the Code, on the sixtieth day after theclose of the taxable year of a foreign personal holding company, each Philippineshareholder, by or for whom on such sixtieth day 50 per cent or more in value of theoutstanding stock of the company is owned, directly or indirectly [including the caseof an individual stock owned by members of his family as defined in Section 66(b)],shall file with the Commissioner of Internal Revenue an information returns asprovided in that section and this section.

(2) Duplicate returns. — If a shareholder in a foreign corporation files as anofficer or director in such corporation, the return required by Section 70(b), suchreturns shall be considered as returns filed under Section 71(b).

(b) FORM OF RETURN. — The return under Section 71(b) shall be madeon the form prescribed by the Commissioner of Internal Revenue. Each shareholdershould carefully prepare his return so as to set forth fully and clearly the informationcalled for therein and by the applicable regulations. Returns which have not been soprepared will not be considered as meeting the requirements of the law.

(c) CONTENTS OF RETURN. — The return shall, in accordance with theprovisions of this section and the instructions on the form, set forth with respect to thetaxable year of the foreign personal holding company the same information which isrequired under Section 71(a), paragraph (c) of Section 232 of these regulations andparagraph (c) of the preceding section, except that if all the required returns withrespect to such year have been filed under Section 71(a), no return under Section71(b) is required.

If a person is required to file an annual return under Section 71(b) with respectto more than one foreign personal holding company, a separate return must be filed


with respect to each foreign personal holding company.

(d) VERIFICATION OF RETURNS. — All returns required by Section71(b) and this section shall be verified under oath or affirmation of the partiesrendering the same.


SECTION 236. Ad valorem penalty for failure to file return. — In case of afailure to make and file a return or list within the time prescribed by law, not due towillful neglect, where such return or list is voluntarily filed by the taxpayer withoutnotice from the Commissioner of Internal Revenue or other officer and it is shownthat the failure to file it in due time was due to a reasonable cause, no surcharge willbe added to the amount of tax due on the return. In such cases, in order to avoid theimposition of the surcharge, the taxpayer must make a statement showing all the factsalleged as a reasonable cause for failure to file the return on time in the form of anaffidavit which should be attached to the return. If the Commissioner of InternalRevenue is satisfied that the delinquency was due to a reasonable cause, no surchargewill be added to the tax due on the return. Whether or not reasonable cause exists willdepend upon the circumstances of each case. As a general rule, if the taxpayerexercised ordinary business care and prudence and was nevertheless unable to file thereturn within the prescribed time, the delay will be considered as being due to areasonable cause.

In case of a failure to make and file a return or list within the time prescribedby law, not due to willful neglect, where the taxpayer voluntarily files the returnwithout notice from the Commissioner of Internal Revenue or other officer andattaches to such return the affidavit mentioned in the preceding paragraph but wherethe Commissioner of Internal Revenue is not satisfied as to the reasonableness of thecause of the delinquency, a surcharge of 25 per cent will be added to the amount oftax due on the return.

In case the failure to make and file a return or list within the time prescribed bylaw is due to willful neglect a surcharge of 50 per cent will be added to the amount oftax due on the return. There is willful neglect in the case of a taxpayer who, beingliable to file a return, knowingly delays the filing of such return. Where the filing ofthe return has been delayed for a considerable length of time, the delinquency will bepresumed to be due to willful neglect. DHIcET

The amount of surcharge so added to the tax due on the return shall be


collected at the same time and in the same manner and as part of the tax unless the taxhas been paid before the discovery of the cause giving rise to the imposition of thesurcharge, in which case the amount so added shall be collected in the same manneras the tax.

SECTION 237. Ad valorem penalty for false or fraudulent return. — Incase a false or fraudulent return or list is made, the Commissioner of Internal Revenueshall add to the tax ascertained to be due on the true net income of the taxpayer asurcharged of 50 per cent of the amount of such tax. If payment has been made on thebasis of such false or fraudulent return before the discovery of the falsity or fraud, thebasis of the surcharge of 50 per cent will be the amount of the tax due on the true netincome less the amount so paid.


SECTION 238. Penalty for failure to file return or to pay tax. — Anyperson liable to pay the tax, to make a return or to supply information required underTitle II of the Code, who refuses or neglects to pay such tax, to make such return or tosupply such information at the time or times specified in each case shall be punishedby a fine of not more than P2,000 or by imprisonment for not more than six months,or both. In case of a corporation failing to file its, return or pay the tax, the penaltyprescribed under the first paragraph of Section 73 will be imposed upon the president,vice-resident, or other responsible officer required to file the return of the corporationor pay the tax due from the same, in accordance with the provisions of Section 46(a)and 51(b) of the Code. In the case of a duly registered general copartnership, failingto file the return required under Section 49 of the Code, the penalty prescribed underthe first paragraph of Section 73 will be imposed upon the managing partner or otherresponsible officer of such partnership.

