Capital Gains and Losses

Sec 39
It is important to know whether the asset sold or exchanged was held as ordinary asset or
capital asset because of the different rules which apply to each.
Capital assets are property held by the taxpayer (whether or not connected with his trade or
business) but does NOT include:
1. Stock in trade of the taxpayer,
2. Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the year
3. Property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business
4. Property used in trade or business of a character which is subject to allowance for
depreciation,
5. Real property used in trade or business.
Property initially classified as capital asset may later become an ordinary asset and vice
versa. (Calasanz v CIR)
Shares of stock would be ordinary assets only to a dealer in securities or a person engaged in
the purchase and sale of, or an active trader in, securities. (China Bank v CA)
Rules on capital gains and losses
1. These rules do not apply to
a. Real property with a capital gain tax, and
b. Shares of stock of a domestic corporation with a capital gain tax
2. The transaction on the capital asset should be a sale or exchange
3. In the case of a taxpayer other than a corporation (for corporations its always 100%), the
following percentages of the gain or loss shall be taken into account in computing net
capital gain, net capital loss and net income:
a. 100% of the gain/loss, if the asset has been held for not more than 12 months
b. 50% of the gain/loss, if the asset has been held for more than 12 months.
4. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the
gains from such sales or exchanges
5. net capital loss carry over - a net capital loss sustained in any taxable year by an
individual other than a corporation, such loss, in an amount not in excess of the net
income (taxable income) of such year, shall be treated in the succeeding year as a loss
from a sale or exchange of a capital asset held for not more than twelve months
Ordinary Income - Ordinary income is any gain from sale or exchange of property which is not a
capital asset. Ordinary loss is the opposite.
Net capital gain - is the excess of the gains from such sales or exchanges of capital assets over
the losses from such sales or exchanges. Net capital loss is the opposite
Determination of Gain or Loss from Sale or Transfer of Property
Sec 40
Gain is the excess amount realized over the basis for determining gain
Loss is the opposite

The amount realized is the sum of money received plus the fair market value of the
property, other than money, received

The basis of determining gain or loss

Mode of acquisition
1. Acquired by purchase
2. By inheritance
3. By gift

4. Acquired for less than an adequate

consideration in money or its worth

Cost basis
The actual cost
Fair market value
The same as if it would be in the hands of the
donor or the last preceding owner,
Provided, if the basis is greater than the fair
market value, then the basis shall be the fair
market value
Amount paid by the transferee for the property

Exchange of property, and tax-free exchange.

General rule: in a sale or exchange of property, the entire amount of gain or loss is
recognized
o EXCEPT (no gain or loss is realized):
i. In a merger/consolidation, where a corporation exchanges property solely for
stock in another corporation, which is also a party to the merger/consolidation
ii. In a merger/consolidation, where a shareholder exchanges stock in a
corporation for the stock of another corporation , also a party to the
merger/consolidation
iii. In a merger/consolidation, where a security holder of a corporation exchanges
his securities in such corporation solely for stock or securities in another
corporation also a party to the merger/consolidation
iv. Where property is transferred to a corporation by a person in exchange for
stock in the corporation, and the result of such exchange is that the person
(and up to 4 other persons) gains control of the corporation, but the stocks
issued for services are not considered as issued in return for property.
Rule of momentary control
If two tax-free exchanges are done in the same taxable year, they are not considered tax-free

Securities - bonds and debentures, but not notes of whatever class or duration.
Merger or consolidation means
o The ordinary merger or consolidation
o The acquisition by one corporation of all or almost all the properties of another
corporation solely for stock
Corporate merger where the new corporation continued to operate the business of the old
corporation is not subject to capital gains tax. The merger, however, must be undertaken for a
bona fide business purpose and not solely for the purpose of escaping the burden of taxation.

