SPECIAL DEDUCTIONS ON GROSS INCOME1. Insurance companies2. Mutual Insurance companies3. Mutual Marine Insurance companies4. Assessment Insurance companies5. Estates & Trusts *6. Private Educ Institutions *

SEC 37. SPECIAL PROVISIONS RE INCOME & DEDUCTIONS of INSURANCE COMPANIES whether DOMESTIC or FOREIGN

A. SPECIAL DEDUCTIONS ALLOWED to INSURANCE COMPANIESInsurance Cos, whether DOMESTIC or FOREIGN doing business in the PH are allowed to DEDUCT in addition to the itemized deductions under Sec 34, the ff:1. NET ADDITIONS (if any) required by law to be made w/in the yr to RESERVE FUNDS2. SUMS other than dividends PAID w/in the yr on POLICY & ANNUITY CONTRACTS.- the released reserve shall be treated as income for the year of release.

B, MUTUAL INSURANCE COMPANIESMutual Insurance Companies (other than mutual life & mutual marine companies), such as Mutual fire Employers liability Workmens compensation Casualty insurance coswhich require their members to make PREMIUM DEPOSITS to provide for losses & expenses are allowed to deduct from their GI:1. Any portion of premium deposits RETURNED to the POLICY HOLDERS;2. Such portion of the premium deposits as are RETAINED for payment ofa. Lossesb. Expensesc. Reinsurance reserves.

C. MUTUAL MARINE INSURANCE COMPANIESMutual Marine Insurance Cos, required to include in their return of GI the GROSS PREMIUMS collected & received by them LESS: AMOUNTS PAID for REINSURANCE, are entitled to deduct from their GI:1. AMTS REPAID to POLICY HOLDERS on account of premiums previously paid by them;2. INTEREST paid upon those amts bet the ascertainment of date & the date of its payment.

D. ASSESSMENT INSURANCE COMPANIESAssessment Insurance Cos, whether domestic/foreign, may deduct in a taxable yr the SUM ACTUALLY DEPOSITED w/ the officers of the GOVT of the PH, pursuant to law as additions to GUARANTEE/RESERVE FUNDS..

*ESTATES & TRUSTS w/c may avail of itemized deductions can deduct from GI, any AMOUNT OF INCOME a. Paidb. Creditedc. To be distributed to the BENEFICIARIES.. but this income shall be TAXABLE to the BENEFICIARIES.

* PRIVATE EDUC INSTITUTIONS in addition to the expenses allowable to a PEI, it may, at its OPTION, elect eithera. To DEDUCT EXPENDITURES w/c are considered as CAPITAL OUTLAYS of depreciable assets incurred during the yr for EXPANSION of school facilities; orb. To DEDUCT DEPRECIATION on such assets.q

SEC 38. LOSSES from WASH SALES of STOCK or SECURITIES

Shares of Stock include shares of stock of a corp, warrants &/or options to purchase shares of stock, as well as units of participation in a partnership GPP, joint stock co, joint accts, joint ventures, assocs, & recreation or amusement clubs & mutual fund certs.Securities shares of tock in a corp & rights to subscribe for or to receive such shares. Includes bonds, debentures, notes, certs or other evidence of indebtedness issued by any corp, including the govt & its political subd, w/ interest coupons or in registered formDealer in securities a corp w/ an established place of business regularly engaged in the purchase of stock or securities & their resale to customers.

* If a taxpayer is NOT a dealer in securities or being a dealer, the securities sold/exchanged were HELD AS INVESTMENT, the gain/loss arising from the sale is treated as CAPITAL GAIN or CAPITAL LOSS.

Dealings by a Corp in its own stock1. Issuance of shares at a premium sale of shares from unissued stock over its par or stated value does NOT give rise to any taxable income. Premium on capital stock is not income; hence it is not taxable.2. Sale of treasury stock sale of treasury stock over its cost or other basis of acquisition results in a TAXABLE GAIN to the corp3. Payment to corp of its own stock If a corp RECEIVES its OWN STOCK as consideration for property sold by it, the gain/loss resulting from the transaction is to be computed in the same manner as though payment had been made in any other property. (basis is fair market value)4. Contributions by shareholders assessments made by a corp to its stockholders for additional funds w/c amounts so received by the corp are credited to its RETAINED EARNINGS ACCT or to a SPECIAL CAPITAL ACCT are NOT considered income

Sale or Retirement of Corporate Bonds1. Bonds issued at face value & retired at a price in excess of face value excess is a DEDUCTIBLE EXPENSE2. Bonds issued at face value & retired at a price LESS than issue price excess is GAIN3. Bonds issued at a premium premium is gain or income w/c should be PRORATED or AMORTIZED over the life of the bond4. Bonds issued at a premium & retired at a price IN EXCESS of issue price If the corp retires any of such bonds at a price in excess of the issue price less any amt of premium already reported as incomethe excess of the redemption price over the issue price minus any amt of premium already returned as income (amortized) is a DEDUCTIBLE EXPENSE

WASH SALE a sale of securities where substantially identical securities are acquired or purchased w/in a 61-day period beginning from 30 days before the sale & ending 30 days after the sale.

NON-DEDUCTIBILITY of LOSSES on WASH SALEGR: Losses arising from sales/exchanges of stock & securities are DEDUCTIBLE as losses from sales/exchanges of property.: Sec 38[a] w/c expressly EXCLUDES losses from WASH sales of stock from the allowable deductions.: The wash sale provisions however, do not apply to:1. INDIVs or CORPS acting as DEALERS in STOCK/SECURITIES such as stock brokers & banks & trust companies, if the sale or other disposition is made in the ORDINARY COURSE of the business of such dealers;2. SHORT SALE Transactions3. GAINS in wash sales (taxable).

CONDITIONS for NON-DEDUCTIBILITYA taxpayer CANNOT deduct any loss claimed to have been sustained from the sale/other disposition of stock/securities, if, within a period beginning 30days before the date of such sale & ending 30 days after (the 61-day period), he has acquired (by purchase/exchange upon w/c the entire amt of gain/loss was recognized by law), or has entered into a contract or option to acquire, substantially identical stocks or securities.REQUISITIES:1. SALE/other dispostiosn of stocks/securities resulted in a LOSS;2. There was an ACQUISITION or CONTRACT/OPTION for acquisition of stock/securities w/in 30days before the date of such sale or 30days after the sale;3. The STOCK/SECURITIES sold were SUBSTANTIALLY the SAME as those acquired w/in the 61-day period.The prohibition does NOT APPLY in the case of a DEALER in STOCK if the said sale is made in the ORDINARY COURSE of business.

Acquired by purchase or by an exchange upon w/c the entire amt of gain/loss was recognized by law, & comprehends cases where the taxpayer has entered into a contract or option w/in the 61-day period to acquire by a purchase or by such exchange the subject shares of stock.Substantially Identical Stock/Securities the stock must be of the SAME CLASS, or in the case of BONDS the TERMS thereof must be the same. There must be similarities on all important particulars.Thus, the ff are NOT identical: Common stock & preferred stock of the same corp Non-voting & voting stock Stock of 1 corp & stock of another corp 2 series of bonds where one is secured by a mortgage & the other is not; or w/c differ as to interest rates.*But 2 series of bonds are substantially identical where the only difference is the date of maturity.

SEC 39. CAPITAL GAINS & LOSSESCLASSIFICATION of ASSETS1. ORDINARY ASSETS they are:a. STOCKS IN TRADE of the taxpayer or other properties of a kind w/c would properly be included in the INVENTORY of the taxpayer Merchandise, finished goods, work in process & raw materialsb. PROPERTY HELD by the taxpayer primarily for SALE to CUSTOMERS in the ordinary course of his trade/business c. PROPERTY USED in the TRADE/business & subject to DEPRECIATION Office equipment, buildingd. REAL PROPERTY used in TRADE/business2. CAPITAL ASSETS they include all property held by the taxpayer whether or not connected in trade/business but those enumerated above as ordinary assets. Accts receivable, property subdivided & sold to tenants at the instance of the govt, interest in partnership, properties held for investments, residential houses, idle lands, membership in the Ph Stock Exchange (gains from sale of the same should be included in the GI.