SECTION 239. Penalty imposed upon person causing a false or fraudulentcorporate return to be filed. — If a false or fraudulent return is filed for a corporationor duly registered general copartnership, the individual or any officer thereof causingsuch return to be filed shall be punished by a fine not exceeding P4,000 or byimprisonment for not more than one year, or both.


SECTION 240. Penalty on corporation refusing or neglecting to makereturn. — A corporation or duly registered general copartnership, refusing orneglecting to make a return required under Title II of the Code, or, rendering a false


or fraudulent return, will be liable to a fine of not exceeding P20,000. The fineimposed under Section 74 will be paid by the corporation or duly registered generalcopartnership as an entity, and is in addition to the penalty which may be imposedunder Section 73 of the Code upon the president, vice-president, or other responsibleofficer of a corporation or duly registered general copartnership.


SECTION 241. Return of information as to payments of dividends. — Everydomestic resident foreign corporation is hereby required to render a return, induplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of itspayments of profits or dividends to stock holders for the taxable year or periodcovered by the return, stating the name and address of each stockholder, the numberand class of shares owned by him, the date and amount of such dividend paid him,and when the surplus out of which it was paid was accumulated. Such return shouldbe verified by the oath or affirmation of the person rendering the same. aHcACT


SECTION 242. Application for and issuance of license for collectingforeign items. — Every individual or organization undertaking, for profit orotherwise, the collection of dividends or interest on foreign securities (not payable inthe Philippines) by means of coupons, checks, or bills of exchange shall, uponapplication, obtain a license therefor from the Commissioner of Internal Revenue.The application shall show the name, address, occupation, and status (as to citizenshipor nationality and residence) of the applicant.


SECTION 243. Return of information as to payments of P1,800 or more. —All persons, corporations, partnerships, and associations, making payment to anotherperson of fixed or determinable income of P1,800 or more in a taxable year mustrender a return thereof to the Commissioner of Internal Revenue within the time fixedfor the filing of the annual returns of said person, corporations, partnerships, andassociations. The name and address of the recipient of the income should be stated, ifpossible. Although to make necessary a return of information the income must befixed or determinable, it need not be annual or periodical.

The names of all employees to whom payments of P1,800 or over a year aremade, whether such total sum is made up of wages, salaries, commissions, orcompensation in any other form, must be reported. Compensations in kind, such as


living quarters, meals, and lodging, are taxable income to the recipient and, as such,should be reported if the sum total of the same and the other compensation in cashreceived shall amount to P1,500 or more during the year.

In the case of payments of annual or periodical income to nonresident alienindividual or to foreign corporations or firm not engaging in trade or business withinthe Philippines and not having any office or place of business therein, the return bywithholding agents shall constitute and be treated as return of information.

SECTION 243. Return of information as to payments of P1,800 or more. —All persons, corporations, partnerships and associations making payments to anotherof fixed or determinable income of P1,800 or more in a taxable .year must render areturn thereof in duplicate on the form prescribed therefor (BIR Form No. 17.01-B).These forms should be attached to and filed together with the annual income taxreturns of said persons, corporations, partnerships and associations as payers, withinthe time fixed by law for the filing of income tax returns. The payments referred toherein do not include the following:

(1) Dividend payments mentioned under Section 75 of the National InternalRevenue Code.

(2) Salaries, wages, bonuses, and other compensations in kind, such asliving quarters, meals, and lodging which are subject to withholding taxand reported in W-2 forms as provided for under Republic Act 590.

(3) Payments subject to withholding tax at source enumerated underSection 53 of the National Internal Revenue Code.

Examples of income covered by these regulations and to be declared in BIRForm 17.01-B are interests, rents, commissions, royalties, advertisements,professional fees, and the like, arising generally from payments between payers andrecipients who have no employer-employee relationship.

(Revenue Regulations No. 9-65 amending and superseding section 243appearing on page 723. As of October 20, 1965, these Regulations, dated June 30,1965, have not yet been published in the Official Gazette).


SECTION 244. Return of corporation contemplating dissolution or retiringfrom business. — All corporations, partnership, joint accounts and associations,


contemplating dissolution or retiring from business without formal dissolution shall,within 30 days after the approval of such resolution authorizing their dissolution, andwithin the same period after their retirement from business, file their income taxreturns covering the profit earned or business done by them from the beginning of theyear up to the date of such dissolution or retirement and pay the correspondingincome tax due thereon upon demand by the Commissioner of Internal Revenue toaddition to the income tax return required to be filed they shall also submit within thesame period the following:

(a) Copy of the resolution authorizing such dissolution;

(b) Balance sheet at the date of dissolution or retirement and a profit andloss statement covering the period from the beginning of the taxableyear to the date of dissolution or retirement;

(c) In the case of a corporation, the names end addresses of theshareholders and the number and par value of the shares held by each;and in the case of a partnership, joint-account or association, the nameof the partners or members and the capital contributed by each;

(d) The value and a description of, the assets received in liquidation byeach shareholder;

(e) The name and address of each individual or corporation, other thanshareholders, if any, receiving assets at the time of dissolution togetherwith a description and the value of the assets received by suchindividuals or corporations; and the consideration, if any, paid by eachof them for the assets received.


