Income

DEFINITION
All wealth that flows into the taxpayer other than as a mere return of capital. It
includes the forms of income specifically described as gains and profits, including
gains derived from the sale or other disposition of capital assets. (Revenue
Regulation No. 2-40, Section 36)
Income means cash received or its equivalent.
It is the amount of money coming to a person within a specific time.
It means something distinct from principal or capital; for while capital is a fund,
income is a flow. As used in our income tax law, income refers to the flow of
wealth. (Commissioner of Internal Revenue v. Japan Air Lines Inc. GR 60714,
October 4, 1991)
 Fisher v. Trinidad
G.R. No. L-17518 October 30, 1922
DOCTRINE: Income Tax is a tax on all yearly profits
arising from property, professions, trades or offices.
FACTS: The BIR has assessed the petitioner a
deficiency income tax on the stock dividends received
as a stockholder from a domestic corporation. The
BIR contends that the dividend is an income for tax
purposes under Act. No 2833 (the then Internal
Revenue Law), further contending that the statutes of
the US are different from the statutes in the
Philippines. Petitioner paid under protest.
ISSUE: Whether or not stock dividends are income
and subject to income taxes.
HELD: No, stock dividends are not income and are not
subject to income taxes. Income is generally defined
as the money, cash or its equivalent, earned by a
person within a specified time as interest, payment
for service or return from investment.
There must be something received irrevocably or
realized with the intention of departing something of
value.
The Court has emphasized the differences between
cash dividend and stock dividend. While cash
dividends are distribution of accumulated earnings of
a corporation of which an interest is parted towards
the stockholder, the stock dividends pertain to the
proportionate increase in the share of the
stockholder in the capital of the corporation. Stock
dividends mean that, instead of the distribution of
the accumulated earnings, such are capitalized and
postponed distribution to the stockholders.
Hence, stock dividends received by a stockholder
does not fall under the definition of income for
nothing is received, realized or imparted to the
stockholder as a form of distribution of earnings.
 Madrigal v. Rafferty
G.R. No. 12287 August 7, 1918
DOCTRINE: Income means profit or gains.
FACTS: Prior to 1914, Vicente Madrigal and Susana
Paterno (plaintiffs-appellants) married under
property relations of conjugal partnership.
For the year 1914, Madrigal declared as his total net
income, the sum of P296,302.73. Subsequently,
Madrigal submitted that this amount does not
represent his income, but was in fact the income of
the conjugal partnership. He posits therefore that the
additional income tax should be computed and
assessed based on the equal division of conjugal
property with one-half as the income of Vicente
Madrigal and the other half of Susana Paterno. The
revenue officers (defendants-appellees) questioned
this, ultimately gaining a decision adverse to
Madrigral.
Madrigal paid under protest, but filed with CFI Manila
for recovery of P3,786.08, the sum collected which
Madrigal alleges is the excess based on the improper
calculation.
ISSUE: Whether or not the additional income tax
should be divided into two equal parts.
HELD: No. Income as contrasted with capital or
property is to be the test. The essential difference
between capital and income is that capital is a fund;
income is a flow. A fund of property existing at an
instant of time is called capital. A flow of services
rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of
time is called an income. Capital is wealth, while
income is the service of wealth.
 Madrigal v. Rafferty
G.R. No. 12287 August 7, 1918
The Supreme Court of Georgia expresses the thought
in the following figurative language: "The fact is that
property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit." A
tax on income is not a tax on property. "Income," as
here used, can be defined as "profits or gains."
This court in speaking of the conjugal partnership,
decided that "prior to the liquidation the interest of
the wife and in case of her death, of her heirs, is an
interest inchoate, a mere expectancy, which
constitutes neither a legal nor an equitable estate,
and does not ripen into title until there appears that
there are assets in the community as a result of the
liquidation and settlement."
Susana Paterno, wife of Vicente Madrigal, has an
inchoate right in the property of her husband Vicente
Madrigal during the life of the conjugal partnership.
She has an interest in the ultimate property rights
and in the ultimate ownership of property acquired
as income after such income has become capital.
Susana Paterno has no absolute right to one-half the
income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno
cannot make a separate return in order to receive the
benefit of the exemption which would arise by reason
of the additional tax.
As she has no estate and income, actually and legally
vested in her and entirely distinct from her husband’s
property, the income cannot properly be considered
the separate income of the wife for the purposes of
the additional tax.
Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled
to the exemption specifically granted by the law.
 Madrigal v. Rafferty
G.R. No. 12287 August 7, 1918