Capital Gain gain derived from the sale/exchange of capital assetsCapital Loss loss incurred from the sale/exchange of capital assetsNet Capital Gain (NCG) the excess of the gains from sales/exchanges of capital assets over the losses from such sales/exchangesNet Capital Loss (NCL) the EXCESS of the LOSSES from sales/exchanges of capital assets OVER the GAINS from such sales/exchangesNet Capital Loss Carry Over (NCLCO) the net capital loss in a taxable yr w/c CANNOT BE DEDUCTED from ORDINARY INCOME but w/c could be CARRIED OVER to the next taxable yr by a taxpayer corp as a DEDUCTION against the NCG up to an amount NOT IN EXCESS of the TAXABLE INCOME (net income before exemptions).Short-term Capital Gain/Loss the gain/loss arising from sale/exchange of capital asset HELD for 12 mos/lessLong-term Capital Gain/Loss the gain/loss arising from sale/exchange of capital asset HELD for MORE than 12 monthsOrdinary Income Income minus expenses & losses capital gains & capital losses (Sec 22(Z)Ordinary Gain gain derived from sale/exchange of an ordinary assetOrdinary loss excess of expenses & losses over the income capital gains & capital losses REQUISITES for RECOGNITION of CAPITAL GAIN/LOSS1. Transaction must involve PROPERTY classified as CAPITAL ASSET2. Transaction must ARISE (gr) from SALE or EXCHANGE Where the TP is an INDIVIDUALa distinction is made bet short term & long term CG/L If the TP is a CORP holding period is of no significance

RULES on CAPITAL GAINS or LOSSES of INDIVIDUALS:A. TRANSACTIONS involving PERSONAL PROPERTY classified as CAPITAL ASSET:1. The PERCENTAGES of gain/loss to be taken into acct shall be:a. 100% - long termb. 50% - short term2. CAPITAL LOSSES shall be deducted only to the extent of the CAPITAL GAINS.3. A Net Capital Loss in a taxable yr in an amt NOT in excess of the taxable income for that yr shall be DEDUCTED from the NC GAIN of the next succeeding year only; &4. ORDINARY LOSSES are deductible from CAPITAL GAINS but NCL cannot be deducted from ordinary gain/income.*Capital Gains derived by individuals from the sale/other disposition of REAL PROPERTY are subj to the FINAL Schedular Tax on Capital Gains under 24D.

LIMITATION ON CAPITAL LOSSESGR: Losses from sales/exchanges of capital assets are allowed only to the extent of the GAINS from such sales/exchanges. (If dealings result in a NCL, such loss cannot be deducted from ordinary income because capital losses are allowable only to the extent of capital gains).: Any loss sustained by a DOMESTIC BANK, or TRUST co, from the sale of bonds, debentures, notes or certificates or other evidence of indebted ness issued by any CORP including the govt is considered as an ORDINARY LOSS & deductible from ordinary income. : disposition of other capital assets of a domestic bank & trust co.Rationale: Banks & trust cos are considered as dealers in security, hence these securities are considered as property primarily held for sale to customers in the ordinary course of business.

RULES on CAPITAL GAINS or LOSSES of CORPORATIONS (on Real & Personal Property)1. Capital Gains & Losses are recognized to the extent of 100% regardless of the holding period.2. The NCLCO is n/a;3. Capital losses are deductible only to the extent of capital gains;4. Ordinary losses are deductible from capital gain BUT net capital loss cannot be deducted from ordinary gain or income.

OTHER CAPITAL ASSET TRANSACTIONSGR: In order that the special capital gain & loss may apply, it is necessary that the transaction arises from sale or exchange.The ff are considered sales/exhanges of capital assets:1. Retirement of bonds (39E)2. Short sales of property (39F)3. Failure to Exercise Privilege/Option to buy/sell Property (39F(2))4. Securities becoming worthless 34D, 4, b5. Distribution in liquidation of corporations 6. Readjustment of interest in partnership

RETIREMENT OF BONDS amts received by the holder upon the retirement of bonds, debentures, notes, certificates or other services of indebtedness issued by any CORP including the govt/political subd, w/ interest coupons or in registered forms shall be considered as AMOUNTS RECEIVED IN EXCHANGE therefor.

GAINS & LOSSES from SHORT SALESShort Sale takes place when a seller first makes a sale of stock w/c he DOES NOT OWN (he merely borrows the stock certificate through/from his stock broker) & subsequently BUYS or COVERS the stock to complete the transaction. He sells the shares SHORT in the expectation of a decrease in value thereof w/in a reasonably short period of time. Consummation: A short sale is NOT deemed consummated until the DELIVERY of property to cover the short sale. If the short sale is made through a BROKER & the broker BORROWS the property to make a delivery the short sale is NOT deemed consummated until the obligation of the seller created by the short sale is finally discharged by a delivery of the property to the broker to replace the property borrowed by such broker.

TREATMENT: Gain/Loss on short sales is always a SHORT-TERM CAPITAL GAIN/LOSS

FAILURE TO EXERCISE AN OPTION Gains/losses attributable to the failure to exercise privileges or options to buy/sell property shall be considered as CAPITAL GAINS/LOSSES.

SECURITIES BECOMING WORTHLESSIf any securities w/c are capital assets are ascertained to be worthless & written off during the taxable yr the loss resulting therefrom in case of a taxpayer bank/trust co incorporated in the PH, a substantial part of whose business is the receipt of deposits, is considered as a CAPITAL LOSS

HOWEVER, the loss is NOT DEDUCTIBLE against the CAPITAL GAINS realized from the barter, sale, exchange or other forms of disposition of shares of stock during the taxable yr, but must be CLAIMED against other capital gains to the extent provided in 34 D 4 b.

For the 5% and 10% net capital gains tax to apply, there must be an ACTUAL DISPOSITION of shares of stock held as capital asset, & the capital gain & capital loss used as the basis in determining net capital gain, must be derived & incurred respectively from a sale, barter, exchange or other disposition of shares of stock.

CAPITAL GAINS TAX ON SALE OF REAL PROPERTY

BASIS of the TAX: 6% on whichever is higher ofa. Gross Selling Price orb. Current FMV

1. where consideration is Cash & Property money received + FMV*Interest included in installment payments shall not form part of the amt realized but shall be treated as ordinary income2. In case of EXCHANGE of property FMV of property exchanged3. In case of PUBLIC BIDDING/AUCTION SALE highest bid price4. In case of transfer WITHOUT CONSIDEREATION NOT subj to tax5. In case of SALE of RIGHTS over realty NOT subj to CGT

INDIVIDUALS LIABLE TO CGT1. RC, NRC2. RA, NRA (whether or not engaged)3. Estates & Trusts

NATURE of the TAX1. FINAL when imposed2. Imposed IN LIEU of income taxGR: Capital gains excluded from GI: sale is made to the GOVT indiv tp has option to either a. subj to CGT or b. include gain in his GI3. Imposed on CAPITAL GAINS PRESUMED REALIZED

