TAXATION M.V.U.

SIA
TAX.04-Gross Income MAY 2020

LECTURE NOTES

A. GROSS INCOME, DEFINED C. DIVIDEND INCOME

Gross Income means all income derived from whatever KINDS:

source, including, but not limited to, the following items: 1) Cash Dividends
(Section 32, RA 8424) 2) Property Dividends
1) Compensation for services in whatever form paid, 3) Stock Dividends
including, but not limited to fees, salaries, wages, 4) Liquidating Dividends
commissions, and similar items;
2) Gross income derived from the conduct of trade or CASH & PROPERTY DIVIDENDS
business or the exercise of a profession;
3) Gains derived from dealings in property; Cash and property dividends shall be taxable upon
4) Interests; declaration.
5) Rents;
6) Royalties; STOCK DIVIDENDS
7) Dividends;
8) Annuities; GENERAL RULE: Distribution of stock dividend is not
9) Prizes and winnings; taxable because they are not realized income.
10) Pensions; and
11) Partner's distributive share from the net income of EXCEPTION: A stock dividend constitutes income if it
the general professional partnership. gives the shareholder an interest different from that
which his former stockholdings represented.
B. RENTAL INCOME
LIQUIDATING DIVIDENDS
VALUATION
Liquidating dividends are exempt up to the extent of
Rental Payments PXXX the cost of investment being a mere return of capital.
Expenses of the lessor assumed by the lessee XXX However, anything in excess of the cost shall be
Income from leasehold improvements XXX considered income and therefore taxable.
Total Rental Income PXXX
If the amount received by the stockholder in
RENTAL PAYMENTS liquidation is less than the cost of investment, the loss
in the transaction is deductible to the extent allowed
Rental income shall be taxable on the year received, for capital losses.
whether earned or unearned, provided, there is no
restriction as to its use, and regardless of method of D. GROSS INCOME FROM WHATEVER SOURCE
accounting employed. DEFINED

SECURITY DEPOSIT The law imposes a tax on income from whatever

source which means that it includes income whether
Security deposit shall be taxable: coming from legal or illegal sources.
1) Upon forfeiture in favor of the lessor; or
2) Upon application as rental payments. EXAMPLES:
1) Income from jueteng
LEASEHOLD IMPROVEMENTS 2) Income from swindling activities
3) Recovery of bad debts
Improvements made by the lessee shall be treated as 4) Refund of taxes
income of the lessor. If: 5) Unutilized/excess campaign funds
1) The improvements will be owned by the lessor at 6) Forgiveness of indebtedness
the end of the lease;
2) The lessor is not required to pay the lessee the RECOVERY OF BAD DEBTS
value of such improvements.
In order for recovery of bad debts to be considered
Income from leasehold improvements is reported as income, the following must be complied:
follows: 1) Bad debts were written off in the previous year/s;
2) Such bad debts were deducted in arriving at
METHOD VALUATION OF INCOME
taxable income;
3) There is a resulting tax benefit on the deduction.
1) Outright Fair Market Value of
Improvements
REFUND OF TAXES
2) Spread-out Book Value at the end of The following are the requirements before refund of
lease term/Remaining taxes be considered income:
term of the lease 1) There is payment of tax in the previous year/s;

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2) The tax paid was deducted in arriving at the COMPENSATION FOR INJURIES OR SICKNESS
taxable income;
3) There is a resulting tax benefit on the deduction. Amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts, as
FORGIVENESS OF INDEBTEDNESS compensation for personal injuries or sickness, plus
the amounts of any damages received, whether by suit
TYPE TAX TREATMENT or agreement, on account of such injuries or sickness.
Debtor performs services to Compensation Income
the creditor INCOME EXEMPT UNDER TREATY
Creditor desires to benefit
the debtor without any Gift Income of any kind, to the extent required by any
consideration treaty obligation binding upon the Government of the
Creditor is a corporation and Philippines.
the debtor is a stockholder of Dividend Income
such corporation RETIREMENT BENEFITS, PENSIONS, GRATUITIES ETC.

