REVENUE REGULATIONS NO. 02-40 INCOME TAX REGULATIONS (PART 1)

INCOME TAX REGULATIONS

SECTION 1.         Scope. — In accordance with the provisions of Sections 4 (I) and 338 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, the following regulations affecting Sections 19 to 84 of the same Code relating to the income tax are hereby promulgated to supersede all circulars, precedents, rulings, and regulations heretofore published on the same subject, and they shall be known as Revenue Regulations No. 2, or the Income Tax Regulations:

(Only the section numbers of the Code are given below as their texts will be found in the same Code. They serve as captions of the pertinent provisions of the Regulations.)

(Section 20 of the Code)

SECTION 2.         Application of title. — Section 20 provides that the provisions of Title II of the National Internal Revenue Code shall apply only to income received from January 1, 1939.   

(Section 21 of the Code)

SECTION 3.         Persons considered citizens of the Philippines. — The following shall be considered citizens of the Philippines:

(1)          Those who were citizens of the Philippines at the time of the adoption of the Constitution of the Philippines.

(2)          Those born in the Philippines of foreign parents who, before the adoption of the Constitution, had been elected to public office in the Philippines.

(3)          Those whose fathers are citizens of the Philippines.

(4)          Those whose mothers are citizens of the Philippines and, upon reaching the age of majority, elect Philippine citizenship.

(5)          Those who are naturalized in accordance with law. (Sec. 1, Article IV, Constitution of the Philippines.)

Philippine citizenship may be lost or reacquired in the manner provided by law. A foreigner who has come to reside in the Philippines and has filed his petition to acquire Philippine citizenship but has not yet received the requisite naturalization certificate still remains an alien.

SECTION 4.         Tax on citizens and residents. — Section 21 imposes progressive rates of income taxes on citizens and residents, starting from 3 per cent upon the amount by which the net income does not exceed P2,000 and rising gradually to 60 per cent upon the amount by which the net income exceeds P500,000. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)

The following is a table, showing the rates of income tax under Section 21, as amended by Section 1 of R.A. No. 2343, applicable to income received from Jan. 1, 1959 and for fiscal periods ending after June 30, 1959:

               1             2             3             4             5             6

               Exceeding            Not        Bracket Rate       Tax on Each        Cumulative

                              Exceeding                           of Tax    Bracket Amount of Tax

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

               2,000     4,000     2,000     6%          120        180

               4,000     6,000     2,000     9%          180        360

               6,000     8,000     2,000     16%       320        680

               8,000     10,000   2,000     20%       400        1,080

               10,000   20,000   10,000   24%       2,400     3,480

               20,000   30,000   10,000   30%       3,000     6,480

               30,000   40,000   10,000   36%       3,600     10,080

               40,000   50,000   10,000   40%       4,000     14,080

               50,000   60,000   10,000   42%       4,200     18,280

               60,000   70,000   10,000   44%       4,400     22,680

               70,000   80,000   10,000   46%       4,600     27,280

               80,000   90,000   10,000   48%       4,800     32,080

               90,000   100,000               10,000   50%       5,000     37,080

               100,000               120,000               20,000   52%       10,400   47,480

               120,000               140,000               20,000   53%       10,600   58,080

               140,000               160,000               20,000   54%       10,800   68,880

               160,000               200,000               40,000   55%       22,000   90,880

               200,000               250,000               50,000   56%       28,000   118,880

               250,000               300,000               50,000   57%       28,500   147,380

               300,000               400,000               100,000               58%       58,000   205,380

               400,000               500,000               100,000               59%       59,000   264,380

               500,000               -              -              60%       -              -

Note: Taxable income is arrived at after deducting personal and additional exemptions to which taxpayer is entitled.   

(Section 22 of the Code)

SECTION 5.         Definition. — A "non-resident alien individual" means an individual —

(a)          Whose residence is not within the Philippines; and

(b)          Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

SECTION 6.         Loss of residence by alien. — An alien who has acquired residence in the Philippines retains his status as a resident until he abandons the same and actually departs from the Philippines. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a resident for the remainder of his stay in the Philippines.

SECTION 7.         Taxation of aliens in general. — For purposes of income tax, alien individuals are divided generally into two classes, namely, resident aliens and non-resident aliens. Resident aliens are taxable in the same manner as citizens of the Philippines, that is, a resident alien is taxable on income derived from all sources including sources without the Philippines. Non-resident aliens are taxable only on income from sources within the Philippines.