Sale of Principal Residence exempt from CGT unutilized portion

GUIDELINES IN DETERMINING WHETHER REAL PROPERTY A CAPITAL OR ORDINARY ASSET1. TAXPAYERS ENGAGED IN REAL ESTATE BUSINESS ORDINARY ASSETSa. Real Estate Dealer buys & sells real property in his OWN ACCOUNT as principal & holding himself out as a full/part-time dealer in real estate b. Real Estate Developer develops properties into subdivisions, builds houses on subdivided lots or constructing residential or commercial units, c. Real Estate Lessor leases or rents out real property on his own account as a principald. TP habitually engaged in real estate business refer collectively to real estate dealers, developers, lessors2. TAXPAYER NOT ENGAGED IN REAL ESTATE BUSINESS real property used/ or being used or have been previously used in the trade or business of the tp ORDINARY ASSETS* Real prop used by EXEMPT CORP in its EXEMPT OPERATIONS CAPITAL (not considered used for business purposes3. TAXPAYERS CHANGING BUSINESS FROM REAL ESTATE TO NON-REAL ESTATE shall not result in the re-classification of real prop held by it from ORDINARY to capital asset4. TAXPAYER ORIGINALLY REGISTERED TO BE ENGAGED IN THE REAL ESTATE BUT FAILED TO SUBSEQUENTLY OPERATE all real prop originally acquired by it shall continue to be treated as ORDINARY ASSETS5. ABANDONED & IDLE REAL PROPERTY of TP ENGAGED IN REAL ESTATE or FORMERLY BEING USED IN THE TRADE of a TP engaged/not engaged in real estate ORDINARY HOWEVER, properties classified as ORDINARY ASSETS for being used in business by a TP not engaged in real estate business are AUTOMATICALLY CONVERTED into CAPITAL assets upon showing that the same have NOT BEEN USED in BUSINESS for more than 2yrs before the consummation of the taxable transactions involving said properties.6. REAL PROPERTIES TRANSFERRED TO A BUYER thru sale, barter, exchange, inheritance, donation or declaration of PROPERTY DIVIDENDSa. Succession/donation to donee who is NOT engaged in real estate & who does not subsequently use such property in trade/business CAPITAL ASSETb. As dividend by the SH who is not engaged in real estate & does not use it in trade/business CAPITAL ASSETc. Received in an EXCHANGE from a TP not engaged in real estate to a TP engaged in real estate or even if not engaged but will use it in his business ORDINARY7. REAL PROPERTY SUBJ OF INVOLUNTARY TRANSFER no effect on the classification

SEC. 40. DETERMINATION of AMOUNT & RECOGNITION of GAIN/LOSS

TAX BASIS of PROPERTY SOLD/EXCHANGED

Measure of gain/loss GR: The amt of the gain/loss, as the case may be, arising therefrom is a TAXABLE GAIN or DEDUCTIBLE LOSS. (this is inconsonance w/ the definition of gross income w/c includes gains, profits & income derived from sales or dealings in property (32A) & the provisions allowing the deduction of losses in 34D.)

FACTORS in DETERMINING GAIN or LOSS1. BASIS of PROPERTY DISPOSED GR: the COST at w/c the taxpayer acquired the property2. ADJUSTMENTS to the BASIS a. Additions (capital expenditures)b. Recoveries (depreciation)3. AMOUNT REALIZED from the disposal of the property4. NATURE or CHARACTER of the property disposed ofa. Capital assetb. Non-capital asset5. HOLDING PERIOD period during w/c the property was held by the taxpayer

COMPUTATION of GAIN or LOSS1. GAIN from sale/other disposition of property (AMT REALIZED) minus (BASIS/adjusted basis for determining gain)2. LOSS (BASIS/adjusted bases for determining loss) minus (amt REALIZED therefrom)3. AMT REALIZED from the sale/other disposition of property (sum of money received) plus (FMV of prop rcvd)4. ADJUSTED BASIS of the property disposed of its orig COST adjusted to the date of its disposition*Adjustment may consist of:1. Adding capital additions (improvements)2. Deducting capital recoveries (depreciation).

BASIS of PORPERTY SOLD/DISPOSED OF depends on the MANNER of ACQUISITION by the taxpayer1. By PURCHASE purchase price + expenses of acquisition2. Included in the INVENTORY latest inventory value3. By DEVISE, BEQUEST or INHERITANCE FMV or V as of the date of acquisition4. By GIFT/DONATION the same as it would be in the hands of the DONOR/last preceding owner by whom it was acquired by gift*If each basis is GREATER than the FMV of the property at the time of the gift for the purpose of determing the LOSS FMV5. For LESS than an ADEQUATE consideration in money/moneys worth (capital asset) whichever is GREATER of -a. AMT PAID by the TRANSFEREE b. TRANSFERORS adjusted basis at the time of the transfer6. In a TRANSACTION where gain/loss NOT recognizeed that as defined in 40 C,5MEASURE of GAIN/LOSS from SALE/ in EXCHANGE of PROPERTY1. The measure of gain/loss from the sale of property is the DIFFERENCE bet the SELLING PRICE of property sold & its COST

Selling PRICE COST GAIN from sale

Cost Selling PRICE LOSS from sale

*If the cost/value of property cannot be shown the whole selling price shall be considered the gain.

2. The gain/loss in an EXCHANGE of property is the DIFFERENCE bet the FMV of the prop RECEIVED & the COST of the property given

FMV of property received COST/basis of property given GAIN from exchange

COST/basis of property given FMV of property received LOSS from exchange

GAIN/LOSS INVOLVING EXCHANGE of PROPERTYIt is NOT necessary that the property received in exchange is ESSENTIALLY DIFFERENT from the property disposed of. If the transaction is an EXCHANGE it is sufficient for gain/loss to be recognized that the property received has a fair market value.

ACQUISITION on/after MARCH 1, 1913 the COST/BASIS depends upon the MODE of ACQUISITION1. By PURCHASE COST2. By GRATUITOUS TITLEa. INHERITANCE FMV/ value at the date of acquisitionb. GIFT/DONATION transferred for LESS than the ADEQUATE & full consideration in money/moneys worththe same as it would be in the hands of the donor/transferor.

READJUSTMENT of INTEREST in a GPP1. RETIREMENT of PARTNER or DISSOLUTION of PARTNERSHIPWhen a partner retires from a GPP or the partnership is dissolved he realizes a GAIN/LOSS measured by the difference bet:

PRICE received for his interest in the GPPLessCOST to him of his interest in the GPPGAIN from retirement/dissolution

COST to him of his interest in the GPPLessPRICE received for his interest in the GPPLOSS from retirement/dissolution2. DISTRIBUTION of ASSETS IN KINDpartner realizes GAIN or suffers LOSS accdg to the FMV of the property received in liquidation

3. ADMISSION of NEW PARTNER or REORGANIZATION of PARTNERSHIP the facts as to such change/reorganization should be fully set forth in the next return of income in order that BIR may determine whether any gain/loss has been realized by any partner.

GR: Upon the sale/exchange of property the entire gain/loss shall be RECOGNIZED.:Exceptions1. Transactions where gains/losses are NOT RECOGNIZED They are:a. Exchange of property SOLELY IN KIND in pursuance of corporate MERGER/CONSOLIDATIONS &b. Exchange by a PERSON of his PROPERTY for STOCK in a corp as a result of which, said person, alone/together w/ others not exceeding 4 persons, gains CONTROL of said corporation.2. Transactions where GAIN is RECOGNIZED, but NOT the LOSS a. Transactions bet RELATED TAXPAYERSb. ILLEGAL transactionsc. Exchanges of prop NOT SOLELY IN KIND in pursuance of MERGER/consolidations.

EXCHANGES of PROPERTIES in CORPORATE READJUSTMENTS

Merger/Consolidation a. ORDINARY MERGER when one/more corps are ABSORBED by 1 corp w/c survies & continues business X bank absorbs Y bank. X will continue the business of the 2 banks. Y bank transfers all its assets & liabilities to X. In turn, X issues its shares to Y in exchange of Ys net assets. Y then distributes the X shares to its stockholders.ORDINARY CONSOLIDATION 2/more corps UNITE into a NEW corp. (constituent corps cease to exist) A corp & B corp agree to consolidate their resources to form a new corp named XY Corp. The assets of A & B are transferred to AB in exchange of shares of stock of AB, which A and B will distribute to their respective stockholders. A & B are dissolved by operation of law.

b. ACQUISITION by 1 corp of ALL/SUBSTANTIALLY ALL the properties of another corp SOLELY for STOCK

BUSINESS PURPOSE for a transaction to be regarded as a merger/consolidation, it must be undertaken for a bona fide business purpose & NOT solely for the purpose of escaping the burden of taxation, & in determining whether a bona business purpose exists each & every step of the transaction shall be considered & the whole transaction or series of transactions shall be treated as a SINGLE UNIT.PROPERTY in determining whether the property transferred constitutes the SUBSTANTIAL portion of the property of the transferor the term shall be taken to INCLUDE the CASH ASSETS of the TRANSFERORCONTROL of a CORPORATION ownership of stocks in a corp possessing AT LEAST 51% of the TOTAL VOTING POWER of ALL CLASSES of stocks entitled to vote. In determining the 51% stock ownership, only those persons who transferred property for stock in the SAME TRANSACTION may be counted up to a maximum of 5.SUBSTANTIALLY ALL the acquisition by the corp of AT LEAST 80% of the ASSETS including CASH, of another corp w/c has the element of PERMANENCE & not merely momentary holding.

