Revenue Reglations No. 2-40 PDF

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 Internal Revenue Code, the following
regulations affecting Sections 19 to 84 of the same Code relating to the income tax are hereby
promulgated to supersede all circulars, precedents, rulings, and regulations heretofore published on the
same subject, and they 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 be found in the same
Code. They serve as captions of the pertinent provisions of the Regulations.)
(Section 20 of the Code)
SECTION 2. Application of title. — Section 20 provides that the provisions of Title II of the
National Internal Revenue Code shall apply only to income received from January 1, 1939.
SECTION 3. Persons considered citizens of the Philippines. — The following shall be considered
citizens of the Philippines:
(1) Those who were citizens of the Philippines at the time of the adoption of the Constitution of
the Philippines.
(2) Those born in the Philippines of foreign parents who, before the adoption of 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 reaching the 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 by law. A foreigner who
has come to reside in the Philippines and has led his petition to acquire Philippine citizenship but has
not yet received the requisite naturalization certificate still remains an alien.
SECTION 4. Tax on citizens and residents . — Section 21 imposes progressive rates of income
taxes on citizens and residents, starting from 3 per cent upon the amount by which the net income does
not exceed P2,000 and rising gradually 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, as amended by
Section 1 of R.A. No. 2343, applicable to income received from Jan. 1, 1959 and for scal 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
CD Technologies Asia, Inc. 2018 cdasiaonline.com
70,000
80,000 80,000
90,000 10,000
10,000 46%
48% 4,600
4,800 27,280
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 additional exemptions to which
taxpayer is entitled. IcEaST

SECTION 5. Definition. — A "non-resident alien individual" means an individual —
(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 or sojourner is a resident
of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay. A mere oating intention inde nite as to
time, to return to another country is not su cient to constitute him a transient. If he lives in the
Philippines and has no de nite intention as to his stay, he is a resident. One who comes to the
Philippines for a de nite purpose which in its nature may be promptly accomplished is a transient. But
if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and
to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it
may be his intention at all times to return to his domicile abroad when the purpose for which he came
has been consummated or abandoned.
SECTION 6. Loss of residence by alien. — An alien who has acquired residence in the Philippines
retains his status as a resident until he abandons the same and actually departs from the Philippines.
An intention to change his residence does not change his status as a resident alien to that of a
nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a resident
for the remainder of his stay in the Philippines.
SECTION 7. Taxation of aliens in general . — For purposes of income tax, alien individuals are
divided generally into two classes, namely, resident aliens and non-resident aliens. Resident aliens are
taxable in the same manner as citizens of the Philippines, that is, a resident alien is taxable on income
derived from all sources including sources without the Philippines. Non-resident aliens are taxable only
on income from sources within the Philippines.
SECTION 8. Taxation of non-resident aliens; classi cation . — Non-resident alien individuals are
divided into two classes: (1) Those engaged in trade or business within the Philippines, and (2) those
not engaged in trade or business within the Philippines. Non-resident aliens falling within the rst class
are subject to the graduated rates established in Section 21 with respect to their net income from
sources within the Philippines. Non-resident aliens falling within the second class are subject to a at
rate of 20 per cent on their total income from sources within the Philippines, if such total income does
not exceed P23,800, otherwise, the graduated rates established in Section 21 will apply to the total
income if it exceeds P23,800. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)
The phrase "engaged in trade or business within the Philippines" includes the performance of
personal services within the Philippines. Whether a non-resident alien has an "o ce or place of
business," however, implies a place for the regular transaction of business and does not include a place
where casual or incidental transactions might be, or are, effected. Neither the bene ciary nor the
grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in trade or business in the
Philippines or to have an o ce or place of business therein, merely because the trustee is engaged in
trade or business in the Philippines or has an o ce or place of business therein. (Test of "o ce or
place of business" was deleted by R.A. 2343.)
SECTION 9. Personal exemption. — Personal exemption is an arbitrary amount allowed for
personal, living, or family expenses of the taxpayer. It is allowed to citizens of the Philippines, to
resident aliens, and to non-resident aliens in certain cases. The procedure of arriving at the tax due after
giving effect to the exemptions allowable is set forth in Section 4 of these regulations. EHcaDT
SECTION 10. Personal exemption of single individuals. — A single individual 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 one exemption of P3,000 is allowed with respect to
the aggregate income of both husband and 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 one household one or
more individuals, who are closely connected with him by blood relationship, relationship by marriage, or
by adoption, and whose right to exercise family control and provide for these dependent individuals is
based upon some moral or legal obligation. In the absence of continuous actual residence together,
whether or not a person with dependent relatives is a head of a family within the meaning of the statute
must depend on the character of the separation. If a father is absent on business, or a child or other
dependent is away at school or on a visit, the common home being still maintained, the additional
exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his
dependent children with relatives or in a boarding house while he lives elsewhere, the additional
exemption may still apply. If, however, without necessity, the dependent continuously makes his home
elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident
alien with children abroad is not thereby entitled to credit as the head of a family. Chief support means
principal or main support. Partial support not amounting to chief support will not entitle the taxpayer to
claim exemption as a head of a family.
Under the law the following persons are entitled to P3,000 exemption: (a) a married man; (b) a
married woman; and (c) an unmarried man or woman with one or both parents, or one or more brothers
or sisters, or one or more legitimate, recognized natural, or adopted children living with and dependent
upon him or her for their chief support, 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 of self-support
because mentally or physically defective. (Conforms with amendments by R.A. 2343, effv. June 20,
1959.)
SECTION 12. Additional exemption for dependents. — The taxpayer is entitled to an additional
exemption of P1,000 for each legitimate, recognized natural, or adopted child wholly dependent upon
and living with such person, if such dependent is not more than 23 years of age, unmarried and not
gainfully employed or incapable of self-support because mentally or physically defective, provided that
the person claiming additional exemption is a head of family. The children with respect to whom
additional exemption is claimed must be wholly dependent upon the taxpayer for support. (Conforms
with amendments by R A. 2343, effv. June 20, 1959.)
SECTION 13. Change of status. — If the status of the taxpayer, insofar as it affects the personal
and additional exemptions, changes during the taxable year by reason of his death, the amount of the
personal and additional exemptions shall be apportioned, 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
be disregarded unless it amounts to more than half a month in which case it shall be considered as one
month. (Conforms with amendment by R.A. 590, effv. Sept. 22, 1950.)
SECTION 14. Personal exemption of non-resident aliens. — A non-resident alien is entitled to a
personal exemption in an amount equal to the exemptions allowed by the income tax law in the country
of which he is a citizen or subject to citizens of the Philippines. The exemption allowed to non-resident
aliens is a reciprocal one; that is, it is only allowed if the country of said non-resident aliens allows
similar exemptions to Filipinos not residing in such country but deriving income from sources therein. If
the country of which the non-resident alien is a citizen or subject does not have any income tax law,
such non-resident alien will not be entitled to personal exemption.
SECTION 15. Income tax on corporations. — The law imposes an annual income tax of 22 per
centum upon that portion of the net income of every corporation not 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
but does not include duly registered general co-partnership (companias colectivas). The tax is upon net
income, which is undetermined by subtracting from the gross income, as de ned 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, domestic or foreign, not otherwise
exempt from tax under Title II or any other law, is liable to tax. A domestic corporation is taxed on its
income from sources within and without the Philippines, but a foreign corporation is taxed only on its
income from sources within the Philippines.
The tax imposed by law on corporations is not imposed only upon such corporations as are
organized and operated for pro t. Any corporation, rm or association, 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 to exemptions from tax on corporations. A corporation is not exempt simply and
only because it is primarily not organized and operated for profit.
SECTION 17. Dividends received by a corporation from a domestic corporation. — Dividends
received by a domestic or resident foreign corporation from a domestic corporation subject to tax are
taxable only to the extent of 25 per cent thereof. All other classes of income (except net capital gains,
Section 34) of corporations 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 these regulations relative to
taxation of dividends and other distributions.)
SECTION 17-A. Tax on life insurance companies . — Every life insurance company organized in or
existing under the laws of the Philippines, or foreign life insurance company authorized to carry on
business in the Philippines are taxable on their total net investment income derived from interest,
dividends and rents from all sources whether within or without the Philippines, to the at rate of 6-
1/2%. However, purely cooperative insurance companies or associations which are conducted by the
members thereof with the money collected from among themselves and solely for their own protection
and not for profit are exempt from income tax.
The total net investment income of domestic life insurance companies means the gross
investment income received during the taxable year from rents, dividends and interest less deductions
for real estate expenses, depreciation, interest paid within the taxable year on its indebtedness except
on indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from
taxation under existing laws, and such investment expenses paid during the taxable year as are ordinary
and necessary in the conduct of its investment. The total net investment income of foreign life
insurance companies doing business here is that portion of their gross world investment income which
bears the same ratio to such income as their total Philippines reserve (whether kept in the Philippines
or abroad) bears to their total world reserve less that portion of their total world investment expenses
which bears the same ratio to such expenses as their total Philippine investment income bears to their
total world investment income. The following equation simplifies this formula:
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 investment income
subjected to tax. For the proper determination of the income tax liability of resident foreign life
insurance companies, they should submit the necessary nancial statement re ecting the nature of the
investment income and corresponding expenses. These nancial statements must be duly certi ed by
an independent certified public accountant and authenticated by a Philippine consular official.STcHDC
Foreign life insurance companies not doing business in the Philippines are subject to the normal
income tax on their income received from sources within the Philippines. They are subject to tax at the
rate of 30% like any other foreign corporation.
Domestic life insurance companies and foreign life insurance companies doing business in the
Philippines are not allowed to deduct from their gross income the net additions, if any, required by law
to be made within the year to reserve funds and the sums other than dividends paid within the year on
policy and annuity contracts. (Proposed by the BIR. If adopted, this will supersede Sec. 124 of existing
regulations.)
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 24 a tax of 25 per cent on the
undistributed portion of the pro ts or surplus of a corporation which is formed or availed of for the
purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders
or members of any other corporation through the medium of permitting gains or pro ts to accumulate
instead of dividing or distributing them. However, banks, insurance companies, personal holding
companies and foreign personal holding companies as de ned in Chapter VIII, are excepted from
taxation under Section 25. The tax imposed by Section 25 applies whether the avoidance was
accomplished through the formation or use of only one corporation or a chain of corporations. For
example, if the capital stock of the M Corporation is held by the N Corporation so that the dividend
distributions of the M Corporation would not be returned as income subject to the tax on individuals
until distributed in turn by the N Corporation to its individual shareholders, nevertheless the tax
imposed by Section 25 applies to the M Corporation, if that corporation is formed or availed of for the
purpose of preventing the imposition of the tax upon the individual shareholders of the N Corporation.
A foreign corporation, whether resident or non-resident, is subject to the tax provided for under Section
25 in the same manner and under the same circumstances as a domestic corporation.
SECTION 19. Purpose to avoid tax; evidence; burden of proof; de nitions of holding or
investment company. — The Collector of Internal Revenue's determination that a corporation was
formed or availed of for the purpose of avoiding the 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
circumstances other than the evidence speci ed in Section 25(b), and whether or not such purpose
was present depends upon the particular circumstances of each case. In other words, a corporation is
subject to taxation under Section 25 if it is formed or availed of for the purpose of preventing the
imposition of the progressive rates of tax upon shareholders through the medium of permitting
earnings or pro ts to accumulate, even though the corporation is not a mere holding or investment
company 50 per cent or more of the outstanding stock of which is owned directly or indirectly by one
person, and does not have an unreasonable accumulation of earnings or pro ts; and on the other hand,
the fact that a corporation is such a company or has an accumulation is not absolutely conclusive
against it if, by clear and convincing evidence, the taxpayer satis es the Commissioner of Internal
Revenue that the corporation was neither formed nor availed of for the purpose of avoiding the tax on
individuals. All the other circumstances which might be construed as evidence of the purpose to avoid
the tax on shareholders cannot be outlined, but among other things the following will be considered: (1)
Dealings between the corporation and its shareholders, such as withdrawal by the shareholders as
personal loans or the expenditure of funds by corporation for the personal bene t of the shareholders,
and (2) the investment by the corporation of undistributed earnings in assets having no reasonable
connection with the business. The mere fact that the corporation distributed a large part of its earnings
for the year in question does not necessarily prove that earnings were not permitted to accumulate
beyond reasonable needs or that the corporation was not formed or availed of to avoid the tax upon
shareholders.
If the Commissioner of Internal Revenue determined that the corporation was formed or availed
of for the purpose of avoiding the progressive rates of tax on individuals through the medium of
permitting earnings or pro ts to accumulate, and the taxpayer contests such determination of fact by
litigation, the burden of proving the determination wrong by a preponderance of evidence, together with
the corresponding burden of rst going forward with evidence, is on the taxpayer under principles
applicable to income tax cases generally, and this is so even though the corporation is not a mere
holding or investment company and does not have an unreasonable accumulation of earnings or
pro ts. However, if the corporation is a mere holding or investment company, then the law gives further
weight to the presumption of correctness already arising from the Commissioner of Internal Revenue's
determination by expressly providing an additional presumption of the existence of a purpose to avoid
the tax upon shareholders, while if earnings or pro ts are permitted to accumulate beyond the
reasonable needs of the business then the law adds still more weight to the Commissioner of Internal
Revenue's determination by providing that irrespective of whether or not the corporation is a mere
holding or investment company, the existence of such an accumulation is determinative of the purpose
to avoid the tax upon shareholders unless the taxpayer proves the contrary by such a clear
preponderance of all the evidence that the absence of such a purpose is unmistakable.
SECTION 20. Holding and investment companies. — A corporation having practically no activities
except holding property, and collecting the income therefrom or investing therein, shall be considered a
holding company within the meaning 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 only from the investment yield
but also from pro ts upon market uctuations, the corporation shall be considered an investment
company within the meaning of Section 25.
SECTION 21. Unreasonable accumulation of pro ts . — An accumulation of earnings or pro ts
(including the undistributed earnings or profits of prior years) is unreasonable if it is not required for the
purposes of the business, considering all the circumstances of the case. It is not intended, however, to
prevent accumulations of surplus for the reasonable needs of the business if the purpose is not to
prevent the imposition of the tax upon shareholders. No attempt is here made to enumerate all the
ways in which earnings or pro ts of a corporation may be accumulated for the reasonable needs of the
business. Undistributed income is properly accumulated if retained for working capital needed by the
business; or if invested in additions to plant reasonably required by the business; or if in accordance
with contract obligations placed to the credit of a sinking fund for the purpose of retiring bonds issued
by the corporation. The nature of the investment of earnings or pro ts is immaterial if they are not in
fact needed in the business. Among other things, the nature of the business, the nancial condition of
the corporation at the close of the taxable year, and the use of the undistributed earnings or pro ts will
be considered in determining the reasonableness of the accumulations.
The business of a corporation is not merely that which it has previously carried on, but includes in
general any line of business which it may undertake. However, a radical change of business when a
considerable surplus has been accumulated may afford evidence of a purpose to avoid the tax. If one
corporation owns the stock of another corporation in the same or a related line of business and in
effect operates the other corporation, the business of the latter may be considered in substance
although not in legal form the business of the rst corporation. Earnings or pro ts of the rst
corporation put into the second through the purchase of stock or otherwise may, therefore, if a
subsidiary relationship is established, constitute employment of the income in its own business.
Investment by a corporation of its income in stock and securities of another corporation is not of itself
to be regarded as employment of the income in its business. The business of one corporation may not
be regarded as including the business of another unless the other corporation is a mere instrumentality
of the rst; to establish this it is ordinarily essential that the rst corporation own all or substantially all
of the stock of the second.
The Commissioner of Internal Revenue may require any corporation to furnish a statement of its
accumulated earnings and pro ts, the name and address of, and number of share held by each of its
shareholders or members, and the amounts that would be payable to each, if the income of the
corporation were distributed.
SECTION 22. General co-partnerships. — General co-partnerships, when duly registered, are not
subject to income tax, but are required to le returns of their income on B.I.R. Form No. 17.04 for the
purpose of furnishing information as to the share in the gains or pro ts which each partner shall include
in his individual return. Individuals carrying on business in general co-partnership are, however, taxable
upon their distributive shares of the net income of such partnership, whether distributed or not, 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 before April 15 of each year or within sixty days after
the end of their scal year depending on whether their books are kept on the calendar or on the scal
year basis. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 23. Distributive shares of partners. — The distributive share of the net pro t of a
general co-partnership must be included in the individual returns of the partners. But where the result of
partnership operation is a loss, the loss will be divisible by the partners in the same proportion as the
net income would have been divisible (or, if the partnership agreement provides for the division of a
loss in a manner different from the division of a gain, in the manner so provided) and may be taken 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 ling returns of income and paying the tax, it is necessary that every organization claiming
exemption le an a davit with the Commissioner of Internal Revenue, showing the character of the
organization, the purpose for which it was organized, its actual activities, the sources of its income and
its disposition, whether or not any of its income is credited to surplus or inures or may inure to the
bene t of any private shareholder or individual, and in general, all facts relating to its operations which
affect its right to exemption. To such a davit should be attached a copy of the charter or articles of
incorporation, the by-laws of the organization, and the latest nancial statement showing the assets,
liabilities, receipts, and disbursement of the organization.
Upon receipt of the a davit and other papers by the Commissioner of Internal Revenue, the
organization will be informed whether or not it is exempt. When an organization has established its right
to exemption, it need not thereafter make and le a return of income as required under Section 46 of
the Tax Code. However, the organization should le on or before April 15 of each year, an annual
information return under oath, stating its gross income and expenses incurred during the preceding
year, and a certi cate showing that there has not been any substantial change in its By-Laws, Articles of
Incorporation, manner of operation and activities as well as sources and disposition of income. (As
amended by Revenue Regulations No. 7-64, approved November 25, 1964.)
SECTION 25. Agricultural and horticultural organizations. — The organizations contemplated by
subsection (a) of Section 27 of the Code as entitled to exemption from income taxation are those
which (1) have no net income inuring to the bene t 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 such
pursuits, the improvement of the grade of their products, and the development of a higher degree of
e ciency in their respective occupations. Organizations such as provincial fairs and like associations
of a quasi-public character, which are designed to encourage the development of better agricultural and
horticultural products through a system of awards, prizes, or premiums, and whose income derived
from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of
upkeep and operation, are thus exempt. On the other hand, associations which have for their purpose,
for example, the holding of periodical race meets, the pro ts from which may inure to the bene t of
their shareholders, are not exempt. Similarly, corporations engaged in growing agricultural or
horticultural products or raising live stock or similar products for pro ts are not exempt from tax under
this paragraph. ITScHa
SECTION 26. Mutual savings bank. — In order that a corporation may be entitled to exemption as
a mutual savings bank, it must appear that it is an organization (1) which has no capital stock
represented by shares, and (2) whose earnings less only the expenses of operation, are distributable
wholly among the depositors. If it appears that the organization has shareholders who participate in the
profits, the organization will not be exempt from income tax.
SECTION 27. Fraternal bene ciary societies . — A fraternal bene ciary society is exempt from tax
only if operated under the "lodge system", or for the exclusive bene t of the members of a society so
operating. "Operating under the lodge system" means carrying on its activities under a form of
organization that comprises local branches, chartered by a parent organization and largely self-
governing, called lodges, chapters, or the like. In order to be exempt, it is also necessary that the
society should have an established system for payment to its members or their dependents of life, sick,
accident, or other benefits.
SECTION 28. Building and loan associations. — (Now subject to tax, as amended by Sec. 4, R.A.
82.)
SECTION 29. Cemetery companies. — A cemetery company may be entitled to exemption, (1) if it
is owned by and operated exclusively for the bene t of its lot owners, or (2) if it is not operated for
pro t. Any cemetery corporation chartered solely for burial purposes and not permitted by its charter
to engage in any business not necessarily incident to that purpose, is exempt from income tax,
provided that no part of its net earnings inures to the bene t of any private shareholder or individual. A
cemetery company which ful lls the other requirement of the statute may be exempt, even though it
issues preferred stock entitling the holders to dividend at a xed rate, provided that its articles of
incorporation require (a) that the preferred stock shall be retired at par as soon as su cient funds are
realized from sales, and (b) that all funds not required for the payment of dividends upon or for the
retirement of preferred stock shall be used by the company for the care and improvement of the
cemetery property.
A cemetery company having a capital stock represented by shares, or which is operated for
profit or for the benefit of persons other than its members, does not come within the exempted class.
SECTION 30. Religious, charitable, scienti c, athletic, cultural, and educational corporations . — A
corporation falling among those enumerated in subsection (e) of Section 27 is exempt from tax on its
income (other than income of whatever kind and character from its properties, real or personal) if such
corporation meets two tests: (a) It must be organized and operated for one or more of the speci ed
purposes; and (b) no part of its net income must inure to the bene t of private stockholders or
individuals.
The income of such corporation which is considered as income from their properties, real or
personal, generally consists of income from corporate dividends, rentals received from their properties,
interests received from such capital loaned to other persons, income from agricultural lands owned by
such corporations, profits from the sale of property, real or personal, and other similar income.
Income not derived from their properties, real or personal, are exempt. For example, in the case
of a religious corporation, income from the conduct of strictly religious activities, such as fees received
for administering baptismals, solemnizing marriages, attending burials, holding masses, and other like
income, is exempt. In the case 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, the income
from such investment, as interests from the capital where the capital has been loaned or dividends on
stock where the capital has been invested in shares of stock, will constitute taxable income. Donations
and other similar contributions received by such corporation from other persons are exempt.
The clause "except income expressly exempt by this Title" appearing in subsection (e) of Section
27 refers to those classes of income which, in accordance with subsection (b) of Section 29, are
exempt from taxation under Title II.
Charitable corporations include an association for the relief of the families of clergymen, even
though the latter make a contribution to the fund established for this purpose; or for furnishing the
services of trained nurses to persons unable to pay for them; or for aiding the general body of litigants
by improving the e cient administration of justice. Educational corporations may include associations
whose sole purpose is the instruction of the public. But associations formed to disseminate
controversial or partisan propaganda are not educational within the meaning of the law. Scienti c
corporations include an association for the scienti c study of law with a view to improving its
administration.
It does not prevent exemption that private individuals, for whose bene t a charity is organized,
receive the income of the corporation or association. The law refers to individuals having a personal
and private interest in the activities of the corporation, such as stockholders. If, however, a corporation
issues "voting shares", which entitle the holders upon the dissolution of the corporation to receive the
proceeds of its property, including accumulated income, the right to exemption ceases to exist, even
though the by-laws provide that the shareholders shall not receive any dividend or other return upon
their shares.
SECTION 31. Business leagues. — A business league is an association of persons having some
common business interest, which limits its activities to work for such common interest and does not
engage in a regular business of a kind ordinarily carried on for pro t. Its work need not be similar to
that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily
carried on for pro t, the fact that the business is conducted on a cooperative basis or produces only
su cient income to be self-sustaining, is not ground for exemption. An association engaged in
furnishing information to prospective investors, to enable them to make sound investments, is not
exempt, since its members have no common business interest, even though all of its income is devoted
to the purpose stated. A clearing house association, not organized for pro t, no part of the net income
of which inures to any private shareholder or individual, is exempt provided its activities are limited to
the exchange of checks, and similar work for the common bene t of its members. An association of
persons who are engaged in the transportation business, whether by land 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 for office expenses is exempt from tax. DSITEH
SECTION 32. Civic leagues. — Civic leagues entitled to exemption comprise those not organized
for pro t but operated exclusively for purposes bene cial to the community as a whole. In general,
organizations engaged in promoting the welfare of mankind are exempt from tax.
SECTION 33. Social clubs. — The exemption applies to practically all social and recreation clubs
which are supported by membership fees, dues, and assessments. If a club, by reason of the
comprehensive powers granted in the charter, engages in business or in agriculture or horticulture, for
pro t, such club is not organized and operated exclusively for pleasure, recreation, or social purposes,
and any profit realized from such activities is subject to tax.
SECTION 34. Mutual insurance companies and like organizations. — It is necessary to exemption
that the income of the company be derived solely from assessments, dues, and fees collected from
members. If income is received from other sources, the corporation is not exempt. Income, however,
from sources other than those speci ed does not prevent exemption where its receipt is a mere
incident of the business of the company. Thus the receipt of interest upon a working bank balance, or
of the proceeds of the sale of badges, o ce supplies, or equipment, will not defeat the exemption. The
same is true of the receipt of interest upon Government bonds, where they were purchased and were
afterwards sold. Where, however, such bonds are bought 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 re insurance company as a condition of membership, does not render the company taxable,
although this fee is called a premium. If an organization issues policies for stipulated cash premiums,
or if it requires advance deposits to cover the cost of the insurance and maintains investments from
which income is derived, it is not entitled to exemption. On the other hand, an organization may be
entitled to exemption, although it makes advance assessment for the sole purpose of meeting future
losses and expenses, provided that the balance of such assessments remaining on hand at the end of
the year is retained to meet losses and expenses or is returned to members. An organization of a purely
local character is one whose business activities are con ned to a particular community, place, or
district, irrespective, however, of political subdivisions.
SECTION 35. Farmers' cooperative marketing and purchasing association. — Cooperative
associations, acting as sales agents for farmers or others, in order to come within the exemption must
establish that for their own account they have no net income. Cooperative dairy companies, which are
engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds,
less necessary operating expenses, among their members upon the basis of the quantity of milk 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 a proportionate basis, the company will be
subject to tax. A farmers' association is not exempt from taxation where in accounting to farmers
furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses
incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax, but
rebates made to purchasers, whether or not members of the association, in proportion to their
purchases may be excluded from gross income in computing the net income subject to tax. Any pro ts
made from non-members and distributed to members 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 also R.A. 702 exempting cooperative
marketing associations.)
SECTION 36. Meaning of net income. — The tax imposed by law is upon income. In the
computation of the tax, various classes of income must be considered: (a) Income, in the broad sense,
meaning all wealth which ows into the tax-payer other than as a mere return of capital. It includes the
forms of income speci cally described as gains and pro ts, including gains derived from the sale or
other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts,
for the statute recognizes as income determining factor other items, among which are inventories,
accounts receivable, property exhaustion, and accounts payable for expenses incurred. (b) Gross
income, meaning income (in the broad sense) less income which is by statutory provision or otherwise
exempt from the tax imposed by law. (c) Net income, meaning gross income less statutory deductions.
The statutory deductions are, in general, though not exclusively, expenditures other than capital
expenditures, connected with production of income. (d) In the case of a taxpayer other than a
corporation as de ned in Section 84 (b) of the Code, net income means gross income less exemptions.
Ordinarily the net income is to be computed in accordance with the method of accounting regularly
employed in keeping the books of the taxpayer.
SECTION 37. Computation of net income. — Net income must be computed with respect to a
xed period. That period is twelve months ending December 31st of every year except in the case of a
corporation ling returns on a scal year basis in which case net income will be computed on the basis
of such scal year. Items of income and of expenditures, which as gross income and deductions, are
elements in the computation of net income, need not be in the form of cash. It is su cient that such
items may be appraised in terms of money. The time as of which any item of gross income or any
deduction is to be accounted for must be determined in the light of the fundamental rule that the
computation shall be made in such a manner as would clearly re ect the taxpayer's income. If the
method of accounting regularly employed by him in keeping his books clearly re ects his income, it is
to be followed with respect to the time as of which items of gross income and deductions are to be
accounted for, otherwise the computation of net income shall be made in such manner as in the opinion
of the Commissioner of Internal Revenue would clearly reflect it.
SECTION 38. Bases of computation. — Approved standard methods of accounting will be
ordinarily regarded as clearly re ecting income. A method of accounting will not, however, be regarded
as clearly re ecting income unless all items of gross income and all deductions are treated with
reasonable consistency. All items of gross income shall be included in the gross income for the taxable
year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly
to re ect income such amounts are to be properly accounted for as of a different 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 re ect income except an accrual method. A taxpayer is deemed to have received items of
gross income which have 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 prior to the realization
of such appreciation through sale or conversion of the property. (For methods of accounting and
determination of accounting period, see Sections 166 to 169 of these regulations.)
(Section 29(a) of the Code)
SECTION 39. What gross income includes. — Gross income includes, in general, compensation
for personal and professional services, business income, pro ts from sales of and dealings in property,
interests, rents, dividends, and gains, pro ts, and income derived from any source whatever, unless
exempt from tax by law. In general, income is the gain derived from capital, from labor, or from both
combined, provided it be understood to include pro t gained through a sale or conversion of capital
assets. Pro t of citizens, resident aliens, or domestic corporations derived from sales in foreign
commerce must be included in their gross income. Income may be in the form of cash or of property.
IHDCcT
For the treatment of dividends for purposes of the tax, see Sections 250 to 256 of these
regulations. For the treatment of capital gains, see Sections 132 to 135 of these regulations.
SECTION 40. Compensation for personal services. — Where no determination of compensation is
had until the completion of the services, the amount received is ordinarily income for the taxable year of
its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received,
if the return is rendered on a receipts and disbursements basis. Commissions paid salesman,
compensation for services on the basis of a percentage of pro ts, commissions on insurance
premiums, tips, and pensions or retiring allowances paid by private persons or by the Government of
the United States or of the Philippines (except pensions exempt 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 contributions received by a clergyman, evangelists, or religious worker for services rendered.
However, so-called pensions awarded by one to whom no services have been rendered are mere gifts
or gratuities and are not taxable.
SECTION 41. Compensation paid other than in cash. — Where services are paid for with
something other than money, the fair market value of the thing taken in payment is the amount to be
included as income. If the services were rendered at a stipulated price, in the absence of evidence to
the contrary, such price will be presumed to be the fair value of the compensation received.
Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold
the stock for its market value and paid the employee in cash. When living quarters are furnished in
addition to cash salary, the rental value of such quarters should be reported as income.
SECTION 42. Compensation paid in promissory notes. — Promissory notes or other evidence of
indebtedness received in payment for services, and not merely as security for such payment, constitute
income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded
as good for its face 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 a note is or could
be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the
amount of its face value less discount computed at the prevailing 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 thereof as represents recovery for the
discount originally deducted.
SECTION 43. Gross income from business. — In the case of a manufacturing, merchandising, or
mining business, "gross income" means the total sales, less the cost of goods sold, plus any income
from investments and from incidental or outside operations or sources. In determining the gross
income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for
items not ordinarily used in computing the cost of goods sold.
SECTION 44. Long term contracts. — Income from long-term contracts is taxable for the period
in which the income is determined, such determination depending upon the nature and terms of the
particular contract. As used herein the term "long-term" contracts means building, installation, or
construction contracts covering a period in excess of one year. Persons whose income is derived in
whole or in par from such contracts may, as to such income, prepare their returns upon the following
bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of
completion. In such case there should accompany the return certi cate of architects, or engineers
showing the percentage of completion during the taxable year of the entire work performed under
contract. There should be deducted from such gross income all expenditures made during the taxable
year on account of the contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the work under the contract but not
yet so applied. If upon completion of a contract, it is found that the taxable net income arising
thereunder has not been clearly re ected for any year or years, the Commissioner of Internal Revenue
may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is nally completed
and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such
method clearly re ects the net income. If this method is adopted there should be deducted from gross
income all expenditures during the life of the contract which are properly allocated thereto, taking into
consideration any material and supplies charged to the work under the contract but remaining on hand
at the time of the completion.
Where a taxpayer has led his return in accordance with the method of accounting regularly
employed by him in keeping his books and such method clearly re ects the income, he will not be
required to change to either of the methods above set forth. If a taxpayer desires to change his method
of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition
of all items appearing upon his balance sheet and used in connection with the method of accounting
formerly employed by him, should accompany his return.
SECTION 45. Gross income of farmers. — A farmer reporting on the basis of receipts and
disbursements (in which no inventory to determine pro ts is used) shall include in his gross income for
the taxable year (1) the amount of cash or the value of merchandise or other property received from the
sale of live stock and produce which were raised during the taxable year or prior years, (2) the pro t
from the sale of any live stock or other items which were purchased, and (3) gross income from all
other sources. The pro t from the sale of live stock or other items which were purchased is to be
ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that
in the case of the sale of animals purchased as draft or work animals, or solely for breeding or dairy
purposes and not for resale, the pro t shall be the amount of any excess of the sales prices over the
amount representing the difference between the cost and the depreciation theretofore sustained and
allowed as a deduction in computing net income.
In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine
pro ts), his gross pro ts are ascertained by adding to the inventory value of live stock and products on
hand at the end of the year the amount received from 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
inventory value of live stock and products on hand at the beginning of the year and the cost of live stock
and products purchased during the year. In such cases all live stock raised or purchased for sale shall
be included in the inventory at their proper valuation determined 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 may be included in the inventory, instead of being treated as capital assets
subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the
sale of any live stock included in an inventory their cost must not be taken as an 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 pro ts) any excess over the cost thereof less the
amount of depreciation theretofore sustained and allowed 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 market value of the article received in exchange is to be included in gross income. Rents
received in crop shares shall be returned as of the year in which the crop shares are reduced to money
or a money equivalent. Proceeds of insurance, such as re and typhoon insurance on growing crops,
should be included in gross income to the amount received in cash or its equivalent for the crop injured
or destroyed. If a farmer is engaged in producing crops which take more than a year from the time of
planting to the time of gathering and disposing, the income therefrom may be computed upon the crop
basis; but in any such cases the entire cost of producing the crop must be taken 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 accepted sense, and includes
stock, dairy, poultry, fruit, and truck farms, also plantations, ranches, and all land used for farming
operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for
gain or pro t either as owners, or tenants, are designated farmers. A person cultivating or operating a
farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded
as a farmer.
SECTION 46. Sale of patents and copyrights. — A taxpayer disposing of patents or copyrights by
sale should determine the pro t or loss arising therefrom by computing the difference between the
selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to
March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these
regulations. The pro t 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 copyrights since March 1, 1913,
or since the date of acquisition if subsequent thereto.
SECTION 47. Sale of goodwill. — Gain or loss from a sale of goodwill results 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 the cost or other basis of the assets, including goodwill. If
speci c payment was not made for 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 through
expenditures which have been currently deducted. It is immaterial that goodwill may never have been
carried on the books as an asset but the burden of proof is on the taxpayer to establish the cost or fair
market value on March 1, 1913, of the goodwill sold.
SECTION 48. Annuities and insurance policies. — Annuities paid by religious, charitable, and
educational corporations under an annuity contract are subject to tax to the extent that the aggregate
amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the
contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the
devisee out of the rents of the land or from other sources. The devisee is not required to return as
gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross
income any sums paid to the annuitant. Amounts received 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
mutual insurance company, which may be credited against the current premium, are not subject to tax.
Distributions on paid-up policies which are made out of earnings of the insurance company subject to
tax are in the nature of corporate dividends and should be included in the taxable income of the
individual, without any credit for the amount of tax paid by the corporation at source.
SECTION 49. Improvements by lessees. — When buildings are erected or improvements made by
a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not
subject to removal by the lessee, the lessor may 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 or improvements are
completed the fair market value of such buildings or improvements subject to the lease.
(b) The lessor may spread over the life of the lease the estimated depreciated value of such
buildings or improvements at the termination of the lease and report as income for each year of the
lease an aliquot part thereof.
If for any other reason than a bona de purchase from the lessee by the lessor the lease is
terminated, so that the lessor comes into possession or control of the property prior to the time
originally xed for the termination of the lease, the lessor receives additional income for the year in
which the lease is so terminated to the extent 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 the
erection of such buildings or improvements. No appreciation in value due to causes other than the
premature termination of the lease shall be included. Conversely, if the building or improvements are
destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when
such destruction takes place the amount previously reported as income because of the erection of
such buildings or improvements, less any salvage value subject to the lease to the extent that such loss
was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior
to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the
extent that such loss was not compensated for by insurance.
SECTION 50. Forgiveness of indebtedness. — The cancellation and forgiveness of indebtedness
may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the
circumstances. If, for example, an individual performs 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 bene t a debtor and without any consideration
therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not
be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the
debt, the transaction has the effect of the payment of a dividend.
SECTION 51. When income is to be reported. — Gains, pro ts, and income are to be included in
the gross income for the taxable year in which they are received by the taxpayer, unless they are
included when they accrue to him in accordance with the approved method of accounting followed by
him. If a person sues in one year on a pecuniary claim or for property, and money or property is
recovered 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 if then received. This is true of a recovery
for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of
the fact that they were determined to be worthless, which are subsequently recovered, whether or not
by suit, constitute income for the year in which recovered, regardless of the date when amounts were
charged off.
SECTION 52. Income constructively received. — Income which is credited to the account of or set
apart for a taxpayer and which may be drawn upon by him 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 or
restriction as to the time or manner of payment or condition upon which payment is to be made. A
book entry, if made, should indicate an absolute transfer from one account to another. If the income is
not credited, but is set apart, such income must be unquali edly subject to the demand of the taxpayer.
Where a corporation contingently credits its employees with bonus stock, but the stock is not available
to such employees until some future date, the mere crediting on the books of the corporation does not
constitute receipt.
SECTION 53. Examples of constructive receipt. — When interest coupons have matured and are
payable, but have not been cashed, such interest payment though not collected when due and payable,
is nevertheless available to the taxpayer and should therefore be included in his gross income for the
year during which the coupons matured. This is true if the coupons are exchanged for other property
instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The
distributive share of the pro ts of a partner in a general co-partnership duly registered is regarded as
received by him, although not distributed. Interest credited on savings bank deposits, even though the
bank nominally has a rule, seldom or never enforced, 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
shareholders of a building and loan association, when such credit passes without restriction to the
shareholder, has taxable status as income for the year of the credit. When the amount of such
accumulations has not become available to the shareholder until the maturity of a share, the amount of
any share in excess of the aggregate amount paid in by the shareholder is income for the year of
maturity of the share. TaSEHC
SECTION 54. Creation of corporate sinking fund. — If a corporation in order solely to secure
payment of its bonds or other indebtedness, places property in trust, or sets aside certain amounts in a
sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums
from time to time, the property or fund thus set aside by the corporation and held by the trustee is an
asset of the corporation, and any gain arising therefrom is income of the corporation and shall be
included as such in its annual return.
SECTION 55. Acquisition or disposition by a corporation of its own capital stock. — Whether the
acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or
deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its
facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital
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 another corporation, the
resulting gain or loss is to be computed in the same manner as though the corporation were dealing in
the shares of another. So also if the corporation receives its own stock as consideration upon the sale
of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in
the same manner as though the payment had been made in any other property. Any gain derived from
such transaction is subject to tax, and any loss sustained is allowable as deduction where permitted by
the provisions of Title II.
SECTION 56. Contributions by shareholders. — Where a corporation requires additional funds for
conducting its business and obtains such needed money through voluntary pro rata payments by its
shareholders, the amounts so received being credited to its surplus account or to a special capital
account, will not be considered income, although there is no increase in the outstanding shares of stock
of the corporation. The payments in such circumstances are in the nature of voluntary assessments
upon, and represent an additional price paid for, in shares of stock held by the individual shareholders,
and will be treated as an addition to and as a part of the operating capital of the company.
SECTION 57. Sale and retirement of corporate bonds. — (1) (a) If bonds are 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 in excess of the issuing price or face value, the
excess of the purchase price over the issuing 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 than the
issuing price or face value, the excess of the issuing price or face value over the purchase price is gain
or income for the taxable year.
(2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is
gain or income which should be prorated or amortized over the life of the bond. (b) If thereafter the
corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any
amount of premium already returned as income, the excess of the purchase price over the issuing price
minus any amount of premium already returned as income (or over the face value plus any amount of
premiums not yet returned as income) is a deductible expenses for the taxable year. (c) If, however, the
corporation purchases and retires any of such bonds at 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 already returned as income (or of the face value plus any amount of premium not yet returned
as 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 of such discount is
deductible and should be prorated or amortized over the life of the bonds. (b) If thereafter the
corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any
amount of discount already deducted, the excess of the purchase price over the issuing price plus any
amount of discount already deducted (or over the face value minus any amount of discount not yet
deducted), is a deductible expense for the taxable year. (c) If, however, the corporation purchases and
retires any of such bonds at a price less than the issuing price plus any amount of discount already
deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face
value minus any amount of discount not yet deducted) over the purchase price is gain or income for the
taxable year.
SECTION 58. Income of corporation from leased property. — Where a corporation has leased its
property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a
certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding
indebtedness, together with taxes, insurance or other xed charges, such payments shall be considered
rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact
that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of
the lessor. The fact that a corporation has conveyed or let its property and has parted with its
management and control, or has ceased to engage in the business for which it was originally organized,
will not relieve it from liability to the tax. While the payments made by the lessee directly to the
bondholders or shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in
one 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 as such shall be accounted for in their
returns.