SECTION 8.         Taxation of non-resident aliens; classification. — Non-resident alien individuals are divided into two classes: (1) Those engaged in trade or business within the Philippines, and (2) those not engaged in trade or business within the Philippines. Non-resident aliens falling within the first class are subject to the graduated rates established in Section 21 with respect to their net income from sources within the Philippines. Non-resident aliens falling within the second class are subject to a flat rate of 20 per cent on their total income from sources within the Philippines, if such total income does not exceed P23,800, otherwise, the graduated rates established in Section 21 will apply to the total income if it exceeds P23,800. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)

The phrase "engaged in trade or business within the Philippines" includes the performance of personal services within the Philippines. Whether a non-resident alien has an "office or place of business," however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, effected. Neither the beneficiary nor the grantor of a trust, whether revocable or irrevocable, is deemed to be engaged in trade or business in the Philippines or to have an office or place of business therein, merely because the trustee is engaged in trade or business in the Philippines or has an office or place of business therein. (Test of "office or place of business" was deleted by R.A. 2343.)

(Section 23 of the Code)

SECTION 9.         Personal exemption. — Personal exemption is an arbitrary amount allowed for personal, living, or family expenses of the taxpayer. It is allowed to citizens of the Philippines, to resident aliens, and to non-resident aliens in certain cases. The procedure of arriving at the tax due after giving effect to the exemptions allowable is set forth in Section 4 of these regulations.   

SECTION 10.       Personal exemption of single individuals. — A single individual is entitled to a personal exemption of P1,800.

SECTION 11.       Personal exemption of married persons and heads of family. — A married person is entitled to a personal exemption of P3,000. Only one exemption of P3,000 is allowed with respect to the aggregate income of both husband and wife. (Conforms with amendments by R.A. 2343, effective June 20, 1959.)

A head of family is an individual who actually supports and maintains in one household one or more individuals, who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the statute must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity, the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. Chief support means principal or main support. Partial support not amounting to chief support will not entitle the taxpayer to claim exemption as a head of a family.

Under the law the following persons are entitled to P3,000 exemption: (a) a married man; (b) a married woman; and (c) an unmarried man or woman with one or both parents, or one or more brothers or sisters, or one or more legitimate, recognized natural, or adopted children living with and dependent upon him or her for their chief support, where such brothers, sisters, or children are not more than 23 years of age, unmarried and not gainfully employed or where such children are incapable of self-support because mentally or physically defective. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

SECTION 12.       Additional exemption for dependents. — The taxpayer is entitled to an additional exemption of P1,000 for each legitimate, recognized natural, or adopted child wholly dependent upon and living with such person, if such dependent is not more than 23 years of age, unmarried and not gainfully employed or incapable of self-support because mentally or physically defective, provided that the person claiming additional exemption is a head of family. The children with respect to whom additional exemption is claimed must be wholly dependent upon the taxpayer for support. (Conforms with amendments by R A. 2343, effv. June 20, 1959.)

SECTION 13.       Change of status. — If the status of the taxpayer, insofar as it affects the personal and additional exemptions, changes during the taxable year by reason of his death, the amount of the personal and additional exemptions shall be apportioned, in accordance with the number of months before and after such change. For the purpose of such apportionment, a fractional part of a month shall be disregarded unless it amounts to more than half a month in which case it shall be considered as one month. (Conforms with amendment by R.A. 590, effv. Sept. 22, 1950.)   

SECTION 14.       Personal exemption of non-resident aliens. — A non-resident alien is entitled to a personal exemption in an amount equal to the exemptions allowed by the income tax law in the country of which he is a citizen or subject to citizens of the Philippines. The exemption allowed to non-resident aliens is a reciprocal one; that is, it is only allowed if the country of said non-resident aliens allows similar exemptions to Filipinos not residing in such country but deriving income from sources therein. If the country of which the non-resident alien is a citizen or subject does not have any income tax law, such non-resident alien will not be entitled to personal exemption.

(Section 24 of the Code)

SECTION 15.       Income tax on corporations. — The law imposes an annual income tax of 22 per centum upon that portion of the net income of every corporation not in excess of P100,000 and 30 per cent on the excess. The term "corporation" includes partnership no matter how created or organized, joint-stock companies, joint-account (cuentas en participacion), association, or insurance companies but does not include duly registered general co-partnership (companias colectivas). The tax is upon net income, which is undetermined by subtracting from the gross income, as defined in the law, the allowable deductions. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

SECTION 16.       Corporations liable to tax. — Every corporation, domestic or foreign, not otherwise exempt from tax under Title II or any other law, is liable to tax. A domestic corporation is taxed on its income from sources within and without the Philippines, but a foreign corporation is taxed only on its income form sources within the Philippines.

