REVENUE REGULATIONS NO. 02-40 INCOME TAX REGULATIONS (PART 3)

PART 3 (last part):

SECTION 130.     Copy of report to Insurance Commissioner to be furnished the Commissioner of Internal Revenue. — To facilitate the auditing of income tax returns, insurance companies shall submit to the Commissioner of Internal Revenue together with returns of income, wherever possible a copy of their annual report to the Insurance Commissioner.

(Section 33 of the Code)

SECTION 131.     Losses from wash sales of stock or securities. — (a) A taxpayer cannot deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if, within a period beginning thirty days before the date of such sale or disposition and ending thirty days after such date (referred to in this section as the sixty-one-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities. However, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of its business as such dealer.

(b)          Where more than one loss is claimed to have been sustained within the taxable year from the sale or other disposition of stock or securities, the provisions of this section shall be applied to the losses in the order in which the stock or securities the disposition of which resulted in the respective losses were disposed of (beginning with the earliest disposition). If the order of disposition of stock or securities disposed of at a loss on the same day cannot be determined, the stock or securities will be considered to have been disposed of in the order in which they were originally acquired (beginning with earliest acquisition).

(c)           Where the amount of stock or securities acquired within the sixty-one day period is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be those with which the stock or securities acquired are matched in accordance with the following rule:

The stock or securities acquired will be matched in accordance with the order of their acquisition (beginning with the earliest acquisition) with an equal number of the shares of stock or securities sold or otherwise disposed of.

(d)          Where the amount of stock or securities acquired within the sixty- one-day period is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which resulted in the nondeductibility of the loss shall be those with which the stock or securities disposed of are matched in accordance with the following rule:

The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.

(e)          The acquisition of any security which results in the non-deductibility of a loss under the provisions of this section shall be disregarded in determining the deductibility of any other loss.

(f)           The word "acquired" as used in this section means acquired by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law, and comprehends cases where the taxpayer has entered into a contract or option within the sixty-one-day period to acquire by purchase or by such an exchange.

EXAMPLE (1): A, whose taxable year is the calendar year, on December 1, 1939, purchased 100 shares of common stock in the M Company for P10,000 and on December 15, 1939, purchased 100 additional shares for P9,000. On January 2, 1940, he sold the 100 shares purchased on December 1, 1939, for P9,000. Because of the provisions of Section 33 no loss from the sale is allowable as a deduction.

EXAMPLE (2): A, whose taxable year is the calendar year, on September 21, 1939, purchased 100 shares of the common stock of the M Company for P5,000. On December 21, 1939, he purchased 50 shares of substantially identical stock for P2,750, and on December 26, 1939, he purchased 25 additional shares of such stock for P1,125. On January 2, 1940, he sold for P4,000 the 100 shares purchased on September 21, 1939. There is an indicated loss of P1,000 on the sale of the 100 shares. Since within the sixty-one-day period A purchased 75 shares of substantially identical stock, the loss on the sale of 75 of the shares (P3,750 less P3,000, or P750) is not allowable as a deduction because of the provisions of Section 33. The loss on the sale of the remaining 25 shares (P1,250 less P1,000, or P250) is deductible subject to the limitations provided in Sections 31(b) and 34. The basis of the 50 shares purchased December 21, 1939, the acquisition of which resulted in the non-deductibility of the loss (P500) sustained on 50 of the 100 shares sold on January 2, 1940, is P2,500 (the cost of 50 of the shares sold on January 2, 1940), plus P750 [the difference between the purchase price of the 50 shares acquired on December 21, 1939, (P2,750) and the selling price of 50 of the shares sold on January 2, 1940 (P2,000)], or P3,250. Similarly the basis of the 25 shares purchased on December 26, 1939, the acquisition of which resulted in the nondeductibility of the loss (P250) sustained on 25 of the shares sold on January 2, 1940, is P1,250 plus P125, or P1,375. (See Section 143 of these regulations.)

EXAMPLE (3): A, whose taxable year is the calendar year, on September 15, 1938, purchased 100 shares of the stock of the M Company for P5,000. He sold these shares on February 1, 1940, for P4,000. On each of the four days from February 15, 1940, to February 18, 1940, he purchased 50 shares of substantially identical stock for P2,000. There is an indicated loss of P1,000 from the sale of the 100 shares on February 1, 1940, but since within the sixty-one-day period A purchased not less than 100 shares of substantially identical stock, the loss is not deductible. The particular shares of stock the purchase of which resulted in the nondeductibility of the loss are the first 100 shares purchased within such period, that is, the 50 shares purchased on February 15, 1940, and the 50 shares purchased on February 16, 1940.   

(Section 34 of the Code)

SECTION 132.     Definition of "capital assets." — The law provides that the term "capital assets" shall be held to mean property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 30 of the Code. The term "capital asset" includes all classes of property not specifically excluded by Section 30(a).

The exclusion from the term "capital assets" of property used in the trade or business of a taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange. It has no application to gains or losses arising from the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished from depreciable improvements upon the land. To such gain or loss allocable to the land, the limitations of Section 34(b) and (c) apply (such limitation may be inapplicable to a dealer in real estate, but, if so, it is because he holds the land primarily for sale to customers in the ordinary course of his trade or business, not because land is subject to a depreciation allowance). Gains or losses from the sale or exchange of property used in the trade or business of the taxpayer of a character which is subject to the allowance for depreciation provided in Section 30(f) of the Code, will not be subject to the percentage provisions of Section 34(b) and losses from such transactions will not be subject to the limitation of losses provided in Section 30(c). (Real property used in taxpayer's trade or business is no longer capital asset per Am. R.A. 82.)

SECTION 133.     Percentage taken into account. — In computing net income, only 50 per cent of the gain or loss recognized upon the sale or exchange for a capital asset shall be taken into account. Thus, in the case of a merchandising concern which has an "ordinary net income" (net income exclusive of net gains from the sale or exchange of capital assets) of P10,000 and a net capital gain of P5,000, the net income subject to tax will be P10,000 plus P2,500 (50 % of P5,000), of P12,500.

SECTION 134.     Limitation on capital losses. — Losses from sales or exchanges of capital assets are allowed only to the extent of the gains from such sales or exchanges. If the dealings of the taxpayer in capital assets during the year result in a net capital loss, such loss cannot be deducted from his ordinary income, inasmuch as capital losses are allowable only to the extent of capital gains. In the case, for example, of a taxpayer, engaged in buying and selling goods, having an ordinary net income of P20,000, capital gains of P5,000 and capital losses of P3,000 the taxable net income is computed as follows:

Ordinary net income                                                              P20,000

Gains from sales of capital assets

               (as stocks or securities)                  P5,000

50% of such gains                                           P2,500

Losses from sales of capital assets                P3,000

50% of such losses                                            P1,500

Net taxable capital gains                                                        1,000

                                                                                                   ————

Taxable net income                                                               P21,000

                                                                                                 =======

If such taxpayer had an ordinary net income of P20,000, capital gains of P2,000 and capital losses of P7,000, the taxable net income would be computed as follows:

Ordinary net income                                      P20,000

Losses from sales of capital assets

               (as stocks or securities)   P7,000

50% of such losses                          P3,500

Gains from sales of capital assets               2,000

50% of such gains                            1,000

                              ———

Net capital losses                            P2,500

Taxable net income                                       P20,000

                                             ======

(The net capital loss of P2,500 is not deductible in arriving at the taxable net income inasmuch as capital losses are allowed only to the extent of capital gains.)

SECTION 134-A. Capital loss carry-over-Illustration. — A, an individual has the following incomes and losses:

1946 — Net income from business             1,000

               Dividends received           750

               Interest earned  500

               Capital gains — on capital assets held for 8 months            5,000

               Capital losses — on capital assets held for 9 months           10,000

1947 — Net income from business             2,000

               Interest earned 200

               Capital gains — on capital assets held for 15 months          5,000

In 1946, his taxable income is computed as follows:

Income from business, dividends and interest                       P2,250

Capital gains and losses:

Capital gains       P5,000

Less-Capital losses           10,000

                              ———

               Net loss carried over to 1947       (P5,000)

                              ———

Net income subject to tax                            P2,250

In 1947, his taxable income is computed as follows:

               Income from business and interest                           P2,200

Capital gains and losses:

                              Capital gains       P5,000

                                             ———

                              One-half              P2,500

                                             ———

                              Less-Capital loss carried over (#) 2,250

               Net capital gain                250

                                                            ———

               Net income subject to tax                            P2,450

                                                            ======

# The net capital loss of P5,000 sustained in 1946 and carried over in 1947 is reduced to P2,250 for the reason that the net income from business and other sources (not including capital gain), for the year 1946 is only P2,250.

If a bank or trust company incorporated under the laws of the Philippines or of the United States, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the limitation contained in Section 34(c) and shall not be included in determining the applicability of such limitation to other losses.

SECTION 135.     Gains and losses from short sales. — For income tax purposes, a short sale is not deemed to be consummated until the delivery of property to cover the short sale. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the brokers to replace the property borrowed by such broker.

(Section 35 of the Code)

SECTION 136.     Basis for determining gain or loss from sale of property. — For the purpose of ascertaining the gain or loss from the sale or exchange of property, the basis is the cost of such property, or in the case of property which should be included in the inventory, its latest inventory value. But in the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the gain to be included in gross income is the excess of the amount realized therefor over such fair market value. (See illustration I, Section 137 of these regulations). Also in the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost the deductible loss is the excess of such fair market value over the amount realized therefor. (See Illustration II, Id.). No gain or loss is recognized in the case of property sold or exchanged (a) at more than cost but less than its fair market value as of March 1, 1913 (See Illustration III, Id.), or (b) at less than cost but at more than its fair market value as of March 1, 1913. (See Illustration IV, Id., Id., Id.) In any case proper adjustment must be made in computing gain or loss from the exchange or sale of property for any depreciation or depletion sustained and allowable as deduction in computing net income; the amount of depreciation previously charged off by the taxpayer shall be deemed to be true depreciation sustained unless shown by clear and convincing evidence to be incorrect. What the fair market value of property was as of March 1, 1913, is a question of fact to be established by evidence which will reasonably and adequately make it appear. The nature and extent of the sales and the circumstances under which they were made should be considered. Prices received at forced sales or for small lots of property may be and often are no real indication of the value of the amount of property in question. For instance, sales from time to time of a small number of shares of stock is little indication of the value of a large or controlling interest in the corporation. If the taxpayer can not determine the cost of securities purchased prior to March 1, 1913, because of the loss, destruction, or failure to keep records, the value of the securities at the date of approximate date of acquisition may be used in determining the cost basis for purposes of computing the gain or loss from the sale of the securities. When the date or approximate date of acquisition is unknown, no general rule can be stated for determining the cost value of such securities. Each case must be considered separately upon its own facts.   

SECTION 137.     Illustrations of the computation of gain or loss from the sale or exchange of property acquired prior to March 1, 1913. — To avoid complexity no adjustment has been made in these examples for depreciation or depletion.

In the case of property acquired before March 1, 1913, when its fair market value as of that date is in excess of its cost, the taxable gain is the excess of the amount realized therefor over such fair market value.

ILLUSTRATION I

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Excess of amount realized over fair

                                                            market value as of March 1, 1913.

                                                            Gain attributed to the period prior

                                                            to March 1, 1913 not taxable.

In the case of property acquired before March 1, 1913, when its fair market value as of that date is lower than its cost, the deductible loss is the excess of such fair market value over the amount realized therefor.

ILLUSTRATION II

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Excess of fair market value over

                                                            amount realized. Loss attributable to

                                                            the period prior to March 1, 1913, not

                                                            deducible.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at more than cost but at less than its fair market value as of that date.

ILLUSTRATION III

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Reason: A gain on whole transaction,

                                                            which gain is attributed to period prior

                                                            to March 1,1913.

No gain or loss is recognized in the case of property acquired before March 1, 1913, and sold or disposed of at less than cost but at more than its fair market value as of that date.

ILLUSTRATION IV

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Reason: A loss on whole transaction,

                                                            which loss is attributable to period

                                                            prior to March 1, 1913.

Where the cost is equal to or greater than the fair market value as of March 1, 1913, and the selling price exceeds the cost, the gain to be included in gross income is the excess of the selling price over the cost.

ILLUSTRATION V

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Reason: Gain on whole transaction,

                                                            all of which is attributable to period

                                                            subsequent to March 1, 1913.

Where the fair market value as of March 1, 1913, is equal to or greater than the cost and the selling price is less than the cost, the deductible loss is the amount by which the cost exceeds the selling price.

ILLUSTRATION VI

                              Fair Market

               Cost       Value     Sale Price             Taxable gain

                              Mar. 1, 1913

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

                                                            Reason: Loss on whole transaction, all

                                                            of which is attributable to period

                                                            subsequent to March 1, 1913. Only

                                                            actual loss sustained deductible.

SECTION 138.     Sale of property acquired by gift. — In computing the gain or loss from the sale or other disposition of property acquired by gift, the basis shall be the selling price and the fair market value of the property at the time the gift was made, or its fair market value as of March 1, 1913, if acquired prior thereto, determined in accordance with the next two preceding sections. In the case of gifts made on or after July 1, 1939, the value taken as a basis for gift tax purposes shall be considered as the fair market value in computing gain or loss from the sale or other disposition of the property.

SECTION 139.     Sale of property acquired by devise, bequests, or inheritance. — In computing the gain or loss from the sale or other disposition of property acquired by devise, bequest, or inheritance, the basis shall be the fair market price or value of such property at the time of the death of the decedent. The term "property acquired by bequest, devise, or inheritance" as used herein includes (a) such property interests as the taxpayer has received as the result of a transfer, or creation of a trust, in contemplation of or intended to take effect in possession or enjoyment at or after death, and (b) such property interest as the taxpayer has received as the result of the exercise by a person of a general power of appointment (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after death. In the case of property acquired by gift, bequest, devise, or inheritance, prior to March 1, 1913, the taxable gain or deductible loss from the sale or other disposition thereof shall be computed in accordance with sections 136 and 137 of these regulations. In the case of property acquired by bequest, devise or inheritance, its value as appraised for the purpose of the inheritance tax shall be deemed to be its fair market value when acquired.   

SECTION 140.     Exchange of property. — Gain or loss arising from the acquisition and subsequent disposition of property is realized only when as the result of a transaction between the owner and another person the property is converted into other property (a) that is essentially different from the property disposed of, and (b) that has a market value. The requirement that the property received in exchange must be "essentially different from the property disposed of" implies that there must be a change in substance and not merely a change in form. By way of illustration, if a taxpayer owning ten shares of stock exchanges his stock certificate for a voting trust certificate, no income is realized. The term "market value" means the fair value of the property in money as between one who wishes to purchase and one who wishes to sell. It is not, however, what can be obtained for the property when the owner is under peculiar compulsion to sell or the purchaser to buy; nor is it a purely speculative value which an owner could not reasonably expect to obtain for the property although he might possibly be fortunate enough to do so. "Market value" is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price, both having reasonable knowledge of the facts, will trade. Evidence as to the assets and liabilities of a corporation and as to its earnings may furnish definite indications of the market value of its stock.

SECTION 141.     Determination of gain or loss from the exchange of property. — The amount of income derived or loss sustained from an exchange of property is the difference between the market value at the time of the exchange of the property received in exchange and the original cost, or other basis, of the property exchange. If the property exchanged was acquired prior to March 1, 1913, see Sections 136 and 137 of these regulations.

