III. GROSS INCOMEINCLUSIONS in Gross Income

SEC. 32. (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;(2) Gross income derived from the conduct of trade or business or the exercise of a profession;(3) Gains derived from dealings in property;(4) Interests;(5) Rents;(6) Royalties;(7) Dividends;(8) Annuities;(9) Prizes and winnings;(10) Pensions; and(11) Partner's distributive share from the net income of the general professional partnership.

1. Compensation: Special Problems on In-Kind CompensationSec. 2.78.1(A) and (1), Rev. Regs. 2-98 (April 17, 1998) (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income.The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them.(1) Compensation paid in kind. Compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair market value of the remuneration received. If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered.

CASES:Henderson vs Collector Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c represents a group of American cos. engaged in the business of general insurance (exc. in life insurance). He receives a basic annual salary of P30,000 and allowance for house rentals and utilities. Although he and his wife are childless and are only two in the family, they lived in a large apartment provided for by his employer. As company president, he and his wife had to entertain and put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental and utilities expenses. Held: The exigencies of Henderson's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Because they had to entertain and put up houseguests, the employer had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartment chosen by the employer is of no moment, for no part of the allowance redounded to the benefit of the Hendersons. Neither was there an amount retained by them. Their bills for rental were paid directly by the employer to the creditor.

CIR v CastanedaFacts: Efren Castaneda retired from govt service as Revenue Attach in the Philippine Embassy, London, England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of Internal Revenue withheld P12,557 allegedly representing that it was tax income.Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from income tax.The Solicitor General contends that the terminal leave is based from an employer-employee relationship and that as part of the services rendered by the employee, the terminal leave pay is part of the gross income of the recipient. CTA ruled in favor of Castaneda and ordered the refund. CA affirmed decision of CTA. Hence, this petition for review on certiorari.Issue: Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income tax.Held: NO. As explained in Borromeo v CSC, the rationale of the court in holding that terminal leave pays are subject to income tax is that: . . commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits.A terminal leave pay is a retirement benefit which is NOT subject to income tax.

Polo vs CIRFacts: David G. Nitafan, Wenceslao M. Polo, and Maximo A. Savellano, Jr., petitioners, vs. Commissioner Of Internal Revenue and The Financial Officer, Supreme Court Of The Philippines, respondents.Facts: Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme Court, from making any deduction of withholding taxes from their salaries.Issue: Whether or not members of the Judiciary are exempt from income taxes.Held: Yes. The Court held that the salaries of Justices and Judges are properly subject to a general income tax law applicable to all income earners and that the payment of such income tax by Justices and Judges does not fall within the constitutional protection against decrease of their salaries during their continuance in office and the ruling that "the imposition of income tax upon the salary of judges is a diminution thereof, and so violates the Constitution" in Perfecto vs. Meer, as affirmed in Endencia vs. David must be declared discarded. The framers of the fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the 1987 Constitution that they have adopted.

a. Limited Choice and Restricted PropertyU.S. v. DrescherFacts: Drescher was an employee of Bausch and Lomb who was given voluntary retirement before he reached 65. He was given in recognition of prior services rendered a non-transferable annuity that would begin to pay when he reached 65 in 1958 )or to his designated beneficiary if he died), for which the company paid a premium of $5,000 and deducted as compensation to Drescher. The policy had no cash surrender value. It was only a guaranteed future income stream for himself or his beneficiary.Issue: What is the includable income value of the annuity in the present tax year? Is it the price of the premium paid by the company ($5,000), or is it zero because the annuity gives the taxpayer no present income?Held: YES. Taxable. The present value of an annuity which is non-transferable is equal to the cost to the taxpayer of acquiring identical rights. An annuity is deferred compensation.Sec. 22(b) (2) "Annuities, etc; Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, 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.The court reasoned that the value lie somewhere between the premium price paid and zero. Even though the taxpayer might die before the annuity started paying, he had some present rights to a future income stream, which he could designate to a beneficiary.Furthermore, the taxpayer could realize present cash payment from a third party who he could designate as a trustee to hold the future payments in trust for him. However, this would probably be worth less than the premium paid by the company based on the risk of the taxpayer dying before the annuity began paying, and thus the payments going to the beneficiary. However, the burden of proof was on Drescher to show that the present value was less than $5,000.