The tax imposed by law on corporations is not imposed only upon such corporations as are organized and operated for profit. Any corporation, firm or association, no matter how created or organized, or what the purpose of its organization may be, is subject to the tax, except as provided in Section 27, relative to exemptions from tax on corporations. A corporation is not exempt simply and only because it is primarily not organized and operated for profit.

SECTION 17.       Dividends received by a corporation from a domestic corporation. — Dividends received by a domestic or resident foreign corporation from a domestic corporation subject to tax are taxable only to the extent of 25 per cent thereof. All other classes of income (except net capital gains, Section 34) of corporations are taxable in full. Likewise dividends from a foreign corporation, whether resident or non-resident, are taxable in full. (See Sections 250 to 256 of these regulations relative to taxation of dividends and other distributions.)

SECTION 17-A.   Tax on life insurance companies. — Every life insurance company organized in or existing under the laws of the Philippines, or foreign life insurance company authorized to carry on business in the Philippines are taxable on their total net investment income derived from interest, dividends and rents from all sources whether within or without the Philippines, to the flat rate of 6-1/2%. However, purely cooperative insurance companies or associations which are conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit are exempt from income tax.

The total net investment income of domestic life insurance companies means the gross investment income received during the taxable year from rents, dividends and interest less deductions for real estate expenses, depreciation, interest paid within the taxable year on its indebtedness except on indebtedness incurred to purchase or carry obligation the interest upon which is wholly exempt from taxation under existing laws, and such investment expenses paid during the taxable year as are ordinary and necessary in the conduct of its investment. The total net investment income of foreign life insurance companies doing business here is that portion of their gross world investment income which bears the same ratio to such income as their total Philippines reserve (whether kept in the Philippines or abroad) bears to their total world reserve less that portion of their total world investment expenses which bears the same ratio to such expenses as their total Philippine investment income bears to their total world investment income. The following equation simplifies this formula:

PGI = PR/WR x WGI

PIE = PGI/WGI x WIE

PGI - PIE = PNI

Legend:

PGI is Philippine Gross Investment Income

PNI is Philippine Net Investment Income

PR is Total Philippine Reserve

WR is Total World Reserve

WGI is World Gross Investment Income

PGI is Philippine Gross Investment Income

WIE is Total World Investment Expenses

PIE is Philippine Investment Expense

In both cases, the deductible expenses must be connected with the investment income subjected to tax. For the proper determination of the income tax liability of resident foreign life insurance companies, they should submit the necessary financial statement reflecting the nature of the investment income and corresponding expenses. These financial statements must be duly certified by an independent certified public accountant and authenticated by a Philippine consular official.   

Foreign life insurance companies not doing business in the Philippines are subject to the normal income tax on their income received from sources within the Philippines. They are subject to tax at the rate of 30% like any other foreign corporation.

Domestic life insurance companies and foreign life insurance companies doing business in the Philippines are not allowed to deduct from their gross income the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts. (Proposed by the BIR. If adopted, this will supersede Sec. 124 of existing regulations.)

(Section 25 of the Code)

SECTION 18.       Taxation of corporation formed or utilized for avoidance of tax. — Section 25 imposes for each year, in addition to the tax imposed by Section 24 a tax of 25 per cent on the undistributed portion of the profits or surplus of a corporation which is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of any other corporation through the medium of permitting gains or profits to accumulate instead of dividing or distributing them. However, banks, insurance companies, personal holding companies and foreign personal holding companies as defined in Chapter VIII, are excepted from taxation under Section 25. The tax imposed by Section 25 applies whether the avoidance was accomplished through the formation or use of only one corporation or a chain of corporations. For example, if the capital stock of the M Corporation is held by the N Corporation so that the dividend distributions of the M Corporation would not be returned as income subject to the tax on individuals until distributed in turn by the N Corporation to its individual shareholders, nevertheless the tax imposed by Section 25 applies to the M Corporation, if that corporation is formed or availed of for the purpose of preventing the imposition of the tax upon the individual shareholders of the N Corporation. A foreign corporation, whether resident or non-resident, is subject to the tax provided for under Section 25 in the same manner and under the same circumstances as a domestic corporation.

