SECTION 59. Gross income of a corporation in liquidation. — When a corporation is dissolved, its affairs are usually wound up by a receiver or trustee in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustee stands in the stead of the corporation for such purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss.
SECTION 60. Gross income of foreign corporations. — The gross income of a foreign corporation subject to tax consists of its gross income from sources within the Philippines. Gross income from sources within the Philippines, as applied to foreign corporations, shall include interest received on bonds, notes, or other interest-bearing obligations issued by residents, corporate or otherwise, as well as income derived from dividends on the capital stock or from the net earnings of domestic or resident foreign corporations, joint stock companies, associations, or insurance companies, dividends from other foreign corporations to the extent provided in Section 37 of the Code, and likewise income from rentals and royalties from all sources within the Philippines.
(Section 29(b) of the Code)
SECTION 61. Exclusions from gross income. — The term "gross income" as used in the Act does not include those items of income exempted by statute or by fundamental law. Such tax-free income should not be included in the income tax return unless information regarding it is specifically called for. The exclusion of such income should not be confused with the reduction of gross income by the application of allowable deductions.
SECTION 62. Proceeds of insurance. — The proceeds of life-insurance policies, paid by reason of the death of an insured to his estate or to any beneficiary (individual, partnership, or corporation, but not a transferee for a valuable consideration), directly or in trust, are excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income. Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract are excluded from gross income but, if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. However, in the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from taxation.
SECTION 63. Amounts received as compensation for injuries or sickness. — The amounts received by an insured or his estate or beneficiaries through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate, and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead.
SECTION 64. Gifts and bequests. — Property received as a gift or received under a will or testament or through legal succession, is exempt from the income tax, although the income therefrom or income derived from its investment, sale, or otherwise is not. An amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable income.
(Section 30(a) of the Code)
SECTION 65. Business expenses. — Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales is computing gross income. Among the items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of transportation, equipment used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source.
SECTION 66. Traveling expenses. — Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip is undertaken for other than business purposes, the transportation expenses are personal expenses, and the meals and lodging are living expenses, and therefore, not deducible. If the trip is solely on business, the reasonable and necessary traveling expenses, including transportation expenses, meals and lodging, become business instead of personal expenses.
(a) If, then, an individual, whose business requires him to travel receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expense allowance, his traveling expenses, including the entire amount expended for meals and lodging, are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in gross income, the amount so repaid and may deduct such expenses.
(c) If an individual receives a salary and also an allowance for meals and lodging, as for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom.
A payment for the use of a sample room at a hotel for the display of goods is a business expense. Only such expenses as are reasonable and necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to herein must attach to his return a statement showing (1) the nature of the business in which he is engaged; (2) the number of days away from home during the taxable year on account of business; (3) the total amount of expenses incident to meals and lodging while absent from home and business during the taxable year; (4) the total amount of other expenses incident to travel and claimed as a deduction.
Claim for the deductions referred to herein must be substantiated, when required by the Commissioner of Internal Revenue by record showing in detail the amount and nature of the expenses incurred.
SECTION 67. Cost of materials. — Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such materials and supplies has not been deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method.
SECTION 68. Repairs. — The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditure. Repairs in the nature of replacement, to the extent that they arrest deterioration and appreciably prolong the life of the property should be charged against the depreciation reserves if such account is kept.
SECTION 69. Professional expenses. — A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc.; used in such offices, and the hire of office assistants. Amounts currently expended for books, furnitures, and professional instruments and equipment, the useful life of which is short, may be deducted. But amounts expended for books, furniture, and professional instruments and equipment of a permanent character are not allowable as deductions.
SECTION 70. Compensation for personal services. — Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. (b) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfers of their business.
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.
SECTION 71. Treatment of excessive compensation. — The income tax liability of the recipient in respect of an amount ostensibly paid to him as compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. Thus, in the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, and are found to be distribution of earnings or profits, the excessive payments will be treated as dividend. If such payments constitute payment for property, they should be treated by the payer as a capital expenditure and by the recipient as part of the purchase price.
SECTION 72. Bonuses to employees. — Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payment, when added to the stipulated salaries, do not exceed a reasonable compensation for the service rendered. It is immaterial whether such bonuses are paid in cash or in kind or partly in cash and partly in kind. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are not deductible from gross income.
SECTION 73. Pensions, compensation for injuries. — Amounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. Salaries paid by employers to employees who are absent in the military, naval or other service of the Government, but who intend to return at the conclusion of such service, are allowable deductions. (See Section 118 of these regulations, relative to pension trust.)
SECTION 74. Rentals. — Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made from gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation.
SECTION 75. Expenses of farmers. — A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming. The cost of ordinary tools of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising livestock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. The cost of farm machinery, equipment, and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards, and ranches, prior to the time when the productive state is reached may be regarded as investments of capital. Amounts expended in purchasing work, breeding or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with Section 149 of these regulations. The purchase price of transportation equipment even when wholly used in carrying on farm operations, is not deductible but is regarded as an investment of capital. The cost of gasoline or fuel, repairs, and upkeep of the transportation equipment if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipt therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deduction.