SECTION 142.     Readjustment of interest in a registered copartnership. — When a partner retires from a duly registered copartnership, or the partnership is dissolved, he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of his interest in the partnership including in such cost the amount of his share in any undistributed partnership net income earned since he became a partner on which the income tax has been paid. However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as hereinbefore provided and the amount of such interest as of date, plus the amount of the shares in any undistributed partnership net income earned since March 1, 1913, on which the income tax has been paid, shall be ascertained and the taxable gain derived or the deductible loss sustained shall be computed as provided in Sections 136 and 137 of these regulations. If the partnership distributes its assets in kind and not in cash, the partner realizes gain or suffers loss according to the market value of the property received in liquidation. Whenever a new partner is admitted, to a partnership, or any existing partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the next return of income, in order that the Commissioner of Internal Revenue may determine whether any gain or loss has been realized by any partner.   ADTCaI

SECTION 143.     Basis of stock or securities acquired in "wash sales". — In the sale or other disposition of stocks or securities the acquisition of which (or the contract or option to acquire which) resulted in the non deductibility of the loss from the sale or other disposition of substantially identical stock or securities the basis shall be the basis of the substantially identical stock so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the stock or securities was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of. The application of this rule may be illustrated by the following examples:

EXAMPLE (1): A purchased a share of common stock of the X Corporation for P100 in 1936, which he sold January 15, 1940, for P80.00. On February 1, 1940, he purchased a share of common stock of the same corporation for P90.00. No loss from the sale is recognized under Section 33 of the Code. The basis of the new share is P110; that is, the basis of the old share (P100) increased by P10, excess of the price at which the new share was acquired (P90) over the price at which the old share was sold (P80).

EXAMPLE (2): A purchased a share of common stock of the X corporation for P100 in 1936, which he sold January 15, 1940, for P80. On January 1, 1940, he purchased a share of common stock of the same corporation for P70. No loss from the sale is recognized under Section 33 of the Code. The basis of the new share is P90; that is, the basis of the old share (P100) decreased by P10, the excess of the price at which the old share was sold (P80) over the price at which the new share was acquired (P70). (See Section 131 of these regulations).

SECTION 143-A. Excerpts from B.I.R. General Circular No. V-253 publishing Republic Act No. 1921 amending Section 35 of the Code, particularly subsection (c) thereof:

Features of the Amendment

1.            Before and after the amendment. — Under the provisions of subsection (c) of Section 35 of the National Internal Revenue Code, before its amendment by Republic Act No. 1921, when property is exchanged for another property, the property received in exchange shall, for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value.

Paragraph 1 of subsection (c) of section 35 of the Tax Code after the amendment states the general rule that upon the sale or exchange of property, the entire amount of gain or loss as the case may be, is recognized, while paragraphs 2 and 3 give the exceptions where gain or loss is not recognized, or gain is recognized only in part.

2.            Exceptions to the rule recognizing gain or loss in exchanges of property solely in kind. — Under paragraph 2 of subsection (c) of Section 35 of the Tax Code after its amendment by Republic Act No. 1921, no gain or loss shall be recognized in the following cases of exchanges made in pursuance of a plan of merger or consolidation:

(a)          By a corporation: If a corporation, a party to a merger or consolidation, in pursuance of such plan of merger or consolidation, exchanges property solely for stock in another corporation, a party to the merger or consolidation.

(b)          By a shareholder: A shareholder who exchanges his stock in a corporation which is a party to the merger or consolidation solely for stock of another corporation, also a party to the merger or consolidation.

(c)           By a security holder: A security holder of a corporation which is a party to the merger or consolidation, who exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation.

3.            Recognition of gain in part but not loss, where exchanges are not solely in kind.

(a)          By a shareholder or security holder. — If in connection with an exchange made by a shareholder or security holder described in the above exceptions, he receives not only stock or securities, permitted to be received without recognition of loss or gain, but also money and/or other property, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of money and the fair market value of such other property. The loss, if any, to the shareholder or security holder from such an exchange is not to be recognized to any extent. However, if the distribution of such other property and/or money to a shareholder in the course of a merger or consolidation has the effect of the distribution of a taxable dividend, there shall be taxed to the distributee as a taxable dividend such an amount of the gain recognized on the exchange as is not in excess of the distributee's ratable share of the undistributed earnings and profits of the corporation, and as a capital gain, the remainder, if any, of the gain so recognized.

               Example: A, in connection with a merger or consolidation in 1957 exchanges a share of stock in the X Corporation (a party to the merger or consolidation) purchased in 1939 at a cost of P100 for a share of stock of the Y Corporation (also a party to the merger or consolidation), which has a fair market value of P90, plus P20 in cash. The gain from the transaction is P10 and is recognized and taxed as a gain from the exchange of property. However, if the share of stock received had a fair market value of P70, the loss from the transaction of P10 would not be recognized.

(b)          By a corporation. — If, in pursuance of a plan of merger or consolidation above described, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss, but also money and/or other property, then, if such money and/or other property received by the corporation is distributed by it pursuant to the plan of merger or consolidation, no gain to the said corporation will be recognized. If the other property and/or money received by the corporation is not distributed by it pursuant to the plan of merger and consolidation, the gain, if any, to the corporation from the exchange will be recognized in an amount not in excess of the sum of money and the fair market value of the other property so received which is not distributed. In either case no loss from the exchange will be recognized.

4.            Assumption of liability. — Where upon an exchange described in the foregoing exceptions, a taxpayer receives stock or securities which would be permitted to be received without the recognition of gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property subject to a liability, such assumption or acquisition shall not be considered as money and/or other property, and shall not prevent the exchange from being within the exceptions. Accordingly, the assumption of the aforesaid liabilities is not to be treated as other property or money for the purpose of determining the amount of realized gain.

5.            Basis of stock or securities for the purpose of determining gain or loss upon subsequent sale.

(a)          By the transferor corporation, or its shareholder or security holder. — The basis of the stock or securities received by the transferor corporation or its shareholder or security holder upon the exchange specified in the above exceptions shall be the same as the basis of the property, stock or securities exchanged decreased by the money received and the fair market value of the other property received, and increased by the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange. The other property or "boot" received in exchange shall have as basis its fair market value.

Examples: 1. A purchased a share of stock in the X Corporation in 1939 for P100. Pursuant to a plan of merger or consolidation, A in 1957 exchanged his share for one share in the Y Corporation, worth P90 and P30 in cash. A realized a gain of P20 upon the exchange. The basis of the share of stock in the Y Corporation is P90, that is, the basis of the share in the X Corporation (P100) less the amount of money received by A (P30) plus the amount of the gain recognized on the exchange (P20).

2.            A purchased a share of stock in the X Corporation in 1939 for P100. Upon a merger or consolidation of the X Corporation in 1957, A received in place of his stock in the X Corporation a share of stock in the Y Corporation worth P60, a Treasury Bond worth P50, and in addition P20 in cash. A realized a gain of P30 upon the exchange. The basis of the property received in exchange is the basis of the old stock decreased in the amount of money received (P20) and increased in the amount of gain that was recognized (P30), which results in a basis for the property received of P110. This basis of P110 is apportioned between the Treasury Bond and the share of stock, the basis of the Treasury Bond being its fair market value at the date of the exchange, P50, and of the share of stock, the remainder, P60.

(b)          By the transferee. — The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor, increased by the amount of the gain recognized to the transferor on the transfer.

(c)           If corporation shareholder or security holder received several kinds of stock or securities. — When securities of a single class were exchanged for new securities of different classes where no gain or loss was recognized, the proper method of apportionment is to allocate to each class of new securities that proportion of the original basis which the market value of the particular class bears to the market value of all securities received on the date of the exchange, for purposes of determining the gain or loss on the subsequent sale of any of the new securities. For example, if 100 shares of common stock par value P100, are exchanged for 50 shares of preferred and 50 shares of common each of P100 par value, and the cost of the old stock was P250 per share, or P25,000, but the market value of the preferred stock on the date of the exchange was P110 per share, or P5,500 for the 50 shares, and the market value of the common was P440 per share or P22,000 for the 50 shares of common, one-fifth of the original cost, or P5,000, would be regarded as the cost of the preferred and four-fifths, or P20,000 as the cost of the common. 

As previously shown cash "boot" operates in the first instance to reduce basis. Then to this result must be added the gain recognized. The remainder is to be allocated between the several types of stock and securities permitted to be received without the recognition of gain or loss. To illustrate: The taxpayer in a nontaxable exchange trades A stock which cost P100 for one share of common stock and one share of preferred stock of B corporation, together worth P100 (P100 each), and P50 cash. The basis for the share of B common stock will therefore be P50 (1/2 of P100) and the B preferred stock will likewise take a P50 basis.

6.            Definitions:

(a)          The term "securities" means bonds and debentures but not "notes" of whatever class or duration.

(b)          The term "merger" or "consolidation" shall be understood to mean the ordinary merger or consolidation, or the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock. In order that a transaction may be regarded as a merger or consolidation within the purview of the amendment, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden on taxation. In determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit. The term "property" shall be taken to include the cash assets of the transferor for purpose of determining whether the property transferred constitutes a substantial portion of the property of the transferor. "Substantially all" as used under this amendment means the acquisition by one corporation of at least 80% of the assets, including cash, of another corporation, which has the element of permanence and not merely momentary holding.

(Section 36 of the Code)

SECTION 144.     Need of inventories. — In order to reflect the net income correctly, inventories at the beginning and end of each year are necessary in every case in which the production, purchase or sale of merchandise is an income producing factor. The inventory should include raw materials and supplies on hand that have been acquired for sale, consumption, or use in productive processes together with all finished or partly finished goods. Only merchandise title to which is vested in the taxpayer should be included in his inventory. Accordingly the seller should include in his inventory goods under contract for sale but not yet segregated and applied to the contract and goods out upon consignment, but should exclude from inventory goods sold, title to which has passed to the purchaser. A purchaser should include in inventory merchandise purchased, title to which has passed to him although such merchandise is in transit or for other reasons has not been reduced to physical possession, but should not include goods ordered for future delivery transfer of title to which has not yet been effected.

SECTION 145.     Valuation of inventories. — The law provides two tests to which each inventory must conform. — (1) It must conform as nearly as possible to the best accounting practice in the trade or business, and (2) it must clearly reflect the income. It follows, therefore, that inventory rules can not be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business. In order to clearly reflect income, the inventory practice of a taxpayer should be consistent from year to year, and greater weight is to be given to consistency than to any particular method of inventory or basis of valuation, as long as the method or basis used is substantially in accord with these regulations. An inventory that can be used under the best accounting practice in a balance sheet showing the financial position of the taxpayer is, as a general rule, regarded as clearly reflecting his income.

The bases of valuation most commonly used by business concerns and which meet the requirements of the Income Tax Law are (a) cost price or (b) cost or market price, whichever is the lower. Any goods in an inventory which are unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second hand goods taken in exchange, should be valued at "bona fide" selling prices whether basis (a) or (b) is used, or if such goods consist of raw materials or partly finished goods held for use or consumption, they should be valued upon a reasonable basis, taking into consideration the usability and the condition of the goods, but in no case shall such value be less than the scrap value. "Bona fide" selling price means actual offerings of goods during a period ending not later than thirty days after inventory date. The burden of proof will rest upon the taxpayer to show that such exceptional goods as are valued upon such selling bases come within the classifications indicated above, and he shall maintain such records of the disposition of the goods as will enable a verification of the inventory to be made.   

In respect to normal goods, whichever basis (a) or (b) is adopted must be applied with reasonable consistency to the entire inventory. Taxpayers were given the option to adopt either basis (a) or (b) for their 1921 inventories, and the basis adopted for that year is controlling and a change can now be made after permission is secured from the Commissioner of Internal Revenue. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be either (a) the goods most recently purchased or produced and the cost thereof will be the actual cost of the goods purchased or produced during the period in which the quantity of goods in the inventory has been acquired, or (b) where the taxpayer maintains book inventories in accordance with a sound accounting system in which the respective inventory accounts are charged with the actual cost of the goods purchased or produced and credited with the value of the goods used, transferred, or sold, calculated upon the basis of the actual cost of the goods acquired during the taxable year (including the inventory at the beginning of the year) the net value as shown by such inventory accounts will be deemed to be the cost of the goods on hand. The balances shown by such inventories should be verified by physical inventories at reasonable intervals and adjusted to conform therewith.

Inventories should be recorded in a legible manner, properly computed and summarized, and should be preserved as a part of the accounting record of the taxpayer. The inventories of taxpayers on whatever basis taken will be subject to investigation by the Commissioner of Internal Revenue and the taxpayer must satisfy the Commissioner of Internal Revenue of the correctness of the price adopted.

The following methods, among others, that are sometimes used in taking or valuing inventories, are not in accord with these regulations and therefore their use for income tax purposes is prohibited, viz.:

(1)          Deducting from the inventory a reserve for price changes, or an estimated depreciation in the value thereof.

(2)          Taking work in process, or other parts of the inventory, at a nominal price or at less than its proper value.

(3)          Omitting portions of the stock on hand.

(4)          Using a constant price or nominal value for a so called normal quantity of materials or goods in stock.

(5)          Including stock in transit, either shipped to or from the taxpayer, the title to which is not vested in the taxpayer.

SECTION 146.     Inventories at cost price. — Cost means: (1) In the case of merchandise on hand at the beginning of the taxable year, the inventory price of such goods.

(2)          In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts, approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods.

(3)          In the case of merchandise produced by the taxpayer since the beginning of the taxable year, (a) the cost of raw materials and supplies entering into or consumed in connection with the products; (b) expenditures for direct labor; (c) indirect expenses incident to and necessary for the production of the particular article, including therein a reasonable proportion of management expenses, but not including any cost of selling or return on capital whether by way of interest or profit.

(4)          In any industry in which the usual rules for computation of cost of production are inapplicable, costs may be approximated upon such basis as may be reasonable and in conformity with established trade practice in the particular industry. Among such cases are: (a) Farmers and raisers of 1ivestock; (b) miners and manufacturers who by a single process or uniform series of processes derive a product of two or more kinds, size or grade, the unit cost of which is substantially alike; and (c) retail merchants who use what is known as the "retail method" in ascertaining approximate cost.   

SECTION 147.     Inventories at market price. — Under ordinary circumstances, and for normal goods in an inventory "market price" means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which usually purchased by the taxpayer and is applicable in the cases (a) of goods purchased and on hand, and (b) of basic elements of cost (materials, labor, and burden) in goods in process of manufacture and in finished goods on hand; exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts (i.e., those not legally subject to cancellation by either party) at fixed prices entered into before the date of the inventory, which goods must be inventoried at cost. Where no open market exists or where quotations are nominal due to stagnant market condition, the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available, such as specific purchase or sales by the taxpayer or others in reasonable volume and made in good faith, or compensation paid for cancellation of contracts for purchase commitments. Where the taxpayer in the regular course of business has offered for sale such merchandise at prices lower than the current price as above defined, the inventory may be value at such prices and the correctness of prices will be determined by reference to the actual sales of the taxpayer for a reasonable period before and after the date of the inventory. Prices which vary materially from the actual prices so ascertained will not be accepted as reflecting the market price.

SECTION 148.     Inventories by dealers in securities. — A dealer in securities who in his books of account regularly inventories unsold securities on hand either —

(a)          At cost;

(b)          At, cost or market, whichever is lower; or

(c)           At market value.

may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another method be authorized by the Commissioner of Internal Revenue. A dealer in securities in whose books of accounts separate computations of the gain or loss from the sale of the various lots of securities sold are made on the basis of the cost of each lot shall be regarded, for the purposes of this section, as regularly inventorying his securities at cost. For the purposes of this rule a dealer in securities is a merchant of securities, whether an individual, partnership; or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.

SECTION 149.     Inventories of livestock raisers and other farmers. — (1) Farmers may change the basis of their returns from that of receipts and disbursements to that of an inventory basis, which necessitates the use of opening and closing inventories for the year in which the change is made. There should be included in the opening inventory all farm products (including livestock) purchased or raised which were on hand at the date of the inventory, but inventories must not include real estate, buildings, permanent improvements, or any other fixed assets.   

(2)          Because of the difficulty of ascertaining actual cost of livestock and other farm products, farmers who render their returns upon an inventory basis may at their option value their inventories for the current taxable year according to the "farm-price method" which provides for the valuation of inventories at market price less cost of marketing. If the use of the "farm-price method" of valuing inventories for any taxable year involves a change in method of pricing inventories from that employed in prior years, the opening inventory for the taxable year in which the change is made should be brought in at the same value as the closing inventory for the preceding taxable year. If such valuation of the opening inventory for the taxable year in which the change is made results in an abnormally large income for that year, there may be submitted with the return for such taxable year an adjustment statement for the preceding year based on the "farm-price method" of valuing inventories; upon the amount of which adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in effect for such preceding year.