SECTION 59. Gross income of a corporation in liquidation. — When a corporation is dissolved, its
affairs are usually wound up by a receiver or trustee in dissolution. The corporate existence is continued
for the purpose of liquidating the assets and paying the debts, and such receiver or trustee stands in
the stead of the corporation for such purposes. Any sales of property by them are to be treated as if
made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60. Gross income of foreign corporations. — The gross income of a foreign
corporation subject to tax consists of its gross income from sources within the Philippines. Gross
income from sources within the Philippines, as applied to foreign corporations, shall include interest
received on bonds, notes, or other interest-bearing obligations issued by residents, corporate or
otherwise, as well as income derived from dividends on the capital stock or from the net earnings of
domestic or resident foreign corporations, joint stock companies, associations, or insurance
companies, dividends from other foreign corporations to the extent provided in Section 37 of the Code,
and likewise income from rentals and royalties from 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 by fundamental law. Such tax-free income
should not be included in the income tax return unless information regarding it is speci cally called for.
The exclusion of such income should not be confused with the reduction of gross income by the
application of allowable deductions.
SECTION 62. Proceeds of insurance. — The proceeds of life-insurance policies, 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 valuable consideration), directly or in trust, are excluded from the gross income of the
bene ciary. It is immaterial whether the proceeds are received in a single sum or in installments. If,
however, such proceeds are held by the insurer under an agreement to pay 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 and interest payments on such amounts) under a life insurance, endowment, or
annuity contract are excluded from gross income but, if such amounts (when added to amounts
received before the taxable year under such contract) exceed the aggregate premiums or consideration
paid (whether or not paid during the taxable year) then the excess shall be included in gross income.
However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life
insurance, endowment, or annuity contract, or any interest therein, only the actual value of such
consideration and the amount of the premiums and other sums subsequently paid by the transferee are
exempt from taxation.
SECTION 63. Amounts received as compensation for injuries or sickness. — The amounts
received by an insured or his estate or bene ciaries through accident or health insurance or under
workmen's compensation acts as compensation for personal injuries or sickness are excluded from
the gross income of the insured, his estate, and other bene ciaries. Any damages recovered by suit or
agreement on account of such injuries or sickness are similarly excluded from the gross income of the
individual injured or sick, if living, or of his estate or other bene ciaries entitled to receive such
damages, if dead.
SECTION 64. Gifts and bequests. — Property received as a gift or received under a will or
testament or through legal succession, is exempt from the income 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 a gift. Neither alimony nor an allowance based on a separation agreement is
taxable income.
(Section 30(a) of the Code)
SECTION 65. Business expenses. — Business expenses deductible from gross income include
the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or
business. The cost of goods purchased for resale, with proper adjustment for opening and closing
inventories, is deducted from gross sales is computing gross income. Among the items included in
business expenses 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 re, storm, theft, accident, or other similar losses
in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct
the necessary expenses paid in carrying on his business from his gross income from whatever source.
SECTION 66. Traveling expenses . — Traveling expenses as ordinarily understood, include
transportation expenses and meals and lodging. If the trip is undertaken for other than business
purposes, the transportation expenses are personal expenses, and the meals and lodging are living
expenses, and therefore, not deductible. If the trip is solely on business, the reasonable and necessary
traveling expenses, including transportation expenses, meals and lodging, become business instead of
personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a salary as full
compensation for his services, without reimbursement for traveling expenses, or is employed on a
commission basis with no expense allowance, his traveling expenses, including the entire amount
expended far meals and lodging, are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall
include in gross income, the amount so repaid and may deduct such expenses. aDcHIC
(c) If an individual receives a salary and also an allowance for meals and lodging, as for example,
a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross
income and the cost of such meals and lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a business
expense. Only such expenses as are reasonable and necessary in the conduct of the business and
directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to
herein must attach to his return a statement showing (1) the nature of the business in which he is
engaged; (2) the number of days away from home during the taxable year on account of business; (3)
the total amount of expenses incident to meals and lodging while absent from home and business
during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a
deduction.
Claim for the deductions referred to herein must be substantiated, when required by the
Commissioner of Internal Revenue by record showing in detail the amount and nature of the expenses
incurred.
SECTION 67. Cost of materials. — Taxpayers carrying materials and supplies on hand should
include in expenses the charges for materials and supplies only to the amount that they are actually
consumed and used in operation during the year for which the return is made, provided that the cost of
such materials and supplies 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 of consumption
is kept or of which physical inventories at the beginning and end of the year are not taken, it will be
permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of
such supplies and materials as were purchased during the year for which the return is made, provided
the net income is clearly 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 it in an ordinarily e cient operating condition,
may be deducted as expense, provided the 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 and
appreciably prolong the life of the property should be charged against the depreciation reserves if such
account is kept.
SECTION 69. Professional expenses. — A professional may claim as deductions the cost of
supplies used by him in the practice of his profession, expenses paid in the operation and repair of
transportation equipment used in making professional calls, dues to professional societies and
subscriptions to professional journals, the rent paid for o ce rooms, the expenses of the fuel, light,
water, telephone, etc.; used in such o ces, and the hire of o ce assistants. Amounts currently
expended for books, furnitures, and professional instruments and equipment, the useful life of which is
short, may be deducted. But amounts expended for books, furniture, and professional instruments and
equipment of a permanent character are not allowable as deductions. SEHTIc
SECTION 70. Compensation for personal services. — Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance
for salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments purely
for service. This test and its practical application may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of
dividend on stock. This is likely to occur in the case 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 the
stockholdings of the o cers or employees, it would seem likely that the salaries are not paid wholly for
services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An
ostensible salary may be in part payment for property. This may occur, for example, where a
partnership sells out to a corporation, 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 merely for
services, but in part constitute payment for the transfers of their business.
(2) The form or method of xing compensation is not decisive as to deductibility. While any form
of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it
does not follow that payments on a contingent basis are to be treated fundamentally on any basis
different from that applying to compensation at a at rate. Generally speaking, if contingent
compensation is paid pursuant to a free bargain between the employer and the individual made before
the services are rendered, not in uenced by any consideration on the part of the employer other than
that of securing on fair and advantageous terms the services of the individual, it should be allowed as a
deduction even though in the actual working out of the contract it may prove to be greater than the
amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is reasonable in all
the circumstances. It is in general just to assume that reasonable and true compensation is only such
amount as would ordinarily be paid for like services by like enterprises in like circumstances. The
circumstances to be taken into consideration 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 tax liability of the recipient in
respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such
by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive
payments by corporations, if such payments correspond or bear a close relationship to stockholdings,
and are found to be distribution of earnings or pro ts, the excessive payments will be treated as
dividend. If such payments constitute payment for property, they should be treated by the payer as a
capital expenditure and by the recipient as part of the purchase price. HSCcTD
SECTION 72. Bonuses to employees. — Bonuses to employees will constitute allowable