SECTION 76. When charges are deductible. — Each year's return, so far as practicable, both as to gross income and deductions therefrom, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances and it follows that if he does not within any year deduct certain of his expenses, losses, interests, taxes, or other charges, he can not deduct them from the income of the next or any succeeding year. If it is recognized, however, that particularly in a going business of any magnitude there are certain overlapping items both of income and deduction, and so long as these overlapping items do not materially distort the income, they may be included in the year in which the taxpayer, pursuant to a consistent policy, takes them into his accounts. Judgments or other binding judicial adjudication, on account of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount of such damages as may have been compensated for by insurance or otherwise: If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from gross income, he may render an amended return for such preceding taxable year including such amount of loss in the deduction from gross income and may in proper cases file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return. A loss from theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which sustained.
SECTION 77. Expenses allowable to non-resident aliens and foreign corporations. — The expenses allowable to a non-resident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business or trade conducted within the Philippines exclusively.
(Section 30(b) of the Code)
SECTION 78. Interest. — Interest paid or accrued within the taxable year on indebtedness may be deducted from gross income, except that interest on indebtedness incurred or continued to purchase bonds and other securities, the interest upon which is exempt from tax, is not deductible. Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or not secured by such mortgage, may be deducted as interest on his indebtedness.
In the case of a non-resident alien individual or foreign corporation, the allowable deduction will be the proportion of such interest which the amount of gross income from sources within the Philippines bears to the amount of gross income from all sources within and without this country; however, to avail of this deduction, such non-resident alien individual or foreign corporation shall include in the return all the information necessary for its calculation.
Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on preferred stock, which is in reality a dividend thereon, can not be deducted in computing net income. In the case of banks and loan or trust companies, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certificates of indebted issued by such hank or loan or trust company may be deducted from gross income.
SECTION 79. Interest on capital. — Interest calculated for cost-keeping or other purposes on account of capital or surplus invested in the business, which does not represent a charge arising under an interest-bearing obligation, is not allowable deduction from gross income.
(Section 30(c) of the Code)
SECTION 80. Taxes in general. — As a general rule, taxes are deductible with the exception of those with respect to which the law does not permit deduction. However, in the case of a non-resident alien individual and a foreign corporation, deduction is allowed only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the Philippines.
Import duties paid to the proper customs officers, and business, occupation, license, privilege, excise and stamp taxes and any other taxes of every name or nature paid directly to the Government of the Philippines or to any political subdivision thereof, are deductible.
The word "taxes" means taxes proper and no deductions should be allowed for amounts representing interest, surcharge, or penalties incident to delinquency. Postage is not a tax. Automobile registration fees are considered taxes. Taxes are deductible as such only by the person upon whom they are imposed. Thus the merchants' sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item.
In computing the net income of an individual no deduction is allowed for the taxes imposed upon his interest as shareholder of a bank or other corporation, which are paid by the corporation without reimbursement from the taxpayer. The amount so paid should not be included in the income of the shareholder.
In the case of corporate bonds or other obligations containing a tax-free covenant clause the corporation paying a tax or any part of it, for someone else pursuant to its agreement is not entitled to deduct such payment from gross income on any ground.
SECTION 81. Income tax imposed by the Government of the Philippines. — The law does not permit the deduction of the income tax paid to or accrued in favor of the Government of the Philippines, and in no case may the taxpayer avail of such deduction.
SECTION 82. Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country. — Income, war-profits, and excess-profits taxes imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries. In the case of a citizen of a foreign country residing in the Philippines whose income from sources within such foreign country is not subject to income tax, only that portion of the taxes paid to such foreign country which corresponds to his net income subject to the Philippine income tax shall be allowed as deduction.
SECTION 83. Estate, inheritance, and gift taxes: taxes assessed against local benefits. — Estate, inheritance, and gift taxes are not deductible.
So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare, by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible.
SECTION 84. Analysis of credit for taxes: — If the taxpayer signifies in his return his desire to claim a credit for taxes, the basis of such credit, in the case of a citizen of the Philippines, whether resident or non-resident, and in the case of a domestic corporation, is as follows: (a) The amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country; and (b) an individual's proportionate share of any such taxes of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued during the taxable year to a foreign country if his distributive share of the income of such partnership or trust is reported for taxation under Title II of the Code.
In the case of an alien resident of the Philippines who signifies in his return his desire to claim a credit for such taxes the basis of the credit is as follows: (a) The amount of any such taxes paid or accrued during the taxable year to any foreign country if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country; and (b) his proportionate share of any such taxes of a partnership of which he is a partner or an estate or trust of which he is a beneficiary paid or accrued during the taxable year to any foreign country if his distributive share of the net income of such partnership or trust is reported for taxation under Title II of the Code, and if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country.
If a taxpayer signifies in his return his desire to claim credit for taxes, such action will be considered to apply to income, war-profits, and excess-profits taxes paid to all foreign countries (including the United States and possessions thereof), and no portion of any such taxes shall be allowed as a deduction from gross income.
SECTION 85. Meaning of terms. — The "amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year" means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during the taxable year on behalf of the taxpayer claiming credit. "Foreign country" means any foreign state or political subdivision thereof, or any foreign political entity, which levies and collects income, war-profits, or excess-profits taxes, and includes the United States or any political subdivision thereof.