E. EXCLUSIONS FROM GROSS INCOME 1) Retirement benefits received under Republic Act
No. 7641
The following items shall not be included in gross income
and shall be exempt from income tax: 2) Those received by officials and employees of
1) Life Insurance private firms, whether individual or corporate, in
2) Amount Received by Insured as Return of Premium accordance with a reasonable private benefit
3) Gifts, Bequests, and Devises plan maintained by the employer: Provided
4) Compensation for Injuries or Sickness a. That the retiring official or employee has been
5) Income Exempt under Treaty in the service of the same employer for at least
6) Retirement Benefits, Pensions, Gratuities, etc. ten (10) years;
7) Miscellaneous Items b. At least fifty (50) years of age at the time of
a) Income Derived by Foreign Government his retirement; and
b) Income Derived by the Government or its c. That the benefits granted shall be availed of by
Political Subdivisions an official or employee only once.
c) Prizes and Awards
d) Prizes and Awards in Sports Competition 3) Any amount received by an official or employee or
e) 13th Month Pay and Other Benefits by his heirs from the employer as a consequence
f) GSIS, SSS, Medicare and Other Contributions of separation of such official or employee from the
g) Gains from the Sale of Bonds, Debentures or service of the employer because of:
other Certificate of Indebtedness a. Death;
h) Gains from Redemption of Shares in Mutual b. Sickness;
Fund c. Other physical disability or for any cause
beyond the control of the said official or
LIFE INSURANCE employee.

GENERAL RULE: Exempt from tax since it is a mere The following are considered involuntary
reimbursement for the loss of life. separation, and therefore not taxable:
1. The installation of labor-saving devices;
EXCEPTION: The following shall be taxable: 2. Redundancy
1) The beneficiary was chosen for a valuable 3. Retrenchment
consideration. 4. Cessation of the employer’s business.
2) The interest earned on the insurance policy.
4) Social security benefits, retirement gratuities,
RETURN OF PREMIUM pensions and other similar benefits received by
resident or nonresident citizens of the Philippines
The amount received by the insured, as a return of or aliens who come to reside permanently in the
premiums paid by him under life insurance, Philippines from foreign government agencies and
endowment, or annuity contracts, either during the other institutions, private or public.
term or at the maturity of the term mentioned in the
contract or upon surrender of the contract. 5) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of
Return of Premium Exempt the United States administered by the United
In excess Income States Veterans Administration.

GIFTS, BEQUESTS & DEVISES 6) Benefits received from or enjoyed under the Social
Security System in accordance with the provisions
The value of property acquired by gift, bequest, of Republic Act No. 8282.
devise, or descent: Provided, however, that income
from such property, as well as gift, bequest, devise, or 7) Benefits received from the GSIS under Republic
descent of income from any property, in cases of Act No. 8291, including retirement gratuity
transfers of divided interest, shall be included in gross received by government officials and employees.
income.
MISCELLANEOUS ITEMS
Property inherited or Exempt
1) Income derived from investments in the Philippines
received as gift
in loans, stocks, bonds or other domestic
Income of above Taxable
securities, or from interest on deposits in banks in
properties
the Philippines by:

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a. Foreign governments 3) Compensation for labor or personal services