BIR Rul. 9-04 (Sept. 13, 2004)Facts: ANZ (Australia and New Zealand) Bank was organized under the laws of Australia; that its shares are listed and traded in the Australian Stock exchange; that in order to increase employee motivation and to create a stronger link between increasing shareholder value and its employee reward system ANZ Bank has established the ANZ Employee Share Acquisition Plan (ESAP) to provide employees with the opportunity to participate in the growth of the Bank.Under the ESAP, all employees, including executive officers, with at least one year of service with the Bank will be offered Australian registered shares in ANZ Bank free of charge. There are two schemes under the plan: (1) the general scheme and (2) the incentive scheme. Under both schemes, a trading lock of three years from the date of award or from the termination of employment from ANZ in case of general scheme shall be implemented. During the trading lock, a Trustee will hold the shares on behalf of the employees. Dividends accruing to the employees during the trading lock are required to be reinvested in ANZ shares under the compulsory participation requirement of theDividend Reinvestment Plan (DRP). As such, employees cannot receive cash dividends; the cash dividends will be received in the form of additional ANZ shares. The additional shares will be released from restriction at the same time the participant's plan shares are released.The main distinction between the two scheme is that in general scheme, shares are not forfeitable under any circumstance whereas in the incentive scheme the shares and any accumulated DRP shares will be forfeited if the employee resigns or is dismissed before the end of the three year restriction period; that however, if the employee retires or is maderedundant, the shares will not be forfeited; that they will be transferred to him following termination of employment.Issue:1. W/N shares granted under the ANZ ESAP Plan which are subject to disposal restriction and forfeiture clause (the latter applies to ESAP shares under incentive scheme) at the time of grant shall not be taxed until the disposal restriction is lifted.2. W/N dividends from ANZ ESAP shares which are mandatorily reinvested through the ANZ Dividend Reinvestment Plan (DRP), with the same disposal restrictions and/or forfeiture clauses as the original shares, shall not also be taxed until the disposal restriction is lifted.

Held:In both instances NOT TAXABLE until disposal restriction of three years is lifted.1. Section 32(A)(l) of the Tax Code of 1997, provides that the term "gross income" includes compensation for services in whatever form paid including, but not limited to, fees, salaries, wages, commissions, and similar items.On the other hand compensation is defined under Section 2.78. (A) of Revenue Regulations (RR) No. 2-98 as "all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code". The regulations further provides that compensation may be paid in money or in some medium other than money, as for example, stocks, bonds or other forms of property.The shares granted pursuant to an employer-employee relationship under the ANZ ESAP Plan which are subject to disposal restriction and forfeiture clause at the time of grant shall not be taxed until the disposal restriction is lifted, that is, for a period of three years from the date the shares are awarded or the termination of employment with ANZ in case of the general scheme and a period of three years from the date the shares are awarded in the case of the incentive scheme whichever is earlier, as the same will only be taxable when actually or constructively received. (Section 2.83.6 of RR 2-98)Sec. 2.83.6. Applicability of constructive receipt of compensation. The withholding tax on compensation shall apply to compensation actually or constructively paid. Compensation is constructively paid within the meaning of these Regulations when it is credited to the account of or set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to possession. To constitute payment in such a case, the compensation must be credited or set apart for the employee without any substantial limitation or restriction as to time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payments brought within his control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but it is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with a bonus stock, which is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute payment. 2. With respect to dividends, the same, should be recognized on the date of declaration, the date on which the payment of dividends is approved. The reason is that when dividends are declared, the stockholder has already the right thereto so much so that if the stocks are subsequently sold, the sales price normally includes the accrued dividends. Once a dividend has been declared, a legal liability binding on the corporation is created.However, stock dividends whether of the same class or different are not income. The reason is that there is no distribution of the assets of the corporation. The stock dividends create only a change in the composition of the stockholders' equity, that is, a transfer from retained earnings to capital stock.

b. Forced Consumption: Convenience of the Employer RuleSec. 2.78.1(A)(2), Rev. Regs. 2-98 (April 17, 1998)SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income.The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them.(2) Living quarters or meals. If a person receives a salary as remuneration for services rendered, and in addition thereto, living quarters or meals are provided, the value to such person of the quarters and meals so furnished shall be added to then remuneration paid for the purpose of determining the amount of compensation subject to withholding.However, if living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as part of compensation income.

Sec. 2, Rev. Audit Mem. Order 1-87 (April 23, 1987)2. Housing and Meals2.1 If an employee receives a remuneration for services salaries and/or allowances and in addition thereto living quarters and/or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose of determining the amount of compensation subject to withholding tax.2.2 The value of lodging furnished to an employee by or on behalf of the employer shall be excluded from the employee's gross income, if the lodging is furnished in the business premises of the employer; and the employee is required to accept such lodging as a condition of his employment.2.3 The value of meals furnished to an employee by or on behalf of his employer shall be excluded from the employee's gross income if the meals are furnished on the business premises of the employer and the meals are furnished for the convenience of the employer.Meals furnished without charge to an employee as regarded as furnished for the convenience of the employer where they are furnished to the employee during his work day to have the employee available for work during his meal period.2.4 Business premises of the employer means the place where the employee performs a significant portion of his duties or where the employer conducts a significant portion of his business. In case of doubt, the criteria to be used shall be (a) time, more than 50% of the employee's work time or (b) value of business, more than 50% of the production of the said employee.2.5 Notwithstanding the provisions of the preceding paragraphs, if an employee is provided by his employer with company housing or living quarters outside the business premises, and such employee, because of his position in the employer company, also uses said house or living quarters for the benefit of the latter, likeentertaining and putting up houseguests and guest of the employer-company, then fifty percent (50%) of such allowance, rental value, or depreciation if the living quarters are owned by the employer, shall be added to the compensation paid to such employee and be subject to the withholding tax on wages. The employer may deduct the said housing expense as a business expense.2.6 Privileges such as "courtesy discounts" on purchases of company merchandise of a value not to exceed 1/2 basic month's salary of an employee or an officer shall not be added to the remuneration of the employee.2.7 Entertainment of and gifts to company officers and employees shall not be a deductible expense except for Christmas and major anniversary celebrations (e.g. 25th year of company's establishment), sports tournament, company picnics not to exceed one a year provided that the value of the gift when it is not a service award for length of service shall not exceed in value of month's of the basic salary of the employee receiving the gift.

