i. Definition

Definition

Income, in the broad sense, means all wealth, which 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. (Rev. Regs. Sec. 36)¹

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.

Property is a tree, income is the fruit; labor is a tree, income is the fruit; capital is a tree, income is the fruit.

“Income,” as here used, can be defined as “profits or gains.” (Madrigal v. Rafferty, G.R. No. L-12287, 7 August 1918)²

Distinguished from revenue and capital

• Gross income means all income derived from whatever source, except as otherwise provided in the NIRC. Taxable income is computed after allowable deductions, not by subtracting all expenses and taxes from revenue. Income is gain derived and severed from capital.
• Revenue is the total amount of money the business receives from its customers for its products and services. It is the total inflow of money or goods to a person without taking into consideration the costs incurred in generating the said revenue. Gross income means all income derived from whatever source, including compensation for services; gross income derived from the conduct of trade or business or the exercise of a profession; gains derived from dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner's distributive share from the net income of a general professional partnership, among others.
• Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. It is the wealth in the form of money or other assets contributed for a particular purpose such as starting a company or investing. It is the source of the flow of the fund or revenue. A mere return of capital is not income; gains derived from dealings in property may be taxable.

BIR Revenue Memorandum Circular No. 65-2012³ concerns the tax treatment of Association Dues paid by condominium unit owners. Sec. 32 (a) of the NIRC⁴ defines gross income as all income derived from whatever source, except as otherwise provided in that Title. The Supreme Court addressed jurisdiction and the proper remedy for assailing the circular; it did not nullify the circular or definitively resolve the VAT treatment of condominium association dues. (In the Matter of Declaratory Relief on the Validity of BIR Revenue Memorandum Ci v. First E-Bank Tower Condominium Corp, G.R. No. 215801, 15 January 2020)⁵

Similarly, in another case, the Court held that RMC No. 35-2012⁶ erroneously foisted a sweeping interpretation that membership fees and assessment dues are sources of income of recreational clubs from which income tax liability may accrue. Income as contrasted with capital or property is to be the test. Considering that membership fees, assessment dues, and other fees of similar nature only constitute contributions to and/or replenishment of the funds for the maintenance and operations of the facilities offered by recreational clubs to their exclusive members, they are considered capital and therefore not subject to tax. They represent funds "held in trust" by these clubs to defray their operating and general costs and hence, only constitute infusion of capital. (Association of Non-Profit Clubs, Inc. v. BIR, G.R. No. 228539, 26 June 2019)⁷

(d) Income from any source whatever

Concept of income from whatever source derived

“Income from whatever sources derived” means inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources.

This includes:

• Income derived from illegal sources

Rationale:

• Shouldn’t give tax benefit to thieves when taxing law-abiding citizens.
• Enforcement of non-tax criminal issues

An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. Hence, money obtained by extortion is income taxable to the extortioner only when he personally benefitted from the funds. (Hobson v. Commissioner, cited identifier U.S.14850-89)⁸

It is well settled that profits or gains earned illegally constitute gross income. (James v. United States, 366 U.S. 213 (1961))⁹

However, in circumstances where misappropriations do not enrich or benefit the misappropriator, and there is a consensual recognition of an obligation to repay the funds, income does not arise. (Beasley v. Commissioner, cited identifier U.s. 3729-85)¹⁰

• Compensation for damages if it represents payment for loss of expected profits
• Those received by mistake (CIR v. Javier, G.R. No. 78953, 31 July 1991)¹¹