SECTION 245. Return of information by brokers. — When required by theCommissioner of Internal Revenue, each person doing business as a broker shallrender a return or statement showing the names and addresses of customers to whomor for whom payments were made or from whom business was transacted during thecalendar year or other specified period, and giving all other particulars which may beneeded by the Commissioner of Internal Revenue.


SECTION 246. Information returns as to formation, etc., of foreign


corporation. — (a) IN GENERAL. — Any attorney, accountant, fiduciary, bank,trust company, financial institution, or other person, who, after July 5, 1939, aids,assists, counsels, or advises in, or with respect to, the formation, organization, orreorganization of any foreign corporation (including a foreign association orpartnership) shall file with the Commissioner of Internal Revenue, within thirty daysafter giving such aid, assistance, counsel or advise, an information return; as providedin Section 80 and this section. The return must be filed in every such case (1)regardless of the nature of the counsel or advice given, whether for or against theformation, organization, or reorganization of the foreign corporation, or the nature ofthe aid or assistance rendered and (2) regardless of the action taken upon the advice orcounsel, that is, whether the foreign corporation is actually formed, organized, orreorganized.

If, in a particular case, the aid, assistance, counsel or advice given by anyperson extends over a period of more than one day and not for more than thirty days,such persons, to avoid the multiple filing of returns, may file a single return for theentire period. In such case, the return shall be filed within thirty days from the firstday of such period: If, in a particular case, the aid, assistance, counsel, or advice givenby any person extends over a period of more than thirty days, such person may file areturn at the end of each thirty days included within such period and at the end of thefractional part of a thirty day period, if any, extending beyond the last full thirty days.In each such case, the return must disclose all the required information which was notreported on a prior return.

(b) SPECIAL PROVISIONS. — (1) Employers. — In the case of aid,assistance, counsel, or advice in, or with respect to, the formation, organization, orreorganization of a foreign corporation given by a person in whole or in part throughthe medium of subordinates or employees (including in the case of a corporation theofficers thereof), the return of the employer must set forth to the full extent allinformation prescribed by these regulations, including that which, as an incident tosuch employment, is within the possession or knowledge or under the control of suchsubordinates or employees.

(2) EMPLOYEES. — The obligation of a subordinate or employee(including in the case of a corporation the officers thereof) to file a return with respectto any aid, assistance, counsel, or advice in, or with respect to, the formation,organization, or reorganization of a foreign corporation, given as an incident to hisemployment, will be satisfied if a complete and adequate return as prescribed by theseregulations is duly filed by the employer setting forth all of the information within the


possession or knowledge or under the control of such subordinate or employee.

Clerks, stenographers, and other subordinates or employees, rendering aid orassistance solely of a clerical or mechanical character in, or with respect to, theformation, organization or reorganization of a foreign corporation are not required tofile returns by reason of such services.

(3) RETURNS JOINTLY MADE. — If two or more persons aid, assist,counsel, or advise in, or with respect to, the formation, organization, or reorganizationof a particular foreign corporation, any two or more of such persons may, in lieu offiling several returns jointly execute and file one return.

(c) PENALTIES. — For criminal penalties for failure to file the returnrequired by Section 80, see Section 73 of the Code.

(d) CONTENTS OF RETURNS. — The return shall set forth the followinginformation to the full extent such information is within the knowledge or possessionor under the control of the person required to file the return.

(1) The name and address of the person (or persons) to whom and theperson (or persons) for whom or on whose behalf the aid, assistance,counsel, or advice was given;

(2) A complete statement of the aid, assistance, counsel, or advice given;

(3) Name and address of the foreign corporation and the country under thelaws of which it was formed, organized, or reorganized;

(4) The months and year when the foreign corporation was formed,organized, or reorganized;

(5) A statement of how the formation, organization, or reorganization of theforeign corporation was effected;

(6) A complete statement of the reasons for, and the purposes sought to beaccomplished, by, the formation, organization, or reorganization of theforeign corporation;

(7) A statement showing the classes and kinds of assets transferred to theforeign corporation in connection with formation, organization, orreorganization, including a detailed list of any stock or securitiesincluded in such assets, and a statement showing the names and


addresses of the persons who were the owners of such assetsimmediately prior to the transfer;

(8) The names and addresses of the shareholders of the foreign corporationat the time of the completion of its formation, organization, orreorganization, showing the classes of stock and number of shares heldby each;

(9) The name and address of the person (or persons) having custody of thebooks of account and records of the foreign corporation;

(10) Such other information as may be required by the return form; and

(11) Where any of the information required to be furnished is withheldbecause its character is claimed to be privileged as a communicationbetween attorney and client within the meaning of Section 80, the returnmust so state and must contain a complete statement of the nature andthe circumstances of the communication on which a decision as to thepropriety of the claim of privilege may be reached.