NON-RECOGNITION of GAIN/LOSSNo gain/loss shall be recognized if in pursuance of a PLAN of MERGER/CONSOLIDATION (M/C)1. a CORPORATION w/c is a party to a M/C, exchanges property solely for stock in a corp w/c is a party to the M/C Y bank transferred to Bank its net assets w/ book value of P5M but its FMV is P20M. X issues shares worth P20M to Y. Y shall report no taxable gain on the exchange2. a SHAREHOLDER exchanges stock in a corp w/c is a party to the M/C solely for stock of another corp, also a party to the M/C Y bank has now as its only remaining assets the X shares valued at P20M, w/ch will be distributed by Y to its stockholders in exchange for the Y shares held by them. A stockholder of Y Bank received X Bank shres w/a FMV of 100k, while the Y shares he surrendered has an adjusted basis of 30k the gain of 70k on the exchange is not taxable3. a SECURITY HOLDER of a CORP w/c is a party to the M/C exchanges his securities in such corp solely for stock/securities in another corp, a party to the M/C Corp X & Corp Y agreed to merge w/ the latter, being absorbed by the former. Previous to the merger, Corp Y has floated 20-yr mortgage bonds, Z, bondholder, exchanged his security w/ a principal amount of P10k for Corp X stock w/ a FMV of P12k the gain of 2k is not taxable4. a PERSON exchanges his property for stock/unit of participation in a corp of w/c as a result of such exchange, said persone alone/together w/ others, NOT exceeding 4persons, gains CONTROL of said corp, provided that stocks issued for services shall not be considered as issued in return of property5. a CORPORATION w/c is a party to the M/C receives in exchange for property not only STOCK of another corp, but ALSO MONEY &/or other property, & DISTRIBUTES it in pursuant of the plan of M/C Corp X & Corp Y were merged w/ Corp X, the absorbing corp. Pursuant to the plan of merger, Corp Y will receive Corp X stocks plus cash & other property w/c will be distributed to the stockholders of Corp Y. Y distributes to its stockholders Corp X stocks plus the cash & other property received from Corp X.the gain on the exchange is not taxable.

A merger/consolidation does NOT involve a sale, exchange, or disposition of shares since there is NO TRANSFER of BENEFICIAL OWNERSHIP over the shares. The surviving corp in a merger, or the new corp in a consolidation succeeds the rights & liabilities of the absorbed/dissolved corp/s. hence, not taxable transaction actually takes place. Sec 40 merely defers recognition of gain/loss from such transaction. If the transferor later sells/exchanges the shares of stocks acquired he shall be subj to the income tax on the gains derived from such sale/exchange taking into consideration that the cost basis of the shares of stock shall be the same as the original acquisition or adjusted cost basis to the transferor of the property exchanged therefor; & that the cost basis of the transferee of the property exchanged for stocks shall be the same as it would be in the hands of the transferor.

RECOGNITION of GAIN, BUT NOT of LOSSGAIN, if any, but NOT the loss shall be recognized, if in connection w/ the exchange described in the above exceptions pursuant to a plan of M/C:1. a SHAREHOLDER or SECURITY HOLDER receives not only STOCKS or SECURITIES permitted to be received w/o recognition of gain/loss but ALSO MONEY &/or other PROPERTYa. the GAIN, if any, shall be RECOGNIZED in an amount not in excess of the sum of money & the FMV of the other property receivedb. if the distribution of such other property &/or money to a shareholder in the course of a M/C has the EFFECT of DISTRIBUTION of a TAXABLE DIVIDEND there shall be TAXED to the distribute AS DIVIDEND such an amount of the gain recognized in the exchange not in excess of the distributees proportionalte share of the undistributed earnings & profits of the corp; and the REMAINDER, if any, as CAPITAL GAIN.2. a CORPORATION w/c is a party to the M/C receives not only STOCK permitted to be received without the recognition of gain/loss, but ALSO MONEY &/or other PROPERTY & DOES NOT DISTRIBUTE it in pursuance of the plan of M/Ca. the GAIN, if any, shall be RECOGNIZED in amount not in excess of the sum of such money & the FMV of such other property so received, w/c is not distributedb. If the amount of LIABILITES assumed, plus the amount of the liabilities to w/c the property is subject, EXCEED the total of the adjusted basis of the property transferred pursuant to such exchange then such shall be considered as GAIN from the sale/exchange of a capital asset or of property, w/c is not a capital asset, as the case may be.3. a TAXPAYER receives stock/securities w/c would be permitted to be received without the recognition of the gain if it were the sole consideration, & as part of the consideration, ANOTHER PARTY to the exchange ASSUMES a LIABILITY of the taxpayer or ACQUIRES from the taxpayer property subject to a liabilitya. such ASSUMPTION/ACQUISITION shall NOT be treated as money &/or other property & therefore, any gain/loss would still not be recognized if not money &/or property was involved in the exchangeb. if the amount of the LIABILITIES ASSUMED, PLUS the amt of the liabilities to w/c the property is SUBJECT, EXCEED the total of the adjusted basis of the property transferred pursuant to such exchange then such shall be considered as GAIN from the sale/exchange of a capital asset or of property w/c is not a capital asset, as the case may be.

BASIS of STOCK/SECURITIES for the purpose of determining gain/loss upon SUBSEQUENT SALE1. by the TRANSFEROR CORP to its SHAREHOLDER or SECURITY HOLDER The basis of the stock/securities received by the transferor corp or its shareholder or security holder upon the exchange specified in the above exceptions shall be equal to the

BASIS of the stock/securities or property received money received FMV of the PROPERTY received+ amt treated as DIVIDEND of the shareholder + amt of GAIN that was recognized on the exchange.

The other property or boot received in exchange shall have as basis its FMV.

If as part of the consideration to the transferor, the TRANSFEREE of the property ASSUMES a LIABILITY of the transferor or ACQUIRES from the latter, PROPERTY SUBJECT to LIABILITY, such assumption/acquisition (in the amount of the LIABILITY) shall, for the purpose of the above, be treated as MONEY RECEIVED by the TRANSFEROR on the exchange.

If the transferor received several kinds of stocks/securities, the CIR is authorized to ALLOCATE the BASIS among such several classes of stocks/securities.

2. by the TRANSFEREE The basis of the PROPERTY transferred in the hands of the transferee shall be equal to the

BASIS in the hands of the TRANSFEROR+ amt of the GAIN recognized to the transferor on the transfer

3. where CORPORATION, SHAREHOLDER or SECURITY HOLDER receives SEVERAL KINDS of STOCK or SECURITIES When the securities of a single class were exchanged for new securities of different classes where NO gain/loss was recognized, the proper METHOD of APPORTIONMENT is to ALLOCATE to each class of new securities that proportion of the ORIGINAL BASIS w/c the market value of the particular class bears to the market value of all securities received on the date of the exchange, for purposes of determining the gain/loss on the subsequent sale of any of the new securities.

SEC 41. INVENTORY

INVENTORY an itemized list of goods/merchandise on hand in a business containing a designation/description of each specific article w/ its valuation.

2 Requirements of an Inventory - a taxpayer may use any method of inventory valuation, provided1. must CONFORM as nearly as possible to the BEST ACCTG PRACTICE in trade/business2. must CLEARLY REFLECT INCOME. shld be consistent from year to year & substantially in accord w/ the IT Regulations

Bases of Valuation Commonly Used1. Cost Price2. Whichever is LOWER of the cost or market price.

Formula for Cost of Goods Sold

Beginning inventoryAdd : PurchasesLess : Cost of goods available for sale= Ending inventoryCost of Goods sold

1. LAST-IN, FIRST-OUT METHOD (LIFO)- taxwise, is more beneficial to the taxpayer because the inventory gain is tied up w/ the stock on hand. Taxation of this unrealized inventory gain is deferred as long as the taxpayer maintains the same level of inventory from year to year.