b. Financing institutions owned, controlled, or performed in the Philippines;
enjoying refinancing from foreign
governments; and 4) Rentals and royalties from property located in the
c. International or regional financial institutions Philippines or from any interest in such property;
established by foreign governments.
5) Gains, profits and income from the sale of real
2) Income derived from any public utility or from the property located in the Philippines;
exercise of any essential governmental function
accruing to the Government of the Philippines or to 6) Gains, profits and income from sale of personal
any political subdivision thereof. property:
a. If purchased, only if sold in the Philippines;
3) Prizes and awards made primarily in recognition of b. If manufactured, only if manufactured and sold
religious, charitable, scientific, educational, artistic, within the Philippines.
literary, or civic achievement but only if:
a. The recipient was selected without any action INCOME FROM SOURCES PARTLY WITHIN OR PARTLY
on his part to enter the contest or proceeding; WITHOUT
and
b. The recipient is not required to render 1) Gains, profits and income from the sale of personal
substantial future services as a condition to property produced (in whole or in part) by the
receiving the prize or award. taxpayer within and sold without the Philippines; or
2) Produced (in whole or in part) by the taxpayer
4) All prizes and awards granted to athletes in local without and sold within the Philippines.
and international sports competitions and
tournaments whether held in the Philippines or G. MULTIPLE CHOICE EXERCISES
abroad and sanctioned by their national sports
associations. 1. One of the following compensation income of an
individual taxpayer is not an exclusion from gross
5) Gross benefits from 13th month pay and other income:
benefits received by officials and employees of a. Monetized vacation leaves not exceeding 10 days a
public and private entities up to the extent of year.
P90,000. b. Separation pay of an employee who resigned from
his employment.
6) GSIS, SSS, Medicare and Pag-Ibig contributions, c. Retirement benefits of an employee who has
and union dues of individuals. worked for an employer for at least 10 years, who
at the time of retirement is not less than 50 years
7) Gains realized from the sale or exchange or of age, and who avails of the retirement for the
retirement of bonds, debentures or other first time.
certificate of indebtedness with a maturity of more d. All of these.
than five (5) years.
2. Which of the following dealings in property is subject
8) Gains realized by the investor upon redemption of to normal income tax?
shares of stock in a mutual fund company as a. Sale of ordinary assets
defined in Section 22(BB) of this Code. b. Sale of real property, located in the Philippines,
classified as capital asset
F. SOURCE OF INCOME c. Sale of shares in a domestic corporation sold
CLASSIFICATION OF INCOME AS TO SOURCE outside the local stock exchange
1) Income from sources within the Philippines d. All of the choices
2) Income from sources partly within or partly
without the Philippines 3. Prizes and awards received shall be exempt from
3) Income from sources without the Philippines income tax when the following conditions are met,
except
INCOME FROM SOURCES WITHIN THE PHILIPPINES a. It is given in recognition of religious, charitable,
scientific, educational, artistic, literary or civic
1) Interests derived from sources within the achievement.
Philippines, and interest on bonds, notes or other b. The recipient of the award or prize is not required
interest-bearing obligations of residents, to render substantial future services as a condition
corporate or otherwise; in receiving the prize or award.
c. The recipient of the award was selected without
2) Dividends from: any action on his part to enter the contest or
a. Domestic Corporation proceeding.
b. Foreign Corporation, IF at least 50% of gross d. None of the above
income for the three year period ending with
the close of its taxable year preceding the 4. Proceeds of insurance taken by a corporation on the
declaration of such dividends (or for such part life of an executive to indemnify the latter’s
of such period as the corporation has been in beneficiaries against loss in case of his death is:
existence) was derived from sources within the a. Exempt from income tax
Philippines. b. Part of taxable income
c. Subject to final tax
Dividend Income PXXX d. Partly exempt, partly taxable
Multiply by: (GI, Ph/GI, World) X%
Dividend Income, Ph PXXX 5. The premiums paid by the corporation in the preceding
number is a:
a. Taxable income of the executive