Income Capital

Denotes a flow of wealth during a definite Fund or property, existing at one distinct
period of time. point of time, which can be used in
All wealth other than as a mere return of producing goods or services.
capital.
Service of wealth Wealth

Income is subject to tax Return of capital is not subject to tax

“Fruit” “Tree”
 Conwi v. CTA
G.R. No. 48532 August 31, 1992
FACTS: Petitioners are Filipino citizens and employees The CTA held that the proper conversion rates are the
of Procter and Gamble who were assigned, for certain rates prescribed in RMC No. 7-71 and 41-71 and not
periods, outside of the Philippines. They were paid in the floating rate based on BIR Ruling No. 70-027,
US dollars as compensation for services in their which the petitioners would like to apply. Petitioners’
foreign assignments. claim for refund and/or tax credit was denied.
Petitioners claimed for refund and/or tax credit for Hence, the petition for review on certiorari.
alleged overpayment of income tax due to
ISSUE: Whether or not the CTA erred in denying the
discrepancy in the conversion rate used for purposes
claim for refund and/or tax credit.
of computing and paying the corresponding income
tax due from them. They argued that since there HELD: No. The dollar earnings of petitioners are the
were no remittances and acceptances of their salaries fruits of their labors in the foreign subsidiaries of
and wages in US dollars into the Philippines, they are Procter & Gamble. It was a definite amount of money,
exempt from the coverage of RMC No. 7-71 and 41- which came to them within a specified period of two
71, which provides for the uniform rate of exchange years as payment for their services.
from US dollars to Philippine peso for internal
revenue tax purpose. Without awaiting the resolution
of the CIR on their claims, petitioners filed a petition
for review.
 Conwi v. CTA
G.R. No. 48532 August 31, 1992
Further, petitioners are citizens of the Philippines,
and their income, within or without, and in these
cases wholly without, is subject to income tax.
Thus, RMC No. 7-71 and 41-71, which was issued to
prescribe a uniform rate of exchange from US dollars
to Philippine peso for internal revenue tax purposes is
applicable to the petitioners.
 Javier v. CA
199 SCRA 824
FACTS: In 1977, Victoria Javier, wife of Javier-
respondent, received $999k from Prudential Bank
remitted by her sister Dolores through Mellon Bank in
US. Around 3 weeks after, Mellon Bank filed a
complaint with CFI Rizal against Javier claiming that
its remittance of $1M was a clerical error and should
have been $1k only and praying that the excess be
returned on the ground that the Javiers are just
trustees of an implied trust for the benefit of Mellon
Bank.
CFI charged Javier with estafa alleging that they
misappropriated and converted it to their own
personal use. A year after, Javier filed his Income Tax
Return for 1977 and stating in the footnote that “the
taxpayer was recipient of some money received
abroad which he presumed to be a gift but turned
out to be an error and is now subject of litigation.”
The Commissioner of Internal Revenue wrote a letter
to Javier demanding him to pay taxes for the
deficiency, due to the remittance. Javier replied to
the Commissioner and said that he will pay the
deficiency but denied that he had any undeclared
income for 1977 and requested that the assessment
of 1977 be made to await final court decision on the
case filed against him for filing an allegedly fraudulent
return.
Commissioner replied that “the amount of Mellon
Bank’s erroneous remittance which you were able to
dispose is definitely taxable” and the Commissioner
imposed a 50% fraud penalty on Javier.
 Javier v. CA
199 SCRA 824
ISSUE: Whether or not a taxpayer who merely states It will only become taxable once the case has been
as a footnote in his income tax return that a sum of settled because by then whatever amount that will
money that he erroneously received and already be rewarded, Javier has a claim of right over it.
spent is the subject of a pending litigation and there
did not declare it as income is liable to pay the 50%
penalty for filing a fraudulent return.
HELD: No. The court held that there was no actual
and intentional fraud through willful and deliberate
misleading of the BIR in the case. Javier even noted
that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but
turned out to be an error and is now subject of
litigation.”
In this case, the remittance was not a taxable gain,
since it is still under litigation and there is a chance
that Javier might have the obligation to return it.
1. When is income taxable?
• Income is taxable when the following requisites for
taxability of income are attendant: (PRN)
1. There must be a gain or profit, whether in cash or its
equivalent;
2. The gain must be realized or received – when income is actually
or physically transferred to a person, or constructively received
by him, this implies that not all economic gains constitute
taxable income; and
3. The gain must not be excluded by law or treaty.