If a person aids, assists, counsels, or advises in or with respect to, theformation, organization, or reorganization of more than one foreign corporation, aseparate return must be filed with respect to each foreign corporation.

(e) VERIFICATION OF RETURN. — All returns required by Section 80and this section shall be verified under oath or affirmation.


SECTION 247. Disposition of income tax returns. — All income tax returnsfiled with the Commissioner of Internal Revenue constitute public records which shallbe open to inspection under rules and regulations prescribed by the Secretary ofFinance with the approval of the President of the Philippines. The circumstancesunder which income tax returns may be inspected by interested parties are dealt withunder separate regulations.

SECTION 248. Publication of list of persons filing returns and payingtaxes. — The second paragraph of Section 81 expressly authorizes the Commissionerof Internal Revenue, with the approval of the Secretary of Finance, to cause to beprepared and published in any newspaper or made available to public inspectionthrough other means, lists containing the names and addresses of persons who have


filed income tax returns, or lists of those who paid income taxes, or both such kindsof lists.


SECTION 249. Recovery of tax. — A suit or proceeding may be maintainedfor the recovery of any internal-revenue tax alleged to have been erroneously orillegally assessed and collected, in accordance with Section 306 of the Code.However, where the Commissioner of Internal Revenue believes that a return is falseor fraudulent or contains any understatement or undervaluation and proceeds to assessand collect the tax due, no portion of the tax so collected shall be recovered by anysuit unless it is proved that the return was not in fact false or fraudulent and did notcontain any understatement or undervaluation, except with respect to return is madein good faith regarding annual depreciation of oil or gas wells and mines.


SECTION 250. Dividends. — Dividends, for the purpose of the law,comprise any distribution whether in cash or other property, in the ordinary course ofbusiness, even though extraordinary in amount, made by a domestic or residentforeign corporation, joint-stock company, partnership, joint account (cuentas enparticipacion), association, or insurance company to the shareholders or members outof its earnings or profits accumulated since March 1, 1913.

Although interest on certain Government bonds and other similar obligations isnot taxable when received by a corporation, upon amalgamation with the other fundsof the corporation, such income loses its identity and when distributed toshareholders, is taxable to the same extent as other dividend.

A taxable distribution made by a corporation to individual stockholders ormembers shall be included is the gross income of the distributees when the cash ofother property is unqualifiedly made subject to their demand. Dividends, in cash orother property received by an individual, are subject to tax in his hands in the samemanner another income.

Dividends, whether in cash or other property, received by a domestic orresident foreign corporation from a domestic corporation are taxable only to theextent of 25 per cent thereof in accordance with Section 24 of the Code. Dividendsreceived by a domestic corporation from a foreign corporation, whether resident ornonresident, are taxable to the extent that they constitute income from sources withinthe Philippines, as provided in Section 37 (a) (2) (b) of the Code. Dividends paid by


the domestic corporation to a nonresident foreign corporation are taxable in full. (Fordefinition of the different classes of corporations, see Section 84 of the Code). AIHDcC

SECTION 251. Dividends paid in property. — Dividends paid in securitiesor other property (other than its own stock), in which the earnings of a corporationhave been invested, are income to the recipients to the amount of the full market valueof such property when receivable by individual stockholders. When receivable bycorporations, the amount of such dividends includible for purposes of the tax oncorporations are specified in Section 24 of the Code. (See also Section 250 of theseregulations). A dividend paid in stock of another corporation is not a stock dividend,even though the stock distributed was acquired through the transfer by the corporationdeclaring the dividends of property to the corporation the stock of which is distributedas a dividend. Where a corporation declares a dividend payable in a stock of anothercorporation, setting aside the stock to be so distributed and notifying the stockholdersof its action, the income arising to the recipients of such stock is its market value atthe time the dividend becomes payable. Scrip dividends are subject to tax in the yearin which the warrants are issued.

SECTION 252. Stock dividends. — A stock dividend which represents thetransfer of surplus to capital account is not subject to income tax. However a dividendin stock may constitute taxable income to the recipients thereof notwithstanding thefact that the officers or directors of the corporation (as defined in Section 84) chooseto call such distribution as a stock dividend. The distinction between a stock dividendwhich does not, and one which does, constitute income taxable to the shareholder isthe distinction between a stock dividend which works no change in the corporateentity, the same interest in the same corporation being represented after thedistribution by more shares of precisely the same character, and a stock dividendwhere there either has been a change of corporate identity or a change in the nature ofthe shares issued as dividends whereby the proportional interest of the shareholdersafter the distribution is essentially different from his former interests. A stockdividend constitutes income if it gives the shareholder an interest different from thatwhich his former stock holdings represented. A stock dividend does not constituteincome if the new shares confer no different rights or interests than did the old — thenew certificates plus the old representing the same proportionate interest in the netassets of the corporation as did the old.