deductions from gross income when such payments are made in good faith and as additional
compensation for the services actually rendered by the employees, provided such payment, when
added to the stipulated salaries, do not exceed a reasonable compensation for the service rendered. It
is immaterial whether such 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 of compensation or
are in excess of reasonable compensation for services, are not deductible from gross income.
SECTION 73. Pensions, compensation for injuries. — Amounts paid for pensions to retired
employees or to their families or others dependent upon them, or on account of injuries received by
employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper
deductions as ordinary and necessary expenses. Such deductions are limited to the amount not
compensated for by insurance or otherwise. When the amount of the salary of an o cer or employee is
paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by
the individual, such payments may be deducted. Salaries paid by employers to employees who are
absent in the military, naval or other service of the Government, but who intend to return at the
conclusion of such service, are allowable deductions. (See Section 118 of these regulations, relative to
pension trust.)
SECTION 74. Rentals. — Where a leasehold is acquired for business purposes for a speci ed
sum, the purchaser may take as a deduction in his return an aliquot 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 rent and constitute a deductible item to the tenant and taxable income to the
landlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting
buildings or making permanent improvements on ground of which he is lessee is held to be a capital
investment and not deductible as a business expense. In order to return to such taxpayer his
investment of capital, an annual deduction may be made from gross income of an amount equal to the
cost of such improvements divided by the number of years remaining of the term of lease, and such
deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater
than the probable life of the buildings erected, or of the improvements made, this deduction shall take
the form of an allowance for depreciation.
SECTION 75. Expenses of farmers. — A farmer who operates a farm for pro t is entitled to
deduct from gross income as necessary expenses all amounts actually expended in the carrying on of
the business of farming. The cost of ordinary tools of short life or small cost, such as hand tools,
including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated
as an expense deduction, in so far as such cost represents actual outlay, but not including the value of
farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in
producing crops which take more than a year from the time of planting to the process of gathering and
disposal, expenses deducted may be determined upon the crop basis, and such deductions must be
taken in the year in which the gross income from the crop has been realized. The cost of farm
machinery, equipment, and farm buildings 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 investments of
capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments
of capital, and may be depreciated unless such animals are included in an inventory in accordance with
Section 149 of these regulations. The purchase price of transportation equipment even when wholly
used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The
cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the
business of farming is deductible as an expense; if used partly for business purposes 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 of business and pleasure or convenience, and only the proportion of
such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is
operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in
connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of
products may be ignored in rendering a return of income, and the expenses incurred, being regarded as
personal expenses, will not constitute allowable deduction.
SECTION 76. When charges are deductible. — Each year's return, so far as practicable, both as to
gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to
make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses,
liabilities, or de cit of one year cannot be used to reduce the income of a subsequent year. A taxpayer
has the right to deduct all authorized allowances and it follows that if he does not within any year
deduct certain of his expenses, losses, interests, taxes, or other charges, he can not deduct them from
the income of the next or any succeeding year. If it is recognized, however, that particularly in a going
business of any magnitude there are certain overlapping items both of income and deduction, and so
long as these overlapping items do not materially distort the income, they may be included in the year in
which the taxpayer, pursuant to a consistent policy, takes them into his accounts. Judgments or other
binding judicial adjudication, on account of damages for patent infringement, personal injuries, or other
cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under
other methods of accounting which clearly re ect the correct deduction, less any amount of such
damages as may have been compensated for by insurance or otherwise: If subsequent to its
occurrence, however, a taxpayer rst ascertains the amount of a loss sustained during a prior taxable
year which has not been deducted from gross income, he may render 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 for refund of the excess tax paid by reason of the failure to deduct such loss in
the original return. A loss from theft or embezzlement occurring in one year and discovered in another
is ordinarily deductible for the year in which sustained.
SECTION 77. Expenses allowable to non-resident aliens and foreign corporations. — The
expenses allowable to a non-resident alien or a foreign corporation consist of only such expenses as
are incurred in carrying on any business or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78. Interest. — Interest paid or accrued within the taxable year on indebtedness may be
deducted from gross income, except that interest on indebtedness incurred or continued to purchase
bonds and other securities, the interest upon which is exempt from tax, is not deductible. Interest paid
by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though
the taxpayer is not directly liable upon the bond or not secured by such mortgage, may be deducted as
interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, the allowable deduction will
be the proportion of such interest which the amount of gross income from sources within the
Philippines bears to the amount of gross income from all sources within and without this country;
however, to avail of this deduction, such non-resident alien individual or foreign corporation shall
include in the return all the information 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 be deducted 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 and secured by interest-bearing certi cates of indebted issued by such hank or
loan or trust company may be deducted from gross income.
SECTION 79. Interest on capital. — Interest calculated for cost-keeping or other purposes on
account of capital or surplus invested in the business, which does not represent a charge arising under
an interest-bearing obligation, is not allowable deduction from gross income.
(Section 30(c) of the Code)
SECTION 80. Taxes in general . — As a general rule, taxes are deductible with 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 is claimed are connected with income from sources within the Philippines.
Import duties paid to the proper customs o cers, and business, occupation, license, privilege,
excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of
the Philippines or to any political subdivision thereof, are deductible. The word "taxes" means taxes
proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties
incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. 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 the individual 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 the taxes imposed upon
his interest as shareholder of a bank or other corporation, which are paid by the corporation without
reimbursement from the taxpayer. The amount so paid should not be included in the income of the
shareholder.
In the case of corporate bonds or other obligations containing a tax-free covenant clause the
corporation paying a tax or any part of it, for someone else pursuant to its agreement is not entitled to
deduct such payment from gross income on any 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 in favor of the Government of the Philippines,
and in no case may the taxpayer avail of such deduction.
SECTION 82. Income, war-pro ts, and excess-pro ts taxes imposed by the authority of a foreign
country. — Income, war-pro ts, and excess-pro ts taxes imposed by the authority of a foreign country
(including the United States and possessions thereof) are allowed as deductions only if the taxpayer
does not signify in his return his desire to have to any extent the bene ts of the provisions of law
allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign
country residing in the Philippines whose income from sources within such foreign country is not
subject to income tax, only that portion of the taxes paid to such 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 against local bene ts . — Estate,
inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local bene ts, such as street, sidewalk, and
other like improvements, imposed because of and measured by some bene t inuring directly to the
property against which the assessment is levied, do not constitute an allowable deduction from gross
income. A tax is considered assessed against local bene ts when the property subject to the tax is
limited to the property bene ted. Special assessments are not deductible, even though an incidental
bene t may inure to the public welfare. The taxes deductible are those levied for the general public
welfare, by the proper taxing authorities at a like rate against all property in the territory over which such
authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of
local bene ts, the taxpayer may deduct assessments paid as an expense incurred in business, if the
payment of such assessments is necessary to the conduct of his business. When the assessments are
made for the purpose of constructing local bene ts, the payments by the taxpayer are in the nature of
capital expenditures and are not deductible. Where assessments are made for the purpose of both
construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the
amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so
paid is deductible.
SECTION 84. Analysis of credit for taxes: — If the taxpayer signi es in his return his desire to
claim a credit for taxes, the basis of such credit, in the case of a citizen of the Philippines, whether
resident or non-resident, and in the case of a domestic corporation, is as follows: (a) The amount of any
income, war-pro ts, and excess-pro ts 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 partner or of an
estate or trust of which he is a bene ciary paid or accrued during the taxable year to a foreign country if
his distributive share of the income of such partnership or trust is reported for taxation under Title II of
the Code.
In the case of an alien resident of the Philippines who signi es in his return his desire to claim a
credit for such taxes the basis of the credit is as follows: (a) The amount of any such taxes paid or
accrued during the taxable year to any foreign country if the foreign country of which such alien resident
is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines
residing in such 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 bene ciary paid or accrued during the taxable year to
any foreign country if his distributive share of the net income 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, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such
country.
If a taxpayer signi es in his return his desire to claim credit for taxes, such action will be
considered to apply to income, war-pro ts, and excess-pro ts taxes paid to all foreign countries
(including the United States and possessions thereof), and no 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-pro ts, and excess-pro ts
taxes paid or accrued during the taxable year" means taxes 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 any foreign
political entity, which levies and collects income, war-pro ts, or excess-pro ts taxes, and includes the
United States or any political subdivision thereof.
SECTION 86. Conditions of allowance of credits. — If the taxpayer signi es in his return his desire
to claim credit for income, war-pro ts, or excess-pro ts taxes paid other than to the Philippines, the
income tax return must be accompanied by the appropriate form prescribed by the Commissioner of
Internal Revenue. The form must be carefully lled in with all the information there called for and with
the calculations of credits there indicated, and must be duly signed and sworn to or affirmed. If credit is
sought for taxes already paid the form must have attached to it the receipt for each such tax payment.
If credit is sought for taxes accrued, the form must have attached to it the return on which each such
accrued tax was based. This receipt or return so attached must be either the original, a duplicate
original, a duly certi ed or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt
or return is attached, there must be kept readily available for comparison on request the original, a
duplicate original, or a duly certi ed or authenticated copy. If the receipt of the return is in a foreign
language, a certi ed translation thereof must be furnished by the taxpayer. Any additional information
necessary for the determination of the amount of income derived from sources without the Philippines
and from each foreign country shall, upon the request of the Commissioner of Internal Revenue, be
furnished by the taxpayer.
In the case of a credit sought for a tax accrued but not paid, the Commissioner of Internal
Revenue may in addition require as a condition precedent to the allowance of credit a bond from the
taxpayer. It shall be in such sum as the Commissioner of Internal Revenue may prescribe, and shall be
conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination
of the tax made necessary by such credit proving incorrect, with such further conditions as the
Commissioner of Internal Revenue may require. This bond shall be executed by the taxpayer, or the
agent or representative of the taxpayer, as principal, and by sureties satisfactory 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 deduction accrued income, war-
pro ts, and excess pro ts taxes imposed by the authority of any foreign country or possession of the
United States but at the time the return is made it is impossible to estimate the amount of such taxes
that may have accrued for the period for which the return is made, the form required under this section
may be led at a later date but a credit cannot be allowed for such taxes unless the taxpayer signi es 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. — In case credit has been
given for taxes accrued, or a proportionate share thereof, and the amount 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 is refunded in whole or in part, the taxpayer shall immediately notify
the Commissioner of Internal Revenue. The Commissioner of Internal Revenue will thereupon
redetermine the amount of the tax of such taxpayer for the year or years for which such incorrect credit
was granted. The amount of tax, if any, due upon such redetermination shall be paid by the taxpayer
upon notice and demand by the Commissioner of Internal Revenue. The amount of tax, if any, shown by
such redetermination to have been overpaid shall be credited or refunded to the taxpayer in accordance
with the provisions of Section 309 of the Code.
SECTION 88. Countries which do or do not satisfy the similar credit requirements. — A country
satis es the similar credit requirement of Section 30(c)(3)(B), as to income tax paid to such country,
either by allowing to citizens of the Philippines residing in such country a credit for the amount of
income taxes paid to 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 in such 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 is a citizen or subject does not allow to a Filipino citizen
residing in such country a credit for taxes paid by such citizen to another foreign country, no credit is
allowed to such resident alien for taxes paid by him to such foreign country.
SECTION 89. When credit for taxes may be taken. — The credit for taxes provided by Section (30)
(c)(3) to (9) may ordinarily be taken either in the return for the year in which the taxes accrued or in
which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his
returns led upon the accrual basis or upon the cash receipts and disbursements basis. Section 30(c)
(6) allows the taxpayer, at his option and irrespective of the method of accounting employed in keeping
his books, to take such credit for taxes as may be allowable in the return for the year in which the taxes
accrued. An election thus made must be followed in returns for all subsequent years, and no portion of
any such taxes will be allowed as a deduction from gross income.
SECTION 90. Domestic corporation owning a majority of the stock of foreign corporation. — In
the case of a domestic corporation which owns a majority of the voting stock of a foreign corporation
from which it receives dividends in any taxable rear, the credit for foreign taxes includes not only the
income, war pro ts and excess-pro ts taxes paid or accrued during the taxable year to any foreign
country by such domestic corporation, but also income, war-pro ts and excess-pro ts taxes deemed
to have been paid determined by taking the same proportion of any income, war-pro ts, and excess-
pro ts taxes paid or accrued by such controlled foreign corporation to any foreign country upon or with
respect to the accumulated pro ts of such foreign corporation from which such dividends were paid,
which the amount of any such dividends received bears to the amount of such accumulated pro ts. The
amount of taxes deemed to have been paid is limited, however, to an amount of the tax against which
the credit for foreign taxes is taken, which the amount of such dividends bears to the amount of the
entire net income of the domestic corporation in which such dividends are included. If dividends are
received from more than one controlled foreign corporation, the limitation is to be computed
separately for the dividends received from each controlled foreign corporation. If the credit for foreign
taxes includes taxes deemed to have been paid, the taxpayer must furnish the same information with
respect to the taxes deemed to have been paid as it is required to furnish with respect to the taxes
actually paid or accrued by it. Taxes paid or accrued by a controlled foreign corporation are deemed to
have been paid by the domestic corporation 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 claim credits against the tax from taxes of
foreign countries.
SECTION 92. Limitation on credit for foreign taxes. — The amount of credit 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 any country shall not exceed
the same proportion of the tax against which such credit is taken, which the taxpayer's net income from
sources within such country taxable under 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 the tax against which
such credit is taken, which the taxpayer's net income from sources without the Philippines taxable
under Title II bears to his entire net income for the same taxable year.
(Section 30(d) of the Code)
SECTION 93. Losses by individuals. — Losses sustained by individuals during 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 res, storm, shipwreck,
or other casualty, or from robbery, theft or embezzlement. No loss shall, however, be allowed as a
deduction if at the time of ling of the return, such loss has been claimed as deduction for estate or
inheritance tax purposes in the estate or inheritance tax return.
SECTION 94. Losses by corporations. — Domestic corporations may deduct losses actually
sustained and charged off within the year and not compensated for 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 in business or trade conducted within the
Philippines, losses of property within the Philippines arising from res, storms, shipwreck, or other
casualty and from robbery, theft, or embezzlement, and losses actually sustained in transactions
entered into for pro t in the Philippines, although not connected with their trade or business, not
compensated by insurance or otherwise.
SECTION 96. Losses generally. — Losses must usually be evidenced by closed and completed
transactions. Proper adjustment must be made in each case for expenditures or items of loss properly
chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion.
Moreover, the amount of the loss 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 residential
property is not deductible unless the property was purchased or constructed by the taxpayer with a
view to its subsequent sale for pecuniary pro t. No loss is sustained by the transfer of property by gift
or death. Losses sustained in illegal transactions are not deductible. EAISDH
SECTION 97. Voluntary removal of buildings. — Loss due to the voluntary removal or demolition
of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements
will be deductible from gross income. When a taxpayer buys real estate upon which is located a
building, which he proceeds to raze with a view to erecting thereon another building, it will be
considered that the taxpayer has sustained no deductible expense on account of the cost 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 of removing the useless building.
SECTION 98. Loss of useful value. — When through some change in business conditions, the
usefulness in the business of some or all of the capital assets is suddenly terminated, so that the
taxpayer discontinues the business or discards such assets permanently from use of such business, he
may claim as deduction the actual loss sustained. In determinating the amount of the loss, adjustment
must be made, however, for improvements, depreciation and the salvage value of the property. This
exception to the rule requiring a sale or other disposition of property in order to establish a loss
requires proof of some unforeseen cause by reason of which the property has been prematurely
discarded, as, for example, where an increase in the cost or change in the manufacture of any product
makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or
where new legislation directly or indirectly makes the continued pro table use of the property
impossible. This exception does not extend to a case where the useful life of property terminates solely
as a result of those gradual processes for which depreciation allowance are authorized. It does not
apply to inventories or to other than capital assets. The exception applies to buildings only when they
are permanently abandoned or permanently devoted to a radically different use, and to machinery only
when its use as such is permanently abandoned. Any loss to be deductible under this exception must
be charged off in the books and fully explained in returns of income.
SECTION 99. Shrinkage in value of stocks. — A person possessing stock of a corporation can not
deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of
such stock through uctuation of the market or otherwise. The loss allowable in such case is that
actually suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost
or other basis determined in accordance with these regulations may be deducted by the owner in the
taxable year in which the stock became worthless, provided a satisfactory showing of its
worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. — Losses incurred in the operation of farms as business
enterprises are deductible from gross income. If farm products are held for favorable markets, no
deduction on account of shrinkage in weight or physical value or by deterioration in storage shall be
allowed, except as such shrinkage may be re ected in an inventory if used to determine pro ts. The
total loss by storm, ood, or re of a prospective crop is not a deductible loss in computing net
income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim
as a loss the value of animals that perish from among those animals that were raised on the farm,
except as such loss is re ected in an inventory if used. If livestock has been purchased after March 1,
1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the
authorities, the actual purchase price of such stock, less any depreciation allowable as a deduction in
computing net income, with respect to such perished, livestock, and also any insurance or indemnity
recovered, may be deducted as a loss. The actual cost of other property (with proper adjustment for
depreciation), which is destroyed by order of the authorities, may in like manner be claimed as a loss;
but if reimbursement is made in whole or in part on account of stock killed or property destroyed, the
amount received shall be reported as income for the year in which reimbursement is made. The cost of
any feed, pasturage, or care which has been deducted as an expense of operation shall not be included
as part of the cost of the stock for the purpose of ascertaining the amount of a deductible loss. If
gross income is ascertained by inventories, 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 re ected in
the inventory by reducing the amount of livestock or products on hand at the close of the year. If an
individual owns and operates a farm, in addition to being engaged in another 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 from all 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 in section 34 of the Code. If any
securities which are capital assets become worthless during the taxable year, the loss resulting
therefrom shall be considered as a loss from the 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 circumstances indicate that a debt is
worthless, and the debt is charged off on the books of the taxpayer within the year, the same may be
allowed as a deduction in computing net income. There should accompany the return a statement
showing the propriety of any deduction 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 a bad 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. In determining whether a debt is worthless the Commissioner of
Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing
the debt and the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that
legal action to enforce payment would in all pro-ability not result in the satisfaction of execution on a
judgment, a showing of those facts will be su cient 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 an
unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy is sometimes
possible before and at other times only when a settlement in bankruptcy shall have been had. Where a
taxpayer ascertained a debt to be worthless and charged it off in one year, the mere fact that
bankruptcy proceedings instituted against the debtor are terminated in a later year, con rming the
conclusion that the debt is worthless, will not authorize shifting the deduction to such later year. If a
taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair
market value when received, which may be less than their face value, the amount deductible for bad
debts in any case is limited to such original valuation.
SECTION 103. Examples of bad debts. — Worthless debts arising from unpaid wages, salaries,
rents, and similar items of taxable income will not be allowed as a deduction unless the income such
items represent has been included in the return of income for the year in which the deduction as a bad
debt is sought to be made or in a previous year. Only the difference between the amount received in
distribution of the 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 in distribution of the assets of
the decedent's estate and the amount of his claim may be considered a worthless debt. A purchaser of
accounts receivable which can not be collected and are consequently charged off the hooks as bad
debt is entitled to deduct them, the amount of deduction to be based upon the price he paid for them
and not upon their face value.
Where under foreclosure of a mortgage, the mortgagee buys the mortgaged property and credits
the indebtedness with the purchase price, the difference between the purchase price and the
indebtedness will not be allowable as a deduction for a bad debt, 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 which are capital assets are
ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall,
except in the case of a bank or trust company incorporated under the laws of the Philippines or of the
United States a substantial part of whose business is the receipt of deposits, be considered as a loss
from the sale or 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 the exhaustion, wear and tear, and
obsolescence of property used in the trade or business may be deducted from gross income. For
convenience such an allowance will usually be referred to as depreciation, excluding from the term any
idea of a mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence.
The proper allowance for such depreciation of any property used in the trade or business is that
amount which should be set aside for the taxable year in accordance with a reasonable consistent plan
whereby the aggregate of the amount so set aside, plus the salvage value, will, at the end of the useful
life of the property in business, equal the basis of the property. Due regard must also be given to
expenditures for current upkeep. cDCSTA
SECTION 106. Depreciable property. — The necessity for a depreciation allowance arises from
the fact that certain property used in the business gradually approaches a point where its usefulness is
exhausted. The allowances should be con ned to property of this nature. In the case of tangible
property, it applies to that which is subject to wear and tear, to decay or decline from natural causes, to
exhaustion and to obsolescence due to the normal progress of the art, as where machinery or other
property must be replaced by a new invention, or due to the inadequacy of the property to the growing
needs of the business. It does not apply to inventories or to stock in trade, nor to land apart from the
improvements or physical development added to it. It does not apply to bodies of minerals which
through the process of removal suffer depletion. Property kept in repair may, nevertheless, be the
subject of a depreciation allowance. The deduction of an allowance for depreciation is limited to
property used in the taxpayer's trade or business. No such allowance may be made in respect to
automobiles or other transportation equipment used solely for the pleasure, a building used by the
taxpayer solely as his residence, nor in respect of furniture or furnishings therein, personal effects, or
clothing; but properties and costumes used exclusively in a business, such as theatrical business, may
be the subject of a depreciation allowance.
SECTION 107. Depreciation of intangible property. — Intangibles, the use of which in the trade or
business is de nitely limited in duration, may be the subject of 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 usually be a proper subject of such an allowance. If however, an intangible asset
acquired through capital outlay is known from experience to be of value in the business for only a
limited period, the length of which can be estimated from experience with reasonable certainty, such
intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in
the return or prior thereto to the satisfaction 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 basis of the property in respect of which
the allowance is made. To this amount should be added from time to time the cost of improvements,
additions, and betterment and from it should be deducted from time to time the amount of any de nite
loss or damage sustained by the property through casualty, as distinguished from the gradual
exhaustion of its utility which is the basis of the depreciation allowance. Where the lessee of real
property erects buildings, or makes permanent improvements which become 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 replaced by depreciation allowance is the same as though no such
buildings had been erected or such improvements made. No depreciation deduction will be allowed in
the case of property which has been amortized to its scrap value and is no longer in use.
SECTION 109. Method of computing depreciation allowance. — The capital 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 trade practice, such as an apportionment of the capital sum over
units of production. Whatever plan or method of apportionment is adopted must be reasonable and
must have due regard to operating conditions during the taxable period. While the burden of proof must
rest upon the taxpayer to sustain the deductions taken by him, such deductions must not be disallowed
unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim
for depreciation shall be determined upon the conditions known to exist at the end of the period for
which the return is made. If it develops that the useful life of the property will be longer or shorter than
the useful life as originally estimated under all the then known facts, the portion of the cost or other
basis of the property not already provided for through depreciation allowances should be spread over
the remaining useful life of the property as reestimated in the light of the subsequent facts, and
depreciation deductions taken accordingly.
SECTION 110. Obsolescence. — With respect to physical property the whole or any portion of
which is clearly shown by the taxpayer as being affected by economic conditions that will result in its
being abandoned at a future date prior to the end of its normal useful life, so that depreciation
deductions alone are insu cient to return the cost (or other basis) at the end of its economic term of
usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in
accordance with the facts obtaining with respect to each item of property concerning which a claim for
obsolescence is made. No deductions for obsolescence will be permitted merely because, in the
opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be
confined to such portion of the property on which obsolescence is definitely shown to be sustained and
can not be held applicable to an entire property unless all portions thereof are affected by the
conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. — In computing depreciation allowance in the
case of a patent or copyright, the capital sum to be replaced is the cost or other basis of the patent or
copyright. The allowance should be computed 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 the
taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the
Government, its cost consists of the various Government fees, cost of drawings, experimental models,
attorney's fees, development or experimental expenses, etc., actually paid. Depreciation of a patent can
be taken on the basis of the fair market value as of March 1, 1913, only when a rmative and
satisfactory evidence of such value is offered. Such evidence should whenever practicable be
submitted with the return. If the patent becomes obsolete prior to its expiration, such proportion of the
amount on which its depreciation may be based as the number of years of its remaining life bears to
the whole number of years intervening between the basic date when it legally expires may be deducted,
if permission to do so is speci cally secured from the Commissioner of Internal Revenue. Owing to the
difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted
only if a rmative and satisfactory evidence that the patent became obsolete in the year for which the
return is made is submitted to the Commissioner of Internal Revenue. The fact that depreciation has
not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater
amount for depreciation than would otherwise be allowable. AcDHCS
SECTION 112. Depreciation of drawings and models. — Where a taxpayer has incurred
expenditures in his business for designs, drawings, patterns, models, or work of an experimental nature
calculated to result in improvement of his facilities or his product, if the period of usefulness of any
such asset may be estimated from experience with reasonable accuracy, it may be the subject of
depreciation allowances spread over such estimated period of usefulness. The facts must be fully
shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue. Except
for such depreciation allowances no deduction shall be made by the taxpayer against any sum so set
up as an asset except on the sale or other disposition of such asset at a loss or on proof of a total loss
thereof.
SECTION 113. Charging off depreciation. — A depreciation allowance, in order 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 the amount measuring a reasonable allowance for depreciation
must be either deducted directly from the book value of the assets or preferably credited to a
depreciation reserve account, which must be re ected in the annual balance sheet. The allowances
should be computed and charged off with express reference to speci c items, units, or groups of
property, each item or unit being considered separately or speci cally included 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 ready veri cation of the factors used in computing the
allowance for each year for each item, unit, or group.
SECTION 114. Depreciation in the case of farmers. — A reasonable allowance for depreciation
may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery, and
other physical property. A reasonable allowance for depreciation may also be claimed on live stock
acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to
determine pro ts in accordance with these regulations. Such depreciation should be based on the cost
or other basis and the estimated life of the live stock. If such live stock be included in an inventory no
depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the
inventory.
SECTION 115. Statement to be attached to return. — To each return in which depreciation
charges are claimed, there should be attached a statement showing the item, unit, or group of
depreciable property, the cost price or its market value as of March 1, 1913, if acquired prior to that
date, the rate of charge, amount previously deducted, and the amount claimed in the return. These data
must agree with those appearing 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 is entitled to deduct depletion.
— In order to be entitled to percentage depletion allowance, the taxpayer must have an economic
interest in the property. To acquire an economic interest, the taxpayer must have a capital investment in
the property and not a 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 legal relationship,
income derived from the extraction of the oil, gas or mineral, to which he must look for a return of his
capital. Thus the parties entitled to share in oil or mineral extracted, or the gross proceeds therefrom
(including the parties to a lease providing for royalty payments of stated amounts per unit mined) have
economic interests in the oil or minerals in place. That is, they, as owners of the rights in oil or other
mineral in place, share the income from production, and the depletion allowances thereon are regarded
as designed to permit tax-free recovery of at least their capital investments in such property rights.
SECTION 115-A-2. Basis for depletion. — On oil or gas wells the percentage depletion allowance
is xed 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 or royalties paid or incurred by the taxpayer in respect to the property. In
both cases, the total percentage depletion allowance shall in no case exceed 50% of the net income or
profit.
Illustration
Subject: Oil and gas wells (1) (2)