SECTION 86. Conditions of allowance of credits. — If the taxpayer signifies in his return his desire to claim credit for income, war-profits, or excess-profits taxes paid other than to the Philippines, the income tax return must be accompanied by the appropriate form prescribed by the Commissioner of Internal Revenue. The form must be carefully filled in with all the information there called for and with the calculations of credits there indicated, and must be duly signed and sworn to or affirmed. If credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. If credit is sought for taxes accrued, the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly certified or authenticated copy. If the receipt of the return is in a foreign language, a certified translation thereof must be furnished by the taxpayer. Any additional information necessary for the determination of the amount of income derived from sources without the Philippines and from each foreign country shall, upon the request of the Commissioner of Internal Revenue, be furnished by the taxpayer.
In the case of a credit sought for a tax accrued but not paid, the Commissioner of Internal Revenue may in addition require as a condition precedent to the allowance of credit a bond from the taxpayer. It shall be in such sum as the Commissioner of Internal Revenue may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of the tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner of Internal Revenue may require. This bond shall be executed by the taxpayer, or the agent or representative of the taxpayer, as principal, and by sureties satisfactory to and approved by the Commissioner of Internal Revenue.
If it is the desire of the taxpayer to claim as a credit and not as a deduction accrued income, war-profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States but at the time the return is made it is impossible to estimate the amount of such taxes that may have accrued for the period for which the return is made, the form required under this section may be filed at a later date but a credit cannot be allowed for such taxes unless the taxpayer signifies in his return his desire to have to any extent the benefits of Section 30(c) (3) to (9).
SECTION 87. Redetermination of tax when credit proves incorrect. — In case credit has been given for taxes accrued, or a proportionate share thereof, and the amount that is actually paid on account of such taxes, or a proportionate share thereof, is not the same as the amount of such credit, or in case any tax payment credited is refunded in whole or in part, the taxpayer shall immediately notify the Commissioner of Internal Revenue. The Commissioner of Internal Revenue will thereupon redetermine the amount of the tax of such taxpayer for the year or years for which such incorrect credit was granted. The amount of tax, if any, due upon such redetermination shall be paid by the taxpayer upon notice and demand by the Commissioner of Internal Revenue. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited or refunded to the taxpayer in accordance with the provisions of Section 309 of the Code.
SECTION 88. Countries which do or do not satisfy the similar credit requirements. — A country satisfies the similar credit requirement of Section 30(c)(3)(B), as to income tax paid to such country, either by allowing to citizens of the Philippines residing in such country a credit for the amount of income taxes paid to the Philippines. A country does not satisfy the similar credit requirement of Section (30)(c)(3)(B) if it does not allow any credit to citizens of the Philippines residing in such country for the amount of income taxes paid to the Philippines, or if such country does not impose any income taxes. If the country of which a resident alien is a citizen or subject does not allow to a Filipino citizen residing in such country a credit for taxes paid by such citizen to another foreign country, no credit is allowed to such resident alien for taxes paid by him to such foreign country.
SECTION 89. When credit for taxes may be taken. — The credit for taxes provided by Section (30)(c)(3) to (9) may ordinarily be taken either in the return for the year in which the taxes accrued or in which the taxes were paid, dependent upon whether the accounts of the taxpayer are kept and his returns filed upon the accrual basis or upon the cash receipts and disbursements basis. Section 30(c)(6) allows the taxpayer, at his option and irrespective of the method of accounting employed in keeping his books, to take such credit for taxes as may be allowable in the return for the year in which the taxes accrued. An election thus made must be followed in returns for all subsequent years, and no portion of any such taxes will be allowed as a deduction from gross income.
SECTION 90. Domestic corporation owning a majority of the stock of foreign corporation. — In the case of a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable rear, the credit for foreign taxes includes not only the income, war profits and excess-profits taxes paid or accrued during the taxable year to any foreign country by such domestic corporation, but also income, war-profits and excess-profits taxes deemed to have been paid determined by taking the same proportion of any income, war-profits, and excess-profits taxes paid or accrued by such controlled foreign corporation to any foreign country upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of any such dividends received bears to the amount of such accumulated profits. The amount of taxes deemed to have been paid is limited, however, to an amount of the tax against which the credit for foreign taxes is taken, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. If dividends are received from more than one controlled foreign corporation, the limitation is to be computed separately for the dividends received from each controlled foreign corporation. If the credit for foreign taxes includes taxes deemed to have been paid, the taxpayer must furnish the same information with respect to the taxes deemed to have been paid as it is required to furnish with respect to the taxes actually paid or accrued by it. Taxes paid or accrued by a controlled foreign corporation are deemed to have been paid by the domestic corporation for purposes of credit only.
SECTION 91. Non-resident aliens and foreign corporations not allowed credits against the tax. — Non-resident aliens and foreign corporations may not claim credits against the tax from taxes of foreign countries.
SECTION 92. Limitation on credit for foreign taxes. — The amount of credit for foreign taxes shall be subject to the following limitations:
(a) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources within such country taxable under Title II bears to his entire net income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources without the Philippines taxable under Title II bears to his entire net income for the same taxable year.