Case: Benaglia v. CIR Convenience of the Employer RuleFacts: The petitioner (Benaglia) managed hotels in Honolulu. He and his wife occupied a suite and received meals at and from the hotel, but did not report their value in his income.The respondent (Commissioner) added $7,845 each year to petitioners gross income as compensation from Hawaiian Hotels, Ltd. arguing that the said amount was the fair market value of rooms and meals furnished by the employer. The Commissioners position was that the cost of meals and lodging were compensation and should be included in petitioners taxable income.Issue: W/N the residence and meals at the hotel were compensation and therefore part of petitioner's gross income for which he could be taxed.Ruling: No. The petitioner lived at the hotel solely because he could not otherwise perform the services required of him. The occupation of the premises was imposed upon him for the benefit of the employer.This is not to say, however, that anytime an employee is fed or lodged by the employer thatit is automatically not taxable income. The court also looked at the intent of the parties and decided the employer never intended the room and board to form part of his compensation.In sum, a taxpayer employee may exclude the value of food and lodging received from his employer, if he receives it solely for the convenience of his employer and as a necessary incident of the proper performance of his duty.

Fringe benefits Tax RR 3-98, RR 05-2011, RMC20-2011 SPECIAL TREATMENT OF FRINGE BENEFITS(A) Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees as defined in these Regulations, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The fringe benefit tax shall be imposed at the following rates:Effective January 1, 1998 - 34%Effective January 1, 1999 - 33%Effective January 1, 2000 - 32%The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of Taxes Withheld) of the Code.The grossed-up monetary value of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the following percentages and in accordance with the following schedule:Effective January 1, 1998 - 66%Effective January 1, 1999 - 67%Effective January 1, 2000 - 68%The grossed-up monetary value of the fringe benefit represents the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received plus the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his employee, pursuant to the provisions of this Section.Coverage These Regulations shall cover only those fringe benefits given or furnished to managerial or supervisory employees and not to the rank and file.The term, "RANK AND FILE EMPLOYEES" means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. "Supervisory employees" are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. cdtaiMoreover, these regulations do not cover those benefits properly forming part of compensation income subject to withholding tax on compensation in accordance with Revenue Regulations No. 2-98.Fringe benefits which have been paid prior to January 1, 1998 shall not be covered by these Regulations.Determination of the Amount Subject to the Fringe Benefit Tax In general, the computation of the fringe benefits tax would entail (a) valuation of the benefit granted and (b) determination of the proportion or percentage of the benefit which is subject to the fringe benefit tax. That the Tax Code allows for the cases where only a portion (i.e. less than 100 per cent) of the fringe benefit is subject to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe benefits which are "required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer" are not subject to the fringe benefit tax. Thus, in cases where the fringe benefits entail joint benefits to the employer and employee, the portion which shall be subject to the fringe benefits tax and the guidelines for the valuation of fringe benefits are defined under these rules and regulations.Unless otherwise provided in these regulations, the valuation of fringe benefits shall be as follows:(1) If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is the amount granted or paid for.(2) If the fringe benefit is granted or furnished by the employer in property other than money and ownership is transferred to the employee, then the value of the fringe benefit shall be equal to the fair market value of the property as determined in accordance with Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe Real Property Values).(3) If the fringe benefit is granted or furnished by the employer in property other than money but ownership is not transferred to the employee, the value of the fringe benefit is equal to the depreciation value of the property.Taxation of fringe benefit received by a non-resident alien individual who is not engaged in trade or business in the Philippines A fringe benefit tax of twenty-five percent (25%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by seventy-five per cent (75%).Taxation of fringe benefit received by (1) an alien individual employed by regional or area headquarters of a multinational company or by regional operating headquarters of a multinational company; (2) an alien individual employed by an offshore banking unit of a foreign bank established in the Philippines; (3) an alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines; and (4) any of their Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees. A fringe benefit tax of fifteen per cent (15%) shall be imposed on the grossed-up monetary value of the fringe benefit. The said tax base shall be computed by dividing the monetary value of the fringe benefit by eighty-five per cent (85%). Taxation of fringe benefit received by employees in special economic zones Fringe benefits received by employees in special economic zones, including Clark Special Economic Zone and Subic Special Economic and Free Trade Zone, are also covered by these regulations and subject to the normal rate of fringe benefit tax or the special rates of 25% or 15% as provided above.(B) Definition of Fringe Benefit In general, except as otherwise provided under these regulations, for purposes of this Section, the term "FRINGE BENEFIT" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following:(1) Housing;(2) Expense account;(3) Vehicle of any kind;(4) Household personnel, such as maid, driver and others;(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;(7) Expenses for foreign travel;(8) Holiday and vacation expenses;(9) Educational assistance to the employee or his dependents; and(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.For this purpose, the guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the fringe benefits are give below. The taxable value shall be the grossed-up monetary value of the fringe benefit.(1) Housing privilege (a) If the employer leases a residential property for the use of his employee and the said property is the usual place of residence of the employee, the value of the benefit shall be the amount of rental paid thereon by the employer, as evidenced by the lease contract. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.(b) If the employer owns a residential property and the same is assigned for the use of his employee as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the market value of the land and improvement, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. The monetary value of the housing fringe benefit is equivalent to the following:MV = [5%(FMV or ZONAL VALUE] X 50%WHERE:MV = MONETARY VALUEFMV = FAIR MARKET VALUE(c) If the employer purchases a residential property on instalment basis and allows his employee to use the same as his usual place of residence, the annual value of the benefit shall be five per cent (5%) of the acquisition cost, exclusive of interest. The monetary value of fringe benefit shall be fifty per cent (50%) of the value of the benefit.(d) If the employer purchases a residential property and transfers ownership thereof in the name of the employee, the value of the benefit shall be the employer's acquisition cost or zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher. The monetary value of the fringe benefit shall be the entire value of the benefit.