2. MOVING AVERAGE METHOD3. FULL ABSORPTION METHOD production cost must be allocated to goods produced during the taxable year or in inventory at the close of the taxable year. Thus, tp must include as part of inventoriable cost, all direct production cost & to a certain extent, indirect production cost.

Direct production costs generally those costs w/c are incident to & necessary for production/manufacturing operations/processes & are components of the cost of either direct materials or direct labor or bothDirect materials cost includes the cost of those materials w/c become an integral part of the specific product & those materials w/c are consumed in the ordinary course of manufacturing & can be identified/associated w/ particular units or groups of units of a specific product.Direct labor costs includes:1) Basic compensation2) OT pay3) Vacation & holiday pay4) Sick leave pay5) Night shift diff 6) Payroll taxes, etc.

Indirect Production costs includes all costs w/c are incident to & necessary for production or manufacturing operations/processes other than direct production costs.Elements:1) General & administrative expenses incident to & necessary for the tps production/manuf operations/processes2) Indirect labor & production supervisory wages3) Indirect materials & supplies4) Utilities such as heat, power & light5) Repairs & expenses6) Maintenance expenses, etc.NOT included under indirect production costs: 1) marketing, advertising, selling expenses, 2) interest, 3) research & experimental expenses incident to & necessary for the tps activities as a whole, rather than to production/manufacturing.4) Salaries paid to officers attributable to the perf of services incident & necessary of tps activities as a whole

After Oct 30, 1984, inventories shall be valued under the MOVING AVERAGE METHOD.Requirements for the Use of MOVING AVERAGE METHOD (MAM)1. The MAM shall be applicable to all types of inventory on manufactured products & raw materials w/c will form an INTEGRAL PART of the FINISHED PRODUCTS;2. The inventory shall be taken @ COST, using the FULL ABSORPTION METHOD, regardless of the market value; &3. The method shall be used consistently from year to yearunless:a. a change to a different method is approved by the Commissioner; orb. a modification is required by the Commissioner

SEC 42. INCOME FROM SOURCES WITHIN the PH

SOURCES of INCOME in GENERALSource not a place but an activity or property, and as such it has a situs/location1. Income derived from LABOR the place where the labor is PERFORMED;2. Income derived from USE of CAPITAL where the capital is EMPLOYED3. Profits from the SALE/EXCHANGE of CAPITAL ASSETS where the sale occurs (although it has been held that in the case of retail merchandising operations the situs alone, of the retail sale does not necessarily determine the sources from w/c the income is derived)

CLASSIFICATION of INCOME as to SOURCE1. Income derived IN FULL from sources WITHIN the PH2. Income derived IN FULL from sources ABROAD3. Income derived PARTLY from sources within & PARTLY from sources ABROAD

GROSS INCOME from SOURCES WITHIN the PHThe ff items of GI are treated as GI from sources WITHIN the PH1. INTEREST INCOMEa. Derived from sources WITHINb. On BONDS, NOTES or other interest-bearing obligations of RESIDENTS (corporate/indiv) X, a domestic corp, was granted a loan of $2M by The Bank of New York. The interest earned by the US bank was Php 2M. this income was earned WITHIN because the borrower is a PH RESIDENT.

2. DIVIDEND INCOMEa. Received from a DOMESTIC CORP;b. Received from a FOREIGN CORP, 50% or more of the GI of w/c for the 3-yr period ending w/ the close of the taxable yr preceding the declaration of such dividends (or for such part of such period as the corp has been in existence), was DERIVED from sources WITHIN the PH but only in an amount w/c bears the SAME RATIO to such dividends as the GI of such corp for such period derived from sources WITHIN the PH bears to its GI from ALL sources.

The portion of the dividend to be considered earned from sources WITHIN may be arrived at by:

PH Gross Income (3yr period)xDividend=Dividend Income from PH SourcesWorld Gross Income (3yr period) Income

X corp, a domestic corp, received a dividend of P100k from the Yersy Corp, a New York corp, whose GI from the PH & all sources follows:200720082009PHP 4,000,000P 4,500,000P 6,500,000WORLD 5,000,000 6,000,000 9,000,000

Q: How much of the dividend received of P100k is from PH sources?

PH GI or P 15Mor 3 x P100k = P75,000World GIP 20M 4

Dividends will be treated as income from sources within the PH unless the taxpayer submits sufficient data to establish to the satisfaction of the Commissioner that they should be excluded from GI.

3. COMPENSATION for PERSONAL SERVICESa. Performed WITHIN the PH regardless ofi. the residence of the payorii. the place in w/c the contract for service was executediii. place of paymentb. When the personal service/labor is performed PARTLY w/in & partly outside the PH & no accurate allocation of such compensation performed in the PH can be made, the amt to be included in the income shall be derived by an apportionment on the TIME BASIS

# of days labor was performed in the PHxTotal compensation=Income WITHIN the PHTotal # of days received labor was performed

c. Wages received for services rendered inside the PH & wages of an ALIEN SEAMAN earned on a coastwise vessel

4. RENTALS & ROYALTIES i. from property located in the PH or ii. from any interest in such property, including: RENTALS & ROYALTIES fora. use or right/privilege to use in the PH anyi. copyrightii. patentiii. design/modeliv. planv. secret formula/processvi. goodwillvii. trademarkviii. trade brand or other like property or right;b. use or R to use in the PH any i. industrialii. commercialiii. scientific EQUIPMENTc. supply of i. scientificii. technicaliii. industrialiv. commercial KNOWLEDGE/INFORMATIONd. supply of any ASSISTANCE that is ancillary & subsidiary to & is furnished as a means of enabling the APPLICATION or ENJOYMENT of any such property/right mentioned in (a), (b) & (c);e. supply of SERVICES by a NONRESIDENT PERSON or his EE, in connection w/ the use of property/rights belonging to, or the installation/operation of any brand, machinery or other apparatus purchased from such nonresident personf. Technical advice, assistance or services rendered in connection w/ TECHNICAL MGT/ADMIN of any scientific, industrial or commercial undertaking, venture, project or scheme; g. Use or R to use:i. Motion picture filmsii. Films/video for TViii. Tapes for RADIO broadcasting

5. GAIN on SALE of REAL PROPERTY Gains, profits & income from the sale of real property LOCATED IN the PH

6. GAIN on SALE of PERSONAL PROPERTYGR: Income derived from the purchase & sale of personal property treated as derived entirely from the COUNTRY WHERE SOLD.: Gain from the sale of SHARES of STOCK in a DOMESTIC CORP treated as derived entirely from sources WITHIN the PH (regardless of where the shares are sold.*PASSAGE of TITLE TEST: PLACE of SALE when & where TITLE to the goods PASSES from seller to buyer

IMPORTANCE of DETERMINING SOURCE of INCOME1. RESIDENT CITIZENS & DOMESTIC CORPS are taxable upon income derived from ALL SOURCES2. NONRESIDENT CITIZENS taxed only on their income WITHIN the PH3. ALIENS & FOREIGN CORPS, whether resident/nonresident liable to pay income tax only on their income from sources WITHIN the PH4. a CLAIM for TAX CREDIT is subject to limitations as to amount w/c may be computed only if the income derived from each foreign country & from all sources is determined.

ECOZONE CORPS The ECOZONE is treated as a separate customs territory from the rest of the PH. Hence, the rule on income from sources partly within & partly without is applied by analogy.An ECOZONE Corp is subject to a special rate of:

5% of its GI derived from its registered operation less: Allowable deduction under PEZA Rules *Exempt from the 32% corporate IT.

DEDUCTIBLE EXPENSE of a MULTINATIONAL CORPWhere an expense of a multinational corp is clearly related to the production of Ph-derived income or to Ph operations that expense can be deducted from the GI acquired in the PH without resorting to apportionment.But the items w/c cannot be definitely allocated/identified w/ the operations of the Ph branch, such as overhead expenses, admin & research, although they directly benefit its branches all over the world including PH, fall under a different category.The LOCAL BRANCH can claim as its deductible share a ratable part of such expenses based upon the ratio of its GI to the total GI worldwide, of the multinational corp.