(Section 30(d) of the Code)
SECTION 93. Losses by individuals. — Losses sustained by individuals during the year not compensated for by insurance or otherwise are fully deductible (except by non-resident aliens) —
(a) If incurred in a taxpayer's trade; or
(b) If incurred in any transaction entered into for profits; or
(c) Of property not connected with the trade or business if arising from fires, storm, shipwreck, or other casualty, or from robbery, theft or embezzlement. No loss shall, however, be allowed as a deduction if at the time of filing of the return, such loss has been claimed as deduction for estate or inheritance tax purposes in the estate or inheritance tax return.
SECTION 94. Losses by corporations. — Domestic corporations may deduct losses actually sustained and charged off within the year and not compensated for by insurance or otherwise.
SECTION 95. Losses by non-resident alien and foreign corporation. — Non-resident aliens and foreign corporations are allowed only losses sustained in business or trade conducted within the Philippines, losses of property within the Philippines arising from fires, storms, shipwreck, or other casualty and from robbery, theft, or embezzlement, and losses actually sustained in transactions entered into for profit in the Philippines, although not connected with their trade or business, not compensated by insurance or otherwise.
SECTION 96. Losses generally. — Losses must usually be evidenced by closed and completed transactions. Proper adjustment must be made in each case for expenditures or items of loss properly chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion. Moreover, the amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvage value, if any, of the property. A loss on the sale of residential property is not deductible unless the property was purchased or constructed by the taxpayer with a view to its subsequent sale for pecuniary profit. No loss is sustained by the transfer of property by gift or death. Losses sustained in illegal transactions are not deductible.
SECTION 97. Voluntary removal of buildings. — Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income. When a taxpayer buys real estate upon which is located a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building.
SECTION 98. Loss of useful value. — When through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use of such business, he may claim as deduction the actual loss sustained. In determinating the amount of the loss, adjustment must be made, however, for improvements, depreciation and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowance are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off in the books and fully explained in returns of income.
SECTION 99. Shrinkage in value of stocks. — A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. The loss allowable in such case is that actually suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis determined in accordance with these regulations may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts.
SECTION 100. Losses of farmers. — Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by deterioration in storage shall be allowed, except as such shrinkage may be reflected in an inventory if used to determine profits. The total loss by storm, flood, or fire of a prospective crop is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm, except as such loss is reflected in an inventory if used. If livestock has been purchased after March 1, 1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the authorities, the actual purchase price of such stock, less any depreciation allowable as a deduction in computing net income, with respect to such perished, livestock, and also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property (with proper adjustment for depreciation), which is destroyed by order of the authorities, may in like manner be claimed as a loss; but if reimbursement is made in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. The cost of any feed, pasturage, or care which has been deducted as an expense of operation shall not be included as part of the cost of the stock for the purpose of ascertaining the amount of a deductible loss. If gross income is ascertained by inventories, no deduction can be made for livestock or products lost during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure.
SECTION 101. Capital losses; losses on wash sales of stock or securities. — Losses on sales or exchanges of capital assets are allowed to the extent provided in section 34 of the Code. If any securities which are capital assets become worthless during the taxable year, the loss resulting therefrom shall be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. Losses on "wash sales" of stock or securities are treated in section 33 of the Code.
(Section 30 (e) of the Code)
SECTION 102. Bad debts. — Where all the surrounding circumstances indicate that a debt is worthless, and the debt is charged off on the books of the taxpayer within the year, the same may be allowed as a deduction in computing net income. There should accompany the return a statement showing the propriety of any deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate, with a reasonable degree of certainty, the uncollectibility of the debt. Any amount subsequently received on account of a bad debt previously charged off and allowed as a deduction for income tax purposes, must he included in gross income for the taxable year in which received. In determining whether a debt is worthless the Commissioner of Internal Revenue will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor.
Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all pro-ability not result in the satisfaction of execution on a judgment, a showing of those facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction. Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy is sometimes possible before and at other times only when a settlement in bankruptcy shall have been had. Where a taxpayer ascertained a debt to be worthless and charged it off in one year, the mere fact that bankruptcy proceedings instituted against the debtor are terminated in a later year, confirming the conclusion that the debt is worthless, will not authorize shifting the deduction to such later year. If a taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair market value when received, which may be less than their face value, the amount deductible for bad debts in any case is limited to such original valuation.
SECTION 103. Examples of bad debts. — Worthless debts arising from unpaid wages, salaries, rents, and similar items of taxable income will not be allowed as a deduction unless the income such items represent has been included in the return of income for the year in which the deduction as a bad debt is sought to be made or in a previous year. Only the difference between the amount received in distribution of the assets of a bankrupt and the amount of the claim may be deducted as a bad debt. The difference between the amount received by a creditor of a decedent in distribution of the assets of the decedent's estate and the amount of his claim may be considered a worthless debt. A purchaser of accounts receivable which can not be collected and are consequently charged off the hooks as bad debt is entitled to deduct them, the amount of deduction to be based upon the price he paid for them and not upon their face value.
Where under foreclosure of a mortgage, the mortgagee buys the mortgaged property and credits the indebtedness with the purchase price, the difference between the purchase price and the indebtedness will not be allowable as a deduction for a bad debt, for the property which was security for the debt stands in the place of the debt. The determination of loss in such case is deferred until the disposal of the property.
