TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y.

2022 – 2023

INCOME TAX (EXCLUSIONS FROM GROSS INCOME)

Objectives
After this chapter, readers are expected to gain familiarization and demonstrate mastery of the following:
1. List of exclusions from gross income
2. Exclusion conditions and limitations of certain income
3. Entities exempt under the Tax Code and other special laws

1. Exclusions defined: The term “exclusions” refer to items that are not included in the determination of
gross income either because:
a. They represent return of capital or are not income, gain or profit; or
b. They are subject to another kind of internal revenue tax; or
c. They are income, gain, or profit that are expressly exempt from income tax under the
constitution, tax treaty, tax code, or general or special law.

Exclusions are in the nature of tax exemptions, and it behooves upon the taxpayer to establish them
convincingly (Commissioner v. Mitsubishi, 181 SCRA 214). Exemption is an immunity or privilege; it
is freedom from a charge or burden to which others are subjected (Greenfield v. Meer, 77 Phil. 394).

Such tax-free income should not be included in the income tax return for individuals (BIR Form
1701) or corporate income tax return (BIR Form 1702), unless information regarding it is specifically
called for. The exclusion of such income should not be confused with the reduction of gross income
by the application of allowable statutory reduction (Sec. 61, Rev. Regs. No. 2).

2. Sec. 32 (B) exclusions from gross income – the following items shall not be included in gross
income and shall be exempt from taxation:
a. Exclusions from 1. Proceeds of the life insurance;
gross income 2. Amount received by insured as returns of
premium;
3. Gifts, bequests and devises;
4. Compensation for injuries or sickness;
5. Income exempt under treaty;
6. Retirement benefits, pensions, gratuities, etc.;
7. Miscellaneous items;
a. Income derived by foreign government
b. Income derived by the government or its
political subdivision;
c. Prizes and awards;
d. Prizes and awards in sports competition;
e. 13th month pay and other benefits;
f. GSIS, SSS, Philhealth and other
contributions;
g. Gains from the sale of bonds, debenture or
other certificate of indebtedness with maturity
of more than 5 years;
h. Gains from redemption of shares in mutual
fund.
b. Used to be 1. Interest on government securities (now subject to
excluded but now 20% final tax)
subject to final tax 2. Income derived as informer’s reward to persons
instrumental in the discovery of violations of the
NIRC and in the discovery and seizure of
smuggled goods (now subject to 10% final tax
based on 10% of the revenues, surcharges or
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 1
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

fees, recovered and/or fine or penalty imposed or

P1,000,000 per case whichever is lower).

3. Exclusions from Gross Income Explained

a. Life Insurance
Life Insurance The proceeds of life insurance policies paid to the heirs or
beneficiaries (individual, partnership, or corporation, but not a
transferee for a valuable consideration) by reason of the death
of the insured, whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement to pay
interest thereon, the interest payments shall be included in gross
income. The interest income shall be taxed at the graduated
income tax rates.

b. Amount received by insured as return of premium

Return of The amount received by the insured, as a return of premiums
premium paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the term
mentioned in the contracts or upon surrender of the contract.

If the amounts, when added to amounts received before the

taxable year under such contract, exceed the aggregate
premium paid, whether or not paid during the taxable year, then
the excess shall be included in gross income.

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 the
sums subsequently paid by the transferee are exempt from
taxation (Sec. 62, Rev. Reg. No. 2). No loss is realized on
surrender of a life insurance policy for its surrender value (Sec.
14.029 (10), (15), U.S. IRC).

Participating dividends are not income to the insured. They are

treated as return of capital.

c. Gifts, bequests and devises

Gifts bequests The value of property acquired by gift, bequest, devise, or
and devises descent.

Gifts, bequests and devises are subject to transfer taxes

(estate tax or donor’s tax).

Income from such property, as well as gift, bequest, devise or

descent of income from any property, in cases of transfers of
divided interest, shall be included in gross income.

Alimony or an allowance based on a separation agreement is

not taxable income.

d. Compensation for injuries or sickness

Compensation Amounts received, through Accident or Health Insurance or
for injuries or under Workmen’s Compensation Acts, as compensation for
sickness personal injuries or sickness, plus the amounts of any
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 2
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

damages received, whether by suit or agreement, on account

of such injuries or sickness.

