I. BASIC STRUCTURAL AND DEFINITIONAL CONCEPTS

A. Meaning of Income

SEC. 32 Gross Income. -

(A) General Definition. - Except when otherwise provided inthis Title, gross income means all income derived from whatever source, including (but not limited to) the following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership.

Baniqued: Income in the NIRC is an enumeration. If its not found in Sec. 32 is it income? Itcould be. Including but not limited to is the wording of the law.

Doctor and Lawyer barters services, is that income? Is that taxable? This is very difficult to monitor.

Income means all wealth which flows into the taxpayer other than as a mere return of capital. An example of a mere return of capital is the payment of loans receivable. Income can also mean as a flow of the fruits of ones labor

Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as their disposition.

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As a general rule, mere increase in the value of property is NOT income but merely an unrealized increase in capital. No income is derived by the owner until after the actual sale of the property in excess of its original cost. (De Leon)

*Fisher vs. Trinidad: Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit.

*Conwi v. CTA: Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be though of as flow of the fruits of one's labor.

*CIR v. Tours Specialist: W/N amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractors tax

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayers benefit. Parenthetically, the room charges entrusted by the foreign travel agencies to the private respondents do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. This arrangement was only to accommodate the foreign travel agencies.

*Eisner vs. Macomber: Income may be defined as the gain derived from capital, from labor,or from both combined, including profit gained through sale or conversion of capital.

Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit, in itself, of exchangeable value, proceeding from capital, severedfrom it, and derived or received by the taxpayer for his separate use, benefit, and disposal. Id.

A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the corporation, takes nothing from the property of the corporation and adds nothing to that of the shareholder. A tax on such dividends is a tax an capital increase, and not on income, and, to be valid under the Constitution, such taxes must be apportioned according to population in the several states.

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*James vs. US: The issue before us in this case is whether embezzled funds are to be included in the "gross income" of the embezzler in the year in which the funds are misappropriated. the obvious intent of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune

B. Realization

It is a separation from capital, resulting in receipt of income

*Eisner v. Macomber: A "stock dividend" shows that the company's accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.

*Bachrach v. Seifert: It is true that profits realized are not dividends until declared by the proper officials of the corporation, but distribution of profits, however made, in dividends, and the form of the distribution is immaterial.

*Helvering v. Horst: The decisions and regulations have consistently recognized that receiptin cash or property is not the only characteristic of realization of income to a taxpayer on the cash receipts basis. Where the taxpayer does not receive payment of income in money or property, realization may occur when the last step is taken by which he obtains the fruition of the economic gain which has already accrued to him.

The enjoyment of the economic benefit accruing to him by virtue of his acquisition of the coupons is realized as completely as it would have been if he had collected the interest in dollars and expended them for any of the purposes named

In a real sense, he has enjoyed compensation for money loaned or services rendered, and not any the less so because it is his only reward for them. To say that one who has made a gift thus derived from interest or earnings paid to his donee has never enjoyed or realized the fruits of his investment or labor because he has assigned them instead of collecting them himself and then paying them over to the donee is to affront common understanding and to deny the facts of common experience. Common understanding and experience are the touchstones for the interpretation of the revenue laws.

The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it.

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*CIR v.CTA: However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, inwhole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated.

C. Imputed Income

Imputed income This reduces administrative difficulty. You cannot expect government officials to monitor everything. Recall the Doctor and Lawyer example, it may be beyond thecapacity of the government to assess. As long as the transaction is personal in nature it would be very difficult to monitor.

D. Recovery of Capital Investment

SEC. 40. Determination of Amount and Recognition of Gain or Loss. -

(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the:1. excess of the amount realized therefrom 2. over the basis or adjusted basis for determining gain, and

the loss shall be 1. the excess of the basis or adjusted basis for determining loss 2. over the amount realized.

The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received.

*Baniqued: There is a land owner, he then asks a building developer to put up a 5 storey town house. There is no payment in cash, but Land owner will give him 2 units in the townhouse. With regard to the contractor, there is compensation for services. What about the landowner, does he derive income? NO. There is a building, an improvement. It is still my capital. When will there be income? When you sell the building.

E. Windfall Receipts

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*Commissioner v. Glenshaw: Respondents contend that punitive damages, characterized as "windfalls" flowing from the culpable conduct of third parties, are not within the scope of thesection. But Congress applied no limitations as to the source of taxable receipts, nor restrictive labels as to their nature.

It would be an anomaly that could not be justified in the absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the additional amount extracted as punishment for the same conduct which caused the injury. And we find no suchevidence of intent to exempt these payments.

F. Recovery of Deducted Items: Tax Benefit Principles

*Baniqued: When theres a fire, then the person claims a loss (P50M) in gross income in that year. In the following year, the insurance company pays me my insurance claim. What happens now? Since you made a tax benefit from the deduction, are you under the obligation to report the income? YES, you are obliged to report it as recovery of deducted items: this is the tax benefit principle.

Employer contributes to a retirement fund, then it claims as deduction the retirement contributions. When the contribution is returned to the ER because it was excessive, then it needs to be reported as income by the ER.

G. Indirect Payments

*Baniqued: If the taxes were borne by the buyer (for example, Capital Gains Tax), this would constitute additional income to the seller. If someone else paid it for you, then that isincome to you.

When you bear the obligation of someone, that is income to the other person. This is discharge of a party of another obligation, will be an additional income to you.

H. Discharge of Indebtedness Income

*Baniqued: It is important to look at the prime consideration for the condonation of the debt. Look at the circumstances. If it is love, affection, generosity and pure liberality, that isa GIFT (exclusion from gross income).

If the ER condones the debt of the EE, is that income? If a firm sends its associate abroad for a scholarship, and it was supposed to be a debt. But since the associate is very good, the ER condoned the debt, is that income?

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