SECTION 19.       Purpose to avoid tax; evidence; burden of proof; definitions of holding or investment company. — The Collector of Internal Revenue's determination that a corporation was formed or availed of for the purpose of avoiding the tax on its shareholders or members is subject to disproof by competent evidence. The existence or non-existence of the purpose may be indicated by circumstances other than the evidence specified in Section 25(b), and whether or not such purpose was present depends upon the particular circumstances of each case. In other words, a corporation is subject to taxation under Section 25 if it is formed or availed of for the purpose of preventing the imposition of the progressive rates of tax upon shareholders through the medium of permitting earnings or profits to accumulate, even though the corporation is not a mere holding or investment company 50 per cent or more of the outstanding stock of which is owned directly or indirectly by one person, and does not have an unreasonable accumulation of earnings or profits; and on the other hand, the fact that a corporation is such a company or has an accumulation is not absolutely conclusive against it if, by clear and convincing evidence, the taxpayer satisfies the Commissioner of Internal Revenue that the corporation was neither formed nor availed of for the purpose of avoiding the tax on individuals. All the other circumstances which might be construed as evidence of the purpose to avoid the tax on shareholders cannot be outlined, but among other things the following will be considered: (1) Dealings between the corporation and its shareholders, such as withdrawal by the shareholders as personal loans or the expenditure of funds by corporation for the personal benefit of the shareholders, and (2) the investment by the corporation of undistributed earnings in assets having no reasonable connection with the business. The mere fact that the corporation distributed a large part of its earnings for the year in question does not necessarily prove that earnings were not permitted to accumulate beyond reasonable needs or that the corporation was not formed or availed of to avoid the tax upon shareholders.

If the Commissioner of Internal Revenue determined that the corporation was formed or availed of for the purpose of avoiding the progressive rates of tax on individuals through the medium of permitting earnings or profits to accumulate, and the taxpayer contests such determination of fact by litigation, the burden of proving the determination wrong by a preponderance of evidence, together with the corresponding burden of first going forward with evidence, is on the taxpayer under principles applicable to income tax cases generally, and this is so even though the corporation is not a mere holding or investment company and does not have an unreasonable accumulation of earnings or profits. However, if the corporation is a mere holding or investment company, then the law gives further weight to the presumption of correctness already arising from the Commissioner of Internal Revenue's determination by expressly providing an additional presumption of the existence of a purpose to avoid the tax upon shareholders, while if earnings or profits are permitted to accumulate beyond the reasonable needs of the business then the law adds still more weight to the Commissioner of Internal Revenue's determination by providing that irrespective of whether or not the corporation is a mere holding or investment company, the existence of such an accumulation is determinative of the purpose to avoid the tax upon shareholders unless the taxpayer proves the contrary by such a clear preponderance of all the evidence that the absence of such a purpose is unmistakable.

SECTION 20.       Holding and investment companies. — A corporation having practically no activities except holding property, and collecting the income therefrom or investing therein, shall be considered a holding company within the meaning of Section 25. If the activities further include, or consist substantially of, buying and selling stocks, securities, real estate, or other investment property (whether upon an outright or a marginal basis) so that the income is derived not only from the investment yield but also from profits upon market fluctuations, the corporation shall be considered an investment company within the meaning of Section 25.

SECTION 21.       Unreasonable accumulation of profits. — An accumulation of earnings or profits (including the undistributed earnings or profits of prior years) is unreasonable if it is not required for the purposes of the business, considering all the circumstances of the case. It is not intended, however, to prevent accumulations of surplus for the reasonable needs of the business if the purpose is not to prevent the imposition of the tax upon shareholders. No attempt is here made to enumerate all the ways in which earnings or profits of a corporation may be accumulated for the reasonable needs of the business. Undistributed income is properly accumulated if retained for working capital needed by the business; or if invested in additions to plant reasonably required by the business; or if in accordance with contract obligations placed to the credit of a sinking fund for the purpose of retiring bonds issued by the corporation. The nature of the investment of earnings or profits is immaterial if they are not in fact needed in the business. Among other things, the nature of the business, the financial condition of the corporation at the close of the taxable year, and the use of the undistributed earnings or profits will be considered in determining the reasonableness of the accumulations.

The business of a corporation is not merely that which it has previously carried on, but includes in general any line of business which it may undertake. However, a radical change of business when a considerable surplus has been accumulated may afford evidence of a purpose to avoid the tax. If one corporation owns the stock of another corporation in the same or a related line of business and in effect operates the other corporation, the business of the latter may be considered in substance although not in legal form the business of the first corporation. Earnings or profits of the first corporation put into the second through the purchase of stock or otherwise may, therefore, if a subsidiary relationship is established, constitute employment of the income in its own business. Investment by a corporation of its income in stock and securities of another corporation is not of itself to be regarded as employment of the income in its business. The business of one corporation may not be regarded as including the business of another unless the other corporation is a mere instrumentality of the first; to establish this it is ordinarily essential that the first corporation own all or substantially all of the stock of the second.   