Gross income after deducting rents and royalties P100.00 P100.00
27 1/2% thereof 27.50 27.50
Net income or net profit 50.00 70.00
50°/ of net income or net profit 25.00 35.00
Allowance depletion 25.00 27.50
Under column (1) P25.00 is the allowance depletion because the allowable percentage cannot
exceed 50% of the net pro t or net income. Under column (2), the allowable depletion is P27.50
because it does not exceed 50% of either the net income or net profit.
SECTION 115-A-3. De nition of terms . — For purposes of the depletion allowance for oil and gas
wells and mines, the following terms and phrases shall have the meaning indicated:
(a) Gross income. — Gross income means the "gross income from the property". The gross
income in the case of gas and oil wells is the amount for which the taxpayer sells the oil and gas in the
immediate vicinity of the well. If the oil and gas are not sold on the property but are manufactured or
converted into a re ned product prior to sale, the gross income from the property shall be assumed to
be equivalent to the representative market or eld price (as of the date of sale) of the oil and gas
before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross income from mining.
The gross income from mining consists of the proceeds from the sales of ores or minerals extracted
from the mining property. Where ores are sent abroad where the ordinary treatment processes are
applied or where they are re ned and where they are sold, the actual cost of ocean freight as well as
insurance, should be deducted from the actual selling price for gross income purposes. Also where
minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under
C.I.F. terms, the actual cost of ocean freight and insurance should be deducted.
(b) Mining . — The term "mining" includes not merely the extraction of the ores or minerals from
the ground but also the ordinary treatment process normally applied by mine owners or operators in
order to obtain the commercially marketable mineral 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 to the plants or mills in which the ordinary treatment processes are applied thereto as
is not in excess of 50 miles unless the Commissioner of Internal Revenue nds that the physical and
other requirements are such that the ore or mineral must be transported a greater 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 mine owners 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 is included in determining "gross income from the property". The length of time between
the prior mining and extraction of ores or minerals from the waste or residue of such mining is
immaterial. Whether the waste or residue results from the application of ordinary treatment processes
or from the process of removal from the ground, income derived therefrom is within the term "gross
income from the property". To be included in "gross income from the property", income derived from
the extraction of ores or minerals from the waste or residue of prior mining must come from such
extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. — The term "ordinary treatment processes" includes the
following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to prevent 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, and minerals which are
customarily sold in the form of a crude mineral product — sorting, concentrating; and sintering to bring
to shipping grade and form, and loading for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or uorspar ores, potash, and ores which are not
customarily sold in the form of the crude mineral product-crushing, grinding, and bene ciation by
concentration (gravity, otation, amalgamation, electrostatic, or magnetic) cyanidation, leaching,
crystallization, precipitation (but not including as an ordinary treatment process electrolytic deposition,
roasting, thermal or electric smelting, or re ning), or by substantially equivalent processes, or
extraction of the product or products from the ore, including the furnacing of quicksilver ores; and
(5) The pulverization of talc, the burning of magnesite, and the sintering and modulizing of
phosphate rock.
(e) Net income or net pro t . — "Net income" or "net pro t" means the taxpayer's taxable income
from the property. Net income or net pro t (computed without allowance for depletion) means the
"gross income from the property" less the allowable deductions attributable to the mineral property
upon which the depletion is claimed and the allowable deductions attributable to the treatment
processes insofar as they relate to the product of such property, including overhead and operating
expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc.
Deductions not directly attributable to particular properties or processes shall be fairly allocated.
ASaTHc
(f) Property. — For the purpose of computing the depletion allowance in the case of mines and
wells, the term "property" means each separate interest owned by the taxpayer in each mineral deposit
in each separate tract or parcel of land.
If a taxpayer owns two or more separate operating mineral interests which constitute 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 a separate property each such interest which he does not
elect to include within the aggregation referred to in (a). Separate operating mineral interests which
constitute part or all of an operating unit may be aggregated whether or not they are included in
contiguous tracts or parcels. A taxpayer may not elect to form more than one aggregation of operating
mineral interests within any one operating unit. Such election may be made by the taxpayer by the giving
of notice of such election to the Commissioner of Internal Revenue not later than the time prescribed
for ling of the return and any such election so made shall be binding upon the taxpayer for all
subsequent taxable years, except that the Commissioner of Internal Revenue may consent to a different
treatment of the interest with respect to which the election has been made.
SECTION 115-A-4. Depletion deductible by non-resident aliens or foreign 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 the Philippines. (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 amount not in excess of 6 per centum, in the case of an
individual, and 3 per centum, in the case of a corporation, of the taxpayer's taxable net income, if
actually paid or made to or for the use of the Government of the Philippines or any political subdivision
thereof for exclusively public purposes or to domestic corporations or associations organized and
operated exclusively for religious, charitable, scienti c, athletic, cultural or educational purposes, or to
societies for the prevention of cruelty to children or animals, provided that no part of the net income of
which inures to the benefit of any private stockholders or individual.
In connection with claims for deductions, there shall be stated on returns of income the name
and address of each organization to which a gift was made and the approximate date and the amount
of the gift in each case. Where the gift is other than money, the basis for calculation of the amount
thereof shall be the fair market value of the property at the time of the gift. Contributions or gifts paid
or made to corporations or associations speci ed in the law will only be allowed as deduction when the
taxpayer attaches to his return the receipt duly signed by the responsible o cer of the corporations or
associations to which the contributions or gifts has been paid or made. If desired, said receipt will be
returned to the taxpayer after they have served their purpose.
(Section 30(i) of the Code)
SECTION 117. Allowance of deductions and credits. — Unless a non-resident alien individual shall
file or cause to be filed with the Commissioner of Internal Revenue, a true and accurate return of income
from all sources, corporate, or otherwise, within the Philippines, regardless of amount, the tax shall be
collected on the basis of the gross income (not the net income) from sources within the Philippines. In
case of failure to le such return, the Commissioner of Internal Revenue will cause a return of income to
be made and include therein the income of such non-resident alien from all source concerning which he
has information, and he will assess the tax and collect it from one or more of the sources of income of
such non-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 employer who adopts or has
adopted a reasonable pension plan, actuarially sound, and who establishes, or has established, and
maintains a pension trust for the payment of reasonable pensions to his employees shall be allowed to
deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan
(including any reasonable amendment thereof), as follows:
(a) If the plan contemplates the payment to the trust, in advance of the time when pensions are
granted, of amounts to provide for future pensions payments, then (1) reasonable amounts paid to the
trust during the taxable year representing the pension liability applicable to such year, determined in
accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary
business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust
during the taxable year to cover in whole or in part the pension liability applicable to the years prior to
the taxable year, or so transferred or paid to place the trust on a sound nancial basis, shall be allowed
as a deduction for the taxable year and for each of the nine succeeding taxable years.
(b) If the plan does not contemplate the payment to the trust, in advance of the time when
pensions are granted, of amounts to provide for future pension payments, then (1) reasonable amounts
paid to the trust during the taxable year representing the present value of the expected future payments
in respect of pensions granted to employees retired during the taxable year shall be allowed as
deduction for such year as an ordinary and necessary business expense, and in addition (2) one tenth of
a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part
the present value of the expected future payments in respect of pensions granted to employees retired
prior to the taxable year, or so transferred or paid to place the trust on a sound nancial basis, shall be
allowed as a deduction for the 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 deductions allowed under this
section an individual, other than a non-resident alien, may elect a standard deduction. Such optional
standard deduction shall be in the amount of one thousand pesos or in an amount equal to ten per
centum of his gross income, whichever is the lesser. Unless the taxpayer signi es in his return his
intention to elect the optional standard deduction he shall be considered as having availed himself of
the deductions allowed in the preceding subsection. The Secretary of Finance shall prescribe the
manner of the election. Such election when made in the return shall be irrevocable 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 and occupied by a taxpayer is a personal expense
and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a
professional man who rents a property for residential purposes, but incidentally receives his clients,
patients, or callers in connection with his professional work (his place of business being elsewhere), no
part of the rent is deductible as a business expense. If however, he uses part of the house for his o ce,
such portion of the rent as is properly attributable to such o ce is deductible. Where the father is
legally entitled to the services of his minor children, any allowances which he gives them, whether said
to be in consideration of services or otherwise, are not allowable deductions in his return of income.
Alimony, and an allowance paid under a separation agreement are not deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross income may be made for any
amounts paid out for new buildings or for permanent improvements or betterments made to increase
the value of the taxpayer's property, or for any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is
or has been made. Amounts expended for securing a copyright and plates, which remain the property
of the person making the payments, are investments of capital. The cost of defending or perfecting title
to property constitutes a part of the cost of the property and is not a deductible expense. The amount
expended for architect's services is part of the cost of the building. Commissions paid in purchasing
securities are a part of the cost of such securities. Commissions paid in selling securities are an offset
against the selling price. Expenses of the administration of an estate, such as court 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 and paid under an agreement between bondholders or
shareholders of a corporation, to be used in a reorganization of the corporation, are investments of
capital and not deductible for any purpose in return of income. DaACIH
In the case of a corporation, expenses for organization, such as incorporation fees, attorney's
fees and accountants' charges, are ordinarily capital expenditures; but where such expenditures are
limited to purely incidental expenses, a taxpayer may charge such items against income in the year in
which they are incurred. A holding company which guarantees dividends at a speci ed rate on the stock
of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing
the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this
guaranty in computing its net income, but such payments may be added to the cost of its stock in the
subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums on
any life insurance policy covering the life of an o cer or employee or of any person nancially
interested in the business of the taxpayer when the taxpayer is directly or indirectly a bene ciary under
such policy are not deductible.
SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect
of losses from sales or exchanges of property, directly or indirectly —
(a) Between members of a family. As used in Section 31, the family of an individual shall include
only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal
descendants;
(b) Except in the case of distributions in liquidation, between an individual and a corporation
more than fty per centum in value of the outstanding stock of which is owned, directly or indirectly, by
or for such individual;
(c) Except in the case of distributions in liquidation, between two corporations more than 50 per
cent in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the
same individual, if either one of such corporations with respect to the taxable year of the corporation
preceding the date of the sale or exchange was, under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the duciary of a trust and the duciary of another trust, if the same 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, the gross income of
insurance companies consists of their total revenue from the operation of the business and of their
income from all other sources within the taxable year, except as otherwise provided by the statute.
Gross income includes net premiums (that is, gross premium less returned premiums on policies not
taken), investment income, profits from the sale of assets, and all gains, profits, and income reported to
the Insurance Commissioner, except income speci cally exempt from tax. A net decrease in reserve
funds required by law within the taxable year must be included in the gross income to the extent that
such funds are released to the general uses of the company and increase its free assets. Any net
decrease in reserves shall be added to the gross income, unless the company shall show that such
decrease resulted from the application of reserves to the purposes for which they were established.
SECTION 124. Gross income of life insurance companies. — A life insurance company shall not
include in gross income such portion of any actual premiums received from any individual policyholder
as is paid back or credited to or treated 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-up insurance or annuities, or to
shorten the endowment or premium-paying period. It does not include dividends provisionally
ascertained and apportioned upon deferred dividends policies. Dividends provisionally ascertained,
apportioned, or credited on deferred dividends policies can not be excluded or deducted from gross
income for the reason that the assured has no vested or enforceable right in them and can not at the
time of the ascertainment, apportionment, or credit, not until the maturity of the policy, avail himself of
such dividends; and in the event of the death of the assured prior to the expiration of the deferred
dividend period, the amount so ascertained, apportioned, or credited lapses. (c) "Treated as an
abatement of premium" means of the premium for the taxable year. Where the dividend paid back is in
excess of the premium received from the policyholder within the taxable year there may be excluded
from gross income only the amount of such premium received, and where no premium is received from
the policyholder within the taxable year the company is not entitled to exclude from its premiums
received from other policyholders an amount in respect to such dividend payment. (See changes in Sec.
24(b), Tax Code.)
SECTION 125. Gross income of mutual insurance companies. — The gross income of mutual
insurance companies (other than life) consists of their total revenue from the operation of the business
and of their income from all other sources within the taxable year, except as otherwise provided by the
statute. Premiums received by mutual marine insurance companies which are paid out for reinsurance
should be eliminated from gross income and the payments for reinsurance, from disbursement.
Deposit premiums on perpetual risks received and returned by mutual re insurance companies should
be treated in the same manner, as no reserve will be recognized covering liability for such deposits. The
earnings on such deposits, including such portion, if any, of the premium deposits as are not returned
to the policyholders upon cancellation of the policies, must be included in the gross income.
SECTION 126. Deductions allowed insurance companies. — Insurance companies are entitled to
the same deductions from gross income as other corporations, and also to the deduction of the net
addition required by law to be made within the taxable year to reserve funds and of the sums other than
dividends paid with the taxable year on policy and annuity contracts. "Paid" includes "accrued" or
"incurred" (construed according to the method of accounting upon the basis of which the net income is
computed) during the taxable year, but does not include any estimate for losses incurred but not
reported during the taxable year. As payments on policies there should be reported all death, disability
and other policy claims (other than dividends as above speci ed) paid within the year, including re,
accident and liability losses, matured endowments, annuities, payments on installment policies and
surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies. — Mutual insurance
companies (other than mutual life and mutual marine insurance companies), which require their
members to make premium deposits to provide for losses and expenses, are allowed to deduct from
gross income the aggregate amount of premium deposits returned to their policyholders or retained
for the payment of losses, expenses, and reinsurance reserves. In determining the amount of premium
deposits retained by a mutual re or mutual casualty insurance company for the payment of losses,
expenses, and reinsurance reserves, it will be presumed that losses and expenses have been paid out of
earnings and pro ts other than premiums to the extent of such earnings and pro ts. If, however, any
portion of such amount is applied during. the taxable year to the payment of losses, expenses, or
reinsurance reserves, or which a separate allowance is taken, then such portion is not deductible; and if
any portion of such amount for which an allowance is taken is subsequently applied to the payment of
expenses, losses, or reinsurance reserves, then such payment can not be separately deducted. The
amount of premium deposits retained for the payment of expenses and losses and the amount of such
expenses and losses, may not both be deducted. A company which invests part of the premium
deposits so retained by it in interest-bearing securities may, nevertheless, deduct such part, but not the
interest received on such securities. A mutual re insurance company which has a guaranty capital is
taxed like other mutual re insurance companies. A stock re insurance company operated on the
mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on
the same basis as a mutual re insurance company with respect to its business conducted on the
mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance companies. — Mutual marine
insurance companies should include in gross income the gross premiums collected and received by
them less amounts paid for reinsurance. They may deduct from gross income amounts repaid to
policyholders on account of premiums previously paid by them together with the interest actually paid
upon such amounts between the date of ascertainment and the date of payment thereof. The
remainder 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 insurance companies and other corporations.
SECTION 129. Net addition to reserve funds. — All policy premiums on which net addition to
reserve is computed, must be included in gross income. Insurance companies may deduct from gross
income the net addition required by law to be made within the taxable year to reserve funds. When the
reserve at the end of the year is less than at the beginning of the year there is a "released reserve", and
the amount so released must be included in gross income. In the case of assessment insurance
companies, whether domestic or foreign, the actual deposit of sums with the o cers of the
Government of the Philippines, pursuant to law, as addition to guaranty or 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 re, marine, accident, liability, and other insurance companies, the net addition to the "unearned
premium reserves", and only such other reserves as are speci cally required by the statute will be
allowed as deductions.
SECTION 130. Copy of report to Insurance Commissioner to be furnished the Commissioner of
Internal Revenue. — To facilitate the auditing of income tax returns, insurance companies shall submit
to the Commissioner of Internal Revenue together 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) A taxpayer cannot deduct
any loss claimed to have been sustained from the sale or other disposition of stock or securities, if,
within a period beginning thirty days before the date of such sale or disposition and ending thirty days
after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or
by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered
into a contract or option so to acquire, substantially identical stock or securities. However, this
prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of
stock or securities is made in the ordinary course of its business as such dealer.
(b) Where more than one loss is claimed to have been sustained within the taxable year from the
sale or other disposition of stock or securities, the provisions of this section shall be applied to the
losses in the order in which the stock or securities the disposition of which resulted in the respective
losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock or
securities disposed of at a loss on the same day cannot be determined, the stock or securities will be
considered to have been disposed of in the order in which they were originally acquired (beginning with
earliest acquisition).
(c) Where the amount of stock or securities acquired within the sixty-one day period 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 other disposition of which is not deductible shall be those with
which the stock or securities acquired are matched in accordance with the following rule:
The stock or securities acquired will be matched in accordance with the order of their acquisition
(beginning with the earliest acquisition) with an equal number of the 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 otherwise disposed of, then the particular shares of
stock or securities the acquisition of which resulted in the nondeductibility of the loss shall be those
with which the stock or securities 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 the order of acquisition (beginning with
the earliest acquisition) of the stock or securities acquired.
(e) The acquisition of any security which results in the non-deductibility of a loss under the
provisions of this section shall be disregarded in determining the deductibility of any other loss.
(f) The word "acquired" as used in this section means acquired by purchase or by an exchange
upon which the entire amount of gain or loss was recognized by law, and comprehends cases where
the taxpayer has entered into a contract or option within 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 on December 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 the provisions 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. On December 21, 1939, he purchased 50
shares of substantially identical stock for P2,750, and on December 26, 1939, he purchased 25
additional shares of such stock for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares
purchased on September 21, 1939. There is an indicated loss of P1,000 on the sale of the 100 shares.
Since within the sixty-one-day period A purchased 75 shares of substantially identical 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 on the sale of the remaining 25 shares (P1,250 less P1,000, or
P250) is deductible subject to the limitations provided in Sections 31(b) and 34. The basis of the 50
shares purchased December 21, 1939, the acquisition of which resulted in the non-deductibility of the
loss (P500) sustained on 50 of the 100 shares sold on January 2, 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 these shares 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 for P2,000. There is an indicated loss of P1,000 from the sale of the 100
shares on February 1, 1940, but since within the sixty-one-day period A purchased not less than 100
shares of substantially identical stock, the loss is not deductible. The particular shares of stock the
purchase of which resulted in the nondeductibility of the loss are the rst 100 shares purchased within
such period, that is, the 50 shares purchased on February 15, 1940, and the 50 shares purchased on
February 16, 1940. AScTaD

SECTION 132. De nition of "capital assets." — The law provides that the term "capital assets"
shall be held to mean property held by the taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property, used in the trade or business, of a character which is subject to the 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 by Section 30(a).
The exclusion from the term "capital assets" of property used in the trade or business of a
taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of
the Code is limited to property used by the taxpayer in the trade or business at the time of the sale or
exchange. It has no application to gains or losses arising from the sale of real property used in the
trade or business to the extent that such gain or loss is allocable to the land, as distinguished from
depreciable improvements upon the land. To such gain or loss allocable to the land, the limitations of
Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate, but, if so, it is
because he holds the land primarily for sale to customers in the ordinary course of his trade or
business, not because land is subject to a depreciation allowance). Gains or losses from the sale or
exchange of property used in the trade or business of the taxpayer of a character which is subject to
the allowance for depreciation provided in Section 30(f) of the Code, will not be subject to the
percentage provisions of Section 34(b) and losses from 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 capital asset per Am. R.A. 82.)
SECTION 133. Percentage taken into account. — In computing net income, only 50 per cent of the
gain or loss recognized upon the sale or exchange for a capital asset shall be taken into account. Thus,
in the case of a merchandising concern which has an "ordinary net income" (net income exclusive of net
gains from the sale or exchange of capital assets) of P10,000 and a net capital gain of P5,000, the net
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 or exchanges of capital assets
are allowed only to the extent of the gains from such sales or exchanges. If the dealings of the taxpayer
in capital assets during the year result in a net capital loss, such loss cannot be deducted from his
ordinary income, inasmuch as capital losses are allowable only to the extent of capital gains. In the
case, for example, of a taxpayer, engaged in buying and selling goods, having an ordinary net income of
P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable net income is computed as
follows:
Ordinary net income P20,000
Gains from sales of capital assets
(as stocks or securities) P5,000
50% of such gains P2,500
Losses from sales of capital assets P3,000
50% of such losses P1,500
Net taxable capital gains 1,000
————
Taxable net income P21,000
=======
If such taxpayer had an ordinary net income of P20,000, capital gains of P2,000 and capital
losses of P7,000, the taxable net income would be computed as follows:
Ordinary net income P20,000
Losses from sales of capital assets
(as stocks or securities) P7,000
50% of such losses P3,500
Gains from sales of capital assets 2,000
50% 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 net income inasmuch as
capital losses are allowed only to the extent of capital gains.)
SECTION 134-A. Capital loss carry-over-Illustration. — A, an individual has the 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

