CHAPTER 3: Introduction to Income Taxation Flashcards
______ is regarded as the best measure of taxpayers’ ability to pay tax. It is an excellent objects of taxation in the allocation of government costs.
Income
The tax concept of income is simply referred to as “______” under the NIRC.
gross income
A taxable item of income is referred to as an “______” or “______”
item of gross income, inclusion in gross income
taxable income in layman’s term
GROSS INCOME
Under the NIRC however, the term “______” refers to certain items of gross income less deductions and personal exemptions allowed by law.
taxable income
Technically, ______ is broader to pertain to any income that can be subjected to income tax.
gross income
Any inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth. It includes income from employment, trade, business or exercise of profession, income from properties, and other sources such as dealings in properties and other regular or casual transactions.
GROSS INCOME
ELEMENTS OF GROSS INCOME
- It is a return on capital that increases net worth.
- It is a realized benefit.
- It is not exempted by law, contract, or treaty.
Any wealth or property
RETURN ON CAPITAL
______ is a return on wealth property that increases the taxpayer’s net worth.
Gross income
Capital items deemed with infinite value
- Life
- Health
- Human reputation
The value of life is immeasurable by money. Under ______ of the NIRC, the proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured, whether in a single sum or otherwise, are ______ from income tax.
Sec. 32, exempted
The proceeds of a life insurance contract collected by an employer as a beneficiary from the life insurance of an officer or any person directly interested with his trade are likewise exempt. Theses proceeds are viewed as ______.
advanced recovery future loss
Taxable return on capital from insurance policies:
a. Any excess amount received over premiums paid by the insured upon surrender or maturity of the policies
b. Gain realized by the insured from the assignment or sale of his insurance policy
c. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premium payments by an assignee of a life insurance policy
Any compensation received in consideration for the loss of health such as compensation for personal injuries or tortuous acts is deemed a ______.
return of capital
The value of one’s reputation cannot be measured financially. Any indemnity received as compensation for its impairment is deemed a ______ exempt from income tax.
return of capital
Examples of human reputation cases
a. Oral defamation or slander
b. Alienation
c. Breach of promise to marry
The ______ results in decrease in net worth while the ______ does not decrease net worth.
lost of capital, loss of profit
The recovery of ______ merely maintains net worth while the recovery of ______ increases net worth.
lost capital, lost profits
Therefore, the recovery of profits is a ______.
return on capital
Recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a ______
taxable return on capital
Taxable recoveries of lost profits:
a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement suit
Any form of advantage derived by the taxpayer.
REALIZED BENEFIT
There is benefit when there is an ______ in the net worth of the taxpayer
increase
The following are not benefits, hence, not taxable:
a. Receipts of a loan
b. Discovery of lost properties
c. Receipts of money or property
properties increase but obligations also increase resulting in an offsetting effect in net worth.
Receipts of a loan
under the law, the finder has an obligation to return the same to the owner.
Discovery of lost properties
The term realized means ______. It requires that there is a degree of undertaking or sacrifice from the taxpayer to be entitled of the benefit.
earned
Requisites of a realized benefit:
- There must be an exchange transaction.
- The transaction involves another entity.
- It increases the net worth of the recipient.
TYPES OF TRANSFER
- Bilateral transfers or exchanges
- Unilateral transfers
- Complex transaction
onerous transactions
Bilateral transfers or exchanges
gratuitous transactions
Unilateral transfers
Examples of Bilateral transfers or exchanges
a. Sale
b. Barter
Examples of Unilateral transfers
c. Succession
d. Donation
bilateral transfers are called “______”
exchanges
Benefits derived from onerous transactions are “______”; hence, they are subject to ______.
earned or realized, income tax
Benefits derived from gratuitous transactions are ______ because of the absence of an earning process.
not realized
Benefits derived from gratuitous transactions are subjects to ______, not income tax.
transfer tax
partly gratuitous and partly onerous
Complex transaction
Complex transactions are commonly referred to as “______”.
transfers for less than full and adequate consideration
The gratuitous portion of the transaction is subject to ______ while the benefit from the onerous is subject to ______.
transfer tax, income tax
Every person, natural or juridical, is an ______.
entity