GROSS INCOME from SOURCES OUTSIDE the PHThe items of GI treated as income from sources OUTSIDE the PH are as follows:1. INTEREST other than that derived from sources WITHIN2. DIVIDENDS other than those derived from sources WITHINa. From FOREIGN CORPS in general; &b. From FOREIGN corps 50%or more of the GI of which for the 3-yr period preceding the declaration of dividends (or for such part of such period as the corp has been in existence) was derived from PH sources in an amount determined by the ff formula:

Foreign GI (3yr period)xDividend =Dividend income from sourcesWorld GI (3yr period)OUTSIDE the PH

3. COMPENSATION for labor/personal services performed OUTSIDE the PH4. RENTALS/ROYALTIES from PROPERTY located OUTSIDE the PH or from any interest in such property, including rentals/royalties for the use of or the privilege of using outside the PH;5. Gains, profits & income from the SALE of REAL PROPERTY located outside the PH;6. Gains, profits & income from the SALE of PERSONAL PROPERTY located outside the PH7. Income derived from the PURCHASE of PERSONAL PROPERTY WITHIN & its SALE OUTSIDE the PH

GROSS INCOME from SOURCES PARTLY WITHIN & PARTLY OUTSIDE the PHItems of GI w/c are not specifically allocated by the Tax Code or Regulations as income from sources within/outside (unless unmistakably from a source within/outside), are treated as income from sources PARTLY within & partly outside the PH.Special rules are provided by the Regulations on the ff classes of income w/c are treated as derived from sources PARTLY within & outside:1. Income from TRANSPORTATION such as foreign steamship companies whose vessels touch PH ports & other services rendered partly within & partly outside such as foreign corps in the business of transmission of TELEGRAPH & CABLE MSGS bet points outside the PH &2. Income from the SALE of PERSONAL PROPERTY a. PRODUCED (in whole/in part) by the taxpayer WITHIN & SOLD OUTSIDE

b. PRODUCED (in whole/in part) by the taxpayer OUTSIDESOLD WITHIN.

GR: treated as income derived entirely from sources within the COUNTRY WHERE SOLD.: Gains from sale of SHARES of STOCK in a DOMESTIC CORP treated as derived entirely from sources WITHIN (regardless where sold)

In fine, therefore, GI from sources WITHIN the PH consists of:1. Items of income derived IN FULL from souces WITHIN, &2. The PORTION of GI w/c is derived PARTLY from sources within & partly from sources outside the PH allocated/apportioned to sources within the PH.

APPORTIONMENT of DEDUCTIONS in COMPUTATION of TAXABLE INCOMEIn computing taxable income from sources WITHIN the PH, or from sources PARTLY within & outside, the taxpayer has 2 GENERAL CLASSES of DEDUCTIONS:1. Expenses, losses & other decuctions properly allocated thereto (GI from sources within & without the PH, as the case may be; &2. A ratable part of expenses, losses or other deductions w/c cannot definitely be allocated to some item/class of GI.The REMAINDER, if any, included in full as taxable income from sources within/without, as the case may be.1) Gross Income from PH sourcesLess : Expenses & losses properly apportioned to GI from PH sourcesLess : Ratable part of unallocated deductionsTaxable income from sources WITHIN the PH

To arrive at the ratable part of unallocated deductions GI from PH sourcesxUnallocated= Ratable PartGI from ALL sourcesdeductions

2) Gross Income fr sources OUTSIDE the PHLess : Expenses & losses properly apportioned to GI from foreign sourcesLess : Ratable part of unallocated deductionsTaxable income from sources OUTSIDE the PH

To arrive at the ratable part of unallocated deductions GI from foreign sourcesxUnallocated= Ratable partGI from ALL sourcesdeductions

TAXABLE INCOME from SOURCES WITHIN the PHGR: As to TAXABLE INCOME from sources WITHIN the PH, the items of deductions to be allowable must be 1. effectively connected with the business/trade conducted exclusively within the PH &2. fully substantiated by all the information necessary for its calculation.: No deductions for INTEREST PAID/INCURRED ABROAD shall be allowed from the items of GI from sources WITHIN the PHUNLESS, the indebtedness was actually incurred to provide funds for use in CONNECTION w/ the CONDUCT or OPERATION of trade/business in the PH.

ACCOUNTING PERIODS

Accounting period the taxable year. It is a FIXED period of time, consisting of 12 months, upon the basis of w/c the TAXABLE INCOME is computed & the income tax imposed.

KINDS of ACCOUNTING PERIODS1. CALENDAR YR a period of 12 months beginning Jan 1 & ending Dec 31 of every yr;2. FISCAL YR a period of 12 months ending on the last day of any month other than December.

GR: The NET INCOME shall be computed upon the BASIS of the TPs ANNUAL ACCTG PERIOD, whether calendar/fiscal yr. It is therefore, of vital importance that income & deductions are reported in a proper year.: In the ff cases, the net income shall be computed on the basis of CALENDAR YR only:1. Taxpayer is an INDIVIDUAL;2. His annual acctg period is OTHER THAN FISCAL;3. He has NO ACCTG PERIOD;4. He does NOT keep BOOKS.

Taxable year the calendar year or the fiscal year ending during such calendar yr upon the basis of w/c the net income is computed & includes in the case of a permitted return made for a fractional part of the year, the period of w/c such return is made.

LENGTH of TAXABLE YEARGR: 12 months: the ff returns, however, may be filed for a period of LESS THAN 12 months1. The FINAL RETURN of a DECEDENT from Jan 1 to the date of death;2. The RETURN of a DECEDENTs ESTATE From the day after date of death to Dec 31.3. FINAL/ADJUSTMENT Returns for SHORT PERIOD resulting from CHANGE of acctg period of a corporation;4. The return of a NEWLY ORGANIZED CORP from the date it was duly organized (usually before incorporation date) up to the end of its calendar year/fiscal year;5. The return of a DISSOLVED/LIQUIDATED/REORGANIZED CORP from the start of its calendar/fiscal yr to the date of dissolution, liquidation or reorganization6. The return of TP whose taxable period is TERMINATED by the CIR by authority of law.*No return can be made for a period of MORE than 12 months.

TAXPAYERS UNDER CALENDAR YEAR1. Those who must be on the calendar yr by provision of LAW;a. Individualsb. Estates & trustsc. GPP2. By CHOICE (corporations)

TAXPAYERS UNDER THE FISCAL YEAROnly corporations may choose fiscal yr as a basis of computing net income. If a corp does not have an annual acctg period or does not keep books, it is required to file returns on a CALENDAR yr basis.

RETURNS for LESS THAN 12 MONTHSA SEPARATE FINAL/ADJUSTMENT return for a fractional part of a yr is required whenever there is CHANGE (w/ the approval of the CIR) in the basis of computing taxable income form 1 taxable yr to another.

PERIOD in w/c ITEMS of GI INCLUDEDThe amounts of ALL ITEMS of GI shall be INCLUDED in the GI for the taxable yr in w/c RECEIVED by the TPunless, under the methods of acctg under Sec 43, any such amts are to be properly accounted for as of a different period.

In the case of the DEATH of the TP there shall be INCLUDED in computing the taxable income for the taxable period in w/c falls the date of his death, AMOUNTS ACCRUED up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

PERIOD for which DEDUCTIONS & CREDITS TAKENDeductions & credits shall be taken for the taxable yr in w/c PAID/ACCRUED or PAID or INCURRED, dependent upon the method of acctg upon the basis of w/c the net income is computed unless in order to clearly reflect the income, the deductions should be taken as of a different period.

In case of the DEATH of a TP, there shall be ALLOWED as DEDUCTIONS for the taxable period in w/c falls the date of his death, AMOUNTS ACCRUED up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

CHANGE of ACCOUNTING PERIOD1. WHO MAY CHANGE only CORPORATIONS froma. Fiscal to calendarb. Calendar to fiscalc. One fiscal yr to another2. HOW CHANGE EFFECTED by filing a written application w/ the CIR designating the proposed date for the closing of its new taxable yr3. WHEN APPLICATION TO BE FILED at any time not less than 30days before the last day of filing its ITR on the basis of its original acctg period.