Recoveries of damages, representing compensation for

personal injuries arising from libel, defamation, slander, breach
of promise to marry, alienation of affection are not subject to
income tax and shall not be included in gross income.

Payments in settlement of an action for breach of promise to

marry and compromise payments in settlement of an action for
damages against a bank on account of conduct of impairing
the taxpayer’s goodwill by injuring its reputation are not taxable
(Lyde McDonal, 9 BTA 1340; Farmers and Merchants Bank of
Carlettsburg v. Commissioner, 59 Fed. (2d) 912.

e. Income exempt under treaty

1. Income Income of any kind to the extent required by any treaty
exempt obligation binding upon the Government of the Philippines
under Examples of income exempt under treaty:
treaty 1. Salaries of officials of the United Nations assigned in
the Philippines if paid by the United Nations and
certified by the Secretary General of the United
Nations;
2. Salaries, allowances, fees, or wages received by
citizens of the United States of America working in
consular offices in the Philippines are exempt from all
taxes;
3. Salaries of diplomatic officials and agents.

As general rule, the provisions of the Philippine Tax Code

(domestic law) shall apply on the income, gain or profit of any
person liable to income tax.

In case of conflict between the provisions of a tax treaty and

domestic law, the provisions of the tax treaty generally prevail
over the provisions of the domestic law.

Where the rate of tax imposed under the domestic law is lower
than the rate imposed under the tax treaty, the lower tax rate
under the domestic law shall prevail.

f. Retirement benefits
1. Retirement benefits a. Retirement benefits received under RA No.
received under R.A. 7641 and those received by officials and
No. 7641 and those employees of private firms, whether
received by officials individual or corporate, in accordance with a
and employees of reasonable private benefit plan maintained by
private firms the employer.
b. The retiring official or employee has been in
the service of the same employer for at least
ten (10) years and is not less than (50) years
of age at the time of his retirement.
c. The benefits granted shall be availed of by an
official or employee only once
d. The term “reasonable private benefit plan”
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 3
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

means:
1. A pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer
for the benefit of some or all of his
officials or employees,
2. Wherein contributions are made by such
employer for the officials or employees, or
both, for the purpose of distributing to
such officials and employees the earnings
and principal of the fund thus
accumulated, and
3. Wherein it is provided in said plan that at
no time shall any part of the corpus or
income of the fund be used for, or be
diverted to, any purpose other than for
the exclusive benefit of the said officials
and employees
2. Any amount Any amount received by an official or employee or
received by an by his heirs from the employer as a consequence of
official or employee separation of such official or employee from the
as a consequence service of the employer because of death, sickness
of separation or other physical disability or for any cause beyond
the control of the said official or employee.

The disease or illness should be of type which would

affect the performance of duties and endanger the
life of the employee if he/she continues working
(RMO No. 25-91).
3. Social security The provisions of any existing law to the contrary
benefits, retirement notwithstanding, social security benefits, retirement
gratuities, pensions gratuities, pensions and other similar benefits
and other similar received by resident or nonresident citizens of the
benefits received Philippines from foreign government agencies and
from foreign other institutions, private or public.
government
agencies and other
institutions, private
or public
4. United States Payments of benefits due or to become due to any
Veterans person residing in the Philippines under the laws of
Administration the United States administered by the United States
benefits Veterans Administration.
5. Social Security Benefits received from or enjoyed under the Social
System (SSS) Security System (SSS)
benefits
6. Government Benefits received from the GSIS including retirement
Service Insurance gratuity received by government officials and
System (GSIS) employees.
benefits