10,000
months
1947 — Net income from business 2,000
Interest earned 200
Capital gains — on capital assets held for 15
5,000
months
In 1946, his taxable income is computed as follows:
Income from business, dividends and interest P2,250
Capital gains and losses:
Capital gains P5,000
Less-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 of the United States,
a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or
certi cate or other evidence of indebtedness issued by any corporation (including one issued by a
government or political subdivision thereof), with interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the limitation contained in Section 34(c) and shall not
be included in determining the applicability of such limitation to other losses.
SECTION 135. Gains and losses from short sales. — For income tax purposes, a short sale is not
deemed to be consummated until the delivery of property to cover the short sale. If the short sale is
made through a broker and the broker borrows property to make delivery, the short sale is not deemed
to be consummated until the obligation of the seller created by the short sale is nally discharged by
delivery 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 be included in the inventory, its latest inventory value.
But in the case of property acquired before March 1, 1913, when its fair market value as of that date is
in excess of its cost, the gain to be included in gross income is the excess of the amount realized
therefor over such fair market value. (See illustration I, Section 137 of these regulations). Also in the
case of property acquired before March 1, 1913, when its fair market value as of that date is lower than
its cost the deductible loss is the excess of such fair market value over the amount realized therefor.
(See Illustration II, Id.). No gain or loss is recognized in the case of property sold or exchanged (a) at
more than cost 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. (See Illustration IV, Id., Id., Id.)
In any case proper adjustment must be made in computing gain or loss from the exchange or sale of
property for any depreciation or depletion sustained and allowable as deduction in computing net
income; the amount of depreciation previously charged off by the taxpayer shall be deemed to be true
depreciation 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 fact to 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 made should be considered. Prices received at forced sales or
for small lots of property may be 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 little
indication of the value of a large or controlling interest in the corporation. If the taxpayer 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 securities at the date of approximate date of acquisition may be
used in determining the cost basis for purposes of computing the gain or loss from the sale of the
securities. When the date or approximate date of acquisition is unknown, no general rule can be stated
for determining the cost value of such securities. Each case must be considered separately upon its
own facts.
SECTION 137. Illustrations of the computation of gain or loss from the sale or exchange of
property acquired prior to March 1, 1913. — To avoid complexity no adjustment has been made in these
examples for depreciation or depletion.
In the case of property acquired before March 1, 1913, when its fair market value as of that date
is in excess of its cost, the taxable gain is the excess of the amount 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 market value as of that date
is lower than its cost, the deductible loss is the excess of such fair market value over the amount
realized therefor.
ILLUSTRATION II
Fair Market
Mar. 1, 1913
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 as of that date.
ILLUSTRATION III
Fair Market
Mar. 1, 1913
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 as of that date.
ILLUSTRATION IV
Fair Market
Mar. 1, 1913
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 is the excess of the selling price
over the cost.
ILLUSTRATION V
Fair Market
Mar. 1, 1913
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 the cost and the
selling price is less than the cost, the deductible loss is the amount by which the cost exceeds the
selling price.
ILLUSTRATION VI
Fair Market
Mar. 1, 1913
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 gain or loss from the sale or
other disposition of property acquired by gift, the basis shall be the selling price and the fair market
value of the property at the time the gift was made, 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
gifts made on or after July 1, 1939, the value taken as a basis for gift tax purposes shall be considered
as the fair market value in computing gain or loss from the sale or other disposition of the property.
SECTION 139. Sale of property acquired by devise, bequests, or inheritance. — In computing the
gain or loss from the sale or other disposition of property acquired by devise, bequest, or inheritance,
the basis shall be the fair market price 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)
such property interests as the taxpayer has received as the result of a transfer, or creation of a trust, in
contemplation of or intended to take effect in possession or enjoyment at or after death, and (b) such
property interest as the taxpayer has received as the result of the exercise by a person of a general
power of appointment (1) by will, or (2) by deed executed in contemplation of or intended to take effect
in possession or enjoyment at or 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 other
disposition 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 its fair market value when acquired. DaIACS
SECTION 140. Exchange of property. — Gain or loss arising from the acquisition and subsequent
disposition of property is realized only when as the result of a transaction between the owner and
another person the property is converted into other 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 must be "essentially different from the property disposed of" implies that there must be a
change in substance and not merely a change in form. By way of illustration, if a taxpayer owning ten
shares of stock exchanges his stock certi cate for a voting trust certi cate, no income is realized. The
term "market value" means the fair value of the property in money as between one who wishes to
purchase and one who wishes to sell. It is not, however, what can be obtained for the property when the
owner is under peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value
which an owner could not reasonably expect to obtain for the property although he might possibly be
fortunate enough to do so. "Market value" is the price at which a seller willing to sell at a fair price and a
buyer willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. Evidence
as to the assets and liabilities of a corporation and as to its earnings may furnish de nite indications of
the market value of its stock.
SECTION 141. Determination of gain or loss from the exchange of property. — The amount of
income derived or loss sustained from an exchange of property is the difference between the market
value at the time of the exchange of the property received in exchange and the original cost, or other
basis, of the property exchange. If the property exchanged was acquired prior to March 1, 1913, see
Sections 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 is dissolved, he realizes a gain or loss
measured by the difference between the price received for his interest and the cost to him of his
interest in the partnership including in such cost the amount of his share in any undistributed
partnership net income earned since he became a partner on which the income tax has been paid.
However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as
hereinbefore provided and the amount of such interest as of date, plus the amount of the shares in any
undistributed partnership net income earned since March 1, 1913, on which 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 and 137 of these regulations. If the partnership distributes its
assets in kind and not in cash, the partner realizes gain or suffers loss according to the market value of
the property received in liquidation. Whenever a new partner is admitted, to a partnership, or any
existing partnership is reorganized, the facts as to such change or reorganization should be fully set
forth in the next return of income, in order that the Commissioner of Internal Revenue may determine
whether any gain or loss has been realized by any partner.
SECTION 143. Basis of stock or securities acquired in "wash sales". — In the sale or other
disposition of stocks or securities the acquisition of which (or the contract or option to acquire which)
resulted in the non deductibility of the loss from the sale or other disposition of substantially identical
stock or securities the basis shall be the basis of the substantially identical stock so sold or disposed
of, increased or decreased, as the case may be, by the difference, if any, between the price at which the
stock or securities was acquired and the price at which such substantially identical stock or securities
were sold or otherwise disposed of. The application of this rule may be illustrated by the following
examples:
EXAMPLE (1): A purchased a share of common stock of the X Corporation for 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 loss from the sale is recognized under Section 33 of the
Code. The basis of the new share is P110; that is, the basis of the old share (P100) increased by P10,
excess of the price at which the new share was acquired (P90) over the price at which the old share
was sold (P80).
EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936,
which he sold January 15, 1940, for P80. On January 1, 1940, he purchased a share of common stock
of the same corporation for P70. No loss from the sale 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 at which the old share was sold (P80) over the price at which the new share was acquired
(P70). (See Section 131 of these regulations).
SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253 publishing Republic Act No.
1921 amending Section 35 of the Code, particularly subsection (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 by Republic Act No. 1921, when property is
exchanged for another property, the property received in exchange shall, for the purpose of determining
gain or loss, be treated 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 the amendment states the
general rule that upon the sale or exchange of property, the entire amount of gain or loss as the case
may be, is recognized, while paragraphs 2 and 3 give the exceptions where gain or loss is not
recognized, or gain is recognized only in part.
2. Exceptions to the rule recognizing gain or loss in exchanges of property solely in kind. — Under
paragraph 2 of subsection (c) of Section 35 of the Tax Code after its amendment by Republic Act No.
1921, no gain or loss shall be recognized in the following cases of exchanges made in pursuance of a
plan of merger or consolidation:
(a) By a corporation: If a corporation, a party to a merger or consolidation, in pursuance of such
plan of merger or consolidation, exchanges property solely for stock in another
corporation, a party to the merger or consolidation.
(b) By a shareholder: A shareholder who exchanges his stock in a corporation which is a party to
the merger or consolidation solely for stock 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 party to the merger or
consolidation, who exchanges his securities in such corporation solely for stock or
securities in another corporation, a party to the merger or consolidation.
3. Recognition of gain in part but not loss, where exchanges are not solely in kind.
(a) By a shareholder or security holder. — If in connection with an exchange made by a
shareholder or security holder described in the above exceptions, he receives not only
stock or securities, permitted to be received without recognition of loss or gain, but also
money and/or other 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 market value of such other
property. The loss, if any, to the shareholder or security holder from such an exchange is
not to be recognized to any extent. However, if the distribution of such other property
and/or money to a shareholder in the course of a merger or consolidation has the effect of
the distribution of a taxable dividend, there shall be taxed to the distributee as a taxable
dividend such an amount of the gain recognized on the exchange as is not in excess of the
distributee's ratable share of the undistributed earnings and profits of the corporation, and
as a capital gain, the remainder, if any, of the gain so recognized.
Example: A, in connection with a merger or consolidation in 1957 exchanges a share of stock in
the X Corporation (a party to the merger or consolidation) purchased in 1939 at a cost of
P100 for a share of stock 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 from the
transaction is P10 and is recognized and taxed as a gain from the exchange of property.
However, if the share of stock received had a fair market value of P70, the loss from the
transaction of P10 would not be recognized.
(b) By a corporation. — If, in pursuance of a plan of merger or consolidation above described, the
transferor corporation receives not only stock permitted to be received without the
recognition of gain or loss, but also money and/or other property, then, if such money
and/or other property received by the corporation is distributed by it pursuant to the plan
of merger or consolidation, no gain to the said corporation will be recognized. If the other
property and/or money received by the corporation is not distributed by it pursuant to the
plan of merger and consolidation, the gain, if any, to the corporation from the exchange will
be recognized in an amount not in excess of the sum of money and the fair market value of
the other property so received which is not distributed. In either case no loss from the
exchange will be recognized.
4. Assumption of liability. — Where upon an exchange described in the foregoing exceptions, a
taxpayer receives stock or securities which would be permitted to be received without the recognition
of gain if it were the sole consideration, and 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 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 other property 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 loss upon 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 its shareholder or security holder upon the
exchange speci ed in the above exceptions shall be the same as the basis of the property, stock or
securities exchanged decreased by the money received and the fair market value of the other property
received, and increased by the amount treated as dividend of the shareholder and the amount of any
gain that was recognized on the exchange. The other property or "boot" received in exchange shall have
as basis its fair market value.
Examples: 1. A purchased a share of stock in the X Corporation in 1939 for P100. Pursuant to a
plan of merger or consolidation, A in 1957 exchanged his share for one share in the Y Corporation,
worth P90 and P30 in cash. A realized a gain of P20 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 money received 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 of his stock in the X Corporation a share
of stock in the Y Corporation worth P60, a Treasury Bond worth P50, and in addition P20 in cash. A
realized a gain of P30 upon the exchange. The basis of the property received in exchange is the basis of
the old stock decreased in the amount of money received (P20) and increased in the amount of gain
that was recognized (P30), which results in a basis for the property received of P110. This basis of
P110 is apportioned between the Treasury Bond and the share of stock, the basis of the Treasury Bond
being its fair market value at the date of the exchange, P50, and of the share of stock, the remainder,
P60.
(b) By the transferee. — The basis of the property transferred in the hands of the transferee shall
be the same as it would be in the hands of the transferor, increased by the amount of the gain
recognized to the transferor on the transfer.
(c) If corporation shareholder or security holder received several kinds of stock or securities. —
When securities of a single class were exchanged for new securities of different classes where no gain
or loss was recognized, the proper method of apportionment is to allocate to each class of new
securities that proportion of the original basis which 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 or loss on the subsequent sale of any of the new securities. For example, if 100 shares of common
stock par value P100, are exchanged for 50 shares of preferred and 50 shares of common each of
P100 par value, and the cost of the old stock was P250 per share, or P25,000, but the market value of
the preferred stock on the date of the exchange was P110 per share, or P5,500 for the 50 shares, and
the market value of the common was P440 per share or P22,000 for the 50 shares of common, one-
fth of the original cost, or P5,000, would be regarded as the cost of the preferred and four- fths, or
P20,000 as the cost of the common.
As previously shown cash "boot" operates in the rst instance to reduce basis. Then to this result
must be added the gain recognized. The remainder is to be allocated between the several types of
stock and securities permitted to be received without the recognition of gain or loss. To illustrate: The
taxpayer in a nontaxable exchange trades A stock which cost P100 for one share of common stock and
one share of preferred stock of B corporation, together worth P100 (P100 each), and P50 cash. 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" of whatever class or
duration.
(b) The term "merger" or "consolidation" shall be understood to mean the ordinary merger or
consolidation, or the acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock. In order that a transaction may be regarded as a merger or consolidation
within the purview of the amendment, it must be undertaken for a bona de business purpose and not
solely for the purpose of escaping the burden on taxation. In determining whether a bona fide business
purpose exists, each and every step of the transaction shall be considered and the whole transaction or
series of transactions shall be treated as a single unit. The term "property" shall be taken to include the
cash assets of the transferor for purpose of determining whether the property transferred constitutes
a substantial portion of the property of the transferor. "Substantially all" as used under this amendment
means the acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation, which has the element of permanence and not merely momentary holding.
SECTION 144. Need of inventories. — In order to re ect the net income correctly, inventories at
the beginning and end of each year are necessary in every case in which the production, purchase or
sale of merchandise is an income producing factor. The inventory should include raw materials and
supplies on hand that have been acquired for sale, consumption, or use in productive processes
together with all nished or partly nished goods. Only merchandise title to which is vested in the
taxpayer should be included in his inventory. Accordingly the seller should include in his inventory goods
under contract for sale but not yet segregated and applied to the contract and goods out upon
consignment, but should exclude from inventory goods sold, title to which has passed to the purchaser.
A purchaser should include in inventory merchandise purchased, title to which has passed to him
although such merchandise is in transit or for other reasons has not been reduced to physical
possession, but should not include goods ordered for future delivery transfer of title to which has not
yet been effected.
SECTION 145. Valuation of inventories. — The law provides two tests to which each inventory
must conform. — (1) It must conform as nearly as possible to the best accounting practice in the trade
or business, and (2) it must clearly re ect the income. It follows, therefore, that inventory rules can not
be uniform but must give effect to trade customs which come within the scope of the best accounting
practice in the particular trade or business. In order to clearly re ect income, the inventory practice of a
taxpayer should be consistent from year to year, and greater weight is to be given to consistency than
to any particular method of inventory or basis of valuation, as long as the method or basis used is
substantially in accord with these regulations. An inventory that can be used under the best accounting
practice in a balance sheet showing the nancial 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 which meet the
requirements of the Income Tax Law are (a) cost price or (b) cost or market price, whichever is the
lower. Any goods in an inventory which are unsalable at normal prices or unusable in the normal way
because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar
causes, including second hand goods taken in exchange, should be valued at "bona de" selling prices
whether basis (a) or (b) is used, or if such goods consist of raw materials or partly nished goods 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 case shall such value be less than the scrap value.
"Bona de" selling price means actual offerings of goods during a period ending not later than thirty
days after inventory date. The burden of proof will rest upon the taxpayer to show that such exceptional
goods as are valued upon such selling bases come within the classi cations indicated above, and he
shall maintain such records of the disposition of the goods as will enable a veri cation of the inventory
to be made. aHTDAc
In respect to normal goods, whichever basis (a) or (b) is adopted must be applied with
reasonable consistency to the entire inventory. Taxpayers were given the option to adopt either basis
(a) or (b) for their 1921 inventories, and the basis adopted for that year is controlling and a change can
now be made after permission is secured from the Commissioner of Internal Revenue. Goods taken in
the inventory which have been so intermingled that they can not be identi ed with speci c invoices will
be deemed to be either (a) the goods most recently purchased or produced and the cost thereof will be
the actual cost of the goods purchased or produced during the period in which the quantity of goods in
the inventory has been acquired, or (b) where the taxpayer maintains book inventories in accordance
with a sound accounting system in which the respective inventory accounts are charged with the actual
cost of the 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 acquired during the taxable year
(including the inventory at the beginning of the year) the net value as shown by such inventory accounts
will be deemed to be the cost of the goods on hand. The balances shown by such inventories should be
verified by physical inventories at reasonable intervals and adjusted to conform therewith.
Inventories should be recorded in a legible manner, properly computed and summarized, and
should be preserved as a part of the accounting record of the taxpayer. The inventories of taxpayers on
whatever basis taken will be subject to investigation by the Commissioner of Internal Revenue and the
taxpayer must satisfy the Commissioner of Internal Revenue of the correctness of the price adopted.
The following methods, among others, that are sometimes used in taking or valuing inventories,
are not in accord with these regulations and therefore their use for income tax purposes is prohibited,
viz.:
(1) Deducting from the inventory a reserve for price changes, or an estimated depreciation 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 of materials or goods
in stock.
(5) Including stock in transit, either shipped to or from the taxpayer, the title to which is not
vested in the taxpayer.
SECTION 146. Inventories at cost price. — Cost means: (1) In the case of merchandise on hand at
the beginning of the taxable year, the inventory price of such goods.
(2) In the case of merchandise purchased since the beginning of the taxable year, 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 the taxpayer, provided a consistent course is followed.
To this net invoice price should be added transportation or other necessary charges incurred in
acquiring possession of the goods.
(3) In the case of merchandise produced by the taxpayer since the beginning of the taxable year,
(a) the cost of raw materials and supplies entering into or consumed 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
including any 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 of production are inapplicable,
costs may be approximated upon such basis as may be reasonable and in conformity with established
trade practice in the particular industry. Among such cases are: (a) Farmers and raisers of livestock; (b)
miners and manufacturers who by a single process or uniform series of processes derive a product of
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 ascertaining approximate cost.
SECTION 147. Inventories at market price. — Under ordinary circumstances, and for normal
goods in an inventory "market price" means the current bid price prevailing at the date of the inventory
for the particular merchandise in the volume 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 nished goods on hand;
exclusive, however, of goods on hand or in process of manufacture for delivery upon rm sales
contracts (i.e., those not legally subject to cancellation by either party) at xed prices entered into
before the date of the inventory, which goods must be inventoried at cost. Where no open market exists
or where quotations are nominal due to stagnant market condition, the taxpayer must use such
evidence of a fair market price at the date or dates nearest the inventory as may be available, such as
speci c purchase or sales by the taxpayer or others in reasonable volume and made in good faith, or
compensation paid for cancellation of contracts for purchase commitments. Where the taxpayer in the
regular course of business has offered for sale such merchandise at prices lower than the current price
as above de ned, the inventory may be value at such prices and the correctness of prices will be
determined by reference to the actual sales of the taxpayer for a reasonable period before and after the
date of the inventory. Prices which vary materially from the actual prices so ascertained will not be
accepted as reflecting the market price.
SECTION 148. Inventories by dealers in securities. — A dealer in securities who 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 to the return, that all the securities
must be inventoried by the same method, and that such method must be adhered to in subsequent
years, unless another method be authorized by the Commissioner of Internal Revenue. A dealer in
securities in whose books of accounts separate computations of the gain or loss from the sale of the
various lots of securities sold are made on the basis of the cost of each lot shall be regarded, for the
purposes of this section, as regularly inventorying his securities at cost. 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 of business, 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 view to
the gains and profits that may be derived therefrom. If such business is simply a branch 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 or business, and o cers of corporations and members of partnerships who in their individual
capacities buy and sell securities, are not dealers in securities within the meaning 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 disbursements to that of an inventory basis, which
necessitates the use of opening and closing inventories for the year in which the change is made. There
should be included in the opening inventory all farm products (including livestock) purchased or raised
which were 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 di culty of ascertaining actual cost of livestock and other farm products,
farmers who render their returns upon an inventory basis may at their option value their inventories for
the current taxable year according to the "farm-price method" which provides for the valuation of
inventories at market price less cost of marketing. If the use of the "farm-price method" of valuing
inventories for any taxable year involves a change in method of pricing inventories from that employed
in prior years, the opening inventory for the taxable year in which the change is made should be brought
in at the same value as the closing inventory for the preceding taxable year. If such valuation of the
opening inventory for the taxable year in which the change is made results in an abnormally large
income for that year, there may be submitted with the return for such taxable year an adjustment
statement for the preceding year based on the "farm-price method" of valuing inventories; upon the
amount of which adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in
effect for such preceding year.
(3) Where returns have been made in which the taxable net income has been computed upon
incomplete inventories, the abnormality should be corrected by submitting with the return for the
current taxable year a statement for the preceding year in which such adjustments shall be made as are
necessary to bring the closing inventory for the preceding year into agreement with opening complete
inventory for the current taxable year.
SECTION 150. Inventories of miners and manufacturers. — A taxpayer engaged in mining or
manufacturing who by a single process or uniform series of processes 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 practice allocates an amount of cost to each kind, size, or grade of product which in
the aggregate will absorb the total cost of production, may use such allocated cost a the basis for
pricing inventories, provided such allocation bears a reasonable relation to the respective selling values
of the different kinds of products.
SECTION 151. Inventories of retail merchants. — Retail merchants who employ what is known as
the "retail method" of pricing inventories may make their returns upon that basis, provided that the use
of such method, is designated upon the returns, that accurate accounts are kept and that such method
is consistently adhered to unless a change is authorized by the Commissioner of Internal Revenue.
Under this method the goods in the inventory are ordinarily priced at the selling prices and the total
retail value of the goods in each department or of each class of goods is reduced to approximate cost
by deducting the percentage which represents the difference between the retail selling value and the
purchase price. This percentage is determined by departments of a store or by classes of goods, and
should represent as accurately as may be the amounts added to the cost prices of the goods to cover
selling and other expenses of doing business and for the margin of pro t. In computing the percentage
above mentioned, proper adjustment should be made for all mark-ups and mark-downs.
A taxpayer maintaining more than one department in his store or dealing in classes of goods
carrying different percentages of gross pro t should not use a percentage of pro t based upon an
average of his entire business but should compute and use in valuing his inventory the proper
percentages for the respective departments or classes of goods.
SECTION 152. Income from sources within the Philippines. — The law divides 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 from sources without the
Philippines.
Non-resident alien individuals and foreign corporations are taxable only upon income from
sources within the Philippines. Citizens and residents of the Philippines and domestic corporations are
taxable upon income derived from sources both within and without the Philippines.
The taxable income from sources within the Philippines includes that derived in full from sources
within the Philippines and that portion of the income which is derived partly from sources within and
partly from sources without the Philippines which is allocated or apportioned to sources within the
Philippines.
SECTION 153. Interest. — Interest on bonds or notes or other interest bearing obligations of
residents, corporate or otherwise, constitutes income from sources within the Philippines.
SECTION 154. Dividends. — Gross income from sources within the Philippines 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 gross income for the three-year
period ending with the close of its taxable year preceding the declaration of such dividends, or for such
part of such period as it has been in existence, was derived from sources within the Philippines; but
only in an amount which bears the same ratio to such dividends as the gross income of the corporation
for such period derived from sources within the Philippines bears to its gross income from all sources.
Dividends will be treated as an income from sources within the Philippines unless the taxpayer
submits su cient data to establish to the satisfaction of the Commissioner of Internal Revenue that
they should be excluded from gross income under Section 37(a)(2)(B).
SECTION 155. Compensation for labor or personal services. — Gross income from sources
within the Philippines includes compensation for labor or personal services performed within the
Philippines regardless of the residence of the payor, of the place in which the contract for service was
made, or of the place of payment. If a speci c amount is paid for labor or personal services performed
in the Philippines, such amount shall be included in the gross income. If no accurate allocation or
segregation of compensation for labor or personal services performed in the Philippines can be made,
or when such labor or service is performed partly within and partly without the Philippines, the amount
to be included in the gross income shall be determined by an apportionment of the time basis, i.e., there
shall be included in 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 within the Philippines
bears to the total number of days performance of labor or services for which the payment is made.
Wages received for services rendered inside the territorial limits of the Philippines and wages of an
alien seaman earned on a coastwise vessel are to be regarded as from sources within the Philippines.
SECTION 156. Rentals and royalties. — Gross income from sources within the Philippines
includes rentals or royalties from property located within the Philippines or from any interest in such
property, including rentals or royalties for the use of or the privilege of using in the Philippines, patents,
copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other
like property. The income arising from the rental of property whether tangible or intangible located
within 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 within the Philippines
includes gain, computed under the provisions of Section 35, derived from the sale or other disposition
of real property located in the Philippines. For the treatment of capital gains and losses, see Sections
132 to 135 of these regulations.
SECTION 158. Income from sources without the Philippines. — Gross income from sources
without the Philippines includes:
(1) Interest other than that speci ed in Section 37(a)(1), as being derived from sources within
the Philippines;
(2) Dividends other than those derived from sources within the Philippines as provided in Section
37(a)(2);
(3) Compensation for labor or personal services performed without the Philippines;
(4) Rentals or royalties derived from property without the Philippines or from any interest in such
property, including rentals or royalties for the use of or for the privilege of using without the Philippines,
patents, copyrights, secret processes and formulas, goodwill, trade-marks, trade brands, franchises,
and other like property; and
(5) Gain derived from the sale of real property located without the Philippines.
SECTION 159. Sale of personal property. — Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The world "sold"
includes "exchanged". The "country in which sold" ordinarily means the place where the property is
marketed. This section does not 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 in
part) by the taxpayer without and sold within the Philippines. (See Section 162 of these regulations.)
SECTION 160. Apportionment of deductions. — From the items speci ed in Section 37(a) as
being derived speci cally from sources within the Philippines there shall be deducted the expenses,
losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other
expenses, losses or deductions which can not de nitely be allocated to some item or class of gross
income. The remainder shall be included in full as net income from sources within the Philippines. The
ratable part is based upon the ratio of gross income from sources within the Philippines to the total
gross income.
EXAMPLE: A non-resident alien individual whose taxable year is the calendar year, derived gross
income from all sources for 1939 of P180,000, including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the
Philippines 11,000
————
Total P36,000
that is, one- fth 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 these expenses the amount
of P8,000 is properly allocated to income from sources within the Philippines and the amount of
P40,000 is properly allocated to income from sources without the Philippines.
The remainder of the expense, P30,000, cannot be de nitely allocated to any class of income. A
ratable part thereof, based upon the relation of gross income from sources within the Philippines to the
total gross income, shall be deducted in computing net income from sources within the Philippines.
Thus, there are deducted from the P36,000 of gross income from sources within the Philippines
expenses amounting to P14,000 (representing P8,000 properly apportioned to the income from
sources within the Philippines and P6,000, a ratable part (one- fth) of the expenses which 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. — Items of gross income other
than those speci ed in Section 37(a) and (c) shall be allocated or 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 or gas well, other
natural deposit, or timber, located within the Philippines, and from the sale by the producer of the
products thereof within or without the Philippines, shall ordinarily be included in gross income from
sources within the Philippines. If, however, it is shown to the satisfaction of the Commissioner of
Internal Revenue that due to the peculiar conditions of productions and sale in a speci c case or for
other reasons all of such gross income should not be allocated to sources within the Philippines and to
sources without the Philippines shall be made as provided in Section 162 of these regulations.
Where items of gross income are separately allocated to sources within the Philippines, there
shall be deducted therefrom, in computing net income, the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other
deductions which cannot definitely be allocated to some item or class of gross income.
SECTION 162. Income from the sale of personal property derived from sources partly within and
partly without the Philippines. — Items of gross income not allocated by Sections 152 to 159 or 161 of
these regulations to sources from within or without the Philippines shall (unless unmistakably from a
source within or a source without the Philippines) be treated as derived from sources partly within and
partly without the Philippines.EcICSA
The portion of such income derived from sources partly within the Philippines and partly within a
foreign country which is attributable to sources within the Philippines shall be determined according to
the following rules and cases:
PERSONAL PROPERTY PRODUCED AND SOLD: — 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
foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold
within the Philippines shall be treated as derived partly from sources within the Philippines and partly
from sources within a foreign country under one of the cases below. As used herein the word
"produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.
CASE 1. Where the manufacturer or producer regularly sells a part of his output to wholly
independent distributors or other selling concerns in such a way as to establish fairly an independent
factory or production price — or shows to the satisfaction of the Commissioner of Internal Revenue
that such an independent factory or production price has been otherwise established — unaffected by
considerations of tax liability, and the selling or distributing branch or department of the business is
located in a different country from that in which the factory is located or the production carried on, the
net income attributable to sources within the Philippines shall be computed by an accounting which
treats the products as sold by the factory or productive department of the business to the distributing
or selling department at the independent factory price as established. In all such cases the basis of the
accounting shall be fully explained in a statement attached to the return.
CASE 2. Where an independent factory or production price has not been established as provided
under Case 1, the net income shall rst be computed by deducting 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 foreign country or produced (in whole or in part) by the taxpayer within a foreign country
and sold within the Philippines, the expenses, losses, or other deductions properly apportioned or
allocated thereto and a ratable part of any expenses, losses, or other deductions which can not
de nitely be allocated to some item or class of gross income. Of the amount of net income so
determined, one-half shall be apportioned in accordance with the value of the taxpayer's property within
the Philippines and within the foreign country, the portion attributable to sources within the Philippines
being determined by multiplying such one half by a fraction the numerator of which consists of the
value of the taxpayer's property within the Philippines, and the denominator of which consists of the
value of the taxpayer's property both within the Philippines and within the foreign country. The
remaining one-half of such net income shall be apportioned in accordance with the gross sales of the
taxpayer within the Philippines and within the foreign country, the portion attributable to sources within
the Philippines being determined by multiplying such one-half by a fraction the numerator of which
consists of the taxpayer's gross sales for the taxable year or period 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 the foreign country. The "gross sales of the taxpayer within the Philippines"
means the gross sales made during the taxable year which were principally secured, negotiated, or
effected by employees, agents, o ces, or branches of the taxpayer's business resident or located in
the Philippines. The term "gross sales" as used in this paragraph refers only to the sales of personal
property produced (in whole or in part) by the taxpayer 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 the
Philippines, and the term "property" includes only the property held or used to produce income which is
derived from such sales. Such property should be taken at its actual value, which in the case of property
valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation
shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed
to be its book value in the absence of a rmative evidence showing such value to be greater or less
than the actual value. The average value during the taxable year or period shall be employed. The
average value of property as above prescribed at the beginning and end of the taxable year or period
ordinarily may be used, unless by reason of material changes during the taxable year or period such
average does not fairly represent the average for such year or period, in which event the average shall
be determined upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory
reason for a different treatment is shown) be assigned or allocated to the Philippines when the debtor
resides in the Philippines.
CASE 3. Applications for permission to base the return upon the taxpayer's books of account will
be considered by the Commissioner of Internal Revenue in the case of any taxpayer who, in good faith
and unaffected by considerations of tax liability, regularly employs in his books of account a detailed
allocation of receipts and expenditures which re ects more clearly than the processes or formulas
herein prescribed, the income derived from sources within the Philippines.
SECTION 163. Foreign steamship companies. — The returns of foreign steamship companies
whose vessels touch ports of the Philippines should include as gross income, the total receipts of all
out-going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the 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 basis upon
which allowable deductions may be computed, the principle being that allowable deductions shall be
computed upon a basis which recognizes that the income 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, in the ratio that the gross income arising in and from this country bears to the entire
gross income arising from business done both within and without this country. In other words, the net
income of a foreign steamship company doing business in or from this country is ascertained for the
purpose of the income tax, by deducting from the 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 the
shipping business such as dividends from investments, interests on deposits, etc. For example —
Given
(a) Gross receipts from outgoing freights and passengers
from P.I. ports P20,000
(b) Gross receipts from outgoing freights and passengers
from 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 received
by 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 corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside the
Philippines derives income partly from sources within and partly from sources without the Philippines.
(1) GROSS INCOME. — The gross income from sources within the Philippines derived from such
services shall be determined by adding (a) its gross revenues derived from messages originating in the
Philippines and (b) amounts collected abroad on collect messages originating in the Philippines and
deducting from such sum amounts paid or accrued for transmission of messages beyond the
company's own circuit. Amounts received by the company in the Philippines with respect to collect
messages originating without the Philippines shall be excluded from gross income.
(2) NET INCOME. — In computing net income from sources within the Philippines there shall be
allowed as deductions from gross income determined in accordance with paragraph (1): (a) all
expenses incurred in the Philippines (not including any general overhead expenses), incident to the
carrying on of the business in the Philippines; (b) all direct expenses incurred abroad in the
transmission of messages originating in the Philippines (not including any general overhead expenses
or maintenance, repairs, and depreciation of cable and not including any amount already deducted in
computing gross income); (c) depreciation of property (other than cables) located in the Philippines
and used in the trade or business therein; and (d) a proportionate part of the general overhead
expenses [not including any items incurred abroad 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
based on the ratio which the number of words originating in the Philippines bears to the total words
transmitted by the enterprise.
SECTION 165. Computation of income. — If a taxpayer has gross income from sources within or
without the Philippines as de ned by Section 37 (a) or (c) together with gross income derived partly
from sources within and partly from sources without the Philippines, the amounts thereof, together
with the expenses and investment applicable thereto, shall be segregated, and the net income from
sources within the Philippines shall be separately computed therefrom. TcHCIS

SECTION 166. General rule. — The method of accounting regularly employed by the taxpayer in
keeping his books, if such method clearly re ects his income is to be followed with respect to the time
as of which items of gross income and deductions are to be accounted for. If the taxpayer does not
regularly employ a method of accounting which clearly re ects his income, the computation shall be
made in such manner as in the opinion of the Commissioner of Internal Revenue clearly re ects it. (See
Section 137 of these regulations for computation of net income, and Section 38 for bases of
computation. For the use of inventories, see Sections 144 to 151 of these regulations.)
SECTION 167. Methods of accounting . — It is recognized that no uniform method of accounting
can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such
forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is
required by law to make a return of his true income. He must, therefore, maintain such accounting
records as will enable him to do so. Any approved standard method of accounting which re ects
taxpayer's income may be adopted. Among the essentials are the following:
(1) In all cases in which the production, purchase, or sale of merchandise of any kind is an income
producing factor, inventories of the merchandise on hand (including nished goods, work in process,
raw materials, and supplies) should be taken at the beginning and end of the year and used in
computing the net income of the year in accordance with Sections 144 to 151 of these regulations;
(2) Expenditures made during the year should be properly classi ed as between 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 be charged 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 through deductions for
wear and tear, depletion, or obsolescence, any expenditure (other than ordinary repairs) made to
restore the property or prolong its useful life should be added to the property account or charged
against the appropriate reserve and not to current 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 the basis 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 year the classes of items differently treated under the two systems, specifying in
particular all amounts duplicated or entirely omitted as the result of such change.
A taxpayer who changes the method of accounting employed in keeping his book shall, before
computing his income upon such new method for purposes of taxation, secure the consent of the
Commissioner of Internal Revenue. For the purposes of this action, a change in the method of
accounting employed in keeping books means any change in the accounting treatment of items of
income or deductions, such as a change from cash receipts and disbursements method to the accrual
method, or vice versa; a change involving the basis of valuation employed in the computation of
inventories (see Sections 144 to 151 of these regulations); a change from the cash or accrual method
to the long-term contract method, or vice versa; a change in the long-term contract method from the
percentage of completion basis to the completed contract basis or vice versa (see Section 44 of these
regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis
of computing net income such as the crop basis. Application for permission to change the method of
accounting employed and the basis upon which the return is made shall be led within 90 days after the
beginning of the taxable year to be covered by the return. The application shall be accompanied by a
statement specifying all amounts which would be duplicated or entirely omitted as a result of the
proposed change. Permission to change the method of accounting will not be granted unless the
taxpayer and the Commissioner of Internal Revenue agree to the terms and conditions under which the
change will be effected.
SECTION 169. Accounting period. — Income tax returns, whether for individuals or for
corporations, associations, or partnerships, are required to be made and their income computed for
each calendar year ending on December 31st of every year. However, corporations, associations, or
partnerships may with the approval of the Commissioner of Internal Revenue rst secured, le their
returns and compute their income on the basis of a scal year which means an accounting period of
twelve months ending on the last day of any month other than December. But in no instance shall
individual taxpayers be authorized to establish a scal year as basis for ling their returns and
computing their income. (For authority to file on fiscal year basis see Section 172 of these regulations.)
SECTION 170. When included in gross income. — Except as otherwise provided 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 are received by the taxpayer, unless they are included as of a different
period in accordance with the approved method of accounting followed by him. If a taxpayer has died
there shall also be included in computing net income for the taxable period in which he died amounts
accrued up to the date of his death if not otherwise properly includible in respect of such period or a
prior period, regardless of the fact that the decedent may have kept his books and made his returns on
the basis of cash receipts and disbursements.
(For income not reduced to possession but considered as constructively received and for
examples of constructive receipt, see Sections 52 and 53 of these regulations. For the treatment of
income from long-term contracts, see Section 44 of these 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 of accounting upon the basis of which the
net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year
in which "paid or accrued" or "paid or incurred", unless in order clearly to re ect the income such
deductions or credits should be taken as of a different period. If a taxpayer desires to claim a
deduction or a credit as of a period other than the period in which it was "paid or accrued" or "paid or
incurred", he shall attach to his return a statement setting forth his request for consideration of the
case by the Commissioner of Internal Revenue together with a complete statement of the facts upon
which he relies. However, in his income tax return he shall take the deduction or credit only for the
taxable period in which 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 decide whether the case is within the
exception provided by the law, and the taxpayer will be advised 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 not applicable with respect to
the taxable period during which the taxpayer dies. In such case there shall also be allowed as
deductions and credits for such taxable period amounts accrued up to the date of his death if not
otherwise allowable with respect to such period or a prior period, regardless of the fact that the
decedent was required to keep 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, including a duly registered
general co-partnership, desires to change its accounting period from scal year to calendar year or
from calendar year to scal year, or from one scal year to another, it shall at any time not less than
thirty days prior to the date xed in Section 46(b) of the Code for the ling of its return on the basis of
its original accounting period submit a written application to the Commissioner of Internal Revenue
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 and closed each year for the past three years, the
date on which the taxable year began and ended as shown on the returns led for the past three years,
and the reasons why the change in accounting period is desired. (See also Section 46(d) of the Code.)
SECTION 173. Returns for periods of less than twelve months. — No return can be made for a
period of more than twelve months. A separate return for a fractional part of a year is therefore
required whenever there is a change, with the approval of the Commissioner of Internal Revenue, in the
basis of computing net income from one taxable year to another taxable year. The periods to be
covered by such separate returns in the several cases are stated in Section 42(a). The requirements
with respect to the filing of a separate return and the payment of tax for a part of a year are the same as
for the filing of a return and the payment of tax for a full taxable year closing at the same time.
DAETcC