PRINCIPAL ACCOUNTING METHODS1. CASH RECEIPTS & DISBURSEMENTS METHOD/ CASH BASIS income earned by the TP is not included in GI until received & expenses are not deducted until paid w/in the taxable year.2. ACCRUAL BASIS income is included in GI when earned, whether received or not, & expenses are allowed as deductions when incurred although not yet paid. Net income is being measured by the excess of income earned during the period over the expenses incurred. Amounts of income accrue where the R to receive them become fixed, where there is created an enforceable liability. Liabilities are accrued when fixed & determinable in amount, w/o regard to indeterminacy merely of time of payment. ALL-EVENTS TEST: Income is reportable when all the ff events have occurred1) The RIGHT to income/liability is FIXED;2) The AMOUNT of such income/liability is DETERMINED w/ reasonable accuracy (not determined exactly)

REQUISITES of ACCRUAL METHOD1) The RIGHT to RECEIVE the amt must be i. Validii. Unconditionaliii. Enforceable (not contingent upon future time)2) The AMOUNT must be reasonably susceptible of accurate estimate3) There must be a reasonable EXPECTATION that the amt will be paid in due course.

3. HYBRID METHOD TP reports his income & expenses by employing the combination of cash & accrual method. Thus he may report his business income on accrual basis & his personal income on cash basis.

GR: A TP is allowed to report income & expenses in accordance w/ the method of acctg employed, provided such method conforms w/ generally accepted acctg principles.: Income arising from RENTALS of PROPERTY TP must report as part of GI, 1. ADVANCE RENTALS received during the taxable yr, 2. Rentals ACTUALLY EARNED but UNCOLLECTED as the end of such period.

SPECIAL ACCOUNTING METHODS1. CROP YR BASIS applicable only to farmers of crops w/c take more than a yr from the time of planting to the process of gathering & disposal. Expenses paid/incurred are deductible in the yr the GI from the sale of crops is realized.2. PERCENTAGE of COMPLETION BASIS & COMPLETED CONTRACT BASIS in case of long-term contracts*Contractors are no longer allowed to adopt the completion of contracts basis3. INCOME over the term of lease basis & Income in the year of completion basis in case of leasehold improvements4. DEFERRED PAYMENT BASIS & INSTALLMENT basis in case of deferred payment sales.5. TAX CREDIT SYSTEM of computing tax payable a method used to acct for creditable taxes deducted by the withholding agents from the income payments to certain payees. The creditable taxes should be clearly identified in the books of the tp such as:a. Creditable Income tax (asset)b. VAT input tax (asset)c. Withholding tax payable Compensation (liability)d. Withholding tax payable Expanded Withholding Tax (EWT (liability)e. VAT output tax (liability)6. COMPUTER-BASED ACCTG SYSTEM allowed on the ff conditions:a. A readable PRINT-OUT of the information/acctg date should be made available/verifiable; &b. DISKETTES containing records, classification & summary of transactions shall be subj to examination & inspection of IR officers as if they are traditional books of accts.c. PERMIT to adopt computerized acctg Sys

Income constructively received income w/c is credited to the acct of or set apart for a taxpayer & w/c may be drawn upon him at any time w/o substantial limitation/condition upon w/c payment is to be made subject to tax for the yr during w/c credited or set apart, although not yet received

INDIRECT APPROACH to DETERMINE INCOME reconstruction of income generally employed where TP keeps no record/inadequate records or where there is strong suspicion that TP has received income from undisclosed sources.1. PERCENTAGE METHOD a ratio analysis of percentages considered typical of the business under investigation to indicate potential areas of revenue adjustment in examination where revenue records do not exist. The computed amt of revenues based on the percentage computation is compared to the amt of revenues reflected on the return. 2. NET WORTH METHOD an increase in net-worth plus non-deductible disbursements (ex. personal & living expenses)minus non-taxable receipts (ex. lotto winnings)= net incomelessexemptions =taxable income

3. BANK DEPOSITS METHOD the bank records of the TP are analyzed & the revenue officer estimates income on the basis of the total bank deposits after eliminating non-income items.4. CASH EXPENDITURE METHOD assumes that the excess of a TPs expenditures during a tax period over his reported income for that period is taxable to the extent not approved otherwise. TP may show that this excess resulted from non-taxable items such as loans, gifts, inheritance or assets on hand at the beginning of the period.2 STEPS INVOLVED1) Valuation of the TPs assets at the beginning of the taxable period 2) Determination of the amt by w/c expenditures exceed reported income for the taxable period.5. UNIT & VALUE METHOD the determination/verification of gross receipts may be computed by applying price & profit figures to the known ascertainable quality of business of the TP6. 3RD PARTY INFORMATION/ACCESS TO RECORDS METHOD7. SUIRVEILLANCE & ASSESSMETN METHOD

METHODS of ACCOUNTING

BASIC RULES:1) NO UNIFORM method of acctg can be prescribed for all TPs, & the law contemplates that each TP shall adopt such forms & systems of acctg as are in his/its judgment best suited to his purpose;2) Each TP is required by law to make a RETURN of his true income;3) TP must maintain such acctg RECORDS as will enable him/it to report his/its true income &4) ANY approved standard METHOD of acctg w/c reflects TPs income may be adopted.

GR: The taxable income shall be computed in accordance w/ the method of acctg regularly employed in the books of the TP.: In the ff cases, the taxable income shall be computed in such matter as the opinion of the CIR clearly reflects the income:a. Where TP has NOT employed any method of acctg; &b. Where the method employed by the TP does NOT clearly REFLECT his/its income.

ESSENTIAL REQUIREMENTS in KEEPING ACCTG RECORDSa. CLASSIFICATION of CAPITAL & INCOME EXPENDITURESb. WHERE the COST of CAPITAL ASSETS is BEING RECOVERED through wear & tear, depletion, obsolescence, any expenditure (ordinary repairs) made to restore the property/prolong its useful life should be ADDED to the property account or charged against the appropriate reserve & NOT to current expenses; &c. INVENTORIES shld be taken at the beginning & end of the yr & used in computing the net income of the yr.

METHODS of ACCOUNTINGA. PRINCIPAL METHODS1. CASH BASIS (Cash Receipts & Disbursements Method)2. ACCRUAL BASIS3. HYBRID METHODB. OTHER METHODS1. Crop year basis2. Installment basis3. In case of long-term contractsa. Percentage of Completion Basisb. Completed Contract Basis

CASH BASIS method under w/c income, profits & gains earned by the TP are NOT included in GI until received & expenses are not deducted until paid w/in the taxable yrCASH BASIS TPsa. Those who keep records under the cash receipts & disbursement methodb. Those who do not keep books & recordsc. Those whose books & records are inadequate to reflect the taxable income:Exceptions to Cash Basis 1. In case of DEATH of TP all income & deductions of the deceased TP up to the time of his death shall be accrued;2. In case of PARTNERS of a GPP the partnership is exempt from IT & its income is taxable to the individual partners, whether actually or constructively distributed;3. Where IMPROVEMENTS are MADE by the LESSEE Lessor may report as income the improvements erected by the lessee w/c shall belong to the lessor upon the termination of the lease.4. CONSTRUCTIVE RECEIPT of income (though not actually received) should be reported for taxation5. Other accounting methods. where the cash basis TP reports his in come ona. Installment basisb. Deferred payment basisc. Long-term contracts based on percentage completion.

REPORTING of INCOME by the LESSOR on IMPROVEMENTS MADE by the LESSEEa. He may report as income at the time when such buildings/improvements are COMPLETED the FAIR VALUE of suchb. He may SPREAD over the LIFE of THE LEASE the ESTIMATED DEPRECIATED VALUE of such buildings/improvements at the termination of the lease & report as income for each yr of the lease an aliquot part thereof.

Constructive Receipt of Income income w/c is credited to the acct of set apart for a TP & w/c may be drawn upon him at any time is subj to tax for the yr w/c credited/set apart although not yet received/reduced to actual possession. To constitute receipt, income must be CREDITED to the TP without any substantial limitation or condition upon w/c payment is to be made.

ACCRUAL BASIS the method under w/c income, gains & profits are INCLUDED in GI when earned whether received or not, & expenses are allowed as deductions when incurred, although not yet paid. It is the right to receipt that determines the inclusion of the amt in GI.EXCEPTIONS to the ACCRUAL BASISa. Where income is reported by the LESSOR on improvements erected by the lessee;b. Where TP reports his income on the INSTALLMENT BASIS;c. Where CONTRIBUTIONS are deducted, such must be paid/made during the taxable yr.