g. Miscellaneous Items
Income derived by Foreign Income derived from investments in the Philippines
Governments in loans, stocks, bonds or other domestic securities,
or from interest on deposits in banks in the
Philippines by:
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 4
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023
Income derived by the
government or its political
subdivisions
Prizes and awards
Prizes and awards in
sports competition
13th month and other
benefits
The exclusion from gross income is not applicable to
self-employed individuals and income generated
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE.
INVALID FOR ANY OTHER PURPOSE.
1. Foreign governments,
2. Financing institutions owned, controlled, or
enjoying refinancing from foreign
governments, and
3. International or regional financial institutions
established by foreign governments.
Income derived from any public utility or from the
exercise of any essential governmental function
accruing to the Government of the Philippines or to
any political subdivision thereof.
Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
a. The recipient was selected without any action
on his part to enter the contest or proceeding;
and
b. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
All prizes and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations.
Thirteenth month pay equivalent to the mandatory
one (1) month basic salary of official and employees
of the government (whether national or local),
including government-owned or controlled
corporations, and/or private offices received after the
twelfth month pay.
Other benefits such as Christmas bonus, productivity
incentives, loyalty award, gift in cash or in kind, and
other benefits of similar nature actually received by
officials and employees of both government and
private offices, including the Additional
Compensation Allowance (ACA) granted and paid to
all officials and employees of the National
Government Agencies (NGAs) including State
Universities and Colleges (SUCs), Government-
Owned and/or Controlled Corporations (GOCCs),
Government Financial Institutions (GFIs) and Local
Government Units (LGUs).
The above stated exclusions shall cover benefits
paid or accrued during the year, provided that the
total amount shall not exceed ninety thousand
pesos (P90,000).
The exclusion shall not apply to other compensation
received by an employee under an employer-
employee relationship such as basic salary and
other allowances.
5
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

from business (R.A. 10653 as implemented under

GSIS, SSS, Medicare
(Philhealth) and other
contributions
Gains from the sale of
bonds, debentures or other
certificate of indebtedness
Gains from redemption of
shares in mutual fund
RR 3-2015 dated March 9, 2015)
GSIS, SSS, Philhealth, Pag-ibig contributions and
union dues of individuals
Any contributions in excess of the mandatory GSIS,
SSS, Philheath and PAG-IBIG or Home
Development Mutual Fund contributions are not
excludible from gross income of the individual
taxpayer and, therefore, are subject to income tax
and consequently, to withholding tax (RMC No. 27-
2011).
Gains realized from the sale or exchange or
retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than (5)
years.
Gains realized by the investor upon redemption of
shares of stock in a mutual fund company.

Note: Mutual fund company is an open-end and

close-end investment company.

h. Other tax-exempt items

1. Compensation income including holiday pay, overtime pay, night shift differential pay, and
hazard pay earned by minimum wage earner, who has no other reportable income
2. Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the
International Rice Research Institute and the Ford Foundation
3. Allowances paid to military personnel
4. Compensation for causal employment like house helper/maid, not connected in the conduct
of business of the employer
5. Interest on the price of land covered by Comprehensive Agrarian Reform Program (CARP)
6. Compensation of Statutory Minimum Wage Earner
7. Income generated from commercial sale of the invention for 10-year which starts from the
date of the first commercial sale
8. Income of registered Barangay Micro Business Enterprise (BMBE) – total assets not more
than P3,000,000 exclusive of the land on which the particular business entity’s office, plant
and equipment are situated
9. Income of duly registered cooperatives dealing/transacting business with members only

i. Income of registered Barangay Micro Business Enterprise (BMBE)

Definition BMBE refers to any business entity or enterprise engaged in the
production, processing or manufacturing of products or
commodities, including agro-processing, trading and services,
whose total assets including those arising from loans but exclusive
of the land on which the particular business entity’s office, plant and
equipment are situated, shall not be more than P3,000,000
Place of The Office of the Treasurer of each city or municipality shall
registration register BMBEs and issue a Certificate of Authority (CA) to enable
the BMBE to avail of incentives under the Act.
Only one Certificate of Authority shall be issued for each BMBE
and only by the Office of the Treasurer of the City or Municipality
that has jurisdiction over the principal place of business of BMBE
(Section 3, IRR of BMBE).
Who are Any person, natural or judicial, such as partnership, corporation,
eligible to association and cooperative, having the qualifications and none of
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 6
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

register the disqualifications shall be eligible to register as BMBEs (Sec. 4,

IRR of BMBE as amended).