SECTION 104. Securities becoming worthless. — If any securities which are capital assets are ascertained to be worthless and charged off within the taxable year, the loss resulting therefrom shall, except in the case of 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, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
(Section 30(f) of the Code)
SECTION 105. Depreciation. — A reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income. For convenience such an allowance will usually be referred to as depreciation, excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. The proper allowance for such depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount so set aside, plus the salvage value, will, at the end of the useful life of the property in business, equal the basis of the property. Due regard must also be given to expenditures for current upkeep.
SECTION 106. Depreciable property. — The necessity for a depreciation allowance arises from the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. The allowances should be confined to property of this nature. In the case of tangible property, it applies to that which is subject to wear and tear, to decay or decline from natural causes, to exhaustion and to obsolescence due to the normal progress of the art, as where machinery or other property must be replaced by a new invention, or due to the inadequacy of the property to the growing needs of the business. It does not apply to inventories or to stock in trade, nor to land apart from the improvements or physical development added to it. It does not apply to bodies of minerals which through the process of removal suffer depletion. Property kept in repair may, nevertheless, be the subject of a depreciation allowance. The deduction of an allowance for depreciation is limited to property used in the taxpayer's trade or business. No such allowance may be made in respect to automobiles or other transportation equipment used solely for the pleasure, a building used by the taxpayer solely as his residence, nor in respect of furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as theatrical business, may be the subject of a depreciation allowance.
SECTION 107. Depreciation of intangible property. — Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents, copyrights, and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue.
SECTION 108. Capital sum recoverable through depreciation allowances. — The capital sum to be replaced by depreciation allowances is the cost or other basis of the property in respect of which the allowance is made. To this amount should be added from time to time the cost of improvements, additions, and betterment and from it should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty, as distinguished from the gradual exhaustion of its utility which is the basis of the depreciation allowance. Where the lessee of real property erects buildings, or makes permanent improvements which become part of the realty and income has been returned by the lessor as a result thereof, as provided in Section 49 of these regulations, the capital sum to be replaced by depreciation allowance is the same as though no such buildings had been erected or such improvements made. No depreciation deduction will be allowed in the case of property which has been amortized to its scrap value and is no longer in use.
SECTION 109. Method of computing depreciation allowance. — The capital sum to be replaced should be charged off over the useful life of the property, either in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of the capital sum over units of production. Whatever plan or method of apportionment is adopted must be reasonable and must have due regard to operating conditions during the taxable period. While the burden of proof must rest upon the taxpayer to sustain the deductions taken by him, such deductions must not be disallowed unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim for depreciation shall be determined upon the conditions known to exist at the end of the period for which the return is made. If it develops that the useful life of the property will be longer or shorter than the useful life as originally estimated under all the then known facts, the portion of the cost or other basis of the property not already provided for through depreciation allowances should be spread over the remaining useful life of the property as reestimated in the light of the subsequent facts, and depreciation deductions taken accordingly.
SECTION 110. Obsolescence. — With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made. No deductions for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and can not be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due.
SECTION 111. Depreciation of patent or copyright. — In computing depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experimental models, attorney's fees, development or experimental expenses, etc., actually paid. Deprecation of a patent can be taken on the basis of the fair market value as of March 1, 1913, only when affirmative and satisfactory evidence of such value is offered. Such evidence should whenever practicable be submitted with the return. If the patent becomes obsolete prior to its expiration, such proportion of the amount on which its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the basic date when it legally expires may be deducted, if permission to do so is specifically secured from the Commissioner of Internal Revenue. Owing to the difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted only if affirmative and satisfactory evidence that the patent became obsolete in the year for which the return is made is submitted to the Commissioner of Internal Revenue. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would otherwise be allowable.
SECTION 112. Depreciation of drawings and models. — Where a taxpayer has incurred expenditures in his business for designs, drawings, patterns, models, or work of an experimental nature calculated to result in improvement of his facilities or his product, if the period of usefulness of any such asset may be estimated from experience with reasonable accuracy, it may be the subject of depreciation allowances spread over such estimated period of usefulness. The facts must be fully shown in the return or prior thereto to the satisfaction of the Commissioner of Internal Revenue. Except for such depreciation allowances no deduction shall be made by the taxpayer against any sum so set up as an asset except on the sale or other disposition of such asset at a loss or on proof of a total loss thereof.
SECTION 113. Charging off depreciation. — A depreciation allowance, in order to constitute an allowable deduction from gross income, must be charged off. The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allowance for depreciation must be either deducted directly from the book value of the assets or preferably credited to a depreciation reserve account, which must be reflected in the annual balance sheet. The allowances should be computed and charged off with express reference to specific items, units, or groups of property, each item or unit being considered separately or specifically included in a group with others to which the same factors apply. The taxpayer should keep such records to each item or unit of depreciable property as will permit the ready verification of the factors used in computing the allowance for each year for each item, unit, or group.
SECTION 114. Depreciation in the case of farmers. — A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery, and other physical property. A reasonable allowance for depreciation may also be claimed on live stock acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with these regulations. Such depreciation should be based on the cost or other basis and the estimated life of the live stock. If such live stock be included in an inventory no depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the inventory.
SECTION 115. Statement to be attached to return. — To each return in which depreciation charges are claimed, there should be attached a statement showing the item, unit, or group of depreciable property, the cost price or its market value as of March 1, 1913, if acquired prior to that date, the rate of charge, amount previously deducted, and the amount claimed in the return. These data must agree with those appearing in the books of the taxpayer.