(e) If the employer purchases a residential property and transfers ownership thereof to his employee for the latter's residential use, at a price less than the employer's acquisition cost, the value of the benefit shall be the difference between the fair market value, as declared in the Real Property Tax Declaration Form, or zonal value as determined by the Commissioner pursuant to Sec. 6(E) of the Code (Authority of the Commissioner to Prescribe Real Property Values), whichever is higher, and the cost to the employee. The monetary value of the fringe benefit shall be the entire value of the benefit.(f) Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of their military service.(g) A housing unit which is situated inside or adjacent to the premises of a business or factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premises of the business if it is located within the maximum of fifty (50) meters from the perimeter of the business premises.(h) Temporary housing for an employee who stays in a housing unit for three (3) months or less shall not be considered a taxable fringe benefit. (2) Expense account (a) In general, expenses incurred by the employee but which are paid by his employer shall be treated as taxable fringe benefits, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the employee.(b) Expenses paid for by the employee but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee.(c) Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.(d) Representation and transportation allowances which are fixed in amounts and are regular received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Sec. 24 of the Code. (3) Motor vehicle of any kind (a) If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.(b) If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer, unless the same was subjected to a withholding tax as compensation income under Revenue Regulations No. 2-98.(c) If the employer purchases the car on installment basis, the ownership of which is placed in the name of the employee, the value of the benefit shall be the acquisition cost exclusive of interest, divided by five (5) years. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.(d) If the employer shoulders a portion of the amount of the purchase price of a motor vehicle the ownership of which is placed in the name of the employee, the value of the benefit shall be the amount shouldered by the employer. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer. (e) If the employer owns and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the acquisition cost of all the motor vehicles not normally used for sales, freight, delivery service and other non-personal used divided by five (5) years. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit. (f) If the employer leases and maintains a fleet of motor vehicles for the use of the business and the employees, the value of the benefit shall be the amount of rental payments for motor vehicles not normally used for sales, freight, delivery, service and other non-personal use. The monetary value of the fringe benefit shall be fifty per cent (50%) of the value of the benefit.(g) The use of aircraft (including helicopters) owned and maintained by the employer shall be treated as business use and not be subject to the fringe benefits tax.(h) The use of yacht whether owned and maintained or leased by the employer shall be treated as taxable fringe benefit. The value of the benefit shall be measured based on the depreciation of a yacht at an estimated useful life of 20 years.(4) Household expenses Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as taxable fringe benefits.(5) Interest on loan at less than market rate(a) If the employer lends money to his employee free of interest or at a rate lower than twelve per cent (12%), such interest foregone by the employer or the difference of the interest assumed by the employee and the rate of twelve per cent (12%) shall be treated as a taxable fringe benefit.(b) The benchmark interest rate of twelve per cent (12%) shall remain in effect until revised by a subsequent regulation.(c) This regulation shall apply to installment payments or loans with interest rate lower than twelve per cent (12%) starting January 1, 1998. (6) Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar organizations. These expenditures shall be treated as taxable fringe benefits of the employee in full.(7) Expenses for foreign travel (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions.The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit tax.(b) In the absence of documentary evidence showing that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as taxable fringe benefits. The business meetings shall be evidenced by official communications from business associates abroad indicating the purpose of the meetings. Business conventions shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee.(c) Travelling expenses which are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.(8) Holiday and vacation expenses Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits.(9) Educational assistance to the employee or his dependents (a) The cost of the educational assistance to the employee which are borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.(b) The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company. (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees.(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe benefits tax shall not be imposed on the following fringe benefits:(1) Fringe benefits which are authorized and exempted from income tax under the Code or under any special law;(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;(3) Benefits given to the rank and file, whether granted under a collective bargaining agreement or not;(4) De minimis benefits as defined in these Regulations;(5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or(6) If the grant of the fringe benefit is for the convenience of the employer.The exemption of any fringe benefit from the fringe benefit tax imposed under this Section shall not be interpreted to mean exemption from any other income tax imposed under the Code except if the same is likewise expressly exempt from any other income tax imposed under the Code or under any other existing law. Thus, if the fringe benefit is exempted from the fringe benefits tax, the same may, however, still form part of the employee's gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment.The term "DE MINIMIS" benefits which are exempt from the fringe benefit tax shall, in general, be limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees such as the following:(1) Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year; (2) Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month;(3) Rice subsidy of P350 per month granted by an employer to his employees;(4) Uniforms given to employees by the employer; (5) Medical benefits given to the employees by the employer;(6) Laundry allowance of P150 per month;(7) Employee achievement awards, e.g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding one-half () month of the basic salary of the employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees; dctai(8) Christmas and major anniversary celebrations for employees and their guests;(9) Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; and(10) Flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc(D) Tax Accounting for the Fringe Benefit Furnished to the Employee and the Fringe Benefit Tax Due Thereon. As a general rule, the amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable deductions from gross income of the employer. However, if the basis for computation of the fringe benefits tax is the depreciation value, the zonal value as determined by the Commissioner pursuant to Section 6(E) of the Code or the fair market value as determined in the current real property tax declaration of a certain property, only the actual fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by the employer.Provided, however, that if the aforesaid zonal value or fair market value of the said property is greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction from the employer's gross income as fringe benefit expense.