“Services” shall exclude those rendered by any one, who is duly

licensed by the government after having passed a government
licensure examination, in connection with the exercise of one’s
profession (Sec. 2, IRR of BMBE).
Incentives 1. Exemption from income tax for income arising from the
and benefits operations of the enterprise.
granted to 2. Reduction of or exemption from local taxes, fees and
BMBEs charges
3. Exemption from the coverage of the Minimum Wage Law
4. Availment of credit services from government financing
institutions
5. Availment of technology transfer, production, management
training programs and marketing assistance from
government entities
6. Availment of Development Funds from GOCCs
7. Access to Trade and Investment Promotion
8. Access to One-Stop Business Registration Center

Items of exclusion because they are expressly exempt from income tax
1. Under the Constitution – all assets and revenues of a non-stock, non-profit educational institution
used directly, actually and exclusively for private educational purposes shall be exempt from
taxation (Sec 4(3), Art. XIV, 1987 Constitution).
2. Under a Tax Treaty – income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines, is exempt from income tax.
3. Under Special Laws –
a. Under R.A. 6938 (Cooperative Code of the Philippines), agricultural multi-purpose
cooperative registered with the Cooperative Development Authority is exempt from ordinary
income tax on its transactions with members and non-members for a period of 10 years from
the date of registration. Thereafter, the income tax exemption shall be limited to business
transactions with member only (BIR Ruling No. 08-2001, March 5, 2001). R.A. 9520
(Philippine Cooperative Code of 2008) exempts from any taxes and fees on duly registered
cooperatives which do not transact business with non-members or the general public, and
cooperatives with accumulated reserves and undivided net savings of not more than P10
million. However, if the cooperative has accumulated reserves and net savings of more than
P10 million, it is subject to income tax on the amount allocated for interest on capitals,
provided that it is not consequently imposed on interest individualy received by members
(Arts. 60 and 61, R.A. 9520, February 17, 2009).
b. Under R.A. 7279 (Urban Development Housing Act of 1992), the National Housing Authority
is exempt from all fees and charges of any kind, whether local or national, such as income
and realty taxes, while the private sector participating in socialized housing shall be exempt
from the following taxes:
i. Project-related corporate or individual income taxes on income directly realized from
the development and/or improvement of socialized housing sites, slum areas,
resettlement areas, and/or construction and sale of socialized housing units to
qualified beneficiaries as approved by HLURB or LGU concerned.
ii. Capital gains tax on sale of raw lands for use in socialized housing project.
c. Under R.A. 7653 (New Central Bank Act), as amended by R.A. 8791, the Bangko Sentral ng
Pilipinas is exempt from all national, provincial, municipal and city taxes for a period of five
years (BIR Ruling No. 1380-96, December 12, 1996). It is exempt from documentary stamp
tax under R.A. 9243 (2003).

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 7

INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

d. Under R.A. 7916 (PEZA Law), as amended, PEZA-registered enterprises are given income
tax holidays of six (6) or four (4) years from the date of commercial operation, depending on
whether their activities are considered as pioneer or non-pioneer.
e. Under R.A. 9178 (Barangay Micro Business Enterprises Act of 2002), Barangay Micro
Business Enterprises shall be exempt from income tax for income arising from the operation
of the enterprise.
f. Local Water Districts are exempt from income tax under R.A. 10026, as circularized by
Revenue Memorandum Circular No. 28-2010 dated. March 23, 2010.
g. Incentives under R.A. 9856 (The Real Estate Investment Trust Act of 2009) as implemented
by Rev Reg No 13-2011, July 25, 2011 – in order to provide opportunities to Filipino citizens
who are not capable of owning real property as such or to democratize wealth by broadening
the participation of Filipinos in the ownership of real estate in the Philippines (Sec. 2, REIT
Law), and to give alien individuals and foreign corporations to own indirectly real properties
in the Philippines, Congress enacted Republic Act No. 9856, otherwise known as the “Real
Estate Investment Trust (REIT)” Law. To make investments in REIT corporations attractive,
the law gives the following tax incentives to qualified investors:
i. Persons entitled to enjoy incentives
There are two (2) kinds of persons entitled to tax incentives, namely:
1. REIT, which is a stock corporation organized primarily to own income-
generating real estate assets; and
2. Investor in REIT shares of stock in accordance with a REIT plan approved by
SEC.
ii. Requisites for Exemption
To be entitled to the incentives provided by law, the following requisites must be
complied with:
1. REIT shares are registered with the SEC and the PSE;
2. REIT complies with the foreign ownership limitations provided for in the 1987
Constitution and special laws on real property ownership;
3. 90% of the distributable income of the REIT shall be distributed to
shareholders during the year. Distributable income excludes proceeds from
the sale of REIT assets that are re-invested within one (1) year from date of
sale;
4. Minimum public ownership – there must be at least 1,000 public shareholders
in the REIT, each shareholder owning at least 50 shares of any class of
shares, who in the aggregate own at least one-third (1/3) of the outstanding
capital of the REIT;
5. Capitalization – the REIT must have a minimum paid-up capital of P300
million;
6. Allowable investments – The REIT may invest in the following: (a) real estate
in the Philippines or if the real estate is outside the Philippines, it does not
exceed 40% of the deposited property and upon special authority from the
SEC; (b) real-estate related assets; (c) managed funds, debt-securities and
listed shares; (d) government securities; and (e) other similar outlets allowed
by SEC;
7. Investment in synthetic investment products – the REIT may invest not more
than five percent (5%) of its investible funds in synthetic investment products,
such as credit default swaps, credit-linked notes, etc., upon approval by the
appropriate regulatory body;
8. Income-generative real estate – the income generating real estate of the
REIT must provide income representing at least 75% of the deposited
property;
9. Property development. – the REIT must hold the developed property until its
completion and the total contract value shall not exceed 10% of the deposited
property of the REIT;