(Section 30(g) of the Code)
SECTION 115-A-1. General Circular V-332, January 6, 1961 — Who is entitled to deduct depletion. — In order to be entitled to percentage depletion allowance, the taxpayer must have an economic interest in the property. To acquire an economic interest, the taxpayer must have a capital investment in the property and not a mere economic advantage. The taxpayer must have acquired at least, by investment, any interest in oil or gas or mineral in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, gas or mineral, to which he must look for a return of his capital. Thus the parties entitled to share in oil or mineral extracted, or the gross proceeds therefrom (including the parties to a lease providing for royalty payments of stated amounts per unit mined) have economic interests in the oil or minerals in place. That is, they, as owners of the rights in oil or other mineral in place, share the income from production, and the depletion allowances thereon are regarded as designed to permit tax-free recovery of at least their capital investments in such property rights.
SECTION 115-A-2. Basis for depletion. — On oil or gas wells the percentage depletion allowance is fixed at 27 1/2% of gross income while on mines, the percentage depletion allowance varies in accordance with the class of minerals. The gross income basis is the amount remaining after deducting therefrom rents or royalties paid or incurred by the taxpayer in respect to the property. In both cases, the total percentage depletion allowance shall in no case exceed 50% of the net income or profit.
Subject: Oil and gas wells (1) (2)
Gross income after deducting rents and royalties P100.00 P100.00
27 1/2% thereof 27.50 27.50
Net income or net profit 50.00 70.00
50°/ of net income or net profit 25.00 35.00
Allowance depletion 25.00 27.50
Under column (1) P25.00 is the allowance depletion because the allowable percentage cannot exceed 50% of the net profit or net income. Under column (2), the allowable depletion is P27.50 because it does not exceed 50% of either the net income or net profit.
SECTION 115-A-3. Definition of terms. — For purposes of the depletion allowance for oil and gas wells and mines, the following terms and phrases shall have the meaning indicated:
(a) Gross income. — Gross income means the "gross income from the property". The gross income in the case of gas and oil wells is the amount for which the taxpayer sells the oil and gas in the immediate vicinity of the well. If the oil and gas are not sold on the property but are manufactured or converted into a refined product prior to sale, the gross income from the property shall be assumed to be equivalent to the representative market or field price (as of the date of sale) of the oil and gas before conversion or transportation.
"Gross income from the property" means, in the case of mines, the gross income from mining. The gross income from mining consists of the proceeds from the sales of ores or minerals extracted from the mining property. Where ores are sent abroad where the ordinary treatment processes are applied or where they are refined and where they are sold, the actual cost of ocean freight as well as insurance, should be deducted from the actual selling price for gross income purposes. Also where minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance should be deducted.
(b) Mining. — The term "mining" includes not merely the extraction of the ores or minerals from the ground but also the ordinary treatment process normally applied by mine owners or operators in order to obtain the commercially marketable mineral product or products, and so much of the transportation of ores or minerals (whether or not by common carrier) from the point of extraction from the ground to the plants or mills in which the ordinary treatment processes are applied thereto as is not in excess of 50 miles unless the Commissioner of Internal Revenue finds that the physical and other requirements are such that the ore or mineral must be transported a greater distance to such plants or mills.
(c) Extraction of the ores or minerals from the ground. — The term "extraction of the ores or minerals from the ground" includes the extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Thus income derived from the working over of tailings, piles or culm banks is included in determining "gross income from the property". The length of time between the prior mining and extraction of ores or minerals from the waste or residue of such mining is immaterial. Whether the waste or residue results from the application of ordinary treatment processes or from the process of removal from the ground, income derived therefrom is within the term "gross income from the property". To be included in "gross income from the property", income derived from the extraction of ores or minerals from the waste or residue of prior mining must come from such extraction by the mine owner or operator himself.
(d) Ordinary treatment processes. — The term "ordinary treatment processes" includes the following:
(1) In the case of coal-cleaning, breaking, sizing, dust-allaying, treating to prevent freezing, and loading for shipment;
(2) In the case of sulfur recovered by the Frasch process — pumping to vats, cooling, breaking, and loading for shipment;
(3) In the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and minerals which are customarily sold in the form of a crude mineral product — sorting, concentrating; and sintering to bring to shipping grade and form, and loading for shipment;
(4) In the case of lead, zinc, copper, gold, silver, or fluorspar ores, potash, and ores which are not customarily sold in the form of the crude mineral product-crushing, grinding, and beneficiation by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic) cyanidation, leaching, crystallization, precipitation (but not including as an ordinary treatment process electrolytic deposition, roasting, thermal or electric smelting, or refining), or by substantially equivalent processes, or extraction of the product or products from the ore, including the furnacing of quicksilver ores; and
(5) The pulverization of talc, the burning of magnesite, and the sintering and modulizing of phosphate rock.
(e) Net income or net profit. — "Net income" or "net profit" means the taxpayer's taxable income from the property. Net income or net profit (computed without allowance for depletion) means the "gross income from the property" less the allowable deductions attributable to the mineral property upon which the depletion is claimed and the allowable deductions attributable to the treatment processes insofar as they relate to the product of such property, including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc. Deductions not directly attributable to particular properties or processes shall be fairly allocated.
