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Taxation Made Easy: Tests in determining whether income is earned for tax purposes - YouTube
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Hi everyone, I hope you are ready for another tax study session.
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I'm gonna be your virtual companion in
studying the
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tests in determining whether income is earned
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for tax purposes which is also
part of the coverage of our exams.
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Before we start, here is our student's
guide
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to learning from home. Set up your study space. Find an area in
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your house where you can sit comfortably and focus.
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Make it separate to your relaxation
space. Ideally away
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from a TV screen or other distractions.
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Take down notes. Stuck in a webinar
zoning out?
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Taking down notes keeps your mind
engaged.
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Plan your day ahead. If you have one,
follow the schedule provided by your
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school. If you just have a list of things
to study,
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break it down into small tasks and plan
to do the hardest ones
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when you have the most energy.
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Lessen distractions. Harness your
imagination
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and picture that you're at school and not at home.
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Lock your phone away if you need to --
don't be afraid to ask your parents to
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intervene.
Subscribe to productivity apps as well
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these are great study companions so you can focus 100%.
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Change it up. You probably have a
schedule for your lessons,
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but if things are becoming difficult to
focus on,
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take a five-minute break and come back
to it --
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just let your teacher know. Be kind to
your mind if you need a break
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from a consistent schedule. Now,
let us proceed with the topic for this
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video. What are the tests in determining
whether income
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is earned? The first test is the
realization test.
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Under the realization test, there is no
taxable income unless income
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is deemed realized. Revenue
is generally recognized when both
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conditions are met: first,
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the earning process is complete or
virtually complete;
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and an exchange has taken place. If you have seen our previous video we
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discussed realization test
also in the concept of income.
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Second tests in determining whether
income is earned
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is a claim of right doctrine. A taxable gain is conditioned upon the
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presence of a claim of right
to the alleged gain and the absence of a
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definite
unconditional obligation to return or
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repay. This is also called the doctrine
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of ownership, command
or control.
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The claim of right doctrine. If a
taxpayer receives money or
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other property and treats it as its own
under the claim of right that the
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payments are made
absolutely and not contingently, such
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amounts are included in the taxpayer's income,
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even though the right to the income has
not been perfected
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at that time. It does not matter that the
taxpayer's title to the property is in
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dispute and that the property may later be
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recovered from the taxpayer. Under this doctrine,
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if the taxpayer who has included amounts in
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income pursuant to the claim of right
doctrine
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subsequently repays those amounts,
the taxpayer may be entitled to a
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deduction in the year of repayment. However, to be entitled to a deduction
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the taxpayer must meet the requirements of a statutory provision
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entitling him or her to a deduction. For instance, it must qualify as a trade
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or business expense or a loss.
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The last test in determining
whether income is earned is the economic
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benefit test. Taking into consideration
the pertinent provisions of law,
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income realized is taxable only to the
extent
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that the taxpayer is economically
benefited. the economic benefit doctrine
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is reputed to have been born in dictum of the 1945 opinion
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of the United States Supreme Court in
Commissioner versus Smith.
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In Smith, the taxpayer had received a
compensatory option from his employer
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to purchase stock in another corporation
at a fixed value.
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At the time of its exercise, the option
price was lower than the fair market
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value of the stock. The Commissioner argued
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that this difference represented
compensation to the employee
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includable in his gross income
in the year the option was executed.
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From this seed sprang a body of both
regulatory
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and decisional law which developed
the dictum of the Smith case into an
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axiom of tax law
which ultimately became known as the
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economic benefit
doctrine. In order for the modern
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doctrine to apply,
an individual must unconditionally
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transfer money
beyond the reach of the transferor's
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creditors
and place that money in a fund in which
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the taxpayer to be benefited has
vested rights. Thus, the doctrine focuses
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on situations
where a cash basis taxpayer having a
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right to receive money
elects to defer the income that would
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arise from the receipt of the money
by pre-arranging to have the money
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deposited in a third
party account. Armed with these concerns,
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the courts have developed the economic
benefit
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doctrine which requires the inclusion in
income of such amounts in the taxable
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period in which the fund
was created. This American case has
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the persuasive effect in our jurisdiction
because Philippine income tax law is
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patterned after its U.S.
counterpart. Lastly,
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we have severance tests also known
as the Macomber test which states
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that there is no taxable income until
there
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is a separation from capital of
something of
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exchangeable value, thereby supplying the realization or transmutation
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which would result in the receipt of
income.
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The essence of the test is that in order
for income to be taxed,
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it is to be severed from the property
from which
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it was derived. The court analogized
''capital'' as being separate from income;
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in the way that a tree is separate from
its fruit.
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It requires the presence of a tax event
which is an event which triggers a
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transfer of ownership of property.
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Remember: Do not just wait to be an
inspiration,
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be the inspiration! Keep safe everyone! <3
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