ESSENCE of ACCRUAL the existence of a DEFINITE LIABILITY. (Expense is allowable when the liability therefor became fixed & the amount is either ascertained or ascertainable in the taxable yr).

HYBRID METHOD TP reports his income & expenses by employing the combination of cash & accrual method as when TP is engaged in more than 1 trade/business, or has business and personal income.

INSTALLMENT METHOD TP reports as income only a part of the GI to be realized from the sale on installment plan equivalent to that proportion of the amt of the installments received every yr w/c the gross profit realized or to be realized when payment is completed bears to the contract price.Formula 1Gross Profitxinstallment payments =Income to be reportedContract priceactually receivedfor the year

Formula 2Gross Profit= Gross profit ratex collection=ordinary capital gainContract price

PERSONS ENTITLED to USE INSTALLMENT METHOD1. DEALERS in Personal Property those who regularly sell or otherwise dispose of personal property on the installment plan, may return as income therefrom in any taxable year that proportion of the installment payments actually received in that yr, w/c gross profit realized or to be realized when payment is completed, bears to the total contract price2. CASUAL SELLERS of Personal Property those who make casual sale or other casual disposition of personal property on installment plan, provided the ff REQUISITES are present:i. Sale/disposition is casualii. Personal property sold is of a kind w/c would not properly be included in the inventoryiii. Selling price exceeds P1,000iv. Initial payments do not exceed 25% of the selling price

3. SELLERS of REAL PROPERTY those who make a sale/disposition f real property on installment plan if the initial payments do not exceed 25% of the selling price.Initial payments payments received in cash/property (evidences of indebtedness due & payable in subsequent yrs) of the purchaser during the taxable yr in w/c the sale/disposition is made. Includes down payment plus all other payments rcvd by the seller during the taxable yr of the sale. Selling price the total amt of price of the sale including the cash/property received & all notes of the buyer or mortgages assumed by himContract price the amt w/c the purchaser contracts to pay the seller in cash, the excess of the mortgages assumed over the cost or other basis of the property sold.*Commissions & other selling expenses paid/incurred by the vendor are NOT deducted or taken into acct in the above. However, selling expenses are to be deducted in ascertaining the gross profit in the case of dealers, who deduct these items as ordinary business expenses.

INSTALLMENT SALES of REAL PROPERTY by INDIVIDUALS1. ELECTION to PAY the CGT in INSTALLMENT an individual who sells real property under a deferred payment sale & is qualified to report the gain on installment basis may elect to pay the CGT. An indiv is qualified to acct for his gain on installment basis if the initial payments no not exceed 25% of the selling priceInitial Payments the payment/s which the seller receives before/upon execution of the instrument of sale & payments w/c he expects is scheduled to receive in cash or property (evidence of indebtedness of the purchaser) during the taxable yr of the sale/disposition.2. COMPUTATION of AMT of TAX PAYABLE in INSTALLMENT if TP elects & qualifies to pay the CGT in installment,

Installment paymentxTax Due =Portion of tax payable Contract price

FILING of RETURNS of INSTALLMENT PAYMENTS & PAYMENT of TAXThe amt of tax to be paid corresponding to the installment received by the seller shall be declared in the prescribed return & shall be filed w/in 30days following the receipt of such installment payment. Likewise, tax due shall be paid at the time of filing.

DEFERRED PAYMENT SALE of REAL PROPERTY NOT ON INSTALLMENT PLAN1. SALES INCLUDEDa. Agreements to purchase & sale w/c contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid.b. Sales in w/c there is an immediate transfer of title, the vendor being protected by a mortgage/other lien as to deferred payments2. SALES CLASSIFIEDa. Sales of Property on the Installment Plan sales in w/c payments received in cash/property other than evidences of indebtedness of the purchaser during the taxable yr in w/c the sale is made do not exceed 25% of the selling price &b. Deferred Payment Sales Not on the Installment Plan sales in w/c the payments received in cash/property other than evidences of indebtedness of the purchaser during the taxable yr in w/c the sale is made EXCEED 25% of the selling price

REPOSSESSION on DEFERRED PAYMENT SALEIf property sold under a deferred payment plan (the income is not returnable on the installment bases) is REPOSSESSED, gain/loss in the yr of repossession is computed under 2 CASES:1. Vendor has retained title to the property &2. Vendor has previously transferred title to the purchaser.

CHANGE from ACCRUAL to INSTALLMENT METHODA TP entitled to the benefits of a dealer in personal property may elect for any taxable yr to report his income on the installment basis. In computing his income for the yr of change or any subsequent ty amounts actually received during any such yr on acct of sales/other dispositions o property made in any prior yr shall not be excluded.

ACCTG METHODS for LONG-TERM CONTRACTSLong-term Contracts building, installation, construction contracts covering a period of more than 1 yr. Income from long term contracts is taxable for the period in w/c the income is determined, such determination depending upon the nature & terms of the particular contract.Persons whose income is derived in whole/in part from such contracts may, as to such income, prepare their returns upon the FF BASES:1. PERCENTAGE of COMPLETION BASIS GI already earned though not yet received, based on ESTIMATES of architects/engineers duly certified by them, is reported in a taxable yr & all deductions relating to such GI for the taxable yr, even if not yet paid, are taken into acct.a. RETURN shld be accompanied by a RETURN CERTIFICATE of architects/engineers showing the percentage of completion during the taxable yr of the entire work performed under contract.b. There should be DEDUCTED from such GI ALL EXPENDITURES made during the taxable yr on acct of the contract, acct being taken of the material & supplies on hand at the beginning & end of the taxable period for use in connection w/ the work but not yet so applied;c. If upon completion of the contract, it is found that the taxable net income arising thereunder has NOT been CLEARLY REFLECTED for any year/s, the CIR may permit/require an AMENDED RETURN.2. COMPLETED CONTRACT BASIS TP reports his income & deductions in the year the contract is finally COMPLETED. He accumulates the cost of the contract during the yrs of construction & deducts from them the income of the contract the yr it is completed.3. METHOD of ACCTG REGULARLY EMPLOYED provided it clearly reflects tps income.

CHANGES in ACCTG METHOD1. Cash accrual, vice versa2. Change involving the BASIS of VALUATION employed in the computation of inventories;3. Cash/accrual long-term contract method, vice versa4. Change in the long-term contract from the percentage of completion completed contract basis, vice versa5. Change involving the adoption of, or a change in the use of any other specialized basis of computing net income;6. Change in the method of DEPRECIATION form one basis to anotherREQUIREMENTS1. Application for permission to change the method of acctg & the basis filed w/in 90days after the beginning of the taxable yr to be covered by the return.2. Accompanied by a STATEMENT specifying all amounts w/c would be duplicated/entirely omitted as a result of the proposed change.3. SEPARATE STATEMENT attached to the ITR setting forth the taxable yr & for the preceding yr the classes of items differently treated under the 2 systems specifying in particular all amounts duplicated/entirely omitted as a result of such change.* The TP & the CIR must agree on the terms & conditions under w/c the change will be effected, otherwise denied.

Sec 73. DISTRIBUTION of DIVIDENDS or ASSETS by CORPORATIONS

Dividends (when used in this Title) any distribution made by a corporation to its shareholders out of its earnings or profits & payable to its shareholders whether in money or in other property.*Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether indiv/corp is TAXABLE income or DEDUCTIBLE loss as the case may be.

(B) Stock Dividend - A stock dividend representing the transfer of surplus to capital acct shall NOT be subj to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time & in such manner as to make the distribution & cancellation or redemption, in whole 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 that it represents a distribution of earnings or profits.

(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits.Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, & shall constitute a part of the annual income of the distribute for the year in w/c received.

(D) Net Income of a Partnership Deemed Constructively Received by PartnersThe taxable income declared by a partnership for a taxable year w/c is subject to a tx under Sec 27A, after deducting the corporate income tax imposed thereon, shall be deemed to have been actually or constructively received by the partners in the same taxable year & shall be taxed to them in their individual capacity, whether actually distributed or not.

1