Transfer of substantially all the assets means a transfer of at least 80% of the assets,
including cash, with some degree of permanence.
Transfer of property for shares of stock: no gain or loss is recognized when a person transfers
property, not services to a corporation in exchange for shares of stock alone or with 4 others,
where such person gains control of the corporation at least 51% of the total voting power
The transfer of assets by one corporation to another must have a business purpose.
Administrative requirements in case of tax-free exchanges.
o You have to submit the following to the BIR:
i. Sworn certificate on the basis of property to be transferred
ii. Certified true copies of the TCT
iii. Certified true copies of the corresponding tax declaration of the real properties
to be transferred
iv. Certified true copies of the certificates of stock evidencing shares of stock to
be transferred
v. Certified true copies of the inventory of the property to be transferred (RR 1801)
Elements of a de factor merger (valid merger)
1. Transfer of all or substantially all of the properties of the transferor corporation solely for
stock
Undertaken for a bona fide business purpose

Assumption of liability in tax-free exchanges:

If the transferor receives stock or securities in a transfer of property, and as part of the
consideration, the other party also assumes the liability of the transferor or that the property
he assumes has a liability, then the property/liability acquired will NOT be treated as money
or other property, so that it still falls under the exception of the Sec 40 (C) and no gain or loss
is recognized.
But if the amount of the liability assumed exceeds the total of the adjusted basis of the
property transferred, then the excess is considered a gain from sale of either a capital asset or
an ordinary asset, as the case may be.
Cost or basis in tax-free exchanges

When the transferor later on sells or exchanges the stock he got tax-free, the basis for
determining the gain or loss is the substituted basis. This will also be the cost basis when the
transferee later on sells the property acquired.
How to compute the substituted basis:
o Take the original basis of the property
o Subtract any money or the fair market value of any property that may have been
received aside from the shares of stock
o Add the amount treated as dividend by the shareholder & any gain that was
recognized on the exchange (if any)

Losses from Wash Sales of Stocks or Securities

Losses are not allowed to be claimed in sales of stock or securities

1. Within a period of 30 days before the sale, and 30 days after the sale (61 days total)
2. When the taxpayer acquires or enters into an option to purchase
3. If substantially the same/identical stocks or securities
Losses are allowed in cases where the taxpayer is a stockbroker and the sale/purchase was
made in the regular course of business.

Situs of Taxation
Sec 42
.
The following are treated as gross income from sources within the Philippines:
1. Interests including interests on bonds, notes and other interest bearing obligations:
a. The loan was used here in the Philippines, or
b. The debtor is in the Philippines
2. Dividends from a domestic corporation and a foreign corporation, unless less than 50%
of the gross income of the foreign corporation was derived from the Philippines
3. Services compensation for labor or personal services performed in the Philippines
4. Rentals & Royalties from property located in the Philippines or from any interest in
such property for:
a. the use of any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other similar stuff
b. the use of any industrial, commercial or scientific equipment
c. the supply of scientific, technical, industrial or commercial knowledge or info
d. the supply of services by a non-resident person in connection with thuse of
property or rights, or the installation or operation of any brand, machinery, or
other apparatus purchased from such non-resident person
e. technical advice, assistance or services rendered in connection with technical
management of any scientific, industrial or commercial undertaking
f. the use of motion picture films, films for tv, tapes for radio broadcast
5. Sale of real property the gains, profits & income from sale of real property located in
the Philippines
6. Sale of personal property gains, profits and income from sale of personal property,
determined by subsection (E)
The place of the singing of a contract is not an issue or a factor for determining the source of
income

Expenses of a multination corporation directly related to the production of Philippinederived income can be deducted from gross income in the Philippines without need of
apportionment, but overhead expenses of its parent company belong to a different category.

These are items which cant be definitely allocated or identified with the operations of the
Philippine branch.
Reinsurance premiums ceded to foreign reinsurers are considered income from Philippine
sources.

Gross income from sources outside the Philippines

1.
2.
3.
4.