SECTION 253. Sale of stock received as dividends. — Stock issued by acorporation, as a dividend, does not constitute taxable income to a stockholder in suchcorporation, but gain may be derived or loss sustained by the stockholder, whetherindividual or corporate, from the sale of such stock, which gain or loss will be treated


as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.)The amount of gain derived or loss sustained from the sale of such stock, or from thesale of the stack with respect to which it is issued, shall be determined in accordancewith the following rules:

(a) Where the stock issued as dividend is all or substantially the samecharacter or preference as the stock upon which the stock dividend is paid, the cost ofeach share (or when acquired prior to March 1, 1913, the fair market value as of suchdate) will be the quotient of the cost (or such fair market value) of the old shares ofstock divided by the total number of the old and new shares.

(b) Where the stock issued as a dividend is in whole or in part of a characteror preference materially different from the stock upon which the stock dividend ispaid, the cost (and when acquired prior to March 1, 1913, the fair market value as ofsuch date) of the old shares of stock shall be divided between such old stock and thenew stock, in proportion, as nearly as may be, to the respective value of each class ofstock, old and new, at the time the new shares of stock are issued, and the cost (orwhen acquired prior to March 1, 1913, the fair market value as of such date) of eachshare of stock will be the quotient of the cost (or such fair market value as of March1, 1913) of the class to which such share belongs divided by the number of shares inthat class.

(c) Where the stock with respect to which a stock dividend is issued waspurchased at different times and at different prices and the identity of the lots can. notbe determined, any sale of the original stock, will be charged to the earliest purchasesof such stock, and any sale of dividend stock issued with respect to such stock will bepresumed to have been made from the stock issued with respect to the earliestpurchased stock, to the amount of the dividend chargeable to such stock.

(d) Where the stock with respect to which a stock dividend is declared waspurchased at different times and at different prices, and the dividend stock issued withrespect to such stock can not be identified as having been issued with respect to anyparticular lot of such stock, then any sale of such dividend stock will be presumed tohave been made from the stock issued with respect to the earliest purchased stock, tothe amount of the stock dividend chargeable to such stock.

SECTION 254. Declaration and subsequent redemption of a stock dividend.— A true stock dividend is not subject to tax on its receipt in the hands of therecipient. Nevertheless, if a corporation, after the distribution of a stock dividend,proceeds to cancel or redeem its stock at such time and in such manner as to make the


distribution and cancellation or redemption essentially equivalent to the distributionof a taxable dividend, the amount received in redemption or cancellation of the stocksshall be treated as a taxable dividend to the extent of the earnings or profitsaccumulated by such corporation since March 1, 1913.

SECTION 255. Sources of distribution. — For the purpose of incometaxation every distribution made by a corporation is made out of earnings or profits tothe extent thereof and from the most recently accumulated earnings or profits. Indetermining the source of a distribution, consideration should be given first, to theearnings or profits of the taxable year; second, to the earnings or profits accumulatedsince February 28, 1913, only in the case where, and to the extent that, thedistribution made during the taxable year are not regarded as out of the earnings orprofits of the taxable year and all the earnings or profits accumulated since February28, 1913, have been distributed; and, fourth, to sources other than earnings or profitsonly after the earnings or profits have been distributed.

SECTION 256. Distribution in liquidation. — In all cases where acorporation (as defined in Section 84) distributes all of its property or assets incomplete liquidation or dissolution, the gain realized from the transaction by thestockholder, whether individual or corporate, is taxable to the extent recognized inSection 34(b) of the Code. For this purpose, the term "complete liquidation" includesany one of a series of distributions made by a corporation in complete cancellation orredemption of all of its stock in accordance with a bona fide plan of liquidation underwhich the transfer of all the assets under liquidation is to be complete within areasonable time from the date of the first distribution, usually not to exceed one yearfrom the time of such first distribution. If the amount received by the stockholder inliquidation is less than the cost or other basis of the stock, the loss in the transaction isdeductible to the extent allowed in Section 34(c) of the Code.


SECTION 257. Income and deductions of American citizens residing in thePhilippines. — Under subsection (u) of Section 84, a citizen of the United Statesresiding in the Philippines, is taxable on income from sources both within and withoutthe Philippines, except income from sources within the United States. Accordingly,items of deductions allocable to income of such taxpayer from sources within theUnited States are not deductible from his income subject to Philippine income tax.(Deemed repealed since our independence).

SECTION 258. Effective date. — These regulations shall take effect upon


their promulgation in the Official Gazette.

(Promulgated February 11, 1941, XXXIX Off. Gaz., No. 18, page 325)

Recommended by:

BIBIANO L. MEERCollector of Internal Revenue

MANUEL ROXASSecretary of Finance

SUPPLEMENT A — WITHHOLDING ON WAGES

(Articles 1 to 9 will be found after Section 84 of the Code)







APPENDIX CCC

Subject : Tax exemptions of (1) all donations and grants to the PhilippineInventors Commission and (2) the manufacture of local inventions

The Law : Republic Act No. 3850 (Excerpts)

SEC. 1. This Act shall be known and cited as the "Philippine InventorsIncentives Act."