(3)          Where returns have been made in which the taxable net income has been computed upon incomplete inventories, the abnormality should be corrected by submitting with the return for the current taxable year a statement for the preceding year in which such adjustments shall be made as are necessary to bring the closing inventory for the preceding year into agreement with opening complete inventory for the current taxable year.

SECTION 150.     Inventories of miners and manufacturers. — A taxpayer engaged in mining or manufacturing who by a single process or uniform series of processes derives a product of two or more kinds, sizes or grades, the unit cost of which is substantially alike, and who in conformity to a recognized trade practice allocates an amount of cost to each kind, size, or grade of product which in the aggregate will absorb the total cost of production, may use such allocated cost a the basis for pricing inventories, provided such allocation bears a reasonable relation to the respective selling values of the different kinds of products.

SECTION 151.     Inventories of retail merchants. — Retail merchants who employ what is known as the "retail method" of pricing inventories may make their returns upon that basis, provided that the use of such method, is designated upon the returns, that accurate accounts are kept and that such method is consistently adhered to unless a change is authorized by the Commissioner of Internal Revenue. Under this method the goods in the inventory are ordinarily priced at the selling prices and the total retail value of the goods in each department or of each class of goods is reduced to approximate cost by deducting the percentage which represents the difference between the retail selling value and the purchase price. This percentage is determined by departments of a store or by classes of goods, and should represent as accurately as may be the amounts added to the cost prices of the goods to cover selling and other expenses of doing business and for the margin of profit. In computing the percentage above mentioned, proper adjustment should be made for all mark-ups and mark-downs.

A taxpayer maintaining more than one department in his store or dealing in classes of goods carrying different percentages of gross profit should not use a percentage of profit based upon an average of his entire business but should compute and use in valuing his inventory the proper percentages for the respective departments or classes of goods.

(Section 37 of the Code)

SECTION 152.     Income from sources within the Philippines. — The law divides the income of taxpayers into three classes:

(1)          Income which is derived in full from sources within the Philippines;

(2)          Income which is derived in full from sources without the Philippines; and

(3)          Income which is derived partly from sources within and partly from sources without the Philippines.

Non-resident alien individuals and foreign corporations are taxable only upon income from sources within the Philippines. Citizens and residents of the Philippines and domestic corporations are taxable upon income derived from sources both within and without the Philippines.   

The taxable income from sources within the Philippines includes that derived in full from sources within the Philippines and that portion of the income which is derived partly from sources within and partly from sources without the Philippines which is allocated or apportioned to sources within the Philippines.

SECTION 153.     Interest. — Interest on bonds or notes or other interest bearing obligations of residents, corporate or otherwise, constitutes income from sources within the Philippines.

SECTION 154.     Dividends. — Gross income from sources within the Philippines includes dividends, as defined by Section 83 of the Code:

(a)          From a domestic corporation; and

(b)          From a foreign corporation unless less than 50 per cent of its gross income for the three-year period ending with the close of its taxable year preceding the declaration of such dividends, or for such part of such period as it has been in existence, was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

Dividends will be treated as an income from sources within the Philippines unless the taxpayer submits sufficient data to establish to the satisfaction of the Commissioner of Internal Revenue that they should be excluded from gross income under Section 37(a)(2)(B).

SECTION 155.     Compensation for labor or personal services. — Gross income from sources within the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, of the place in which the contract for service was made, or of the place of payment. If a specific amount is paid for labor or personal services performed in the Philippines, such amount shall be included in the gross income. If no accurate allocation or segregation of compensation for labor or personal services performed in the Philippines can be made, or when such labor or service is performed partly within and partly without the Philippines, the amount to be included in the gross income shall be determined by an apportionment of the time basis, i.e., there shall be included in the gross income an amount which bears the same relation to the total compensation as the number of days of performance of the labor or services within the Philippines bears to the total number of days performance of labor or services for which the payment is made. Wages received for services rendered inside the territorial limits of the Philippines and wages of an alien seaman earned on a coastwise vessel are to be regarded as from sources within the Philippines.

SECTION 156.     Rentals and royalties. — Gross income from sources within the Philippines includes rentals or royalties from property located within the Philippines or from any interest in such property, including rentals or royalties for the use of or the privilege of using in the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. The income arising from the rental of property whether tangible or intangible located within the Philippines, or from the use of property, whether tangible or intangible, located within the Philippines, is from sources within the Philippines.

SECTION 157.     Sale of real property. — Gross income from sources within the Philippines includes gain, computed under the provisions of Section 35, derived from the sale or other disposition of real property located in the Philippines. For the treatment of capital gains and losses, see Sections 132 to 135 of these regulations.

SECTION 158.     Income from sources without the Philippines. — Gross income from sources without the Philippines includes:

(1)          Interest other than that specified in Section 37(a)(1), as being derived from sources within the Philippines;

(2)          Dividends other than those derived from sources within the Philippines as provided in Section 37(a)(2);

(3)          Compensation for labor or personal services performed without the Philippines;

(4)          Rentals or royalties derived from property without the Philippines or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trade-marks, trade brands, franchises, and other like property; and

(5)          Gain derived from the sale of real property located without the Philippines.   

SECTION 159.     Sale of personal property. — Income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The world "sold" includes "exchanged". The "country in which sold" ordinarily means the place where the property is marketed. This section does not apply to income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and sold within the Philippines. (See Section 162 of these regulations.)

SECTION 160.     Apportionment of deductions. — From the items specified in Section 37(a) as being derived specifically from sources within the Philippines there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part is based upon the ratio of gross income from sources within the Philippines to the total gross income.

EXAMPLE: A non-resident alien individual whose taxable year is the calendar year, derived gross income from all sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic corporation                                        P9,000

Dividends on stock of domestic corporation                                          4,000

Royalty for the use of patents within the Philippines                          12,000

Gain from sale of real property located within the Philippines          11,000

                                                                                                                         ————

                                                                                                        Total      P36,000

that is, one-fifth of the total gross income was from sources within the Philippines. The remainder of the gross income was from sources without the Philippines, determined under Section 37(c).

The expenses of the taxpayer for the year amounted to P78,000. Of these expenses the amount of P8,000 is properly allocated to income from sources within the Philippines and the amount of P40,000 is properly allocated to income from sources without the Philippines.

The remainder of the expense, P30,000, cannot be definitely allocated to any class of income. A ratable part thereof, based upon the relation of gross income from sources within the Philippines to the total gross income, shall be deducted in computing net income from sources within the Philippines. Thus, there are deducted from the P36,000 of gross income from sources within the Philippines expenses amounting to P14,000 (representing P8,000 properly apportioned to the income from sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses which could not be allocated to any item or class of gross income). The remainder, P22,000, is the net income from sources within the Philippines.

SECTION 161.     Other income from sources within the Philippines. — Items of gross income other than those specified in Section 37(a) and (c) shall be allocated or apportioned to sources within or without the Philippines, as provided in Section (37)(e).

The income derived from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or timber, located within the Philippines, and from the sale by the producer of the products thereof within or without the Philippines, shall ordinarily be included in gross income from sources within the Philippines. If, however, it is shown to the satisfaction of the Commissioner of Internal Revenue that due to the peculiar conditions of productions and sale in a specific case or for other reasons all of such gross income should not be allocated to sources within the Philippines and to sources without the Philippines shall be made as provided in Section 162 of these regulations.

Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted therefrom, in computing net income, the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income.

SECTION 162.     Income from the sale of personal property derived from sources partly within and partly without the Philippines. — Items of gross income not allocated by Sections 152 to 159 or 161 of these regulations to sources from within or without the Philippines shall (unless unmistakably from a source within or a source without the Philippines) be treated as derived from sources partly within and partly without the Philippines.   

The portion of such income derived from sources partly within the Philippines and partly within a foreign country which is attributable to sources within the Philippines shall be determined according to the following rules and cases:

PERSONAL PROPERTY PRODUCED AND SOLD: — Gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country, or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines shall be treated as derived partly from sources within the Philippines and partly from sources within a foreign country under one of the cases below. As used herein the word "produced" includes created, fabricated, manufactured, extracted, processed, cured, or aged.

CASE 1. Where the manufacturer or producer regularly sells a part of his output to wholly independent distributors or other selling concerns in such a way as to establish fairly an independent factory or production price — or shows to the satisfaction of the Commissioner of Internal Revenue that such an independent factory or production price has been otherwise established — unaffected by considerations of tax liability, and the selling or distributing branch or department of the business is located in a different country from that in which the factory is located or the production carried on, the net income attributable to sources within the Philippines shall be computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department at the independent factory price as established. In all such cases the basis of the accounting shall be fully explained in a statement attached to the return.

CASE 2. Where an independent factory or production price has not been established as provided under Case 1, the net income shall first be computed by deducting from the gross income derived from the sale of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, the expenses, losses, or other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. Of the amount of net income so determined, one-half shall be apportioned in accordance with the value of the taxpayer's property within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one half by a fraction the numerator of which consists of the value of the taxpayer's property within the Philippines, and the denominator of which consists of the value of the taxpayer's property both within the Philippines and within the foreign country. The remaining one-half of such net income shall be apportioned in accordance with the gross sales of the taxpayer within the Philippines and within the foreign country, the portion attributable to sources within the Philippines being determined by multiplying such one-half by a fraction the numerator of which consists of the taxpayer's gross sales for the taxable year or period within the Philippines, and the denominator of which consists of the taxpayer's gross sales for the taxable year, or period both within the Philippines and within the foreign country. The "gross sales of the taxpayer within the Philippines" means the gross sales made during the taxable year which were principally secured, negotiated, or effected by employees, agents, offices, or branches of the taxpayer's business resident or located in the Philippines. The term "gross sales" as used in this paragraph refers only to the sales of personal property produced (in whole or in part) by the taxpayer within the Philippines and sold within a foreign country or produced (in whole or in part) by the taxpayer within a foreign country and sold within the Philippines, and the term "property" includes only the property held or used to produce income which is derived from such sales. Such property should be taken at its actual value, which in the case of property valued or appraised for purposes of inventory, depreciation, depletion, or other purposes of taxation shall be the highest amount at which so valued or appraised, and which in other cases shall be deemed to be its book value in the absence of affirmative evidence showing such value to be greater or less than the actual value. The average value during the taxable year or period shall be employed. The average value of property as above prescribed at the beginning and end of the taxable year or period ordinarily may be used, unless by reason of material changes during the taxable year or period such average does not fairly represent the average for such year or period, in which event the average shall be determined upon a monthly or daily basis. Bills and accounts receivable shall (unless satisfactory reason for a different treatment is shown) be assigned or allocated to the Philippines when the debtor resides in the Philippines.   

CASE 3. Applications for permission to base the return upon the taxpayer's books of account will be considered by the Commissioner of Internal Revenue in the case of any taxpayer who, in good faith and unaffected by considerations of tax liability, regularly employs in his books of account a detailed allocation of receipts and expenditures which reflects more clearly than the processes or formulas herein prescribed, the income derived from sources within the Philippines.

SECTION 163.     Foreign steamship companies. — The returns of foreign steamship companies whose vessels touch ports of the Philippines should include as gross income, the total receipts of all out-going business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it and the gross income from all parts, both within and without the Philippines of all vessels, whether touching ports of the Philippines or not, should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed upon a basis which recognizes that the income arising and accruing from business done if any from this country shall bear its share, and no more, of expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and without this country. In other words, the net income of a foreign steamship company doing business in or from this country is ascertained for the purpose of the income tax, by deducting from the gross receipts from outgoing business such a portion of the aggregate expenses, losses, etc., as such receipts bear to the aggregate receipts from all ports of all vessels, including in each case incoming of a nonshipping character but incidental, to the shipping business such as dividends from investments, interests on deposits, etc. For example —

Given

(a)          Gross receipts from outgoing freights and passengers

from P.I. ports    P20,000

(b)          Gross receipts from outgoing freights and passengers

from all ports other than those of P. I       200,000

(c)           Interests and other nonshipping income received by P.I.

office    5,000

(d)          Interests, dividends, and other nonshipping income received

by all offices other than those in P.I.         50,000

(e)          Total expenses and deductions of the company as a whole,

including those incurred by P.I. office        150,000

Computation of P.I. Net Income

(f)           P.I. Gross Income:

               Freights and passengers  P20,000

               Interest and other income             5,000

                              ———

               Total      25,000

(g)          P.I. expenses:

               P.I. gross income

               ——————————     x             World's expenses, or

               World's gross income

               20,000 plus 5,000

               ——————————————————   x             150,000, or

               200,000 plus 20,000 plus 50,000 plus 5,000

               25,000

               —————          x             150,000 = 13,636

               275,000

(h)          P.I. net income:

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

               P25,000 less P13,636 = P11,364

SECTION 164.     Telegraph and cable service. — A foreign corporation carrying on the business of transmission of telegraph or cable messages between points in the Philippines and points outside the Philippines derives income partly from sources within and partly from sources without the Philippines.

(1)          GROSS INCOME. — The gross income from sources within the Philippines derived from such services shall be determined by adding (a) its gross revenues derived from messages originating in the Philippines and (b) amounts collected abroad on collect messages originating in the Philippines and deducting from such sum amounts paid or accrued for transmission of messages beyond the company's own circuit. Amounts received by the company in the Philippines with respect to collect messages originating without the Philippines shall be excluded from gross income.

(2)          NET INCOME. — In computing net income from sources within the Philippines there shall be allowed as deductions from gross income determined in accordance with paragraph (1): (a) all expenses incurred in the Philippines (not including any general overhead expenses), incident to the carrying on of the business in the Philippines; (b) all direct expenses incurred abroad in the transmission of messages originating in the Philippines (not including any general overhead expenses or maintenance, repairs, and depreciation of cable and not including any amount already deducted in computing gross income); (c) depreciation of property (other than cables) located in the Philippines and used in the trade or business therein; and (d) a proportionate part of the general overhead expenses [not including any items incurred abroad corresponding to those enumerated in (a), (b), and (c)], and of maintenance, repairs, and depreciation of cables of the entire cable system of the enterprise based on the ratio which the number of words originating in the Philippines bears to the total words transmitted by the enterprise.

SECTION 165.     Computation of income. — If a taxpayer has gross income from sources within or without the Philippines as defined by Section 37 (a) or (c) together with gross income derived partly from sources within and partly from sources without the Philippines, the amounts thereof, together with the expenses and investment applicable thereto, shall be segregated, and the net income from sources within the Philippines shall be separately computed therefrom.   

(Section 38 of the Code)

SECTION 166.     General rule. — The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner of Internal Revenue clearly reflects it. (See Section 137 of these regulations for computation of net income, and Section 38 for bases of computation. For the use of inventories, see Sections 144 to 151 of these regulations.)

SECTION 167.     Methods of accounting. — It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting which reflects taxpayer's income may be adopted. Among the essentials are the following:

(1)          In all cases in which the production, purchase, or sale of merchandise of any kind is an income producing factor, inventories of the merchandise on hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year in accordance with Sections 144 to 151 of these regulations;

(2)          Expenditures made during the year should be properly classified as between capital and income; that is to say, expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; and

(3)          In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion, or obsolescence, any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses.

SECTION 168.     Changes in accounting methods. — The true income, computed under the law shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change.

A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this action, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change from cash receipts and disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see Sections 144 to 151 of these regulations); a change from the cash or accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of completion basis to the completed contract basis or vice versa (see Section 44 of these regulations); or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method of accounting employed and the basis upon which the return is made shall be filed within 90 days after the beginning of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of Internal Revenue agree to the terms and conditions under which the change will be effected.

SECTION 169.     Accounting period. — Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be made and their income computed for each calendar year ending on December 31st of every year. However, corporations, associations, or partnerships may with the approval of the Commissioner of Internal Revenue first secured, file their returns and compute their income on the basis of a fiscal year which means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish a fiscal year as basis for filing their returns and computing their income. (For authority to file on fiscal year basis see Section 172 of these regulations.)

(Section 39 of the Code)

SECTION 170.     When included in gross income. — Except as otherwise provided in Section 39 in the case of the death of a taxpayer, gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. If a taxpayer has died there shall also be included in computing net income for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made his returns on the basis of cash receipts and disbursements.   

(For income not reduced to possession but considered as constructively received and for examples of constructive receipt, see Sections 52 and 53 of these regulations. For the treatment of income from long-term contracts, see Section 44 of these regulations.)

(Section 40 of the Code)

SECTION 171.     "Paid or incurred" and "paid or accrued". — (a) The terms "paid or incurred" and "paid or accrued" will be construed according to the method of accounting upon the basis of which the net income is computed by the taxpayer. The deductions and credits must be taken for the taxable year in which "paid or accrued" or "paid or incurred", unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in which it was "paid or accrued" or "paid or incurred", he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together with a complete statement of the facts upon which he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in which it was actually "paid or incurred", or "paid or accrued", as the case may be. Upon the audit of the return, the Commissioner of Internal Revenue will decide whether the case is within the exception provided by the law, and the taxpayer will be advised as to the period for which the deduction or credit is properly allowable.

(b)          The provisions of paragraph (a) of this section in general are not applicable with respect to the taxable period during which the taxpayer dies. In such case there shall also be allowed as deductions and credits for such taxable period amounts accrued up to the date of his death if not otherwise allowable with respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books and make his returns on the basis of cash receipts and disbursements. (See also Section 76 of these regulations.)

(Section 41 of the Code)

SECTION 172.     Change of accounting period. — If a corporation, including a duly registered general co-partnership, desires to change its accounting period from fiscal year to calendar year or from calendar year to fiscal year, or from one fiscal year to another, it shall at any time not less than thirty days prior to the date fixed in Section 46(b) of the Code for the filing of its return on the basis of its original accounting period submit a written application to the Commissioner of Internal Revenue designating the proposed date for the closing of its new taxable year, together with a statement of the date on which the books of account were opened and closed each year for the past three years, the date on which the taxable year began and ended as shown on the returns filed for the past three years, and the reasons why the change in accounting period is desired. (See also Section 46(d) of the Code.)

(Section 42 of the Code)

SECTION 173.     Returns for periods of less than twelve months. — No return can be made for a period of more than twelve months. A separate return for a fractional part of a year is therefore required whenever there is a change, with the approval of the Commissioner of Internal Revenue, in the basis of computing net income from one taxable year to another taxable year. The periods to be covered by such separate returns in the several cases are stated in Section 42(a). The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full taxable year closing at the same time.   

(Section 43 of the Code)

SECTION 174.     Sale of personal property on installment plan. — Dealers in personal property ordinarily sell either for cash or on the personal credit of the purchaser or on the installment plan. Dealers who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default —

(a)          By an agreement that title is to remain in the vendor until the purchaser has completely performed his part of the transaction;

(b)          By a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the selling price;

(c)           By a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the vendor; or

(d)          By conveyance to a trustee pending performance of the contract and subject to its provisions.

The general purpose and effect being the same in all of these cases, the same rule is uniformly applicable. The general rule prescribed is that a person who regularly sells or otherwise disposes of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total or gross profit (that is, sales less cost of goods sold) realized or to be realized when the property is paid for, bears to the total contract price. Thus the income of a dealer in personal property on the installment plan may be ascertained by taking as income that proportion of the total payments received in the taxable year from installment sales (such payments being allocated to the year against the sales of which they apply) which the total or gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year. No payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change by the taxpayer to the installment basis of returning income. Deductible items are not to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are "paid or incurred" or "paid or accrued", as provided by Section 40 and 84(q) of the Code. A dealer who desires to compute his income on the installment basis shall maintain books of account in such a manner as to enable an accurate computation to be made on such basis in accordance with the provisions of this section.

The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly be included in inventory) may be reported on the installment basis only if (1) the sale price exceeds P1,000 and (2) the initial payments do not exceed 25 per cent of the selling price.   

If for any reason the purchaser defaults in any of his payments, and the vendor returning income on the installment basis repossesses the property sold whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the repossession occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the repossession or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property repossessed and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the repossession. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged, or applied upon the repossession of the property shall be the excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged, or applied upon the repossession, unless it is clearly shown that after the property was repossessed the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the repossession. If the property repossessed is bid in by the vendor at a lawful public auction or judicial sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. The property repossessed shall be carried on the books of the vendor at its fair market value at the time of the repossession.

If the vendor chooses as a matter of consistent practice to return the income from installment sales on the straight accrual or cash receipts and disbursement basis, such a course is permissible.

SECTION 175.     Sale of real property involving deferred payments. — Under Section 43 deferred-payment sales of real property include (a) agreements to purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as follows:

(1)          Sales of property on the installment plan, that is, sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not exceed 25 per cent of the selling price.

(2)          Deferred-payment sales not on the installment plan, that is sales in which the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made exceed 25 per cent of the selling price.

In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the "selling price" but the amount of the mortgage, to the extent that it does not exceed the basis to the vendor of the property sold, shall not be considered as a part of the "initial payments" or of the "total contract price", as those terms are used in Section 43 of the Code, in Sections 174 and 176 of these regulations, and in this section. The term "initial payments" does not include amounts received by the vendor in the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price which are due and payable in subsequent years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken into account in determining the amount of the "initial payments," the "total contract price", or "the selling price". The term "initial payments" contemplates at least one other payment in addition to the initial payment. If the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the first year, the income may not be returned on the installment basis. Income may not be returned on the installment basis where no payment in cash or property, other than evidences of indebtedness of the purchaser, is received during the first year, the purchaser having promised to make two or more payments, in later years.

SECTION 176.     Sale of real property on installment plan. — In transactions included in class (1) in the preceding section the vendor may return as income from such transactions in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price.   

If the purchaser defaults in any of his payments, and the vendor returning income on the installment basis reacquires the property sold, whether title thereto had been retained by the vendor or transferred to the purchaser, gain or loss for the year in which the reacquisition occurs is to be computed upon any installment obligations of the purchaser which are satisfied or discharged upon the reacquisition or are applied by the vendor to the purchase or bid price of the property. Such gain or loss is to be measured by the difference between the fair market value of the property acquired (including the fair market value of any fixed improvements placed on the property by the purchaser) and the basis in the hands of the vendor of the obligations of the purchaser which are so satisfied, discharged, or applied, with proper adjustment for any other amounts realized or costs incurred in connection with the reacquisition. The basis in the hands of the vendor of the obligations of the purchaser satisfied, discharged, or applied upon the reacquisition of the property will be the excess of the face value of such obligations over an amount equal to the income which would be returnable were the obligations paid in full. No deduction for a bad debt shall in any case be taken on account of any portion of the obligations of the purchaser which are treated by the vendor as not having been satisfied, discharged, or applied upon the reacquisition of the property, unless it is clearly shown that after the property was reacquired the purchaser remained liable for such portion; and in no event shall the amount of the deduction exceed the basis in the hands of the vendor of the portion of the obligations with respect to which the purchaser remained liable after the acquisition. If the property reacquired is bid in by the vendor at a foreclosure sale, the fair market value of the property shall be presumed to be the purchase or bid price thereof in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of reacquisition (including the fair market value of any fixed improvements placed on the property by the purchaser).

If the vendor chooses as a matter of consistent practice to turn the income from installment sales on the straight accrual or cash receipts and disbursements basis, such a course is permissible, and the sales will be treated as deferred-payment sales not on the installment plan.

SECTION 177.     Deferred-payment sale of real property not on installment plan. — In transactions included in class (2) in Section 175 of these regulations, the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash.

If the vendor has retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor plus the fair-market value at the time of repossession of fixed improvements placed on the property by the purchaser and (2) the sum of the profits previously returned as income in connection therewith and an amount representing what would have been a proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and depletion of the property during the period the property was in the hands of the purchaser had the sale not been made will constitute gain or loss, as the case may be to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the sale plus the fair market value at the time of repossession, of fixed improvements placed on the property by the purchaser. If the vendor has previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquired the property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property for such of the purchaser's obligations as are applied by the vendor to the purchase or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the case may be for the year of reacquisition, measured by the difference between the fair market value of the property including fixed improvements placed by the purchaser on the property, and the amount of the obligations of the purchaser which were applied by the vendor to the purchase or bid price of the property. The fair market value of the property reacquired shall be presumed to be the amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold the basis for determining gain or loss is the fair market value of the property at the date of reacquisition including the fair market value of the fixed improvements placed on the property by the purchaser.   

SECTION 178.     Sale of real estate in lots. — Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire fair market value as of March 1, 1913, or the cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or parcels and made a matter of record on the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss on every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly.

SECTION 178(a).               In all cases where a taxpayer sells during the year real or personal property on the installment basis, there should be attached to the income tax return a statement of each sale made during the year containing the following information:

(a)          Name of buyer

(b)          Address of buyer

(c)           Date of sale

(d)          Selling price

(e)          Payments received during the year corresponding to each sale.

(This new section has been inserted in Revenue Regulations No. 2 by Revenue Regulations No. 8-65 dated June 1, 1965. Took effect upon their promulgation in the Official Gazette on September 27, 1965).

(Section 44 of the Code)

SECTION 179.     Determination of the taxable net income of a controlled taxpayer. — (A) DEFINITIONS. — When used in this section —

(1)          The term "organization" includes any organization of any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not.

(2)          The terms "trade" or "business" include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on.

(3)          The term "controlled" includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or the mode of its exercise. A presumption of control arises if income or deductions have been arbitrarily shifted.

(4)          The term "controlled taxpayer" means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests.   

(5)          The terms "group" and "group of controlled taxpayers" mean the organizations, trades, or businesses owned or controlled by the same interests.

(6)          The term "true net income" means, in the case of a controlled taxpayer, the net income (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction, arrangement, or other act) dealt with the other member or members of the group at arm's length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interests controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto).

(b)          SCOPE AND PURPOSE. — The purpose of Section 44 is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayers are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting record truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has not been done, and the taxable net incomes are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between/or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer dealing at arm's length with another uncontrolled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply such provisions.

(c)           APPLICATION. — Transactions between the controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer.

(Section 45 of the Code)

SECTION 180.     Individual returns. — Returns, in duplicate, are required of: (a) Every citizen or resident alien having a gross income of P1,800 or more for the taxable year; (b) every non-resident alien having income from sources within the Philippines irrespective of amount; and (c) guardians, trustees, executors, administrators, receivers, conservators, and all others acting in any fiduciary capacity, when, for the taxable year, the gross income of the person, trust, or estate for whom or which they act reaches P1,800. (See Section 214 of these regulations.)

For each calendar year, every person whether married or single, having a gross income from all sources of P1,800 or over, including dividends, excepting stock dividends, must make a return of income although the tax has been paid at source and the return shows no tax liability. Whether or not an individual is the head of a family or has dependents is immaterial in determining his liability to render a return. The husband shall include in his return the income derived not only from his services, labor, or industry or the income derived from the conjugal partnership but also the income of the wife derived from her industry or labor as well as that derived from her separate, data, or paraphernal property. Where, however, the filing of one consolidated return is impracticable, married persons may file separate returns but the incomes declared in such returns will be consolidated and the tax computed on such consolidated income.

The law requires that the income of unmarried minors derived from property received from a living parent shall be included in the return of the parent, except (1) when the gift tax imposed under Chapter II of Title III of the Code has been paid on such property, or (2) where the transfer of such property is exempt from the gift tax.

A signature affixed to a return is presumed to be genuine.

SECTION 181.     When and where to file individual returns. — The return must be filed with the Commissioner of Internal Revenue, provincial revenue agent, or treasurer of the province, city or municipality in which the taxpayer has his legal residence or principal place of business, on or before April 15th of the year following that for which the return is filed.

When the last due date for filing return falls on Sunday or a legal holiday, the last due date will be held to be the day following such Sunday or legal holiday, or if placed on the mails, it should be posted in ample time to reach the Commissioner of Internal Revenue, provincial revenue agent or treasurer of the province, city, or municipality in which the taxpayer has his legal residence or principal place of business, under ordinary handling of mail, on or before the date on which the return is required to be filed. When question is raised as to whether or not the return was posted in ample time to reach the proper official, the envelope in which the return was transmitted and the return should be submitted to the Commissioner of Internal Revenue with such comment and recommendation as the receiving officer may consider proper to make.   

SECTION 182.     Persons under disability. — If the taxpayer is unable to make his own return, on account of minority, illness, absence or non-residence, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false, or fraudulent returns.

SECTION 183.     Form of return. — Individual returns shall be prepared on B.I.R. Form No. 17.01. The forms may be had from the office of the Commissioner of Internal Revenue in Manila, or in the office of the provincial treasurers or their deputies.

A taxpayer will not be excused from making a return by the fact that no return form has been furnished him. Taxpayers not supplied with the proper forms should make application therefor to the Commissioner of Internal Revenue or to the provincial treasurers, or their deputies in ample time to have their returns prepared, verified, and filed with the proper official on or before the due date. Each taxpayer should carefully prepare his return so as to fully and clearly set forth the data therein called for. Imperfect or incorrect returns will not be accepted as meeting the requirements of the statute. (There are now BIR Provincial Revenue Officers.)

(Section 46 of the Code)

SECTION 184.     Corporation returns. — Corporations are required to make returns of income in duplicate, regardless of the amount of their net income.

A corporation claiming exemption from tax and from the filing of returns must establish its right to exemption in accordance with the procedure set forth in Section 24 of these regulations, otherwise it will be amenable to the penalties for failure to file returns.

In the case of ordinary corporations, partnerships, and joint accounts (cuentas en participacion), the return shall be on the form prescribed for corporations (B.I.R Form No. 17.02), and the returns of insurance companies, on the prescribed form (B.I.R. Form No. 17.03). A corporation having an existence during any portion of a taxable year is required to make a return. A corporation which has received a charter, but has never perfected its organization, and which has transacted no business and had no income from any source, may upon presentation of the facts to the Commissioner of Internal Revenue be relieved from the necessity of making a return so long as it remains in an unorganized condition. In the absence of a proper showing to the Commissioner of Internal Revenue such corporation must file the necessary return.

A corporation desiring to change its accounting period from calendar year to fiscal year must comply with the procedure set forth in Section 172 of these regulations relative to the change in accounting period of corporations.

SECTION 185.     Returns of insurance companies. — Insurance companies transacting business in the Philippines or deriving income from sources therein are required to file returns of income. The return shall be made on the prescribed form (B.I.R. Form No. 17.03).

SECTION 186.     Returns of foreign corporations. — Every foreign corporation having income from sources within the Philippines must make a return of income on the form prescribed for corporation (B.I.R. Form No. 17.02). If such a corporation has no office or place of business in this country, but has a resident agent therein, the latter shall make the return. Although the foreign corporation is not engaged in business in this country and has no office, branch, or agency in the Philippines, it is required to make a return if it has received income from sources within the Philippines.

SECTION 187.     Time and place for filing corporate returns. — Returns of corporations, associations, or partnerships must be filed on or before the fifteenth day of April in each year or on or before the 15th day of the fourth month following the close of a duly designated fiscal year. The return, if placed in the mails, should be posted in ample time to reach the Commissioner of Internal Revenue, provincial, revenue agent, or treasurer of the province, city or municipality in which is located the principal office of the corporation where its books of account and other data are kept, on or before the last due date for the filing of the return. When the last due date falls on Sunday or a legal holiday, the returns may be filed without penalty on the next succeeding business day. (Conforms with Am. by R.A. 2343.)

(Section 47 of the Code)

SECTION 188.     Extension of time for filing returns. — The Commissioner of Internal Revenue may, in meritorious cases, grant a reasonable extension of time for filing returns of income. Requests for such extension of time must be submitted before the last day of the period for filing returns. Absence or sickness is considered as reasonable cause, whereas, inability to close the books or to gather information required due to various circumstances will be subject to careful investigations before the request for extension is favorably considered.   

(Section 48 of the Code)

SECTION 189.     Returns by receiver. — Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, partnerships, or associations must make returns of income for such corporations, partnerships or associations covering each year or part of the year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. A receiver in charge of only part of the property of a corporation, however, as a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make a return of income.

(Section 49 of the Code)

SECTION 190.     Returns of duly registered general co-partnerships. — Duly registered general copartnerships are required to render, in duplicate, a return of their earnings, profits and income, setting forth the items of the gross income and the deductions allowable, and the names and addresses of the individuals who would be entitled to the net earnings, profits, and income, if distributed. (See sections 22 and 23 of these regulations.)

(Section 50 of the Code)

SECTION 191.     Verification of returns. — All income tax returns must be verified by the oath or affirmation of the person rendering them. Oath may be taken before any officer authorized to administer oaths or if desired, before the Commissioner of Internal Revenue or any internal-revenue officer especially deputized by him or authorized by law to administer oaths, free of charge.

SECTION 192.     Discovery of understatement of income. — If the amount of income declared in a return has been found to be understated, the Commissioner of Internal Revenue or any internal-revenue officer shall notify the taxpayer of such fact, and the taxpayer may, if he so desires, under a sworn statement, present testimony to the contrary and disprove the findings made.

(Section 51 of the Code)

SECTION 193.     Assessment of tax. — All income tax returns filed with the provincial revenue agents or with the treasurers of provinces, cities, or municipalities must be stamped with the date of their receipt and immediately forwarded to the Commissioner of Internal Revenue. All assessments of income tax shall be made by the Commissioner of Internal Revenue and all taxpayers shall be notified of the amount for which they are respectively liable on or before the first day of May of each successive year. In the case of a corporation filing returns on the basis of a fiscal year, it shall be notified of the amount for which it is liable on or before the first day of the fifth month following the close of its fiscal year. (See changes made by R.A. 2343, effv. June 20, 1959, introducing here self assessment.)

SECTION 194.     Payment of tax. — The total amount of tax assessed shall be paid on or before the fifteenth day of April following the close of the calendar year by the person subject to tax, and in the case of a corporation, by the president, vice-president, or other responsible officer thereof. In the case of corporations filing returns on the basis of a fiscal year, the total amount of tax shall be paid on or before the fifteenth day of the fourth month following the close of the fiscal year. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

Where the tax assessed against the taxpayer is in excess of P500, the taxpayer may elect to pay the tax in two equal installments. The first installment shall be paid on or before the date prescribed in section 51 (a) and the second installment on or before the fifteenth day of July following the close of the calendar year or on or before the fifteenth day of the seventh month following the close of the fiscal year, as the case may be. Upon failure to pay any installment on the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

SECTION 195.     Commissioner's authority to make returns. — In cases wherein taxpayers have neglected or refused to make return, and in cases wherein returns are found, upon examination or otherwise, to be erroneous, false, or fraudulent, the Commissioner of Internal Revenue shall upon discovery thereof, make a return upon the best evidence obtainable, and the tax so discovered to be due, together with the penalties prescribed, shall be assessed and the amount thereof shall be paid immediately upon notice and demand.   

SECTION 196.     Surcharge and interest in case of delinquency. — Upon failure to pay any tax or installment thereof, of any deficiency tax, when the same is due, a penalty of 5 per cent of the amount of tax unpaid, and interest at the rate of 1 per cent per month upon the said tax from the time the same became due until paid, shall be added to the amount of such tax. (See Sec. 51(b) to (e) as amended by R.A. 2343, effv. June 20, 1959.)

(Section 52 of the Code)

SECTION 197.     Receipts for income tax payments. — It shall be the duty of the collecting officer to acknowledge the receipt of the payment of income tax due from each taxpayer by issuing the requisite Revenue Official Receipt (B.I.R. Form No. 25.24).

(Section 53 of the Code)

SECTION 198.     Withholding tax at source. — Withholding is required (a) of a tax of 20 per centum in the case of fixed or determinable annual or periodical income, including dividends or net gains or net profits received from corporations, partnerships or associations, payable to non-resident alien individuals not engaged in trade or business and not having an office or place of business in the Philippines; and (b) of a tax of 20 per centum in the case of interest upon bonds, obligations or securities issued by domestic or resident foreign corporations, containing a so-called tax-free covenant clause, payable either to citizens or aliens, residents or non-residents, where the owner of such interest income does not file with the withholding agent a signed notice on B.I.R. Form No. 17.13 claiming the benefit of personal exemption. Subject to the exception just mentioned, withholding taxes takes place in all cases of payments of interest upon tax-free covenant bonds or other securities regardless of the place where such bonds or securities are issued or marketed and the interest thereupon paid. Bonds issued under a trust deed containing a tax-free covenant are treated as if they contain such a covenant.

SECTION 199.     Fixed or determinable annual or periodical income. — Only fixed or determinable annual or periodical income is subject to withholding. The statute specifically includes in such income, interests, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, and emoluments, but other kinds of income may be included, as for instance, royalties.

Income is fixed when it is to be paid in amounts definitely pre-determined. On the other hand, it is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained.

The income need not be paid annually if it is paid periodically; that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with some one's will or with the happening of an event does not make the payments any the less determinable or periodical. A salesman working by the month for a commission on sales which is paid or credited monthly receives determinable periodical income. The income derived from the sale in the Philippines of property whether real or personal, is not fixed or determinable annual or periodical income.

Dividends from every domestic corporation are subject to the withholding provisions of the law. Dividends from a foreign corporation are subject to withholding if (1) such foreign corporation is engaged in trade or business within the Philippines or has an office or place of business therein, and (2) more than 85 per cent of its gross income for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines. In case the owners of any securities are not known to the withholding agent, the latter should deduct and withhold a tax of 20 per cent on the interest on such securities.   

SECTION 200.     Payments to non-resident alien individuals. — The law requires withholding of the tax on income payable to a non-resident alien individual not engaged in trade or business in the Philippines and not having an office or place of business therein. A non-resident alien individual is presumed not to be engaged in trade or business in the Philippines and not to have an office or place of business therein, unless the withholding agent has definite knowledge that such resident is engaged in trade or business in the Philippines and of the name and address of his resident agent in this country, or unless the withholding agent definitely knows that such non-resident has an office or place of business in the Philippines and of the location of such office or place of business. An individual whose address is without the Philippines is presumed to be a non-resident alien, unless the withholding agent has definite knowledge that such person is either a citizen or a resident of the Philippines. An individual whose address is within the Philippines, may be presumed to be a resident of the Philippines, unless the withholding agent has reason to believe that such individual, not being a citizen of the Philippines, has not established residence in this country.

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination of whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding the withholding agent may thereupon remit the amount of tax withheld.

SECTION 201.     Exception from withholding. — Withholding of a tax on interests upon bonds or other obligations containing a tax-free covenant clause shall not be required in the case of a citizen or resident alien individual if he files with the withholding agent when presenting interest coupons for payment, not later than February 1 following the taxable year, an ownership and exemption certificate on the requisite form (B.I.R. Form No. 17.13) claiming a personal exemption or credits for dependents. The withholding agent shall forward such certificate to the Commissioner of Internal Revenue with a letter of transmittal. The income of domestic and resident foreign corporations is free from withholding.

SECTION 202.     Ownership certificates for interest coupons. — The owners, except domestic and resident foreign corporations, of bonds or other obligations containing a tax-free covenants clause, issued by a domestic or resident foreign corporation, when presenting interest coupons for payment, shall file a certificate of ownership on B.I.R. Form No. 17.13, for each issue of bonds, showing the name and address of the debtor corporation, the name and address of the owner of the bonds, the nature of the obligations, the amount of interest and its due date, and the amount of any tax withheld. In the case of corporate bonds or similar obligations not containing a tax-free covenant clause, no ownership certificates are required. But ownership certificates are required in the case of such bonds if the owner is unknown to the withholding agent. Ownership certificates need not be filed in the case of interest payments on bond or similar obligations of the United States or of the Government of the Philippines or of any political subdivision thereof.

Where in connection with the sale of its property payment of the bonds or other obligations of a corporation is assumed by the assignee, such assignee, whether an individual, partnership, corporation, province, city or municipality, must deduct and withhold such taxes as would have been required to be withheld by the assignor had not such sales and transfer been made.

SECTION 203.     Return and payment of tax withheld. — (a) Every withholding agent shall make an annual return in duplicate, on B.I.R. Form No. 17.43 of the tax withheld from interest on corporate bonds or other obligations on or before the 15th day of April of each year for the preceding calendar year. (b) Every person required to deduct and withhold any tax from income other than such bond interest shall make an annual return thereon, in duplicate, on B.I.R. Form No. 17.43 on or before April 15 of each year for each non-resident alien individual not engaged in trade or business within the Philippines and not having any office or place of business therein, to whom income other than bond interest was paid during the previous taxable year. The entire amount of the income from which the tax was withheld shall be included in gross income without deduction for such payment of the tax. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

The tax due on withholding income tax returns are payable at the same time and in the same manner as taxes due on individual returns.

SECTION 204.     Income of recipient. — Income upon which the tax is required to be withheld at source shall nevertheless be included in the return of the recipient of such income. However, the amount of tax withheld shall be credited against the amount of income tax due on such return, and the amount, if any, by which the tax withheld at source exceeds the tax due on the return shall be refunded in accordance with the provisions of Section 309 of the Code.   

(Section 54 of the Code)

SECTION 205.     Withholding of tax on income of nonresident foreign corporations, firms, etc. — All persons, corporations, partnerships, and associations, having the control, receipt, custody, disposal, or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income received or obtained from sources within the Philippines by a non-resident alien firm, copartnership, corporation, association, trust company, trustee, and insurance company, not engaged in business or trade within the Philippines and not having an office or place of business therein, are required to withhold a tax of 30 per cent thereon, file the requisite withholding return on the prescribed form (B.I.R. Form No. 17.43), and pay the tax withheld, in accordance with the provisions of sections 198 to 204 of these regulations. The withholding provisions of the law are likewise applicable to the income derived from interest upon bonds, mortgages, or deeds of trust, or other interest-bearing obligations of a domestic or resident foreign corporation, firm or association, whether or not the bonds and other such obligations, or securities contain the so-called tax-free covenant clause, and regardless of the place where such bonds, obligations, or securities are issued, negotiated, or marketed and the interest thereon paid, in case where such interest-income is received or obtained by, or paid to, a non-resident alien firm, corporation, association, trust company, or trustee, not engaged in business or trade within the Philippines and not having an office or place of business therein. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

A foreign corporation is presumed not to be engaged in trade or business within the Philippines and not to have office or place of business therein, unless the withholding agent has definite knowledge that such foreign corporation is in fact engaged in trade or business in the Philippines and of the name and address of its resident agent, or unless the withholding agent has definite knowledge that such foreign corporation has a branch office or business in this country and of the location of such branch office or place of business.

(Section 55 of the Code)

SECTION 206.     Income tax not otherwise collectible from taxpayer chargeable to his representative. — It is the intent and purpose of the law to charge and collect income tax imposed under Title II of the Code on all gains, profits, and income of a taxable class, and the tax is required to be paid by the owner of such gains, profits. and income or by the proper representative having the receipt, custody, control, or disposal of the same. Thus, where a non-resident has charged a resident, under a power of attorney, to sell in his behalf property, real or personal in the Philippines, the proper tax due may be collected from the owner of the gains or profits or from the representative who had the receipt, custody, control or disposal of such gains, profits, or income, as the personal liability of such representative.

(Sections 56 to 60 of the Code)

SECTION 207.     Estates and trusts. — "Fiduciary" is a term which applies to all persons or corporations that occupy positions of peculiar confidence towards others, such as trustees, executors, or administrators; and a fiduciary, for income tax purposes, is any person or corporation that holds in trust an estate of another person or persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be created.  

In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by and will be taxed to the respective beneficiaries, but the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee. Three exceptions to this general rule are found in the law: (1) in the case of revocable trust (Section 59); (2) in the case of a trust the income of which, in whole or in part, may be held or distributed for the benefit of the grantor (Section 60); and (3) in the case of a trust administered in a foreign country [Section 57(c)]. In the first case, the income from such part of the trust estate title to which may be revested in the grantor should be included in the grantor's return. In the second case, part of the income of the trust, which may be held or distributed for the benefit of the grantor, should be included in the grantor's return. In the third case, the trustee is not entitled to the deductions mentioned in subsections (a) and (b) of Section 57 and the net income of the trust undiminished by any amounts distributed, paid or credited to beneficiaries will be taxed to the trustees; however, the income included in the return of the trustees is not to be included in computing the income of the beneficiaries.

SECTION 208.     Consolidation of incomes of two or more trusts. — Section 56(b)(2) expressly requires the consolidation of the income of two or more trusts where the creator of the trust in each instance is the same person and the beneficiary in each instance is the same. The tax due on the consolidated income will be collected from the trustees in proportion to the net income of the respective trusts. (See Section 215 of these regulations.)

SECTION 209.     Estates and trusts taxed to fiduciary. — In the case of a decedent's estate the settlement of which is the object of testamentary or intestate proceedings, the fiduciary, executor, or administrator is required to file an annual return for the estate up to the final settlement thereof. In the same manner, the fiduciary is required to file a yearly return covering the income of a trust, whether created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise. In both cases the income of the estate or trust is taxed to the fiduciary. Where under the terms of a will or deed, the trustee, may in his discretion, distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not affected by the fact that an ultimate beneficiary may be a person exempt from tax.

SECTION 210.     Estate and trust taxed to beneficiaries. — In the case of (a) a trust the income of which is to be distributed annually or regularly; (b) an estate of a decedent the settlement of which is not the object of judicial testamentary or intestate proceedings; and (c) properties held under a co-ownership or tenancy in common, the income is taxable directly to the beneficiary or beneficiaries. Each beneficiary must include in his return his distributive share of the net income of the trust, estate, or co-ownership. In the case of trusts which are in whole or in part subject to revocation by the grantor, or which are for the benefit of the grantor, the income of the trust is to be included in computing the net income of the grantor.   

SECTION 211.     Decedent's estate administration. — The "period of administration or settlement of the estate" is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular, the collection of assets and the payment of debts and legacies. Estates during the period of administration have but one beneficiary and that beneficiary is the estate.

No taxable income is realized from the passage of property to the executor or administrator on the death of the decedent, even though it may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where, however, prior to the settlement of the estate, the executor or administrator sells property of a decedent's estate for more than the appraised value placed upon it at the death of the decedent, the excess is income, taxable to the estate. Where property is sold after the settlement of the estate by the devisee, legatee or heir at a price greater than the appraised value placed upon it at the time he inherited the property from the decedent, he is taxable individually on any profit derived. An allowance paid a widow or heir out of the corpus of the estate is not deductible from gross income.

SECTION 212.     Liability for tax on estate or trusts. — Liability for payment of the tax attaches to the person of an executor or administrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when the estate has been distributed, the heirs, devisees, legatees, and distributors may be required to discharge the amount of the tax due and unpaid, to the extent of and in proportion to any share received. The same consideration apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, the net income on which the tax is paid is free from tax when distributed to the beneficiaries.

SECTION 213.     Exemption allowed to estate or trusts. — An estate or a trust is allowed a personal exemption of P1,800. Each beneficiary is entitled to but one personal exemption, no matter from how many trusts he may receive income.

(Section 61 of the Code)

SECTION 214.     Fiduciary returns. — Fiduciaries are required to make returns of income on B.I.R. Form No. 17.01, in duplicate, when the gross income of the person, trust, or estate for whom or which they act amounts to P1,800 or more and will be subject to all the provisions of law which apply to individuals. A fiduciary making return shall make oath that he has sufficient knowledge of the affairs of the person trust, or estate for whom or which he acts to enable him to make such return, and that the same is, to the best of his knowledge and belief, true and correct. A return by one of two or more joint fiduciaries in the form prescribed filed in the municipality or city in which such fiduciary resides shall be sufficient compliance with the requirement for fiduciary returns.