(f) Property. — For the purpose of computing the depletion allowance in the case of mines and wells, the term "property" means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.
If a taxpayer owns two or more separate operating mineral interests which constitute part or all of an operating unit, he may elect to form (a) one aggregation of, and to treat as one property, any two or more of such interests and (b) to treat as a separate property each such interest which he does not elect to include within the aggregation referred to in (a). Separate operating mineral interests which constitute part or all of an operating unit may be aggregated whether or not they are included in contiguous tracts or parcels. A taxpayer may not elect to form more than one aggregation of operating mineral interests within any one operating unit. Such election may be made by the taxpayer by the giving of notice of such election to the Commissioner of Internal Revenue not later than the time prescribed for filing of the return and any such election so made shall be binding upon the taxpayer for all subsequent taxable years, except that the Commissioner of Internal Revenue may consent to a different treatment of the interest with respect to which the election has been made.
SECTION 115-A-4. Depletion deductible by non-resident aliens or foreign corporations. — A non-resident alien individual or a foreign corporation is entitled to an allowance for depletion of oil and gas wells or mines located in the Philippines. (Gen. Cir. V-332 implements Sec. 30(g), Tax Code, as amended by R.A. 2698)
(Section 30(h) of the Code)
SECTION 116. When contributions or gifts may be deducted. — Contributions or gifts within the taxable year are deductible to an aggregate amount not in excess of 6 per centum, in the case of an individual, and 3 per centum, in the case of a corporation, of the taxpayer's taxable net income, if actually paid or made to or for the use of the Government of the Philippines or any political subdivision thereof for exclusively public purposes or to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or to societies for the prevention of cruelty to children or animals, provided that no part of the net income of which inures to the benefit of any private stockholders or individual.
In connection with claims for deductions, there shall be stated on returns of income the name and address of each organization to which a gift was made and the approximate date and the amount of the gift in each case. Where the gift is other than money, the basis for calculation of the amount thereof shall be the fair market value of the property at the time of the gift. Contributions or gifts paid or made to corporations or associations specified in the law will only be allowed as deduction when the taxpayer attaches to his return the receipt duly signed by the responsible officer of the corporations or associations to which the contributions or gifts has been paid or made. If desired, said receipt will be returned to the taxpayer after they have served their purpose.
(Section 30(i) of the Code)
SECTION 117. Allowance of deductions and credits. — Unless a non-resident alien individual shall file or cause to be filed with the Commissioner of Internal Revenue, a true and accurate return of income from all sources, corporate, or otherwise, within the Philippines, regardless of amount, the tax shall be collected on the basis of the gross income (not the net income) from sources within the Philippines. In case of failure to file such return, the Commissioner of Internal Revenue will cause a return of income to be made and include therein the income of such non-resident alien from all source concerning which he has information, and he will assess the tax and collect it from one or more of the sources of income of such non-resident alien within the Philippines, without allowance for deductions or credit. (Cf. effect of Sec. 22(b) as amended by R.A. 2343.)
(Section 30(j) of the Code)
SECTION 118. Payments to employees' pension trusts. — An employer who adopts or has adopted a reasonable pension plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to his employees shall be allowed to deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan (including any reasonable amendment thereof), as follows:
(a) If the plan contemplates the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pensions payments, then (1) reasonable amounts paid to the trust during the taxable year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years.
(b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pension payments, then (1) reasonable amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as deduction for such year as an ordinary and necessary business expense, and in addition (2) one tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years.
(Section 30(k) of the Code)
SECTION 118-A. Optional standard deduction. — In lieu of the deductions allowed under this section an individual, other than a non-resident alien, may elect a standard deduction. Such optional standard deduction shall be in the amount of one thousand pesos or in an amount equal to ten per centum of his gross income, whichever is the lesser. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction he shall be considered as having availed himself of the deductions allowed in the preceding subsection. The Secretary of Finance shall prescribe the manner of the election. Such election when made in the return shall be irrevocable for the taxable year for which the return is made.
(Section 31 of the Code)
SECTION 119. Personal, living, and family expenses. — Personal, living, and family expenses are not deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for residential purposes, but incidentally receives his clients, patients, or callers in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his minor children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his return of income. Alimony, and an allowance paid under a separation agreement are not deductible from gross income.
SECTION 120. Capital expenditures. — No deduction from gross income may be made for any amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of the taxpayer's property, or for any amount expended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made. Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount expended for architect's services is part of the cost of the building. Commissions paid in purchasing securities are a part of the cost of such securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney's fees, and executor's commissions, are chargeable against the "corpus" of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in return of income.
In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.
SECTION 121. Premiums on life insurance of employees. — Any amounts paid for premiums on any life insurance policy covering the life of an officer or employee or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy are not deductible.
SECTION 122. Losses from sales or exchanges of property. — No deduction is allowed in respect of losses from sales or exchanges of property, directly or indirectly —
(a) Between members of a family. As used in Section 31, the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;
(b) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;
(d) Between a grantor and a fiduciary of any trust;
(e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or
(f) Between a fiduciary of a trust and a beneficiary of such trust.