SEC. 9. All donations and grants to the Commission shall be tax-exemptand deductible in full from the donor's income tax returns when evidenced by a certificateduly issued by the Commissioner. Any person who evades or defeats, or attempts to evade ordefeat in any manner any tax imposed by law by availing himself of the provisions of thissection through fraud or misrepresentation shall be punished by a fine of not more than fivethousand pesos or imprisonment not exceeding one year or both, in the discretion of thecourt. In case the violator is a corporation or association, the president or general managerthereof shall be criminally liable without prejudice to the criminal responsibility of themember, officer or employee thereof committing such violation.

SEC. 10. To promote and encourage the manufacture of local inventions, theyshall be exempted from all kinds of taxes, licenses and permits during the first five yearsfrom the date of the grant of the letters of patent: Provided, That their capitalization does notexceed fifty thousand pesos: And provided, further, That their manufacture is carried out bythe inventor himself as a home industry.

SEC. 15. This Act shall take effect upon its approval.

Approved, April 13, 1964.

APPENDIX DDD

Subject : Tax and other exemptions of "naphtha" in certain cases, for fiveyears from January 1, 1965 to December 31, 1969

The Law : Republic Act No. 4068

SEC. 1. Any provision of law to the contrary notwithstanding, anyperson, partnership, company or corporation engaged or which shall engage in themanufacture of chemical products, including the direct reduction of iron ore shall be entitledto exemption from the payment of special import tax, specific tax, fees, dues, customs dutiesand all other taxes of whatever nature or description, payable by such person, partnership,company or corporation in respect to their local purchase and importation of naphtha when


used as a feedstock or raw material in chemical industries and the direct reduction of iron oreand only when, in the course of such manufacture, its chemical structure is changed:Provided, however, That naphtha when used as a fuel, solvent, lubricant, feedstock forpetroleum refineries or for other purposes, is subject to the corresponding taxes, dues andcustoms duties: Provided, further, That the exemption from the special import tax, specifictax, fees, dues and customs duties and all other taxes of whatever nature and description onsuch naphtha shall be made only when the Department of Finance, after investigation, findsthat the following concur:

(a) Naphtha sought to be exempted has the following specifications:

Gravity, ° API 60 to 88Distillation, ASTM, ° F 80 to 450Total Sulfur, wt. % 0.01 to 0.2Unsaturates, vol. % trace to 1.0Aromatics, vol. % trace to 30

(b) It will be used directly and exclusively as feedstock or raw material and that, inthe course of manufacture, its chemical structure is changed.

(c) It will be stored separately and such storage shall be provided with facilities tomeasure or record the quantity of naphtha used as raw material or feedstock.

(d) The shipping and other supporting documents covering the local purchase orimportation are in the name of the tax-exempt firm to whom the goods shall be delivereddirectly.

SEC. 2. Any person, partnership, company or corporation eligible to taxexemption privileges under the preceding section and enjoying tax exemption privileges onits local purchase and importations of raw materials under other existing laws, shall notenjoy tax exemption privileges under this Act without relinquishing its tax exemptionprivileges under other existing laws insofar as its local purchase and importations of naphthaare concerned.

SEC. 3. The Department of Finance shall promulgate the rules and regulationsnecessary for the implementation of this Act: Provided, That any violation of this Act or ofthe rules and regulations issued in accordance with this section, and any misrepresentation ofany essential fact required by said rules, shall subject the offender to cancellation of hisexemption privilege and to the payment of double the duties and taxes involved; and toimprisonment of not less than two nor more than four years and a fine of not less than tenthousand pesos nor more than twenty thousand pesos. Where the offender is a partnership,corporation or other entity, the president, manager or person in charge thereof shall becriminally responsible therefor and, in the case of an alien, he shall be ordered deported.


SEC. 4. All existing laws, executive orders, and administrative rules andregulations or parts thereof, which are inconsistent with the provisions of this Act are herebyrepealed or modified accordingly.

SEC. 5. This Act shall be effective for a period of five years beginning Januaryfirst, nineteen hundred sixty-five to December thirty-first, nineteen hundred sixty-nine.

Approved, June 18, 1964.

APPENDIX EEE

Subject : Exemption from duties and taxes of certain importations by thetextile industry, subject to specified conditions


SEC. 2. Period of non-payment of duties and taxes. Any person, partnership,company or corporation covered by this Act shall be excluded from the payment of dutiesand taxes as follows:

(a) One hundred per centum of the taxes and duties due during the period from thedate of the approval of this Act up to December thirty-first, nineteen hundred sixty-six;

(b) Seventy-five per centum of the taxes and duties due during the period fromJanuary first, nineteen hundred sixty-eight;

(c) Fifty per centum of the taxes and duties due during the period from January firstto December thirty-first, nineteen hundred seventy;

(e) On or after January first, nineteen hundred seventy-one all taxes and duties shallbe paid in full.

SEC. 4. All textile manufacturers who register under this Act shall, in lieu of thetaxes herein exempted, be assessed and shall pay a special tax of one per centum of theirgross sales as defined by the National Internal Revenue Code, to be paid in the same mannerand at the same time and subject to the same penalties and surcharges as the sales-tax, whichshall constitute a Special Textile Research Fund, to be disposed of and disbursed by theNational Science Development Board for research, experiment and study in such projects as,in its judgment, will contribute to the local growth, production or manufacture of rawmaterials needed by the industry; and to the improvement or invention of machineryequipment processes or production methods for the industry.

SEC. 5. Any person, partnership, company or corporation eligible to tax


exemption privileges under this Act and enjoying tax exemption under other existing lawsshall not enjoy tax exemption privileges under this Act.



APPENDIX FFF

Subject : Tax exemption of private development banks


SEC. 1. This Act shall be known as "The Private Development Bank's Act."

SEC. 10. All existing private development banks shall be totally exempted fromthe payment of income and gross receipts taxes for a period of three (3) years after theeffectivity of this Act. Thereafter, they shall be taxed on a gradually increasing basis oftwenty-five percent (25%) per year for the next succeeding four (4) years after the end ofwhich period they shall pay all taxes in full. Those banks that may be established withinthree (3) years from the date of effectivity of this Act, shall be totally exempted from incomeand gross receipts taxes for three years from the date off their organization. Thereafter theyshall be taxed on a gradually increasing basis of twenty-five per cent (25%)) per year for thenext succeeding four (4) years after the end of which period they shall pay all such taxes infull.



APPENDIX GGG

Subject : Limitation in the tariff or taxes that may be imposed on importationof high grade foreign leaf tobacco


SEC. 4. Importation of foreign leaf tobacco only for blending purposes. .. . : Provided, further, That no other tariff or taxes shall be imposed on high grade foreignleaf tobacco so imported except an amount equivalent to one hundred per centum; of itslanded cost.

SEC. 10. Effectivity. — This Act shall take effect upon its approval.



APPENDIX HHH

THE INTERNAL REVENUE LAWS PRIOR TO THEIR CODIFICATION IN 1939

Citations of the sources or patterns of the original provisions of the Code, as foundmostly in Volume II of the Report of the Tax Commission, tabulated section by section. Sources or Patterns of the Original Provisions of the Code as found mostly in the Report of the Tax Commission, Volume II. (1) (2) (3) (4)Sections of Sections of Sections of thethe Code the Report 2 Adm. Code 3 Other Sources or Patterns

1 1 1420

2 2 1421

3 3 1423

4 1424, as amended by Acts Nos. 2819, 2833 and 2835

5 4 1425

6 5 1426

7 6 1427

8 7 1428

9 8 1429

10 9 1430

11 10 1431

12 11 1432

13 12 1433

14 13 1434

15 14 1435, as amended by SEC. 1 of Act No. 2892


16 15 1436

17 16 1437

18 17 1438, as amended by SEC. 2 of Act No. 2819

19 to 84 18 to 83 Act of the U. S. Congress of October 3, 1913 (in force from March 1, 1913 to December 31, 1915)

Act of the U. S. Congress of September 8, 1916 (in force from January 1, 1916 to December 31, 1918)

Act No. 2833 of the Philippine Legislature (in force from January 1, 1919 to December 31, 1919)

Act No. 2926 of the Philippine Legislature (in force from January 1, 1920 to December 31, 1935)

Commonwealth Act No. 117 (in force from January 1, 1936 to December 31, 1938)

85 84 No citation

86 85 1536, as amended by SEC. 10, Act No. 2835, sec. 1 Act No. 3031; and sec. 1, Commonwealth Act No. 106

87 86 1541

88 87 Section 302 of the U. S. Revenue Act 1926, as amended by SEC. 401 of the Revenue Act of 1934 and by sec. 805 of the Revenue Act of 1936