SECTION 174. Sale of personal property on installment plan. — Dealers in personal property
ordinarily sell either for cash or on the personal credit of the purchaser or on the installment plan.
Dealers who sell on the installment plan usually adopt 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 purchaser has completely
performed his part of the transaction;
(b) By a form of contract in which title is conveyed to the purchaser immediately, 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 and subject to its
provisions.
The general purpose and effect being the same in all of these cases, the same rule is uniformly
applicable. The general rule prescribed is that a person who regularly 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, may return as income therefrom in any taxable year that proportion of the installment
payments actually received in that year which the total or gross pro t (that is, sales less cost of goods
sold) realized or to be realized when the property is paid for, bears to the total contract price. Thus the
income of a dealer in personal property on the installment plan may be ascertained by taking as income
that proportion of the total payments received in the taxable year from installment sales (such
payments being allocated to the year against the sales of which they apply) which the total or gross
pro t realized or to be realized on the total installment sales made during each year bears to the total
contract price of all such sales made during that respective year. No payments received in the taxable
year shall be excluded in computing the amount of income to be returned on the ground that they were
received under a sale the total pro t from which was returned as income during a taxable year or years
prior to the change by the taxpayer to the installment basis of returning income. Deductible items are
not to be allocated to the years in which the profits from the sales of a particular year are to be returned
as income, but must be deducted for the taxable year in which the items are "paid or incurred" or "paid
or accrued", as provided by Section 40 and 84(q) of the Code. A dealer who desires to compute his
income on the installment basis shall maintain books of account in such a manner as to enable an
accurate computation to be made on such basis in accordance with the provisions of this section.
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) may be 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 vendor returning income
on the installment basis repossesses the property sold whether title thereto had been retained by the
vendor or transferred to the purchaser, gain or loss for the year in which the repossession occurs is to
be computed upon any installment obligations of the purchaser which are satis ed or discharged upon
the repossession or are applied by the vendor to the purchase or bid price of the property. Such gain or
loss is to be measured by the difference between the fair market value of the property repossessed
and the basis in the hands of the vendor of the obligations of the purchaser which are so satis ed,
discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in
connection with the repossession. The basis in the hands of the vendor of the obligations of the
purchaser satis ed, discharged, or applied upon the repossession of the property shall be the excess
of the face value of such obligations over an amount equal to the income which would be returnable
were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of
any portion of the obligations of the purchaser which are treated by the vendor as not having been
satis ed, discharged, or applied upon the repossession, unless it is clearly shown that after the
property was repossessed the purchaser remained liable for such portion; and in no event shall the
amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations
with respect to which the purchaser remained liable after the repossession. If the property
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 price thereof in the absence of clear and
convincing proof to the contrary. The property repossessed shall be carried on the books of the vendor
at its fair market value at the time of the repossession.
If the vendor chooses as a matter of consistent practice to return the income from 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 to purchase and sale which 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, and (b) sales in which there is an immediate transfer of title, the vendor being protected
by a 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 the payments received in cash
or property other than evidences of indebtedness of the purchaser during the taxable year in which the
sale is made do not exceed 25 per cent of the selling price.
(2) Deferred-payment sales not on the installment plan, that is sales in which the 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 the selling price.
In the sale of mortgaged property the amount of the mortgage, whether the property is merely
taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included
as a part of the "selling price" but the amount of the mortgage, to the extent that it does not exceed the
basis to the vendor of the property 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 Sections 174 and 176 of
these regulations, and in this section. The term "initial payments" does not include amounts received by
the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part
of the purchase price which are due and payable in subsequent years. Commissions and other selling
expenses paid or incurred by the vendor are not to be deducted or taken into account in determining
the amount of the "initial payments," the "total contract price", or "the selling price". The term "initial
payments" contemplates at least one other payment in addition to the initial payment. If the entire
purchase price is to be paid in a lump sum in a later year, there being no payment during the rst year,
the income may not be returned on the installment basis. Income may not be returned on the
installment basis where no payment in cash or property, other than evidences of indebtedness of the
purchaser, is received during the rst year, the purchaser having promised to make two or more
payments, in later years.
SECTION 176. Sale of real property on installment plan. — In transactions included in class (1) in
the preceding section the vendor may return as income from such transactions in any taxable year that
proportion of the installment payments actually received in that year which the total pro t realized or to
be realized when the property is paid for bears to the total contract price.
DAaHET
If the purchaser defaults in any of his payments, and the vendor returning income on the
installment basis reacquires the property sold, whether title thereto had been retained by the vendor or
transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be
computed upon any installment obligations of the purchaser which are satisfied or discharged upon the
reacquisition or are applied by the vendor to the purchase or bid price of the property. Such gain or loss
is to be measured by the difference between the fair market value of the property acquired (including
the fair market value of any xed improvements placed on the property by the purchaser) and the basis
in the hands of the vendor of the obligations of the purchaser which are so satis ed, discharged, or
applied, with proper adjustment for any 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 satis ed,
discharged, or applied upon the reacquisition of the property will be the excess of the face value of
such obligations over an amount equal to the income which would be returnable were the obligations
paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the
obligations of the purchaser which are treated by the vendor as not having been satis ed, discharged,
or applied upon the reacquisition of the property, unless it is clearly shown that after the property was
reacquired the purchaser remained liable for such portion; and in no event shall the amount of the
deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to
which the purchaser remained liable after the acquisition. If the property reacquired is bid in by the
vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase
or bid price thereof in the absence of clear and convincing proof to the contrary. If the property
reacquired is subsequently sold, the basis for determining gain or loss is the fair market value of the
property at the date of reacquisition (including the fair market value of any xed improvements placed
on the property by the purchaser).
If the vendor chooses as a matter of consistent practice to turn the income from installment
sales on the straight accrual or cash receipts and disbursements basis, such a course is permissible,
and the sales will be treated as deferred-payment sales not on the installment plan.
SECTION 177. Deferred-payment sale of real property not on installment plan. — In transactions
included in class (2) in Section 175 of these regulations, the obligations of the purchaser received by
the vendor are to be considered as the equivalent of cash.
If the vendor has retained title to the property and the purchaser defaults in any of 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 by the vendor plus the fair-market value at the
time of repossession of xed improvements placed on the property by the purchaser and (2) the sum
of the pro ts previously returned as income in connection therewith and an amount representing what
would have been a proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and
depletion of the property during the period the property was in the hands of the purchaser had the sale
not been made will constitute gain or loss, as the case may be to the vendor for the year in which the
property is repossessed, and the basis of the property in the hands of the vendor will be the original
basis at the time of the sale plus the fair market value at the time of repossession, of xed
improvements placed on the property by the purchaser. If the vendor has previously transferred title to
the purchaser, and the purchaser defaults in any of his payments and the vendor reacquired the
property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property
for such of the purchaser's obligations as are applied by the vendor to the purchase or bid price of the
property. Such an exchange will be regarded as having resulted in the realization by 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 including xed improvements placed by the purchaser on the property,
and the amount of the obligations of the purchaser which were applied by the vendor to the purchase or
bid price of the property. The fair market value of the property reacquired shall be presumed to be the
amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary.
If the property reacquired is subsequently sold the basis for determining gain or loss is the fair market
value of the property at the date of reacquisition including the fair market value of the xed
improvements placed on the property by the purchaser.
SECTION 178. Sale of real estate in lots. — Where a tract of land is purchased 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 subsequently to that date, shall be equitably apportioned to the several
lots or parcels and made a matter of record on the books of the taxpayer, to the end that any gain
derived from the sale of any such lots or parcels may be returned as income for the year in which the
sale was made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel
sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income
shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or
loss will be accounted for accordingly.
SECTION 178(a). In all cases where a taxpayer sells during the year real or personal property on
the installment basis, there should be attached to the income tax return a statement of each sale made
during the year containing the following information:
(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 Revenue Regulations No. 8-
65 dated June 1, 1965. Took effect upon their promulgation in the O cial Gazette on September 27,
1965).
SECTION 179. Determination of the taxable net income of a controlled taxpayer. — (A)
DEFINITIONS. — When used in this section —
(1) The term "organization" includes any organization of any kind, whether it be a sole
proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place
where organized, where operated, or where its trade 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 of any kind, regardless
of whether or where organized, whether owned individually or otherwise, 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 of the control which is decisive, not
its form or the mode of its exercise. A presumption of control arises if income or deductions have been
arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or more organizations, trades, or
businesses owned or controlled directly or indirectly by the same interests. aCHDST
(5) The terms "group" and "group of controlled taxpayers" mean the organizations, 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 its affairs (or, as the case may be, in the particular contract,
transaction, arrangement, or other act) dealt with the other member or members of the group at arm's
length. It does not mean the income, the deductions, or the item or element of either, resulting to the
controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled
taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or
arrangement be legally binding upon the parties thereto).
(b) SCOPE AND PURPOSE. — The purpose of Section 44 is to place a controlled taxpayer on a tax
parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled
taxpayer, the true net income from the property and business of a controlled taxpayer. The interests
controlling a group of controlled taxpayers are assumed to have complete power to cause each
controlled taxpayer so to conduct its affairs that its transactions and accounting record truly re ect the
net income from the property and business of each of the controlled taxpayers. If, however, this has not
been done, and the taxable net incomes are thereby understated, the statute contemplates that the
Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments,
or allocations as he may deem necessary of gross income or deductions, or of any item or element
affecting net income, between/or among the controlled taxpayers constituting the group, shall
determine the true net income of each controlled taxpayer dealing at arm's length with another
uncontrolled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer.
Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any
right to compel the Commissioner of Internal Revenue to apply such provisions.
(c) APPLICATION. — Transactions between the controlled taxpayer and another will be subjected
to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape
taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal
Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or
sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting
income or deductions. The authority to determine true net income extends to any case in which either
by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other
than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer
dealing at arm's length with 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 the taxable year; (b) every non-resident alien
having income from sources within the Philippines irrespective of amount; and (c) guardians, trustees,
executors, administrators, receivers, conservators, and all others acting in any duciary capacity, when,
for the taxable year, the gross income of the person, trust, or estate for whom or which they act reaches
P1,800. (See Section 214 of these regulations.)
For each calendar year, every person whether married or single, having a gross income from all
sources of P1,800 or over, including dividends, excepting stock dividends, must make a return of
income although the tax has been paid at source and the return shows no tax liability. Whether or not an
individual is the head of a family or has dependents is immaterial in determining his liability to render a
return. The husband 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 the income of the wife derived
from her industry or labor as well as that derived from her separate, data, or paraphernal property.
Where, however, the ling of one consolidated return is impracticable, married persons may le
separate returns but the incomes declared in such returns will be consolidated and the tax computed
on such consolidated income.
The law requires that the income of unmarried minors derived from property received 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 on such 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 le individual returns . — The return must be led with the
Commissioner of Internal Revenue, provincial revenue agent, or treasurer of the province, city or
municipality in which the taxpayer has his legal residence or principal place of business, on or before
April 15th of the year following that for which the return is filed.
When the last due date for ling return falls on Sunday or a legal holiday, the last due date will be
held to be the day following such Sunday or legal holiday, or if placed on the mails, it should be posted
in ample time to reach the Commissioner of Internal Revenue, provincial revenue agent or treasurer of
the province, city, or municipality in which the taxpayer has his legal residence or principal place of
business, under ordinary handling of mail, on or before the date on which the return is required to be
led. When question is raised as to whether or not the return was posted in ample time to reach the
proper o cial, the envelope in which the return was transmitted and the return should be submitted to
the Commissioner of Internal Revenue with such comment and recommendation as the receiving
officer may consider proper to make. aHSCcE
SECTION 182. Persons under disability. — If the taxpayer is unable to make his own return, on
account of minority, illness, absence or non-residence, the return may be made by his duly authorized
agent or representative or by the guardian or other person charged with the care of his person or
property, the principal and his representative or guardian assuming the responsibility of making the
return and incurring penalties provided for erroneous, false, or fraudulent returns.
SECTION 183. Form of return. — Individual returns shall be prepared on B.I.R. Form No. 17.01.
The forms may be had from the o ce of the Commissioner of Internal Revenue in Manila, or in the
office of the provincial treasurers or their deputies.
A taxpayer will not be excused from making a return by the fact that no return form has been
furnished him. Taxpayers not supplied with the proper forms should make application therefor to the
Commissioner of Internal Revenue or to the provincial treasurers, or their deputies in ample time to
have their returns prepared, veri ed, and led with the proper o cial on or before the due date. Each
taxpayer should carefully prepare his return so as to fully and clearly set forth the data therein called
for. Imperfect or incorrect returns will not be accepted as meeting the requirements of the statute.
(There are now BIR Provincial Revenue Officers.)
SECTION 184. Corporation returns. — Corporations are required to make returns of income in
duplicate, regardless of the amount of their net income.
A corporation claiming exemption from tax and from the ling of returns must establish its right
to exemption in accordance with the procedure set forth in Section 24 of these regulations, otherwise it
will be amenable to the penalties for failure to file returns.
In the case of ordinary corporations, partnerships, and joint accounts (cuentas en participacion),
the return shall be on the form prescribed for corporations (B.I.R Form 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 a taxable 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 and
had no income from any source, may upon presentation of the facts to the Commissioner of Internal
Revenue be relieved from the necessity of making a return so 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 necessary return.
A corporation desiring to change its accounting period from calendar year to scal year must
comply with the procedure set forth in Section 172 of these regulations relative to the change in
accounting period of corporations.
SECTION 185. Returns of insurance companies. — Insurance companies transacting business in
the Philippines or deriving income from sources therein are required to le 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 foreign corporation having income from
sources within the Philippines must make a return of income on the form prescribed for corporation
(B.I.R. Form No. 17.02). If such a corporation has no o ce or place of business in this country, but has
a resident agent therein, the latter shall make the return. Although the foreign corporation is not
engaged in business in this country and has no o ce, branch, or agency in the Philippines, it is required
to make a return if it has received income from sources within the Philippines.
SECTION 187. Time and place for ling corporate returns . — Returns of corporations,
associations, or partnerships must be led on or before the fteenth day of April in each year or on or
before the 15th day of the fourth month following the close of a duly designated scal year. The return,
if placed in the mails, should be posted in ample time to reach the Commissioner of Internal Revenue,
provincial, revenue agent, or treasurer of the province, city or municipality in which is located the
principal o ce of the corporation where its books of account and other data are kept, on or before the
last due date for the ling of the return. When the last due date falls on Sunday or a legal holiday, the
returns may be led without penalty on the next succeeding business day. (Conforms with Am. by R.A.
2343.)
SECTION 188. Extension of time for ling returns . — The Commissioner of Internal Revenue may,
in meritorious cases, grant a reasonable extension of time for ling returns of income. Requests for
such extension of time must be submitted before the last day of the period for ling returns. Absence
or sickness is considered as reasonable cause, whereas, inability to close the books or to gather
information required 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 of corporations, partnerships, or associations must
make returns of income for such corporations, partnerships or associations covering each year or part
of the year during which they are in control. Notwithstanding that the powers and functions of a
corporation are suspended and that the property and business are for the time being in the custody of
the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee
stands in the place of the corporate o cers and is required to perform all the duties and assume all the
liabilities which would devolve upon the o cers of the corporation were they in control. A receiver in
charge of only part of the property of a corporation, however, as a receiver in mortgage foreclosure
proceedings involving merely a small portion of its property, need not make a return of income.
SECTION 190. Returns of duly registered general co-partnerships. — Duly registered general
copartnerships are required to render, in duplicate, a return of their earnings, pro ts and income, setting
forth the items of the gross income and the deductions allowable, and the names and addresses of the
individuals who would be entitled to the net earnings, pro ts, and income, if distributed. (See sections
22 and 23 of these regulations.)
SECTION 191. Veri cation of returns . — All income tax returns must be veri ed by the oath or
a rmation of the person rendering them. Oath may be taken before any o cer authorized to
administer oaths or if desired, before the Commissioner of Internal Revenue or any internal-revenue
officer especially deputized by him or authorized by law to administer oaths, free of charge.
SECTION 192. Discovery of understatement of income. — If the amount of income declared in a
return has been found to be understated, the Commissioner of Internal Revenue or any internal-revenue
o cer shall notify the taxpayer of such fact, and the taxpayer may, if he so desires, under a sworn
statement, present testimony to the contrary and disprove the findings made.
SECTION 193. Assessment of tax. — All income tax returns led with the provincial revenue
agents or with the treasurers of provinces, cities, or municipalities must be stamped with the date of
their receipt and immediately forwarded to the Commissioner of Internal Revenue. All assessments of
income tax shall be made by the Commissioner of Internal Revenue and all taxpayers shall be notified of
the amount for which they are respectively liable on or before the rst day of May of each successive
year. In the case of a corporation ling returns on the basis of a scal year, it shall be noti ed of the
amount for which it is liable on or before the rst day of the fth month following the close of its scal
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 be paid on or before the
fteenth day of April following the close of the calendar year by the person subject to tax, and in the
case of a corporation, by the president, vice-president, or other responsible o cer thereof. In the case
of corporations ling returns on the basis of a scal year, the total amount of tax shall be paid on or
before the fteenth day of the fourth month following the close of the scal year. (Conforms with
amendments by R.A. 2343, effv. June 20, 1959.)
Where the tax assessed against the taxpayer is in excess of P500, the taxpayer may elect to pay
the tax in two equal installments. The rst installment shall be paid on or before the date prescribed in
section 51 (a) and the second installment on or before the fteenth day of July following the close of
the calendar year or on or before the fteenth day of the seventh month following the close of the scal
year, as the case may be. Upon failure to pay any installment on the date xed for its payment, the
whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.
(Conforms with amendments by R.A. 2343, effv. June 20, 1959.)
SECTION 195. Commissioner's authority to make returns . — In cases wherein taxpayers have
neglected or refused to make return, and in cases wherein returns are found, upon examination or
otherwise, to be erroneous, false, or fraudulent, the Commissioner of Internal Revenue shall upon
discovery thereof, make a 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 shall be 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 de ciency tax, when the same is due, a penalty of 5 per cent of the amount of
tax unpaid, and interest at the rate of 1 per 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 of the collecting o cer
to acknowledge the receipt of the payment of income tax due from each taxpayer by issuing the
requisite Revenue Official Receipt (B.I.R. Form No. 25.24).
SECTION 198. Withholding tax at source. — Withholding is required (a) of a tax of 20 per centum
in the case of xed or determinable annual or periodical income, including dividends or net gains or net
pro ts received from corporations, partnerships or associations, payable to non-resident alien
individuals not engaged in trade or business and not having an o ce or place of business in the
Philippines; and (b) of a tax of 20 per centum in the case of interest upon bonds, obligations or
securities issued by domestic or resident foreign corporations, containing a so-called tax-free covenant
clause, payable either to citizens or aliens, residents or non-residents, where the owner of such interest
income does not le with the withholding agent a signed notice on B.I.R. Form No. 17.13 claiming the
bene t of personal exemption. Subject to the exception just mentioned, withholding taxes takes place
in all cases of payments of interest upon tax-free covenant bonds or other securities regardless of the
place where such bonds or securities are issued or marketed and the interest thereupon paid. Bonds
issued under a trust deed containing a tax-free covenant are treated as if they contain such a covenant.
SECTION 199. Fixed or determinable annual or periodical income. — Only xed or determinable
annual or periodical income is subject to withholding. The statute speci cally includes in such income,
interests, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and
emoluments, but other kinds of income may be included, as for instance, royalties.
Income is xed when it is to be paid in amounts de nitely pre-determined. On the other hand, it is
determinable whenever there is a basis of calculation by which the amount 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 during which the payments are to be made
may be increased or diminished in accordance with some one's will or with the happening of an event
does not make the payments any the less determinable or periodical. A salesman working by the month
for a commission on sales which is paid or credited monthly receives determinable periodical income.
The income derived from the sale in the Philippines of property whether real or personal, is not xed or
determinable annual or periodical income.
Dividends from every domestic corporation are subject to the withholding provisions of the law.
Dividends from a foreign corporation are subject to withholding if (1) such foreign corporation is
engaged in trade or business within the Philippines or has an o ce or place of business therein, and (2)
more than 85 per cent of its gross income for the three-year period ending with the close of its taxable
year preceding the declaration of such dividends (or for such part of such period as the corporation has
been in existence) was derived from sources within the Philippines. In case the owners of any securities
are not known to the withholding agent, the latter should deduct and withhold a tax of 20 per cent on
the interest on such securities.
SECTION 200. Payments to non-resident alien individuals. — The law requires withholding of the
tax on income payable to a non-resident alien individual not engaged in trade or business in the
Philippines and not having an o ce or place of business therein. A non-resident alien individual is
presumed not to be engaged in trade or business in the Philippines and not to have an o ce or place of
business therein, unless the withholding agent has de nite knowledge that such resident is engaged in
trade or business in the Philippines and of the name and address of his resident agent in this country, or
unless the withholding agent de nitely knows that such non-resident has an office or place of business
in the Philippines and of the location of such office or place of business. An individual whose address is
without the Philippines is presumed to be a non-resident alien, unless the withholding agent has de nite
knowledge that such person is either a citizen or a resident of the Philippines. An individual whose
address is within the Philippines, may be presumed to be a resident of the Philippines, unless the
withholding agent has reason to believe that such individual, not being a citizen of the Philippines, has
not established residence in this country.
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and
promptly causing a query to be addressed to the Commissioner of Internal Revenue for the
determination of whether or not the income paid to an individual is not subject to withholding. In case
the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to
withholding the withholding agent may thereupon remit the amount of tax withheld.
SECTION 201. Exception from withholding . — Withholding of a tax on interests upon bonds or
other obligations containing a tax-free covenant clause shall not be required in the case of a citizen or
resident alien individual if he les with the withholding agent when presenting interest coupons for
payment, not later than February 1 following the taxable year, an ownership and exemption certi cate
on the requisite form (B.I.R. Form No. 17.13) claiming a personal exemption or credits for dependents.
The withholding agent shall forward such certi cate to the Commissioner of Internal Revenue with a
letter of transmittal. The income of domestic and resident foreign corporations is free from
withholding.
SECTION 202. Ownership certi cates for interest coupons . — The owners, except domestic and
resident foreign corporations, of bonds or other obligations containing a tax-free covenants clause,
issued by a domestic or resident foreign corporation, when presenting interest coupons for payment,
shall le a certi cate of ownership on B.I.R. Form No. 17.13, for each issue of bonds, showing the name
and address of the debtor corporation, the name and address of the owner of the bonds, the nature of
the obligations, the amount of interest and its due date, and the amount of any tax withheld. In the case
of corporate bonds or similar obligations not containing a tax-free covenant clause, no ownership
certi cates are required. But ownership certi cates are required in the case of such bonds if the owner
is unknown to the withholding agent. Ownership certi cates need not be led in the case of interest
payments on bond or similar obligations of the United States or of the Government of the Philippines or
of any political subdivision thereof.
Where in connection with the sale of its property payment of the bonds or other obligations of a
corporation is assumed by the assignee, such assignee, whether an individual, partnership, corporation,
province, city or municipality, must deduct and withhold such taxes as would have been required to be
withheld by the assignor had not such sales and transfer been made.
SECTION 203. Return and payment of tax withheld. — (a) Every withholding agent shall make an
annual return in duplicate, on B.I.R. Form No. 17.43 of the tax withheld from interest on corporate bonds
or other obligations on or before the 15th day of April of each year for the preceding calendar year. (b)
Every person required to deduct and withhold any tax from income other than such bond interest shall
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 in trade or business within the Philippines and not
having any o ce or place of business therein, to whom income other than bond interest was paid
during the previous taxable year. The entire amount of the income from which the tax was withheld shall
be included in gross income without deduction for such payment of the tax. (Conforms with
The tax due on withholding income tax returns are payable at the same time and in the same
manner as taxes due on individual returns.
SECTION 204. Income of recipient. — Income upon which the tax is required to be withheld at
source shall nevertheless be included in the return of the recipient of such income. However, the
amount of tax withheld shall be credited against the amount of income tax due on such return, and the
amount, if any, by which the tax withheld at source exceeds the tax due on the return shall be refunded
in accordance with the provisions of Section 309 of the Code. TaCSAD