The Commissioner of Internal Revenue may require any corporation to furnish a statement of its accumulated earnings and profits, the name and address of, and number of share held by each of its shareholders or members, and the amounts that would be payable to each, if the income of the corporation were distributed.

(Section 26 of the Code)

SECTION 22.       General co-partnerships. — General co-partnerships, when duly registered, are not subject to income tax, but are required to file returns of their income on B.I.R. Form No. 17.04 for the purpose of furnishing information as to the share in the gains or profits which each partner shall include in his individual return. Individuals carrying on business in general co-partnership are, however, taxable upon their distributive shares of the net income of such partnership, whether distributed or not, and are required to include such distributive shares in their individual returns. The returns of duly registered general co-partnerships should be rendered on or before April 15 of each year or within sixty days after the end of their fiscal year depending on whether their books are kept on the calendar or on the fiscal year basis. (Conforms with amendments by R.A. 2343, effv. June 20, 1959.)

SECTION 23.       Distributive shares of partners. — The distributive share of the net profit of a general co-partnership must be included in the individual returns of the partners. But where the result of partnership operation is a loss, the loss will be divisible by the partners in the same proportion as the net income would have been divisible (or, if the partnership agreement provides for the division of a loss in a manner different from the division of a gain, in the manner so provided) and may be taken by the individual partners in their respective returns of income.

(Section 27 of the Code)

SECTION 24.       Proof of exemption. — In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption file an affidavit with the Commissioner of Internal Revenue, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and its disposition, whether or not any of its income is credited to surplus or inures or may inure to the benefit of any private shareholder or individual, and in general, all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation, the by-laws of the organization, and the latest financial statement showing the assets, liabilities, receipts, and disbursement of the organization.

Upon receipt of the affidavit and other papers by the Commissioner of Internal Revenue, the organization will be informed whether or not it is exempt. When an organization has established its right to exemption, it need not thereafter make and file a return of income as required under Section 46 of the Tax Code. However, the organization should file on or before April 15 of each year, an annual information return under oath, stating its gross income and expenses incurred during the preceding year, and a certificate showing that there has not been any substantial change in its By-Laws, Articles of Incorporation, manner of operation and activities as well as sources and disposition of income. (As amended by Revenue Regulations No. 7-64, approved November 25, 1964.)

SECTION 25.       Agricultural and horticultural organizations. — The organizations contemplated by subsection (a) of Section 27 of the Code as entitled to exemption from income taxation are those which (1) have no net income inuring to the benefit of any member; (2) are educational or instructive in character; and (3) have as their objects the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations. Organizations such as provincial fairs and like associations of a quasi-public character, which are designed to encourage the development of better agricultural and horticultural products through a system of awards, prizes, or premiums, and whose income derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation, are thus exempt. On the other hand, associations which have for their purpose, for example, the holding of periodical race meets, the profits from which may inure to the benefit of their shareholders, are not exempt. Similarly, corporations engaged in growing agricultural or horticultural products or raising live stock or similar products for profits are not exempt from tax under this paragraph.   

SECTION 26.       Mutual savings bank. — In order that a corporation may be entitled to exemption as a mutual savings bank, it must appear that it is an organization (1) which has no capital stock represented by shares, and (2) whose earnings less only the expenses of operation, are distributable wholly among the depositors. If it appears that the organization has shareholders who participate in the profits, the organization will not be exempt from income tax.

SECTION 27.       Fraternal beneficiary societies. — A fraternal beneficiary society is exempt from tax only if operated under the "lodge system", or for the exclusive benefit of the members of a society so operating. "Operating under the lodge system" means carrying on its activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. In order to be exempt, it is also necessary that the society should have an established system for payment to its members or their dependents of life, sick, accident, or other benefits.

SECTION 28.       Building and loan associations. — (Now subject to tax, as amended by Sec. 4, R.A. 82.)