(Section 32 of the Code)
SECTION 123. Gross income of insurance companies. — In general, the gross income of insurance companies consists of their total revenue from the operation of the business and of their income from all other sources within the taxable year, except as otherwise provided by the statute. Gross income includes net premiums (that is, gross premium less returned premiums on policies not taken), investment income, profits from the sale of assets, and all gains, profits, and income reported to the Insurance Commissioner, except income specifically exempt from tax. A net decrease in reserve funds required by law within the taxable year must be included in the gross income to the extent that such funds are released to the general uses of the company and increase its free assets. Any net decrease in reserves shall be added to the gross income, unless the company shall show that such decrease resulted from the application of reserves to the purposes for which they were established.
SECTION 124. Gross income of life insurance companies. — A life insurance company shall not include in gross income such portion of any actual premiums received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. (a) "Paid back" means paid in cash. (b) "Credited to" means held to the credit of, including dividends applied to pay renewal premiums, to purchase additional paid-up insurance or annuities, or to shorten the endowment or premium-paying period. It does not include dividends provisionally ascertained and apportioned upon deferred dividends policies. Dividends provisionally ascertained, apportioned, or credited on deferred dividends policies can not be excluded or deducted from gross income for the reason that the assured has no vested or enforceable right in them and can not at the time of the ascertainment, apportionment, or credit, not until the maturity of the policy, avail himself of such dividends; and in the event of the death of the assured prior to the expiration of the deferred dividend period, the amount so ascertained, apportioned, or credited lapses. (c) "Treated as an abatement of premium" means of the premium for the taxable year. Where the dividend paid back is in excess of the premium received from the policyholder within the taxable year there may be excluded from gross income only the amount of such premium received, and where no premium is received from the policyholder within the taxable year the company is not entitled to exclude from its premiums received from other policyholders an amount in respect to such dividend payment. (See changes in Sec. 24(b), Tax Code.)
SECTION 125. Gross income of mutual insurance companies. — The gross income of mutual insurance companies (other than life) consists of their total revenue from the operation of the business and of their income from all other sources within the taxable year, except as otherwise provided by the statute. Premiums received by mutual marine insurance companies which are paid out for reinsurance should be eliminated from gross income and the payments for reinsurance, from disbursement. Deposit premiums on perpetual risks received and returned by mutual fire insurance companies should be treated in the same manner, as no reserve will be recognized covering liability for such deposits. The earnings on such deposits, including such portion, if any, of the premium deposits as are not returned to the policyholders upon cancellation of the policies, must be included in the gross income.
SECTION 126. Deductions allowed insurance companies. — Insurance companies are entitled to the same deductions from gross income as other corporations, and also to the deduction of the net addition required by law to be made within the taxable year to reserve funds and of the sums other than dividends paid with the taxable year on policy and annuity contracts. "Paid" includes "accrued" or "incurred" (construed according to the method of accounting upon the basis of which the net income is computed) during the taxable year, but does not include any estimate for losses incurred but not reported during the taxable year. As payments on policies there should be reported all death, disability and other policy claims (other than dividends as above specified) paid within the year, including fire, accident and liability losses, matured endowments, annuities, payments on installment policies and surrender values actually paid.
SECTION 127. Special deductions allowed mutual insurance companies. — Mutual insurance companies (other than mutual life and mutual marine insurance companies), which require their members to make premium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policyholders or retained for the payment of losses, expenses, and reinsurance reserves. In determining the amount of premium deposits retained by a mutual fire or mutual casualty insurance company for the payment of losses, expenses, and reinsurance reserves, it will be presumed that losses and expenses have been paid out of earnings and profits other than premiums to the extent of such earnings and profits. If, however, any portion of such amount is applied during. the taxable year to the payment of losses, expenses, or reinsurance reserves, or which a separate allowance is taken, then such portion is not deductible; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses, or reinsurance reserves, then such payment can not be separately deducted. The amount of premium deposits retained for the payment of expenses and losses and the amount of such expenses and losses, may not both be deducted. A company which invests part of the premium deposits so retained by it in interest-bearing securities may, nevertheless, deduct such part, but not the interest received on such securities. A mutual fire insurance company which has a guaranty capital is taxed like other mutual fire insurance companies. A stock fire insurance company operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual fire insurance company with respect to its business conducted on the mutual plan.
SECTION 128. Special deductions allowed mutual marine insurance companies. — Mutual marine insurance companies should include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. They may deduct from gross income amounts repaid to policyholders on account of premiums previously paid by them together with the interest actually paid upon such amounts between the date of ascertainment and the date of payment thereof. The remainder of the premiums accordingly forms part of the net income of the company, except to the extent that it is subject to then deductions allowed such insurance companies and other corporations.
SECTION 129. Net addition to reserve funds. — All policy premiums on which net addition to reserve is computed, must be included in gross income. Insurance companies may deduct from gross income the net addition required by law to be made within the taxable year to reserve funds. When the reserve at the end of the year is less than at the beginning of the year there is a "released reserve", and the amount so released must be included in gross income. In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sums with the officers of the Government of the Philippines, pursuant to law, as addition to guaranty or reserve funds shall be treated as being payments required by law to reserve funds. In the case of life insurance companies, the net addition to the "reinsurance reserve" and the "reserve for supplementary contracts", and in the case of fire, marine, accident, liability, and other insurance companies, the net addition to the "unearned premium reserves", and only such other reserves as are specifically required by the statute will be allowed as deductions.