SECTION 205. Withholding of tax on income of nonresident foreign corporations, rms, 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, or other xed or determinable annual or periodical gains, pro ts, and
income received or obtained from sources within the Philippines by a non-resident alien rm,
copartnership, corporation, association, trust company, trustee, and insurance company, not engaged in
business or trade within the Philippines and not having an o ce or place of business therein, are
required to withhold a tax of 30 per cent thereon, le 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 to 204 of these regulations. The withholding provisions of the law are likewise applicable to the
income derived from interest upon bonds, mortgages, or deeds of trust, or other interest-bearing
obligations of a domestic or resident foreign corporation, rm 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 place where such bonds, obligations, or securities are issued, negotiated, or marketed and the
interest thereon paid, in case where such interest-income is received or obtained by, or paid to, a non-
resident alien firm, corporation, association, trust company, or trustee, not engaged in business or trade
within the Philippines and not having an o ce or place of business therein. (Conforms with
A foreign corporation is presumed not to be engaged in trade or business within the Philippines
and not to have o ce or place of business therein, unless the withholding agent has de nite knowledge
that such foreign corporation is in fact engaged in trade or business in the Philippines and of the name
and address of its resident agent, or unless the withholding agent has de nite knowledge that such
foreign corporation has a branch o ce or business in this country and of the location of such branch
office or place of business.
SECTION 206. Income tax not otherwise collectible from taxpayer chargeable to his
representative. — It is the intent and purpose of the law to charge and collect income tax imposed
under Title II of the Code on all gains, pro ts, and income of a taxable class, and the tax is required to
be paid by the owner of such gains, pro ts. 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 the Philippines, the proper
tax due may be collected from the owner of the gains or pro ts or from the representative who had the
receipt, custody, control or disposal of such gains, pro ts, 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 to all persons or
corporations that occupy positions of peculiar con dence towards others, such as trustees, executors,
or administrators; and a duciary, for income tax purposes, is any person or corporation that holds in
trust an estate of another person or persons. In order that a duciary relationship may exist, it is
necessary that a legal trust be created.
In general, the income of a trust for the taxable year which is to be distributed to the bene ciaries
must be returned by and will be taxed to the respective bene ciaries, but the income of a trust which is
to be accumulated or held for future distribution, whether consisting of ordinary income or gain from
the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the
trustee. Three exceptions to this general rule are found in the law: (1) in the case of revocable trust
(Section 59); (2) in the case of a trust the income of which, in whole or in part, may be held or
distributed for the bene t of the grantor (Section 60); and (3) in the case of a trust administered in a
foreign country [Section 57(c)]. In the rst case, the income from such part of the trust estate title to
which may be revested in the grantor should be included in the grantor's return. In the second case, part
of the income of the trust, which may be held or distributed for the bene t of the grantor, should be
included in the grantor's return. In the third case, the trustee is not entitled to the deductions mentioned
in subsections (a) and (b) of Section 57 and the net income of the trust undiminished by any amounts
distributed, paid or credited to bene ciaries will be taxed to the trustees; however, the income included
in the return of the trustees is not to be included in computing the income of the beneficiaries.
SECTION 208. Consolidation of incomes of two or more trusts. — Section 56(b)(2) expressly
requires the consolidation of the income of two or more trusts where the creator of the trust in each
instance is the same person and the bene ciary in each instance is the same. The tax due on the
consolidated income will be collected from the trustees in proportion to the net income of the
respective trusts. (See Section 215 of these regulations.)
SECTION 209. Estates and trusts taxed to duciary . — In the case of a decedent's estate the
settlement of which is the object of testamentary or intestate proceedings, the duciary, executor, or
administrator is required to le an annual return for the estate up to the nal settlement thereof. In the
same manner, the duciary is required to le a yearly return covering the income of a trust, whether
created by will or deed, for accumulation of income, whether for unascertained persons or persons with
contingent interests or otherwise. In both cases the income of the estate or trust is taxed to the
duciary. Where under the terms of a will or deed, the trustee, may in his discretion, distribute the
income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his
discretion. The imposition of the tax is not affected by the fact that an ultimate bene ciary may be a
person exempt from tax.
SECTION 210. Estate and trust taxed to bene ciaries . — In the case of (a) a trust the income of
which is to be distributed annually or regularly; (b) an estate of a decedent the settlement of which is
not the object of judicial testamentary or intestate proceedings; and (c) properties held under a co-
ownership or tenancy in common, the income is taxable directly to the bene ciary or bene ciaries. Each
bene ciary must include in his return his distributive share of the net income of the trust, estate, or co-
ownership. In the case of trusts which are in whole or in part subject to revocation by the grantor, or
which are for the bene t of the grantor, the income of the trust is to be included in computing the net
income of the grantor. aITECD
SECTION 211. Decedent's estate administration . — The "period of administration or settlement

of the estate" is the period required by the executor or administrator to perform the ordinary duties
pertaining to administration, in particular, the collection of assets and the payment of debts and
legacies. Estates during the period of administration have but one bene ciary and that bene ciary is
the estate.
No taxable income is realized from the passage of property to the executor or administrator on
the death of the decedent, even though it may have appreciated in value since the decedent acquired it.
In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where,
however, prior to the settlement of the estate, the executor or administrator sells property of a
decedent's estate for more than the appraised value placed upon it at the death of the decedent, the
excess is income, taxable to the estate. Where property is sold after the settlement of the estate by the
devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he
inherited the property from the decedent, he is taxable individually on any pro t derived. An allowance
paid a widow or heir out of the corpus of the estate is not deductible from gross income.
SECTION 212. Liability for tax on estate or trusts. — Liability for payment of the tax attaches to
the person of an executor or administrator up to and after his discharge, where prior to distribution and
discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether
or not such obligations existed. Liability for the tax also follows the estate itself, and when the estate
has been distributed, the heirs, devisees, legatees, and distributors may be required to discharge the
amount of the tax due and unpaid, to the extent of and in proportion to any share received. The same
consideration apply to other trusts. Where the tax has been paid on the net income of an estate or trust
by the duciary, the net income 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 a trust is allowed a personal
exemption of P1,800. Each bene ciary is entitled to but one personal exemption, no matter from how
many trusts he may receive income.
SECTION 214. Fiduciary returns. — Fiduciaries are required to make returns of income on B.I.R.
Form No. 17.01, in duplicate, when the gross income of the person, trust, or estate for whom or which
they act amounts to P1,800 or more and will be subject to all the provisions of law which apply to
individuals. A duciary making return shall make oath that he has su cient 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 return by one of two or more joint
duciaries in the form prescribed led in the municipality or city in which such duciary resides shall be
sufficient compliance with the requirement for fiduciary returns.
A duciary acting as the guardian of a minor or other incapacitated person must make a return
for such minor or incapacitated person and pay the tax, unless such minor or incapacitated person
himself makes a return or cause it to be made. The parent is held to be the natural guardian of a minor
child.
SECTION 215. Returns in case of two or more trusts. — Where, in the case of more than one trust,
the creator of the trust in each instance is the same person and the trustee in each instance is the same
but the beneficiaries are different, the trustee should make a separate return for each of the trusts in his
hands. When a trustee holds trust created by different persons for the bene t of the same bene ciary,
he should also make a return for each trust separately. But where a person creates two or more trusts
in favor of the same bene ciary [Section 56(b) (2)] appointing two or more trustees, the latter should
each make a separate return for each trust but in such case the Commissioner of Internal Revenue will
consolidate the net incomes of the different trusts and compute the tax on such consolidated income,
allowing only one absolute exemption of 1,800.
SECTION 216. Return by receiver. — A receiver who stands in the place of an individual or
corporation must render a return of income and pay the tax for his trust, but a receiver of only part of
the property of an individual or corporation need not. 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 duciary, and in
such case the return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.
SECTION 217. Fiduciaries indemni ed against claims for taxes paid . — Fiduciaries are
indemni ed against the claims or demands of every bene ciary for all payments of taxes which they
shall be required to make and they shall have credit for such payments in any accounting which they
make as such fiduciaries.
SECTION 218. Tax on personal holding companies . — Section 63 imposes for such taxable year
beginning after December 31, 1938 (in addition to the tax imposed by Section 24 of the Code), a tax
upon corporations classi ed as personal holding companies. Corporations so classi ed are exempt
from the additional tax on corporation improperly accumulating surplus imposed by Section 25, but are
not exempt from the other taxes imposed by Title II of the Code. Unlike the tax imposed by Section 25,
the tax imposed by Section 63 applies to all personal holding companies de ned as such in Section 64,
regardless of whether or not they were formed or availed of to accumulate earnings or pro ts for the
purpose of avoiding the tax upon shareholders. The tax imposed by Section 63 is 45 per cent of the
amount of the undistributed net income.
A foreign corporation, whether resident or non-resident, which is classi ed as a personal holding
company under Section 64 (not including a foreign personal holding company as de ned in Section 67)
is subject to the tax imposed by Section 63 with respect to its income from sources within the
Philippines. The term "personal holding company" as used in Chapter VIII of Title II of the Code does
not include a foreign corporation if (1) its gross income from sources within the Philippines for the
period speci ed in Section 37(a) (2) (B) is less than 50 per cent of its total gross income from all
sources and (2) all of its stock outstanding during the last half of the taxable year is owned by
nonresident alien individuals, whether directly or indirectly through other foreign corporations.
ESDHCa

SECTION 219. De nition of personal holding company . — A personal holding company is any
corporation (other than a corporation speci ed in section 64(b) which for the taxable year meets (a)
the gross income requirement speci ed in Section 220 of these regulations, and (b) the stock
ownership requirement speci ed in Section 221 of these regulations. Both requirements must be
satisfied and both must be met with respect to each taxable year.
SECTION 220. Gross income requirement. — To meet the gross income requirement, it is
necessary that either of the following percentages of gross income of the corporation for the taxable
year be personal holding company income as defined in Section 65:
(a) Eighty per cent or more; or
(b) Seventy per cent or more if the corporation has been classi ed as a personal 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 was so classi ed, during
no part of the last half of which the stock ownership requirement speci ed in Section 64(a) (2) exists;
or
(2) Three consecutive years have intervened since the last taxable year for which it was so
classi ed, during each of which its personal holding company income was less than 70 per cent of its
gross income.
In determining whether the personal holding company income is equal to the required
percentage of the total gross income, the determination must not be made upon the basis of gross
receipts, since gross income is not synonymous with gross receipts. For a further discussion of what
constitutes "gross income", see Section 29 of the Code and the regulations prescribed under that
section.
SECTION 221. Stock ownership requirements. — To meet the stock ownership requirement, it is
necessary that at some time during the last half of the taxable year more than 50 per cent it value of the
outstanding stock of the corporation be owned, directly or indirectly, by or for not more than ve
individuals: For such purpose, 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 the taxable year,
whether in the number of shares or classes of stock, or whether in the ownership thereof, the
conditions existing immediately prior .and subsequent to each change must be taken into
consideration.
In determining whether the statutory conditions with respect to stock ownership 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 the corporate stock outstanding at such time (not including
treasury stock). This value may be determined upon 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 the value of the stock. If the value of the stock is greatly at variance with that re ected by the
corporate books the evidence of such value should be led with 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 according to the relative value of each class therein.
The rules stated in the last two preceding paragraphs are equally applicable in determining the
stock ownership requirement speci ed in Section 65(e); relating to personal service contracts and
Section 65(f), relating to the use of corporation property by a shareholder. The stock ownership
requirement speci ed in these sections relates, however, to the stock outstanding at anytime during
the entire taxable year and not merely during the last half thereof.
SECTION 222. Personal holding company income. — The term "personal holding company
income" means the portion of the gross income which consists of the following:
(1) DIVIDENDS. — The term "dividends" includes dividends as de ned in Section 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 not constitute 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 loaned except 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, and other like property. It does not include rents, or overriding royalties
received by an operating company. As used in this paragraph the term "overriding royalties" means
amounts received from the sublease by the operating company which originally leased and developed
the natural resources property in respect of which such overriding royalties are paid.
(4) ANNUITIES. — The term "annuities" includes annuities only to the extent includible in the
computation of gross income. [See Section 29(b) (2)].
(5) GAINS FROM THE SALE OR EXCHANGE OF STOCK OR SECURITIES. — The term "gains from
the sale or exchange of stock or securities" as used in Section 65(b) applies to all gains (including gains
from liquidation dividends and other distributions from capital) from the sale or exchange of stock or
securities includible in gross income. The term "stock or securities" as used in Section 65(b) includes
shares or certi cates of stock, or interest in any corporation (including any joint stock company,
insurance, company association, or other organization classi ed as a corporation under Title II)
certi cates of interest or participation in mineral royalty, or leave, collateral trust certi cates, voting
trust certi cates, stock rights or warrants, bonds, debentures, certi cates of indebtedness, notes, car
trusts certi cates, 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 or securities" the term
does not include gains derived from the sale or exchange of stock or securities made in the normal
course of business. The term "regular dealer in stock or securities" means corporations with an
established place of business regularly engaged in the purchases of stock or securities and their resale
to customers, but such corporations are not dealers with respect to stock or securities held for
speculation or investment.
(6) GAINS FROM FUTURES TRANSACTIONS IN COMMODITIES. — Gains from futures
transactions in commodities include gains from futures transactions in any commodity on or subject to
the rules of a board of trade or commodity exchange, but do not include gains from cash transactions
or gains by a producer, processor, merchant, or handler of the commodity, which arise out of bona de
hedging transactions reasonably necessary to the conduct of its business in the manner in which such
business is customarily and usually conducted by others. In general, personal holding company income
includes gains on futures contracts which are speculative. Futures contracts representing true hedges
against price uctuations in spot goods are not speculative transactions, though not concurrent with
spot transactions. Futures contracts which are not hedges against spot transactions are speculative
unless they are hedges against concurrent futures or forward sales or purchases.
(7) INCOME FROM ESTATES AND TRUSTS. — The income from estates and trusts which is to be
included in personal holding company income consists of the income from estates and trusts which is
required to be included in the gross income of the corporation under Section 29 in relation to Section
56 of the Code, together with the gains derived by the corporation from the sale or other disposition of
any interest in an estate or trust.
(8) AMOUNTS RECEIVED UNDER PERSONAL SERVICE CONTRACTS. — Amounts includible in
personal holding company income as amount received under personal service contracts consist of
amounts received pursuant to a contract under which the corporation is to furnish personal services,
and amounts received from a sale or other disposition of such a contract, if —
(a) Some person other than the corporation has the right to designate (by name or by
description) the individual who is to perform the services or if the individual 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 the outstanding stock of
the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform,
or may be designated (by name or by description), as the one to perform such services. For this
purpose the stock ownership 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 the outstanding capital stock of
the M Corporation. The Corporation entered into a contract with A under which A was to perform
personal services for the person or persons whom the M Corporation might designate, in consideration
of which A was to receive P10,000 a year from the M Corporation. The M Corporation entered into a
contract with the O Corporation in which A was designated to perform personal services for the O
Corporation in consideration of which the O Corporation was to pay the M Corporation P500,000 a
year. The P500,000 received by the M Corporation from the O Corporation constitutes a personal
holding company income.
Example (2): The N Corporation, the entire outstanding capital stock of which is owned by four
individuals, is engaged in engineering. The N Corporation entered into a contract with the O Corporation
to perform engineering services for the O Corporation, in consideration of which the O Corporation was
to pay the N Corporation P50,000. The individual who was to perform the services was not designated
(by name or by description) in the contract and no one but the N Corporation 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 not constitute personal holding company income. HTaIAC
(9) COMPENSATION FOR USE OF PROPERTY. — The compensation for the use of, or the right to
use, the property of the corporation which is to be included in personal holding company income
consists of amounts received as compensation (however designated and from whomsoever received)
for the use of, or the right to use, property of the corporation in any case in which, at any time during the
taxable year 25 per cent or more in value of the outstanding stock of the corporation is owned, directly
or indirectly, by or for an individual entitled to the use of the property, whether such right is obtained
directly from the corporation or by means of a sublease or other arrangement. The property may
consist of a yacht, a city residence, a country house, or any other kind of property.
(10) RENTS (including interest constituting rent). — The rents which are to be 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, to the extent such debts represent the price for which real property
held primarily for sale to customers in the ordinary course of its trade or business was sold or
exchanged by the corporation, but do not include amounts constituting personal holding company
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 or more 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 gross income of the corporation for the taxable year and (B) the
aggregate amount of deductions allowable for expenses under Section 30 (a) of the Code (other than
compensation 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 "overriding royalties", received
from any interest in mineral, oil, or gas royalties. As used in this paragraph the term "overriding
royalties" means amounts received from the sublease by the operating company which originally leased
and developed the natural resources property in respect of which such overriding royalties are bid.
SECTION 223. Stock ownership . — For the purpose of determining whether —
(a) A corporation is a personal holding company in so far as such determination 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 of such a contract
constitute personal holding company income in so far as such determination 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-ship requirement speci ed in Section 65(f), stock
owned by an individual includes stock constructively owned by him as provided in Section 66. All forms
and classes of stock, 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 the ownership of stock for any of
the purposes set forth in the preceding section, stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust shall be considered as being owned proportionately by its
shareholders, partners, or bene ciaries. For example, if A and B, two individuals, are the exclusive and
equal bene ciaries of a trust or estate, and if such trust or estate owns the entire capital stock of the M
Corporation, and if the M Corporation in turn owns the entire capital stock of the N Corporation, then
the stock of both the M Corporation and the N Corporation shall be considered as being owned equally
by A and B as the individuals owning the beneficial interest therein.
SECTION 225. Family and partnership ownership . — In determining the ownership of stock for
any of the purposes set forth in Section 223 of these regulations, an individual shall be considered as
owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the
purposes of such determination 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 the ownership of stock for the
purpose set forth in (a) of Section 223 of these regulations is illustrated by the following example:
Example: The M Corporation at some time during the last half of the taxable year had 1,800
shares of outstanding stock, 450 of which were held by various individuals 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 20
His father AF 10 BF 10 CF 10 DF 10 EF 10
His wife AW 10 BW 40 CW 40 DW 40 EW 40
His brother AB 10 BB 10 CB 10 DB 10 EB 10
His son AS 10 BS 40 CS 40 DS 40 ES 40
His daughter by
former marriage
(son's half sister) ASHS 10 BSHS 40 CSHS 40 DSHS 40 ESHS 40
His brother's wife ABW 10 BBW 10 CBW 10 DBW 160 EBW 10
His wife's father AWF 10 BWF 10 CWF 110 DWF 10 EWF 10
His wife's brother AWB 10 BWB 10 CWB 10 DWB 10 EWB 10
His wife's brother's
wife AWBW 10 BWBW 10 CWBW 10 DWBW 10 EWBW 110
Individual's partner AP 10 - - - - - - - -
By applying the statutory rule provided in Section 66(a) ve individuals own more than 50 per
cent of the outstanding stock as follows:
A (including AF, AW, AB, AS, ASHS, AP) 160
B (including BF, BW, BB, BS, BSHS) 160
CW (including C, CS, CWF, CWB) 220
DB (including D, DF, DBW) 200
EWB (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 owns the bulk of the family
stock and naturally is the head of the group. A's partner owns to shares of the stock. Individual B
represents the case where he is still head of the group because of the ownership of stock by his
immediate family. Individuals C and D represent cases where the individuals fall in groups headed in C's
case by his wife and in D's case by his brother because of the preponderance of holdings on the part of
relatives by marriage. Individual E represents the case where the preponderant holding of others
eliminate that individual from the group.
The method of applying the family and partnership rule as illustrated in the foregoing example
also applies in determining the ownership of stock for the purposes stated in (b) and (c) of Section 223
of these regulations.
SECTION 226. Options. — In determining the ownership of stock for any of the purposes set
forth in Section 223 of these regulations if any person has an option 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 each one of a series of such options, so that the person who has an option
on an option to acquire stock may be considered as the owner of the stock.
SECTION 227. De nition of foreign personal holding company . — A foreign personal holding
company is any foreign corporation (other than a corporation exempt from taxation under Section 27 of
the Code) which for the taxable year meets (a) the gross income requirements speci ed in Section 67
(a) (1), and (b) the stock ownership requirement speci ed in Section 67(a) (2). Both requirements must
be satisfied and both must be met with respect to each taxable year.
A foreign corporation which comes within the classi cation of a foreign personal holding
company for any taxable year beginning after December 31, 1938, is not subject to taxation for such
taxable year under Section 25 of the Code but may be subject to taxation under that section for other
taxable years. The fact that a foreign corporation is a foreign personal holding company does not
relieve the corporation from liability for the tax imposed generally under Section 24 upon foreign
corporations, since such tax applies regardless of the classi cation of the foreign corporation as a-
foreign personal holding company.
SECTION 228. Gross income requirement. — To meet the gross income requirement, it is
necessary that either of the following percentages of gross income of the corporation for the taxable
year be foreign personal holding company income in 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 classi ed as a foreign 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 was so classi ed, during
no part of which the stock ownership requirement specified in Section 67 (a) (z) exist; or
(2) Three consecutive years have intervened since the last taxable year for which it was so
classi ed, during each of which its foreign personal holding company income was less than 50 per cent
of its gross income.
In determining whether the foreign personal holding company income is equal to the required
percentage of the total gauss income, the determination must not be made on the basis of gross
receipts since gross income is not synonymous with gross receipts. For a further discussion on what
constitutes "gross income," see Section 29(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 than 50 per cent in value of the outstanding stock
of the foreign corporation be owned, directly or indirectly, by or for not more than ve individuals who
are citizens or residents 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 ownership thereof, the conditions existing
immediately prior and subsequent to each change must be taken into consideration, since a
corporation comes within the classi cation if the statutory conditions with respect to stock ownership
are present at any time during the taxable year.
In determining whether the statutory conditions with respect to stock ownership 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 stock outstanding at such time (not including treasury stock). This
value may be determined upon 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 the value of
the stock. If the value of the stock which is used is greatly at variance with that re ected by the
corporate books, the evidence of such value should be led with the return. In any case where there are
two or more classes of stock outstanding, the total value of all the stock should be allocated among
the different classes according to the relative value of each lass therein.
DIcSHE

SECTION 230. Gross income and stock ownership requirements of foreign personal holding
companies. — For the purpose of determining whether a foreign corporation satis es the gross income
requirement prescribed under Section 67(a)(1), the same items of income classi ed under Section 65
as personal holding company income shall, if received by a foreign corporation, be considered as
foreign personal holding company income. In determining whether a foreign corporation satis es the
stock ownership requirement prescribed under Section 67(a) (2) the rules established in Section 66
shall apply.
SECTION 231. Income of foreign personal holding companies taxed to Philippine shareholders.
— (a) General rule. — Section 69 does not impose a tax on foreign personal holding companies. The
undistributed net income (from all sources), of such companies, however, must be included in the
manner and to the extent set forth in this section, in the gross income of their "Philippine shareholders",
that is, the shareholders who are individual citizens or residents of the Philippines.
(b) AMOUNT INCLUDIBLE IN GROSS INCOME. — Each Philippine shareholder, who was a
shareholder on the day in the taxable year of the, foreign personal holding company which was the last
day on which the stockholders satisfying the stock ownership requirement of Section 67(a)(2),
hereinafter referred to as the "Philippines group", existed with respect to the company, shall include in
his gross income a dividend, for the taxable year in which or with which the taxable year of the company
ends, the amount he would have received as a dividend if on such last day there has been distributed by
the company and received by the shareholders an amount which bears the same ratio to the net income
of the company for the taxable year as the portion of such taxable year up to and including such last
day bears to the entire taxable year.
The undistributed net income of the foreign personal holding company is includible only in the
gross income of the Philippine shareholders who were shareholders in the company on the last day of
its taxable year on which the Philippine groups existed with respect to the company. Such Philippine
shareholders, accordingly, are determined by the stock holdings as of such speci ed time. This applies
to every Philippine shareholder who was a shareholder in the company at the speci ed time regardless
of whether the Philippine shareholder is included with the Philippine group.
The Philippine shareholders must include in their gross income their distributive shares of that
proportion of the undistributed net income for the taxable-year of the company which is equal in ratio to
that which the portion of the taxable year up to and including the last day on which the Philippine group
with respect to the company existed bears to the entire taxable year. Thus if the last day in the taxable
year on which the required Philippine group existed was also the end of the taxable year, the portion of
the taxable year up to and including such last day would be equal to 100 per cent and in such case, the
Philippine shareholders would be required to return their distributive shares in the entire undistributed
net income. But if the last day on which the required Philippine group existed was September 30, and
the taxable year was a calendar year, the portion of the taxable year up to and including such last day
would be equal to nine-twelfths of the undistributed net income.
The amount which each Philippine shareholder must return is that amount which he would have
received as a dividend if the above speci ed portion of the undistributed net income had in fact been
distributed by the foreign personal holding company as a dividend on the last day of its taxable year on
which the required Philippine group existed. Such amount is determined, therefore, by the interest of the
Philippine shareholder in the foreign personal holding company, that is, by the number of shares of
stock owned by the Philippine shareholder and the relative rights of his class of stock, if there are
several classes of stock outstanding. Thus, if a foreign personal holding company has both common
and preferred stock outstanding and the preferred shareholders are entitled to a speci c dividend
before any distribution may be made to the common shareholders, then the assumed distribution of
the stated portion of the undistributed net income must rst be treated as a payment of the speci ed
dividend on the preferred stock before any part may be allocated as a dividend on the common stock.
The assumed distribution of the required portion of the undistributed net income must be
returned as dividend income by the Philippine shareholders for their respective taxable years in which
or with which the taxable year of the foreign personal holding company ends. In applying this rule, the
date as of which the Philippine group last existed with respect to the company is immaterial.
SECTION 232. Information returns by officers and directors of certain foreign corporations. — (a)
REQUIREMENT FOR FILING RETURNS. — (1) General. — Under Section 70 (a), on the 15th day of each
month which begins after July 1, 1939, each individual who on such 15th day is an o cer or, a director
of a foreign corporation which, with respect to its taxable year preceding the taxable year in which such
month occurs, was a foreign personal holding company, is required to le with the Commissioner of
Internal Revenue a monthly information return as provided in Section 70(a). The Commissioner of
Internal Revenue may authorize the filing of returns covering periods longer than a month.
(2) RETURNS JOINTLY MADE. — If two or more o cers or directors of a foreign corporation are
required to le information returns for any period under Section 70(a), any two or more of such o cers
or directors may, in lieu of filing separate returns for such period, jointly execute and file one return.
(b) FORM OF RETURN. — The return under Section 70(x). of the Code and this section shall be
made on the form prescribed by the Commissioner of Internal Revenue. Each o cer 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
the requirements of the law.
(c) CONTENTS OF RETURN. — The return shall, in accordance with provisions of this section and
the instructions on the form, set forth with respect to the preceding 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 corporation outstanding as of the
beginning and end of the period;
(6) Number of shares and par value of preferred stock of the corporation outstanding as of the
beginning and end of the period, the rate of dividend on such stock and whether such
dividend is cumulative or noncumulative;
(7) A description of the convertible securities issued by the corporation, including a statement of
the face value of, and rate of interest on, such securities:
(8) The name and address of each shareholder, the class and number of shares held by each,
together with any changes in stock holdings during such period;
(9) The name and address of each holder of securities convertible into stock of the corporation,
the class, number and face value of the securities held by each, together with any changes
in the holding of such securities during the period;
(10) A certified copy of any resolution or plan, and any amendments thereof or supplements
thereto, for or in respect of the dissolution of the corporation of the liquidation of the
whole or any part of its capital stock; 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 Code and this section with
respect to more than one foreign corporation, a separate return must be filed with respect
to each foreign corporation.
(d) VERIFICATION OF RETURNS. — All returns required by Section 70(a) and this section shall be
verified under oath or affirmation of the parties rendering the same.