c. De Minimis BenefitsSec. 2.78.1 (A) (3), Rev. Regs. 2-98 (April 17, 1998)SECTION 2.78.1. Withholding of Income Tax on Compensation Income. (A) Compensation Income Defined. In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code.The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income.The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.Remuneration for services constitutes compensation even if the relationship of employer and employee does not exist any longer at the time when payment is made between the person in whose employ the services had been performed and the individual who performed them.The basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes compensation. Thus, it may be paid on the basis of piece-work, or a percentage of profits; and may be paid hourly, daily, weekly, monthly or annually.(3) Facilities and privileges of a relatively small value. Ordinarily, facilities and privileges (such as entertainment, medical services, or so called "courtesy" discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.Where compensation is paid in property other than money, the employer shall make necessary arrangements to ensure that the amount of the tax required to be withheld is available for payment to the Commissioner. Case:BIR Rul. 23-02 (June 21, 2002)De minimis benefits facilities or privileges furnished or offered by an employer to his employees that are relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees, and as such, they are subject to neither compensation income tax nor fringe benefits tax. They are, therefore, not subject to withholding tax as well.Facts: Sodexho Pass International (Sodexho) is a French service company engaged in operating innovative systems (the issuance of service vouchers) to manage employee benefits given by private companies, national government agencies, etc. Sodexho proposes to introduce administration of food and rice subsidy benefits given by Philippine employers to their employees through the following procedures:1. Client company transfers to Sodexho the amount allotted for its employees' annual or monthly meal and food allowance and/or rice subsidy with instructions on the amount to be allotted per employee in conformity with a de minimis threshold that would be established;2. Sodexho issues meal and food vouchers (intended for each employee with the value allotted for the respective employee's benefit per working day) and delivers the same to the client company. The face value of the vouchers shall be equivalent to the amount transferred by the client company to Sodexho;3. Client company distributes the vouchers to its employees;4. Employee uses these vouchers for meals and/or food at an accredited establishment (e.g., restaurant/food outlet) of his choice;5. Accredited outlet sends back used vouchers to Sodexho for reimbursement;6. Sodexho reimburses the store/outlet.Issues: Counsel for Sodexho sought confirmation from the Commissioner of the following opinions:1. That meal and food benefits provided by client companies through Sodexho meal and food vouchers may be considered tax-exempt benefits;2. That a meal and food allowance of no more than Php100.00 per day is considered de minimis benefit; and 3. That de minimis rice allowance of Php1,000 per month given to the employees may be aggregated with the meal allowance through Sodexho meal and food vouchers and shall still be exempt from both withholding tax on compensation and fringe benefit tax.Ruling:1. The meal and food benefits provided by the client-companies to their employees through Sodexho meal and food vouchers may be considered tax-exempt benefits. The meal and food benefits provided to their employees by client companies through Sodexho meal and food vouchers may be tax-exempt, subject to:(a) the standards set for de minimis thresholds for fringe benefits. (See Revenue Regulations No. 3-98, as amended by Revenue Regulations No. 8-2000 and 10-2000 for the list. Not an assigned reading but you may want to check.); and(b) the conditions set for the benefits to be exempt pursuant to the tests of convenience of the employer and the promotion of health, goodwill, contentment, or efficiency of the employees. (See Sec. 2-78.1(A)(2) and (3) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 8-2000 and 10-2000. These is an assigned reading.)2. The meal and food allowance, although not for overtime work, is considered de minimis if it does not exceed 25% of the basic minimum wage. Meal and food benefits not exceeding 25% of the daily minimum wage may be considered de minimis meal benefit and therefore, tax exempt. The excess over this amount shall be considered other benefits as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997. The excess of the meal and food allowance given over the de minimis ceiling shall still be exempt provided that it, together with the total amount of other benefits, shall not exceed Php30,000.3. The rules and regulations on de minimis benefits do not allow aggregation of the amounts set for each type of benefit. There can be no aggregation of the values set for each item of benefit stated in Revenue Regulations Nos. 2-98 and 3-98, as amended by Revenue Regulations Nos. 8-2000 and 10- 2000. The intent of the Regulations is to treat each item of de minimis benefits independently of each other.The Regulations separately provide maximum values for rice allowance and for meal allowance. Accordingly, there can be no aggregation of de minimis values for rice and meal and food benefits through Sodexho meal and food vouchers. In order to clearly conform with prescribed de minimis standards, therefore, separate vouchers should be used for the rice allowance and the meal and food benefit.