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 8

INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

10. Single entity limit – The REIT shall not invest not more than 15% of the
investible funds in any one issuer’s securities or managed fund, except
government securities where the limit is 25%;
11. Joint Venture – the REIT shall not make investment by acquiring shares or
interests in an unlisted special purpose vehicle constituted to hold/own real
estate and the REIT shall have freedom to dispose of such investment; and
12. The valuation of the REIT assets shall be made by an independent appraisal
company at least once a year.
iii. Tax Incentives – the tax incentives of a REIT corporation include the following:
1. The regular corporate income tax (RCIT) of the REIT shall be computed on its
Net Taxable Income as defined in the REIT law (i.e., dividend paid during the
year and on or before the last day of the 5th month following the close of the
taxable year which is considered paid as of the end of the year is deductible
from its gross income);
2. The REIT shall not be liable to the minimum corporate income tax (MCIT)
computed at two percent (2%) of its gross income;
3. The distributable income excludes the proceeds from sale of REIT assets that
are re-invested by the REIT within one (1) year from the date of sale;
4. One percent (1%) creditable withholding tax on income payments to REIT;
5. 10% final tax on dividends paid by REIT, unless received by a non-resident
person that is subject to income tax rate of less than 10% pursuant to a
treaty. Overseas Filipino investor is exempt from the dividend tax for seven
(7) years;
6. The sale of listed investor securities through the PSE, including block sales or
cross sales with prior PSE approval, is subject to stock transaction tax of ½ of
once percent (1%) of the gross selling price;
7. The initial public offering and secondary offering of investor securities is
exempt from the IPO tax;
8. The original issuance of investor securities shall be subject to documentary
stamp tax;
9. The sale or transfer of real property and security interest thereto shall be
entitled to 50% discount of the applicable documentary stamp tax thereon,
and the unlisted REIT may avail of this privilege, provided its listed within two
(2) years from the initial availment of the incentive;
10. However, a seller of real property to a REIT shall be subject to income tax,
because the REIT law does not provide for any exemption on such
transaction. Likewise, the sale and lease of real property by a REIT shall be
subject to value added tax (VAT), but a REIT shall not be considered as a
dealer of securities and shall not be subject to VAT on sale or exchange of
securities forming part of its real estate-related assets.
h. R.A. 9505 (Personal Equity and Retirement Account [PERA] Act of 2008 – A qualified
contributor shall be entitled to a tax credit in the amount of five percent (5%) of the
aggregate qualified PERA contributions made in one taxable year against his own income
tax liability. However, if the contributor is an overseas Filipino, he shall be entitled to claim
the five percent (5%) tax credit against any national internal revenue tax liabilities, excluding
the contributor’s withholding tax liabilities as withholding agent.