Interests other than those derived from sources within

Dividends other than those derived from sources within
Compensation for labor or personal services performed outside the Phil
Rentals or royalties from property located outside the Philippines or any interest in such
property
5. Gains, profits, income from sale of real property located outside the Philippines
Income from sources partly within and partly without the Philippines

For the gross income items allocated to sources partly within and partly without the
Philippines,
o there shall be deducted the expenses, losses and other deductions properly
apportioned, and
o A ratable part of other expenses, losses & deductions which cannot properly be
allocated to some item of gross income.
If there is any remainder, it shall be included in full as taxable income from sources within
the Philippines

Situs of sale of personal property

Gains, profits and income derived from purchase of personal property within and sold
without, or from purchase without and sale within, are treated as derived entirely from
sources with the country in which it is sold.
Situs of sale of stocks in a domestic corporation
Gains from sale of shares of stock in a domestic corporation are treated as derived entirely
from sources within the Philippines regardless of where the said shares are sold.
Accounting Periods and Methods
Sec 43

Taxable income is computed on the basis of the taxpayers annual accounting period in
accordance with the method of accounting regularly employed in keeping his books.
If there is no method employed or he doesnt keep books, the taxable income shall be
computed on the basis of the calendar year.
If the taxpayer is an individual, it shall be the calendar year.
Although the taxpayer is allowed to do his own accounting method, some guidelines should
be followed:

o When the production, purchase or sale of merchandise of any kind is an income

producing factor, inventories should be taken at the beginning and at the end of the
year
o Expenses should be properly classified between capital and income. Capital expenses
are those which have a long useful life extending substantially beyond the year
o When the cost of capital assets is being recovered thru deductions for wear & tear,
etc, any expenses made to restore the property or prolong its useful life should be
added to the property account, and not to current expenses
Accrual basis is the default - report income when earned and report expense when incurred,
when its legally due, demandable and enforceable.
Sec 44
Period in which Items of Gross Income Included

The items of gross income are included in the taxable year that they are received by the
taxpayer, unless they are properly accounted for as of a different period.

Sec 45
Period for which Deductions and Credits Taken

The deduction shall be taken for the taxable year in which it is incurred.

Sec 46
Change of Accounting Period.

If the taxpayer, other than an individual, changes his accounting period, the net income will
be computed on the basis of his new accounting period

Sec 47
. Final or Adjustment Returns for a Period of Less than Twelve (12) Months
If the taxpayer changes his accounting period, a separate return must be made for the gap
caused by the change. Income will be apportioned properly.
Short-term periods are also needed in instances of death and dissolution of a corporation.
Sec 48
Accounting for Long-Term Contracts

Long term means building, installation or construction contracts covering a period in excess
of 1 year.
Persons reporting long-term contracts must report it on basis of percentage of completion.
SEC. 49.
Installment Basis

Sales of dealers in personal property

o A person who regularly sells personal property on the installment plan may return as
income in any taxable year that proportion of the installment payment which the gross
profit realized bears to the total contract price

Sale of real property and casual sales of personal property

o If the price exceeds P1000 or where the initial payment does not exceed 25% of the
selling price, the same basis as above may be followed
Sales of real property considered as capital asset by individuals
o An individual who sells real property considered as capital asset may pay the capital
gains tax in installments under the rules of the BIR
Changes from Accrual to installment basis
o When a taxpayer decides to report his taxable income on the installment basis, the
amounts actually received in prior years are not excluded
If postdated checks were given to pay a sale on installments, and then the postdated checks
were discounted. (Banas v CA,)

SEC. 50.
Allocation of Income and Deductions

When two or more organizations, trades or businesses are owned or controlled directly or
indirectly by the same interests, the CIR can distribute, apportion or allocate gross income or
deductions between or among such orgs, trades or businesses, in order to prevent tax evasion.