A fiduciary acting as the guardian of a minor or other incapacitated person must make a return for such minor or incapacitated person and pay the tax, unless such minor or incapacitated person himself makes a return or cause it to be made. The parent is held to be the natural guardian of a minor child.

SECTION 215.     Returns in case of two or more trusts. — Where, in the case of more than one trust, the creator of the trust in each instance is the same person and the trustee in each instance is the same but the beneficiaries are different, the trustee should make a separate return for each of the trusts in his hands. When a trustee holds trust created by different persons for the benefit of the same beneficiary, he should also make a return for each trust separately. But where a person creates two or more trusts in favor of the same beneficiary [Section 56(b) (2)] appointing two or more trustees, the latter should each make a separate return for each trust but in such case the Commissioner of Internal Revenue will consolidate the net incomes of the different trusts and compute the tax on such consolidated income, allowing only one absolute exemption of 1,800.

SECTION 216.     Return by receiver. — A receiver who stands in the place of an individual or corporation must render a return of income and pay the tax for his trust, but a receiver of only part of the property of an individual or corporation need not. If the receiver acts for an individual the return shall be on B.I.R. Form No. 17.01. When acting for a corporation a receiver is not treated as a fiduciary, and in such case the return shall be made, as if by the corporation itself, on B.I.R. Form No. 17.02.

(Section 62 of the Code)

SECTION 217.     Fiduciaries indemnified against claims for taxes paid. — Fiduciaries are indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make and they shall have credit for such payments in any accounting which they make as such fiduciaries.

(Section 63 of the Code)

SECTION 218.     Tax on personal holding companies. — Section 63 imposes for such taxable year beginning after December 31, 1938 (in addition to the tax imposed by Section 24 of the Code), a tax upon corporations classified as personal holding companies. Corporations so classified are exempt from the additional tax on corporation improperly accumulating surplus imposed by Section 25, but are not exempt from the other taxes imposed by Title II of the Code. Unlike the tax imposed by Section 25, the tax imposed by Section 63 applies to all personal holding companies defined as such in Section 64, regardless of whether or not they were formed or availed of to accumulate earnings or profits for the purpose of avoiding the tax upon shareholders. The tax imposed by Section 63 is 45 per cent of the amount of the undistributed net income.

A foreign corporation, whether resident or non-resident, which is classified as a personal holding company under Section 64 (not including a foreign personal holding company as defined in Section 67) is subject to the tax imposed by Section 63 with respect to its income from sources within the Philippines. The term "personal holding company" as used in Chapter VIII of Title II of the Code does not include a foreign corporation if (1) its gross income from sources within the Philippines for the period specified in Section 37(a) (2) (B) is less than 50 per cent of its total gross income from all sources and (2) all of its stock outstanding during the last half of the taxable year is owned by nonresident alien individuals, whether directly or indirectly through other foreign corporations.   

(Section 64 of the Code)

SECTION 219.     Definition of personal holding company. — A personal holding company is any corporation (other than a corporation specified in section 64(b) which for the taxable year meets (a) the gross income requirement specified in Section 220 of these regulations, and (b) the stock ownership requirement specified in Section 221 of these regulations. Both requirements must be satisfied and both must be met with respect to each taxable year.

SECTION 220.     Gross income requirement. — To meet the gross income requirement, it is necessary that either of the following percentages of gross income of the corporation for the taxable year be personal holding company income as defined in Section 65:

(a)          Eighty per cent or more; or

(b)          Seventy per cent or more if the corporation has been classified as a personal holding company for any taxable year beginning after December 31, 1938, unless —

(1)          A taxable year has intervened since the last taxable year for which it was so classified, during no part of the last half of which the stock ownership requirement specified in Section 64(a) (2) exists; or

(2)          Three consecutive years have intervened since the last taxable year for which it was so classified, during each of which its personal holding company income was less than 70 per cent of its gross income.

In determining whether the personal holding company income is equal to the required percentage of the total gross income, the determination must not be made upon the basis of gross receipts, since gross income is not synonymous with gross receipts. For a further discussion of what constitutes "gross income", see Section 29 of the Code and the regulations prescribed under that section.

SECTION 221.     Stock ownership requirements. — To meet the stock ownership requirement, it is necessary that at some time during the last half of the taxable year more than 50 per cent it value of the outstanding stock of the corporation be owned, directly or indirectly, by or for not more than five individuals: For such purpose, the ownership of the stock must be determined as provided in Section 66.

In the event of any change in the stock outstanding during the last half of the taxable year, whether in the number of shares or classes of stock, or whether in the ownership thereof, the conditions existing immediately prior .and subsequent to each change must be taken into consideration.

In determining whether the statutory conditions with respect to stock ownership are present at any time during the last half of the taxable year, the phrase "in value" shall, in the light of all the circumstances, be deemed the value of the corporate stock outstanding at such time (not including treasury stock). This value may be determined upon the basis of the company's net worth, earning and dividend paying capacity, appreciation of assets, together with such other factors as have a bearing upon the value of the stock. If the value of the stock is greatly at variance with that reflected by the corporate books the evidence of such value should be filed with the return. In any case where there are two or more classes of stock outstanding, the total value of the stock should be allocated among the different classes according to the relative value of each class therein.

The rules stated in the last two preceding paragraphs are equally applicable in determining the stock ownership requirement specified in Section 65(e); relating to personal service contracts and Section 65(f), relating to the use of corporation property by a shareholder. The stock ownership requirement specified in these sections relates, however, to the stock outstanding at anytime during the entire taxable year and not merely during the last half thereof.

(Section 65 of the Code)

SECTION 222.     Personal holding company income. — The term "personal holding company income" means the portion of the gross income which consists of the following:

(1)          DIVIDENDS. — The term "dividends" includes dividends as defined in Section 83 (a), and amounts required to be included in gross income under Section 69 (b) of this Code. It does not include stock dividends (to the extent that they do not constitute income to the shareholders with the meaning of Section 83(b) of the Code) and liquidating dividends.   

(2)          INTEREST (other than interest constituting rent). — The term "interest" means any amount, includible in gross income, received for the use of money loaned except that it does not include interest constituting rent [see subparagraph (1)].

(3)          ROYALTIES (other than mineral, oil, or gas royalties). — The term "royalties" include amounts received for the privilege of using patents, copyrights, secret processes and formulas, good will, trade marks, trade brands, franchises, and other like property. It does not include rents, or overriding royalties received by an operating company. As used in this paragraph the term "overriding royalties" means amounts received from the sublease by the operating company which originally leased and developed the natural resources property in respect of which such overriding royalties are paid.

(4)          ANNUITIES. — The term "annuities" includes annuities only to the extent includible in the computation of gross income. [See Section 29(b) (2)].

(5)          GAINS FROM THE SALE OR EXCHANGE OF STOCK OR SECURITIES. — The 

term "gains from the sale or exchange of stock or securities" as used in Section 65(b) applies to all gains (including gains from liquidation dividends and other distributions from capital) from the sale or exchange of stock or securities includible in gross income. The term "stock or securities" as used in Section 65(b) includes shares or certificates of stock, or interest in any corporation (including any joint stock company, insurance, company association, or other organization classified as a corporation under Title II) certificates of interest or participation in mineral royalty, or leave, collateral trust certificates, voting trust certificates, stock rights or warrants, bonds, debentures, certificates of indebtedness, notes, car trusts certificates, bills of exchange, obligations issued by or on behalf of a Government, State, Territory, or political subdivision thereof. In the case of "regular dealers in stock or securities" the term does not include gains derived from the sale or exchange of stock or securities made in the normal course of business. The term "regular dealer in stock or securities" means corporations with an established place of business regularly engaged in the purchases of stock or securities and their resale to customers, but such corporations are not dealers with respect to stock or securities held for speculation or investment.

(6)          GAINS FROM FUTURES TRANSACTIONS IN COMMODITIES. — Gains from futures transactions in commodities include gains from futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, but do not include gains from cash transactions or gains by a producer, processor, merchant, or handler of the commodity, which arise out of bonafide hedging transactions reasonably necessary to the conduct of its business in the manner in which such business is customarily and usually conducted by others. In general, personal holding company income includes gains on futures contracts which are speculative. Futures contracts representing true hedges against price fluctuations in spot goods are not speculative transactions, though not concurrent with spot transactions. Futures contracts which are not hedges against spot transactions are speculative unless they are hedges against concurrent futures or forward sales or purchases.

(7)          INCOME FROM ESTATES AND TRUSTS. — The income from estates and trusts which is to be included in personal holding company income consists of the income from estates and trusts which is required to be included in the gross income of the corporation under Section 29 in relation to Section 56 of the Code, together with the gains derived by the corporation from the sale or other disposition of any interest in an estate or trust.

(8)          AMOUNTS RECEIVED UNDER PERSONAL SERVICE CONTRACTS. — Amounts includible in personal holding company income as amount received under personal service contracts consist of amounts received pursuant to a contract under which the corporation is to furnish personal services, and amounts received from a sale or other disposition of such a contract, if —

(a)          Some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services or if the individual who is to perform the services is designated (by name or by description) in the contract; and

(b)          At some time during the taxable year 25 per cent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description), as the one to perform such services. For this purpose the stock ownership must be determined as provided in Section 66 of the Code.

The application of Section 65(e) may be illustrated by the following examples:

Example (1): A, whose profession is that of an actor, owns all of the outstanding capital stock of the M Corporation. The Corporation entered into a contract with A under which A was to perform personal services for the person or persons whom the M Corporation might designate, in consideration of which A was to receive P10,000 a year from the M Corporation. The M Corporation entered into a contract with the O Corporation in which A was designated to perform personal services for the O Corporation in consideration of which the O Corporation was to pay the M Corporation P500,000 a year. The P500,000 received by the M Corporation from the O Corporation constitutes a personal holding company income.

Example (2): The N Corporation, the entire outstanding capital stock of which is owned by four individuals, is engaged in engineering. The N Corporation entered into a contract with the O Corporation to perform engineering services for the O Corporation, in consideration of which the O Corporation was to pay the N Corporation P50,000. The individual who was to perform the services was not designated (by name or by description) in the contract and no one but the N Corporation had the right to designate (by name or by description) such individual. The P50,000 received by the N Corporation from the O Corporation does not constitute personal holding company income.   

(9)          COMPENSATION FOR USE OF PROPERTY. — The compensation for the use of, or the right to use, the property of the corporation which is to be included in personal holding company income consists of amounts received as compensation (however designated and from whomsoever received) for the use of, or the right to use, property of the corporation in any case in which, at any time during the taxable year 25 per cent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property, whether such right is obtained directly from the corporation or by means of a sublease or other arrangement. The property may consist of a yacht, a city residence, a country house, or any other kind of property.

(10)        RENTS (including interest constituting rent). — The rents which are to be included in personal holding company income consist of compensation, however, designated including charter fees, etc., for the use of, or the right to use, real property, or any other kind of property and the interest on debts bowed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation, but do not include amounts constituting personal holding company income under Section 65(f) and paragraph (9) of this section. However, rents do not constitute personal holding company income if constituting 50 per cent or more of the gross income of the corporation.

(II)          MINERAL, OIL, OR GAS ROYALTIES. — The income from mineral, oil, or gas royalties is to be included as personal holding company income, unless (A) the aggregate amount of such royalties constitutes 50 percent or more of the gross income of the corporation for the taxable year and (B) the aggregate amount of deductions allowable for expenses under Section 30 (a) of the Code (other than compensation for personal services rendered by the shareholders of the corporation) equals 15 per cent or more of the gross income of the corporation for the taxable year.

The term "mineral, oil, or gas royalties" means all royalties, except "overriding royalties", received from any interest in mineral, oil, or gas royalties. As used in this paragraph the term "overriding royalties" means amounts received from the sublease by the operating company which originally leased and developed the natural resources property in respect of which such overriding royalties are bid.

(Section 66 of the Code)

SECTION 223.     Stock ownership. — For the purpose of determining whether —

(a)          A corporation is a personal holding company in so far as such determination is based on the stock ownership requirement specified in Section 64(a) (2), or

(b)          Amounts received under a personal service contract or from the sale of such a contract constitute personal holding company income in so far as such determination is based on the stock ownership requirement specified in Section 65 (e), or

(c)           Compensation for the use of property constitutes personal holding company income in so far as such determination is based on the stock owner-ship requirement specified in Section 65(f), stock owned by an individual includes stock constructively owned by him as provided in Section 66. All forms and classes of stock, however denominated, which represent the interests of shareholders, members, or beneficiaries in the corporation shall be taken into consideration.

SECTION 224.     Stock not owned by individual. — In determining the ownership of stock for any of the purposes set forth in the preceding section, stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries. For example, if A and B, two individuals, are the exclusive and equal beneficiaries of a trust or estate, and if such trust or estate owns the entire capital stock of the M Corporation, and if the M Corporation in turn owns the entire capital stock of the N Corporation, then the stock of both the M Corporation and the N Corporation shall be considered as being owned equally by A and B as the individuals owning the beneficial interest therein.

SECTION 225.     Family and partnership ownership. — In determining the ownership of stock for any of the purposes set forth in Section 223 of these regulations, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of such determination the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

The application of the family and partnership rule in determining the ownership of stock for the purpose set forth in (a) of Section 223 of these regulations is illustrated by the following example:

Example: The M Corporation at some time during the last half of the taxable year had 1,800 shares of outstanding stock, 450 of which were held by various individuals having no relationship to one another and none of whom were partners, and the remaining 1,350 were held by 51 shareholders as follows:

Relationship        Shares                  Shares                  Shares                  Shares                  Shares

An individual       A             100        B             20           C             20           D            20           E             20

His father            AF           10           BF           10           CF           10           DF          10           EF           10

His wife AW         10           BW         40           CW         40           DW        40           EW         40

His brother          AB          10           BB          10           CB          10           DB          10           EB          10

His son AS           10           BS           40           CS           40           DS          40           ES           40

His daughter by

former marriage

(son's half sister)               ASHS      10           BSHS      40           CSHS      40           DSHS      40           ESHS      40

His brother's wife             ABW      10           BBW      10           CBW      10           DBW      160        EBW      10

His wife's father AWF       10           BWF       10           CWF       110        DWF      10           EWF       10

His wife's brother             AWB      10           BWB      10           CWB      10           DWB      10           EWB      10

His wife's brother's

wife       AWBW  10           BWBW  10           CWBW  10           DWBW  10           EWBW  110

Individual's partner          AP          10           -              -              -              -              -              -              -              -              

By applying the statutory rule provided in Section 66(a) five individuals own more than 50 per cent of the outstanding stock as follows:

A             (including AF, AW, AB, AS, ASHS, AP)          160

B             (including BF, BW, BB, BS, BSHS) 160

CW         (including C, CS, CWF, CWB)         220

DB          (including D, DF, DBW)    200

EWB      (including EW, EWF, EWBW)         170

                              ——

Total, or more than 30 per cent   910

Individual A represents the obvious case where the bead of the family owns the bulk of the family stock and naturally is the head of the group. A's partner owns to shares of the stock. Individual B represents the case where he is still head of the group because of the ownership of stock by his immediate family. Individuals C and D represent cases where the individuals fall in groups headed in C's case by his wife and in D's case by his brother because of the preponderance of holdings on the part of relatives by marriage. Individual E represents the case where the preponderant holding of others eliminate that individual from the group. 

The method of applying the family and partnership rule as illustrated in the foregoing example also applies in determining the ownership of stock for the purposes stated in (b) and (c) of Section 223 of these regulations.

SECTION 226.     Options. — In determining the ownership of stock for any of the purposes set forth in Section 223 of these regulations if any person has an option to acquire stock, such stock may be considered as owned by person. The term "option" as used in this section includes an option to acquire such an option and each one of a series of such options, so that the person who has an option on an option to acquire stock may be considered as the owner of the stock.

(Section 67 of the Code)

SECTION 227.     Definition of foreign personal holding company. — A foreign personal holding company is any foreign corporation (other than a corporation exempt from taxation under Section 27 of the Code) which for the taxable year meets (a) the gross income requirements specified in Section 67 (a) (1), and (b) the stock ownership requirement specified in Section 67(a) (2). Both requirements must be satisfied and both must be met with respect to each taxable year.

A foreign corporation which comes within the classification of a foreign personal holding company for any taxable year beginning after December 31, 1938, is not subject to taxation for such taxable year under Section 25 of the Code but may be subject to taxation under that section for other taxable years. The fact that a foreign corporation is a foreign personal holding company does not relieve the corporation from liability for the tax imposed generally under Section 24 upon foreign corporations, since such tax applies regardless of the classification of the foreign corporation as a-foreign personal holding company.

SECTION 228.     Gross income requirement. — To meet the gross income requirement, it is necessary that either of the following percentages of gross income of the corporation for the taxable year be foreign personal holding company income in accordance with Section 68 in relation to Section 65 of the Code:

(a)          Sixty per cent of more; or

(b)          Fifty per cent or more if the foreign corporation has been classified as a foreign personal holding company for the taxable year ending after December 31, 1938, unless —

(1)          A taxable year has intervened since the last taxable year for which it was so classified, during no part of which the stock ownership requirement specified in Section 67 (a) (z) exist; or

(2)          Three consecutive years have intervened since the last taxable year for which it was so classified, during each of which its foreign personal holding company income was less than 50 per cent of its gross income.

In determining whether the foreign personal holding company income is equal to the required percentage of the total gauss income, the determination must not be made on the basis of gross receipts since gross income is not synonymous with gross receipts. For a further discussion on what constitutes "gross income," see Section 29(n) and the regulations prescribed under that section.

SECTION 229.     Stock ownership requirement. — To meet the stock ownership requirement it is necessary that at some time in the taxable year more than 50 per cent in value of the outstanding stock of the foreign corporation be owned, directly or indirectly, by or for not more than five individuals who are citizens or residents of the Philippines.

In the event of any change in the stock outstanding during the taxable year, whether in the number of shares or classes of stock, or whether in the ownership thereof, the conditions existing immediately prior and subsequent to each change must be taken into consideration, since a corporation comes within the classification if the statutory conditions with respect to stock ownership are present at any time during the taxable year.

In determining whether the statutory conditions with respect to stock ownership are present at any time during the taxable year, the phrase "in value" shall, in the light of all the circumstances, be deemed the value of the corporate stock outstanding at such time (not including treasury stock). This value may be determined upon the basis of the company's net worth, earning and dividend paying capacity, appreciation of assets, together with such other factors as have a bearing upon the value of the stock. If the value of the stock which is used is greatly at variance with that reflected by the corporate books, the evidence of such value should be filed with the return. In any case where there are two or more classes of stock outstanding, the total value of all the stock should be allocated among the different classes according to the relative value of each lass therein.   

 (Section 68 of the Code)

SECTION 230.     Gross income and stock ownership requirements of foreign personal holding companies. — For the purpose of determining whether a foreign corporation satisfies the gross income requirement prescribed under Section 67(a)(1), the same items of income classified under Section 65 as personal holding company income shall, if received by a foreign corporation, be considered as foreign personal holding company income. In determining whether a foreign corporation satisfies the stock ownership requirement prescribed under Section 67(a) (2) the rules established in Section 66 shall apply.

(Section 69 of the Code)

SECTION 231.     Income of foreign personal holding companies taxed to Philippine shareholders. — (a) General rule. — Section 69 does not impose a tax on. foreign personal holding companies. The undistributed net income (from all sources), of such companies, however, must be included in the manner and to the extent set forth in this section, in the gross income of their "Philippine shareholders", that is, the shareholders who are individual citizens or residents of the Philippines.

(b)          AMOUNT INCLUDIBLE IN GROSS INCOME. — Each Philippine shareholder, who was a shareholder on the day in the taxable year of the, foreign personal holding company which was the last day on which the stockholders satisfying the stock ownership requirement of Section 67(a)(2), hereinafter referred to as the "Philippines group", existed with respect to the company, shall include in his gross income a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there has been distributed by the company and received by the shareholders an amount which bears the same ratio to the net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year.

The undistributed net income of the foreign personal holding company is includible only in the gross income of the Philippine shareholders who were shareholders in the company on the last day of its taxable year on which the Philippine groups existed with respect to the company. Such Philippine shareholders, accordingly, are determined by the stock holdings as of such specified time. This applies to every Philippine shareholder who was a shareholder in the company at the specified time regardless of whether the Philippine shareholder is included with the Philippine group.

The Philippine shareholders must include in their gross income their distributive shares of that proportion of the undistributed net income for the taxable-year of the company which is equal in ratio to that which the portion of the taxable year up to and including the last day on which the Philippine group with respect to the company existed bears to the entire taxable year. Thus if the last day in the taxable year on which the required Philippine group existed was also the end of the taxable year, the portion of the taxable year up to and including such last day would be equal to 100 per cent and in such case, the Philippine shareholders would be required to return their distributive shares in the entire undistributed net income. But if the last day on which the required Philippine group existed was September 30, and the taxable year was a calendar year, the portion of the taxable year up to and including such last day would be equal to nine-twelfths of the undistributed net income.

The amount which each Philippine shareholder must return is that amount which he would have received as a dividend if the above specified portion of the undistributed net income had in fact been distributed by the foreign personal holding company as a dividend on the last day of its taxable year on which the required Philippine group existed. Such amount is determined, therefore, by the interest of the Philippine shareholder in the foreign personal holding company, that is, by the number of shares of stock owned by the Philippine shareholder and the relative rights of his class of stock, if there are several classes of stock outstanding. Thus, if a foreign personal holding company has both common and preferred stock outstanding and the preferred shareholders are entitled to a specific dividend before any distribution may be made to the common shareholders, then the assumed distribution of the stated portion of the undistributed net income must first be treated as a payment of the specified dividend on the preferred stock before any part may be allocated as a dividend on the common stock.

The assumed distribution of the required portion of the undistributed net income must be returned as dividend income by the Philippine shareholders for their respective taxable years in which or with which the taxable year of the foreign personal holding company ends. In applying this rule, the date as of which the Philippine group last existed with respect to the company is immaterial.   

 (Section 70 of the Code)

SECTION 232.     Information returns by officers and directors of certain foreign corporations. — (a) REQUIREMENT FOR FILING RETURNS. — (1) General. — Under Section 70 (a), on the 15th day of each month which begins after July 1, 1939, each individual who on such 15th day is an officer or, a director of a foreign corporation which, with respect to its taxable year preceding the taxable year in which such month occurs, was a foreign personal holding company, is required to file with the Commissioner of Internal Revenue a monthly information return as provided in Section 70(a). The Commissioner of Internal Revenue may authorize the filing of returns covering periods longer than a month.

(2)          RETURNS JOINTLY MADE. — If two or more officers or directors of a foreign corporation are required to file information returns for any period under Section 70(a), any two or more of such officers or directors may, in lieu of filing separate returns for such period, jointly execute and file one return.

(b)          FORM OF RETURN. — The return under Section 70(x). of the Code and this section shall be made on the form prescribed by the Commissioner of Internal Revenue. Each officer or director should carefully prepare his return so as to set forth fully and clearly the information called for therein and by the applicable regulations. Returns which have not been so prepared will not be considered as meeting the requirements of the law.

(c)           CONTENTS OF RETURN. — The return shall, in accordance with provisions of this section and the instructions on the form, set forth with respect to the preceding period the following information:

(1)          Name and address of corporation;

(2)          Kind of business in which the corporation is engaged;

(3)          Date of incorporation;

(4)          The country under the laws of which the corporation is incorporated;

(5)          Number of shares and par value of common stock of the corporation outstanding as of the beginning and end of the period;

(6)          Number of shares and par value of preferred stock of the corporation outstanding as of the beginning and end of the period, the rate of dividend on such stock and whether such dividend is cumulative or noncumulative;

(7)          A description of the convertible securities issued by the corporation, including a statement of the face value of, and rate of interest on, such securities:

(8)          The name and address of each shareholder, the class and number of shares held by each, together with any changes in stock holdings during such period;

(9)          The name and address of each holder of securities convertible into stock of the corporation, the class, number and face value of the securities held by each, together with any changes in the holding of such securities during the period;

(10)        A certified copy of any resolution or plan, and any amendments thereof or supplements thereto, for or in respect of the dissolution of the corporation of the liquidation of the whole or any part of its capital stock; and

(11)        Such other information as may be required by the return form.

               If a person is required to file a return under Section 70(a) of the Code and this section with respect to more than one foreign corporation, a separate return must be filed with respect to each foreign corporation.

(d)          VERIFICATION OF RETURNS. — All returns required by Section 70(a) and this section shall be verified under oath or affirmation of the parties rendering the same.

SECTION 233.     Annual information returns by officers and directors of certain foreign corporations. — (a) Requirement for filing returns.

(1)          GENERAL. — Under Section 70(b), on the sixtieth day after the close of the taxable year of a foreign personal holding company each individual who on such sixtieth day is an officer or director of the corporation shall file with the Commissioner of Internal Revenue an annual information return as provided in that section of the Code and this section.

(2)          RETURNS JOINTLY MADE. — If two or more officers or directors of a foreign corporation are required to file annual information returns under Section 70(b) for any taxable year of the corporation any two or more of such officers or directors may in lieu of filing separate annual returns for such taxable year, jointly execute and file one annual return.

(b)          FORM OF RETURN. — The return under Section 70(b) and this section shall be made on the form prescribed by the Commissioner of Internal Revenue. Each officer or director should carefully prepare his returns so as to set forth fully and clearly the information called for therein and by the applicable regulations. Returns which have not been so prepared will not he considered as meeting the requirements of the law.

(c)           CONTENTS OF RETURN. — The return shall, in accordance with the provisions of this section and the instructions on the form, set forth with respect to the taxable year of the foreign personal holding company the following information:

(1)          The gross income, deductions and credits, net income, and undistributed net income of the foreign personal holding company for such taxable year, in complete detail;

(2)          The same information with respect to such taxable year which is required by Section 70(a) and paragraph (c) of the preceding section, except that if all the required returns with respect to such year have been filed under Section 70(a) and the preceding section, no information under Section 70(b) (2) and this paragraph need be set forth in such annual return; and

(3)          Such other information as may be required by the return form.

(d)          VERIFICATION OF RETURNS. — All returns required by Section 70(b) and this section shall be verified under oath or affirmation of the parties rendering the same.

(Section 71 of the Code)

SECTION 234.     Information returns by shareholders of certain foreign corporations. — (a) REQUIREMENT FOR FILING RETURNS.

(1)          General. — On the 15th day of each month which begins after July 1, 1939 each Philippine shareholder, by or for whom 50 per cent or more in value of the outstanding stock of a foreign corporation is owned, directly or indirectly [including, in the case of an individual, stock owned by members of his family as defined in Section 66(b)], if such foreign corporation with respect to its taxable year preceding the taxable year in which such month occurs was a foreign personal holding company, shall file with the Commissioner of Internal Revenue an information, return as provided in Section 71(a). The Commissioner of Internal Revenue may authorize the filing of returns covering period longer than a month.

(2)          Duplicate returns. — If a shareholder in a foreign corporation files, as an officer or director in such corporation, the returns required by Section 70(b), such returns shall be considered as returns filed under Section 71(a).

(b)          FORM OF RETURN. — The return under Section 71(a) shall be made on the form prescribed by the Commissioner of Internal Revenue. Each shareholder should carefully prepare his return so as to set forth fully and clearly the information called for therein and by the applicable regulations. Returns which have not been so prepared will not be considered as meeting the requirements of the law.

(c)           CONTENTS OF RETURN. — The return shall, in accordance with the provisions of this section and the instructions on the form, set forth with respect to the preceding period the same information as required, to be shown on that form by Section 70(a) and paragraph (c) of Section 232 of these regulations.

If a person is required to file a return under Section 71(a) of the Code and this section with respect to more than one foreign corporation, a separate return must he filed with respect to each foreign corporation.

(d)          VERIFICATION OF RETURNS. — All returns required by Section 71(a) of the Code and this section shall be verified under oath or affirmation of the parties rendering the same.

SECTION 235.     Annual information returns by shareholders of certain foreign corporations. — (a) REQUIREMENT FOR FILING RETURNS.

(1)          General. — Under Section 71(b) of the Code, on the sixtieth day after the close of the taxable year of a foreign personal holding company, each Philippine shareholder, by or for whom on such sixtieth day 50 per cent or more in value of the outstanding stock of the company is owned, directly or indirectly [including the case of an individual stock owned by members of his family as defined in Section 66(b)], shall file with the Commissioner of Internal Revenue an information returns as provided in that section and this section.

(2)          Duplicate returns. — If a shareholder in a foreign corporation files as an officer or director in such corporation, the return required by Section 70(b), such returns shall be considered as returns filed under Section 71(b).

(b)          FORM OF RETURN. — The return under Section 71(b) shall be made on the form prescribed by the Commissioner of Internal Revenue. Each shareholder should carefully prepare his return so as to set forth fully and clearly the information called for therein and by the applicable regulations. Returns which have not been so prepared will not be considered as meeting the requirements of the law.

(c)           CONTENTS OF RETURN. — The return shall, in accordance with the provisions of this section and the instructions on the form, set forth with respect to the taxable year of the foreign personal holding company the same information which is required under Section 71(a), paragraph (c) of Section 232 of these regulations and paragraph (c) of the preceding section, except that if all the required returns with respect to such year have been filed under Section 71(a), no return under Section 71(b) is required.

If a person is required to file an annual return under Section 71(b) with respect to more than one foreign personal holding company, a separate return must be filed with respect to each foreign personal holding company.

(d)          VERIFICATION OF RETURNS. — All returns required by Section 71(b) and this section shall be verified under oath or affirmation of the parties rendering the same.

(Section 72 of the Code)

SECTION 236.     Ad valorem penalty for failure to file return. — In case of a failure to make and file a return or list within the time prescribed by law, not due to willful neglect, where such return or list is voluntarily filed by the taxpayer without notice from the Commissioner of Internal Revenue or other officer and it is shown that the failure to file it in due time was due to a reasonable cause, no surcharge will be added to the amount of tax due on the return. In such cases, in order to avoid the imposition of the surcharge, the taxpayer must make a statement showing all the facts alleged as a reasonable cause for failure to file the return on time in the form of an affidavit which should be attached to the return. If the Commissioner of Internal Revenue is satisfied that the delinquency was due to a reasonable cause, no surcharge will be added to the tax due on the return. Whether or not reasonable cause exists will depend upon the circumstances of each case. As a general rule, if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, the delay will be considered as being due to a reasonable cause.

In case of a failure to make and file a return or list within the time prescribed by law, not due to willful neglect, where the taxpayer voluntarily files the return without notice from the Commissioner of Internal Revenue or other officer and attaches to such return the affidavit mentioned in the preceding paragraph but where the Commissioner of Internal Revenue is not satisfied as to the reasonableness of the cause of the delinquency, a surcharge of 25 per cent will be added to the amount of tax due on the return.

In case the failure to make and file a return or list within the time prescribed by law is due to willful neglect a surcharge of 50 per cent will be added to the amount of tax due on the return. There is willful neglect in the case of a taxpayer who, being liable to file a return, knowingly delays the filing of such return. Where the filing of the return has been delayed for a considerable length of time, the delinquency will be presumed to be due to willful neglect. 

The amount of surcharge so added to the tax due on the return shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the cause giving rise to the imposition of the surcharge, in which case the amount so added shall be collected in the same manner as the tax.

SECTION 237.     Ad valorem penalty for false or fraudulent return. — In case a false or fraudulent return or list is made, the Commissioner of Internal Revenue shall add to the tax ascertained to be due on the true net income of the taxpayer a surcharged of 50 per cent of the amount of such tax. If payment has been made on the basis of such false or fraudulent return before the discovery of the falsity or fraud, the basis of the surcharge of 50 per cent will be the amount of the tax due on the true net income less the amount so paid.

(Section 73 of the Code)

SECTION 238.     Penalty for failure to file return or to pay tax. — Any person liable to pay the tax, to make a return or to supply information required under Title II of the Code, who refuses or neglects to pay such tax, to make such return or to supply such information at the time or times specified in each case shall be punished by a fine of not more than P2,000 or by imprisonment for not more than six months, or both. In case of a corporation failing to file its, return or pay the tax, the penalty prescribed under the first paragraph of Section 73 will be imposed upon the president, vice-resident, or other responsible officer required to file the return of the corporation or pay the tax due from the same, in accordance with the provisions of Section 46(a) and 51(b) of the Code. In the case of a duly registered general copartnership, failing to file the return required under Section 49 of the Code, the penalty prescribed under the first paragraph of Section 73 will be imposed upon the managing partner or other responsible officer of such partnership.

SECTION 239.     Penalty imposed upon person causing a false or fraudulent corporate return to be filed. — If a false or fraudulent return is filed for a corporation or duly registered general copartnership, the individual or any officer thereof causing such return to be filed shall be punished by a fine not exceeding P4,000 or by imprisonment for not more than one year, or both.

(Section 74 of the Code)

SECTION 240.     Penalty on corporation refusing or neglecting to make return. — A corporation or duly registered general copartnership, refusing or neglecting to make a return required under Title II of the Code, or, rendering a false or fraudulent return, will be liable to a fine of not exceeding P20,000. The fine imposed under Section 74 will be paid by the corporation or duly registered general copartnership as an entity, and is in addition to the penalty which may be imposed under Section 73 of the Code upon the president, vice-president, or other responsible officer of a corporation or duly registered general copartnership.

(Section 75 of the Code)

SECTION 241.     Return of information as to payments of dividends. — Every domestic resident foreign corporation is hereby required to render a return, in duplicate, on the form prescribed for corporations (B.I.R. Form No. 17.02) of its payments of profits or dividends to stock holders for the taxable year or period covered by the return, stating the name and address of each stockholder, the number and class of shares owned by him, the date and amount of such dividend paid him, and when the surplus out of which it was paid was accumulated. Such return should be verified by the oath or affirmation of the person rendering the same.   

 (Section 76 of the Code)

SECTION 242.     Application for and issuance of license for collecting foreign items. — Every individual or organization undertaking, for profit or otherwise, the collection of dividends or interest on foreign securities (not payable in the Philippines) by means of coupons, checks, or bills of exchange shall, upon application, obtain a license therefor from the Commissioner of Internal Revenue. The application shall show the name, address, occupation, and status (as to citizenship or nationality and residence) of the applicant.

(Section 77 of the Code)

SECTION 243.     Return of information as to payments of P1,800 or more. — All persons, corporations, partnerships, and associations, making payment to another person of fixed or determinable income of P1,800 or more in a taxable year must render a return thereof to the Commissioner of Internal Revenue within the time fixed for the filing of the annual returns of said person, corporations, partnerships, and associations. The name and address of the recipient of the income should be stated, if possible. Although to make necessary a return of information the income must be fixed or determinable, it need not be annual or periodical.

The names of all employees to whom payments of P1,800 or over a year are made, whether such total sum is made up of wages, salaries, commissions, or compensation in any other form, must be reported. Compensations in kind, such as living quarters, meals, and lodging, are taxable income to the recipient and, as such, should be reported if the sum total of the same and the other compensation in cash received shall amount to P1,500 or more during the year.

In the case of payments of annual or periodical income to nonresident alien individual or to foreign corporations or firm not engaging in trade or business within the Philippines and not having any office or place of business therein, the return by withholding agents shall constitute and be treated as return of information.

SECTION 243. *  Return of information as to payments of P1,800 or more. — All persons, corporations, partnerships and associations making payments to another of fixed or determinable income of P1,800 or more in a taxable .year must render a return thereof in duplicate on the form prescribed therefor (BIR Form No. 17.01-B). These forms should be attached to and filed together with the annual income tax returns of said persons, corporations, partnerships and associations as payers, within the time fixed by law for the filing of income tax returns. The payments referred to herein do not include the following:

(1)          Dividend payments mentioned under Section 75 of the National Internal Revenue Code.

(2)          Salaries, wages, bonuses, and other compensations in kind, such as living quarters, meals, and lodging which are subject to withholding tax and reported in W-2 forms as provided for under Republic Act 590.

(3)          Payments subject to withholding tax at source enumerated under Section 53 of the National Internal Revenue Code.

Examples of income covered by these regulations and to be declared in BIR Form 17.01-B are interests, rents, commissions, royalties, advertisements, professional fees, and the like, arising generally from payments between payers and recipients who have no employer-employee relationship.

(Revenue Regulations No. 9-65 amending and superseding section 243 appearing on page 723. As of October 20, 1965, these Regulations, dated June 30, 1965, have not yet been published in the Official Gazette).

(Section 78 of the Code)

SECTION 244.     Return of corporation contemplating dissolution or retiring from business. — All corporations, partnership, joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such resolution authorizing their dissolution, and within the same period after their retirement from business, file their income tax returns covering the profit earned or business done by them from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding income tax due thereon upon demand by the Commissioner of Internal Revenue to addition to the income tax return required to be filed they shall also submit within the same period the following:

(a)          Copy of the resolution authorizing such dissolution;

(b)          Balance sheet at the date of dissolution or retirement and a profit and loss statement covering the period from the beginning of the taxable year to the date of dissolution or retirement;

(c)           In the case of a corporation, the names end addresses of the shareholders and the number and par value of the shares held by each; and in the case of a partnership, joint-account or association, the name of the partners or members and the capital contributed by each;

(d)          The value and a description of, the assets received in liquidation by each shareholder;

(e)          The name and address of each individual or corporation, other than shareholders, if any, receiving assets at the time of dissolution together with a description and the value of the assets received by such individuals or corporations; and the consideration, if any, paid by each of them for the assets received.

(Section 79 of the Code)

SECTION 245.     Return of information by brokers. — When required by the Commissioner of Internal Revenue, each person doing business as a broker shall render a return or statement showing the names and addresses of customers to whom or for whom payments were made or from whom business was transacted during the calendar year or other specified period, and giving all other particulars which may be needed by the Commissioner of Internal Revenue.

(Section 80 of the Code)

SECTION 246.     Information returns as to formation, etc., of foreign corporation. — (a) IN GENERAL. — Any attorney, accountant, fiduciary, bank, trust company, financial institution, or other person, who, after July 5, 1939, aids, assists, counsels, or advises in, or with respect to, the formation, organization, or reorganization of any foreign corporation (including a foreign association or partnership) shall file with the Commissioner of Internal Revenue, within thirty days after giving such aid, assistance, counsel or advise, an information return; as provided in Section 80 and this section. The return must be filed in every such case (1) regardless of the nature of the counsel or advice given, whether for or against the formation, organization, or reorganization of the foreign corporation, or the nature of the aid or assistance rendered and (2) regardless of the action taken upon the advice or counsel, that is, whether the foreign corporation is actually formed, organized, or reorganized.

If, in a particular case, the aid, assistance, counsel or advice given by any person extends over a period of more than one day and not for more than thirty days, such persons, to avoid the multiple filing of returns, may file a single return for the entire period. In such case, the return shall be filed within thirty days from the first day of such period: If, in a particular case, the aid, assistance, counsel, or advice given by any person extends over a period of more than thirty days, such person may file a return at the end of each thirty days included within such period and at the end of the fractional part of a thirty day period, if any, extending beyond the last full thirty days. In each such case, the return must disclose all the required information which was not reported on a prior return.

(b)          SPECIAL PROVISIONS. — (1) Employers. — In the case of aid, assistance, counsel, or advice in, or with respect to, the formation, organization, or reorganization of a foreign corporation given by a person in whole or in part through the medium of subordinates or employees (including in the case of a corporation the officers thereof), the return of the employer must set forth to the full extent all information prescribed by these regulations, including that which, as an incident to such employment, is within the possession or knowledge or under the control of such subordinates or employees.

(2)          EMPLOYEES. — The obligation of a subordinate or employee (including in the case of a corporation the officers thereof) to file a return with respect to any aid, assistance, counsel, or advice in, or with respect to, the formation, organization, or reorganization of a foreign corporation, given as an incident to his employment, will be satisfied if a complete and adequate return as prescribed by these regulations is duly filed by the employer setting forth all of the information within the possession or knowledge or under the control of such subordinate or employee.

Clerks, stenographers, and other subordinates or employees, rendering aid or assistance solely of a clerical or mechanical character in, or with respect to, the formation, organization or reorganization of a foreign corporation are not required to file returns by reason of such services.

(3)          RETURNS JOINTLY MADE. — If two or more persons aid, assist, counsel, or advise in, or with respect to, the formation, organization, or reorganization of a particular foreign corporation, any two or more of such persons may, in lieu of filing several returns jointly execute and file one return.

(c)           PENALTIES. — For criminal penalties for failure to file the return required by Section 80, see Section 73 of the Code.

(d)          CONTENTS OF RETURNS. — The return shall set forth the following information to the full extent such information is within the knowledge or possession or under the control of the person required to file the return.   

(1)          The name and address of the person (or persons) to whom and the person (or persons) for whom or on whose behalf the aid, assistance, counsel, or advice was given;

(2)          A complete statement of the aid, assistance, counsel, or advice given;

(3)          Name and address of the foreign corporation and the country under the laws of which it was formed, organized, or reorganized;

(4)          The months and year when the foreign corporation was formed, organized, or reorganized;

(5)          A statement of how the formation, organization, or reorganization of the foreign corporation was effected;

(6)          A complete statement of the reasons for, and the purposes sought to be accomplished, by, the formation, organization, or reorganization of the foreign corporation;

(7)          A statement showing the classes and kinds of assets transferred to the foreign corporation in connection with formation, organization, or reorganization, including a detailed list of any stock or securities included in such assets, and a statement showing the names and addresses of the persons who were the owners of such assets immediately prior to the transfer;

(8)          The names and addresses of the shareholders of the foreign corporation at the time of the completion of its formation, organization, or reorganization, showing the classes of stock and number of shares held by each;

(9)          The name and address of the person (or persons) having custody of the books of account and records of the foreign corporation;

(10)        Such other information as may be required by the return form; and

(11)        Where any of the information required to be furnished is withheld because its character is claimed to be privileged as a communication between attorney and client within the meaning of Section 80, the return must so state and must contain a complete statement of the nature and the circumstances of the communication on which a decision as to the propriety of the claim of privilege may be reached.

If a person aids, assists, counsels, or advises in or with respect to, the formation, organization, or reorganization of more than one foreign corporation, a separate return must be filed with respect to each foreign corporation.

(e)          VERIFICATION OF RETURN. — All returns required by Section 80 and this section shall be verified under oath or affirmation.

(Section 81 of the Code)

SECTION 247.     Disposition of income tax returns. — All income tax returns filed with the Commissioner of Internal Revenue constitute public records which shall be open to inspection under rules and regulations prescribed by the Secretary of Finance with the approval of the President of the Philippines. The circumstances under which income tax returns may be inspected by interested parties are dealt with under separate regulations.

SECTION 248.     Publication of list of persons filing returns and paying taxes. — The second paragraph of Section 81 expressly authorizes the Commissioner of Internal Revenue, with the approval of the Secretary of Finance, to cause to be prepared and published in any newspaper or made available to public inspection through other means, lists containing the names and addresses of persons who have filed income tax returns, or lists of those who paid income taxes, or both such kinds of lists.

(Section 82 of the Code)

SECTION 249.     Recovery of tax. — A suit or proceeding may be maintained for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed and collected, in accordance with Section 306 of the Code. However, where the Commissioner of Internal Revenue believes that a return is false or fraudulent or contains any understatement or undervaluation and proceeds to assess and collect the tax due, no portion of the tax so collected shall be recovered by any suit unless it is proved that the return was not in fact false or fraudulent and did not contain any understatement or undervaluation, except with respect to return is made in good faith regarding annual depreciation of oil or gas wells and mines.

(Section 83 of the Code)

SECTION 250.     Dividends. — Dividends, for the purpose of the law, comprise any distribution whether in cash or other property, in the ordinary course of business, even though extraordinary in amount, made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account (cuentas en participacion), association, or insurance company to the shareholders or members out of its earnings or profits accumulated since March 1, 1913.

Although interest on certain Government bonds and other similar obligations is not taxable when received by a corporation, upon amalgamation with the other funds of the corporation, such income loses its identity and when distributed to shareholders, is taxable to the same extent as other dividend.

A taxable distribution made by a corporation to individual stockholders or members shall be included is the gross income of the distributees when the cash of other property is 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 another income.

Dividends, whether in cash or other property, received by a domestic or resident foreign corporation from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation, whether resident or nonresident, are taxable to the extent that they constitute income from sources within the Philippines, as provided in Section 37 (a) (2) (b) of the Code. Dividends paid by the domestic corporation to a nonresident foreign corporation are taxable in full. (For definition of the different classes of corporations, see Section 84 of the Code).   

SECTION 251.     Dividends paid in property. — Dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the full market value of such property when receivable by individual stockholders. When receivable by corporations, the amount of such dividends includible for purposes of the tax on corporations are 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 recipients of such stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax in the year in which the warrants are issued.

SECTION 252.     Stock dividends. — A stock dividend which represents the transfer of surplus to capital account is not subject to income tax. However a dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact that the officers or directors 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 interests. A stock dividend constitutes income if it gives the shareholder an interest different from that which his former stock holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old — the new certificates plus the old representing the same proportionate interest in the net assets of the corporation as did the old.

SECTION 253.     Sale of stock received as dividends. — Stock issued by a corporation, as a dividend, does not constitute taxable income to a stockholder in such corporation, but gain may be derived or loss sustained by the stockholder, whether individual or corporate, from the sale of such stock, which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See Section 34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the sale of the stack with respect to which it is issued, shall be determined in accordance with the following rules:

(a)          Where the stock issued as dividend is all or substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March 1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market value) of the old shares of stock divided by the total number of the old and new shares.

(b)          Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1, 1913, the fair market value as of such date) of the old shares of stock shall be divided between such old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class of stock, old and new, at the time the new shares of stock are issued, and the cost (or when acquired prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share belongs divided by the number of shares in that class.

(c)           Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots can. not be determined, any sale of the original stock, will be charged to the earliest purchases of such stock, and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such stock.

(d)          Where the stock with respect to which a stock dividend is declared was purchased at different times and at different prices, and the dividend stock issued with respect to such stock can not be 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.   

SECTION 254.     Declaration and subsequent redemption of a stock dividend. — A true stock dividend is not subject to tax on its receipt in the hands of the recipient. Nevertheless, if a corporation, after the distribution of a stock dividend, proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stocks shall be treated as a taxable dividend to the extent of the earnings or profits accumulated by such corporation since March 1, 1913.

SECTION 255.     Sources of distribution. — For the purpose of income taxation every distribution made by a corporation is made out of earnings or 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.

SECTION 256.     Distribution in liquidation. — In all cases where a corporation (as defined in Section 84) distributes all of its property or assets in complete liquidation or dissolution, the gain realized from the transaction by the stockholder, whether individual or corporate, is taxable to the extent recognized in Section 34(b) of the Code. For this purpose, the term "complete liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation under which the transfer of all the assets under liquidation is to be complete within a reasonable time from the date of the first distribution, usually not to exceed one year from the time of such first distribution. If the amount received by the stockholder in liquidation is less than the cost or other basis of the stock, the loss in the transaction is deductible to the extent allowed in Section 34(c) of the Code.

(Section 84 of the Code)

SECTION 257.     Income and deductions of American citizens residing in the Philippines. — Under subsection (u) of Section 84, a citizen of the United States residing in the Philippines, is taxable on income from sources both within and without the Philippines, except income from sources within the United States. Accordingly, items of deductions allocable to income of such taxpayer from sources within the United States are not deductible from his income subject to Philippine income tax. (Deemed repealed since our independence).

SECTION 258.     Effective date. — These regulations shall take effect upon their promulgation in the Official Gazette.

(Promulgated February 11, 1941, XXXIX Off. Gaz., No. 18, page 325)

Recommended by:

BIBIANO L. MEER

Collector of Internal Revenue

MANUEL ROXAS

Secretary of Finance