SECTION 29.       Cemetery companies. — A cemetery company may be entitled to exemption, (1) if it is owned by and operated exclusively for the benefit of its lot owners, or (2) if it is not operated for profit. Any cemetery corporation chartered solely for burial purposes and not permitted by its charter to engage in any business not necessarily incident to that purpose, is exempt from income tax, provided that no part of its net earnings inures to the benefit of any private shareholder or individual. A cemetery company which fulfills the other requirement of the statute may be exempt, even though it issues preferred stock entitling the holders to dividend at a fixed rate, provided that its articles of incorporation require (a) that the preferred stock shall be retired at par as soon as sufficient funds are realized from sales, and (b) that all funds not required for the payment of dividends upon or for the retirement of preferred stock shall be used by the company for the care and improvement of the cemetery property.

A cemetery company having a capital stock represented by shares, or which is operated for profit or for the benefit of persons other than its members, does not come within the exempted class.

SECTION 30.       Religious, charitable, scientific, athletic, cultural, and educational corporations. — A corporation falling among those enumerated in subsection (e) of Section 27 is exempt from tax on its income (other than income of whatever kind and character from its properties, real or personal) if such corporation meets two tests: (a) It must be organized and operated for one or more of the specified purposes; and (b) no part of its net income must inure to the benefit of private stockholders or individuals.

The income of such corporation which is considered as income from their properties, real or personal, generally consists of income from corporate dividends, rentals received from their properties, interests received from such capital loaned to other persons, income from agricultural lands owned by such corporations, profits from the sale of property, real or personal, and other similar income.   

Income not derived from their properties, real or personal, are exempt. For example, in the case of a religious corporation, income from the conduct of strictly religious activities, such as fees received for administering baptismals, solemnizing marriages, attending burials, holding masses, and other like income, is exempt. In the case of an educational corporation, income from the holding of an educational fair or exhibit is exempt. However, if such exempt income is invested by the corporation, the income from such investment, as interests from the capital where the capital has been loaned or dividends on stock where the capital has been invested in shares of stock, will constitute taxable income. Donations and other similar contributions received by such corporation from other persons are exempt.

The clause "except income expressly exempt by this Title" appearing in subsection (e) of Section 27 refers to those classes of income which, in accordance with subsection (b) of Section 29, are exempt from taxation under Title II.

Charitable corporations include an association for the relief of the families of clergymen, even though the latter make a contribution to the fund established for this purpose; or for furnishing the services of trained nurses to persons unable to pay for them; or for aiding the general body of litigants by improving the efficient administration of justice. Educational corporations may include associations whose sole purpose is the instruction of the public. But associations formed to disseminate controversial or partisan propaganda are not educational within the meaning of the law. Scientific corporations include an association for the scientific study of law with a view to improving its administration.

It does not prevent exemption that private individuals, for whose benefit a charity is organized, receive the income of the corporation or association. The law refers to individuals having a personal and private interest in the activities of the corporation, such as stockholders. If, however, a corporation issues "voting shares", which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, including accumulated income, the right to exemption ceases to exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares.

SECTION 31.       Business leagues. — A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. If it engages in a regular business of a kind ordinarily carried on for profit, the fact that the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not ground for exemption. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not exempt, since its members have no common business interest, even though all of its income is devoted to the purpose stated. A clearing house association, not organized for profit, no part of the net income of which inures to any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks, and similar work for the common benefit of its members. An association of persons who are engaged in the transportation business, whether by land or water, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses is exempt from tax.   

SECTION 32.       Civic leagues. — Civic leagues entitled to exemption comprise those not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the welfare of mankind are exempt from tax.

SECTION 33.       Social clubs. — The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If a club, by reason of the comprehensive powers granted in the charter, engages in business or in agriculture or horticulture, for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes, and any profit realized from such activities is subject to tax.

SECTION 34.       Mutual insurance companies and like organizations. — It is necessary to exemption that the income of the company be derived solely from assessments, dues, and fees collected from members. If income is received from other sources, the corporation is not exempt. Income, however, from sources other than those specified does not prevent exemption where its receipt is a mere incident of the business of the company. Thus the receipt of interest upon a working bank balance, or of the proceeds of the sale of badges, office supplies, or equipment, will not defeat the exemption. The same is true of the receipt of interest upon Government bonds, where they were purchased and were afterwards sold. Where, however, such bonds are bought as a permanent investment, the receipt of the interest destroys the exemption. The receipt of what is, in substance, an entrance fee, charged by a mutual fire insurance company as a condition of membership, does not render the company taxable, although this fee is called a premium. If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which income is derived, it is not entitled to exemption. On the other hand, an organization may be entitled to exemption, although it makes advance assessment for the sole purpose of meeting future losses and expenses, provided that the balance of such assessments remaining on hand at the end of the year is retained to meet losses and expenses or is returned to members. An organization of a purely local character is one whose business activities are confined to a particular community, place, or district, irrespective, however, of political subdivisions.