SECTION 233. Annual information returns by o cers and directors of certain foreign
corporations. — (a) Requirement for filing returns.
(1) GENERAL. — Under Section 70(b), on the sixtieth day after the close of the taxable year of a
foreign personal holding company each individual who on such sixtieth day is an o cer or director of
the corporation shall le with the Commissioner of Internal Revenue an annual information return as
provided in that section of the Code and this section.
(2) RETURNS JOINTLY MADE. — If two or more o cers or directors of a foreign corporation are
required to le annual information returns under Section 70(b) for any taxable year of the corporation
any two or more of such o cers or directors may in lieu of ling separate annual returns for such
taxable year, jointly execute and file one annual return.
(b) FORM OF RETURN. — The return under Section 70(b) and this section shall be made on the
form prescribed by the Commissioner of Internal Revenue. Each o cer or director should carefully
prepare his returns 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 he considered as meeting the
requirements of the law.
(c) CONTENTS OF RETURN. — The return shall, in accordance with the provisions of this section
and the instructions on the form, set forth with respect to the taxable year of the foreign personal
holding company the following information:
(1) The gross income, deductions and credits, net income, and undistributed net income of the
foreign personal holding company for such taxable year, 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 been filed under Section 70(a) and the preceding section, no
information under Section 70(b) (2) and this paragraph need be set forth in such annual
return; and
(3) Such other information as may be required by the return form.
(d) VERIFICATION OF RETURNS. — All returns required by Section 70(b) and this section shall be
SECTION 234. Information returns by shareholders of certain foreign corporations. — (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 the outstanding 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 de ned in Section 66(b)], if such foreign corporation with respect to its
taxable year preceding the taxable year in which such month occurs was a foreign personal holding
company, shall le with the Commissioner of Internal Revenue an information, return as provided in
Section 71(a). The Commissioner of Internal Revenue may authorize the filing of returns covering period
longer than a month.
(2) Duplicate returns. — If a shareholder in a foreign corporation les, as an o cer or director in
such corporation, the returns required by Section 70(b), such returns shall be considered as returns
filed under Section 71(a).
(b) FORM OF RETURN. — The return under Section 71(a) shall be made on the form prescribed by
the Commissioner of Internal Revenue. Each shareholder 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 the requirements of the law.
and the instructions on the form, set forth with respect to the preceding 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 le a return under Section 71(a) of the Code and this section with
respect to more than one foreign corporation, a separate return must he led with respect to each
foreign corporation.
(d) VERIFICATION OF RETURNS. — All returns required by Section 71(a) of the Code and this
section shall be verified under oath or affirmation of the parties rendering the same.
SECTION 235. Annual information returns by shareholders of certain foreign corporations. — (a)
REQUIREMENT FOR FILING RETURNS.
(1) General. — Under Section 71(b) of the Code, on the sixtieth day after the close of the taxable
year of a foreign personal holding company, each Philippine shareholder, by or for whom on such
sixtieth day 50 per cent or more in value of the outstanding stock of the company is owned, directly or
indirectly [including the case of an individual stock owned by members of his family as de ned in
Section 66(b)], shall le with the Commissioner of Internal Revenue an information returns as provided
in that section and this section.
(2) Duplicate returns. — If a shareholder in a foreign corporation les as an o cer or director in
such corporation, the return required by Section 70(b), such returns shall be considered as returns led
under Section 71(b).
(b) FORM OF RETURN. — The return under Section 71(b) shall be made on the form prescribed by
the Commissioner of Internal Revenue. Each shareholder 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 the requirements of the law.
and the instructions on the form, set forth with respect to the taxable year of the foreign personal
holding company the same information which is required under Section 71(a), paragraph (c) of Section
232 of these regulations and paragraph (c) of the preceding section, except that if all the required
returns with respect to such year have been led under Section 71(a), no return under Section 71(b) is
required.
If a person is required to le an annual return under Section 71(b) with respect to more than one
foreign personal holding company, a separate return must be led with respect to each foreign
personal holding company.
(d) VERIFICATION OF RETURNS. — All returns required by Section 71(b) and this section shall be
SECTION 236. Ad valorem penalty for failure to file return. — In case of a failure to make and le a
return or list within the time prescribed by law, not due to willful neglect, where such return or list is
voluntarily led by the taxpayer without notice from the Commissioner of Internal Revenue or other
o cer and it is shown that the failure to le it in due time was due to a reasonable cause, no surcharge
will be added to the amount of tax due on the return. In such cases, in order to avoid the imposition of
the surcharge, the taxpayer must make a statement showing all the facts alleged as a reasonable cause
for failure to le the return on time in the form of an a davit which should be attached to the return. If
the Commissioner of Internal Revenue is satis ed that the delinquency was due to a reasonable cause,
no surcharge will be added to the tax due on the return. Whether or not reasonable cause exists will
depend upon the circumstances of each case. As a general rule, if the taxpayer exercised ordinary
business care and prudence and was nevertheless unable to le the return within the prescribed time,
the delay will be considered as being due to a reasonable cause.
In case of a failure to make and le a return or list within the time prescribed by law, not due to
willful neglect, where the taxpayer voluntarily les the return without notice from the Commissioner of
Internal Revenue or other o cer and attaches to such return the a davit mentioned in the preceding
paragraph but where the Commissioner of Internal Revenue is not satis ed as to the reasonableness of
the cause of the delinquency, a surcharge of 25 per cent will be added to the amount of tax due on the
return.
In case the failure to make and le a return or list within the time prescribed by law is due to
willful neglect a surcharge of 50 per cent will be added to the amount of tax due on the return. There is
willful neglect in the case of a taxpayer who, being liable to le a return, knowingly delays the ling of
such return. Where the ling of the return has been delayed for a considerable length of time, the
delinquency will be presumed 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 tax has been paid before the discovery of
the cause giving rise to the imposition of the surcharge, in which case the amount so added shall be
collected in the same manner as the tax.
SECTION 237. Ad valorem penalty for false or fraudulent return. — In case a false or fraudulent
return or list is made, the Commissioner of Internal Revenue shall add to the tax ascertained to be due
on the true net income of the taxpayer a surcharged of 50 per cent of the amount of such tax. If
payment has been made on the basis of such false or fraudulent return before the discovery of the
falsity or fraud, the basis of the surcharge of 50 per cent will be the amount of the tax due on the true
net income less the amount so paid.
SECTION 238. Penalty for failure to le return or to pay tax . — Any person liable to pay the tax, to
make a return or to supply information required under Title II of the Code, who refuses or neglects to
pay such tax, to make such return or to supply such information at the time or times speci ed in each
case shall be punished by a ne of not more than P2,000 or by imprisonment for not more than six
months, or both. In case of a corporation failing to le its, return or pay the tax, the penalty prescribed
under the rst paragraph of Section 73 will be imposed upon the president, vice-resident, or other
responsible o cer required to le the return of the corporation or 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, failing to le the return required under Section 49 of the Code, the penalty
prescribed under the rst paragraph of Section 73 will be imposed upon the managing partner or other
responsible officer of such partnership.
SECTION 239. Penalty imposed upon person causing a false or fraudulent corporate return to be
filed. — If a false or fraudulent return is led for a corporation or duly registered general copartnership,
the individual or any o cer thereof causing such return to be led shall be punished by a ne not
exceeding P4,000 or by imprisonment for not more than one year, or both.
SECTION 240. Penalty on corporation refusing or neglecting to make return. — A corporation or
duly registered general copartnership, refusing or neglecting to make a return required under Title II of
the Code, or, rendering a false or fraudulent return, will be liable to a ne of not exceeding P20,000. The
ne imposed under Section 74 will be paid by the corporation or duly registered general copartnership
as an entity, and is in addition to the penalty which may be imposed under Section 73 of the Code upon
the president, vice-president, or other responsible o cer of a corporation or duly registered general
copartnership.
SECTION 241. Return of information as to payments of dividends. — Every domestic resident
foreign corporation is hereby required to render a return, in duplicate, on the form prescribed for
corporations (B.I.R. Form No. 17.02) of its payments of pro ts or dividends to stock holders for the
taxable year or period covered by the return, stating the name and address of each stockholder, the
number and 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 should be veri ed by the oath or
affirmation of the person rendering the same. aHcACT

SECTION 242. Application for and issuance of license for collecting foreign items. — Every
individual or organization undertaking, for pro t or otherwise, the collection of dividends or interest on
foreign securities (not payable in the Philippines) by means of coupons, checks, or bills of exchange
shall, upon application, obtain a license therefor from the Commissioner of Internal Revenue. The
application shall show the name, address, occupation, and status (as to citizenship or 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 another person of xed or
determinable income of P1,800 or more in a taxable year must render a return thereof to the
Commissioner of Internal Revenue within the time xed for the ling of the annual returns of said
person, corporations, partnerships, and associations. The name and address of the recipient of the
income should be stated, if possible. Although to make necessary a return of information the income
must be fixed or determinable, it need not be annual or periodical.
The names of all employees to whom payments of P1,800 or over a year are made, whether such
total sum is made up of wages, salaries, commissions, or compensation 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
cash received shall amount to P1,500 or more during the year.
In the case of payments of annual or periodical income to nonresident alien individual or to
foreign corporations or rm not engaging in trade or business within the Philippines and not having any
o ce or place of business therein, the return by withholding 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 another of xed or determinable
income of P1,800 or more in a taxable .year must render a return thereof in duplicate on the form
prescribed therefor (BIR Form No. 17.01-B). These forms should be attached to and led together with
the annual income tax returns of said persons, corporations, partnerships and associations as payers,
within the time xed by law for the ling of income tax returns. The payments referred to herein do not
include the following:
(1) Dividend payments mentioned under Section 75 of the National Internal Revenue Code.
(2) Salaries, wages, bonuses, and other compensations in kind, such as living quarters, meals,
and lodging which are subject to withholding tax and reported in W-2 forms as provided
for under Republic Act 590.
(3) Payments subject to withholding tax at source enumerated under Section 53 of the National
Internal Revenue Code.
Examples of income covered by these regulations and to be declared in BIR Form 17.01-B are
interests, rents, commissions, royalties, advertisements, professional fees, and the like, arising
generally from payments between payers and recipients who have no employer-employee relationship.
(Revenue Regulations No. 9-65 amending and superseding section 243 appearing 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 retiring from 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, and within the same period after their retirement from business, le their
income tax returns covering the pro t earned or business done by them from the beginning of the year
up to the date of such dissolution or retirement and pay the corresponding income tax due thereon
upon demand by the Commissioner of Internal Revenue to addition to the income tax return required to
be filed they shall also submit within the same period the following:
(a) Copy of the resolution authorizing such dissolution;
(b) Balance sheet at the date of dissolution or retirement and a profit and loss statement
covering the period from the beginning of the taxable year to the date of dissolution or
retirement;
(c) In the case of a corporation, the names end addresses of the shareholders and the number
and par value of the shares held by each; and in the case of a partnership, joint-account or
association, the name of the partners or members and the capital contributed by each;
(d) The value and a description of, the assets received in liquidation by each shareholder;
(e) The name and address of each individual or corporation, other than shareholders, if any,
receiving assets at the time of dissolution together with a description and the value of the
assets received by such individuals or corporations; and the consideration, if any, paid by
each of them for the assets received.
SECTION 245. Return of information by brokers. — When required by the Commissioner of
Internal Revenue, each person doing business as a broker shall render a return or statement showing
the names and addresses of customers to whom or for whom payments were made or from whom
business was transacted during the calendar year or other speci ed period, and giving all other
particulars which may be needed by the Commissioner of Internal Revenue.
SECTION 246. Information returns as to formation, etc., of foreign corporation. — (a) IN
GENERAL. — Any attorney, accountant, duciary, bank, trust company, nancial institution, or other
person, who, after July 5, 1939, aids, assists, counsels, or advises in, or with respect to, the formation,
organization, or reorganization of any foreign corporation (including a foreign association or
partnership) shall file with the Commissioner of Internal Revenue, within thirty days after giving such aid,
assistance, counsel or advise, an information return; as provided in Section 80 and this section. The
return must be led in every such case (1) regardless of the nature of the counsel or advice given,
whether for or against the formation, organization, or reorganization of the foreign corporation, or the
nature of the aid or assistance rendered and (2) regardless of the action taken upon the advice or
counsel, that is, whether the foreign corporation is actually formed, organized, or reorganized.
If, in a particular case, the aid, assistance, counsel or advice given by any person extends over a
period of more than one day and not for more than thirty days, such persons, to avoid the multiple ling
of returns, may le a single return for the entire period. In such case, the return shall be led within thirty
days from the rst day of such period: If, in a particular case, the aid, assistance, counsel, or advice
given by any person extends over a period of more than thirty days, such person may le a return at the
end of each thirty days included within such period and at the end of the fractional 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 not reported 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, or reorganization of a foreign corporation given by a
person in whole or in part through the medium of subordinates or employees (including in the case of a
corporation the o cers thereof), the return of the employer must set forth to the full extent all
information prescribed by these regulations, including that which, as an incident to such employment, is
within the possession or knowledge or under the control of such subordinates 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 respect to 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 his employment, will be satis ed if a complete and adequate return as prescribed by these
regulations is duly led 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 or assistance solely
of a clerical or mechanical character in, or with respect to, the formation, organization or reorganization
of a foreign corporation are not required to file 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 reorganization of a particular foreign corporation, any two or
more of such persons may, in lieu of filing several returns jointly execute and file one return.
(c) PENALTIES. — For criminal penalties for failure to le the return required by Section 80, see
Section 73 of the Code.
(d) CONTENTS OF RETURNS. — The return shall set forth the following information to the full
extent such information is within the knowledge or possession or under the control of the person
required to file the return.
(1) The name and address of the person (or persons) to whom and the person (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 the laws 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 the foreign corporation
was effected;
(6) A complete statement of the reasons for, and the purposes sought to be accomplished, by,
the formation, organization, or reorganization of the foreign corporation;
(7) A statement showing the classes and kinds of assets transferred to the foreign corporation
in connection with formation, organization, or reorganization, including a detailed list of any
stock or securities included in such assets, and a statement showing the names and
addresses of the persons who were the owners of such assets immediately prior to the
transfer;
(8) The names and addresses of the shareholders of the foreign corporation at the time of the
completion of its formation, organization, or reorganization, showing the classes of stock
and number of shares held by each;
(9) The name and address of the person (or persons) having custody of the books 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 withheld because its character is
claimed to be privileged as a communication between attorney and client within the
meaning of Section 80, the return must so state and must contain a complete statement
of the nature and the circumstances of the communication on which a decision as to the
propriety of the claim of privilege may be reached.
If a person aids, assists, counsels, or advises in or with respect to, the formation, organization, or
reorganization of more than one foreign corporation, a separate return must be led with respect to
each foreign corporation.
(e) VERIFICATION OF RETURN. — All returns required by Section 80 and this section shall be
verified under oath or affirmation.
SECTION 247. Disposition of income tax returns. — All income tax returns led with the
Commissioner of Internal Revenue constitute public records which shall be open to inspection under
rules and regulations prescribed by the Secretary of Finance with the approval of the President of the
Philippines. The circumstances under which income tax returns may be inspected by interested parties
are dealt with under separate regulations.
SECTION 248. Publication of list of persons ling returns and paying taxes . — The second
paragraph of Section 81 expressly authorizes the Commissioner of Internal Revenue, with the approval
of the Secretary of Finance, to cause to be prepared and published in any newspaper or made available
to public inspection through 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 kinds of lists.
SECTION 249. Recovery of tax. — A suit or proceeding may be maintained for the recovery of any
internal-revenue tax alleged to have been erroneously or illegally assessed and collected, in accordance
with Section 306 of the Code. However, where the Commissioner of Internal Revenue believes that a
return is false or fraudulent or contains any understatement or undervaluation and proceeds to assess
and collect the tax due, no portion of the tax so collected shall be recovered by any suit unless it is
proved that the return was not in fact false or fraudulent and did not contain any understatement or
undervaluation, except with respect to return is made in 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 of business, even though extraordinary in
amount, made by a domestic or resident foreign corporation, joint-stock company, partnership, joint
account (cuentas en participacion), association, or insurance company to the shareholders or members
out of its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is not taxable when
received by a corporation, upon amalgamation with the other funds of the corporation, such income
loses its identity and when distributed to shareholders, is taxable to the same extent as other dividend.
A taxable distribution made by a corporation to individual stockholders or members shall be
included is the gross income of the distributees when the cash of other property is unquali edly made
subject to their demand. Dividends, in cash or other property received by an individual, are subject to tax
in his hands in the same manner another income.
Dividends, whether in cash or other property, received by a domestic or resident foreign
corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in
accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign
corporation, whether resident or nonresident, are taxable to the extent that they constitute income from
sources within the 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. (For de nition of the
different classes of corporations, see Section 84 of the Code). AIHDcC
SECTION 251. Dividends paid in property. — Dividends paid in securities or other property (other
than its own stock), in which the earnings of a corporation have been invested, are income to the
recipients to the amount of the full market value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of such dividends includible for purposes
of the tax on corporations are speci ed in Section 24 of the Code. (See also Section 250 of these
regulations). 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 corporation declaring the dividends of
property to the corporation the stock of which is distributed as a dividend. Where a corporation
declares a dividend payable in a stock of another corporation, setting aside the stock to be so
distributed and notifying the stockholders of its action, the income arising to the recipients of such
stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax in
the year in which the warrants are issued.
SECTION 252. Stock dividends. — A stock dividend which represents the transfer of surplus to
capital account is not subject to income tax. However a dividend in stock may constitute taxable
income to the recipients thereof notwithstanding the fact that the o cers or directors of the
corporation (as de ned in Section 84) choose to call such distribution as a stock dividend. The
distinction between a stock dividend which does not, and one which does, constitute income taxable to
the shareholder is the distinction between a stock dividend which works no change in the corporate
entity, the same interest in the same corporation being represented after the distribution by more
shares of precisely the same character, and a stock dividend where there either has been a change of
corporate identity or a change in the nature of the shares issued as dividends whereby the proportional
interest of the shareholders after the distribution is essentially different from his former interests. A
stock dividend constitutes income if it gives the shareholder an interest different from that which his
former stock holdings represented. A stock dividend does not constitute income if the new shares
confer no different rights or interests than did the old — the new certi cates plus the old representing
the same proportionate interest in the net assets of the corporation as did the old.
SECTION 253. Sale of stock received as dividends. — Stock issued by a corporation, as a
dividend, does not constitute taxable income to a stockholder in such corporation, but gain may be
derived or loss sustained by the stockholder, whether individual 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 the sale of the stack with respect to which it is issued, shall be determined in accordance with the
following rules:
(a) Where the stock issued as dividend is all or substantially the same character or preference as
the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to
March 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair
market value) of the old shares of stock 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 character or preference
materially different from the stock upon which the stock dividend is paid, the cost (and when acquired
prior to March 1, 1913, the fair market value as of such date) of the old shares of stock shall be divided
between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of
each class of stock, old and new, at the time the new shares of stock are issued, and the cost (or when
acquired prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the
quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share
belongs divided by the number of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was purchased at different
times and at different prices and the identity of the lots can. not be determined, any sale of the original
stock, will be charged to the earliest purchases of such stock, and any sale of dividend stock issued
with respect to such stock will be presumed to have been made from the stock issued with respect to
the earliest purchased stock, to the amount of the dividend chargeable to such stock.
(d) Where the stock with respect to which a stock dividend is declared was purchased at
different times and at different prices, and the dividend stock issued with respect to such stock can not
be identi ed as having been issued with respect to any particular lot of such stock, then any sale of
such dividend stock will be presumed to have been made from the stock issued with respect to the
earliest purchased stock, to the 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 the recipient. 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
distribution of a taxable dividend, the amount received in redemption or cancellation of the stocks shall
be treated as a taxable dividend to the extent of the earnings or pro ts accumulated by such
corporation since March 1, 1913.
SECTION 255. Sources of distribution. — For the purpose of income taxation every distribution
made by a corporation is made out of earnings or pro ts to the extent thereof and from the most
recently accumulated earnings or pro ts. In determining the source of a distribution, consideration
should be given rst, to the earnings or pro ts of the taxable year; second, to the earnings or pro ts
accumulated since February 28, 1913, only in the case where, and to the extent that, the distribution
made during the taxable year are not regarded as out of the earnings or pro ts of the taxable year and
all the earnings or pro ts accumulated since February 28, 1913, have been distributed; and, fourth, to
sources other than earnings or profits only after the earnings or profits have been distributed.
SECTION 256. Distribution in liquidation. — In all cases where a corporation (as defined in Section
84) distributes all of its property or assets in complete liquidation or dissolution, the gain realized from
the transaction by the stockholder, whether individual or corporate, is taxable to the extent recognized
in Section 34(b) of the Code. For this purpose, the term "complete liquidation" includes any one of a
series of distributions made by a corporation in complete cancellation or redemption of all of its stock
in accordance with a bona de plan of liquidation under which the transfer of all the assets under
liquidation is to be complete within a reasonable time from the date of the rst distribution, usually not
to exceed one year from the time of such rst distribution. If the amount received by the stockholder in
liquidation is less than the cost or other basis of the stock, the loss in the transaction is deductible to
the extent allowed in Section 34(c) of the Code.
SECTION 257. Income and deductions of American citizens residing in the Philippines. — Under
subsection (u) of Section 84, a citizen of the United States residing in the Philippines, is taxable on
income from sources both within and without the Philippines, except income from sources within the
United States. Accordingly, items of deductions allocable to income of such taxpayer from sources
within the United 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. MEER
Collector of Internal Revenue
MANUEL ROXAS
Secretary of Finance
SUPPLEMENT A — WITHHOLDING ON WAGES
(Articles 1 to 9 will be found after Section 84 of the Code)
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APPENDIX CCC
Subject : Tax exemptions of (1) all donations and grants to the Philippine Inventors 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 Inventors Incentives Act."
SEC. 9. All donations and grants to the Commission shall be tax-exempt and deductible in full from the
donor's income tax returns when evidenced by a certi cate duly issued by the Commissioner. Any person who
evades or defeats, or attempts to evade or defeat in any manner any tax imposed by law by availing himself of
the provisions of this section through fraud or misrepresentation shall be punished by a ne of not more than
ve thousand pesos or imprisonment not exceeding one year or both, in the discretion of the court. In case the
violator is a corporation or association, the president or general manager thereof shall be criminally liable
without prejudice to the criminal responsibility of the member, o cer or employee thereof committing such
violation.
SEC. 10. To promote and encourage the manufacture of local inventions, they shall be exempted from
all kinds of taxes, licenses and permits during the rst ve years from the date of the grant of the letters of
patent: Provided, That their capitalization does not exceed fty thousand pesos: And provided, further, That
their manufacture is carried out by the 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 five years from January 1, 1965 to
December 31, 1969
The Law : Republic Act No. 4068
SEC. 1. Any provision of law to the contrary notwithstanding, any person, partnership, company or
corporation engaged or which shall engage in the manufacture of chemical products, including the direct
reduction of iron ore shall be entitled to exemption from the payment of special import tax, speci c tax, fees,
dues, customs duties and 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 ore and 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 for petroleum re neries or for other purposes, is subject to the
corresponding taxes, dues and customs duties: Provided, further, That the exemption from the special import
tax, speci c tax, fees, dues and customs duties and all other taxes of whatever nature and description on such
naphtha shall be made only when the Department of Finance, after investigation, nds that the following
concur:
(a) Naphtha sought to be exempted has the following specifications:
Gravity, ° API 60 to 88
Distillation, ASTM, ° F 80 to 450
Total Sulfur, wt. % 0.01 to 0.2
Unsaturates, vol. % trace to 1.0
Aromatics, vol. % trace to 30
(b) It will be used directly and exclusively as feedstock or raw material and that, in the course of
manufacture, its chemical structure is changed.
(c) It will be stored separately and such storage shall be provided with facilities to measure or record the
quantity of naphtha used as raw material or feedstock.
(d) The shipping and other supporting documents covering the local purchase or importation are in the
name of the tax-exempt firm to whom the goods shall be delivered directly.
SEC. 2. Any person, partnership, company or corporation eligible to tax exemption privileges under the
preceding section and enjoying tax exemption privileges on its local purchase and importations of raw
materials under other existing laws, shall not enjoy tax exemption privileges under this Act without
relinquishing its tax exemption privileges under other existing laws insofar as its local purchase and
importations of naphtha are concerned.
SEC. 3. The Department of Finance shall promulgate the rules and regulations necessary for the
implementation of this Act: Provided, That any violation of this Act or of the rules and regulations issued in
accordance with this section, and any misrepresentation of any essential fact required by said rules, shall
subject the offender to cancellation of his exemption privilege and to the payment of double the duties and
taxes involved; and to imprisonment of not less than two nor more than four years and a ne of not less than
ten thousand 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 be criminally responsible therefor and, in
the case of an alien, he shall be ordered deported.
SEC. 4. All existing laws, executive orders, and administrative rules and regulations or parts thereof,
which are inconsistent with the provisions of this Act are hereby repealed or modified accordingly.
SEC. 5. This Act shall be effective for a period of ve years beginning January rst, 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 the textile 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 duties and taxes as follows:
(a) One hundred per centum of the taxes and duties due during the period from the date 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 from January rst, nineteen
hundred sixty-eight;
(c) Fifty per centum of the taxes and duties due during the period from January rst to December thirty-
first, nineteen hundred seventy;
(e) On or after January first, nineteen hundred seventy-one all taxes and duties shall be paid in full.
SEC. 4. All textile manufacturers who register under this Act shall, in lieu of the taxes herein exempted,
be assessed and shall pay a special tax of one per centum of their gross sales as de ned by the National
Internal Revenue Code, to be paid in the same manner and at the same time and subject to the same penalties
and surcharges as the sales-tax, which shall constitute a Special Textile Research Fund, to be disposed of and
disbursed by the National 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 raw materials needed by the
industry; and to the improvement or invention of machinery equipment 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 laws shall 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 from the payment of income
and gross receipts taxes for a period of three (3) years after the effectivity of this Act. Thereafter, they shall be
taxed on a gradually increasing basis of twenty- ve percent (25%) per year for the next succeeding four (4)
years after the end of which period they shall pay all taxes in full. Those banks that may be established within
three (3) years from the date of effectivity of this Act, shall be totally exempted from income and gross receipts
taxes for three years from the date off their organization. Thereafter they shall be taxed on a gradually
increasing basis of twenty- ve per cent (25%)) per year for the next succeeding four (4) years after the end of
which period they shall pay all such taxes in full.
APPENDIX GGG
Subject : Limitation in the tariff or taxes that may be imposed on importation of 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 foreign leaf tobacco so imported except an amount
equivalent to one hundred per centum; of its landed 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 found mostly 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 the

the 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
Section 302 of the U. S. Revenue Act 1926, as
88 87
amended
by SEC. 401 of the Revenue Act of 1934 and by
sec. 805 of the Revenue Act of 1936
and 1539, as amended by secs. 1 and 2, respectively,
89 88 1538
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
252 253
254 1501
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
Commonwealth Act No. 195
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
350 351
352 2731 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 date
1 Commonwealth Act No. 466.

2 Report of the Tax Commission, Volume II.
3 Act No. 2711 (Revised Administrative Code of the Philippines)

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February 10, 1940

REVENUE REGULATIONS NO. 02-40

INCOME TAX REGULATIONS

P- P2,000 2,000 3% P60 P60

(Section 22 of the Code)

SECTION 10. Personal exemption of single individuals. — A single individual is entitled to a

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SECTION 72. Bonuses to employees. — Bonuses to employees will constitute allowable

(Section 30(g) of the Code)

Subject: Oil and gas wells (1) (2)

(Section 34 of the Code)

Capital losses — on capital assets held for 9

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

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

P20,000 P60,000 P40,000 No taxable gain or deductible loss.

P20,000 P6,000 P10,000 No taxable gain or deductible loss.

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

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

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P.I. gross income less P.I. expenses, or

(Section 38 of the Code)

(Section 43 of the Code)

(Section 48 of the Code)

(Section 54 of the Code)

SECTION 211. Decedent's estate administration . — The "period of administration or settlement

(Section 64 of the Code)

Relationship Shares Shares Shares Shares Shares

(Section 68 of the Code)

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(Section 76 of the Code)

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CD Technologies Asia, Inc. 2018 cdasiaonline.com

CD Technologies Asia, Inc. 2018 cdasiaonline.com

CD Technologies Asia, Inc. 2018 cdasiaonline.com

CD Technologies Asia, Inc. 2018 cdasiaonline.com

Sources or Patterns of the Original Provisions of the

(1) (2) (3) (4)

Sections of Sections of Sections of the

86 85 1536, as amended by SEC. 10, Act No. 2835, sec. 1

185 191 No citation

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270 272 1517

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357 359 485

1 Commonwealth Act No. 466.

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