d. Travel and EntertainmentRudolph v. U.S.Facts: Facts: Rudolph was an insurance agent employed by Southland Life Insurance Company, in Dallas. The company sent Rudolph and his wife, with other agents and their wives, to New York City on a one week trip that was devoted mostly to pleasure. The district court ruled that the value of the trip (measured by the pro rata cost) must be included in the Rudolphs income because its purpose was primarily pleasure. The court of appeals affirmed.Held: The petition for writ of certiorari is dismissed as improvidently granted. Justice Harlan writes an opinion defending the result, agreeing that the value of the trip should be treated as income to the employees and observing that there should be no deduction under 162(a).

2. Business Income In the case of manufacturing, merchandising, or mining, gross income means total sales less cost of goods sold, plus all income from incidental and outside sources. 3. GainsGain or loss on sale or exchange of property is recognized if the following conditions are satisfied: The property received in exchange is essentially different from the property disposed, and The property received has market value. In a sale or exchange of property, real or personal, a distinction must be made between ordinary and capital assets. Special rules on gains and losses on sales or exchanges of capital assets do not apply to sales and exchanges of ordinary assets. 4. InterestSec.50, NIRC. In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

5. RentsImprovements 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 of the lease all adequate part thereof.If for any other reason than a bona fide 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 fixed 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 improvements6. RoyaltiesThe term royalts as used in this Article means any payment of any kind received as a consideration for he use of, o right to use, any patent, trademark, design or model, secret formula, or process, or for the use of , industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience. 7. DividendsSEC. 73. Distribution of dividends or Assets by Corporations. -(A) Definition of Dividends. - The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be.(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits.(C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to have been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received.(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.

Revenue Regulation Section 2 Sec. 250, RR2. 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, 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, the same extent as other dividends.A taxable distribution made by a corporation to individual stockholders or members shall be included in the gross income of the distributees when the cash or other property is unqualifiedly 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 as other 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 non-resident, 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 non-resident foreign corporation are taxable in full.Sec. 251, RR2. 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 all 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 specified 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 recipient 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.Sec. 252, RR2. 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 recipient thereof notwithstanding the fact that the officers or director of the corporation (as defined 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 interest. 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 interest than did the old - the new certificates plus the old representing the same proportionate interest in the net asset of the corporation as did the old.Sec. 253, RR2. 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 stock with respect to which it is issued, shall be determined in accordance with the following rules:(a) Where the stock issued as dividend is as 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 cannot 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 cannot be identified 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.Sec. 254, RR2. 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 stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation since March 1, 1913Sec. 255, RR2. Sources of distribution. For the purpose of income taxation every distribution made by a corporation is made out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits. In determining the source of a distribution, consideration should be given first, to the earnings or profits of the taxable year; second, to the earnings or profits, 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 profits of the taxable year and all the earnings or profits 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.Sec. 256, RR2. Distribution in liquidation. - In all case's 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 anyone of a series of distributions made by a corporation in complete cancellation or redemption of an of its stocks in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation is to be completed within a reasonable time from the date of the first distribution, usually not to exceed one year from the time of such first distribution. If the amount zeceived 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.

Cases:Wise vs. Meer Facts: Wise & Co., Inc. et. al (Plaintiff-appellants) were stockholders of Manila Wine Merchants, Ltd., a foreign corporation duly authorized to do business in the Philippines. The Board of Directors of Manila Wine Merchants, Ltd., (HK Co.), recommended to the stockholders that they adopt resolutions necessary to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation, (PH Co.), for thes um of P400,000. The HK Co. made a distribution from its earnings for the year 1937 to its stockholders. As a result of the sale of its business and assets to PH Co., a surplus was realized and the HK Co. distributed this surplus to the shareholders (Appellants included).Philippine income tax had been paid by HK Co. on the said surplus from which the said distributions were made. At a special general meeting of the shareholders of the HK Co., the stockholders by resolution directed that the company be voluntarily liquidated and its capital distributed among the stockholders. The Appellants duly filed Income Tax Returns, on which the defendant, Meer (CIR) made deficiency assessments. Plantiffs paid under written protest and sought recovery. CFI ruled in favor of CIR hence the appeal.Issue(s): 1. Whether the amount received by the petitioners were ordinary dividends or liquidating dividends. 2. Whether such dividends were taxable or not. 3. Whether or not the profits realized by the non-resident alien individual appellants constitute Income from the Philippines considering that the sale took place outside the Philippines.HELD: 1. The distributions under consideration were not ordinary dividends. Therefore, they are taxable as liquidating dividends. It was stipulated in the deed of sale that the sale and transfer of the HK Co. shall take effect on June 1, 1937. Distribution took place on June 8. They could not consistently deem all the business and assets of the corporation sold as of June 1, 1937, and still say that said corporation, as a going concern, distributed ordinary dividends to them thereafter.2. Income tax law states that Where a corporation, partnership, association, joint-account, or insurance company distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or a deductible loss as the case may be. Appellants received the distributions in question in exchange for the surrender and relinquishment by them of their stock in the HK Co. which was dissolved and in process of complete liquidation. That money in the hands of the corporation formed a part of its income and was properly taxable to it under the Income Tax Law. When the corporation was dissolved and in process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place. The shareholder who received the consideration for the stock earned that much money as income of his own, which again was properly taxable to him under the Income Tax Law.3. This contention is untenable. The HK Co. was at the time of the sale of its business in the Philippines, and the PH Co. was a domestic corporation domiciled and doing business also in the Philippines. The HK Co. was incorporated for the purpose of carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and the other objects set out in its memorandum of association. Hence, its earnings, profits, and assets, including those from whose proceeds the distributions in question were made, the major part of which consisted in the purchase price of the business, had been earned and acquired in the Philippines. As such, it is clear that said distributions were income "from Philippine sources.

CIR vs. Manning Facts: Reese, the majority stockholder of Mantrasco, executed a trust agreement between him, Mantrasco, Ross, Selph, carrascoso & Janda law firm and the minority stockholders, Manning, McDonald and Simmons. Said agreement was entered into because of Reeses desire that Mantrasco and Mantrasocs 2 subsidiaries, Mantrasco Guam and Port Motors, to continue under the management of Manning, McDonald and Simmons upon his [Reese] death. When Reese died, Mantrasco paid Reeses estate the value of his shares. When said purchase price has been fully paid, the 24,700 shares, which were declared as dividends, were proportionately distributed to Manning, McDonald and Simmons. Because of this, the BIR issued assessments on Manning, McDonald and Simmons for deficiency income tax for 1958. Manning et al, opposed this assessment but the BIR still found them liable. Manning et al. appealed to the CTA, which absolved them from any liability.Held: The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700shares of Reese as absolutely outstanding shares of Reese's estate until they were fully paid. Such being the true nature of the 24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.CIR vs CA 1999Facts:Sometime in the 1930s, Don Andres Soriano, a citizen and residentofthe United States, formed the corporation A. Soriano Y Cia, predecessor of ANSCOR with a 1,000,000.00 capitalization divided into 10,000common sharesat a parvalue ofP100/share. ANSCOR is wholly owned and controlled by thefamily ofDon Andres, who are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.

On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00 divided into 25,000common shareswith the same par value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to subscribe to the new issues. This increased his subscription to 14,963common shares. A month later, Don Andres transferred 1,250 shares each to his two sons, Jose and Andres Jr., as their initial investments in ANSCOR. Both sons are foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and December 20, 1963. On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a total shareholdings of 185,154 shares. 50,495 of which are original issues and the balance of 134,659 shares as stock dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife, Doa Carmen Soriano, as her conjugal share.The offerhalf formed part of his estate.

A day after Don Andres died, ANSCOR increased its capital stock to P20M and in 1966 further increased it to P30M. In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and 138,864common shareseach.

On December 28, 1967, Doa Carmen requested a ruling fromthe United StatesInternal Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme. By January 2, 1968, ANSCOR reclassified its existing 300,000common shares into 150,000 common and 150,000 preferred shares.

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax avoidance. Consequently, on March 31, 1968 Doa Carmen exchanged her whole 138,864common sharesfor 138,860 of the preferred shares. The estate of Don Andres in turn exchanged 11,140 of itscommon sharesfor the remaining 11,140 preferred shares.

In 1973, after examining ANSCORs books of account and record Revenue examiners issued a report proposing that ANSCOR be assessed for deficiencywithholding tax-at-source, for the year 1968 and the 2nd quarter of 1969 based on the transaction of exchange and redemption of stocks. BIR made the corresponding assessments. ANSCORs subsequent protest on the assessments was denied in 1983 by petitioner. ANSCOR filed a petition for review with the CTA, the Tax Court reversed petitioners ruling. CA affirmed the ruling of the CTA. Hence this position.

Issue:Whether or not a person assessed for deficiencywithholding tax under Sec. 53 and 54 of the Tax Code is being held liable in its capacity as a withholding agent.