Returns and Payment of Taxes

Individual Return
Sec 51
Who are required to file?
1. Resident citizen, on income within and without the Philippines
2. Non-resident citizen, on income within only
3. Resident alien, on income within only
4. Non-resident alien engaged in business here, on income within only
Who are not required to file?
1. Those whose gross income does not exceed his total personal and additional exemptions
o But those engaged in business or practices a profession must file, regardless of the
amount of gross income
2. Those who earn pure compensation income and the income tax on which has already
been correctly withheld substituted filing, done by employer, provided that an individual
deriving compensation concurrently from 2 or more employers at any time during the
table year shall file an income tax return
3. The following are not required to file, regardless of income amount final withholding
taxed already
a. Those whose income consists solely of royalties, interests, prizes, winnings,
dividends, etc and the share in a partnership or association, joint venture, or
consortium taxable as a corporation
b. Aliens employed by Regional Operating Head Quarters with respect to their
compensation income
c. Aliens employed by foreign service contractors and subcontractors engaged in
petroleum exploration, with respect to their compensation income

4. Minimum wage earners

5. Those exempted by the Tax code and other special laws
Where to file?
1. Authorized agent bank
2. Revenue district officer
3. Collection agent
4. Duly authorized city treasurer where he is legally residing
5. Office of the commissioner

File On or before April 15 of each year

Those married individuals who do not derive income purely from compensation shall file a
return to include income from both spouses. But if impractical, then they may file separate
returns.

Parents must include the income of unmarried minors derived from property received from a
living parent.
o EXCEPT
i. When the donors tax has already been paid on such property
ii. When the transfer of such property is exempt from donors tax

Sec 56
When to pay this applies to both individuals and corporations

It is pay-as-you-file and pay-where-you-file

A person may pay in installments if the tax due exceeds P2,000.

Sec 74
Annual Declaration of income tax

Individuals who receive self-employment income must make and file a declaration of his
estimated income for the current year on or before April 15
Self-employemnet income consists of earnings from the practice of a profession or conduct
of trade or business carried on as the sole proprietor or a partnership of which he is a member
Quarterly payment of income tax, in 4 installments
i. at time of declaration
ii. August 15
iii. November 15
iv. On or before April 15
Sec 52
Corporate Returns

All corporations, except foreign corporation not engaged in trade or business in Philippines
are required to file:
o Quarterly income tax return, on a cumulative basis for the preceding quarters

o A final or adjustment return, on or before April 15

A corporation may use either calendar year or fiscal year basis for filing

Quarterly income tax return

SEC. 75.
Declaration of Quarterly Corporate Income Tax

A corporation must file tax return for preceding quarter within 60 days following the close of
each quarter

SEC. 76.
Final Adjustment Return
A corporation will file the final return at the end of either fiscal or calendar year
If the sum of the quarterly returns is not equal to the total tax due, the corporation shall either
o Pay the balance;
o Carry over the excess credit perpetually, or
o Be credited or refunded with the excess amount.
i. But the corporation can choose only 1 option and it is irrevocable, even if you
didnt get the benefit of the overpayment.
The carry-over of the excess can be used perpetually. (Systra v CIR)
Subsequent acts can show the exercise of the carry-over (Philam v CIR)
SEC. 77.
Place and Time of Filing and Payment of Quarterly Corporate Income Tax
Where to file: same as individuals
When to file:
o For quarterly declarations: within 60 days following the close of the quarter
o For final: on or before April 15, or the 15th day of the 4th month following the close of
the fiscal year
When to pay: same as individuals
Filing of return covering capital gains from shares of stock

For sale of exchange of stock not traded thru local stock exchanges, within 30 days after each
transaction and a final consolidated return of all transactions during the year

Return of corporations contemplating dissolution/reorganization

After the corporation adopts a plan or resolution for its dissolution, it must submit to the BIR,
within 30 days, a return specifying the terms of the resolution and other information. It must
secure a tax clearance certificate from the BIR which it will submit to the SEC before its
dissolution.
They have to submit to the BIR:
o A copy of the resolution
o Balance sheet at the date of dissolution and the income statement covering the
beginning of the year to the date of dissolution
o Names and addresses of the shareholders and their holdings
o Value and a description of the assets received in liquidation by each shareholder
The approval of the SEC of liquidation is the starting point.

Return of General Professional Partnerships

General professional partnerships and joint ventures for construction, and other exempt
corporations are requred to file their tax return, which should specify:
o The items of gross income,
o The deductions allowed, and
o The names, TIN, addresses and shares of each partner