89 88 1538 and 1539, as amended by secs. 1 and 2, respectively, of Act No. 3606

90 89 1543

91 90 1542

92 91 No citation

93 92 1544

94 93 No citation

95 94 1545

96 95 No citation


97 96 No citation

98 97 No citation

99 98 No citation

100 99 No citation

101 100 No citation

102 101 No citation

103 102 1546

104 103 1547

105 104 1548

106 105 1537, as amended by section II of Act No. 2835

107 106 2739

108 to 122 107 to 121 No citation

123 122 1478

124 123 1479

125 124 1480

126 125 1482

127 126 1483

128 127 1484

128-A No citation

129 128 1485, as amended by section 1 of Act No. 2733

130 129 1488

131 130 1489





136 135 1490

137 137 1492



139 139 No citation

140 140 No citation

141 142 1494

142 143 1495

143 144 1496

144 145 No citation

145 146 No citation

146 147 1497

147 148 1498

148 149 1498-A

149 151 1553

150 152 1554

151 153 1555

152 154 1556

153 155 1557

154 156 1558

155 157 1559

156 158 1560

157 159 1561

158 160 1562

159 161 1563

160 162 1564

161 163 1565

162 164 1566

163 165 1567

164 166 1568

165 167 1569

166 168 1470

167 169 1571


168 170 1572

169 171 1573

170 172 2721

171 173 2724

172 174 2725

173 175 2726

174 176 2727

175 177 2728, as amended by SECTION 2 of Commonwealth Act 207

176 178 2730

177 179 2736

178 180 1453

179 181 1454

180 182 1455

181 183 1456

182 184 1457, as amended by Commonwealth Act No. 243

183 185 1458

184 186 1459

185 191 No citation

185-A No citation

186 No citation

186-A No citation

187 No citation

188 No citation

189 No citation

190 189

191 193 1462

192 194 1463

193 195 1464

194 196 1465


195 197 1466

196 198 1468

197 199 1469

198 200 1470

199 201 1471

200 202 1472

201 203 1473

202 204 1474

203 205 1449

204 206 No citation

205 207 1550

206 208 1551

207 209 1552

208 210 2722

209 211 2723

210 212 1449

211 213 1449 (a)

212 124 1449 (b)

213 215 1449 (c)

214 216 1449 (d)

215 127 1949 (e)

216 218 1449 (f)

217 219 1449 (g)

218 220 1449 (h)

219 221 1449 (i)

220 222 1449 (j)

221 223 1449 (k)

222 224 1449 (l)

223 225 1449 (m)


224 226 1449 (n)

225 227 1449 (o)

226 228 1449 (p)

227 229 1449 (q)

228 230 1449 (s)

229 231 1449 (t)

230 232 1449 (u)

231 233 1449 (v)

232 234 1449 (w)

233 235 1449 (x)

234 236 1449 (y)

235 237 1449 (z)

236 238 1450

237 239 1451, as amended by sec. 2 of Act No. 3047


239 241 2721

240 242 2720

241 243 No citation

242 244 Section 3 of Act No. 2719, as amended by sec. 1 of Act No. 3516

Section 79 of Commonwealth Act No. 137

243 245 No citation

244 246 Sections 79 and 88 of Commonwealth Act No. 137

245 247 No citation

246 248 No citation

247 249 No citation

248 250 No citation


250 252 1500


251 253 1501

252 254 1502

253 255 1503

254 256 1504

255 257 1505

256 258 1506

257 259 1507

258 260 Section 192 of Act No. 2427, as amended by section 2 of Act. No. 2648 and section 4 of Act No. 3575

259 261 1508

260 262 Section 1 of Commonwealth Act No. 128

260-A No citation

260-B No citation

260-C No citation

261 263 Section 2 of Commonwealth Act No. 128

262 264 1509

263 265 1510

264 266 1511

265 267 1512

266 268 1513

267 269 1514

268 270 1515

269 271 1516

270 272 1517

271 273 1518

272 274 1519

273 275 1520

274 276 1521

275 277 1522


276 278 1523

277 279 1524

278 280 1525

279 281 1526

280 282 1527

281 283 1528

282 284 1529

283 285 1530

284 286 1531

285 287 1532

286 288 1533

287 289 2732

298 290 2733

289 291 2734

290 292 Section 1 of Act No. 3097


292 294 Section 3 of Act No. 3097, as amended by

Commonwealth Act No. 195





297 299 Section 4 of Act No. 3997, as amended by Commonwealth Act No. 341




301 303 Section 7 of Act No. 3997, as amended by


Commonwealth Act No. 341


303 305 Section 22 of Act No. 2152 (Irrigation Act)

304 306 Section 23 of Act No. 2152 (Irrigation Act)

305 307 1578

306 308 1579 and Section 3226 of the U.S. Revised Statutes, as amended by the Revenue Act of 1932

307 309 1580

308 310 1581

309 311 1582

310 312 1583

311 313 1584

312 314 1585

313 315 1586

314 316 1587

315 317 1588

316 318 1589

317 319 No citation

318 320 1590

319 321 1591

320 322 1591

321 323 1592

322 324 1593

323 325 1594

324 326 1595

325 327 1596

326 328 1597

327 329 1598

328 330 1599


329 331 1600

330 332 1601

331 333 Section 275 of the U. S. Revenue Act of 1938



334 336 Section 1 of Act No. 3292 (Bookkeeping Law)




338 340 No citation

339 341 1574

340 342 1575

341 343 1576

342 344 1577

343 345 No citation

344 346 No citation

345 347 2714

346 348 2715

347 349 2716

348 350 2717

349 351 2731

350 352 No citation

351 353 No citation

352 354 2741

353 355 No citation


355 357 No citation

356 358 2738

357 359 485


358 360 486

359 361 488


361 363 1495

362 364 490

363 365 491

364 366 492

365 367 494

366 368 495

367 369 498

368 370 497

369 371 Laws repealed


371 373 Effective date1 Commonwealth Act No. 466.2 Report of the Tax Commission, Volume II.3 Act No. 2711 (Revised Administrative Code of the Philippines)


Endnotes

1 (Popup - Popup)Appendix CCCAppendix DDDAppendix EEEAppendix FFFAppendix GGGAppendix HHH

Documents

Income Tax Regulations