REALIZATION or

SEVERANCE TEST
• Also known as Macomber Test

• Income is Recognized when both of the

following conditions are met:
1. The earning is complete or virtually
complete.
2. An exchange has taken place.
SEC. 28 OF RR NO. 2-40
• February 10, 1940

Bases of Computation – Approved standard methods of accounting will

be ordinarily regarded as clearly reflecting income. A method of
accounting will not, however, be regarded as clearly reflecting income
unless all items of gross income and all deductions are treated with
reasonable consistency. All items of gross income shall be included in
the gross income for the taxable year in which they are received by the
taxpayer and deductions taken accordingly, unless in order clearly to
reflect income such amounts are to be properly accounted for as a
different period.
SEC. 28 OF RR NO. 2-40
For instance, in any case in which it is necessary to use an inventory, no
accounting in regard to purchases and sales will correctly reflect
income except an accrual method.

A taxpayer is deemed to have received items of gross income which

have been credited to or set apart for him without restriction.

On the other hand, appreciation in value of property is not even an

accrual of income to a taxpayer prior to the realization of such
appreciation through sale or conversion of the property.
MANILA MANDARIN HOTELS INC. v. CIR
• CTA Case No. 5046 dated March 24, 1997

FACTS:
Petitioner is a domestic corporation engaged in business as a hotel and
restaurant operator. It is a VAT registered enterprise with VAT
Registration no. 32-0-000281.

On July 8, 1992, petitioner received an assessment notice, dated June

22, 1992, demanding the payment of deficiency value-added and
percentage taxes for the taxable year 1988, amounting to
P11,765,054.03 as value added tax and P455,933.50 percentage tax.
MANILA MANDARIN HOTELS INC. v. CIR
• CTA Case No. 5046 dated March 24, 1997
FACTS:
Petitioner alleged that the tax deficiencies stemmed from respondent’s
erroneous interpretation of various tax laws which resulted in a legally-
flawed assessment. This protest cited four items of value-added tax and
one item of percentage tax which petitioner claims to have been
wrongly imposed by the respondent
MANILA MANDARIN HOTELS INC. v. CIR
ISSUE:
Whether the deposits made by the clients of Manila Mandarin Hotels
Inc. for the use of hotel facilities, which are not included in the bills
cannot be classified as income as they are mere security deposits, and
therefore not taxable.

HELD:
The deposits made by petitioners hotel clients should not be treated as
part of its gross income
MANILA MANDARIN HOTELS INC. v. CIR
HELD:
Under the Realization Principle, revenue is generally recognized when
both of the following conditions are met: (a) the earning process is
complete or virtually complete; (b) an exchange has taken place.

The principle requires that revenue must be earned before it is

recorded.

The amounts received in advance are not treated as revenue of the

period in which the are received but as revenue of the future period or
periods in which they are earned.
MANILA MANDARIN HOTELS INC. v. CIR
HELD:

These amount are carried as unearned revenue, that is, liabilities to

transfer goods or render services in the future- until the earning
process is complete.
BIR Ruling No. 049-98
• February 10, 1998

The tax exemption privileges extended to Unite Nations personnel

under Section (b) Article V and Sections 18 and 19 (b) of Article VI of
the Convention on the Privileges and Immunities f the United Nations
do not include exemption from the final withholding tax the interest
income from personal deposits of the personnel of the United Nations
residing in the Philippines, whether Filipino or resident alien,
considering that the interest income is derived from passive investment
in the Philippines and not from their salaries or emolument as
personnel of the United Nations.
CLAIM OF RIGHT
DOCTRINE

• If the taxpayer receives earnings under a

claim of right and without restriction as to its
disposition, such earnings considered
income.
• A taxable gain is conditioned upon the presence of a claim of right to
the alleged gain and the absence of a definite unconditional
obligation to return or repay that which would otherwise constitute a
gain.

• Also known as Doctrine of Ownership , Command or Control

MANILA ELECTRIC COMPANY V. CIR
• CTA Case No. 7242 dated December 6, 2010

FACTS:

Amended Petition is an appeal from respondent CIR’s inaction/ denial

on MERALCO’s claim for a tax refund or credit of excess income tax
payments for the taxable years 1994-1998 and 2000.
MANILA ELECTRIC COMPANY V. CIR
FACTS:
MERALCO’s claim for a tax refund or credit is due to the alleged
overpayment of income tax arising from the decision of the Supreme
Court in the consolidated case of Republic of the Philippines et al. v.
Manila Electric Company (G.R. No. 141314) and Lawyers against
Monopoly etc., v. Manila Electric Company (G.R. No. 141369) which
became final and executory on May 5. 2003, mandating MERALCO to
refund the amount equivalent to P0.167 per kilowatt-hour of over
billed electric charges to its customers for their electric consumption
made from February 1994 to December 2003
MANILA ELECTRIC COMPANY V. CIR
ISSUE:
Whether petitioner’s right to recover its excess income tax payments for
taxable years 1994-1998 and 2000 has prescribed.

HELD:
Section 299 of the 1997 National Internal Revenue Code as amended,
provides that taxpayers seeking a refund or any national internal revenue tax
hereafter alleged to have been: (1) erroneously or illegally assessed or
collected or (2) of any penalty claimed to have been collected without
authority; or (3) of any sum alleged to have been excessive or in any manner
wrongfully collected. It must file within the (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may
arise after payment.