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b. Deductible expense of the corporation a. Refund of fringe benefits tax

c. Both “a” and “b” b. Refund of Philippine income tax
d. Neither “a” nor “b” c. Refund of estate or donor’s tax
d. Refund of special assessment
6. On July 1, 2014, Mr. V leased his vacant lot for a
period of 12 years to Mr. J at an annual rate of 14. An operator of an illegal horse betting business,
P2,400,000. It was also agreed that Mr. J will pay the
single, has the following data:
following:
Receipt from illegal bets P600,000
 P4,800,000 representing rental payment for two
Rent of space where bets are received, 120,000
(2) years. Subsequent rental payments will be
gross of 5% withholding tax
made every July 1 of the applicable year.
Salaries of assistants, gross of creditable 100,000
 Security deposit of P2,400,000.
withholding tax
 Annual real property tax of P30,000.
Bribe money to obtain protection from 50,000
arrest and prosecution
The lease contract provides, among others that the
lessee will construct a 5-storey building for parking
purposes at a cost of P36,000,000. Ownership of the How much is the taxable income
building shall belong to the lessor upon the expiration a. P380,000 c. P180,000
or termination of the lease contract. b. P330,000 d. P150,000

15. Corazon insured her life with Malayan Insurance

The building was completed on July 1, 2016 with an
company. Under the contract, she will pay a monthly
estimated useful life of 15 years. Mr. V shall report premium of P2,000 for 10 years. In case of death
total income from the lease for 2014 at before the 10th year, her beneficiary will receive an
a. P2,430,000 c. P4,830,000 indemnification in the amount of P150,000. If she is
b. P2,400,000 d. P2,640,000 still living on the 10th year, she will receive P500,000.
If Corazon dies on the 5th year, her beneficiary will
7. Assuming Mr. V will use outright method in recognizing report an income of:
income from leasehold improvements, how much is the a. P500,000 c. P260,000
total income from lease for year 2016? b. P150,000 d. nil
a. P3,030,000 c. P38,430,000
b. P3,630,000 d. P2,400,000 16. Suppose Corazon dies on the 5th year and her
beneficiary was offered to receive the P150,000 in cash
8. Assuming Mr. V will use spread-out method in or to receive it in installment of P20,000 for ten (10)
recognizing income from leasehold improvements, how monthly installment payments and the beneficiary
much is the total income from lease for year 2016? chose the 2nd option, she will report an income of:
a. P3,030,000 c. P14,430,000 a. P500,000 c. P50,000
b. P3,630,000 d. P2,400,000 b. P150,000 d. nil

9. Assuming that due to the fault of the lessee, the lease 17. If Corazon survives the policy and is able to receive
contract was terminated on January 1, 2018, how the P500,000, she will report an income of:
much income is to be reported by the lessor in 2018? a. P500,000 c. P150,000
a. P32,400,000 c. P34,830,000 b. P260,000 d. nil
b. P30,600,000 d. P33,030,000
18. Marlon was hit by a car driven by Jaysee causing
10. Mr. Santiago purchased a life annuity for P100,000 severe injuries to the former. It was found out during
which will pay him P10,000 a year. The life expectancy trial that the driver was drunk at the time of the
of Mr. Santiago is 12 years. Which of the following will incident.
Mr. Santiago be able to exclude from his gross income? After trial, the court awarded the following:
a. P100,000 c. P20,000  P1,500,000 actual damages for hospitalization
b. P10,000 d. P120,000  P300,000 exemplary damages
 P500,000 for loss of income,; and
11. The following data were provided to you by ABC  P100,000 moral damages.
Company for the current year:
Amount 2018 Income Amount Marlon also received a cash gift of P100,000 from
written-off in (Loss) before Recovered in Jaysee. The taxable income received by Marlon is:
2018 write off 2019 a. P2,400,000 c. P1,500,000
P50,000 P350,000 P20,000 b. P1,900,000 d. P500,000
10,000 (50,000) 10,000
30,000 20,000 30,000 19. In order for gains realized from the sale or exchange
or retirement of bonds, debentures or other certificate
The income from bad debt recovery during 2017 is: of indebtedness be exempt from income taxation, what
a. P0 c. P50,000 is the prescribed length of its maturity?
b. P40,000 d. P60,000 a. 5 years or more
b. 5 years or less
12. Which of the following is not a taxable income? c. More than 5 years
a. Bad debts previously written off and recovered d. Exactly 5 years
subsequently.
b. Tax expense previously disallowed as deduction 20. Gains realized by the investor upon redemption of
from taxable income, fully refunded subsequently. shares of stock in a mutual fund company is:
c. Income from gambling. a. Exempt
d. Income from usurious financing. b. Subject to final withholding tax
c. Subject to basic tax
13. The following are not taxable, except d. Any of the choices