Held:An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiencywithholding tax, as such, it is being held liable in its capacity as a withholding agent and not in its personality as taxpayer. A withholding agent, A. Soriano Corp. in this case, cannot be deemed a taxpayer for it to avail of a tax amnesty under a Presidential decree that condones the collection ofall internalrevenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal, or administrative liabilities arising from or incident to voluntary disclosures under the NIRC of previously untaxed income and/or wealth realized here or abroad by any taxpayer, natural or juridical. The Courtexplains: The withholding agent is not a taxpayer, he is a mere tax collector. Under the withholding system, however, the agent-payer becomes a payee by fiction of law. His liability is direct and independent from the taxpayer, because theincome taxis still imposed and due from the latter. The agent is not liable for the tax as no wealth flowed into him, he earned no income.

BIR RULING 39-02A distribution in liquidation, without consideration, of the assets of a corporation consisting of real estate is not subject to DST under Section 196 of the Tax Code of 1997. A corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter. However, the notarial certification on the deeds of assignment is subject to DST of P15.00 under Section 188 of the Tax Code of 1997.(BIR Ruling No. 039-2002 dated November 11, 2002) 8. AnnuitiesAnnuities are exempt. An annuity is a sum of money payable yearly or at other regular intervals. 9. Prizes and winningsPrizes and Winnings are generally taxable. Such payments constitute gains derived from labor. Not taxable if recipient selected without any action on his part to enter the contest or proceedings; and the recipient is not required to render substantial future services as a condition for receiving the prize or award. Those granted to athletes shall be exempt from income tax. Prizes and awards in the nature of gifts are not taxable.

10. PensionsPensions are exempt. A pension is a a gratuity granted (as by a government) as a favor or reward, or one paid under given conditions to a person following retirement from service or to surviving dependents.11. Share in GPPs income26, NIRC. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

EXLUSIONS in Gross Income

SEC. 32. (B) - The following items shall not be included in gross income and shall be exempt from taxation under this title:(1) Gifts, Bequests and DevisesSEC. 32. (B) (3) - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That 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.

(2) Compensation for Injuries or Sickness SEC. 32. (B) (4) - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

(3) Retirement Benefits, Pensions, Gratuities, etc.SEC. 32. (B) (6) (a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That 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 fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means 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, 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 wherein its 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.(b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

SEC. 32. (B) (7) (e) - 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.

Cases:CIR vs. CA (1992)Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in accordance with Rep. Act No. 4917.In 1984, Respondent GCL made investments and earned therefrom interest income from which was withheld the fifteen per centum (15%) final withholding tax imposed by Pres. Decree No. 1959, which took effect on 15 October 1984.GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15%final withholding tax from the interest income as it is an entity fully exempt from income tax as provided under Rep. Act No. 4917 in relation to Section 56 (b) of the Tax Code.CIR denied the refund, Petitioner elevated the matter to CTA.CTA - ruled in favor of GCL, holding that employees' trusts are exempt from the 15%final withholding tax on interest income and ordering a refund of the tax withheld.Issue: Whether GCL is exempted from Income Tax.Held: GCL Plan was qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.1983.The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax exemption. Employees' trusts or benefit plans normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be exposed. It is an independent and additional source of protection for the working group. What is more, it is established for their exclusive benefit and for no other purpose.

CIR vs. CA (1991)Facts: Efren Castaneda retired from government service as Revenue Attach in the Philippine Embassy in London, England on 10 December 1982 under the provisions of Section 12 (c) of Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits, terminal leave pay from which the Commissioner withheld P12,557.13, allegedly representing income tax thereon. Castaneda claimed for a refund.Issue: Whether terminal leave pay is subject to withholding income tax.Held: Terminal Leave Pay received by a government official or employee is not subject to withholding income tax. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that retirement pay for public servants is less than generous, if not inadequate. Terminal leave payments are given thus not only at the same time but also for the same policy considerations governing retirement benefits. Not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.

In RE Zialcita AM 90-6-015-SC, October 1990Facts: On 23 August 1990, a resolution was issued by the Court En Banc stating that the terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement can never be considered a part of his salary subject to the payment of income tax but falls under the phrase other benefits received by retiring employees and workers, within the meaning of Section 1 of PD 220 and is thus exempt from the payment of income tax. That the money value of his accrued leave credits is not part of his salary is buttessed by Section 3 of PD 985, which it makes it clear that the actual service is the period of time for which pay has been received, excluding the period covered by terminal leave. The Commissioner filed a motion for reconsideration.Issue: Whether terminal leave pay is exempt from tax; as well as other amounts claimed herein. Held: Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660, and Section 28 (c) of the former law, the amount received by Atty. Zialcita as a result of the conversion of unused leave credits, commonly known as terminal leave, is applied for by an officer or employee who retires, resigns, or is separated from the service through no fault of his own. Since the terminal leave is applied for after the severance of the employment, terminal pay is no longer compensation for services rendered. It cannot be viewed as salary. Further, the terminal leave pay may also be considered as a retirement gratuity, which is also another exclusion from gross income as provided for in Section 28 (b), 7 (f) of the Tax Code. The 23 August Resol