Exempt Corporations
Government-owned or controlled corporations – all corporations, agencies, or instrumentalities owned or
controlled by the Government, except:
1. Government Service Insurance System;
2. Social Security System; and
3. Philippine Health Insurance Corporation

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 9

INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in a similar business, industry, or activity, the provisions of existing special or general laws to the
contrary notwithstanding (BIR Ruling No. 063-2000, November 20, 2000).

Exempt corporation and associations – Section 30 of the Revised Tax Code expressly exempt from tax the
income received by the following organizations as such:
A. Labor, agricultural or horticultural organization not organized principally for profit;
B. Mutual savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;
C. A beneficiary society, order or association, operating for the exclusive benefit of the members such
as fraternal organization operating under the lodge system, or a mutual association or a nonstock
corporation organized by employees providing for the payment of life, sickness, accident or other
benefits exclusively to the members of such society, order, or association, or nonstock corporation
or their dependents;
D. Cemetery company owned and operated exclusively for the benefit of its members;
E. Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;
F. Business league, chamber of commerce, or board of trade, not organized for profit and no part of
the net income of which inures to the benefit of any private stockholder or individual;
G. Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
H. A nonstock and nonprofit educational institution;
I. Government educational institution;
J. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses; and
K. Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose
of marketing the products of its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce finished by them.

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code.

While the Revised Tax Code enumerates certain non-stock, non-profit associations that are exempt
from income tax, their income from property, real or personal, or from an activity conducted for
profit, regardless of the disposition of the proceeds of the sale or income shall be taxable to them.

SOURCES:

[1] Commissioner v. Mitsubishi, 181 SCRA 214

[2] Greenfield v. Meer, 77 Phil. 394
[3] Sec. 61 and 62, Rev. Regs. No. 2
[4] Sec. 14.029 (10), (15), U.S. IRC
[5] Lyde McDonal, 9 BTA 1340; Farmers and Merchants Bank of Carlettsburg v. Commissioner, 59
Fed. (2d) 912
[6] RMO No. 25-91
[7] Sec. 2,3,4, IRR of BMBE
[8] BIR Ruling No. 08-2001, March 5, 2001
[9] Arts. 60 and 61, R.A. 9520, February 17, 2009
[10] BIR Ruling No. 1380-96, December 12, 1996
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 10
INVALID FOR ANY OTHER PURPOSE.
TAX 11 - Income Taxation  Prof. Balderama, CPA  1st Semester A.Y. 2022 – 2023

[11] Barangay Micro Business Enterprises Act of 2002

[12] R.A. 9856 - The Real Estate Investment Trust Act of 2009) as implemented by Rev Reg No 13-
2011, July 25, 2011
[13] BIR Ruling No. 063-2000, November 20, 2000
[14] RA No. 10963 – “An Act Amending Sections 5, 6, 24, 25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 74,
79, 84, 90,91, 97, 99, 100, 101, 106, 107, 108, 109, 110, 112, 114, 116, 127, 128, 129, 145, 149,
151, 155, 171, 174, 175, 177, 178, 179, 180, 181, 182, 183, 186, 188, 189, 190, 191, 192, 193, 194,
195, 196, 197, 232, 236, 237, 249, 254, 264, 269, and 288; Creating New Sections 51-A, 148-A,
150-A, 150-B, 237-A, 264-A, 264-B, and 265-A; and Repealing Sections 35, 62 and 89; All Under
Republic Act No. 8424, Otherwise Known as the National Internal Revenue Code of 1997, as
amended, and for Other Purposes,” also known as Tax Reform for Acceleration and Inclusion
(TRAIN) Law, Approved 19 December 2017; with Presidential veto on certain portions; Effective 1
January 2018.
[15] Revised National Internal Revenue Code of 1997

EXERCISE 1

Question (CPA Exam):

Mr. J. Cruz insured his life with his estate as beneficiary. In 2018, after Mr. Cruz had paid P65,000 in
premiums, he assigned the policy to Mr. S. Santos for P60,000, and Mr. Santos collected the total
proceeds of P200,000. Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid total
premiums of P80,000.
Compute for the: (a) exempted amount; and (b) the taxable amount of Mr. Santos

Answer:
Proceeds of life insurance P200,000
Less: Payments for the assignment of insurance P60,000
Premiums paid 80,000 140,000
Taxable amount P60,000

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 11

INVALID FOR ANY OTHER PURPOSE.