SECTION 35.       Farmers' cooperative marketing and purchasing association. — Cooperative associations, acting as sales agents for farmers or others, in order to come within the exemption must establish that for their own account they have no net income. Cooperative dairy companies, which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among their members upon the basis of the quantity of milk or of butter fat in the milk furnished by such members are exempt from the tax. If the proceeds of the business are distributed in any other way than on such a proportionate basis, the company will be subject to tax. A farmers' association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. Cooperative associations acting as purchasing agents are not expressly exempt from tax, but rebates made to purchasers, whether or not members of the association, in proportion to their purchases may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax.  

Cooperative marketing associations duly incorporated under Act No. 3425, known as the Cooperative Marketing Law are exempt from income tax. (See also R.A. 702 exempting cooperative marketing associations.)

(Section 28 of the Code)

SECTION 36.       Meaning of net income. — The tax imposed by law is upon income. In the computation of the tax, various classes of income must be considered: (a) Income, in the broad sense, meaning all wealth which flows into the tax-payer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. Income cannot be determined merely by reckoning cash receipts, for the statute recognizes as income determining factor other items, among which are inventories, accounts receivable, property exhaustion, and accounts payable for expenses incurred. (b) Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by law. (c) Net income, meaning gross income less statutory deductions. The statutory deductions are, in general, though not exclusively, expenditures other than capital expenditures, connected with production of income. (d) In the case of a taxpayer other than a corporation as defined in Section 84 (b) of the Code, net income means gross income less exemptions. Ordinarily the net income is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer.

SECTION 37.       Computation of net income. — Net income must be computed with respect to a fixed period. That period is twelve months ending December 31st of every year except in the case of a corporation filing returns on a fiscal year basis in which case net income will be computed on the basis of such fiscal year. Items of income and of expenditures, which as gross income and deductions, are elements in the computation of net income, need not be in the form of cash. It is sufficient that such items may be appraised in terms of money. The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as would clearly reflect the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for, otherwise the computation of net income shall be made in such manner as in the opinion of the Commissioner of Internal Revenue would clearly reflect it.

SECTION 38.       Bases of computation. — Approved standard methods of accounting will be ordinarily regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property. (For methods of accounting and determination of accounting period, see Sections 166 to 169 of these regulations.)

(Section 29(a) of the Code)

SECTION 39.       What gross income includes. — Gross income includes, in general, compensation for personal and professional services, business income, profits from sales of and dealings in property, interests, rents, dividends, and gains, profits, and income derived from any source whatever, unless exempt from tax by law. In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. Profit of citizens, resident aliens, or domestic corporations derived from sales in foreign commerce must be included in their gross income. Income may be in the form of cash or of property.   

For the treatment of dividends for purposes of the tax, see Sections 250 to 256 of these regulations. For the treatment of capital gains, see Sections 132 to 135 of these regulations.

SECTION 40.       Compensation for personal services. — Where no determination of compensation is had until the completion of the services, the amount received is ordinarily income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received, if the return is rendered on a receipts and disbursements basis. Commissions paid salesman, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, and pensions or retiring allowances paid by private persons or by the Government of the United States or of the Philippines (except pensions exempt by law from tax) are income to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions received by a clergyman, evangelists, or religious worker for services rendered. However, so-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and are not taxable.

SECTION 41.       Compensation paid other than in cash. — Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair value of the compensation received. Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters are furnished in addition to cash salary, the rental value of such quarters should be reported as income.

SECTION 42.       Compensation paid in promissory notes. — Promissory notes or other evidence of indebtedness received in payment for services, and not merely as security for such payment, constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at that time. Thus, if it appears that such a note is or could be discounted on a 6 per cent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions.

If the payment due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted.

SECTION 43.       Gross income from business. — In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold.

SECTION 44.       Long term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "long-term" contracts means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in par from such contracts may, as to such income, prepare their returns upon the following bases:

(a)          Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificate of architects, or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner of Internal Revenue may permit or require an amended return.

(b)          Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of the completion.   

Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

SECTION 45.       Gross income of farmers. — A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other property received from the sale of live stock and produce which were raised during the taxable year or prior years, (2) the profit from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased is to be ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals, or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales prices over the amount representing the difference between the cost and the depreciation theretofore sustained and allowed as a deduction in computing net income.