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b. P7,500,000 d. P7,430,000
21. Sandara, a nonresident Korean stockholder, received a
dividend income of P300,000 in 2020 from Super Bowl 26. Assume that F5 Corporation is a resident foreign
Corporation, a foreign corporation doing business in corporation, how much is the taxable income?
the Philippines. The gross income of the foreign a. P9,200,000 c. P8,200,000
corporation from within and without the Philippines b. P7,500,000 d. P7,280,000
for the past three years preceding 2015 were as 27. Which of the following is taxable?
follows: a. Interest on long-term deposit or investment
Source 2018 2019 2020 b. Gain on sale of 10-year bond
Philippines P16,000,000 P12,000,000 P14,000,000 c. Prize not exceeding P10,000
Abroad 8,000,000 14,000,000 16,000,000 d. PCSO Lotto winnings

The amount of income subject to tax should be: 28. Situs of taxation on income from sale of property
a. P0 c. P157,500 purchased.
b. P90,000 d. P300,000 a. Place of the seller
b. Place of sale
22. Assuming Super Bowl is a domestic corporation, the c. Place of buyer
amount of income subject to tax of Sandara s hould d. As determined by the Commissioner
be:
a. P0 c. P157,500 29. Which of the following test of source of income is
b. P90,000 d. P300,000 incorrect?
a. Interest income - residence of the debtor
Use the following data for the next two (2) questions: b. Income from services – place of performance
c. Royalties – place of use of intangible
A resident alien had the following data in 2018: d. Gain on sale of real property – place of sale.
Gross income, Philippines P2,000,000
Business expenses 1,200,000 30. Which of the following income is derived from sources
within the Philippines:
Dividends received: a. Dividends received from a non-resident foreign
From domestic corporation (net) corporation;
60% of its income came from 90,000 b. Gain on sale of personal property (movable)
the Philippines manufactured in the Philippines and sold outside of
40% of its income came from 72,000 the Philippines.
the Philippines c. Gains on sale of real property located in Malaysia.
From resident foreign corporation d. Royalty income arising from use in the Philippines
(gross) of technical know-how whereby the owner and
60% of its income came from 50,000 developer is situated in Japan.
the Philippines
40% of its income came from 40,000 31. Assume the following:
the Philippines Gain on sale of personal property P400,000
purchased in the Philippines and sold
23. The taxpayer’s taxable income is in Hongkong
a. P750,000 c. P796,000 Compensation received for personal 200,000
b. P780,000 d. P830,000 services in the Philippines
Rent income from real property in 300,000
24. The final withholding taxes on dividends amount to Malaysia
a. P16,200 c. P25,200 Gain from sale in the Philippines of 100,000
b. P18,000 d. P26,000 shares of a foreign corporation
Deductions identified with:
Use the following data for the next two (2) questions: Philippine income 80,000
F5 Corporation, a domestic corporation had the Foreign income 120,000
following data during the calendar year 2017 Deductions unidentified with any 30,000
Gross Income, Philippines P10,000,000 particular income
Allowable itemized 4,000,000
deductions/expenses The Philippine net income is
Dividend income FROM: a. P220,000 c. P190,000
a) Domestic corporation 1,000,000 b. P211,000 d. P111,000
b) Foreign corporation, 80% 1,000,000
of its gross income were
derived from the
Philippines
c) Foreign corporation, 60% 800,000
of its gross income were
derived from the
Philippines
d) Foreign corporation, 25% 400,000
of its gross income were
derived from the
Philippines

25. The taxable income is

a. P9,200,000 c. P8,200,000

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