In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are ascertained by adding to the inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock products, and miscellaneous receipts for hire of teams, machinery, and the like, during the year, and deducting from this sum the inventory value of live stock and products on hand at the beginning of the year and the cost of live stock and products purchased during the year. In such cases all live stock raised or purchased for sale shall be included in the inventory at their proper valuation determined in accordance with the method authorized and adopted for the purpose. Also, live stock acquired for drafts, breeding, or dairy purposes and not for sale may be included in the inventory, instead of being treated as capital assets subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any live stock included in an inventory their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory.

In every case of the sale of machinery, farm equipment, or other capital assets (which are not to be included in an inventory if one is used to determine profits) any excess over the cost thereof less the amount of depreciation theretofore sustained and allowed as a deduction in computing net income, shall be included as gross income. Where farm produce is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent. Proceeds of insurance, such as fire and typhoon insurance on growing crops, should be included in gross income to the amount received in cash or its equivalent for the crop injured or destroyed. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized.   

As herein used the term "farm" embrace the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit either as owners, or tenants, are designated farmers. A person cultivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer.

SECTION 46.       Sale of patents and copyrights. — A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the cost. The taxable income in the case of patents or copyrights acquired prior to March 1, 1913, should be ascertained in accordance with the provisions of section 136 of these regulations. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patent or copyrights since March 1, 1913, or since the date of acquisition if subsequent thereto.

SECTION 47.       Sale of goodwill. — Gain or loss from a sale of goodwill results only when the business, or a part of it, to which the goodwill attaches is sold, in which case the gain or loss will be determined by comparing the sale price with the cost or other basis of the assets, including goodwill. If specific payment was not made for goodwill acquired after March 1, 1913, there can be no deductible loss with respect thereto, but gain may be realized from the sale of goodwill built up through expenditures which have been currently deducted. It is immaterial that goodwill may never have been carried on the books as an asset but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the goodwill sold.

SECTION 48.       Annuities and insurance policies. — Annuities paid by religious, charitable, and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds the amounts paid by him as consideration for the contract. An annuity charged upon devised land is taxable to a donee-annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as gross income the amount of rent paid to the annuitant, and he is not entitled to deduct from his gross income any sums paid to the annuitant. Amounts received by an insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, such as the so-called "dividends" of a mutual insurance company, which may be credited against the current premium, are not subject to tax. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and should be included in the taxable income of the individual, without any credit for the amount of tax paid by the corporation at source.

SECTION 49.       Improvements by lessees. — When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases;

(a)          The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease.

(b)          The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof.

If for any other reason than a bona fide purchase from the lessee by the lessor the lease is terminated, so that the lessor comes into possession or control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the building or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the buildings or improvements destroyed were acquired prior to March 1, 1913, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance.   

SECTION 50.       Forgiveness of indebtedness. — The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend.

SECTION 51.       When income is to be reported. — Gains, 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 when they accrue to him in accordance with the approved method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefore in a later year, income is realized in that year, assuming that the money or property would have been income in the earlier year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when amounts were charged off.

SECTION 52.       Income constructively received. — Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.

SECTION 53.       Examples of constructive receipt. — When interest coupons have matured and are payable, but have not been cashed, such interest payment though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in which paid. The distributive share of the profits of a partner in a general co-partnership duly registered is regarded as received by him, although not distributed. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder, has taxable status as income for the year of the credit. When the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of maturity of the share.   

SECTION 54.       Creation of corporate sinking fund. — If a corporation in order solely to secure payment of its bonds or other indebtedness, places property in trust, or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the corporation and shall be included as such in its annual return.

SECTION 55.       Acquisition or disposition by a corporation of its own capital stock. — Whether the acquisition or disposition by a corporation of share of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.

But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transaction is subject to tax, and any loss sustained is allowable as deduction where permitted by the provisions of Title II.

SECTION 56.       Contributions by shareholders. — Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special capital account, will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments in such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, in shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company.

SECTION 57.       Sale and retirement of corporate bonds. — (1) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year.

(2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or amortized over the life of the bond. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income (or over the face value plus any amount of premiums not yet returned as income) is a deductible expenses for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income) over the purchase price is gain or income for the taxable year.

(3) (a) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. (b) If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any amount of discount not yet deducted), is a deductible expense for the taxable year. (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted) over the purchase price is gain or income for the taxable year.   

SECTION 58.       Income of corporation from leased property. — Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding indebtedness, together with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders, such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns.